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it will help to learn the risks of bank

it will help to learn the risks of bank

Published in Economy & Finance
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  • 1. CHAPTER FIVEMeasuring And Evaluating The Performance OfBanks And Their Principal Competitors 1
  • 2. Determining the Bank’s Long- range Objectives A fair evaluation of any bank’sperformance should start byevaluating whether it has been ableto achieve its objectives. 2
  • 3. Maximizing the Value of the Firm If the stock of a bank fails torise in value, current investors willstart to sell the stocks and the bankmay face difficulty in raising newcapital for future growth. 3
  • 4. Performance based classification of banksCategory PositionA Best PerformerB Moderate performerC Average PerformerD Below Average performerE Losing and Bad performer
  • 5. CAMELS RATINGSThe components of a banks condition that are assessed (C) Capital adequacy, (A) Asset quality, (M) Management Capability, (E) Earnings, (L) Liquidity and (S) Sensitivity to Market Risk
  • 6. Key Profitability Ratios in Banking Net Income After TaxesReturn on Equity Capital (ROE) = Total Equity Capital Net Income After TaxesReturn on Assets (ROA) = Total Assets Net Interest IncomeNet Interest Margin = Total Assets Net Noninterest IncomeNet Noninterest Margin = Total Assets 6
  • 7. Key Profitability Ratios in Banking (cont.) Total Operating Revenues - Total Operating Expenses Net Bank Operating Margin = Total Assets Net Income After TaxesEarnings Per Share (EPS) = Common Equity Shares Outstanding 7
  • 8. Bank Risks Credit Risk Liquidity Risk Market Risk Interest Rate Risk Earnings Risk Capital Risk 8
  • 9. Credit RiskThe Probability that Some ofthe Bank’s Assets Will Declinein Value and Perhaps BecomeWorthless 9
  • 10. 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 10
  • 11. Liquidity RiskProbability the Bank Will Not HaveSufficient Cash and Borrowing Capacity toMeet Deposit Withdrawals and Other CashNeeds 11
  • 12. Liquidity Risk Measures Purchased Funds/Total Assets Net Loans/Total Assets Cash and Due from Banks/Total Assets Cash and Government Securities/Total Assets 12
  • 13. Market RiskProbability of the Market Valueof the Bank’s InvestmentPortfolio Declining in ValueDue to a Rise in Interest Rates 13
  • 14. 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 14
  • 15. Interest Rate RiskThe Danger that Shifting InterestRates May Adversely Affect aBank’s Net Income, the Value ofits Assets or Equity 15
  • 16. Interest Rate Risk Measures Interest Sensitive Assets/Interest Sensitive Liabilities Uninsured Deposits/Total Deposits 16
  • 17. Earnings RiskThe Risk to the Bank’s BottomLine – Its Net Income After AllExpenses 17
  • 18. Earnings Risk Measures Standard Deviation of Net Income Standard Deviation of ROE Standard Deviation of ROA 18
  • 19. Capital RiskProbability of the Value of theBank’s Assets Declining Below theLevel of its Total Liabilities. TheProbability of the Bank’s Long RunSurvival 19
  • 20. Capital Risk Measures Stock Price/Earnings Per Share Equity Capital/Total Assets Purchased Funds/Total Liabilities Equity Capital/Risk Assets 20
  • 21. Indicators of successful banks
  • 22. Indicators of Problem banks
  • 23. Dealing with failed banksThe three ways as follows; Liquidation Merger Nationalization