1 / 27

Analyzing Bank Performance and Risks for Stock Value Maximization

Understand how banks' financial performance and risks affect stock value, including profitability ratios, ROE components, risk categories, and capital risk measures.

couture
Download Presentation

Analyzing Bank Performance and Risks for Stock Value Maximization

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter Six Measuring and Evaluating the Performance of Banks and Their Principal Competitors

  2. Value of the Bank’s Stock

  3. 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

  4. Value of Bank’s Stock if Earnings Growth is Constant

  5. Key Profitability Ratios in Banking

  6. Key Profitability Ratios in Banking (cont.) Total Interest Income __ Total Interest Expense Earnings Spread = Total Earning Assets Total Interest Bearing Liability

  7. Breaking Down ROE x x

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

  9. Components of ROE for All Insured U.S. Banks (1996-2005)

  10. A Variation on ROE

  11. Breakdown of ROA

  12. Credit Risk Liquidity Risk Market Risk Interest Rate Risk Operational Risk Legal and Compliance Risk Reputation Risk Strategic Risk Capital Risk Bank Risks

  13. Credit Risk The Probability that Some of the Financial Firm’s Assets Will Decline in Value and Perhaps Become Worthless

  14. 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

  15. Liquidity Risk Probability the Financial Firm Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit Withdrawals and Other Cash Needs

  16. Liquidity Risk Measures • Purchased Funds/Total Assets • Net Loans/Total Assets • Cash and Due from Banks/Total Assets • Cash and Government Securities/Total Assets

  17. Market Risk Probability of the Market Value of the Financial Firm’s Investment Portfolio Declining in Value Due to a Change in Interest Rates

  18. 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 Value of Preferred Stock and Common Stock

  19. Interest Rate Risk The Danger that Shifting Interest Rates May Adversely Affect a Bank’s Net Income, the Value of its Assets or Equity

  20. Interest Rate Risk Measures • Interest Sensitive Assets/Interest Sensitive Liabilities • Uninsured Deposits/Total Deposits

  21. 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

  22. 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

  23. 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.

  24. 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

  25. Capital Risk Measures • Stock Price/Earnings Per Share • Equity Capital/Total Assets • Purchased Funds/Total Liabilities • Equity Capital/Risk Assets

  26. Other Goals in Banking

  27. UBPR • The Uniform Bank Performance Report Provided by U.S. Federal Regulators so that Analysts Can Compare the Performance of One Bank Against Another

More Related