A simplified bank example

1. A simplified bank example The profitability ratio often different for bank than for manufacturing business because bank have just a small investment in fixed assets , such as premises , and they have comparatively little equitycapital , and substantially larger amounts in short term financial assets

2. XYZ Commercial company The balance sheet for the year ended 1998 Assets liabilities and net worth Cash and due from ban $8000000 Current Liabilities 70000000 Short term loans 60000000Long term liabi. 23000000 Long term loans 30000000 Common stock 1000000 premises 2000000 undividend profits 6000000 $ 100000000 100000000 Income Statement for the year 1998

3. Profitability Analysis 1- interest margin = net interest income = 5000000 = 5.6% revenues 9000000 2- Net margin after tax = net income = 1320000 = 14.7% revenues 9000000 3- assets turnover = revenues = 9000000 = 9% assets 100000000 4- Return on asset (ROI) = Net income = 1320000 = 1.32% Assets 100000000 5- leverage multiplier = assets = 100000000 = 14.3x Equity 7000000 6- Return on equity(ROE)= Net income = 1320000 =18.86%

4. Return and Risk measures for banks. The bank obtain fund in only five ways. 1-transaction deposits 2- short term time and savings deposits 3- long term- time deposits which mature in over 180 days 4- money borrowed from other sources . 5- equity capital representing the owners investment and earnings retained in the bank . The bank employs the funds in obtains in one of only five ways : 1-short term high- quality debt securities maturing within 180 days . 2-long term high- quality debt securities maturing in over 180 days .

5. 3-good quality loans whose rate varies with changes in interest rate . 4- medium –quality loans whose are varies with changes in interest rates . 5-good- quality fixed rate loans .

6. Balance Sheet (dollars in thousands ) The balance sheet for the year ended 1998 Assets liabilities and net worth Cash and due from ban $6900 transaction deposits 30000 Short term securities 15000short term time deposits. 30000 Long term securities 15000 long term time deposits 30000 High variable loans 20000 borrowing 3000 medium variable loans 20000 equity capital 7000 Fixed rate loans 20000 Premises and other assets 3100 total 100000 100000 Income Statement for the year 1998

7. The following table illustrate the method of calculating the revenues in the income statement.

9. Introductory return and risk measurements.

10. Measuring Risk: risk measures are related to the profitability measurements , because a bank must take risks to earn adequate returns . Categories of risk : Liquidity Risk : Liquidity risk measures show the relationship of a banks liquidity need for meeting deposit outflows and loan increasing , Versus its actual sources of liquidity from either selling an assets it acquiring additional liabilities .

11. Interest risk This risk refers to the changes in assets and liabilities returns and valuescaused by movement in interest rate Interest sensitive assets include short term securities and all variable rate loans . Interest sensitive liabilities : include transaction deposits , short term deposits , saving deposits , Borrowing Credit Risk The credit of bank is defined as the risk that the interest on securities and loans will not be paid as a promised Credit risk = medium loans / assets

12. Capital risk : • The capital risk of a bank includes how much assets values may decline before the position of its depositors . • We measure the capital risk of the bank by determine the percentage of assets that are covered by its equity • Capital risk = capital / assets

13. Risk measures