Lecture 2: Evaluating performance of

commercial banks using financial

statements
Bank Management
Dr. Le Anh Tuan

1
Financial statement

2
Financial statement

3
Non-performing loans in Vietnam
► Decision No. 493/2005/QD-NHNN of April 22, 2005
► https://vanbanphapluat.co/493-2005-qd-nhnn
► Credit institutions shall carry out the debts classification as
follows:
► Group 1 (standard debts)
► Group 2 (debts, which need special attention)
► overdue < 90 days
► Group 3 (sub-standard debts)
► Overdue from 90 to 180 days;
► Group 4 (doubtful debts)
► Overdue from 181 to 360 days;
► Group 5 (potentially irrecoverable debts)
► Overdue more than more than 360 days;
► Bad debts (or non-performing loans) are debts in groups 3, 4, and
5.
► The ratio of NPL may be scaled by the total loans or total assets.

4
Allowance for credit risk

► Allowance for credit in Vietnam includes two parts: specific

allowance and general allowance.
► A specific allowance for credit risk shall be as follows:
► Group 1: 0%;
► Group 2: 5%
► Group 3: 20%
► Group 4: 50%
► Group 5: 100%.

► A general allowance for credit risk is 0.75% of total outstanding

loans (excluding group 5).

5
Measuring profitability and performance
► Bank value
► Stock value
► Market-to-book ratio
► Bank profitability
► ROE, ROA
► Net interest margin
► Net noninterest margin
► Net operating margin
► EPS

6
Measuring profitability and performance
► Return on assets (ROA) is primarily an indicator of managerial efficiency
► Indicates how capable management has been in converting
assets into net earnings
► Return on equity (ROE) is a measure of the rate of return flowing to
shareholders
► Approximates the net benefit that the stockholders have
received from investing their capital in the financial firm
► 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

7
Measuring profitability and performance
► Another traditional measure of earnings efficiency is the earnings
spread

► Measures the effectiveness of a financial firm’s intermediation function

in borrowing and lending money and also the intensity of competition in
the firm’s market area

► Greater competition tends to squeeze the difference between average

asset yields and average liability costs

► If other factors are held constant, the spread will decline as competition
increases

8
DUPONT analysis

9
 DUPONT analysis

or

where

10
 DUPONT analysis

11
 DUPONT analysis

• We can also divide a financial firm’s return on assets into its

component parts

12
 DUPONT analysis

13
 DUPONT analysis
► Other Goals in Banking and Financial-Services Management

► A rise in the value of the operating efficiency ratio often indicates

an expense control problem or a falloff in revenues, perhaps due
to declining market demand

► In contrast, a rise in the employee productivity ratio suggests

management and staff are generating more operating revenue
and/or reducing operating expenses per employee, helping to
squeeze out more product with a given employee base

14
 Pros and Cons of Financial Ratios
► Pros:
► Easy to calculate, cheap, and less time-consuming.
► Good benchmark to compare banks performance.
► Cons:
► Depend on the quality and consistency of financial statements.
► Incorrect to predict the trends in the future based on historical
data.
► The calculation methodology of different ratios is not
standardized.

15
 Key drivers of non-interest income
► New technologies make it possible for banks to develop fee-related
services.
► The support of regulatory climate. Compared to a decade ago, banks
today have more freedom to provide non-traditional products.
► Increase income diversification, be less risky, and sustainable growth
for banks.
► Keep profit in case of high and unstable interest rate, or low credit
rooms.

19
 Key drivers of non-interest income

20
 Bank risk management

21
 Risks of financial institutions
► Risk management is the process by which managers identify, assess,
monitor, and control risks associated with a financial institution’s
activities.
► The complexity and range of financial products have made risk
management more difficult to accomplish and evaluate.

22
 Risks of financial institutions

23
 Risks of financial institutions
► Legal risk
► It creates variability in earnings resulting from actions taken
by our legal system.
► Strategic Risk
► Variations in earnings due to adverse business decisions,
improper implementation of decisions, or lack of
responsiveness to industry changes.
► Reputation Risk
► the uncertainty associated with public opinion.

24
 ESG reputational risk

Source: Reprisk

25
 Notes
► Exercises for Session 2

26