1 Trend and Ratio analysis of national banking sectors – a European experience St. Petersburg, 8-9 June 2006 Michael Olsen The views expressed are mine and do not necessarily represent those of the European Central Bank.

2 Outline Basis for presentation Trend analysis Ratio analysis Concluding remarks

3 Basis for presentation A book in English and in Russian –Available in electronic format on the websites of the European Central Bank and the Bank of Russia

4 Trend analysis What are European banking supervisors looking at: –Trends in quantitative issues such as Capital adequacy (composition and quality of capital, adequacy, access to capital, repayment of capital) Liquidity (liquid assets, access to market, the liquidity plan) Asset quality (composition, concentration, provisioning) Liability (composition, concentration) Earnings (profitability, earning performance, the profit plan and budget) Risk concentration (key products and markets, credit and market risk (etc.) and risk positions)

5 Trend analysis What are European banking supervisors looking at: –Trends in and the strength of qualitative issues such as Management (fit and proper nature, board composition, cultural attitude, corporate planning and strategy) Internal control system (decision-making process, risk management framework, limits and standards, IT, reporting, staff policy, segregation of responsibilities, money laundering controls)

6 Trend analysis What are European banking supervisors looking at: –Three lines of defense: Good management and sufficient profitability to absorb losses; Proper provisioning practices that set aside reserves to cover expected losses; and Adequate capital and equity reserves to cover unexpected losses.

7 Ratio analysis Ratios used to assess performance related issues Profitability (ROE, ROA, net interest margin, operating income/total assets) Efficiency (cost-to-income ration, cost-to-assets ratio, staff costs to total income) Income breakdown (interest income to total income, fee income to total income, trading income to total income, non-interest income to total income) Margins (net interest margin, fee income margin, trading margin, income margin, operating cost margin, operating result margin, risk provision margin, pre-tax profit margin)

8 Ratio analysis Ratios used to assess risks, buffers and structure Credit risk (risk provisions to total customer loans, risk provisions to risk-weighted assets, risk provisions to net interest income, non-performing loans to customer loans, coverage, risk-weighted assets to total assets) Capital (tier 1 ratio, total capital ratio, equity ratio) Balance sheet structure (customer loans to total loans, interest-earning assets to total assets, trading assets to total assets, deposits to total assets, loan deposit ratio, interbank ratio, liquidity ratio)

9 Ratio analysis Ratios used for assessment of growth Change in customer loans Change in customer deposits Change in total assets Change in pre-provision operating profit Change in pre-tax profit Change in net profit

10 Concluding remarks Is trend and ratio analysis useful? –For banking supervisors –For the banking sector Thank you for your attention!