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CHAPTER 6

CHAPTER 6. CASE STUDIES IN BANK VALUATION AND PERFORMANCE. LEARNING OBJECTIVES . To apply accounting and market performance measures to various financial and bank holding companies, banks, and other financial-services firms

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CHAPTER 6

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  1. CHAPTER 6 CASE STUDIES IN BANK VALUATION AND PERFORMANCE Chapter 6

  2. LEARNING OBJECTIVES • To apply accounting and market performance measures to various financial and bank holding companies, banks, and other financial-services firms • To understand the financial statements and unique financial characteristics of various financial and bank holding companies, banks, and other financial-services firms Chapter 6

  3. CHAPTER THEME • In 1974, a noted bank-stock analyst said, regarding the first billion-dollar bank failure in the U.S., • “People who can read a balance sheet were out of there long ago.” • A self-serving statement for sure for an analyst of bank stocks Chapter 6

  4. How To Read a Balance Sheet (and other financial statements) • It’s important to the various stakeholders in a bank including • Owners/directors/managers • Creditors (uninsured vs. insured) • Safety-net managers (regulators and deposit insurers) • Analysts and rating agencies Chapter 6

  5. Analyzing Bank/BHC Financial Statements: Approaches and Caveats • “du Pont” model -- ROE decomposition analysis • ROE = PM x AU x EM • Pro-Forma Analysis (forecasting) Chapter 6

  6. Analyzing Bank/BHC Financial Statements: Approaches and Caveats Four Pieces of Accounting Data Needed to Start ROE Analysis • Net Income (profits) • Total Operating Income (“sales”) • Total Assets • Total Equity Capital Chapter 6

  7. Analyzing Bank/BHC Financial Statements: Approaches and Caveats Ratio Components of the ROE Model • ROE = Net Income / Equity Capital • ROA = Net Income / Total Assets • PM = Net Income / Operating Income • AU = Operating Income / Total Assets • EM = Total Assets / Equity Capital Chapter 6

  8. Exercises • For the case studies that follow, if the companies still exist, find the most recent accounting data and, if available, market data and determine how the company has performed compared to the data presented here Chapter 6

  9. CitigroupThe Largest FHC in the United States • Overview of holding company (3-31-00) • UnitAssetsNet inc.ROA • Citicorp 400.1 8.580 2.15% • Salomon 226.7 3.952 1.74 • Travelers 107.3 2.0941.95 • Citigroup 738.2 14.360 1.95% • Note: $ billions for assets and NI Chapter 6

  10. Overview of Travelers (3-31-00) • UnitAssetsNet inc.ROA • Ins. Co. 67.9 0.704 1.04% • Life&Annuity 8.5 0.066 0.78 • P&C Corp. 30.91.3244.28 • Citigroup 107.3 2.094 1.95% • Note: $ billions for assets and NI Chapter 6

  11. CitigroupThe Largest FHC in the United States • Total Assets = 738,205 • Total Equity Capital = 50,326 • Total Operating Income = 95,448 • Net Income = 14,360 ($ Millions, March 31, 2000) Chapter 6

  12. CitigroupThe Largest FHC in the United States • ROE = 0.2853 = 0.0195 x 14.67 • ROA = 0.0195 = 0.1504 x 0.1293 • PM = 0.1504 • AU = 0.1293 • EM = 14.67 Chapter 6

  13. Bank of AmericaThe Largest BHC in the United States • Total Assets = 656,113 • Total Equity Capital = 45,299 • Total Operating Income = 56,528 • Net Income = 8,960 ($ Millions, 3-31-00) Chapter 6

  14. Bank of AmericaThe Largest BHC in the United States • ROE = 0.1978 = 0.01367 x 14.48 • ROA = 0.0137 = 0.1558 x 0.0862 • PM = 0.1585 • AU = 0.0862 • EM = 14.48 Chapter 6

  15. KeycorpA Superregional BHC • Total Assets = 84,412 • Total Equity Capital = 6,507 • Total Operating Income = 2,186 • Net Income = 1,229 ($ Millions, 6-30-00) Chapter 6

  16. KeycorpA Superregional BHC • ROE = 0.1889 = 0.0146 x 12.97 • ROA = 0.0146 = 0.2049 x 0.0711 • PM = 0.2049 • AU = 0.0711 • EM = 12.97 Chapter 6

  17. Compass BancsharesA Regional BHC • Total Assets = 18.972 • Total Equity Capital = 1.325 • Total Operating Income = 1.950 • Net Income = 0.191 ($ Millions, 6-30-00) Chapter 6

  18. Compass BancsharesA Regional BHC • ROE = 0.1442 = 0.0101 x 14.32 • ROA = 0.0101 = 0.0979 x 0.1028 • PM = 0.0979 • AU = 0.1028 • EM = 14.32 Chapter 6

  19. Market Data • The preceding banking companies have market data available while the ones that follow do not • Tables 6-3 (p. 165) and 6-6 (p. 171) show some of the variables based on market data that can be used to assess bank performance Chapter 6

  20. Variables for Market Profiles • Stock price (P) • Market capitalization (P x N, where N = number of shares outstanding) • EPS, DPS, and dividend yield (DPS/P) and payout [DPS/(EPS + DPS)] • P/E (P/EPS) and market-to-book ratios • Beta • Holding-period return (HPR) Chapter 6

  21. First American Bank & TrustA Community Bank • Total Assets = 163.999 • Total Equity Capital = 17.722 • Total Operating Income = 13.346 • Net Income = 2.016 ($ Millions, 3-31-00) Chapter 6

  22. First American Bank & TrustA Community Bank • ROE = 0.1138 = 0.0123 x 9.254 • ROA = 0.0123 = 0.15 x 0.0814 • PM = 0.15 • AU = 0.0814 • EM = 9.254 Chapter 6

  23. Citizens Trust BankA Minority - Owned Bank • Total Assets = 252.736 • Total Equity Capital = 19.243 • Total Operating Income = 24.294 • Net Income = 3.042 ($ Millions, 6-30-00) Note: Correction on p. 177 of the text: flow data should read with decimals point not commas Chapter 6

  24. Citizens Trust BankA Minority - Owned Bank • ROE = 0.1581 = 0.0120 x 13.13 • ROA = 0.0120 = 0.1252 x 0.0961 • PM = 0.1252 • AU = 0.0961 • EM = 13.13 • Note: Typo on p. 177 of the text, ROE is 0.1581 as shown above and not 0.1768 Chapter 6

  25. NetBankA Pure-Internet Savings Bank • Total Assets = 1,225 • Total Equity Capital = 218 • Total Operating Income = 21.302 • Net Income = 0.408 ($ Millions, 12-31-99) Chapter 6

  26. NetBankA Pure-Internet Savings Bank • ROE = 0.0019 = 0.0003 x 5.76 • ROA = 0.0003 = 0.0192 x 0.017 • PM = 0.0192 • AU = 0.017 • EM = 5.76 Chapter 6

  27. Bankers’ Banks and The Bankers Bank: A Correspondent-Banking Innovation Qualifications to be a Bankers’ Bank 1. Be organized solely to do business with other financial institutions 2. Be owned primarily by the financial institutions with which it does business 3. Not do business with the general public Chapter 6

  28. Bankers’ Banks and The Bankers Bank: A Correspondent-Banking Innovation • Total Assets = 840.414 • Total Equity Capital = 48.694 • Total Operating Income = 76.812 • Net Income = 4.168 ($ Millions, 3-31-00) Chapter 6

  29. Bankers’ Banks and The Bankers Bank: A Correspondent-Banking Innovation • ROE = 0.0856 = 0.005 x 17.26 • ROA = 0.0050 = 0.0543 x 0.0914 • PM = 0.0543 • AU = 0.0914 • EM = 17.26 Chapter 6

  30. Decision-Making Lessons • On a pre-tax basis, ROA is driven by three key factors: • 1. Net interest income or its ratio net interest margin (NIM) – the efficiency of the intermediation business • 2. Provision for loan loss – loan quality • 3. Net noninterest income (“burden”) – the efficiency of operations and fee generation Chapter 6

  31. Decision-Making Lessons(continued) • A bank’s portfolio and related cash flows drive its market performance • Investors focus on the timing, size, and riskiness of future cash flows and what they are worth today (present value) • Banks that mismanage credit risk have a difficult maximizing shareholder value Chapter 6

  32. CHAPTER SUMMARY • From a giant FHC, like Citigroup, down to the thousands of community banks, the ROE model provides an analytical framework for analyzing bank performance based on accounting data • When available, market data provide more timely and accurate measures of bank performance Chapter 6

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