it will help to learn the risks of bank

1. CHAPTER FIVE
Measuring And Evaluating
The Performance Of
Banks And Their Principal
Competitors
1

2. Determining the Bank’s Long-
range Objectives
A fair evaluation of any bank’s
performance should start by
evaluating whether it has been able
to achieve its objectives.
2

3. Maximizing the Value of the
Firm
If the stock of a bank fails to
rise in value, current investors will
start to sell the stocks and the bank
may face difficulty in raising new
capital for future growth.
3

4. Performance based classification of
banks
Category Position
A Best Performer
B Moderate performer
C Average Performer
D Below Average performer
E Losing and Bad performer

5. CAMELS RATINGS
The components of a bank's condition that are
assessed
 (C) Capital adequacy,
 (A) Asset quality,
 (M) Management Capability,
 (E) Earnings,
 (L) Liquidity and
 (S) Sensitivity to Market Risk

6. Key Profitability Ratios in
Banking
Net Income After Taxes
Return on Equity Capital (ROE) =
Total Equity Capital
Net Income After Taxes
Return on Assets (ROA) =
Total Assets
Net Interest Income
Net Interest Margin =
Total Assets
Net Noninterest Income
Net Noninterest Margin =
Total Assets
6

7. Key Profitability Ratios in Banking
(cont.)
Total Operating Revenues -
Total Operating Expenses
Net Bank Operating Margin =
Total Assets
Net Income After Taxes
Earnings Per Share (EPS) =
Common Equity Shares Outstanding
7

8. Bank Risks
 Credit Risk
 Liquidity Risk
 Market Risk
 Interest Rate Risk
 Earnings Risk
 Capital Risk
8

9. Credit Risk
The Probability that Some of
the Bank’s Assets Will Decline
in Value and Perhaps Become
Worthless
9

10. 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
 Total Loans/Total Deposits
10

11. Liquidity Risk
Probability the Bank Will Not Have
Sufficient Cash and Borrowing Capacity to
Meet Deposit Withdrawals and Other Cash
Needs
11

12. Liquidity Risk Measures
 Purchased Funds/Total Assets
 Net Loans/Total Assets
 Cash and Due from Banks/Total Assets
 Cash and Government Securities/Total
Assets
12

13. Market Risk
Probability of the Market Value
of the Bank’s Investment
Portfolio Declining in Value
Due to a Rise in Interest Rates
13

14. 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
14

15. Interest Rate Risk
The Danger that Shifting Interest
Rates May Adversely Affect a
Bank’s Net Income, the Value of
its Assets or Equity
15

16. Interest Rate Risk Measures
 Interest Sensitive
Assets/Interest Sensitive
Liabilities
 Uninsured Deposits/Total
Deposits
16

17. Earnings Risk
The Risk to the Bank’s Bottom
Line – Its Net Income After All
Expenses
17

18. Earnings Risk Measures
 Standard Deviation of Net Income
 Standard Deviation of ROE
 Standard Deviation of ROA
18

19. Capital Risk
Probability of the Value of the
Bank’s Assets Declining Below the
Level of its Total Liabilities. The
Probability of the Bank’s Long Run
Survival
19

20. Capital Risk Measures
 Stock Price/Earnings Per Share
 Equity Capital/Total Assets
 Purchased Funds/Total
Liabilities
 Equity Capital/Risk Assets
20

21. Indicators of successful banks

22. Indicators of Problem banks

23. Dealing with failed banks
The three ways as follows;
 Liquidation
 Merger
 Nationalization