01-Evaluating Bank Performance

Evaluating Bank Financial
Performance & Ratings
Prof. Tarek Eldomiaty

Prof. of Finance
Fall 2021 ©Prof.Tarek Eldomiaty 1

Commercial Banks
 The main provider of credit to the households and
corporate sector.
 CBs could be publicly listed on the stock market or
privately owned.
 Deal with both retail and corporate customers.
 CBs have well diversified deposits and loans.

Balance Sheet

Balance Sheet
 Assets  Liabilities and

Shareholder’s Equity
Uses of Financing Sources of Financing
➢ Cash ➢ Due to banks

➢ Investment in Financial ➢ Deposits
Securities ➢ Credit balances
➢ Loans ➢ Long Term Loans
➢ Fixed assets ➢ Shareholder Equity

Cash
 Cash in hand
• Cash kept with the central bank (within the required reserve
percentage).
Investments in Financial Securities

 Treasury bills
 Financial assets held for trading
 Financial derivatives.

Loans
 Loans are offered to individuals, corporations and other
banks.
 Discounted Bills
 Loans to customers
 Loans to Banks
 The amount of loans excludes provision of loan losses and
interest in suspense.

Fixed Assets
 Land
 Premises
 Transportation means
 Furniture
 Equipments
 Computers

Due to Banks
 Current accounts
 Deposits from the central bank, local banks and foreign banks
Deposits
• Demand deposits
• Time and call deposits
• Certificates of Deposit
• Saving deposits

Credit Balances
• Accrued interest
• Deferred revenue
• Accrued expenses
• Creditors
• Accrued tax
What is the purpose of keeping “Accrued items?

Long-Term Loans
• Loans from the central bank.
• Loans from other banks
• For example: AAIB
• During 2007, the bank obtained EGP 500 million long term debt
from a local bank and has to be re-paid once on February 2014,
bearing a fixed interest rate of 9.75% paid semi annually.

Shareholder Equity
• Paid-in Capital
• Reserves
• Retained Earnings

Income Statement

Income Statement
❖ Income Statement (Report of Income)

✓ Interest income
✓ Noninterest income
✓ Interest expenses
✓ Noninterest expenses (including provision for loan losses)
✓ Net profit

Measures of Bank Financial Performance

Key Profitability Ratios in
Banking

Key Profitability Ratios in Banking
Net Income
Return on Equity Capital (ROE) =
Total Equity Capital
Net Income
Return on Assets (ROA) =
Total Assets
Net Interest Income

Net Interest Margin =
Total Assets
Net Noninterest Income
Net Noninterest Margin =
Total Assets
Net Operating Income

Net Bank Operating Margin =
Total Assets
Total Interest Income __ Total Interest Expense

Earnings Spread = Total Earning Assets Total Interest Bearing Liability
Net Income After Taxes

Earnings Per Share (EPS) =
Common Equity Shares Outstanding

Net Income
Net Profit Margin =
Interest Income + Noninterest Income

Asset Utilization =
Total Assets
Or " Asset Management Efficiency"
Total Assets
Equity Multiplier =
Total Equity
Or " Funds Management Efficiency"

Net Income
Tax Management Efficiency =
PreTax Operating Income
Pre Tax Operating Income

Expense Control Efficiency =
Operating Efficiency Ratio =

Interest Expense + NonInterest Expenses + Provision for Loan Losses + Tax
Interest Income + Noninterest Income + Securities Gains (or losses)

Galloping Merchants National Bank
Assets 2006 2007
Cash and Deposits due from banks $200 210
Investment Securities $200 210
Federal Funds Sold $50 52.5
Net Loans $400 500
(Allowance for loan losses =25)
(Unearned income on loans 5)
Plant and Equipment $130 $355
Total Assets $980 $1,328

*** Total earning assets $650 $763
Liabilities & Equity 2006 2007

Demand deposits $190 199.5
Savings deposits $180 288
Time deposits $470 752
Federal funds purchased $60 0
Total liabilities $900 $1,240
Equity Capital
Common stock $20 $20
Surplus $25 30
Retained earnings $35 $38
Total Equity Capital $80 $88
Total liabilities & Equity $980 $1,328
Fall 2021 ©Prof.Tarek Eldomiaty
**** Interest bearing deposits $650 $1,040 21
Income and Expense Statement 2006 2007
Interest and Fees on Loans $65 $68
Interest Dividends on Securities $12 $13
Total Interest Income $77 $81
Interest Paid on Deposits $49 $54
Interest on Nondeposit Borrowings $6 $7
Total Interest Expense $55 $61
Net Interest Income $22 $20
Provision for Loan Losses $2 $3
Noninterest Income and Fees $7 $15
Noninterest Expenses:
Salaries and Employee Benefits $12 $15
Overhead Expenses $5 $8
Other Noninterest Expenses $3 $4
Total Noninterest Expenses $20 $27
Pretax operating income $7 $5
Securities Gains (or Losses) $1 $3
Pretax net operating income $8 $8
Taxes $1 $1
Net Operating Income $7 $7
Net Extraordinary items ($1) ($1)
Net Income $6 $6
Dividends Paid Out $3 $3
Fall 2021 Retained Earnings ©Prof.Tarek Eldomiaty $3 $3 22
2006 2007
ROE 7.50% 7.22%
ROA 0.61% 0.48%
Net interest margin 2.24% 1.53%
Net noninterest margin -1.33% -0.90%
Net operating margin 0.71% 0.55%
Earnings spread 4.10% 4.79%
Net profit margin 7.14% 6.62%
Equity multiplier 12.25 15.09
Tax management efficiency 85.71% 118.69%
Expense control efficiency 8.33% 5.58%
Asset management efficiency 8.57% 7.22%
Operating efficiency ratio 91.76% 92.56%
Break Down of Bank Profitability

Breaking Down ROE
ROE = Net Income/

Total Equity Capital
ROA = Equity Multiplier =

Net Income/Total Total Assets/Equity
Assets Capital
Net Profit Margin = Asset Utilization =

Net Income/Interest Interest + Non
+ Non Interest Interest
Income Income/Total Assets
ROE (2006) = 7.14% * 8.56% * 12.25 = 7.50%

MAPPING ROE
ROE Depends On:
• Equity Multiplier
– Leverage or Financing Policies
• Net Profit Margin
– Effectiveness of Expense Management
• Asset Utilization
– Portfolio Management Policies

Components of ROE for All Insured U.S. Banks
(1996-2005)
Year ROE = NPM X AU X EM
2005 12.68 = 18.89 X 6.93 X 9.63
2004 13.27 = 19.81 X 6.51 X 9.72
2003 15.04 = 19.86 X 6.95 X 10.93
2002 14.11 = 17.10 X 7.60 X 10.87
2000 13.53 = 12.02 X 9.48 X 11.78
1998 13.51 = 12.73 X 9.11 X 11.74

A Variation on ROE
Net Income Pre-Tax Net Operating Income
ROE =  
Pre-Tax Net Operating Income Total Operating Revenue
Total Operating Revenue Total Assets


Total Assets Total Equity Capital
ROE = Tax Management Efficiency 
Expense Control Efficiency 
Asset Management Efficiency 
Funds Management Efficiency
A Variation on ROE
ROE = Tax Management Efficiency 
Expense Control Efficiency 
Asset Management Efficiency 
Funds Management Efficiency
Tax management efficiency 85.71% 118.69%

Expense control efficiency 8.33% 5.58%
Asset management efficiency 8.57% 7.22%
Funds management efficiency (Equity
Multiplier) 12.25 15.09
ROE 7.50% 7.22%

Breakdown of ROA
Net Interest Income
ROA=
Total Assets
Net NonInterest Income
+
Total Assets
PLL  Security Gain(losses)+Taxes-Extraordinary Gains
−
Total Assets
ROA=Net Interest Margin

+ Net Noninterest Margin
- Special Transactions affecting Net Income
BANK MIDB
31/12/2017 31/12/2016 31/12/2015 31/12/2014 31/12/2013
LE 000 LE 000 LE 000 LE 000 LE 000
NET INCOME 390921 547732 216738 281913 245217
TOTAL EQUITY CAPITAL 2861255 2465957 1982657 1929784 1773977
TOTAL ASSETS 21123984 17459937 13464307 10684695 10746080
FIXED ASSETS 58114 45236 43926 41753 45613
INTEREST INCOME 2405796 1236260 821195 664931 645860
INTEREST EXPENSES -1897455 -842433 -546126 -397264 -437243
NET INTEREST INCOME 508341 393827 275069 267667 208617
NON INTEREST INCOME 305581 898111 227731 209191 261094
NON INTEREST EXPENSES -268277 -156960 -159531 -126895 -114586
NET NON INTEREST INCOME 37304 741151 68200 82296 146508
NET OPERATING INCOME 646835 556263 395352 374369 300510
TOTAL EARNING ASSETS 21065870 17414701 13420381 10642942 10700467
INTEREST BEARING LIAB 17844004 14610182 11146822 8426250 8775790
PRE-TAX OPERATING INCOME 531262 614016 264294 384522 309077
PROVISIONS FOR LOANS -14383 -520960 -78975 34559 -46048
TAX 140341 66284 47556 102609 63860
SECURITIES GAINS

BANK MIDB
31/12/2017 31/12/2016 31/12/2015 31/12/2014 31/12/2013
PROFITABILITY RATIOS
ROE 0.14 0.22 0.11 0.15 0.14
ROA 0.02 0.03 0.02 0.03 0.02
Net interest margin 0.02 0.02 0.02 0.03 0.02
Net noninterest margin 0.64 16.38 1.55 1.97 3.21
Net operating margin 11.13 12.30 9.00 8.97 6.59
Earnings spread 0.22 0.13 0.11 0.11 0.11
Net profit margin 0.14 0.26 0.21 0.32 0.27
Equity multiplier 7.38 7.08 6.79 5.54 6.06
Tax management efficiency 0.74 0.89 0.82 0.73 0.79
Expense control efficiency 0.20 0.29 0.25 0.44 0.34
Asset management efficiency 0.13 0.12 0.08 0.08 0.08
Operating efficiency ratio -1.24 -1.40 -1.34 -1.79 -1.52
Shares Profitability ( EPS)
LE/SHARE 147.65 211.17 79.31 105.55 91.07

Sources of Liquidity 2017 2016 2015 2014
Purchased Funds 296,754.00 578,087.00 164,552.00 149,207.00
Total Assets 21,123,984.00 17,459,937.00 13,464,307.00 10,684,695.00
Net Loans 6,244,083.00 6,225,772.00 4,333,548.00 3,796,701.00
Cash and Due from Banks 5,179,852.00 5,494,746.00 5,409,272.00 2,555,885.00
Cash and due from central bank of
Egypt 1,209,364.00 287,235.00 292,086.00 289,275.00
Investment Securities 1,838,023.00 1,630,733.00 1,289,277.00 1,760,498.00

Liquidity Ratios 2017 2016 2015 2014
Purchased Funds/Total Assets 1.40% 3.31% 1.22% 1.40%
Net Loans/Total Assets 30% 36% 32% 36%
Cash and Due from Banks/Total Assets 25% 31% 40% 24%
Temporary investments ratio 14% 11% 12% 19%
Volatile liability dependency ratio 262% 221% 247% 210%

Key Risk Ratios in Banking

Bank Risks
• Credit Risk • Legal and

• Liquidity Risk Compliance Risk
• Market Risk • Reputation Risk
• Interest Rate Risk • Strategic Risk
• Operational Risk • Capital Risk

National Bank
Income and Expense Statement

Interest and Fees on Loans
Operating Interest Dividends on Securities
Total Interest Income
Efficiency Interest Paid on Deposits
Interest on Nondeposit Borrowings
Total Interest Expense
Net Interest Income
Credit Risk Provision for Loan Losses
Noninterest Income and Fees
Asset Noninterest Expenses:
Salaries and Employee Benefits
Quality Operating Overhead Expenses
Efficiency Other Noninterest Expenses
Total Noninterest Expenses
Pre-tax operating income
Securities Gains (or Losses)
Pre-tax net operating income
Taxes
Net Extraordinary items
Net Income
Dividends Paid Out
Retained Earnings

National Bank Interest
Risk
Liquidity
Risk
Assets Liabilities & Equity Liquidity
Interest
Cash and Deposits due from banks Demand deposits Risk
Risk Investment Securities Savings deposits

Interest
Federal Funds Sold Time deposits Risk
Total Loans Federal funds purchased

Credit (Allowance for loan losses =25) Total liabilities
Risk
(Unearned income on loans 5) Equity Capital
Net Loans Capital
Risk
Liquidity Plant and Equipment Common stock
Risk
Surplus
Asset
Retained earnings Market
and Capital
Quality Total Equity Capital Risk
Total Assets Total liabilities & Equity
*** Total earning assets **** Interest bearing deposits
Income and Expense Statement 2006 2007

Interest and Fees on Loans 65.00 68.25
Interest Dividends on Securities 12.00 12.60
Total Interest Income 77.00 80.85
Interest Paid on Deposits 49.00 53.90
Interest on Nondeposit Borrowings 6.00 6.60
Total Interest Expense 55.00 60.50
Net Interest Income 22.00 20.35
Provision for Loan Losses 2.00 3.00
Noninterest Income and Fees 7.00 15.00
Noninterest Expenses:
Salaries and Employee Benefits 12.00 15.00
Overhead Expenses 5.00 8.00
Other Noninterest Expenses 3.00 4.00
Total Noninterest Expenses 20.00 27.00
Pretax operating income 7.00 5.35
Securities Gains (or Losses) 1.00 3.00
Pretax net operating income 8.00 8.35
Taxes 1.00 1.00
Net Operating Income 7.00 7.35
Net Extraordinary items (1.00) (1.00)
Net Income 6.00 6.35
Dividends Paid Out 3.00 3.35
Retained Earnings 3.00 3.00
Assets 2006 2007

Cash and Deposits due from banks 200.00 210.00
Investment Securities 200.00 210.00
Federal Funds Sold 50.00 52.50
Total Loans 430.00 537.50
(Allowance for loan losses =25) 25.00 31.25
(Unearned income on loans 5) 5.00 6.25
Net Loans 400.00 500.00
Plant and Equipment 130.00 355.00
Total Assets 980.00 1,327.50

*** Total earning assets 650.00 762.50
Assets-Fixed assets-cash

Liabilities & Equity 2006 2007
Demand deposits 190.00 199.50
Savings deposits 180.00 288.00
Time deposits 470.00 752.00
Federal funds purchased 60.00 0.00
Total liabilities 900.00 1,239.50
Equity Capital
Common stock 20.00 20.00

Surplus 25.00 30.00
Retained earnings 35.00 38.00
Total Equity Capital 80.00 88.00
Total liabilities & Equity 980.00 1,327.50
**** Interest bearing deposits 650.00 1,040.00
savings deposits + Time deposits

Credit Risk
The Probability that Some of the Financial

Firm’s Assets Will Decline in Value and
Perhaps Become Worthless

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
• Nonperforming Loans/Equity Capital

Credit Risk Measures

Asset quality
❑ Risk ratios
Asset quality
Provision for loan loss ratio
= PLL/TL (provision for loan losses/total loans and leases)
Loan ratio
= Net loans/Total assets
Loss ratio
= Net charge-offs on loans (gross charge-offs minus
recoveries)/Total loans and leases
Reserve ratio
= Reserve for loan losses (reserve for loan losses last year
minus gross charge-offs plus PLL and recoveries)/Total
loans and leases
Nonperforming ratio
= Nonperforming assets (nonaccrual loans and restructured
loans)/Total loans and leases

Asset Quality
Credit
Risk
Credit
Risk
Liquidity Risk
Probability that the Financial Firm Will

Not Have Sufficient Cash and Borrowing
Capacity to Meet Deposit Withdrawals
and Other Cash Needs

Liquidity Risk Measures
• Purchased Funds/Total Assets

• Net Loans/Total Assets
• Cash and Due from Banks/Total Assets
• Temporary Investment Ratio, p.70
• Volatile Liability Dependency Ratio, p.70

Liquidity Risk Measures
2006 2007
Purchased Funds/Total Assets 6.12% 0.00%
Net Loans/Total Assets 40.82% 37.66%
Cash and Due from Banks/Total Assets 20.41% 15.82%
Temporary investments ratio 45.92% 35.59%
Volatile liability dependency ratio 5.00% 55.90%
➢Volatile liability dependency ratio indicates the portion of the

nonliquid assets financed by volatile liabilities
• Temporary Investment Ratio = Cash +Investment Securities + Federal Funds
Sold) / Total Assets
• Volatile Liability Dependency Ratio = [ Time Deposits -(Cash +Investment
Securities + Federal Funds Sold) ] / Net Loans
Market Risk
Probability of the Market Value of the Financial

Firm’s Investment Portfolio Declining in Value
Due to a Change in Interest Rates

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 Risk Measures
2006 2007
# of shares 20 20
Stock price 5 6
Market Value of Assets 1960 3318.75
Market Value of Assets / Book-Value of Assets

2 2.5
Market Value of Equity /Book-Value of Equity
1.25 1.36

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 Sensitivity Gap Ratio

= (Interest Sensitive Assets-Interest Sensitive Liabilities) / Total
Assets
• Uninsured Deposits/Total Deposits

Interest Rate Risk Measures
• Interest Sensitive Assets = Investment Securities
• Interest Sensitive Liabilities = Time Deposits
2006 2007
Interest Sensitivity Gap Ratio -27.55% -40.83%
✓ The large negative gap ratio suggests that the bank

profitability is in danger due to changes in interest
rates in the short-run.

Operational Risk
Uncertainty Regarding a Financial Firm’s

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

Legal and Compliance Risk
Risk of Earnings Resulting from Actions Taken by

the Legal System. This can Include
Unenforceable Contracts, Lawsuits or Adverse
Judgments. Compliance Risk Includes
Violations of Rules and Regulations

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

Capital Risk Measures
• Stock Price/Earnings Per Share (PE ratio)

• Equity Capital/Total Assets
• Purchased Funds/Total Liabilities
• Equity Capital/Risk Assets

Capital Risk Measures
2006 2007
Stock Price/Earnings Per Share (PE ratio) 3.33 4.72
Equity Capital/Total Assets 8.16% 6.63%
Purchased Funds/Total Liabilities 6.12% 0.00%
Risk Assets / Equity Capital 300.00% 295.45%

Capitalization
• Capitalization
❖Total Capital Ratio
• (Total equity + Long-term debt + Reserve for loan losses)
/ Total assets
2006 2007
Total capital ratio 16.84% 8.98%

Efficiency Ratios: (Cost Control)
Total Operating Revenues

Operating Efficiency Ratio =
Total Operating Expenses

Employee Productivity Ratio =
Number of Full Time-Equivalent Employees
Wages and salaries/Total expenses

Operating Efficiency: (Cost Control)
2006 2007
# of employees 0.2 0.3
Operating Efficiency Ratio 110.00% 75.37%
Employees Productivity Ratio 35.00 24.50
Wages and salaries/Total expenses 60.00% 55.56%

Further Readings
Rose P., and Hudgins S., 2005. Banking Management and Financial
Services. 6th Edition. McGraw Hill
Gup, Benton E and Kolari, James W. 2005. Commercial Banking: The

Management of Risk, 3rd edition. Wiley.

01-Evaluating Bank Performance

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01-Evaluating Bank Performance

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Evaluating Bank Financial

Performance & Ratings

Prof. Tarek Eldomiaty

Fall 2021 ©Prof.Tarek Eldomiaty 1

Fall 2021 ©Prof.Tarek Eldomiaty 3

Fall 2021 ©Prof.Tarek Eldomiaty 4

 Assets  Liabilities and

➢ Cash ➢ Due to banks

Fall 2021 ©Prof.Tarek Eldomiaty 5

Investments in Financial Securities

Fall 2021 ©Prof.Tarek Eldomiaty 6

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What is the purpose of keeping “Accrued items?

Fall 2021 ©Prof.Tarek Eldomiaty 10

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❖ Income Statement (Report of Income)

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Net Interest Income

Net Operating Income

Total Interest Income __ Total Interest Expense

Net Income After Taxes

Fall 2021 ©Prof.Tarek Eldomiaty 18

Interest Income + Noninterest Income

Fall 2021 ©Prof.Tarek Eldomiaty 19

Pre Tax Operating Income

Operating Efficiency Ratio =

Fall 2021 ©Prof.Tarek Eldomiaty 20

Total Assets $980 $1,328

Liabilities & Equity 2006 2007

Fall 2021 ©Prof.Tarek Eldomiaty 24

ROE = Net Income/

ROA = Equity Multiplier =

Net Profit Margin = Asset Utilization =

ROE (2006) = 7.14% * 8.56% * 12.25 = 7.50%

Fall 2021 ©Prof.Tarek Eldomiaty 25

Fall 2021 ©Prof.Tarek Eldomiaty 26

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Total Operating Revenue Total Assets

Tax management efficiency 85.71% 118.69%

Fall 2021 ©Prof.Tarek Eldomiaty 29

ROA=Net Interest Margin

Fall 2021 ©Prof.Tarek Eldomiaty 32

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Volatile liability dependency ratio 262% 221% 247% 210%

Fall 2021 ©Prof.Tarek Eldomiaty 35

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• Credit Risk • Legal and

Fall 2021 ©Prof.Tarek Eldomiaty 37

Income and Expense Statement

Fall 2021 ©Prof.Tarek Eldomiaty 38

Risk Investment Securities Savings deposits

Total Loans Federal funds purchased

Income and Expense Statement 2006 2007

Assets 2006 2007

Total Assets 980.00 1,327.50

Fall 2021 ©Prof.Tarek Eldomiaty 41

Common stock 20.00 20.00