商業(yè)銀行管理英文課件：第6章 Measuring and Evaluating Bank Performance

1、Chapter Six Measuring and Evaluating Bank PerformanceBased on Rose and Hudgins, Bank Mgt & Fin Services, Gup text, and adapted by Dorla EvansKey TopicsStock Values and Profitability RatiosMeasuring Credit, Liquidity, and Other RisksMeasuring Operating EfficiencyperformanceStockholdersBank management

2、RegulatorsDepositorsBusiness communityperformance refers to how adequately a financial firm meets the needs of its stockholders (owners), employees, depositors and other creditors, and borrowing customers. At the same time, financial firms must find a way to keep government regulators satisfied that

3、 their operating policies, loans, and investments are sound, protecting the public interest.External performanceMarket valueIs the bank maximizing shareholder wealth? Meeting its business goals relative to competitors in the region? Assets, deposits, loans, financial services?Regulatory complianceIs

4、 the bank complying with federal and state regulations dealing with capital adequacy, riskiness of assets, security laws, etc?Public confidenceDoes the public perceive the bank to be safe?Shareholders Wealth: Value of stockPresent value of future cash flowsDeterminants of stock price:Size of cash fl

5、owsTiming of cash flowsRiskiness of cash flowsVo = CF1 + CF2 + CF3 + + CFn (1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n6.1 Stock valuesV stock valueD stockholder dividends expected to be paid in future periodsr discount factor （ a minimum acceptable rate of return tied to the financial firms perceived level

6、of risk. ）6.1 Stock values The minimum acceptable rate of return, r, is sometimes referred to as an institutions cost of capital and has two main components: the risk-free rate of interest (often proxied by the current yield on government bonds) (2) the equity risk premium (which is designed to comp

7、ensate an investor for accepting the risk of investing in a financial firms stock rather than in risk-free securities).Expected Dividends IncreaseRisk of the Bank FallsMarket Interest Rates DecreaseCombination of Expected Dividend Increase and Risk DeclineValue of a Banks Stock Rises When:Valuation

8、using P/E ratioThe ratio of the price of the stock and the after-tax profit per share in the previous year（P/E），it is a dynamic indicator to measure the stock investment value.Forward looking price per share, based on future expected growth and earnings.Backward looking earnings based on historical

9、data.Expected P/E: 20, 22, 24Earnings per share: $4.50Estimated price:$4.50 x 20 = $90$4.50 x 22 = $99$4.50 x 24 = $108Use P/E index to estimate the stock priceP/E6.2 Profitability Ratios: A Surrogate for Stock Values Return on equity capitalReturn on assets非利息凈收益率6.2 Profitability Ratios: A Surroga

10、te for Stock Values Return on equity (ROE) can be decomposed as follows:So the return on equity related to two parts : Managerial efficiencyFinancial leverage6.3 the Return on Equity and Its Principal ComponentsThe lower a banks ROA, the higher it must push its leverage to achieve a target ROE. High

11、er risk; higher return.Leverage: EquityMultiplierROA0.5%1.0%1.5%10:15.0%10.0%15.0%15:17.5%15.0%22.5%20:110.0%20.0%30.0%6.3 the Return on Equity and Its Principal ComponentsReturn on equity (ROE) can be decomposed as follows:ROE = Net income / Total equity = Net Profit margin (NPM) x Asset utilizatio

12、n (AU) x Equity multiplier (EM) So the return on equity related to three parts :Operating efficiency (keep expenses under control)Asset use efficiency (portfolio mgt policies, mix & yield)Financial leverage (sources chosen to fund bank)6.3 the Return on Equity and Its Principal ComponentsBreaking Do

13、wn ROExx6-166.3 the Return on Equity and Its Principal ComponentsThe net profit margin (NPM)Subject to some degree of management control and directionsuccessfully control expenses and maximize revenuesAsset utilization (AU)Allocate assets to the highest-yielding loans and investmentsavoid excessive

14、risk6.3 the Return on Equity and Its Principal ComponentsEquity multiplier (EM) Usually the largest contributor to ROE10 x for smaller banks20 x for larger banksEvery one dollar equity（how many dollars of assets must be supported by each dollar of equity (owners) capital and how much of the financia

15、l firms resources, therefore, must rest on debt.）the larger the multiplier, the greater the potential for high returns for the stockholders.6.3 the Return on Equity and Its Principal Components6-206.3 the Return on Equity and Its Principal Components In this case we have merely split the net profit

16、margin (NPM) into two parts: A tax-management efficiency ratio: reflecting the use of security gains or losses and other tax-management tools (such as buying tax-exempt bonds) to minimize tax exposure.(2) the ratio of before-tax income to total revenue :an indicator of how many dollars of revenue su

17、rvive after operating expenses are removed.6.3 the Return on Equity and Its Principal ComponentsTrends in ROEAll FDIC-insured institutionsTrends in Components of ROEAll FDIC-insured institutions6.4 the Return on Assets and Its Principal ComponentsGross interest income/Total assets Interest expense /

18、Total assets (Net interest margin Total assets) + Noninterest income/Total assets Noninterest expenses/Total assets Provision for loan losses/Total assets (Pretax net operating income Total assets) Income taxes/Total assets (Income before extraordinary items Total assets) + Extraordinary net gains/T

19、otal assets = Net income / Total assets (or ROA)What a Breakdown of Profitability Measures Can Tell Us?achieve superior profitability for a financial institution depends upon :Careful use of financial leverageCareful use of operating leverageCareful control of operating expensesCareful management of

20、 asset portfolio to meet liquidity and return needsCareful control of exposure to risk to maintain profitability and equity capital.6.5 Measuring Risk in BankingCreditLiquidityMarketPriceInterest rateOperationalLegal and complianceReputationStrategicCapitalRisk to the manager of a bank means the per

21、ceived uncertainty associated with a particular event. For example: will the customer renew his or her loan? Will deposits and other sources of funds grow next month? Will the banks stock price rise and its earnings increase? Are interest rates going to rise or fall next week? measures of overall ri

22、sk Standard deviation () or variance (2) of stock prices. Standard deviation or variance of net income. Standard deviation or variance of return on equity (ROE) and return on assets (ROA).6.5 Measuring Risk in BankingCredit riskNonperforming assets are income-generating assets, including loans, that

23、 are past due for 90 days or more.The probability that some of a financial institutions assets, especially its loans, will decline in value and perhaps become worthless is known as credit risk.Credit riskCharge-offs, on the other hand, are loans that have been declared worthless and written off the

24、lenders books. If some of these loans ultimately generate income, the amounts recovered are deducted from gross charge-offs to yield net charge-offs.Peer comparison: 1.18% The final two credit risk indicator ratios reveal the extent to which a lender is preparing for loan losses by building up its l

25、oan-loss reserves (the allowance for loan losses) through annual charges against current income (the provision for loan losses).Credit riskBanks dont have sufficient cash and borrowing capacity to meet customer withdrawals, loan demand, and other cash needs.Faced with liquidity risk a bank may be fo

26、rced to borrow emergency funds at excessive cost to cover its immediate cash needs, reducing its earnings.Liquidity riskLiquidity ratiosOne useful measure of liquidity risk exposure is the ratio of Purchased funds to total assets.Purchased funds including Eurodollars, federal funds, security RPs, la

27、rge CDs, and commercial paper.Other indicators of exposure to liquidity risk include the ratios of: Cash and due from balances held at other depository institutions to total assets. Cash assets and government securities to total assets.Liquidity riskTrend toward less liquidityLiability mgt replacing

28、 asset mgt resulting in:Higher rates of return because more assets have greater maturity.Lower holdings of U.S. Treasury securities.Higher credit risk. the market values of assets, liabilities, and net worth of banks are constantly in a state of flux due to uncertainties concerning market rates or p

29、rices.Market risk is composed of both price risk and interest rate risk.Price Risk Especially sensitive to these market-value movements are bond portfolios and stockholders equity (net worth), which can dive suddenly as market prices move against a financial firm.Interest Rate Risk Movements in mark

30、et interest rates can also have potent effects on the cost of borrowing, loan and Securities income.Market riskPrice riskThe market value of common and preferred stock per share, reflecting investor perceptions of a financial institutions risk exposure and earnings potential.Market riskInterest rate

31、 riskInterest rate-sensitive means short-term with maturities of less than one year (or repriced in less than one year).Liabilities assets, then bank at higher risk with rising ratesAssets liabilities, then bank at higher risk with falling ratesMarket riskOperational riskRisk due to failing computer

32、 systems, errors, misconduct by employees, floods, tornadoes, lightning strikesLegal and compliance riskLegal risk legal system creates adverse outcomes, e.g., unenforceable contracts, adverse lawsuit judgmentsCompliance risk violations to the rules and regulations, e.g., insufficient capitalReputat

33、ion riskUncertainty due to public opinion as it pertains to confidence of customers and creditorsStrategic riskVariation in earnings due to poor business decisions, improper implementation of decisions, lack of responsiveness to industry changes or public expectations.Capital riskImpact of all the p

34、revious risks affects capital and the banks survival chancesthe prices and yields on capital stock and on large uninsured deposits can serve as an early warning sign of solvency problems.Capital riskThe interest rate spread between market yields on debt issues and the market yields on government sec

35、urities of the same maturity. An increase in that spread indicates that investors in the market expect increased risk of loss from purchasing and holding a financial institutions debt.The ratio of stock price per share to annual earnings per share (P/E ratio ). This ratio often falls if investors co

36、me to believe that a financial firm is undercapitalized relative to the risks it has taken on.The ratio of equity capital (net worth) to total assets. A decline in equity funding relative to assets may indicate increased risk exposure for shareholders and debtholders.Capital riskThe ratio of purchas

37、ed funds to total liabilities. Purchased funds usually include uninsured deposits and borrowings in the money market from banks, nonbank corporations, and governmental units that fall due within one year.The ratio of equity capital to risk assets. reflect how well the current level of a financial in

38、stitutions capital covers potential losses from those assets most likely to decline in value.6.5 Other Goals in Banking Managementoperating efficiencySalaries and benefits and overhead costs are largest noninterest costs.Among the most revealing measures of operating efficiency and employee producti

39、vity for a bank are its:Questions?Exercises Galloping commercial bank recent balance sheet and income statement as shown below：Income statementLoan interest and fee income65Operating costs5Securities interest and dividends12Other Non-interest spending3Total interest incomeTotal Non-interest spending

40、Deposit interest expense49Operating income before taxNon-deposit borrowings interest expense 6Security benefits（loss）1Total interest expense Net operating income before taxNet interest income Taxes1Loan loss reserves 2Net operating incomeNon-interest and fee income7Extraordinary net gains-1Non-inter

41、est expenseNet income Wages and employee benefits 12Balance sheetCash and other bank deposit100Current deposit 190Investment securities150Saving deposits 180Federal funds sold10Fixed time deposit470Net loan670The federal funds bought60Allowance for loan lossTotal Liabilities 900The nonprofit revenue for the loa