Copyright 2002 Thomson Publishing. All rights reserved. OUTLINE
OF INCOME STATEMENT Interest Income (from loans & investments)
- Interest Expense =Net Interest Income (spread or margin)
+Non-interest Income - Non-interest Expense - Loan Losses (Bad Debt
Expense) +/- Security Gains/Losses - Income Tax =Net Income
Performance Evaluation of Banks
Slide 3
Copyright 2002 Thomson Publishing. All rights reserved. Exhibit
20.2
Slide 4
Copyright 2002 Thomson Publishing. All rights reserved. Ch 20,
Problem (10e, p. 529; 11e, p.563) Managing in Financial Markets
INCOME STATEMENT FOR HAWAII BANK % of Avg Assets Interest Income
(from loans & invest.) ?% - Interest Expense ?% =Net Interest
Income (spread or margin) ?% +Non-interest Income ?% - Non-interest
Expense ?% - Loan Losses (Bad Debt Expense) ?% = Net Income before
Tax ?% - Income Tax ?% =Net Income ?% ROA = (Net Inc / Avg Assets)
= ?% ROE = (Net Inc / Equity) ?% / ?% = ?% or ROE = ROA * (Avg
Assets/Equity) = ?%
Slide 5
Copyright 2002 Thomson Publishing. All rights reserved.
Performance Evaluation of Banks Interest income and expenses Gross
interest income = interest income generated from all
interest-bearing assets Affected by market rates Impacted by
composition of bank assets (loans provide higher rate than liquid
investments) Gross interest expenses = interest paid on deposits
and borrowed funds Affected by market rates Impacted by the
composition of bank liabilities (demand accounts are less costly
than time deposits) Net interest income = gross interest income
interest expenses
Slide 6
Copyright 2002 Thomson Publishing. All rights reserved.
Slide 7
Gross Interest Income/Expense
Slide 8
Copyright 2002 Thomson Publishing. All rights reserved.
Slide 9
Performance Evaluation of Banks Noninterest income and expenses
Noninterest income results from fees charged on services Lockboxes,
overdraft fees, ATM fees, bankers acceptances fees, cashier check
fees, foreign exchange transactions, investment banking and other
advisory fees Loan loss provision is a reserve account established
in anticipation of future losses Noninterest expenses include
salaries, office equipment Securities gains and losses
Slide 10
Copyright 2002 Thomson Publishing. All rights reserved.
Slide 11
Slide 12
Performance Evaluation of Banks Return on assets (ROA) Net
income as a percent of total assets Net Income / Total Assets = ROA
Usually lower for large banks (money center banks) because they
obtain funds from large deposits (CDs) that pay higher interest
rates. Small banks usually get funds from demand deposits (zero
interest) and small savings accounts (low interest).
Slide 13
Copyright 2002 Thomson Publishing. All rights reserved. How to
Evaluate a Banks Performance Examination of Return on Assets (ROA)
Will usually reveal poor performance, but will not indicate the
source of the problem Possible reasons for a low ROA: Excessive
interest expenses (e.g too many CDs) Low interest received on loans
and securities Too conservative with loansexcessive short-term
securities Insufficient noninterest income Service fees too low
(should raise NSF fees, etc.) High provision for loans losses
Slide 14
Copyright 2002 Thomson Publishing. All rights reserved.
Performance Evaluation of Banks Return on equity (ROE) The return
on capital invested Net Income / Capital = ROE ROE = ROA x leverage
multiplier (inverse of capital ratio) ROE for large banks has been
lower than for small banks for the same reasons that their ROA has
been lower
Slide 15
Copyright 2002 Thomson Publishing. All rights reserved.
Slide 16
Exhibit 20.11 Breakdown of Performance Measures
Slide 17
Copyright 2002 Thomson Publishing. All rights reserved.
Influence of Bank Policies and Other Factors on a Banks Income
Statement
Slide 18
Copyright 2002 Thomson Publishing. All rights reserved. Zager
Bank Example Application: Example of Zager Bank l Zager bank is a
medium size bank l Aggressive management style can be viewed as
risky due to limited collateral and cash flow situation. l The bank
charges high interest rates on loans because the borrowers do not
have alternative lenders. l Strategy was successful during strong
economic conditions. l When economy weakened in 2008, borrowers had
trouble repaying their loans.
Slide 19
Copyright 2002 Thomson Publishing. All rights reserved. Zager
Bank Example
Slide 20
Copyright 2002 Thomson Publishing. All rights reserved. Risk
Evaluation of Banks No consensus measurement exists that would
allow for comparison of various types of risk among all banks Some
analysts measure a firms risk by its beta, which measures the
sensitivity of stock returns to the market as a whole, but Beta
ignores firm-specific characteristics Examples: look up BofA (BAC)
or Banner Bank (BANR).
Slide 21
Copyright 2002 Thomson Publishing. All rights reserved. Beta
measures non-diversifiable risk
Slide 22
Copyright 2002 Thomson Publishing. All rights reserved. Betas
During Financial Crisis Feb-08 / Today 0.19 / ? (BAC - Bank of
America) 1.14 / ? (C - Citibank) 0.5 / ? (JPM - JP Morgan Chase)
0.04 / ? (WFC - Wells Fargo) 1.17 / ? (BANR - Banner Bank)
Slide 23
Copyright 2002 Thomson Publishing. All rights reserved. History
of U.S. Bank Failures # of banks failed 3 in 2007 30 in 2008 148 in
2009 157 in 2010 92 in 2011 51 in 2012 24 in 2013 3 so far in 2014
See FDIC website for details
http://www.fdic.gov/bank/individual/failed/banklist.htmlhttp://www.fdic.gov/bank/individual/failed/banklist.html
Slide 24
Copyright 2002 Thomson Publishing. All rights reserved. Bank
Failures Historical reasons for bank failure Fraud from poor
internal controls Embezzlement of funds No separation of personnel
dutiesesp. at small banks High loan default percentage Excessive
reliance on a specific industry (such as oil, defense, or
agriculture) or a specific geographic location. Recession periods
Liquidity crisis Bank runs, panics Loss of confidence of financial
markets Increased competition (very tight margins)
Under-capitalization / over-leverage (too much debt)
Slide 25
Copyright 2002 Thomson Publishing. All rights reserved. Bank
Failures Study by the Office of the Comptroller of the Currency
reviewed 162 national banks that have failed since 1979 and found
that: 81% did not have a loan policy or did not closely follow
their policy 59 % did not use an adequate system to identify
problem loans 63% did not adequately monitor key bank officers or
departments 57% allowed one individual to make major corporate
decisions Since these are all controllable, must conclude major
reason is poor management.