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1、CHAPTER 6MEASURING AND EVALUATING THE PERFORMANCE OF BANKS AND THEIR PRINCIPAL COMPETITORSGoal of This Chapter: The purpose of this chapter is to discover what analytical tools can be applied to a banks financial statements so that management and the public can identify the most critical problems in

2、side each bank and develop ways to deal with those problems Key Topics in This Chapter· Stock Values and Profitability Ratios· Measuring Credit, Liquidity, and Other Risks· Measuring Operating Efficiency· Performance of Competing Financial Firms· Size and Location Effects

3、83; The UBPR and Comparing PerformanceChapter OutlineI.Introduction:II.Evaluating a Bank's PerformanceA.Determining Long-Range ObjectivesB.Maximizing The Value of the Firm: A Key Objective for Nearly All Financial-Service InstitutionsC.Profitability Ratios: A Surrogate for Stock Values1.Key Prof

4、itability Ratios2.Interpreting Profitability RatiosD.Useful Profitability Formulas for Banks and Other Financial Service CompaniesE.Breaking Down Equity Returns for Closer AnalysisF.Break-Down Analysis of the Return on AssetsG.What a Breakdown of Profitability Measures Can Tell UsH.Measuring Risk in

5、 Banking and Financial Services1.Credit Risk2.Liquidity Risk3.Market Risk4.Interest-Rate Risk5.Operational Risk6.Legal and Compliance Risk7.Reputation Risk8.Strategic Risk9.Capital RiskI.Other Goals in Banking and Financial Services ManagementIII.Performance Indicators among Bankings Key Competitors

6、IV.The Impact of Size on PerformanceA.Size, Location and Regulatory Bias in Analyzing The Performance of Banks and Competing Financial InstitutionsB.Using Financial Ratios and Other Analytical Tools to Track Bank Performance-The UBPR.V.Summary of the ChapterAppendix to the Chapter - Improving the Pe

7、rformance of Financial Firms Through Knowledge: Sources of Information on the Financial-Services IndustryConcept Checks6-1.Why should banks and other corporate financial firms be concerned about their level of profitability and exposure to risk?Banks in the U.S. and most other countries are private

8、businesses that must attract capital from the public to fund their operations. If profits are inadequate or if risk is excessive, they will have greater difficulty in obtaining capital and their funding costs will grow, eroding profitability. Bank stockholders, depositors, and bank examiners represe

9、nting the regulatory community are all interested in the quality of bank performance. The stockholders are primarily concerned with profitability as a key factor in determining their total return from holding bank stock, while depositors (especially large corporate depositors) and examiners typicall

10、y focus on bank risk exposure.6-2.What individuals or groups are likely to be interested in these dimensions of performance for a bank or other financial institution?The individuals or groups likely to be interested in bank profitability and risk include other banks lending to a particular bank, bor

11、rowers, large depositors, holders of long-term debt capital issued by banks, bank stockholders, and the regulatory community.6-3.What factors influence the stock price of a financial-services corporation?A bank's stock price is affected by all those factors affecting its profitability and risk e

12、xposure, particularly its rate of return on equity capital and risk to shareholder earnings. A bank can raise its stock price by creating an expectation in the minds of investors of greater earnings in the future, by lowering the bank's perceived risk exposure, or by a combination of increases i

13、n expected earnings and reduced risk.6-4.Suppose that a bank is expected to pay an annual dividend of $4 per share on its stock in the current period and dividends are expected to grow 5 percent a year every year, and the minimum required return to equity capital based on the bank's perceived le

14、vel of risk is 10 percent. Can you estimate the current value of the bank's stock?In this constant dividend growth rate problem the current value of the bank's stock would be:Po = D1 / (k g) = $4 / (0.10 0.05) = $80.6-5.What is return on equity capital and what aspect of performance is it su

15、pposed to measure? Can you see how this performance measure might be useful to the managers of financial firms?Return on equity capital is the ratio of Net Income/Total Equity Capital. It represents the rate of return earned on the funds invested in the bank by its stockholders. Financial firms have

16、 stockholders, too who are interested in the return on the funds that they invested.6-6 Suppose a bank reports that its net income for the current year is $51 million, its assets totally $1,144 million, and its liabilities amount to $926 million. What is its return on equity capital? Is the ROE you

17、have calculated good or bad? What information do you need to answer this last question?The bank's return on equity capital should be:ROE =Net Income =$51 million= .098 or 9.8 percentEquity Capital$1,444 mill.-$926 mill.In order to evaluate the performance of the bank, you have to compare the ROE

18、 to the ROE of some major competitors or some industry average.6-7What is the return on assets (ROA), and why is it important? Might the ROA measure be important to bankings key competitors?Return on assets is the ratio of Net Income/Total Assets. The rate of return secured on a bank's total ass

19、ets indicates the efficiency of its management in generating net income from all of the resources (assets) committed to the institution. This would be important to banks and their major competitors.6-8.A bank estimates that its total revenues will amount to $155 million and its total expenses (inclu

20、ding taxes) will equal $107 million this year. Its liabilities total $4,960 million while its equity capital amounts to $52 million. What is the bank's return on assets? Is this ROA high or low? How could you find out?The bank's return on assets would be:ROA =Net Income=$155 mill. - $107 mil

21、l.= 0.0096 or 0.96 percentTotal Assets$4,960 mill. + $52 mill.The size of this bank's ROA should be compared with the ROA's of other banks similar in size and location to determine if this bank's ROA is high or low relative to the average forcomparable banks.6-9.Why do the managers of fi

22、nancial firms often pay close attention today to the net interest margin and noninterest margin? To the earnings spread?The net interest margin (NIM) indicates how successful the bank has been in borrowing funds from the cheapest sources and in maintaining an adequate spread between its returns on l

23、oans and security investments and the cost of its borrowed funds. If the NIM rises, loan and security income must be rising or the average cost of funds must be falling or both. A declining NIM is undesirable because the bank's interest spread is being squeezed, usually because of rising interes

24、t costs on deposits and other borrowings and because of increased competition today.In contrast, the noninterest margin reflects the banks spread between its noninterest income (such as service fees on deposits) and its noninterest expenses (especially salaries and wages and overhead expenses). For

25、most banks the noninterest margin is negative. Management will usually attempt to expand fee income, while controlling closely the growth of noninterest expenses in order to make a negative noninterest margin less negative.The earnings spread measures the effectiveness of the bank's intermediati

26、on function of borrowing and lending money, which, of course, is the bank's primary way of generating earnings. As competition increases, the spread between the average yields on assets and the average cost of liabilities will be squeezed, forcing the bank's management to search for alternat

27、ive sources of income, such as fees from various services the bank offers.6-10. Suppose a banker tells you that his bank in the year just completed had total interest expenses on all borrowings of $12 million and noninterest expense of $5 million, while interest income from earning assets totaled $1

28、6 million and noninterest revenues added to a total of $2 million. Suppose further that assets amounted to $480 million of which earning assets represented 85 percent of total assets, while total interest-bearing liabilities amounted to 75 percent of total assets. See if you can determine this bank&

29、#39;s net interest and noninterest margins and its earnings base and earnings spread for the most recent year.The bank's net interest and noninterest margins must be:Net Interest =$16 mill. - $12 mill.Noninterest=$2 mill. - $5 mill.Margin$480 mill.Margin$480 mill.=.00833= -.00625The bank's e

30、arnings spread and earnings base are:Earnings=$16 mill.-$12 mill.Spread$480 mill * 0.85$480 mill. * 0.75= .0392=.0333Earnings Base=$480 mill. - $480 mill. * 0.15=0.85 or 85 percent$480 mill.6-11. What are the principal components of ROE and what do each of these components measure?The principal comp

31、onents of ROE are:a.The net profit margin or net after-tax income to operating revenues which reflects the effectiveness of a bank's expense control program;b.The degree of asset utilization or ratio of operating revenues to total assets which measures the effectiveness of managing the bank'

32、s assets, especially the loan portfolio; and,c.The equity multiplier or ratio of total assets to total equity capital which measures a bank's use of leverage in funding its operations.6-12.Suppose a bank has an ROA of 0.80 percent and an equity multiplier of 12x. What is its ROE? Suppose this ba

33、nk's ROA falls to 0.60 percent. What size equity multiplier must it have to hold its ROE unchanged?The bank's ROE is:ROE = 0.80 percent *12 = 9.60 percent.If ROA falls to 0.60 percent, the bank's ROE and equity multiplier can be determined from:ROE = 9.60% = 0.60 percent * Equity Multipl

34、ier Equity Multiplier = 9.60 percent = 16x. 0.60 percent6-13.Suppose a bank reports net income of $12, before-tax net income of $15, operating revenues of $100, assets of $600, and $50 in equity capital. What is the bank's ROE? Tax-management efficiency indicator? Expense control efficiency indi

35、cator? Asset management efficiency indicator? Funds management efficiency indicator?The bank's ROE must be:ROE = = 0.24 or 24 percent Its tax-management, expense control, asset management, and funds management efficiency indicators are:Tax Management=$12Expense Control=$15Efficiency indicator$15

36、Efficiency Indicator$100= .8 or 80 percent=.15 or 15 percentAsset Management=$100Funds Management=$600Efficiency Indicator$600Efficiency Indicator$50= 0.1666 or 16.67 percent= 12 x6-14.What are the most important components of ROA and what aspects of a financial institutions performance do they refl

37、ect?The principal components of ROA are:a. Total Interest Income Less Total Interest Expense divided by Total Assets, measuring a bank's success at intermediating funds between borrowers and lenders;b. Provision for Loan Losses divided by Total Assets which measures management's ability to c

38、ontrol loan losses and manage a bank's tax exposure;c. Noninterest Income less Noninterest Expenses divided by Total Assets, which indicates the ability of management to control salaries and wages and other noninterest costs and generate tee income;d. Net Income Before Taxes divided by Total Ass

39、ets, which measures operating efficiency and expense control; ande. Applicable Taxes divided by Total Assets, which is an index of tax management effectiveness.6-15.If a bank has a net interest margin of 2.50%, a noninterest margin of -1.85%, and a ratio of provision for loan losses, taxes, security

40、 gains, and extraordinary items of -0.47%, what is itsROA?The bank's ROA must be:ROA = 2.50 percent - 1.85 percent - 0.47 percent = 0.18 percent6-16.To what different kinds of risk are banks and their financial-service competitors subjected today?a. Credit Risk - the probability that loans and s

41、ecurities the bank holds will not pay out as promised.b. Liquidity Risk - the probability the bank will not have sufficient cash on hand in the volume needed precisely when cash demands arise.c. Market Risk - the probability that the value of assets held by the bank will decline due to falling marke

42、t prices.d. Interest-Rate Risk - the possibility or probability interest rates will change, subjecting the bank to lower profits or a lower value for the firms capital.e. Operational Risk the uncertainly regarding a financial firms earnings due to failures in computer systems, employee misconduct, f

43、loods, lightening strikes and other similar events.f. Legal and Compliance Risk the uncertainty regarding a financial firms earnings due to actions taken by our legal system or due to a violation of rules and regulationsg. Reputation Risk the uncertainty due to public opinion or the variability in e

44、arnings due to positive or negative publicity about the financial firmh. Strategic Risk the uncertainty in earnings due to adverse business decisions, lack or responsiveness to changes and other poor decisions by managementi. Capital Risk the risk that the value of the assets will decline below the

45、value of the liabilities. All of the other risks listed above can affect earnings and the value of the assets and liabilities and therefore can have an effect on the capital position of the firm.6-17.What items on a bank's balance sheet and income statement can be used to measure its risk exposu

46、re? To what other financial institutions do these risk measures apply?There are several alternative measures of risk in banking and financial service firms. Capital risk is often measured by bank capital ratios, such as the ratio of total capital to total assets or total capital to risk assets. Cred

47、it risk can be tracked by such ratios as net loan losses to total loans or relative to total capital. Liquidity risk can be followed by using such ratios as cash assets to total assets or by total loans to total assets. Interest-rate risk may be indicated by such ratios as interest-sensitive liabili

48、ties to interest-sensitive assets or the ratio of money-market borrowings to money-market assets. 6-18.A bank reports that the total amount of its net loans and leases outstanding is $936 million, its assets total $1,324 million, its equity capital amounts to $110 million, and it holds $1,150 millio

49、n in deposits, all expressed in book value. The estimated market values of the bank's total assets and equity capital are $1,443 million and $130 million, respectively. The bank's stock is currently valued at $60 per share with annual per-share earnings of $2.50. Uninsured deposits amount to

50、 $243 million and money market borrowings total $132 million, while nonperforming loans currently amount to $43 million and the bank just charged off $21 million in loans. Calculate as many of the bank's risk measures as you can from the foregoing data.Net Loans and Leases=$936 mill.Uninsured De

51、posits$243 mill.Total Assets$1,324 mill.Total Deposits$1,150 mill.0.7069 or 70.69 percent0.2113 or 21.13 percentEquity Capital=$130 mill.Stock Price$60Total Assets$1,443 mill.Earnings Per Share$2.50= 0.0901 or 9.01 percent= 24 XNonperforming Assets=$43 mill.=0.0459 or 4.59 percentNet Loans and Lease

52、s$936 mill.Charge-offs of loans=$21Purchased Funds=$243 mill. + $132 mill.Total Loans and Leases$936Total Liabilities$1,324 mill. - $110 mill.=.0224 or 2.24 percent.3089 or 30.89 percentBook Value of Assets=$1324=0.9175 or 91.75 percentMarket Value of Assets$1443Problems6-1.An investor holds the sto

53、ck of First National Bank of Imoh and expects to receive a dividend of $12 per share at the end of the year. Stock analysts have recently predicted that the banks dividends will grow at approximately 3 percent a year indefinitely into the future. If this is true, and if the appropriate risk-adjusted

54、 cost of capital (discount rate) for the bank is 15 percent, what should be the current stock price per share of Imohs stock?6-2.Suppose that stockbrokers have projected that Poquoson Bank and Trust Company will pay a dividend of $3 per share on its common stock at the end of the year; a dividend of

55、 $4.50 per share is expected for the next year and $6 per share in the following year. The risk-adjusted cost of capital for banks in Poquosons risk class is 17 percent. If an investor holding Poquosons stock plans to hold that stock for only three years and hopes to sell it at a price of $55 per sh

56、are, what should the value of the banks stock be in todays market? P0 = $43.94 per share.6-3Depositors Savings Association has a ratio of equity capital to total assets of 7.5 percent. In contrast, Newton Savings reports an equity capital to asset ratio of 6 percent. What is the value of the equity multiplier for each of these institutions? Suppose that both institutions have an ROA of 0.85 percent. What must each institutions return on equity capital be? What do your