1. 1 COMMERCIAL BANK MANAGEMENT 1

2. 2 MEASURING AND EVALUATING THE PERFORMANCE OF BANKS PERFORMANCE REFERS TO HOW ADEQUATELY A BANK MEETS THE OBJECTIVES IDENTIFIED BY ITS SHAREHOLDERS, EMPLOYEES, DEPOSITORS, AND OTHER CREDITORS, AND BORROWING CUSTOMERS. THESE STAKEHOLDERS OF A BANK OFTEN HAVE CONFLICTING INTERESTS, THE BANK MANAGEMENT MUST BALANCE THESE CONFLICTING INTERESTS.

3. 3 MEASURING AND EVALUATING THE PERFORMANCE OF BANKS BANK MANAGEMENT MUST ALSO CONVINCE THE GOVERNMENT REGULATORS THAT THEIR OPERATING POLICIES, LOANS AND INVESTMENTS ARE SOUND, THEREBY PROTECTING THE PUBLIC INTEREST. THE SUCCESS OR FAILURE TO MEET ALL THESE EXPECTATIONS MAY BE REVEALED BY A CAREFUL AND THOROUGH ANALYSIS OF THEIR FINANCIAL STATEMENTS.

4. 4 MAXIMIZING SHAREHOLDER VALUE CLEARLY AS AGENTS OF THE SHAREHOLDERS (THE OWNERS) THE MANAGEMENT OF A BANK (AS WITH ANY OTHER COMPANY) IS CHARGED WITH MAXIMIZING SHAREHOLDER VALUE. BY THIS WE MEAN THAT THE VALUE OF THE BANK (OR COMPANY) SHOULD BE INCREASING OVER TIME. THE VALUE OF THE BANK (OR COMPANY) IS REFLECTED IN THE SHARE PRICE (FOR THOSE QUOTED ON A STOCK EXCHANGE).

5. 5 MAXIMIZING SHAREHOLDER VALUE EXPECTED STREAM OF DIVIDENDS SHARE VALUE= -------------------------------- DISCOUNT FACTOR

6. 6 MAXIMIZING SHAREHOLDER VALUE THIS RELATIONSHIP CAN ALSO BE SHOWN MATHEMATICALLY AS SHARE VALUE P 0 = Σ E (D t )/(1+r) t r= THE MINIMUM ACCEPTABLE RATE OF RETURN

7. 7 MAXIMIZING SHAREHOLDER VALUE THE VALUE OF A BANK’S SHARE WILL RISE IN ANY OF THE FOLLOWING SITUATIONS 1. THE VALUE OF THE FUTURE DIVIDENDS IS EXPECTED TO INCREASE 2. THE PERCEIVED LEVEL OF RISK FALLS 3. MARKET INTEREST RATES DECREASE 4. EXPECTED DIVIDEND INCREASES ARE COMBINED WITH DECLINING RISK.

8. 8 KEY PROFITABILITY RATIOS RETURN ON EQUITY CAPITAL (ROE) = NET INCOME AFTER TAX / TOTAL EQUITY CAPITAL RETURN ON ASSETS (ROA) = NET INCOME AFTER TAX / TOTAL ASSETS NET INTEREST MARGIN (NIM) = NET INTEREST INCOME / TOTAL ASSETS

9. 9 KEY PROFITABILITY RATIOS NET NONINTEREST MARGIN = NET NONINTEREST INCOME / TOTAL ASSETS NET OPERATING MARGIN = (TOTAL OPERATING REVENUES – TOTAL OPERATING EXPENSES) / TOTAL ASSETS EARNINGS PER SHARE = NET INCOME AFTER TAX / COMMON EQUITY SHARES OUTSTANDING

10. 10 KEY PROFITABILITY RATIOS EARNINGS SPREAD = (TOTAL INTEREST INCOME / TOTAL EARNING ASSETS) – (TOTAL INTEREST EXPENSE / TOTAL INTEREST-BEARING BANK LIABILITIES)

11. 11 MEASURING RISK IN BANKING RISK TO A BANKER MEANS THE PERCEIVED UNCERTAINTY ASSOCIATED WITH A PARTICULAR EVENT. FOR EXAMPLE: WILL DEPOSITS GROW? ARE INTEREST RATES GOING TO RISE OR FALL? WHAT WILL LOAN DEMAND BE NEXT MONTH?

12. 12 MEASURING RISK IN BANKING BANKERS ARE CONCERNED WITH SIX MAIN TYPES OF RISK: 1.CREDIT RISK 2.LIQUIDITY RISK 3.MARKET RISK 4.INTEREST RATE RISK 5.EARNINGS RISK 6.CAPITAL RISK

13. 13 CREDIT RISK THE PROBABILITY THAT SOME OF THE BANK’S ASSETS, ESPECIALLY ITS LOANS, WILL DECLINE IN VALUE IS KNOWN AS “CREDIT RISK”. THE MOST WIDELY USED INDICATORS OF CREDIT RISK ARE: 1. THE RATIO OF NON-PERFORMING LOANS TO TOTAL LOANS 2. THE RATIO OF NET CHARGE-OFFS OF LOANS TO TOTAL LOANS 3. THE RATIO OF THE ANNUAL PROVISION FOR LOAN LOSSES TO TOTAL LOANS OR TO EQUITY CAPITAL 4. THE RATIO OF ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS OR TO EQUITY CAPITAL 5. THE RATIO OF NON-PERFORMING LOANS TO EQUITY CAPITAL 6. THE RATIO OF TOTAL LOANS TO TOTAL DEPOSITS

14. 14 LIQUIDITY RISK THE RISK THAT A BANK WILL NOT HAVE SUFFICIENT CASH AND BORROWING CAPACITY TO MEET CUSTOMER WITHDRAWALS, LOAN DEMAND AND OTHER CASH NEEDS IS REFERRED TO AS “LIQUIDITY RISK”. USEFUL MEASURES OF LIQUIDITY RISK EXPOSURE INCLUDE: 1. PURCHASED FUNDS (FED.FUNDS, CDs, COMML PAPER) TO TOTAL ASSETS 2. CASH AND DEPOSITS HELD AT OTHER BANKS TO TOTAL ASSETS 3. CASH ASSETS AND GOVERNMENT SECURITIES TO TOTAL ASSETS.

15. 15 MARKET RISK CHANGES IN MARKET INTEREST RATES AND CURRENCY PRICES, SHIFTING PUBLIC DEMANDS FOR BANK SERVICES, SUDDEN ALTERATIONS IN CENTRAL BANK MONETARY POLICIES AND CHANGING INVESTOR PERCEPTIONS OF THE RISKINESS OF BANKS ALL CREATE “MARKET RISK”.

16. 16 MARKET RISK INDICATORS OF MARKET RISK INCLUDE: 1.THE RATIO OF BOOK-VALUE ASSETS TO THE ESTIMATED MARKET VALUE OF THOSE SAME ASSETS 2.THE RATIO OF BOOK-VALUE EQUITY CAPITAL TO THE MARKET VALUE OF EQUITY CAPITAL 3.THE MARKET VALUE OF BONDS AND OTHER FIXED-INCOME ASSETS HELD RELATIVE TO THEIR VALUE AS RECORDED ON THE BANK’S BOOKS 4.THE MARKET VALUE OF COMMON AND PREFERRED STOCK PER SHARE, REFLECTING INVESTOR PERCEPTIONS OF A BANK’S RISK EXPOSURE AND EARNINGS POTENTIAL

17. 17 INTEREST RATE RISK THE IMPACT OF CHANGING INTEREST RATES ON A BANK’S MARGIN OF PROFIT IS CALLED “INTEREST RATE RISK”. WIDELY USED MEASURES OF INTEREST RATE RISK EXPOSURE ARE 1.THE RATIO OF INTEREST-SENSITIVE ASSETS TO INTEREST-SENSITIVE LIABILITIES 2.THE RATIO OF UNINSURED DEPOSITS TO TOTAL DEPOSITS

18. 18 EARNINGS RISK EARNINGS MAY DECLINE UNEXPECTEDLY DUE TO INTERNAL OR EXTERNAL FACTORS THIS IS REFERRED TO AS “EARNINGS RISK”. POPULAR MEASURES OF EARNINGS RISK ARE THE FOLLOWING: 1.STANDARD DEVIATION OR VARIANCE OF AFTER TAX NET INCOME 2.STANDARD DEVIATION OR VARIANCE OF THE RETURN ON EQUITY AND THE RETURN ON ASSETS THE HIGHER THE STANDARD DEVIATION OR VARIANCE OF A BANK’S INCOME THE MORE RISKY THE EARNINGS PICTURE IS.

19. 19 CAPITAL RISK BANKERS MUST BE DIRECTLY CONCERNED ABOUT RISKS TO THEIR INSTITUTIONS’ LONG-RUN SURVIVAL, OFTEN CALLED “CAPITAL RISK”. WHEN INVESTORS BELIEVE THAT A BANK HAS AN INCREASED CHANCE OF FAILING, THE MARKET VALUE OF ITS SHARES BEGINS TO FALL AND IT MUST INCREASE THE INTEREST RATE ON ITS BORROWINGS IN ORDER TO ATTRACT NEEDED FUNDS.

20. 20 CAPITAL RISK THE RISK OF DEFAULT OR FAILURE CAN BE MEASURED BY SUCH FACTORS AS: 1.THE INTEREST RATE SPREAD BETWEEN MARKET YIELDS ON DEBT ISSUES AND MARKET YIELDS ON GOVERNMENT SECURITIES 2.THE RATIO OF SHARE PRICE TO ANNUAL EARNINGS PER SHARE 3.THE RATIO OF EQUITY CAPITAL TO TOTAL ASSETS 4.THE RATIO OF PURCHASED FUNDS TO TOTAL LIABILITIES 5.THE RATIO OF EQUITY CAPITAL TO RISK ASSETS

21. 21 OTHER FORMS OF RISK IN BANKING INFLATION RISK CURRENCY OR EXCHANGE RISK POLITICAL RISK CRIME RISK