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CHAPTER FIVEMeasuring And Evaluating  The Performance OfBanks And Their Principal      Competitors                        ...
Determining the Bank’s Long-      range Objectives   A fair evaluation of any bank’sperformance should start byevaluating ...
Maximizing the Value of the          Firm   If the stock of a bank fails torise in value, current investors willstart to s...
Performance based classification of              banksCategory   PositionA          Best PerformerB          Moderate perf...
CAMELS RATINGSThe components of a banks condition that are  assessed (C) Capital adequacy, (A) Asset quality, (M) Manag...
Key Profitability Ratios in             Banking                                 Net Income After TaxesReturn on Equity Cap...
Key Profitability Ratios in Banking                    (cont.)                             Total Operating Revenues -     ...
Bank Risks Credit Risk Liquidity Risk Market Risk Interest Rate Risk Earnings Risk Capital Risk                     ...
Credit RiskThe Probability that Some ofthe Bank’s Assets Will Declinein Value and Perhaps BecomeWorthless                 ...
Credit Risk Measures   Nonperforming Loans/Total Loans   Net Charge-Offs/Total Loans   Provision for Loan Losses/Total ...
Liquidity RiskProbability the Bank Will Not HaveSufficient Cash and Borrowing Capacity toMeet Deposit Withdrawals and Othe...
Liquidity Risk Measures Purchased Funds/Total Assets Net Loans/Total Assets Cash and Due from Banks/Total Assets Cash ...
Market RiskProbability of the Market Valueof the Bank’s InvestmentPortfolio Declining in ValueDue to a Rise in Interest Ra...
Market Risk Measures Book-Value of Assets/ Market Value of  Assets Book-Value of Equity/ Market Value of  Equity Book-V...
Interest Rate RiskThe Danger that Shifting InterestRates May Adversely Affect aBank’s Net Income, the Value ofits Assets o...
Interest Rate Risk Measures Interest Sensitive  Assets/Interest Sensitive  Liabilities Uninsured Deposits/Total  Deposit...
Earnings RiskThe Risk to the Bank’s BottomLine – Its Net Income After AllExpenses                              17
Earnings Risk Measures Standard Deviation of Net Income Standard Deviation of ROE Standard Deviation of ROA            ...
Capital RiskProbability of the Value of theBank’s Assets Declining Below theLevel of its Total Liabilities. TheProbability...
Capital Risk Measures Stock Price/Earnings Per Share Equity Capital/Total Assets Purchased Funds/Total  Liabilities Eq...
Indicators of successful banks
Indicators of Problem banks
Dealing with failed banksThe three ways as follows; Liquidation Merger Nationalization
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Chap bank perf

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Chap bank perf

  1. 1. CHAPTER FIVEMeasuring And Evaluating The Performance OfBanks And Their Principal Competitors 1
  2. 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. 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. 4. Performance based classification of banksCategory PositionA Best PerformerB Moderate performerC Average PerformerD Below Average performerE Losing and Bad performer
  5. 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. 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. 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. 8. Bank Risks Credit Risk Liquidity Risk Market Risk Interest Rate Risk Earnings Risk Capital Risk 8
  9. 9. Credit RiskThe Probability that Some ofthe Bank’s Assets Will Declinein Value and Perhaps BecomeWorthless 9
  10. 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. 11. Liquidity RiskProbability the Bank Will Not HaveSufficient Cash and Borrowing Capacity toMeet Deposit Withdrawals and Other CashNeeds 11
  12. 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. 13. Market RiskProbability of the Market Valueof the Bank’s InvestmentPortfolio Declining in ValueDue to a Rise in Interest Rates 13
  14. 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. 15. Interest Rate RiskThe Danger that Shifting InterestRates May Adversely Affect aBank’s Net Income, the Value ofits Assets or Equity 15
  16. 16. Interest Rate Risk Measures Interest Sensitive Assets/Interest Sensitive Liabilities Uninsured Deposits/Total Deposits 16
  17. 17. Earnings RiskThe Risk to the Bank’s BottomLine – Its Net Income After AllExpenses 17
  18. 18. Earnings Risk Measures Standard Deviation of Net Income Standard Deviation of ROE Standard Deviation of ROA 18
  19. 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. 20. Capital Risk Measures Stock Price/Earnings Per Share Equity Capital/Total Assets Purchased Funds/Total Liabilities Equity Capital/Risk Assets 20
  21. 21. Indicators of successful banks
  22. 22. Indicators of Problem banks
  23. 23. Dealing with failed banksThe three ways as follows; Liquidation Merger Nationalization

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