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Chapter. 5. Measuring and Evaluating Bank Performance. The purpose of this chapter is to discover what analytical tools can be applied to a bank’s financial statements so that management and the public can identify the most critical problems inside each bank

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  1. Chapter 5 Measuring and Evaluating Bank Performance The purpose of this chapter is to discover what analytical tools can be applied to a bank’s financial statements so that management and the public can identify the most critical problems inside each bank and develop ways to deal with those problems.

  2. Value of the Bank’s Stock

  3. Value of a Bank’s Stock Rises When: • Expected Dividends Increase • Risk of the Bank Falls • 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.)

  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 Banks

  10. Bank Risks • Credit Risk • Liquidity Risk • Market Risk • Interest Rate Risk • Earnings Risk • Solvency Risk

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

  12. 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 • Total Loans/Total Deposits

  13. Liquidity Risk Probability the Bank Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit Withdrawals and Other Cash Needs

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

  15. Market Risk Probability of the Market Value of the Bank’s Investment Portfolio Declining in Value Due to a Rise in Interest Rates

  16. 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

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

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

  19. Earnings Risk The Risk to the Bank’s Bottom Line – Its Net Income After All Expenses

  20. Earnings Risk Measures • Standard Deviation of Net Income • Standard Deviation of ROE • Standard Deviation of ROA

  21. Solvency or Default 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

  22. Solvency Risk Measures • Spread Between Bank CDs and Treasury Securities of the Same Maturity • Stock Price/Earnings Per Share • Equity Capital/Total Assets • Purchased Funds/Total Liabilities • Equity Capital/Risk Assets

  23. Other Forms of Risk in Banking • Inflation Risk • Currency or Exchange Rate Risk • Political Risk • Crime Risk

  24. Performance Measures Related to Bank Size

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

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