Académique Documents
Professionnel Documents
Culture Documents
http://www.westga.edu/~rbest/GSB.html
Ron Best
Professor of Finance
University of West Georgia
Spreadsheet template
Overview
Financial Intermediation
Decomposition of ROE
Bank Risk
Putting it all Together
Review
3
Asset Value/Price
Present value of expected future cash flows
Bank management must determine the
appropriate balance between risk and return
Higher expected profitability often goes handin-hand with additional risk
Higher profit does not always translate into
higher value
Warning!
Past performance
Other
Oth banks
b k (peer
(
or target
t
t banks;
b k industry
i d t (or
(
peer group) average/median)
CAMELS
Capital Adequacy
Asset Quality
Management Quality
Earnings
Liquidity
Sensitivity
Created
C eated for
o ba
bank supe
supervisory,
so y, e
examination,
a
at o ,
and management purposes
Bank's performance and balance-sheet
composition
earnings, liquidity, capital, asset and liability
management, and growth management
9
Bank Data
10
Financial Statements
Balance Sheet
FFIEC: UBPR
https://cdr.ffiec.gov/public/ManageFacsimiles.aspx
Income Statement
http://www2.fdic.gov/sdi/index.asp
11
12
Balance Sheet
Cash & DFB
Bank Assets
Cash and due from banks
Deposits
Non-interest Bearing
Interest Bearing
Investment
Securities
Investment Securities
Purchased Liabilities
Fed Funds
Repos
Other S-T Liab
Loans
Other Assets
Loans
Commercial, consumer, RE, agricultural, etc.
Generate most of interest income; highest default risk
LT Sub. Debt
Equity Accounts
Other assets
Bank premises and equipment, interest receivable,
prepaid expenses, other real estate owned
13
14
Bank Investments
Transaction Accounts
Interest bearing
Negotiable orders of withdrawal (NOWs) and
automatic transfers from savings (ATS)
Pay interest rate set by bank
Money market deposit accounts (MMDAs)
Pay market rates, but customer is allowed a
limited number of checks or automatic
transfers each month
15
16
Other Borrowings
17
Demand deposits
Savings deposits
Time deposits
Purchased liabilities
18
Stockholders equity
Ownership interest in the bank
Common and preferred stock listed at par
Surplus account represents the amount of
proceeds received by the bank in excess of par
when it issued the stock
Retained earnings equals accumulated net
income not paid out as cash dividends
19
Income Statement
< $100M
13,256,267
29,949,725
4,402,033
77,176,882
1,389,083
11,591
2,307,348
4,841,455
131,945,301
$100M - $1B
79,440,913
213,817,470
16,065,850
680,336,280
13,921,325
157,266
20,184,662
48,624,471
1,058,626,912
$1B - $10B
87,912,852
223,629,694
7,386,095
679,566,993
17,036,426
1,952,625
15,945,198
73,997,841
1,090,391,298
> $10B
742,489,011
1,884,243,297
426,501,368
4,940,678,681
184,979,558
719,167,669
72,233,013
1,001,326,459
9,786,639,498
Total Dep
FF Purch
Trading Liab
Other Borrow
Total Liab
Preferred
Total CE
Total L & E
112,038,834
712,936
246
4,117,643
116,869,659
53,361
15,022,281
131,945,301
884,022,292
17,811,129
15,482
50,383,231
952,232,134
703,068
105,691,710
1,058,626,912
841,932,762
49,734,897
306,929
74,718,167
966,692,755
1,839,106
121,859,437
1,090,391,298
6,676,292,164
460,130,931
287,730,266
1,241,473,095
8,665,626,456
3,923,131
1,117,089,911
9,786,639,498
20
Interest Income
- Interest Expense
Net Interest Income
- Provision for Loan Losses
+ Noninterest Income
- Noninterest Expense
+ Gains/Losses on Secs
Pretax Earnings
- Taxes
Net income
Noninterest income
22
Noninterest Expense
Fiduciary activities
Personnel expense
Occupancy expense
Rent and depreciation on equipment and
premises and
premises,
Service charges
Utilities
Deposit insurance premiums
Other
Investment banking
Venture capital revenue
Insurance commission fees
Note: Burden =
Non-interest expense minus non-interest income
23
24
$1B - $10B
48,579,075
11,663,894
36,915,181
13,802,500
14,236,852
33 017 009
33,017,009
475,924
4,808,448
-2,948
2,776,820
2,028,680
> $10B
376,775,949
63,354,759
313,421,190
122,374,086
192,469,437
287 331 790
287,331,790
7,115,710
103,300,461
-597,387
28,956,516
73,746,558
25
26
Total Dep
FF Purch
Trading Liab
Other Borrow
Total Liab
Preferred
Total CE
Total L & E
84.91%
0.54%
0.00%
3.13%
88.58%
0.04%
11.38%
100.00%
83.51%
1.68%
0.00%
4.76%
89.95%
0.07%
9.98%
100.00%
$1B - $10B
8.06%
20.51%
0.68%
62.32%
1.56%
0.18%
1.46%
6.79%
100.00%
> $10B
7.59%
19.25%
4.36%
50.48%
1.89%
7.35%
0.74%
10.24%
100.00%
77.21%
4.56%
0.03%
6.86%
88.66%
0.17%
11.17%
100.00%
68.22%
4.70%
2.94%
12.69%
88.55%
0.04%
11.41%
100.00%
$1B - $10B
4.47%
1.07%
3.40%
1.27%
1.31%
3 04%
3.04%
0.04%
0.44%
0.00%
0.26%
0.18%
27
28
Average Equity =
> $10B
3.88%
0.65%
3.23%
1.26%
1.98%
2 96%
2.96%
0.07%
1.06%
-0.01%
0.30%
0.75%
Return on Equity
Equity t + Equity t 1
2
Return on Assets
30
ROE Example
2010
3154
503
Equity
Net Income
ROA =
Ratio Basics
2009
3371
521
503
= 0.1541 = 15.41%
3 154 + 3,371
3 371)
(3,154
ROE increases:
If NI increases faster than Equity increases
If Equity decreases faster than NI decreases
ROE decreases:
If NI decreases faster than Equity decreases
If Equity increases faster than NI increases
31
Return on Equity
Strategic Relationship
Equity
Ratio
Eq/TA
5.00%
6.00%
7.00%
8.00%
ROE
Net Income
Equity
ROA
Net Income
Assets
32
EM
Assets
Equity
Equity
Mult.
TA/Eq
20.0
16.7
14.3
12.5
x
x
x
x
x
ROA
1.50%
1.50%
1.50%
1.50%
=
=
=
=
=
ROE
30.0%
25.0%
21.4%
18.8%
1
EM = Assets =
Equity Equity ratio
33
34
Capital Ratios
36
2010
2009
2008
ROE
8.02%
7.69%
7.52%
EM
7 71
7.71
7 18
7.18
6 71
6.71
ROA
1.04%
1.07%
1.12%
Analysis:
2010
2009
2008
ROE
7.52%
7.69%
8.02%
EM
6 71
6.71
7 18
7.18
7 71
7.71
ROA
1.12%
1.07%
1.04%
38
Analysis:
Bank
ROE
EM
ROA
2010
8.02%
7.71
1.04%
2009
7.69%
7.18
1.07%
2008
7.52%
6.71
1.12%
Peer Group
ROE
EM
ROA
2010
8.02%
9.214
0.87%
2009
7.69%
8.352
0.92%
2008
7.52%
7.601
0.99%
39
40
2010
8.02%
7.71
1.04%
2009
7.69%
7.18
1.07%
2008
7.52%
6.71
1.12%
Peer Group
ROE
EM
ROA
2010
7.09%
6.881
1.03%
2009
7.14%
6.732
1.06%
2008
7.46%
6.662
1.12%
Return on Assets
ROA is determined by the Profit Margin (PM)
and Asset Utilization (AU)
ROA
Net Income
Assets
AU
Revenue
Assets
PM
Net Income
Revenue
42
ROE Breakdown
ROE
ROA
AU
EM
PM
Variable
2010
2009
2008
ROE
8.02%
7.69%
7.52%
7.71
7
71
1.04%
7.18
7
18
1.07%
6.71
6
71
1.12%
7.31%
14.23%
7.33%
14.60%
7.37%
15.20%
EM
ROA
EM
AU
PM
2010
2009
2008
ROE
8.02%
7.69%
7.52%
7.71
7
71
1.04%
7.18
7
18
1.07%
6.71
6
71
1.12%
6.85%
15.18%
7.00%
15.29%
7.37%
15.20%
EM
ROA
AU
PM
44
Bank
1.04%
7.31%
14.23%
PG
0.87%
5.73%
15.18%
Bank
1.04%
7.31%
14.23%
PG
0.87%
7.55%
11.52%
45
46
Income Statement
Net Income
Revenue
Asset Utilization
Expense
AU
Interest Income
- Interest Expense
Net Interest Income
- Provision for Loan Losses
+ Noninterest Income
- Noninterest Expense
+ Gains/Losses on Secs
Pretax Earnings
- Taxes
Net income
Int Inc
TA
47
G/L
TA
48
2010
2009
AU
II/TA
Non II/TA
GL/TA
7.31%
5.79%
5
79%
1.52%
0.00%
7.33%
6 06%
6.06%
1.27%
0.00%
Interest Income
Earning Assets
Earning Assets
Assets
Yield on
Earning Assets
Real World:
Why are banks worried about loss of fee income?
Earnings
Base
50
49
2010
2009
II/TA
EA/TA
II/EA
5.79%
90.14%
6.42%
6.06%
88.72%
6.83%
yiAi
Int Inc
i =1
Yield on EA =
=
EA
EA
where:
yi = yield on asset i
Ai = dollar amount of asset i
Interest Income
Asset
Non earning
50
52
i%
Inc
Asset
i% Inc
i+
Inc+
Non earning
50
Securities
100 x
Securities
100
Bus Loans
200 x
10
Bus Loans
200
10
12
Cons Loans
200 x
12
Cons Loans
200
12
16
25
5.0%
90.91%
4.55%
Int Inc
Int Inc/EA
Int Inc/TA
Int Inc
Int Inc/EA
EA/TA
Int Inc/TA
25
5.0%
4.55%
$32
6.4%
5.82%
54
i%
Inc
New
Inc
Non earning
50
50
Securities
100
100
Bus Loans
200
10
300
15
Cons Loans
200
12
100
Int Inc
Int Inc/EA
Int Inc/TA
$25
5.0%
4.55%
$24
4.8%
4.36%
Which is better?
i%
New
i% amt
Non earn 50
50
Sec
100
100
+1
B Loans
200
300
+2
+5
+1
C Loans
200
100
+4
-6
-2
$30
6.0%
5.45%
+7
-1
-1
Asset
Int Inc
Int Inc/EA
Int Inc/TA
$25
5.0%
4.55%
55
Camel Trail A
How can a bank increase rates across all
categories of loans?
Earnings base = EA / TA
58
Non-Interest Income
Non II
TA
Fid Fees
TA
Dep Svc
TA
56
Gains/Losses on Securities
+
Other
TA
G/L
TA
G/L
SEC
SEC
TA
Gains/Losses relati
relative
e to le
level
el of sec
securities
rities
and securities as percentage of assets
60
10
ROE Breakdown
AssetUtilization2010
ROE
7.00%
6.00%
ROA
5.00%
4.00%
IntInc
3.00%
NonII
2.00%
GL
AU
EM
PM
EM
1.00%
0.00%
1.00%
<100M(2009)
<100M(2010)
>10B(2010)
>10B(2009)
61
62
Net Income
Revenue
NI
= Revenue
Expense
Revenue
Assets
So
Net Income
=
Revenue
Revenue
Revenue
Asset Utilization
ROA
Expense
Revenue
Expense
Revenue
Asset Utilization
Revenue
Assets
Expense
Assets
63
Income Statement
Net Income
Revenue
M lti l i th
Multiplying
through
h we get:
t
Expense
Revenue
Profit Margin
64
Expense
Assets
Interest Income
- Interest Expense
Net Interest Income
- Provision for Loan Losses
+ Noninterest Income
- Noninterest Expense
+ Gains/Losses on Secs
Pretax Earnings
- Taxes
Net income
IE
TA
Non IE
TA
PLL
TAX
TA
TA
IE = Interest Expense
Non IE = Non-Interest Expense
PLL = Provision for Loan Losses
TAX = Taxes
65
66
11
Interest Expense
Assets
Interest Expense
Int Bearing Liab
ciLi
Int Exp
i =1
Cost Rate on IBL =
=
IBL
IBL
where:
Cost Rate on
Int Bearing Liab
67
68
i% Exp New i%
New Exp
Liab
i%
New Exp
DDAs
100
DDAs
100
100
NOWs
200
NOWs
200
100
MMD
MMDs
100
MMD
MMDs
100
150
CDs
100
CDs
100
150
4.5
Int Exp
Int Exp/IBL
Int Exp/TA
$7
1.75%
1.27%
$12
3.0%
2.18%
Int Exp
Int Exp/IBL
Int Exp/TA
Equity = 50
69
i%
New
i% amt
100
100
NOWs
200
100
+2
-1
-1
MMDs
100
150
+1
+1
+0.5
CDs
100
150
+2
+1.5
+1
+5
+1.5
+0.5
Equity = 50
$7
1.75%
1.27%
$14
3.5%
2.55%
$8.5
2.125%
1.55%
Equity = 50
70
DDAs
Int Exp
Int Exp/IBL
Int Exp/TA
$7
1.74%
1.27%
71
Composition of liabilities
Size of holdings across and within various
types of liabilities
Cost per liability (average rate paid)
Differences in risk premiums
Timing of borrowing
Maturity of borrowing
Pricing expertise
72
12
Non-Interest Expense
Personnel
TA
Personnel
# Employees
# Employees
TA
Occupancy
TA
Occupancy
# Branches
# Branches
TA
2010
3.33%
1.79%
0.36%
1.18%
2009
3.22%
1.75%
0.39%
1.08%
74
PLL
TA
PLL
Loans
Loans
TA
76
Camel Trail A
Loss experience
Variable
2010
2009
PG
PLL / TA
1.19%
0.37%
0.89%
0.52%
0
52%
71.17%
1.28%
1
28%
69.62%
PLL / Loans
L
1 71%
1.71%
Loans / TA 69.64%
Gross losses, net losses, and recoveries to average total loans and
leases
Recovery percentages and losses by loan type
Bank preparation
Provision for loan loss to average assets and loans
Allowance for loan losses to net losses and total loans
Earnings coverage of net loss
Analysis:
77
78
13
Taxes
TAX
TA
TAX
Taxable Inc
Taxable Inc
REV
TotalExpenseRatio
REV
TA
7.00%
6.00%
5.00%
IntExp
4.00%
NonIE
3.00%
PLL
2.00%
TAX
1.00%
0.00%
<100M(2009)
<100M(2010)
>10B(2010)
>10B(2009)
79
80
Components of ROA
ROA
Asset Utilization
Revenue
Assets
Expense
Assets
AU
G/L
TA
ROA =
Int Exp
TA
EXP =
PLL
TA
NII
TA
Burden
TA
PLL
TA
G/L
TA
TAX
TA
TAX
TA
81
Decomposition of ROE
82
ROE
x
ROA
AU
EM
Net Interest
Margin
PM
NII
Earning Assets
EA
TA
Earnings
Base
AU
NII
TA
Burden
TA
Tot Exp
PLL
TA
G/L
TA
Net Interest
Margin
TAX
TA
83
Int Inc
EA
Int Exp
EA
84
14
NII
TA
Int Inc
EA
EA
TA
) (
Yield on
Earning Assets
Int Exp
IBL
IBL
TA
Net Interest
Margin
Int Inc
EA
Int Exp
EA
Spread
Int Inc
EA
Int Exp
IBL
85
Efficiency Ratio
Efficiency
Ratio
88
Avoiding Problems
90
15
Relationships
91
92
Risk Considerations
Window dressing
g
Timing of asset/liability adjustments may impact
reported numbers
Accounting Differences
Leeway in accounting reporting rules often make
comparisons difficult
93
94
ReturnonEquity
ReturnonAssets
20.00%
2.00%
15.00%
1.50%
10.00%
1.00%
<100M
<100M
100M<1B
5.00%
100M<1B
0.50%
1B<10B
1B<10B
>10B
0.00%
>10B
0.00%
5.00%
95
2009
2010
2008
2006
2007
2004
2005
2002
2003
2000
2001
1998
1999
1997
1995
1996
1993
1994
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.50%
96
16
EquityMultiplier
AssetUtilization
11.00%
15.00
14.00
10.00%
13.00
9.00%
12.00
11.00
<100M
10.00
100M<1B
<100M
8.00%
9.00
1B<10B
8.00
>10B
100M<1B
7.00%
1B<10B
6.00%
>10B
5.00%
7.00
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
4.00%
1993
6.00
97
98
IntInctoTA
ProfitMargin
9.00%
20.00%
8.00%
15.00%
7.00%
10.00%
<100M
<100M
5.00%
100M<1B
1B<10B
0.00%
6 00%
6.00%
100M<1B
1B<10B
5.00%
>10B
>10B
5.00%
4.00%
10.00%
2009
2010
2007
2008
2006
2004
2005
2002
2003
2001
1999
2000
1997
1998
1996
1994
1995
1993
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
3.00%
99
100
NetInterestMargin
InterestExpensetoTA
4.50%
4.00%
3.50%
4.00%
3.00%
2.50%
<100M
2 00%
2.00%
3.50%
<100M
100M<1B
1.50%
1B<10B
1.00%
>10B
100M<1B
3.00%
1B<10B
>10B
2.50%
0.50%
0.00%
101
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
2.00%
102
17
NonInterestExpensetoTA
NonIntInctoTA
4.50%
3.50%
3.00%
4.00%
2.50%
3.50%
<100M
2.00%
<100M
3.69%
100M<1B
1.50%
1B<10B
1.00%
>10B
3.00%
1B<10B
>10B
2.50%
0.50%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1993
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1994
2.00%
0.00%
103
104
Gains/LossesonSecuritiestoTA
Burden
0.15%
3.00%
0.10%
2.50%
0.05%
0.00%
2.00%
1 50%
1.50%
1.00%
<100M
0.05%
<100M
100M<1B
0.10%
100M<1B
1B<10B
0.15%
>10B
0.20%
1B<10B
>10B
0.50%
0.25%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1993
1994
0.30%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0.00%
105
106
ProvisionforLoanLossestoTA
LoanstoTA
75.00%
2.50%
70.00%
2.00%
65.00%
1.50%
<100M
<100M
100M<1B
1.00%
1B<10B
60 00%
60.00%
100M<1B
1B<10B
55.00%
1B<10B
0.50%
>10B
50.00%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
45.00%
1993
0.00%
107
108
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EfficiencyRatio
85.00%
80.00%
75.00%
<100M
70.00%
100M<1B
65.00%
1B<10B
60.00%
>10B
55.00%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
50.00%
109
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110
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111
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112
113
114
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116
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118
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119
20
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121
122
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ROE
EM
ROA
2010
8.02%
7.71
1.04%
2009
7.69%
7.18
1.07%
2008
7.52%
6.71
1.12%
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124
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126
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Assets
divided by
q y
Equity
Return on Assets
0.5%
1.0%
1.5%
Return on Equity
10:1
128
5.0%
10.0%
15.0%
15:1
20:1
129
130
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131
132
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Which of the following would help explain why the banks ROA
increased from 2007 to 2008?
2008
2007
ROE 18.101%
18.333%
ROA 1.756%
1.601%
EM 10.308
11.453
AU
0.0960
0.0931
PM
18.292%
17.200%
a. management generated more revenue per dollar of assets
b. management did a better job of controlling expenses
c. management used less financial leverage
d. a and b, but not c, help explain the increase in ROA
133
134
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135
136
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Calculate the banks ROA.
NII/TA
4.982%
Burden/TA
2.014%
PLL/TA
0.121%
GL/TA
G
/
0.030%
TAX/TA
0.442%
a. 2.678%
b. 2.436%
c. 2.376%
d. 3.561%
137
138
23
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139
140
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Burden measures:
a. the difference between interest income and
interest expense
b. the difference between non-interest
expense and non
non-interest
interest income
c. gains/losses on securities
d. taxes paid by the bank
141
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142
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143
144
24