b_04.pdf
(
150 KB
)
Pobierz
Bachelor Studies in Finance
Year 2, Spring 2012
Overview
1. Assets and liabilities of commercial
banks and investment banks
2. Bank performance and financial
ratio analysis
BANKING
Lecture 4
Banks’ balance sheet and income
statement
Ewa Kania, Department of Banking
2
1. Assets and liabilities of commercial banks
Banks’ assets (uses of funds) are:
•C sh
•
Liquid assets (securities)
Sources of funds
for banks are:
•
•
Short-term money market instruments
Retail deposits from the general public
•
Loans
•
Small, medium and large corporate deposits
•
Other investments
•
Interbank deposits
•
Fixed (real) assets (branch network, „brick and mortar”,
office equipment, premises)
•
Equity (share) issues
•
Debt issues (bonds and loans)
•
Retained earnings (saved past profits)
Banks liabilities tend to have shorter maturities than assets.
This mismatch generates risks and requires apt management.
These are banks’
liabilities
(debt) and
capital
(equity) which in
turn are transformed into financial and real assets.
Capital
(also referred to as
equity
capital or
net worth)
=
=
Assets – Liabilities
3
4
The primary
function of bank capital
is to reduce the risk of
failure by providing protection against operating losses:
• Providing a cushion to absorb unexpected losses and
enable bank to remain solvent
• Protecting uninsured depositors in the event of insolvency
and liquidation
• Protecting bank insurance funds and taxpayers
• Providing access to financial markets and thus guarding
against liquidity problems caused by deposit outflows
• Limiting risk taking
Banks’ income structure
•
Bank’s income statement (profit and loss account)
measures bank’s performance between two year-end
balance sheets.
•
Balance sheet reports stock values whereas income
statement represents cash flow values for a particular year.
•
Costs include: payment of interest on deposits, dividends
to shareholders, interest on debt, provision for loans losses
and taxes; noninterest costs, staffing costs and other
operating costs.
•
Revenues generated by assets include: interest earned on
loans and investments; fees and commissions. These are,
respectively, interest and non-interest revenues.
Capital is also needed to acquire plant and other real property.
More risk requires more capital so capital adequacy should be
a function of risk exposure all other things being equal.
Bank profits = Income – Costs
5
6
A simplified bank income statement
•
Investment banks
mainly deal with corporations and
other large institutions; they do not offer services to retail
customers (apart from private banking services to high
net-worth individuals).
A
B
C = A – B
D
E = C – D
F
G
H = F – G
I = E + H
L
M = I ± L
N
O
P = M – N – O
Q
R = P – Q
Interest income
Interest expense
Net interest income (NII)
Provision for loan losses (PLL)
NII after PLL
Non-interest income
Non-interest expense
Net non-interest income
Pre-tax net operating profit
Securities gains (losses)
Profit before taxes
Taxes
Extraordinary items
Net profit
Cash dividends
Retained profit
•
The balance sheet structure and income statement of
investment banks differ significantly from those of
commercial banks.
•
Assets:
cash and other non-earning assets; trading assets;
collaterized securities financing transactions (receivable);
marketable investment securities; loans, notes and
mortgages; other investments; fixed assets; other assets
(mainly intangible assets and goodwill; assets generated
from unrealized gains on derivatives used to hedge bank’s
activities).
7
8
Investment banks’ income statements
Their
revenues
come from the following sources:
1. Trading and principal investments
2. Underwriting and financial advisory services
3. Asset management, portfolio service fees and commissions
4. Interest income from wholesale lending
Liabilities and equity
•
Collaterized securities
include payables under repurchase
agreements and payables under securities loan transactions.
•
Trading liabilities
include activities based on forecasts such
as trading securities, derivatives dealing and brokerage.
•
Commercial paper
consists of short-term negotiable debt
instruments issued by the bank to raise unsecured funding;
they are traded in the money market.
Costs
include:
1. Interest expenses (much higher compared to retail banks)
2. Operating expenses (mainly staff costs)
3. Communication and technology
4. Occupancy and depreciation
5. Brokerage, clearing and exchange fees
6. Professional fees
7. Marketing
•
High-volume
corporate deposits
(savings and time deposits);
•
Other liabilities
to customers, brokers and dealers;
•
Stockholders’
equity
.
9
10
2. Bank performance and financial ratio
analysis
•
NIM is net interest margin and measures the net interest
income relative to the bank’s total, average or earning assets:
Interest
income
−
Interest
expense
NIM
=
•
Profitability ratios
typically used in banking are ROE
(return on equity), ROA (return on assets), NIM (net interest
margin) and C/I (cost-to-income).
Total
assets
•
NIM reflects the difference between interest earned on assets
minus interest costs per one currency unit of assets. High
NIM suggests that the difference (spread) between deposit
rates and loan (and other interest earning assets) rates are
high, and
vice versa
.
•
ROE, i.e., net income divided by total equity, is the most
important indicator of a bank’s profitability and growth
potential. It is the rate of return to shareholders or the
percentage return on each currency unit of equity invested in
the bank. The ROE can be decomposed into two parts:
ROE = ROA × EM
where EM (equity multiplier) = total assets / total equity
•
C/I ratio is a quick test of bank’s efficiency that reflects bank
non-interest costs as a proportion of income:
Non
-
interest
expenses
•
ROA is calculated as net income divided by total assets;
indicates how much net income is generated per one
currency unit of assets.
C/I
=
Net
interest
income
+
Non
-
interest
income
11
12
•
Decomposition of ROE
:
ROE = ROA × EM = NPM × AU × EM
net profit margin NPM = net income / total operating revenues
asset utilization AU = total operating revenues / total assets
equity multiplier EM = total assets / total equity capital
or decomposing NPM into:
(net income / pre-tax net operating income)
× (pre-tax net operating income / total operating revenues)
•
ROE is considered good when > 10 per cent. High performing
banks usually adopt a target ROE of over 15 per cent.
•
Typically ROA ranges between 0.4 and 0.5 percent. Standard
ROA level is around 1 per cent.
•
The higher ROE and ROA, the better for a bank.
•
A low C/I indicates efficient way of operating.
•
PM (profit margin) = EBIT / total operating income
•
NNIM (net non-interest margin) = (non-interest revenues
minus
provisions for loan and lease losses
minus
non-interest expenses)
/ total (earning) assets
Net Income
Pre-Tax Net Operating Income
ROE =
Pre-Tax Net Operating Income
×
×
Total Operating Revenue
•
NOM (net operating margin) = (total operating revenues
minus
total operating expenses) / total assets = pre-tax operating
income / total assets
Total Operating Revenue
Total Assets
×
Total Assets
Total Equity Capital
•
EPS (earnings per share of stock) = net income / common equity
shares outstanding
ROE = Tax Management Efficiency
Expense Control Efficiency
Asset Management Efficiency
Funds Management Efficiency
×
×
•
earnings spread = (total interest income / total earning assets)
minus
(total interest expense / total interest-bearing liabilities)
×
14
Asset quality
•
Asset quality
•
Asset growth rate
details the change in total assets over the
past year.
Net charge-offs / total loans
Also called
write-off
– a loan written off as uncollectible bad
debt. When full repayment is considered unlikely, loans are
removed from the lender’s balance sheet and charged against
the loan loss reserves account for bad debt.
•
Non-performing asset is
a debt obligation where the
borrower has not paid any previously agreed upon interest
and principal repayments to the lender for an extended period
of time.
•
Loans removed from the lender’s books may be partially or
fully
recovered
by the lender’s collection department or an
outside debt collection agency if the loan is secured by
collateral or the borrower has additional assets that are not
secured by the debt.
•
Non-performing loans / total loans
is the percentage of
loans that are 90 days or more past due, or are no longer
accruing interest.
•
Net losses to average total loans
presents the level of net
losses, on an annualized basis, as a percentage of the total
portfolio. It takes into consideration any recoveries on prior
period losses.
•
Total loans / total deposits
•
Loan losses allowance to total loans
measures the
allowance available to absorb loan losses relative to total
loans outstanding.
15
16
Noninterest expense
•
Burden
(net overhead expense)
Burden = Noninterest Expense – Noninterest Income
• Lower is better
Net Noninterest Margin
Personnel expense:
wages, salaries, and benefits
•
Occupancy expense:
rent and depreciation on buildings and
equipment
Burden
•
Goodwill impairment:
any amortization from permanently
impaired goodwill
Net
Nonint.
Margin
=
Average
total
assets
•
Other intangible amortization:
amortization expense and
impairment losses for other intangible assets
• Lower is better
Efficiency Ratio (C/I)
equals a bank’s noninterest expense as a
fraction of net operating revenue. A ratio of 0.6 indicates that
a bank pays 60 cents in noninterest expense per 1 euro of net
operating revenue.
•
Other operating expense:
all other noninterest expense
•
Cost savings in these areas often drive
bank mergers
•
Key ratios
to measure and monitor a bank’s ability to control expenses
and generate noninterest income
•
The efficiency ratio demonstrates the
trade-offs
among
expense, net interest margin and noninterest income.
•
A crucial issue is whether low efficiency ratios correspond to
higher profitability ratios.
17
18
•
Operating Risk Ratio
differentiates performance attributable to
cost controls versus fee generation.
•
The lower is the operating risk ratio, the better is the bank’s
operating performance because it generates proportionately
more of its revenues from fees, which are more stable and thus
more valuable.
Ratio
Bank One
Bank Two
ROA
1.40%
1.40%
NIM
4.00%
4.50%
Percentage of average total assets:
Noninterest income
1.25%
0.75%
•
The ratio subtracts fee income from non-interest expense and
divides the total by NIM:
Operating revenue
5.25%
5.25%
Noninterest expense
3.25%
3.25%
Nonint.
expense
−
Fee
income
Efficiency ratio
3
25
%
3
25
%
Operating
Risk
Ratio
=
=
61
.
=
61
.
Net
interest
margin
(
)
(
)
4
+
1
25
%
4
+
0
75
%
(
)
(
)
3
.
25
%
−
1
.
25
%
•
Example.
Banks One and Two report identical ROAs, overhead
expense as a fraction of assets, operating revenue as a fraction
of assets and efficiency ratios. Bank One reports a lower
operating risk ratio, because it generates a higher fraction of its
operating revenue from fee income.
Operating risk ratio
3
.
25
%
−
0
.
75
%
=
50
%
=
55
.
6
%
4
%
4
.
5
%
19
20
•
Productivity ratios
are tracked to assess whether banks
get the maximum use of employees and capital
Cost of capital and shareholder value creation in banking
•
A bank creates shareholder value by maximizing the return
on capital invested relative to the opportunity cost of capital;
thus return on capital must be greater than cost of capital.
Average
assets
Assets
per
employee
=
#
of
full
-
time
employees
Personnel
expense
Cost of equity = Risk-free rate of return +
β⋅
Risk premium
Average
personnel
expense
=
#
of
full
-
time
employees
where β is estimated by means of the CAPM.
Average
loans
Loans
per
employee
=
#
of
full
-
time
employees
•
A simpler method for calculating the cost of equity is to take
weighted average cost with weights equal to shares of assets
funded by the respective source of funds.
Net
income
Net
income
per
employee
=
#
of
full
-
time
employees
21
22
% of
Interest
Operating
Total
Weighted
Source of funds
assets
cost (%)
cost (%)
cost (%)
cost (%)
•
Gamma Bank has a higher cost of funds (2.4%) on its core
deposits than Alpha and Beta banks.
Alpha Bank
Checking accounts
20
2
5
7
1.4
Savings accounts
40
4
1
5
2.0
•
Beta Bank has higher cost of funds on its CDs (4.5%) and
equity capital (14.15%) than Alpha and Gamma Banks.
CDs
30
6
0.50
6.5
1.95
Equity capital
10
12
0.25
12.25
1.225
•
Despite the lowest operating costs (0.915%) at Beta Bank,
its overall weighted cost of capital is highest (7.215%),
mostly due to their reliance on CDs (60% of their assets
are funded by CDs vs. just 20% at Gamma Bank and 30%
at Alpha Bank.
Weighted average:
5
1.575
6.575
Beta Bank
Checking accounts
10
1
4
5
0.5
Savings accounts
20
3
1
4
0.8
CDs
60
7
0.5
7.5
4.5
Equity capital
10
14
0.15
14.15
1.415
Weighted average:
6.3
0.915
7.215
Gamma B ank
Checking accounts
30
3
5
8
2.4
Savings accounts
40
4
1
5
2.0
CDs
20
5
0.5
5.5
1.1
Equity capital
10
10
0.35
10.35
1.035
Weighted average:
4.5
2.035
6.535
24
Plik z chomika:
Lajira
Inne pliki z tego folderu:
b_0.pdf
(11 KB)
b_01.pdf
(175 KB)
b_02.pdf
(148 KB)
b_03.pdf
(209 KB)
b_04.pdf
(150 KB)
Inne foldery tego chomika:
odpowiedzi banking od oli k
test 2011
tutorials
Zgłoś jeśli
naruszono regulamin