slike bài giảng quản trị ngân hàng chương 10measuring and evaluating the performance of banks and their principal competitors

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slike bài giảng quản trị ngân hàng chương 10measuring and evaluating the performance of banks and their principal competitors

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William Chittenden edited and updated the PowerPoint slides for this edition. MEASURING & EVALUATING THE PERFORMANCE OF BANKS Chapter 10 Key topics 1. Stock values and profitability ratios 2. Measuring credit, liquidity, and other risks 3. Measuring operating efficiency 4. Performance of competing financial firms 5. Size and location effects 6. The UBPR and comparing performance 6-2 Banks’ key objectives 1. Maximizing the bank value 2. Controlling wide-range risks Value of the bank’s stock 6-4 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 6-5 Value of bank’s stock if earnings growth is constant g -r D P 1 0 = 6-6 Key profitability ratios in banking Assets Total IncomeInterest Net Assets Total expense)Interest - income(Interest Margin Interest Net == Assets Total Incomet NoninteresNet Assets Total expensest Noninteres- PLLL- revenuet Noninteres Margin t NoninteresNet == Net Income Return on Equity Capital (ROE) = Total Equity Capital Net Income Return on Assets (ROA) = Total Assets 6-7 Key profitability ratios in banking (cont.) gOutstandin SharesEquity Common TaxesAfter IncomeNet (EPS) SharePer Earnings = Total Interest Income __ Total Interest Expense Earnings Spread = Total Earning Assets Total Interest Bearing Liability 6-8 Assets Total Expenses Operating Total - Revenues Operating Total Margin OperatingBank Net = Assets Total Assets Earning Base Earning = Breaking down ROE N e t P r o f i t M a r g i n = N e t I n c o m e / T o t a l O p e r a t i n g R e v e n u e A s s e t U t i l i z a t i o n = T o t a l O p e r a t i n g R e v e n u e / T o t a l A s s e t s R O A = N e t I n c o m e / T o t a l A s s e t s E q u i t y M u l t i p l i e r = T o t a l A s s e t s / E q u i t y C a p i t a l R O E = N e t I n c o m e / T o t a l E q u i t y C a p i t a l x x 6-9 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 [...]... principal components of ROE, and what does each of the these components measure? 3 Suppose a bank has an ROA of 0.80% and an equity multiplier of 12x What is its ROE? Suppose this bank’s ROA falls to 0.60% What size equity multiplier must it have to hold its ROE unchanged? 4 What are the most important components of ROA and what aspects of a financial institution’s performance do they reflect? Bank risk... Breakdown of ROA Financial ratios …PNC and Community National Bank UBPR for PNC Interest expense …composition, rate and volume effects for PNC and Community National Bank Interest income …composition, rate and volume effects for PNC and Community National Bank 6-24 Quick quiz 1 What individuals or groups are likely to be interested in the banks level of profitability and exposure to risk? 2 What are the principal. .. financial institution’s performance do they reflect? Bank risk …Popular measures of overall risk 1 Standard deviation (σ) or variance (σ2) of stock price 2 Standard deviation or variance of net income 3 Standard deviation or variance of ROE & ROA The higher σ and σ2, the greater the overall risk 6-26 Bank risks … most important types of risk 1 Credit risk 2 Liquidity risk 3 Market risk 7 Reputation risk 4... equity capital  Leverage or financing policies: the choice of sources of funds (debt or equity)  Net profit margin=Net income/Total operating revenue  Effectiveness of expense management (cost control)  Asset utilization=Total operating revenue/Total assets  Portfolio management policies (the mix and yield on assets) Bank Performance Model Bank Performance Model Returns to Returns to Shareholders... assets and average total LN&LS 2 LN&LS Allowance to: net losses and total LN&LS 3 Earnings coverage of net loss Credit risk ratios : PNC and Community National 6-33 Liquidity risk Probability the financial firm will not have sufficient cash and borrowing capacity to meet deposit withdrawals and other cash needs 6-34 Liquidity risk measures 1 Purchased funds/Total assets 2 Net loans/Total assets 3 Cash and. .. Fees and Serv Charge Non Interest Trust Other Return to the Bank ROA = NI / TA Rate Interest Composition (mix) Volume EXPENSES Overhead Degree of Leverage EM =1 / (TE / TA) Prov for LL Taxes Salaries and Benefits Occupancy Other Expense ratio (ER = Exp / TA) … the ability to control expenses  Interest expense / TA  Cost per liability (avg rate paid)  Int exp liab (j) / $ amt liab (j)  Composition of. .. Liquidity risk measures 1 Purchased funds/Total assets 2 Net loans/Total assets 3 Cash and due from banks/ Total assets 4 Cash and government securities/Total sssets Liquidity risk ratios : PNC and Community National Market risk: comprises price risk and interest rate risk Probability of the market value of the financial firm’s investment portfolio declining in value due to a change in interest rates 6-36... Strategic risk 5 Operational risk 9 Capital risk 6 Legal and compliance risk 6-27 Credit risk The probability that some of the financial firm’s assets will decline in value and perhaps become worthless resulting from nonpayment or delayed payment on loans and securities 6-28 Credit risk measures 1 Nonperforming loans/Total loans 2 Net charge-offs/Total loan 3 Provision for loan losses/Total loan 4...  Interest income asset (i) / $ amount of asset (i)  Composition of assets (mix)  $ amount asset (i) / TA  Volume of Earning Assets  Earning assets / TA  Noninterest income / TA Fees and service charges  Securities gains (losses)  Other income  6-17 Determinants of ROE in a financial firm Components of ROE for all insured U.S Banks (1992-2007) 6-18 6-19 A variation on ROE Net Income Pre-Tax... $ amt of liab (j) / TA  Volume of int bearing debt and equity  Non-interest expense / TA  Salaries and employee benefits / TA  Occupancy expense / TA  Other operating expense / TA  Provisions for loan losses / TA  Taxes / TA Asset utilization (AU = TR / TA): … the ability to generate income  Interest Income / TA  Asset yields (avg rate earned)  Interest income asset (i) / $ amount of asset . William Chittenden edited and updated the PowerPoint slides for this edition. MEASURING & EVALUATING THE PERFORMANCE OF BANKS Chapter 10 Key topics 1. Stock values and profitability ratios 2 liquidity, and other risks 3. Measuring operating efficiency 4. Performance of competing financial firms 5. Size and location effects 6. The UBPR and comparing performance 6-2 Banks key. objectives 1. Maximizing the bank value 2. Controlling wide-range risks Value of the bank’s stock 6-4 Value of a bank’s stock rises when:  Expected dividends increase  Risk of the bank falls  Market

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Mục lục

  • MEASURING & EVALUATING THE PERFORMANCE OF BANKS

  • Key topics

  • Banks’ key objectives

  • Value of the bank’s stock

  • Value of a bank’s stock rises when:

  • Value of bank’s stock if earnings growth is constant

  • Key profitability ratios in banking

  • Key profitability ratios in banking (cont.)

  • Breaking down ROE

  • Return on equity (ROE = NI / TE) … the basic measure of stockholders’ returns

  • Return on assets (ROA = NI / TA) …can be decomposed into two parts:  Asset Utilization (AU) → income generation  Expense Ratio (ER) → expense control

  • ROA is driven by the bank’s ability to: …generate income (AU) and control expenses (ER)

  • ROE depends on:

  • Bank Performance Model

  • Expense ratio (ER = Exp / TA) … the ability to control expenses

  • Asset utilization (AU = TR / TA): … the ability to generate income.

  • Slide 17

  • Components of ROE for all insured U.S. Banks (1992-2007)

  • A variation on ROE

  • Breakdown of ROA

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