Chapter Six

Measuring and Evaluating the

Performance of Banks and
Their Principal Competitors

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 6-2

Key Topics
• Stock Values and Profitability Ratios
• Measuring Credit, Liquidity, and Other Risks
• Measuring Operating Efficiency
• Performance of Competing Financial Firms
• Size and Location Effects
• The Uniform Bank Performance Report
(UBPR) and Comparing Performance

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 6-3

Value of the Bank’s Stock

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 6-4

Value of a Bank’s Stock Rises When:

• Expected Dividends Increase

• Risk of the Bank Falls
• Market Interest Rates Decrease
• Combination of Expected Dividend Increase
and Risk Decline

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 6-5

Value of Bank’s Stock if Earnings Growth

is Constant

D1
P0 
r-g

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An investor holds the stock of Foremost Financials
and expects to receive a dividend of $5.75 per share
at the end of the year. Stock analysts recently
predicted that the bank’s dividends will grow at
approximately 3 percent a year indefinitely into the
future. If this is true, and if the appropriate risk-
adjusted cost of capital (discount rate) for the bank is
12.25 percent, what should be the current price per
share of Foremost Financials’ stock?

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Po = D1 / (r – g)
= $5.75 / (0.1225 -0.03)
= $62.16

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Suppose that stockbrokers have projected that
Yorktown Savings will pay a dividend of $3 per share
on its common stock at the end of the year; a
dividend of $4.50 per share is expected for the next
year, and $ 5.50 per share in the following two year.
The risk-adjusted cost of capital for banks in
Yorktown’s risk class is 15 percent. If an investor
holding Yorktown’s stock plans to hold that stock for
only four years and hopes to sell it at a price of $60
per share, what should the value of the bank’s stock
be in today’s market?

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Po = 3 / (1 + 0.15) + 4.5 l/(1 +
0.15)2 + 5.5 /(1 + 0.15)3 +
5.5 /(1 + 0.15)4 + 60 /(1 +
0.15)4
= 2.60 + 3.40 + 3.62 + 3.15
+ 34.40
= $47.08
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 6-10

Key Profitability Ratios in Banking

Net Income
Return on Equity Capital (ROE) =
Total Equity Capital
Net Income
Return on Assets (ROA) =
Total Assets
(Interest income
- Interest expense) Net Interest Income
Net Interest Margin  
Total Assets Total Assets

Noninterest revenue
- PLLL
- Noninterest expenses Net Noninterest Income
Noninterest Margin 
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Assets Total Assets
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 6-11

Key Profitability Ratios in Banking (cont.)

Total Operating Revenues -

Total Operating Expenses
Net Bank Operating Margin 
Total Assets

Net Income After Taxes

Earnings Per Share (EPS) 
Common Equity Shares Outstanding

Total Interest Income __ Total Interest Expense

Earnings Spread = Total Earning Assets Total Interest Bearing Liability

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The following information is for Blue Sky National
Bank:
 
Interest income = $2200
Interest expense = $1400
Total assets = $45,000
Securities losses or gains = $21
Earning assets = $40,000
Total liabilities = $38,000
Taxes paid = $16
Shares of Common Stock outstanding =5,000
Noninterest income = $800
Noninterest expense = $900
Provision for loan losses = $100
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Please calculate:
ROE --------------
ROA
Net interest margin --------------
Earnings per share --------------
Net noninterest margin --------------
Net operating margin --------------
 

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ROE = 605 / (45000 – 38000) = 8.64%
ROA = 605 / 45000 = 1.3 %
Net interest margin =(2200 – 1400) / 40000 = 2%
Earning per share = 605 / 5000 = 0.121 per share
Net noninterest margin = (800-100- 900) / 40000 =
- 0.5%
Net operating margin = (2200 + 800 ) – (1400 + 900
+ 100) / 45000 = 1.33%

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 6-15

Breaking Down ROE

R O E = N e t In c o m e / T o ta l E q u ity C a p ita l

ROA = E q u ity M u ltip lie r =

N e t In c o m e /T o ta l A s s e ts x T o ta l A s s e ts /E q u ity C a p ita l

N e t P ro fit M a rg in = x A s s e t U tiliz a tio n =

N e t In c o m e /T o ta l O p e ra tin g R e v e n u e T o ta l O p e ra tin g R e v e n u e /T o ta l A s s e ts
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