Measuring and Evaluating

Value of a Bank’
Bank Performance

 Expected
Incr Total Equity Capital Dividends
Net Income After Taxes
Return on Equity Capital (ROE) =

∞
Value
E(D ) of the Key
Bank’s Profitability
Stock
 Risk of the Bank Falls
Return on Assets (ROA) = R Net Income After Taxes
Total Assets

P =∑
t
Net Interest Income
0 Net Interest Margin =

t = 0 (1 + r)
t Total Assets
 Combination of Expecte
Net Noninteres t Margin =
Net Noninteres t Income
Total Assets

The purpose of this chapter isDecline

to discover what anal
be applied to a bank’s financial statements so that m
the public can identify the most critical problems ins
Value of Bank’s StockKey if Earnings Growth
Profitability Ratiosis
Total Operating Revenues -

and develop
D ways to deal with those problems.
Net Bank Operating Margin =
Total Operating Expenses

Constant
Total Assets
P0 =
1

r-g EarningsPer Share (EPS) =

Net IncomeAfter Taxes
Common EquityShares Outstanding
 R O

R
E

O
=

A
N

=
e t I n c o m

E q u i t y
e / T

M
Breaking
o t a l

u l t i p
E q u

l i e r =
i t y C a p i t a l

N e t I n c o m e / T T o o t at a l l A A s s s s e e t s t s / E q u i t y C a p i t a l

N e t P r o f it M a r A g si n s e = t U t i l i z a t i o n =
N e t I n c o m e / T T o o t a t a l lO O p p e er a r a t i tn i ng g R R e e v ve en nu ue e / T o t a l A s s e t s

Components
ROE Depends On:of R

Year ROE =
1999 14.92 =
 Equity Multiplier 1998 12.72 =
1997 11.94 =
 Leverage or Financing Policies
1996 13.87 =
 Net Profit Margin 1995 14.19 =
1994 14.31 =
 Effectiveness of Expense Management
1993 15.13 x =
 Asset Utilization 1992 12.18 =
1991 8.00 =
 Portfolio Management Policies
 Bank Risks

 Credit Risk
 Liquidity Risk Credi
Credit Risk Measures
 Market Risk

 Interest Rate Risk

The Probability that
 Earnings Risk
 Nonperforming Loans/TotalAssets
LoansWill Decline
 Solvency Risk
 Net Charge-Offs/Total Loans Liqui
Become
 Provision
Liquidity Risk Measures
for Loan Losses/Total Loans
 Provision for Loan Losses/Equity Capital the B
Probability
 Allowance for Loan Losses/Total Loans
Sufficient Cash and B
Meet Deposit
 Allowance for Loan Losses/Equity CapitalWithdr
 Purchased Funds/Total
Total Loans/Total Assets
Deposits Mark
 Net Loans/Total Assets

 Cash and Due from Banks/Total Assets

Probability of the
 Cash and Government Securities/Total Assets P
Bank’s Investment
Value Due to a R
 Market Risk Measures

 Book-Value of Assets/ Market Value Interest

of Assets
Interest Rate Risk Measures
 Book-Value of Equity/ Market Value of Equity

 Book-Value of Bonds/MarketTheValue of Bonds

Danger that Sh
May
 Market Value of Preferred Stock andAdversely
Common A S
Income, the Value o
Earni
Earnings
 Interest Sensitive Risk Measures
Assets/Interest Sensitive Liabil
 Uninsured Deposits/Total Deposits
The Risk to the Bank
Net Income Af

 Standard Deviation of Net IncomeSolvency or

Solvency RiskOther Measures
Forms of
 Standard Deviation of ROE

 Standard Deviation of ROA Probability of the

Assets Declining B
 Spread Between Bank CDs Total
and Liabilities.
Treasury SecuritiT
 Inflation Risk
the Same Maturity Bank’s Lo
Performance Measur

Performance Indicators B
ROA 1
ROE 1
Net Operating Margin/TA 1
Net Interest Margin/EA 4
Net Noninterest Margin/EA -1
Operating Exp./Operating Rev. 5
PLL/Net Charge Offs 10
Net Charge Offs/Total Loans 0
ALL/Total Loans 1
Noncurrent Assets + Real Estate/TA 0
Net Loans/TotalDeposits 8
Equity Capital/TA 8