PERFORMANCE ASSESSMENT

Performance Analysis Return Analysis ROE analysis Matrix analysis Data Envelopment Analysis Risk Analysis Credit risk Liquidity risk Market risk Price risk Interest rate risk Operational risk Capital Adequacy Analysis

ROE ANALYSIS

ROE Analysis ROE = ROA X Equity Multiplier ROA = Net Profit / Total Assets Equity Multiplier = Total Assets / Total Equity ROA = Net Profit Margin x Asset Utilization Net Profit Margin = Net Profit / Operating Revenue Asset Utilization = Operating Revenue / Total Assets

ROA Analysis Net Interest Margin = (Interest income – Interest expense)/ Total assets Net Non-interest Margin = (Non-interest income – Non-interest expense) / Total assets Net Operating Margin = (Total operating income – Total operating expense) / Total Assets

Earnings Spread

Profitability Ratios Break-even yield ratio Break-Even Yield =((Interest Expense + Non-Interest Expense - Non-Interest Income) / Average Earning Assets) X 100 Cost of funds ratio = (Interest on Borrowings / Total Borrowings) Return on advances ratio = (Income from Advances / Total Advances) Return on advances adjusted for cost of funds ratio = (Income from Advances – Interest on Borrowings) / Total Advances)

Sub-Categorization Analysis Interest Rate analysis Composition analysis Volume analysis Non-interest Fees as a percentage of non-interest income Trading profits as a percentage of non-interest income Other income as a percentage of non-interest income

ROE Analysis Tax Management Efficiency Net income / Pre-tax net operating income Expense Control Efficiency Pre-tax net operating income / Total Operating revenue Asset Management Efficiency Total operating revenue / Total assets Funds Management Efficiency Total Assets / Total Equity Capital

Operating Efficiency Operating Income as a Percent of Working Funds Fund based Income as a Percent of Operating Income  Fee based Income as a Percent of Operating Income 

Business Efficiency Demand Deposit of Total Deposits   Saving Deposit of Total Deposits  Time Deposit of Total Deposits  Deposits within India as Percent to Total Deposits  Deposits Outside India as Percent to Total Deposits 

Employee Efficiency Business per Employee Profit per Employee Wages / Total Expenses Operating Income per Employee  Operating Profit per Employee  Administrative Expenses per Employee   Deposits per Employee  Fund Advances per Employee 

Branch Efficiency Operating Income per Branch Operating Profit per Branch  Net Profit per Branch  Personnel Expenses per Branch  Administrative Expenses per Branch  Financial Expenses per Branch  Borrowings per Branch Advances per Branch  Deposits per Branch 

Risk Analysis Standard Deviation / Variance Net income ROE ROA Market return Beta Equity beta Income beta Operating beta

Credit Risk Gross non performing assets / Total loans & leases Net non performing assets / Total loans & leases Net non performing assets / Equity

Net NPA Net NPA = Gross NPA less Provision for NPA NPA is a loan for which the interest or the principal or both remain unpaid for two quarters or more. Gross NPA Poor credit recovery Little legal support Lengthy legal proceedings Sticky loans

Net NPA Banks in some countries provide for NPAs as a general provision and write off losses by identifying them at an early stage. In such countries, banks would carry very little NPAs in their books since recovery measures are expedited so as to avoid bankruptcy. Gross NPA and Net NPA is absent in these countries. In India, owing to the time lag involved in the recovery, banks tend to hold on to advances considered irrecoverable in their books. In a normal scenario these should be completely written off from the books. This leads to gross NPAs.

Liquidity Risk Liquid funds / Total assets Cash and due from banks / Total assets Cash and Government securities / Total assets

Market Risk Price risk Book value of assets / Market value of assets Interest Rate risk Interest sensitive assets / Interest sensitive liabilities

Other Risk Operational risk Legal risk Reputation risk Strategic risk Capital risk Market price / EPS Net worth / Total assets CRAR

Capital Adequacy Ratio Computation of CAR Tier I capital Tier II capital Risk Weighted Assets (RWA)

Capital to Risk Weighted Asset Ratio (CAR or CRAR) Capital Adequacy Ratio: Capital Adequacy Ratio = (Tier I capital + Tier II capital) / Risk Weighted Assets

Case Analysis of Bank Performance Financial Data Analysis Relating to a Public Sector Bank is Presented Here

ROE Analysis ROE = Net profit / Equity = 28% ROE = ROA x Equity Multiplier = 0.42% x 66.83 ROA = Asset utilization x Net Profit = 0.0951 x 4.42% OM = (OI-OE)/Assets = 8.03% NIM = (II – IE)/Assets = 1.80% NNIM = (NII – NIE)/Assets = -0.36% Earnings spread = 2.45%

Breakeven Yield Ratio Total expense = Interest Expense + Non Interest Expense Desired Interest Income = Total Expense - Non-Interest Income Average Assets Breakeven yield = 7.32% Cost of Deposits = 6.97% Cost of Borrowings = 1.89% Cost of funds = 6.92% Return on advances = 14.77% Return on advances adjusted to cost of capital = 7.85%

Return on Equity Analysis Tax Management Efficiency = 33.50% Expense control Efficiency = 13.20% Asset Management Efficiency = 9.52% Funds Management Efficiency = 66.83

Operating Efficiency Operating Income Efficiency = 9.51% Fee Based Efficiency = 5.96% Fund Based Efficiency = 93.36%

Business Efficiency Demand Deposit of Total Deposits = 7.59% Saving Deposit of Total Deposits = 16.45% Time Deposit of Total Deposits  = 75.97% Deposits within India to Total Deposits = 100% Deposits Outside India to Total Deposits = 0%

Employee Efficiency Business per employee = 751.60 Profit per employee = 2.19 Wages / Total expenses = 5.00 Operating Income per Employee  = 49.58 Operating Profit per Employee = 41.85 Administrative Expenses per Employee  = 2.73 Deposits per Employee  = 455.41 Fund Advances per Employee  = 295.19

Branch Efficiency Operating Income per Branch = 563.78 Operating Profit per Branch  = 475.97 Net Profit per Branch  = 24.93 Personnel Expenses per Branch = 56.74  Administrative Expenses per Branch  = 31.07 Financial Expenses per Branch  = 1.11 Borrowings per Branch  = 58.81 Deposits per Branch = 5179.05

Risk Analysis Coefficient of Variation Interest income / Total assets = 0.0633 ROE = 0.4716 ROA = 0.4585 Net NPA / Net Advances = 0.2025

Credit Risk Gross NPA / TA = 1.95% Net NPA / TA = 0.82% Net NPA / Equity = 31.31%

Liquidity Risk Liquid funds / Assets = 11.85 Cash and due from banks / Assets = 9.19% Cash and Government securities / Assets = 32.11%

Market Risk Interest sensitivity = 95.83% Capital adequacy ratio = 13.15%