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1、Profitability & Pricing1 Bank Profitability Session 10 Profitability & Pricing2 Bank Profitability 3Operating Profitability 3Asset Utilization 3Bank Financing Profitability & Pricing3 Operating Profitability 3 Profit 3 Absolute profit versus relative profit? 3 What are the major drivers of profit? 3

2、 What are the major impediments to earning profits? 3 Profit/Gross Revenues 3 What does this tell us? 3 How can we improve the ratio? 3 Operating Revenue/Operating expense 3 What does this tell us? 3 How can we improve the ratio? Profitability & Pricing4 Asset Utilization 3 Portfolio Composition 3 I

3、mpact on profitability? 3 Impact on risk? 3 Impediments to achieving the composition you desire? 3 Gross revenues/Average total assets 3 What does the ratio tell us? 3 How can you improve the ratio? Profitability & Pricing5 Bank Financing 3 Sources of borrowed funds 3 Impact on interest expense? 3 I

4、mpact on flexibility? 3 Impact on interest rate risk? 3 Impact on liquidity? 3 Equity 3 Forms of equity? 3 Cost of the different forms of equity? 3 Risks of the different forms of equity? 3 Average Assets/Average Equity 3 What does the ratio tell us? 3 Impact on ROE? 3 Impact on financial risk? Prof

5、itability & Pricing6 Breakdown of Bank Profitability ROE = Profit X Gross Revenue X Average Assets Gross Rev Average Assets Average Equity ROE = Profit Margin X Gross Yield X Leverage ROA = Profit Margin X Gross Yield Profitability & Pricing7 Concept of Sustainable Growth 3 Objective: 3 To develop a

6、n internally consistent strategy for bank capital growth while recognizing several constraints . . . 3 Profit margin & gross yield generating capabilities 3 Desired level of financial leverage 3 Desired dividend payout ratio 3 Issue: 3 What is the maximum growth rate that a bank can sustain on the b

7、asis of internally generated capital, without altering its financial leverage or dividend payout ratios? Profitability & Pricing8 The Growth Cycle 3 Initial Conditions 3 Assets $_ 3 Liabilities $_ 3 Equity$_ 3 Target leverage ratio_ 3 Asset growth target_ 3 Funds required to meet growth target_ Prof

8、itability & Pricing9 The Growth Cycle (Cont) Asset Yield _% $_ Interest Expense_% $_ Other Expenses_% $_ Taxes_% $_ Dividends_% $_ Retained Earnings_% $_ Funds Required for Growth$_ Funds Available for Growth:Equity$_ Debt$_ Sustainable Growth Rate_% Profitability & Pricing10 Required Return on Equi

9、ty 3Net income/Average Equity 3Impact of risk & return to the shareholder 3The linkages between 3Profits, assets & financing 3ROE in different countries 3Shareholder value creation Profitability & Pricing11 Bank Stock Pricing 3Price/Earnings Ratio 3Calculation? 3How do we interpret the ratio? 3What

10、is high? What is low? 3Book/Market Ratio 3Calculation? 3How do we interpret the ratio? 3What is high? What is low? Profitability & Pricing12 Valuation Value Cost of the Assets Depreciated book value Replacement cost Yield Capitalized earnings or dividends Realizable cash flow from: - Liquidation - G

11、oing concernMarket Direct quote Inference (P/E + . . . ) Bargaining/ Arbitration Profitability & Pricing13 Fundamental Stock Valuation Common Stock Price Depends on Earnings per share (E) Growth rate of earnings per share (G) Dividend payout ratio (DPR) Risk (R) Profitability & Pricing14 Gordon Grow

12、th Model t EPSDPRg P rg 0 1 Where: P - Price of the common stock EPS - Earning per share at time period t DPR - Dividend payout ratio g - Growth rate of the firms dividends r - Firm specific discount rate Profitability & Pricing15 Gordon Growth Model 3 Points to remember: 3 Must always use the cash

13、flow at time period 1, not at time period zero 3 The price of the stock is simply the present value of the expected future cash flows to the investor. 3 The investors cash flows are the dividends Profitability & Pricing16 Gordon Growth Model 3 Example: Assume that the Widget Corporation has earnings

14、 per share of $2.00 at time period zero (today). The firms earnings have been growing at 5% per year for the last ten years. The firm has a history of paying out 50% of its earnings in the form of dividends. If the investors required return on equity for holding Widget Corporation common stock is 15

15、%, what price should the investor pay for Widget stock? Profitability & Pricing17 Gordon Growth Model t EPSDPRg P rg . . $. 0 1 2 00501 05 1505 10 50 The solution: The investor should pay $10.50 per share for Widget stock Profitability & Pricing18 Growth-Valuation Matrix EXPAND ASSETS Look for acqui

16、sitions & invest surplus in securities EXPAND FINANCING Issue equity or attract deposit flows RESTRUCTURE LIABILITIES redeem high cost funds increase dividends RESTRUCTURE ASSET PORTFOLIO Divest unprofitable activity Refinance to decrease cost ROE/COE Ga/Gs Ga/Gs ROE - Return on EquityGa - Actual growth rate of assets COE - Cost of EquityGs - Sustainable growth rate of assets 1 Profitability & Pricing19 Dividend Policy 3Country tax rules 3Dividends & value 3Sustainable growth again Profitability & Pricing20 Eleme