第二章 商业银行经营评价

1. 第二章 商业银行经营评价 • Balance Sheet • Income Statement • Relationship between Balance Sheet and Income Statement • Return on Equity Model • 股份制商业银行风险评级体系(04年2月22日) • Performance Characteristics of Different-sized Banks 管理资源吧（www.glzy8.com），提供海量管理资料免费下载！

2. Balance Sheet • It is a statement of financial position listing assets owned, liabilities owed, and owner’s equity as of a specific date. • Assets = Liabilities + Equity. • Balance sheet figures are calculated at a particular point in time and thus represent stock values. 管理资源吧（www.glzy8.com），提供海量管理资料免费下载！

3. China Big Four Banks (12/31/2002) v.s. All US Banks (12/31/2002) 管理资源吧（www.glzy8.com），提供海量管理资料免费下载！

4. PNC Bank (12/31/2000, TA: 63 bn) v.s. Community National Bank (12/31/00, TA: 0.1bn) 管理资源吧（www.glzy8.com），提供海量管理资料免费下载！

5. Bank Assets: Loans • Loans are the major asset in most banks’ portfolios and generate the greatest amount of income before expenses and taxes. • They also exhibit the highest default risk and are relatively illiquid. 管理资源吧（www.glzy8.com），提供海量管理资料免费下载！

6. Loans: Categories • Real estate loans • Commercial loans • Loans to individuals • Agricultural loans • Other loans in domestic offices • Loans and leases in foreign offices • Three adjustments • Leases; Unearned income; Loss allowance

7. PNC and CNB: Loan portfolio (2000)

8. Bank Assets: Investment securities • Investment securities are held to • earn interest, • help meet liquidity needs • speculate on interest rate movements • serve as part of a bank’s dealer functions. • The administration and transaction costs are extremely low.

9. Bank Assets: Investment securities • Short-term investments • Interest-bearing bank balances (deposits due from other banks) • federal funds sold • securities purchased under agreement to resell (RPs) • Treasury bills • municipal tax warrants • Long-term investment: notes and bonds • Treasury securities • Obligations of federal agencies • Mortgage-backed, foreign, and corporate

10. Bank Assets: Noninterest cash and due from banks • It consists of • vault cash, • deposits held at Federal Reserve Banks • deposits held at other financial institutions • cash items in the process of collection • These assets are held to • meet customer withdrawal needs • meet legal reserve requirements • assist in check clearing and wire transfers • effect the purchase and sale of Treasury securities

11. Bank Assets: Other assets • Other assets are residual assets of relatively small magnitudes such as • bankers acceptances • premises and equipment • other real estate owned and other smaller amounts

12. Bank Liabilities • The characteristics of various debt instruments differ in terms of • check-writing capabilities • interest paid • maturity • whether they carry FDIC insurance • whether they can be traded in the secondary market.

13. Bank liabilities: Deposits • Demand deposits • transactions accounts that pay no interest • Negotiable orders of withdrawal (NOWs) and automatic transfers from savings (ATS) accounts • pay interest set by each bank without federal restrictions • Money market deposit accounts (MMDAs) • pay market rates, but a customer is limited to no more than six checks or automatic transfers each month

14. Bank liabilities: Deposits • Two general time deposits categories exist: • Time deposits in excess of $100,000, labeled jumbo certificates of deposit (CDs). • Small CDs, considered core deposits which tend to be stable deposits that are typically not withdrawn over short periods of time. • Deposits held in foreign offices • balances issued by a bank subsidiary located outside the U.S.

15. Core doposits • Core deposits are stable deposits that are not highly interest rate-sensitive. • Core deposits are more sensitive to the fees charged, services rendered, and location of the bank. • Core deposits include: demand deposits, NOW accounts, MMDAs, and small time deposits.

16. Borrowings (volatile funds) • Large, or volatile, borrowings are liabilities that are highly rate-sensitive. • Normally issued in uninsured denominations. • Their ability to borrow is sensitive to the markets perception of their asset quality. • Volatile liabilities or net non-core liabilities include: • large CDs (over 100,000) • deposits in foreign offices • federal funds purchased • repurchase agreements • other borrowings with maturities less than one year

17. Capital: Subordinated notes and debentures • Notes and bonds with maturities in excess of one year. • Long-term uninsured debt. • Most meet requirements as bank capital for regulatory purposes. • Unlike deposits, the debt is not federally insured and claims of bondholders are subordinated to claims of depositors.

18. Capital: Stockholders' equity • Ownership interest in the bank. • Common and preferred stock are listed at par • Surplus account represents the amount of proceeds received by the bank in excess of par when it issued the stock.

19. Income Statement • It is a financial statement showing a summary of a firm’s financial operations for a specific period, including net profit or loss for the period in question. • A bank’s income statement reflects the financial nature of banking, as interest on loans and investments comprises the bulk of revenue. • Net interest income made up approximately 77 percent of net revenue at a bank in 1981, but only about 58 percent of total net revenue at the end of 2001.

20. The Income statement + Interest income (II) - Interest expense (IE) = Net interest Income (NII) + Noninterest income (OI) - Noninterest expense (OE) - Loan-loss provisions (PLL) = Operating income before securities transactions and taxes +(-) Realized gains or losses = Pretax net operating income - Taxes = Net income =burden

21. Interest income • …the sum of interest and fees earned on all of a bank's assets. … • Interest income includes interest from: • Loans • Deposits held at other institutions • Municipal and taxable securities • Investment and trading account securities

22. Interest expense • …. the sum of interest paid on all interest-bearing liabilities …. • It includes interest paid to • transactions accounts (NOW, ATS, and MMDA) • time and savings deposits • short-term non- core liabilities • long-term debt • Interest income less interest expense is net interest income (NII)

23. Noninterest income • Trust or fiduciary income • reflects what a bank earns from operating a trust department • Fees and deposit service charges • reflect charges on checking account activity, safe-deposit boxes, and many other transactions. • Trading revenues • reflect commissions and profits or gains from operating a trading account • Other foreign transactions • Other noninterest income

24. Noninterest expense • Personnel expense: • Salaries and fringe benefits paid to bank employees • Occupancy expense : • Rent and depreciation on equipment and premises • Other operating expenses: • Utilities and • Deposit insurance premiums

25. Loan-loss provisions (PLL) • Represent management's estimate of potential lost revenue from bad loans. • It is subtracted from net interest income in recognition that some of the reported interest income overstates what will actually be received when some of the loans go into default. • Charge-offs indicate loans that a bank formally recognizes as uncollectable and charges-off against the loss reserve.

27. Income statement: PNC &CNB, 2000 + Interest income (II) 72% & 92% - Interest expense (IE) 38% & 27% = Net interest Income (NII) + Noninterest income (OI) 27% & 8% - Noninterest expense (OE) 35% & 46% - Loan-loss provisions (PLL) 2.1% & 1.7% = Operating income before securities transactions and taxes +(-) Realized gains or losses 0.3% & 0% = Pretax net operating income - Taxes 8.5% & 8.6% = Net income 16.3% & 16.0%

28. Realized securities gains (or losses) • They arise when a bank sells securities from its investment portfolio at prices above (or below) the initial or amortized cost to the bank. • Generally, securities change in value as interest rates change, but the gains or losses are unrealized (meaning that the bank has not sold the securities to capture the change in value).

29. Relationship between balance sheet and income statement • The composition of assets and liabilities and the relationships between different interest rates determine net interest income. • The mix of deposits between consumer and commercial customers affects the services provided and thus the magnitude of noninterest income and noninterest expense. • The ownership of nonbank subsidiaries increases fee income but often raises noninterest expense.

30. Relationship between balance sheet and income statement • Expenses and loan losses directly effect the balance sheet. • The greater the size of loan portfolio, the greater is operating overhead and PLL. • Consumer loans are usually smaller and hence more expensive (non-interest) per dollar of loans.

31. Return on equity (ROE = NI / TE)… the basic measure of stockholders’ returns • ROE is composed of two parts: • Return on Assets (ROA = NI / TA) • represents the returns to the assets the bank has invested in. • Equity Multiplier (EM = TA / TE) • the degree of financial leverage employed by the bank.

32. Return on assets (ROA = NI / TA)…can be decomposed into two parts: Asset utilization (AU) → income generation Expense ratio (ER) → expense control • ROA = AU － ER = (TR / TA) － (TE / TA) • TR = total revenue or total operating income = Int. inc. + non-int. inc. + SG(L) • TE = total expenses= Int. exp. + non-int. exp. + PLL + Taxes

34. Asset utilization (AU = TR / TA):… the ability to generate income. • Interest Income / TA • Asset yields (rate) • Interest income asset (i) / $ amount of asset (i) • Composition of assets (mix) • $ amount asset (i) / TA • Volume of Earning Assets • Earning assets / TA • Non interest income / TA • Fees and Service Charges • Securities Gains (Losses) • Other income

35. Expense ratio (ER = Exp / TA)… the ability to control expenses. • Interest expense / TA • Cost per liability (rate) • Int. exp. liab. (j) / $ amt. liab. (j) • Composition of liabilities • $ amt. of liab. (j) / TA • Volume of debt and equity • Non-interest expenses / TA • Salaries and employee benefits / TA • Occupancy expenses / TA • Other operating expense / TA • Provisions for loan losses / TA • Taxes / TA

36. Other aggregate profitability measures • Net interest margin • NIM = NII / earning assets (EA) • Spread • Spread = (int inc / EA) - (int exp / int bear. Liab.) • Earnings base • EB = EA / TA • Burden / TA • (Noninterest exp. - Noninterest income) / TA • Efficiency ratio • Non int. Exp. / (Net int. Inc. + Non int. Inc.)

37. Financial ratios…PNC, 2000