Professional Documents
Culture Documents
Summary
Evaluating a Banks Performance
Measuring Risk in Banking
Bank Size and Performance
Examples
D1
P0
r -g
Net Income
Return on Assets (ROA) =
Total Assets
Net Interest Income
Net Interest Margin
Total Assets
6-9
The net operating margin, net interest margin, and net noninterest margin
are efficiency measures as well as profitability measures
The net interest margin measures how large a spread between interest
revenues and interest costs management has been able to achieve
The net noninterest margin measures the amount of noninterest
revenues stemming from service fees the financial firm has been able to
collect relative to the amount of noninterest costs incurred
Typically, the net noninterest margin is negative
6-10
ROA =
Net Income/Total Assets
Equity Multiplier =
Total Assets/Equity Capital
Asset Utilization =
x Total Operating Revenue/Total Assets
Asset Utilization
Portfolio Management Policies
6-13
6-14
or
where
6-15
6-16
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
A Variation on ROE
Breakdown of ROA
Net Interest Income Net Noninterest Income
ROA =
Total Assets
Total Assets
PLL-Security Gain(Losses)+Taxes-Extraordinary Gains
Total Assets
2000
1999
1998
1996
1994
1992
1990
6.98%
-3.51
3.38
2.47
-3.58
-1.11
-0.43
1.84
-0.64
-0.06
1.14
6.41%
-3.05
3.35
2.52
-3.56
-1.04
-0.38
1.25
-0.69
0
1.25
6.65%
-3.29
2.37
2.27
-3.57
-1.3
-0.41
1.09
-0.59
0.06
1.14
6.83%
-3.28
3.55
2.04
-3.51
-1.47
-0.36
1.73
-0.61
0.02
1.14
6.29%
-2.67
3.62
1.88
-3.52
-1.64
-0.27
1.71
-0.59
1.01
1.13
7.47%
-3.57
3.9
1.95
-3.87
-1.92
-0.77
1.21
-0.42
0.13
0.92
9.60%
-6.44
3.46
1.67
-3.49
-1.82
-0.96
0.68
-0.24
0.03
0.47
6-20
Breakdown of ROA
6-21
6-22
2.
3.
4.
5.
6-23
Bank Risks
Credit Risk
Liquidity Risk
Market Risk
Interest Rate Risk
Operational Risk
Legal and
Compliance Risk
Reputation Risk
Strategic Risk
Capital Risk
Credit Risk
The Probability that Some of the
Financial Firms Assets Will Decline
in Value and Perhaps Become
Worthless
Liquidity Risk
Probability the Financial Firm Will
Not Have Sufficient Cash and
Borrowing Capacity to Meet Deposit
Withdrawals and Other Cash Needs
Market Risk
Probability of the Market Value of the
Financial Firms Investment Portfolio
Declining in Value Due to a Change in
Interest Rates
Operational Risk
Uncertainty Regarding a Financial
Firms Earnings Due to Failures in
Computer Systems, Errors, Misconduct
by Employees, Floods, Lightening
Strikes and Similar Events or Risk of
Loss Due to Unexpected Operating
Expenses
Reputation Risk
This is Risk Due to Negative Publicity that
can Dissuade Customers from Using the
Services of the Financial Firm. It is the
Risk Associated with Public Opinion.
Capital Risk
Probability of the Value of the Banks
Assets Declining Below the Level of
its Total Liabilities. The Probability of
the Banks Long Run Survival
6-38
6-39
UBPR
The Uniform Bank Performance
Report Provided by U.S. Federal
Regulators so that Analysts Can
Compare the Performance of One
Bank Against Another