Chapter 2

Yanuar Dananjaya, Bsc., MM

Analyzing Bank Performance

Profitability Analysis
Most important parameter for profitability:
ROE = NI / E
Equity put in the equation is the average equity
Shows ability of equity to produce NI
ROE can be broken down into 2 components
ROE = ROA X EM
ROA = NI / A
Asset put in the equation is average asset
ROA shows ability of company to utilize asset to produce NI
shows ability of management

EM = Equity Multiplier = Asset / Equity

EM shows level of equity multiplication by debt magnifies
ROA in both directions

ROE is management ability magnifies by use of debt

Yanuar Dananjaya, Bsc., MM

Analyzing Bank Performance

ROA Components
NI = TR TE Tax
NI = Nett Income
TR = Total Revenue
TE = Total Expense
ROA = NI / A = TR/A TE/A Tax/A
TR/A = AU Asset Utilization shows ability of management
in using asset to generate revenue

TE/A = ER Expense Ratio shows ability of management

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to cut cost

Tax/A = TR Tax Ratio

ROA = AU ER TR

Yanuar Dananjaya, Bsc., MM

Analyzing Bank Performance

Expense Components
Total Expense = Interest Expense + Non Interest Expense +

Chapter 2

Provision for Loan Loss

Biggest and most important to control is Interest expense

Interest Expense depends on three factors:
Interest Rate
Risk premium riskier bank must offer higher rate
Timing people put deposit during high/low rate
Maturity how long deposit with certain rate mature
Composition
Composition between saving deposit and time deposit
Volume
How much asset comes from liability

Yanuar Dananjaya, Bsc., MM

Analyzing Bank Performance

Income Components
Total Income = Interest Income + Non Interest Income + Realized

Chapter 2

Security gain/loss

Biggest and most important to control is Interest income

Interest Income depends on three factors:
Interest Rate
Risk premium riskier debtor must pay higher rate
Timing credit given during high/low rate
Maturity how long credit with certain rate mature
Composition
Composition between high risk and low risk credit
Volume
How much asset is put in interest bearing asset

Yanuar Dananjaya, Bsc., MM

Analyzing Bank Performance

Other Parameters for Performance
Nett Interest Margin NIM = Net Interest Income / Interest earning
asset shows effectiveness of credit activity

Spread (Interest Income / Interest earning asset) (Interest

Expense/Interest bearing liabilities) shows the interest rate spread

between borrowing and lending activity

Burden Ratio (Non Interest Expense Non Interest Income)/A to

compare burden with other banks

Efficiency Ratio = Non Interest Expense / (NII + Non interest

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income)