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Student Name

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Date: October 30, 2019

SNL: Peer Analytics

I have selected the Bank of New York Mellon Corporation (NYSE:BK), and Bank of

America Corporation (NYSE:BAC) for the purposes of this assignment. Importance of each of

the ratio and the ratio for each of the banks are discussed as follows:

Key Ratios

Return on Average Equity (ROAE)

The Return on Average Equity (ROAE) applies to a company's performance throughout a

fiscal year. This ratio is a modified version of the capital return that calculates a company's

profitability. ROAE's value can be measured from the way that investors use it to validate higher

ROAE indicators with other return ratios in order to make sure that an increasing ROAE is due

to increased revenue and productivity improvements rather than increased debt. ROAE is

calculated as “Net Income / Average Total Equity”.

The importance of Return on Average Equity (ROAE) can be demonstrated by the fact

that many stakeholders want to see how much net profit is earned through the use of investment

by shareholders. And this is why we call the net profit and then split the entire net benefit by the

assets of the investors.

For the Bank of New York Mellon Corporation, the ROAE for the last five quarters has

been fluctuating between 8.51 and 10.68. While for the Bank of America Corporation the ROAE

has been slightly higher i.e. 10.23 to 11.04. The following charts clarify the trend in more detail.
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Bank of New York Mellon Corporation

Bank of America Corporation

Comparing the results of both the banks, the average ROAE of Bank of New York

Mellon Corporation over the last five quarters is lower than that of Bank of America

Corporation. Bank of America’s total assets are more than 6 times the total assets of the Bank of

New York Mellon Corporation and the ROAE of the banks is slightly different than each other’s.

The Return on Average Equity of the Bank of America is higher because its equity investments

are being utilized more efficiently than the Bank of New York Mellon Corporation.
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Return on Average Assets (ROAA)

Return on average assets (ROAA) is a metric used to measure the productivity of a

company's assets and is most widely used by banks and other financial institutions as a way of

measuring financial results. It is also referred to as the Return on Assets (ROA). This ratio is

important because it is an indicator of the competitiveness and productivity of a business – the

lower the ROA, the more competitive and productive the capital assets of a firm are. This allows

stakeholders to evaluate sector-wide business performance. The current as well as the

prospective shareholders can get an idea of the business i.e. is it asset intensive or asset-light? It

is calculated as “Net Income/ Average Total Assets.”

For the Bank of New York Mellon Corporation, the ROAA for the last five quarters has

been greater than that for the Bank of America. Bank of New York Mellon Corporation has

performed well as compared to Bank of America Corporation in terms of Return on Average

Assets. The following charts clarify the trend in more detail.

Bank of New York Mellon Corporation

Bank of America Corporation

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Comparing the Return on Average Assets of both the banks it can seen from the results

that the Bank of New York Mellon Corporation has outperformed the Bank of America. The

reason behind these results is that the Bank of New York Mellon Corporation has been able to

utilize its assets efficiently as compared to Bank of America, regardless of its smaller size.

Moreover, the management of Bank of New York Mellon Corporation has played an important

role in the way that they are optimizing the utilization of their available assets instead of taking

more debt from outside sources.

Net Interest Margin

The Net Interest Margin is a measure that determines how effective a business is in

spending its assets relative to its expenditures on the same securities. A negative valuation

signifies the company's failure to make an effective investment decision when interest costs

exceed the amount of profits produced by the investment. Net Interest Margin (NIM) is

important as it shows the dispersal between interest income and interest payments by the lender.

Net Interest Margin is therefore one of the leading indicators to be evaluated throughout the

review of the bank’s profitability. It is calculated as “Net Interest Income/ Average Earning

Assets.”
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Net Interest Margin for the Bank of New York Mellon Corporation has been lower than

that for the Bank of America. Graphs of Net Interest Margin for both the banks are attached as

follows:

Bank of New York Mellon Corporation

Bank of America Corporation

The net interest margin for the Bank of New York Mellon Corporation has been

considerably lower as compared to the Bank of America. No doubt that the Bank of America has

been more successful in terms of Net Interest Margin, because it has been more effective in

spending its assets relative to its expenses on the same securities due to its considerably larger
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size than that of Bank of New York Mellon Corporation. While the Bank of New York Mellon

Corporation has been unsuccessful in making effective investment decisions where its interest

costs had been higher than the Bank of America.

Non-Interest Income / Average Total Assets

Non-interest income is bank or borrower profit mainly generated from charges including

loan or transaction fees, insufficient funds (NSF) fees, annual fees, regular account service fees,

inactivity fees, test and transaction slip fees, etc. Credit card companies also impose interest

charges, like over-the-limit or late fees. Organizations charge fees to produce non-interest

income as a way to increase profits and maintain flexibility in case of higher default rates. It is

calculated as Noninterest Income/ Avg Assets (%).

The importance of Non-Interest Income can be understood from the fact that most non-

banking businesses rely completely on non-interest income. On the other hand, financial

institutions and banks earn most of the money from loans and re-loans. As a result, these

businesses view non-interest income on the income statement as a strategic line item.

For the Bank of New York Mellon Corporation the Non-Interest Income / Average Total

Assets has approximately been constant over the last five quarters. While for the Bank of

America Corporation the ratio has declined by a negligible percentage. The following graphs

present the trend of the Non-Interest Income / Average Total Assets ratio over the last five

quarters.

Bank of New York Mellon Corporation

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Bank of America Corporation

The Bank of New York Mellon Corporation has greater ratio due to its larger size and

greater scope of business. While the Bank of America’s assets are considerable than that of Bank

of New York Mellon Corporation that’s why its ratio is lesser than its competitor.

No Interest Expense / Average Total Assets

A non-interest expense is a bank or financial institution's operating expense that is

independently categorized as interest costs and credit loss provision. Types of non-interest

expenditures include wages, incentives or pensions to workers; leased and renting facilities; IT
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charges, leases, telecom services, taxation, consulting services, advertising; and amortization for

intangibles. It is calculated as Non-Interest Expense/ Avg. Assets (%).

The importance of Non-Interest Expense/ Avg. Assets (%) can be understood from the

element that a bank has two major heads of expenses: interest and non-interest costs. Reserves,

short-term and long-term credits, and money market debts incur interest costs. A non-interest

expense is a cost on loans or debt other than interest payments. These costs are sometimes

operational & administrative expenses incurred in the bank's day-to-day operation. The

following graphs present the trend of the Non-Interest Expenses / Average Total Assets ratio

over the last five quarters.

Bank of New York Mellon Corporation

Bank of America Corporation

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The graphs show that there has been large increase in the Non-Interest Expense of the

Bank of New York Mellon Corporation, while the Bank of America’s Non-Interest Expenses has

approximately been the same. The potential reasons for the fluctuations can be that the Bank of

New York has incurred greater Non-Interest Expenses during the last quarter of the year 2018.

Credit Risk Ratios

Non-Performing Assets / Total Loans and Leases

Non-Performing Assets corresponds to the category of mortgages or deposits in a lender's

accounts in which no principal and interest payments have been earned and are "overdue." In

most instances, debt has been categorized as non-performing assets, with loans outstanding for

more than 90 days. The period of default within which the loan will be categorized as non-

performing assets is generally mentioned in the term sheet/sanction letter of each loan. It is

calculated as NPAs/ (Loans + OREO) (%).

The importance of Non-Performing Assets / Total Loans and Leases can be understood

from the fact that the non-performing loan balance is an indicator of the total fund's value and,

essentially, the investment practices of a bank There may be numerous reasons for the decline in

the value of the loan portfolio. In fact, it is probable that banks make errors. Nonetheless, the real
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issues are structural in nature for most failed banks and are embedded in the credit environment

and style of management of a bank. The following graphs present the trend of the Non-

Performing Assets / Total Loans and Leases ratio over the last five quarters.

Bank of New York Mellon Corporation

Bank of America Corporation

For the Bank of New York Mellon corporation the ratio has increased significantly in the

first two quarters of year 2019. While, for the Bank of America the ratio has declined

expressively during the second quarter of the year 2019.

Net Charge Offs Loans/ Total Loans and Leases

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A net charge-off (NCO) is the dollar amount that defines the discrepancy between gross

charge-offs and any eventual debt recovery. Net charge-offs apply to the debt owed to a client

that this business is unlikely to come back. Often written off this "bad debt" and categorized it as

gross charge-offs. If some money on the debt is recovered at a later date, the amount will be

deducted from the gross charge-offs to calculate the net charge-off value. It is calculated as Net

Chargeoffs/ Avg Loans (%).

The ratio is important for banks because Net Charge Offs numbers provide stakeholders

with important information regarding borrowers ' performance quality and can also offer

warnings about general economic conditions. The following graphs present the trend of the Net

Charge Offs Loans/ Total Loans and Leases ratio over the last five quarters.

Bank of New York Mellon Corporation

Bank of America Corporation

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The performance of Bank of America in this context has been worse than the Bank of

New York Mellon Corporation. The ratio of charge offs of Bank of America has been fluctuating

between 0.41% and 0.36%, while that of Bank of New York Mellon Corporation has been a

maximum of 0.08% and in negative percentages as well. The Bank of New York has a

competitive advantage of being of a larger size that’s why it has been able to manage is Net

Charge Offs ratio.

Total Loans / Total Deposits

The loan-to-deposit ratio (LDR) is used to measure the stability of a company by

measuring the cumulative liabilities of a lender over the same duration with its total deposits.

The percentage of LDR is expressed. If the amount is too high, it implies that the institution

might not have enough resources to fulfill the unexpected needs for the funds. Alternatively, the

bank might not always gain as much as it could have been if the percentage is too small. The

ratio is calculated as Total Loans / Total Deposits (%).

This ratio is important while analyzing financial institutions and taking investment

decisions, it is critical for investors to consider several financial metrics. The following graphs

present the trend of the Total Loans / Total Deposits ratio over the last five quarters.
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Bank of New York Mellon Corporation

Bank of America Corporation

The Total Loans / Total Deposits ratio of the Bank of New York Mellon Corporation is

definitely better than the Bank of America Corporation. Moreover, the Bank of New York

Mellon Corporation is successful in further improving the ratio as evident from the trend

presented in the graph. While in the case of Bank of America the ratio is more than 70% and it

has reduced slightly during the period of last five quarters.

Efficiency Ratios

Operating Efficiency Ratio

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The performance ratio is generally used to assess how well the bank internally uses its

assets and debts. The output formula can be used to measure the receivables performance, the

redemption of debts, the volume and use of debt, and the overall use of stocks and equipment. Its

formula can also be used to measure and assess market and investment bank results. It is

calculated as Operating Expenses / Operating Revenues (%).

The ratio is an important measure in context of banking industry because the ratio of

bank efficiency is a fast and easy indicator of the capacity of a bank to convert resources into

income. The lesser the ratio, the better (the maximum optimal ratio is generally considered to be

50 percent). An upsurge in the efficiency ratio shows either greater costs or reduced revenues.

The following graphs present the trend of the Operating Expenses / Operating Revenues ratio

over the last five quarters.

Bank of New York Mellon Corporation

Bank of America Corporation

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The Bank of America is more efficient as compared to the Bank of New York Mellon

Corporation in terms of Operating Expenses / Operating Revenues ratio as evident from the

graphs. The Bank of America is more or less 10% more efficient that the Bank of Mellon

Corporation. The reasons for the higher ratio can be attributed to the bad performance of

receivables, lower redemption of debts, inefficient volume and use of debt, and the ineffective

overall use of stocks and equipment.

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References

S&P. Bank of America Corporation | Regulatory Financial Highlights. n.d.

https://platform.marketintelligence.spglobal.com/web/client?

auth=inherit&ignoreIDMContext=1#company/report?id=100369&keypage=303237. 28

October 2019.

—. Bank of New York Mellon Corporation | Regulatory Financial Highlights. n.d.

https://platform.marketintelligence.spglobal.com/web/client?

auth=inherit&ignoreIDMContext=1#company/report?id=100144&keypage=303237. 28

October 2019.