Académique Documents
Professionnel Documents
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Performance of Banks
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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Key Topics
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
6-5
D1
P0
r-g
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
6-6
Net Income
Return on Assets (ROA) =
Total Assets
(Interest income
- Interest expense) Net Interest Income
Net Interest Margin
Total Assets
Total Assets
Noninterest revenue
- PLLL
- Noninterest expenses Net Noninterest Income
Net Noninterest Margin
McGraw-Hill/Irwin
Total Assets
Total Assets
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
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R O E = N e t In c o m e / T o ta l E q u ity C a p ita l
ROA =
N e t In c o m e /T o ta l A s s e ts
N e t P ro fit M a rg in =
A s s e t U tiliz a tio n =
x
N e t In c o m e /T o ta l O p e ra tin g R e v e n u e T o ta l O p e ra tin g R e v e n u e /T o ta l A s s e ts
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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6-10
Determinants of
ROE in a
Financial Firm
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
6-11
Components of ROE
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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A Variation on ROE
Net Income
Pre-Tax Net Operating Income
ROE =
Total Assets
Total Equity Capital
CAMELS Analysis
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
6-14
Breakdown of ROA
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
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Rapid Fire
What are the principal components of ROE, and what
does each of the these components measure?
Suppose a bank has an ROA of 0.80% and an equity
multiplier of 12x. What is its ROE? Suppose this
banks ROA falls to 0.60%. What size equity
multiplier must it have to hold its ROE unchanged?
What are the most important components of ROA and
what aspects of a financial institutions performance
do they reflect?
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
6-16
Bank Risks
Credit Risk
Liquidity Risk
Market Risk
Interest Rate Risk
Operational Risk
Legal and
Compliance Risk
Reputation Risk
Strategic Risk
Capital Risk
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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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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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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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
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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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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2008 The McGraw-Hill Companies, Inc.,
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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
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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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.
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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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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2008 The McGraw-Hill Companies, Inc.,
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc.,
Bank Management and Financial Services, 7/e All Rights Reserved.