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Chapter. 5. Measuring and Evaluating Bank Performance. The purpose of this chapter is to discover what analytical tools can be applied to a bank’s financial statements so that management and the public can identify the most critical problems inside each bank

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Measuring and Evaluating Bank Performance

The purpose of this chapter is to discover what analytical tools can

be applied to a bank’s financial statements so that management and

the public can identify the most critical problems inside each bank

and develop ways to deal with those problems.

value of a bank s stock rises when
Value of a Bank’s Stock Rises When:
  • Expected Dividends Increase
  • Risk of the Bank Falls
  • Combination of Expected Dividend Increase and Risk Decline
roe depends on
ROE Depends On:
  • Equity Multiplier
    • Leverage or Financing Policies
  • Net Profit Margin
    • Effectiveness of Expense Management
  • Asset Utilization
    • Portfolio Management Policies
bank risks
Bank Risks
  • Credit Risk
  • Liquidity Risk
  • Market Risk
  • Interest Rate Risk
  • Earnings Risk
  • Solvency Risk
credit risk

Credit Risk

The Probability that Some of the Bank’s Assets Will Decline in Value and Perhaps Become Worthless

credit risk measures
Credit Risk Measures
  • Nonperforming Loans/Total Loans
  • Net Charge-Offs/Total Loans
  • Provision for Loan Losses/Total Loans
  • Provision for Loan Losses/Equity Capital
  • Allowance for Loan Losses/Total Loans
  • Allowance for Loan Losses/Equity Capital
  • Total Loans/Total Deposits
liquidity risk

Liquidity Risk

Probability the Bank Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit Withdrawals and Other Cash Needs

liquidity risk measures
Liquidity Risk Measures
  • Purchased Funds/Total Assets
  • Net Loans/Total Assets
  • Cash and Due from Banks/Total Assets
  • Cash and Government Securities/Total Assets
market risk

Market Risk

Probability of the Market Value of the Bank’s Investment Portfolio Declining in Value Due to a Rise in Interest Rates

market risk measures
Market Risk Measures
  • Book-Value of Assets/ Market Value of Assets
  • Book-Value of Equity/ Market Value of Equity
  • Book-Value of Bonds/Market Value of Bonds
  • Market Value of Preferred Stock and Common Stock
interest rate risk

Interest Rate Risk

The Danger that Shifting Interest Rates May Adversely Affect a Bank’s Net Income, the Value of its Assets or Equity

interest rate risk measures
Interest Rate Risk Measures
  • Interest Sensitive Assets/Interest Sensitive Liabilities
  • Uninsured Deposits/Total Deposits
earnings risk

Earnings Risk

The Risk to the Bank’s Bottom Line – Its Net Income After All Expenses

earnings risk measures
Earnings Risk Measures
  • Standard Deviation of Net Income
  • Standard Deviation of ROE
  • Standard Deviation of ROA
solvency or default risk

Solvency or Default Risk

Probability of the Value of the Bank’s Assets Declining Below the Level of its Total Liabilities. The Probability of the Bank’s Long Run Survival

solvency risk measures
Solvency Risk Measures
  • Spread Between Bank CDs and Treasury Securities of the Same Maturity
  • Stock Price/Earnings Per Share
  • Equity Capital/Total Assets
  • Purchased Funds/Total Liabilities
  • Equity Capital/Risk Assets
other forms of risk in banking
Other Forms of Risk in Banking
  • Inflation Risk
  • Currency or Exchange Rate Risk
  • Political Risk
  • Crime Risk


The Uniform Bank Performance Report Provided by U.S. Federal Regulators so that Analysts Can Compare the Performance of One Bank Against Another