Chapter Six & More

Measuring and Evaluating the Performance of Banks BBK as a case

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Key Topics BBK a case study Stock Values and Profitability Ratios Measuring Credit, Liquidity, and Other Risks Measuring Operating Efficiency

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Type of Balance Sheets Fat Fit Skinny

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BBK Case
BBK Consolidated Statement of Financial Position ASSETS Cash and balances with central banks Treasury bills Deposits and due from banks and other nancial institutions Loans and advances to customers Non-trading investment securities Investments in associated companies and joint venture Interest receivable and other assets Premises and equipment TOTAL ASSETS Liabilities Deposits and due to banks and other nancial institutions Borrowings under repurchase agreement Customers current, savings and other deposits Term borrowings Interest payable and other liabilities Total liabilities Equity Share capital Statutory reserve General reserve Retained earnings and other reserves Total equity TOTAL LIABILITIES AND EQUITY BBK 2009 BD000s 162,408 61,655 362,407 1,268,561 357,151 27,472 11,235 28,003 2,278,892 BBK 2010 BD000s 358,926 130,172 171,037 1,276,316 425,428 35,120 21,096 29,082 2,447,177 NBB 2010 BD000s 95,290 183,610 360,140 950,800 656,410 0 11,680 16,120 2,274,050

239,579
1,516,909 257,173 34,237 2,047,898 122,209 39,001 20,000 49,784 230,994 2,278,892

195,501 1,678 1,593,576 370,279 45,601 2,206,635

121312 42,568 27,000 49,662 240,542 2,447,177

125,240 106,590 1,768,470 0 10,780 2,011,080

77,760 38,880 32,400 113930 262,970 2,274,050

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BBK Case
BBK 2009 Consolidated statement of income Interest and similar income Interest and similar expense Net interest income Other income Total operating income Staff costs Other expenses Depreciation Total operating expenses Net Operating Income Net provision for impairment on loans and advances to customers Net provision for impairment of non-trading investment securities PROFIT BEFORE TAXATION Net tax provision Non-controlling interest PROFIT FOR THE YEAR 42,938 49,624 11,291 2,952 35,381 -364 4 35,013 45,621 63,457 17,718 6,001 39,738 -589 7 39,142 25,830 46,050 1,580 1,450 43,020 0 0 43,020 BD000s 82,422 21,125 61,297 31,265 92,562 27,873 15,065 BBK 2010 BD000s 84,923 28,968 55,955 53,123 109,078 29,388 16,233 NBB 2010 BD000s 66,560 17,860 48,700 23,180 71,880 19,120 6,710

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BBK Profitability Ratios

Profitability Ratios BBK ROE

2009 15.2%

2010 16.3%

NBB 16.4%

ROA
Net Profit Margin (net profit/operating revenue)

1.5%
37.8%

1.6%
35.9%

1.9%
59.8%

Asset Efficiency (operating revenue/total assets)

Leverage (total assets/total equity)

4.1%
9.9

4.5%
10.2

3.2%
8.6

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What affects NPM

Interest Spread Average interest yield Average interest cost Interest Spread Net Profit Margin (NPM) Analysis Operational efficiency (operating expenses/operating revenue) Non interest income ratio Bad debts provisions

2009 4.0% 1.0% 3.0% 2009 46% 34% 15%

2010 3.9% 1.3% 2.6% 2010 42% 49% 22%

NBB 3.1% 0.9% 2.2% NBB 36% 32% 4%

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Breaking Down ROE

ROE = Net Income/ Total Equity Capital

ROA = Net Income/Total Assets

Equity Multiplier = Total Assets/Equity Capital

Net Profit Margin = Asset Utilization = x Net Income/Total Operating Revenue Total Operating Revenue/Total Assets

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Liquidity Position

Liquidity Ratios (Liquidity Risk) Primary liquid assets Quoted investments Secondary liquid assets

2009 224,063 191,315 415,378

2010

NBB

489,098 278,900 286,627 491,194 775,725 770,094

Liquid ratio primary

Liquid ratio secondary Funding Ratio (Loan to Deposits Ratio)

15%
27% 84%

31%
49% 80%

16%
44% 54%

CBB Requirement is 25%

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Credit Quality
Credit Quality (Default Risk) Gross Loan and Advances Allowance for bad debts Net Loans & Advances NPL NPL/Gross Loans Collateral Collateral & Provisions/ NPL 2009 1,332,931 64,370 1,268,561 139,882 10% 72,182 98% 2010 1,359,003 82,687 1,276,316 123,763 9% 56,330 112%

Gross Securities Investments Allowance for impairment Net Securities Investments Allowance for impairment/Gross

422,376 65,225 357,151 15%

488,086 62,658 425,428 13%

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Value of the Banks Stock

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Value of a Banks Stock Rises When:

Expected Dividends Increase Risk of the Bank Falls Market Interest Rates Decrease Combination of Expected Dividend Increase and Risk Decline

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Value of Banks Stock if Earnings Growth is Constant

D1 P0 r-g

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Key Profitability Ratios in Banking

Net Income Return on Equity Capital (ROE) = Total Equity Capital

Net Income Return on Assets (ROA) = Total Assets

(Interestincome - Interest expense) Net Interest Income Net Interest Margin Total Assets Total Assets

Noninterest revenue - PLLL Net Noninterest Margin - Noninterest expenses Net Noninterest Income Total Assets Total Assets

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Key Profitability Ratios in Banking (cont.)

Total Operating Revenues Total Operating Expenses Net Bank Operating Margin Total Assets
Net IncomeAfter Taxes Earnings Per Share (EPS) Common Equity Shares Outstanding
Total Interest Income __ Total Interest Expense Earnings Spread = Total Earning Assets Total Interest Bearing Liability

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ROE Depends On:

Equity Multiplier=Total assets/Total equity capital
Leverage or Financing Policies: the choice of sources of funds (debt or equity)

Net Profit Margin=Net income/Total operating revenue

Effectiveness of Expense Management (cost control)

Asset Utilization=Total operating revenue/Total assets

Portfolio Management Policies (the mix and yield on assets)

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Determinants of ROE in a Financial Firm

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Components of ROE for All Insured U.S. Banks (1992-2007)

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Bank Risks Credit Risk Liquidity Risk Market Risk Interest Rate Risk Operational Risk
Legal and Compliance Risk Reputation Risk Strategic Risk Capital Risk

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Credit Risk

The Probability that Some of the Financial Firms Assets Will Decline in Value and Perhaps Become Worthless

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Credit Risk Measures

Nonperforming Loans/Total Loans Net Charge-Offs/Total Loans Provision for Loan Losses/Total Loans Provision for Loan Losses/Equity Capital Allowance for Loan Losses/Total Loans Allowance for Loan Losses/Equity Capital Nonperforming Loans/Equity Capital

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Liquidity Risk Probability the Financial Firm Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit Withdrawals and Other Cash Needs

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Liquidity Risk Measures Purchased Funds/Total Assets Net Loans/Total Assets Cash and Due from Banks/Total Assets Cash and Government Securities/Total Assets

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Market Risk: Comprises Price Risk and Interest Rate Risk

Probability of the Market Value of the Financial Firms Investment Portfolio Declining in Value Due to a Change in Interest Rates

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Market Risk Measures

Book-Value of Assets/ Market Value of Assets Book-Value of Equity/ Market Value of Equity Book-Value of Bonds/Market Value of Bonds Market Value of Preferred Stock and Common Stock

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Interest Rate Risk

The Danger that Shifting Interest Rates May Adversely Affect a Banks Net Income, the Value of its Assets or Equity

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Interest Rate Risk Measures

Interest Sensitive Assets/Interest Sensitive Liabilities

Uninsured Deposits/Total Deposits

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Off-Balance-Sheet Risk
The Volatility in Income and Market Value of Bank Equity that May Arise from Unanticipated Losses due to OBS Activities (activities that do not have a balance sheet reporting impact until a transaction is affected)

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Operational Risk
Uncertainty Regarding a Financial Firms Earnings Due to Failures in Computer Systems, Errors, Misconduct by Employees, Floods, Lightening Strikes and Similar Events or Risk of Loss Due to Unexpected Operating Expenses

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Legal and Compliance Risk

Risk of Earnings Resulting from Actions Taken by the Legal System. This can Include Unenforceable Contracts, Lawsuits or Adverse Judgments. Compliance Risk Includes Violations of Rules and Regulations

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Reputation Risk

This is Risk Due to Negative Publicity that can Dissuade Customers from Using the Services of the Financial Firm. It is the Risk Associated with Public Opinion.

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Capital Risk

Probability of the Value of the Banks Assets Declining Below the Level of its Total Liabilities. The Probability of the Banks Long Run Survival

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Capital Risk Measures

Stock Price/Earnings Per Share Equity Capital/Total Assets Purchased Funds/Total Liabilities Equity Capital/Risk Assets