E VALUATING B ANK P ERFORMANCE Presented by: FAIRUZ CHOWDHURY Lecturer, BBS

V ALUE OF F IRM Value of stock= Expected stream of future dividends/ discount factor Po= E(Dt)/ (1+r)^t SO: >>>> Value of firm??? if dividends are expected to grow at constant rate over time?????

A F RAMEWORK FOR E VALUATING B ANK P ERFORMANCE Presentation of Bank Financial Statements Balance sheet (Report of Condition) Assets: cash assets, loans, and securities Liabilities: deposit funds and nondeposit funds Capital: equity capital, subordinated notes and debentures, loan loss reserves Income Statement (Report of Income) Interest income Noninterest income Interest expenses Noninterest expenses (including provision for loan losses) Net profit

A NALYZING B ANK P ERFORMANCE WITH F INANCIAL R ATIOS Profitability ratios: Rate of return on equity ROE = NI/TE (net income after taxes/total equity) Rate of return on assets ROA = NI/TA (net income after taxes/total assets) Other profit measures Net interest margin NIM = (Total interest income - Total interest expense)/Total assets* Net non-interest margin NNIM = (Total non interest income – Total non interest expense- Provision for loan and lease losses)/Total assets* Net operating margin = (Total operating revenue- Total operating expense)/Total assets * total earnings asset : generating fee and interest income WHY??

A NALYZING B ANK P ERFORMANCE WITH F INANCIAL R ATIOS Profit ratios Unraveling profit ratios ROE = ROA x TA/TE (equity multiplier). Thus, by decreasing equity, a bank can increase ROE based on any given level of ROA. ROE = NI/OR x OR/TA x TA/TE (OR is operating revenue) NI/OR ratio -profit margin OR/TA- asset utilization TA/TE- equity multiplier/ Leverage ratio ROA: managerial efficiency measure/indicator ROA and ROE: trade-off between risk and return Low ROA but high ROE : possible??

A NALYZING B ANK P ERFORMANCE WITH F INANCIAL R ATIOS Net interest margin: how large the spread between interest revenues and interest cost. Cost management? What does this mean?? Non – interest margin: amount of non interest revenue stemming from service fees the financial institute has been able to collect in proportion to amount of non interest expense. USUALLY:-ve BOTH ARE ALL EFFICIENCY MEASURES

A NALYZING B ANK P ERFORMANCE WITH F INANCIAL R ATIOS DU PONT ANALYSIS: =Net Income/Total operating Revenue (OR) * OR/Total Assets(A) * A/Equity NPM * ATO * Lev ROA * Lev NPM: Net Profit Margin ATO: Asset Turnover / AU (asset utilization) Further: ROE= NI/ Pretax operating income (POI) * POI/ OR * OR/A * A/E = Tax management efficiency* expense control efficiency* Asset management efficiency * funds management efficiency

A NALYZING B ANK P ERFORMANCE WITH F INANCIAL R ATIOS Operating efficiency=Total operation expense/ Total operating Revenues Employee Productivity ratio= Net operating Income/ No of full time equivalent employees

A NALYZING B ANK P ERFORMANCE WITH F INANCIAL R ATIOS Problems: Chapter 6, No. 1 & 4.