Professional Documents
Culture Documents
C H A P T E R
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
S I X
Measuring and
Evaluating the
Performance of Banks
and Their Principal
Competitors
Key Topics in This Chapter
61 Introduction
Humorist and poet Ogden Nash once wrote, Bankers are just like anybody else,
except richer. It turns out that statement may or may not be true; a lot depends
upon how suc-cessful bankers and other financial-service managers are as
performers in the financial marketplace. Indeed, in todays world, bankers and
their competitors are under great pres-sure to perform well all the time.
What do we mean by the word perform when it comes to financial firms? In this case
performance refers to how adequately a financial firm meets the needs of its stockholders
(owners), employees, depositors and other creditors, and borrowing customers. At the
same time, financial firms must find a way to keep government regulators satisfied that
their operating policies, loans, and investments are sound, protecting the public interest.
The success or lack of success of these institutions in meeting the expectations of others
is usually revealed by a careful study of their financial statements.
Why are financial statements under such heavy scrutiny today? One key reason is that
banks and other financial institutions now depend heavily upon the open market to raise
the funds they need, selling stocks, bonds, and short-term IOUs (including deposits). Entry
into the open market to raise money means that a financial firms financial statements will
163
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
164
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
be gone over with a fine tooth comb by stock and bond market investors, credit
rating agencies (such as Moodys and Standard & Poors), regulators, and scores
of other people and institutions.
This development has placed the management of banks and many of their competitors
under great pressure to set and meet the institutions performance goals or suffer serious
financial and reputational losses. In 2002 J. P. Morgan Chase, the second largest banking
company in the United States, became a prominent example. The firms credit rating came
under review and, for a time, it faced rising borrowing costs as major depositors and other
creditors reacted negatively to the banks potential loan losses and the adverse pub-licity
from its alleged involvement with Enron Corporation and other troubled companies.
Subsequently, J. P. Morgan Chases position strengthened and improved.
At the same time, as we saw in Chapters 14, competition for traditional loan and deposit
customers has increased dramatically. Credit unions, money market funds, insurance companies, brokerage firms and security dealers, and even chain stores are fighting for a bigger
slice of nearly every credit or deposit market. Bankers have been called upon to continually
reevaluate their loan and deposit policies, review their plans for growth and expansion, and
assess their returns and risk exposure in light of this new competitive environment.
In this chapter we take a detailed look at the most widely used indicators of the quality and
quantity of bank performance and at some performance indicators used to measure bankings
principal competitors. The chapter centers on the most important dimensions of perfor-mance
profitability and risk. After all, financial institutions are simply businesses organized to maximize
the value of the shareholders wealth invested in the firm at an acceptable level of risk. The
objectives of maximum (or at least satisfactory) profitability with a level of risk acceptable to the
institutions owners is not easy to achieve, as recent institutional failures around the globe
suggest. Aggressive pursuit of such an objective requires a financial firm to be continually on
the lookout for new opportunities for revenue growth, greater efficiency, and more effective
planning and control. The pages that follow examine the most important measures of return and
risk for banks and some of their toughest competitors.
62 Evaluating Performance
How can we use financial statements, particularly the Report of Condition
(balance sheet) and Report of Income (income statement), to evaluate how well
a financial firm is per-forming? What do we look at to help decide if a financial
institution is facing serious prob-lems that its management should deal with?
Certainly many financial institutions have their own unique objectives. Some
wish to grow faster and achieve some long-range growth objective. Others seem
to prefer the quiet life, minimizing risk and conveying the image of a sound
institution, but with modest rewards for their shareholders.
Maximizing the Value of the Firm: A Key Objective
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 165
Key URLs
The most comprehensive sites on the World Wide Web for the
financial statements of individual banks and for the industry as a
whole are www2.fdic.gov/sdi
and www.ffiec.gov/ nicpubweb/nicweb/ nichome.aspx.
stock.
Indeed,
the basic
principle
s
of
financial
manage
ment, as
that
science
is
practice
d today,
suggest
strongly
that
attempti
ng
to
maximiz
e
a
corporati
ons
stock
value is
the key
objective
that
should
have
priority
over all
others. If
the stock
fails to
rise
in
value
commensura
te with
stockhol
der
expectati
ons,
current
investors
may
seek to
unload
their
r
a
t
e
o
f
r
e
t
u
r
n
o
n
e
q
u
i
t
y
c
a
p
i
Expected stream
stockholder d
Discount factor
t
a
where
E(Dt)
represent
s
stockhold
er
dividends
expected
to
be
paid
in
future
periods,
discounted
by
a
minimum
acceptab
le rate of
return (r)
tied
to
the
financial
firms
perceive
d level of
risk. The
minimum
acceptab
le rate of
return, r,
is
sometim
es
referred
to as an
institutions
cost
of
capital
and has
two main
compone
nts: (1)
the riskfree rate
of
interest
(often
proxied
by
the
current
yield on
governm
ent
bonds)
and (2)
the
equity
risk
premium
(which is
g
i
v
e
n
e
a
c
h
f
i
n
a
n
c
i
a
l
f
i
r
m
'
s
p
e
r
c
e
i
v
e
d
l
e
v
e
l
o
f
3. Market
risk,
as
perceived
by
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
166
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
expected constant growth rate at which stock dividends will grow each year, and r
must be greater than g.
For example, suppose that a bank is expected to pay a dividend of $5 per share in period 1,
dividends are expected to grow 6 percent a year thereafter, and the appropriate discount rate to
reflect shareholder risk is 10 percent. Then the banks stock price must be valued at
Po
$5/(0.10
0.06)
The two stock-price formulas discussed above assume the financial firm will
pay div-idends indefinitely into the future. Most capital-market investors have a
limited time horizon, however, and plan to sell the stock at the end of their
planned investment horizon. In this case the current value of a financial
corporations stock is determined from
D1
D2
11 0.10 2
10.10 2
11 0.10 2
Concept Check
61.Why should banks and other corporate financial
firms be concerned about their level of profitability
and exposure to risk?
62.What individuals or groups are likely to be interested
in these dimensions of performance for a financial
institution?
63.What factors influence the stock price of a financialservice corporation?
1
2
Po
1 1r 2
1 1r 2
where we assume the investor will hold the stock for n periods, receiving the
stream of div-idends D1 D2, ..., Dn, and sell the stock for price P n at the end of the
planned investment horizon. For example, suppose investors expect a bank to
pay a $5 dividend at the end of period 1, $10 at the end of period 2, and then
plan to sell the stock for a price of $150 per share. If the relevant discount rate to
capture risk is 10 percent, the current value of the banks stock should approach:
$5
$10
$150
Po
A financial calculator can be used to help solve the above equation for stock price per share where
N = 2, I/Y = 10, PV = (?), Pmt = 5, FV = 155.
1r 2
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 167
E - B AN K I N G AN D E - C O M M E R C E
benefits, but outsourcing also
Institutions
like
Wachovia
Financial firms utilize information handled by computers for nearly become leaders in the adoption of
every service they offer. As electronic data processing of financial outsourcing designed to reduce
information becomes more and more integral to the functions of the cost of operations. By outfinancial-service firms, their managers can realize cost advantages sourcing computer facilities and
from outsourcingtransferring tasks from inside the financial firm itself people, these leading financialto outside firms specializing in information technology, known as service firms hope to save money
vendors. Often the vendors are centered in distant locations, such as and time while improving overall
accuracy. Savings on personnel
China, India, and Costa Rica.
and
Factoid
Contrary to popular opinion, the largest banks
in the industry are not always the most
profitable. The same is true for the smallest
banks. The highest ROAs and ROEs often lie
among medium-size institutions.
Key
Profitability
Ratios
Among the most
important ratio
measures of
profitability
used today are
the following:
equipment
are
obvi-ous
improves
nating
financial
efficiency
dead
time
firms
by
elimi-
when
computer
utilized.
Through
Net income
1ROE 2
Return on assets
1ROA 2
Net interest margin
Total assets
Interest income
a Interest expense
2
Total assets
Noninterest revenues
Net noninterest
margin
Interpreti
ng
Net operating margin
Profitabili
Ratios
Earningstyper
share
Each of the
of stockforegoing
1EPS 2
Like all financial ratios, eachratios looks at
of
these
profitabilitya
slightly
measures
often
varies
substantially over time anddifferent
aspect
of
from market to market.
a Noninterest expenses
2
Total assets
profitability. has
Thus, returnbee
on
assetsn in
(ROA)
iscon
primarily anverti
indicator
ofng
managerial ass
efficiency; itets
indicates howinto
capable
net
management ear
(64)
(65)
(66)
b
(67)
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
168
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
net benefit that the stockholders have received from investing their capital in the
finan-cial firm (i.e., placing their funds at risk in the hope of earning a suitable profit).
The net operating margin, net interest margin, and net noninterest margin are
efficiency measures as well as profitability measures, indicating how well management
and staff have been able to keep the growth of revenues (which come primarily from
loans, investments, and service fees) ahead of rising costs (principally the interest on
deposits and other borrow-ings and employee salaries and benefits). The net interest
margin measures how large a spread between interest revenues and interest costs
management has been able to achieve by close control over earning assets and pursuit of
the cheapest sources of funding. The net non-interest margin, in contrast, measures the
amount of noninterest revenues stemming from service fees the financial firm has been
able to collect relative to the amount of noninterest costs incurred (including salaries and
wages, repair and maintenance of facilities, and loan-loss expenses). Typically, the net
noninterest margin is negative: Noninterest costs generally outstrip fee income, though fee
income has been rising rapidly in recent years as a percent-age of all revenues.
Earnings
spread
The spread measures the effectiveness of a financial firms intermediation function in borrowing and lending money and also the intensity of competition in the firms market area.
Greater competition tends to squeeze the difference between average asset yields and
average liability costs. If other factors are held constant, the spread will decline as
competition increases, forcing management to try to find other ways (such as generating
fee income from new services) to make up for an eroding earnings spread.
$16
million
noninterest
totaled
Concept Check
65. What is return on equity capital and what aspect of banks return on assets? Is
performance is it supposed to measure? Can you see this ROA high or low? How
how this performance measure might be useful to the could you find out?
managers of financial firms?
66.
assets
revenues
$2
Suppose
to $52 million. What is the
and
million.
further
amounted
that
to
assets
represented 85 percent
of that total while total
Suppose a bank reports that its net income for the current financial firms often pay
interest-bearing
year is $51 million, its assets total $1,144 million, and its close attention today to the
liabilities amounted to
liabilities amount to $926 million. What is its return on equity net interest margin and
75
capital? Is the ROE you have calculated good or bad? What noninterest margin? To the
information do you need to answer this last question?
earnings spread?
percent
of
net
68.
A bank estimates that its total revenues will amount to $155 expenses on all borrowings
million and its total expenses (including taxes) will equal $107 of
$12
million
and
million this year. Its liabilities total $4,960 million while its noninterest expenses of $5
million, while interest income
equity capital amounts
from earning assets totaled
total
interest
and
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 169
Factoid
Who must declare that a bank operating in the United States has
failed? Who usually sells or liquidates the failed institution? Answer:
A failure declaration must come from the agency issuing the banks
charter; the seller or liquidator is normally the FDIC.
Useful
Profita
bility
Formu
las for
Banks
and
Other
Finan
cialServic
e
Comp
anies
In
analyzin
g
how
well any
given
financialservice
firm
is
performi
ng, it is
often
useful to
break
down
some of
these
profitabili
ty ratios
into their
key
compon
ents. For
example
, it is
easy to
see that
ROE
and
ROA,
two
of
the most
popular
profitabili
ty
measure
Total assets
Total equity capi
ROEROA
Or, in other words:
Net income
Total equity capital
Net income
Total assets
To
Total
ROE
T
o
t
a
l
a
s
s
e
t
s
ROE
ROA
Total equity
capital
To
0.01 $10
1
0
0
1
0
p
e
r
c
e
n
t
$
1
If, however, the banks ROA is expected to fall to 0.5
percent, a 10 percent ROE is attain-able only if each
$1 of capital supports $20 in assets. In other words:
ROE
10
percent
$1
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
170
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Risk-Return Trade-Offs for Return on Assets (ROA) and Return on Equity (ROE)
ROE with an ROA of:
Ratio of Total Assets to Total
Equity Capital Accounts
0.5%
1.0%
1.5%
2.
5:1
10:1
15:1
20:1
2.5%
5.0
7.5
10.0
5.0%
10.0
15.0
20.0
7.5%
15.0
22.5
30.0
10
20
30
40
Total assets
Total assets
Total equity capital
or
ROE Net profit margin
Equity multiplier
where:
The net
profit margin 1NPM 2
The degree of
asset utilization 1AU 2
The equity
Net income
multiplier 1EM 2
Total equity capital
Each component of this simple equation is a telltale indicator of a different aspect
of a financial firms operations. (See Exhibit 61.)
For example:
effectiveness of
assets.
The net profit margin
reflects
expense
leverage or
(NPM)
management (cost
financing
control)
and
service
policies: the
The degree of asset
reflects
pricing
policies.
sources chosen
utilization (AU)
portfolio
to fund the
management
financial
The equity multiplier
reflects
policies, especially
institution (debt
(EM)
The
multiplier is
a
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 171
EXHIBIT 61 Elements that Determine the Rate of Return Earned on the Stockholders
Investment (ROE) in a Financial Firm
Managementdecisionsregardingcapital
structure:
Rateofreturn
earnedonthe
stockholders
investment
(ROEornet
income/equity
capital)
Equitymultiplier(EM)
ortheemploymentof
financialleverageto
raisenetearnings
forthestockholders
(totalassets/
equitycapital)
Managementdecisionsregarding:
Netprofit
margin(net
income/
Themixoffundsraisedand
invested
Howbigtheinstitutionshouldbe
operating
Returnonassets
(ROA)asameasure
ofoveralloperating
efficiency(ROA
ornet
income/totalassets)
revenues)
(NPM)
Asset
utilization
(AU)asa
Controlofoperatingexpenses
Thepricingofservices
Howtominimizethefinancialfirms
taxliability
measure
ofasset
management
efficiency
(operating
revenue/total
assets)
direct measure of
financial leverage
In the years since World War II the number how many dollars of
of U.S. banks failing annually has averaged
assets
must
be
less than 1 or 2 percent of the industry
supported by each
population.
dollar
of
equity
(owners) capital and
how much of the
financial
firms
resources, therefore,
must rest on debt.
Because equity must
absorb losses on
assets, the larger the
multiplier, the more
exposed to failure risk
the financial institution
is. However, the larger
the multiplier, the
greater the potential
for high returns for the
stockholders.
The
net
profit
margin (NPM), or the
Factoid
ratio ofincrea
net
se
income their
to totalearnin
revenue gs
s,
isand
also
the
sub-ject return
to somes
to
degree their
of
stock
manage holder
ment s by
control succe
and
ssfully
directio contro
n.
Itlling
reminds expen
us thatses
financia and
lmaxi
service mizin
corpora g
tions
reven
can
ues.
An interesting case in
point is the recent track
record of average ROE for all
FDIC-insured
depository
institutions between 1992
and 2005, shown in Table 6
1. Careful perusal of the
figures in this table reveals
very attractive ROEs for
FDIC-insured
deposi-tory
institutions covering more
than a decade. The lowest
earnings over this period for
depository institutions, as
measured by ROE, were a
very
acceptable
12.21
percent in 1992. The average
ROE
for
the
industry
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
172
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
TABLE 61
Components of Return on Equity (ROE) for All FDICInsured Institutions
(19922005)
Source: Federal Deposit
Insurance Corporation.
The McGrawHill
Companies, 2008
Year
Return on
Equity
Capital
(ROE)
2005*
2004
2003
2002
2000
1998
1996
1994
1992
12.68%
13.27
15.04
14.11
13.53
13.51
13.31
13.33
12.21
Net Profit
Margin (NPM)
(Net After-Tax
Income/Total
Revenues)
=
=
=
=
=
=
=
=
=
18.89%
19.81
19.86
17.10
12.02
12.73
12.21
12.59
9.55
Asset
Utilization (AU)
(Total
Revenues/
Total Assets)
6.93%
6.51
6.95
7.60
9.48
9.11
9.01
8.34
9.11
Equity
Multiplier (EM)
(Total Assets/
Total Equity
Capital)
9.63x
9.72x
10.93x
10.87x
11.78x
11.74x
12.17x
12.80x
13.42x
In
) to minimize tax exposure, and
this
(2) the ratio of before-tax
income to total revenue as an
case
indicator of how many dollars
Why did these latter two ratios (AU we
of
and EM) decline? The industrys assethave
utilization (AU) ratio fell mainly becausemerel
market interest rates stayed low andy split
were declining much of the time. The the
equity multiplier (EM) fell because equitynet
capital increased due to record profitsprofit
and encouragement from governmentmargi
regulators that depository institutions usen
more equity and less debt to finance their(NPM
purchases of assets. Regulators urged) into
depository institutions to increase theirtwo
capital in hopes of protecting depositorsparts:
and preserving the governments deposit(1) a
insurance reserves. At the same timetaxbanks managed to slow their assetmana
growth by making much heavier use ofgeme
off-balance-sheet transactions (as went
saw in Chapter 5) and by increasingefficie
revenues from the sale of fee-basedncy
services rather than booking so manyratio,
new assets.
reflect
A slight variation on this simpleing
ROE model produces an efficiencythe
equation useful for diagnosinguse of
problems in four different areas in the securi
management of financial-servicety
firms:
gains
or
losse
s and
Net income
other
ROE
Pretax
taxnet operating
mana
income
geme
nt
Total operating
tools
revenue
(such
Totalas
assets
buyin
or:
g taxTax
Expense exem
pt
ROEmanagementcontrolmanagementmanagement
efficiency
efficiency bonds
*Figures for 2005 are for first half only.
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 173
E T H I C S I N B AN K I N GAN D
F I NAN C IALS E R V I C E S
that this dual relationship
compromised the auditors
QUESTIONABLE ACCOUNTING PRACTICES CAN
judgment and discouraged
TURN BANK PERFORMANCE SOUR
them from blowing the whistle
In 2001 Superior Bank of Chicagoa federal savings bank
on the banks accounting
failed and was taken over by the Federal Deposit Insurance
problems.
The
delay
in
Corporation (FDIC). This failed banking firm provides a classic
reporting overvalua-tion of the
example of how misleading accounting practices that inflate asset
banks mortgage-related assets
values and revenues and deflate liabilities and expenses can hurt
allegedly caused the FDICs
a financial institutions performance and ultimately bring it down.
loss to eventually balloon to
In 2002 the FDIC, acting as receiver and liquidator, filed suit against
about three-quarters of a billion
the public accounting firm of Ernst and Young LLP, claiming that the
dollars. The Sarbanes-Oxley
firms auditors detected flawed accounting practices at Superior Bank,
Accounting Standards Act of
but did not report their findings until months later. Allegedly, this delay
2002 now restricts combined
on the part of the out-side auditors prevented regulators from acting
auditing
and
consulting
quickly to min-imize losses to the governments insurance fund.
relationships in order
to
Ernst and Young allegedly had both an auditorclient and a
promote auditor objectivity and
consultantclient relationship with Superior. The FDIC charged
inde-pendence. However, that
law was passed after the
Superior Bank failure occurred.
In
short,
strong
performance on the part of
financial-ser-vice providers
depends
on
honest
reporting that fairly values
current
and
expected
revenues, operating costs,
assets, and liabilities so
that both insiders and
outsiders get a clear picture
of how well a financial firm
is performing and where it
seems to be headed.
Source: Federal Deposit
Insurance Corporation.
Total operating
revenue
$39.3
million
Total assets
$122.0 million
Total equity
capital
$7.3
million
$1.0 mil
$1.3 mil
0.769
0.033
$1.3 mil
$39.3 mil
0.322
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
174
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Components of ROA
Net interest margin 1Interest income Interest expense 2
Total assets
PLUS
1Noninterest income 2
Noninterest expense 2
Total assets
LESS
Provision for loan losses
Special transactions
EQUALS
Net income
Total assets
from assets 2
Such a breakdown of the components of return on assets (ROA) can be very helpful in
explaining some of the recent changes that financial-service providers have experienced
in their financial position. For example, as shown in Table 63, the average ROA for all
FDIC-insured institutions between 1992 and 2005 rose from 0.87 percent in 1992 to a high
of 1.38 percent in 2003 before leveling out in 2004 and 2005.
Why did ROA for 19922003 keep getting better and better? Better control over
expenses, led by advances in automation and mergers that eliminated many overlapping
facilities, along with an expanding economy, which propelled upward the publics demand
for financial services, resulted in a rapid expansion of fee (noninterest) income and loan
revenues. All this occurred in the face of falling market interest rates, which
Total assets
TABLE 62
Calculation Return on Assets (ROA)
Gross
interest
income
Total
assets
Interest
expens
e
Total
assets
1=
Net
inter
est
mar
gin
Income taxes
Total assets*
2=
Noninterest income
Total assets
Noninterest
expenses Total
assets
Provision for
loan losses Total
assets
3=
1=
Pretax
net
operating
income Total
assets
Income
before
extraordinary
items Total assets +
Extraordinary
net
gains Total assets
Net income
Total assets (or
ROA)
(620
1d
2d
3d
4d
5d
6d
7d
Income from holding assets
Supply cost of funds for holding assets
Return earned because the lending institutions credit
quality is better than its customers credit quality
Income from handling customer transactions
Cost of operations
Accrual expense
Re
tur
n
on
as
set
s
bef
or
e
tax
es
8d
9d
The
financial
firms
share of
the cost
of
govern
ment
services
Net
income
from
recurring
sources
of
revenue
10d Nonrecurring
sources
of
income or loss
11d Earnings
left
over for the
stockholders
after all costs
are met
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Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 175
+ Securities gains(losses)/
Income Statement
Items
Total assets
0.06
0.13
TABLE 63
Total interest income/
Applicable income taxes/
Components of Return on Assets (ROA) for All FDIC
Total assets Total assets
0.64
0.67
Insured Depository
Total interest =expense/
Income before extraordinary
Total assets items/Total assets
Institutions (19922005)
1.31
1.37
= Net interest income/
+ Extraordinary gains (net)/
Source: Federal Deposit
Total assets Total assets
0.00** 0.00**
Insurance Corporation.
Provision for =loan
Netand
income/Total assets
1.31
1.38
lease losses/Total assets
+ Total noninterest
income/
Notes: Figures
may not add
Total assets exactly to totals due to
rounding
and the exclusion
Total noninterest
expense/
of extraordinary items. *2005
Total assets figures are for first half of
= Pretax net operating
year only. income/
Total assets **Less than 0.005 percent.
0.15
0.02
0.64
0.61
1.30
1.14
0.00**
1.30
0.00**
1.14
Concept Check
611.
What
are
the
Exp
aspects of a financial
institutions
performance
do
they
reflect?
principalens
trol
612. Suppose a bank haseffi
an ROA of 0.80cie
percent and an equityncy
multiplier of 12. Whatindi
is its ROE? Supposecat
this banks ROA falls toor?
0.60 percent. WhatAss
size equity multiplieret
must it have to hold itsma
nROE unchanged?
613. Suppose a bank reports net age
income of $12, pretax netme
income of $15, operatingnt
revenues of $100, assets of effi
$600, and $50 in equitycie
ncy
capital. What is the banks
indi
ROE?
Tax-management
cat
efficiency indicator?
or?
Fun
ds
ma
nag
em
ent
effi
cie
ncy
indi
cat
or?
Wh
at
are
the
mo
st
imp
orta
nt
co
mp
one
nts
of
RO
A
and
wh
at
What a
Breakdown of
Profitability
Measures Can
Tell Us
Clearly, breaking down
profitability measures into
their respective
components tells us much
about the causes of
earnings difficulties and
suggests where
management needs to
look for
RoseHudgins: Bank
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6. Measuring and
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Performance of Banks and
Their Principal
Competitors
possible
Factoid
The McGrawHill
Companies, 2008
cures for
Which banks in the industry tend to have the biggest net interest any
margins between their interest income from loans and securities
and the interest cost of borrowed funds? Answer: The smallest earnings
banks usually do.
problems
that
surface.
The
foregoing
analysis
reminds
us that
achieving
superior
profitabilit
y for a
financial
institution
depends
upon
several
crucial
factors:
1. Caref
ul
use
of
finan
cial
lever
age
(or
the
prop
ortio
n of
asset
s
finan
ced
by
debt
as
oppo
sed
to
equit
y capital).
3. Careful
control
of
operating
expenses so that more dollars of
sales revenue become net income.
Market
Operational
Legal
Reputation
( ) of stock prices.
2 Standard deviation or variance of
net income.
3 Standard
deviation or variance of
return on equity (ROE) and return on
assets (ROA).
Credit
Liquidity
Credit
Liquidity
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Leverage
(lower
equity
medium-size or larger institutions that seem to benefit from lower
capital and greater use of debt)
overall operating costs and greater operating efficiency.
Expense control stands out as the most important discrimina-tor also emerges as a profit
between top performers and the also-rans. For example, high-profit motivator. Top-earning banks, for
banks manage their operating expenses better, generally posting example, generally economize
lower average interest costs, and especially lower per-sonnel on using high-cost owners
expenses and overhead. Their ratios of operating expenses to capital and rely on the earningsoperating revenues tend to be significantly below the expense-to- leveraging effects of cheaper
debt.
revenue ratios of low-profit institutions.
The deposit structure also appears to influence profit perforThe expansion of fee
mance. Top-earning banks often hold more demand deposits than income has become a key
other banks; these checkable deposits pay little or no interest and element in strategies to
carry customer service fees that bring in more revenues. Relat-edly, increase profits in recent
many highly profitable banks hold a large volume of core depositsyears. Government deregulasmaller denomination deposits from individuals and smalltion has put added pressure
businesses that pay low interest rates and are more loyal to the on financial institutions to
charge fees for many
bank than larger deposit accounts.
than
average,
pos-sibly
acceptance
of
their
banks
that
seem
growth
can
to
be
U.S.
Commercial
Banks
in
Credit Risk
The probability that some of a
financial institutions assets, especially
its loans, will decline in value and
perhaps become worthless is known
as credit risk. Because financial firms
tend to hold little owners capital
relative to the aggregate value of their
assets, only a small percentage of
total loans needs to turn bad to push
them to the brink of failure. The
following are four of the most widely
used indicators of credit risk:
4 The
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The McGrawHill
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just around the corner. The final two credit risk indicator ratios reveal the extent to
which a lender is preparing for loan losses by building up its loan-loss reserves
(the allowance for loan losses) through annual charges against current income
(the provision for loan losses).
Another popular and long-standing credit risk measure is:
The ratio of total loans to total deposits.
As this ratio grows, examiners representing the regulatory community may
become more concerned because loans are usually among the riskiest of all
assets for depository institu-tions, and, therefore, deposits must be carefully
protected. A rise in bad loans or declining market values of otherwise good loans
relative to the amount of deposits creates greater depositor risk.
Liquidity Risk
Financial-service managers are also concerned about the danger of not having sufficient
cash and borrowing capacity to meet customer withdrawals, loan demand, and other cash
needs. Faced with liquidity risk a financial institution may be forced to borrow emergency
funds at excessive cost to cover its immediate cash needs, reducing its earnings. Very few
financial firms ever actually run out of cash because of the ease with which liquid funds
can be borrowed from other institutions. In fact, so rare is such an event that when a small
Montana bank in the early 1980s had to refuse to cash checks for a few hours due to a
tem-porary cash-out, there was a federal investigation of the incident!
1 Cash and due from balances held at other depository institutions to total assets.
2 Cash assets and government securities to total assets.
Cash assets include vault cash held on the financial firms premises, deposits held with
the central bank in the region, deposits held with other depository institutions to compensate them for clearing checks and other interbank services, and cash items in the
process of collection (mainly uncollected checks). Standard remedies for reducing a financial institutions exposure to liquidity risk include increasing the proportion of funds committed to cash and readily marketable assets, such as government securities, or using
longer-term liabilities to fund the institutions operations.
Market Risk
In market-oriented economies, where most of the worlds leading financial institutions offer
their services today, the market values of assets, liabilities, and net worth of financialservice providers are constantly in a state of flux due to uncertainties concerning market
rates or prices. Market risk is composed of both price risk and interest rate risk.
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Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 179
Price Risk
Especially sensitive to these market-value movements are bond portfolios and
stockhold-ers equity (net worth), which can dive suddenly as market prices move
against a finan-cial firm. Among the most important indicators of price risk in
financial institutions management are
1 The ratio of book-value assets to the estimated market value of those same assets.
2 The ratio of book-value equity capital to the market value of equity capital.
3 The market value of bonds and other fixed-income assets held relative to their
value as recorded on a financial institutions books.
4 The market value of common and preferred stock per share, reflecting investor
per-ceptions of a financial institutions risk exposure and earnings potential.
As technology has improved, computer hardware and software systems have become
essential to the daily operations of most financial firms. If computer systems involve a
patchwork of old programs, requiring employee intervention to reconcile and create
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Key URLs
Many of the types of risk discussed in this section have been developed
and refined by the Bank for International Settlements at www.bis.org and
by a related entity, the Basel Committee on International Capital
Standards, at www.bis.org/publ/bcbs/
reports,
then
operatio
nal risk
may be
high.
While
the
failure
of
a
new
comput
er
system
may be
less
likely,
heavy
reliance
by the
institutio
ns
personn
el and
custom
ers on
such
systems
creates
vulnera
bility for
any
financial
firm.
Today
, acts of
terrorism
such as
9/11 and
natural
disasters
such as
hurricane
s, earthquakes,
and
tsunamis
can lead
Reputation Risk
Negative publicity, whether true or not,
can affect a financial firms earnings by
dissuading customers from using the
services of the institution, just as positive
publicity may serve to promote a financial
firms services and products. Reputation
Becaus
e
Variations in earnings due to adverse business variabilit
decisions, improper implementation of deci-sions, or y
in
lack of responsiveness to industry changes are parts capital
of what is called strategic risk. This risk category canstems
be characterized as the human element in making bad from
long-range management decisions that reflect poor other
timing, lack of foresight, lack of persistence, and lack types of
risk it is
of determination to be successful.
often
Capital Risk
not
The impact of all the risks examined above can conside
affect a financial firms long-run survival, often red
Strategic Risk
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Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 181
Filmtoid
What 2000 film stars Paul Newman as an incarcerated bank
robber who had stolen millions from the banks to which he sold
and installed security systems and then returned to rob them?
The
failure of
a
financialservice
corporati
on may
leave its
stockhol
ders with
none of
the
capital
they
committe
d to the
institutio
n.
Moreove
r, in the
case of
deposito
ry institutions,
deposito
rs
not
covered
by
insuranc
e
also
risk
losing a
substanti
al
portion
of their
funds.
For this
reason,
the
prices
and
yields on
capital
stock
and on
large
uninsure
d
deposits
can
serve as
1 The
3 The
while
nonperforming
Concept Check
mated
value
millio
n,
respe
ctively
. The
bank
s
stock
is
curre
ntly
value
d
at
$60
per
share
with
annua
l pershare
earnin
gs of
$2.50.
Unins
ured
depos
its
amou
nt
to
$243
millio
n and
mone
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Other
Key URLs
Goals
Performance data on bankings closest competitors
in
nonbank depository institutionscan most easily be found at
such Web sites as www.ots.treas.gov, www.fdic.gov, and Banki
www.ncua.gov.
ng
and
Finan
cialServic
es
Manag
Factoid
ement
63
Perf
lowe
r
Factoid
In recent years FDIC-insured
savings associations (savings and
loans and savings banks) have had
Total opera
ormance Indicators
Competitors
among Bankings Key
Many
of
thebanks
and
theirincl
performance
nonbank competitors.udi
indicators discussed inThis is espe-cially trueng
the foregoing sectionsof
those
nonbanksto
apply equally well forfinancial
institutionsckh
measuring
thethat are private, profit-old
performance of bothmaking corpora-tions,er-
owned
thrift
institutions, insurance
companies,
finance
and
credit-card
companies, security
broker and dealer
firms, and mutual
p
r
e
f
e
r
r
e
d
10.87 percent for
S
savings associations. o
Why do you think these
m
differences exist?
r
g
i
n
assets to equity
capital ratio
Book-value
assets to
market-value
assets Equity
capital to
risk-exposed
assets
A
s
s
e
t
each nonbank
financialservice
industry.
example,
er
among
fo
insurance
companies,
key
performance
nc
measures
include
in
growth of net
di
premiums
ca
written
to
measure
rs
total
ar
life
pension
ni
reserves (their
q
u
e
to
For
the
(a
of
sales)
and
s
t
o
c
k
yields on the
financial firms
debt and market
yields on
government
securities
g nonbank financial
firms are these:
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Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 183
chief liabilities) relative to total assets. Insurers also pay close attention to an
efficiency measurethe combined ratio of claims paid out plus operating
expenses relative to premi-ums earned from policyholders.
Among mutual funds, key performance markers include the growth of net sales
(i.e., gross sales of shares less share redemptions by the public), service fees
relative to aver-age assets, and the rate of return on funds invested. In contrast,
finance and credit-card companies often pay close attention to the growth of their
outstanding debt and their gross receivables (a measure of total loans extended to
customers). Finally, among com-peting depository institutions, such as credit unions
and mutual savings associations, key performance measures include total loans to
members relative to capital reserves (a measure of risk), home mortgage loans to
total assets (a rapidly growing credit ser-vice), and the number of actual members
(customers) relative to potential members (customers).
No financial institution can safely ignore its level of performance today relative
to its past performance and relative to its competitors. Even if some financialservice institu-tions dont seem to care about their performance, both the public
and the regulatory com-munity clearly do.
Thus, size bias is especially evident in the banking industry. For example, as
Table 64 shows, key earnings and risk measures change dramatically as we move
from the smallest banks (those in the table with assets of less than $100 million) to
the largest banking firms (with assets exceeding $10 billion). For example, the most
profitable banks in terms of ROA were banks with more than $1 billion in assets and
less than $10 billion in assets, while the largest equity returns (ROE) were obtained
by the very largest banks with more than $10 billion in assets in 2005.
On the other hand, middle-size and large banks with assets ranging from $100
mil-lion to $10 billion in total assets often display the most favorable net operating
margins and the best operating efficiency (often with the lowest operatingexpense-to-revenue ratio). Similarly, the largest banks generally report the
highest (least negative) nonin-terest margins because they charge fees for so
many of their services. Smaller and medium-size banks frequently display larger
net interest margins and, therefore, greater spreads between interest revenue
and interest costs because most of their deposits are small-denomination
accounts with lower average interest costs. Moreover, a larger proportion of small
and medium-size banks loans tend to be higher-interest consumer loans.
In terms of balance-sheet ratios, many of which reflect the various kinds of risk exposure banks face, the smallest banks usually report higher ratios of equity capital to assets.
Some bank analysts argue that larger banks can get by with lower capital-to-asset
cushions because they are more diversified across many different markets and have more
risk-hedg-ing tools at their disposal. Smaller banks appear to be more liquid, as reflected
in their lower ratios of net loans to deposits, because loans are often among a banks least
liquid assets. The biggest banks also appear to carry greater credit risk as revealed by
their higher loan-loss (net charge-offs to total loans and leases) ratios.
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Evaluating the
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Competitors
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TABLE 64 Important Performance Indicators Related to the Size and Location of FDIC-Insured Banks (2005) *
Source: Federal Deposit Insurance Corporation.
Average for
All FDICInsured
Institutions
Average for
All FDICInsured
Banks
1.31%
12.68
1.27
3.51
1.05
57.35
1.34%
13.12
1.32
3.59
1.01
57.36
1.05%
8.84
1.05
4.23
2.60
68.74
92.44
0.44
1.23
91.34
0.50
1.38
183.09
0.16
1.43
148.82
0.20
1.32
115.34
0.26
1.31
85.47
0.60
1.40
0.48
92.74
10.38
5.50
1.99
0.50
87.29
10.23
5.52
1.94
0.72
74.21
11.87
5.89
1.66
0.56
83.22
10.13
6.05
1.80
0.45
92.01
10.87
5.70
1.82
0.49
87.76
10.10
5.40
1.99
2.45
2.69
1.02
1.46
2.15
3.02
1.33%
13.15
1.32
4.25
2.09
61.67
1.41%
13.09
1.41
3.89
1.35
56.80
1.34%
13.26
1.32
3.42
0.74
56.56
Notes: Data for all U.S. commercial banking and savings institutions whose deposits are
FDIC insured. *Figures shown are for the first 2 quarters of 2005 and are annualized.
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Long-Term
Ratings
Short-Term Ratings
TBW-1: Very high likelihood of timely
repayment of principal and interest.
TBW-2: Strong likelihood of timely
repayment of principal and interest.
TBW-3: Adequate capacity to
service principal and interest in
a timely way.
TBW-4: Noninvestment grade and
speculative in nature.
capacity
repay.
to
27:
Strong
ability to repay.
1:
Relatively
strong ability to
repay.
54: Lowest
may be marked
with a + or a
banks,
where
If you wanted to
possible,
compare the overall
should
profitability of the
be
insurance industry to
that of the banking
compare
industry, where would d against
you look? The data
that
of
supplied by the
other
American Council of
national
Life Insurance at
www.acli.org and by banks,
the Insurance
and
Information Institute at
statewww.iii.org would be
chartered
helpful.
institution
s should
be
compare
d against
other
statelicensed
institution
s. If a
financial
firm is an
Key URLs
investment
grade2:
Hi
rating
with
an
gher degree
acceptable capacity
of
to repay.
uncertainty
28:
Likeliho and greater
od of default just likelihood of
above investment default than
highergrade with some for
rated issues
significant
uncertainties
affecting
the
capacity to repay.
affiliate oforang
a holdinges
company,beca
it can beuse
revealing of
to
their
compare obvio
its
per-us
formance differ
with
ence
other
s; the
holding same
company is
affiliates true
rather
in the
than withfinan
independ cialently
servi
owned ces
institution field.
s. ThereNo
is an oldtwo
saying finan
about
cial
avoiding firms
comparin are
g applesever
and
exact
29:
Subordi
nated to CCC
obligations with
less
risk
protection.
D: Defaulted
obligation.
55: High
likelihood
of default.
appears to top or nearer the bottom of each
lie nearer therating category.
ly
institutions
alike then proceed
in
caution.
size,
locatio U
n,
s
servic
i
e
menu, n
or
g
custo
mer
base. F
The i
perforn
mance
analys a
t mustn
make
c
his or
i
her
best a
effort
l
to find
the
most R
compaa
rable
andt
with
o
l
t
h
r
T
A
y
t
a
n
k
P
liabilities,
capital,
revenues
,
and
expenses
.
Supple
mentary
items
in
r
the UBPR
f
include
o
breakdow
ns of loan
r
and lease
m
commitme
a
nts,
analysis of
n
problem
c
loans and
e
loan
losses,
and
a
T
profile of
h
each
e
banks
exposure
to risk and
U
its sources
B
of capital.
Bankers
P
can also
R
obtain
Compared to otherpeer
financial institutions,group
more information isreports,
available
aboutwhich
banks than any otherallow them
type of financial firm.
to
comThrough
the
pare their
cooperative effort of
bank with
four federal banking
other
agenciesthe
institutions
Federal
Reserve
of
System, the Federal
comparabl
Deposit
Insurance
e
size;
Corporation,
the
average
Office
of
Thrift
Supervision, and thereports,
Office
of
thewhich
Comptroller of theprovide
Currencythe Uni-mean ratio
form
Bankvalues for
Performance Reporteach peer
(UBPR) provides keygroup; and
information
forstate
financial
analysts.reports,
The UBPR, which iswhich
sent quarterly to allpermit
federally supervisedcompariso
banks, reports eachns
banks
assets,between
an
individual
bank and
the
combined
financial
statement
s of all
banks in a
given
state. An
important
added
feature is
that
a
banker
can
acquire
the UBPR
report for
any
RoseHudgins: Bank
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TABLE 65 The Assets Section from the Balance Sheet for National City Bank
Source: Uniform Bank Performance Reports (www.ffiec.gov).
12/31/2004
12/31/2003
$ Change
Percentage
Change
$24,625,884
9,271,907
7,851,544
25,317
212,112
272,417
42,259,181
27,130
514,318
41,717,733
1,087,363
86,420
85
984,143
2,811,741
1,103,067
193,987
6,266,806
47,984,539
$21,209,496
8,672,817
7,912,526
6,369
276,387
234,689
38,312,284
25,738
592,394
37,694,152
1,324,272
20,293
78
1,232,536
12,372
463,760
210,932
3,264,243
40,958,395
$3,416,388
599,090
60,982
18,948
64,275
37,728
3,946,897
1,392
78,076
4,023,581
236,909
66,127
7
248,393
2,799,369
639,307
16,945
3,002,563
7,026,144
16.11%
6.91
0.77
297.50
23.26
16.08
10.30
5.41
13.18
10.67
17.89
325.86
8.97
20.15
22626.65
137.85
8.03
91.98
17.15
1,792,763
558,058
5,643
0
2,633,913
$52,974,916
1,646,705
511,519
6,902
0
3,152,501
$46,276,022
146,058
46,539
1,259
0
518,588
$6,698,894
8.87
9.10
18.24
5,643
23,731
0
2,158,011
6,902
749,899
0
2,577,179
1,259
726,168
0
419,168
18.24
96.84
16.45
14.48%
16.26
other federally supervised bank, thus enabling comparison of banks in the same
market area subject to the same environmental conditions.
To get a better picture of the type of information in the UBPR, we present an example based
on the 2004 and 2003 UBPRs of the lead bank for National City Corporation, National City Bank
(NCB). In Chapter 5, we examined the aggregate numbers for all the banks in this holding
company, using data found at the FDICs Web site. The financial statements we see in this
analysis, however, are focused on a single bank. The format of the UBPR is more detailed and
extensive, but similar to the financial statements presented in Chapter 5.
NCB is a large national bank located in Cleveland, Ohio, with total assets exceeding $52
billion on December 31, 2004. How well or how poorly has NCB performed in recent years? We
will examine this banks financials for 2003 and 2004 in order to provide insights regarding this
question. To put this analysis in context, we should recall that the U.S. cen-tral bank, the
Federal Reserve System, reduced short-term interest rates 13 times from 2001 to 2003 as they
tried to stimulate a sluggish economy. The 10-year Treasury bond yield dropped to a 45-year
low in June of 2003. The lowered interest rates and disappointing stock returns inspired
consumers to invest in real estate, which increased the prices of homes and other properties
while increasing the demand for real estate loans. As the econ-omy slowly recovered from the
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 187
slowly increase interest rates in 2004. In a period characterized by low, but volatile interest
rates, investors and lenders talked about whether a real estate bubble was about to burst!
Tables 65 through 69, taken from UBPR reports for 2004 and 2003, are used to
assess the performance of NCB. Tables 65 and 66 indicate the principal assets,
liabilities, and capital items held by this bank and show how these items and their
components have increased or decreased in volume since the same time a year earlier. In
terms of growth, NCBs assets increased by more than $6.6 billion for an annual growth
rate close to 14.5 percent (Table 65, line 25). If we examine the asset items having the
largest dollar increases, we find that net loans and leases (item 10) increased by $4.02
billion (10.67 per-cent) and total investments (item 18) increased by $3 billion (91.98
percent). The sources of funds supporting this growth included a $3.21 billion rise (13.01
percent) in total deposits (Table 66, item 9) and a dramatic $4.88 billion increase (169.73
percent) in other borrowings with maturities greater than one year (item 14).
Table 65 indicates that NCB focuses on traditional banking services with $41.7
bil-lion in net loans and leases (item 10). In 2004 NCB increased its real estate loans
(item 1) by 16.11 percent or $3.4 billion, while the balances in most other loan
categories (items 25) increased or decreased by smaller dollar amounts. Essentially,
NCB provided what customers wantedfinancing for housing at a time when prices
in the stock market were declining and securities (i.e., government and private bonds)
were offering histori-cally low returns. The increased proportion of real estate loans
would most likely increase the average maturity of the banks loan portfolio and also
increase its interest-rate risk exposure, a concept introduced earlier in this chapter
and discussed in detail in Part Three of this book.
NCBs deposit growth and its growth in nondeposit liabilities more than covered the
growth in its loan portfolio. In Table 66 we see that deposits in foreign offices (item 8)
increased significantly, up more than 53 percent, while core deposits (item 6) increased a
mere 2.87 percent. Core deposits are the sum of items 15 in Table 66, representing stable funds that are less likely to be removed from the bank. Core deposits also tend to be
TABLE 66 The Liabilities and Capital Section from the Balance Sheet for National City Bank
Source: Uniform Bank Performance Reports (www.ffiec.gov).
12/31/2004
12/31/2003
$3,873,889
270,253
9,087,746
4,611,592
2,797,895
20,641,375
1,934,527
5,343,291
27,919,193
2,820,675
245,006
1,281,709
6,274,512
7,761,259
1,475,244
47,777,598
1,413,606
3,783,712
$4,348,224
189,433
8,219,768
4,652,219
2,655,344
20,064,988
1,149,764
3,490,673
24,705,425
4,139,388
22
1,122,701
6,888,395
2,881,257
2,201,346
41,938,534
1,434,585
2,902,903
$ Change
$474,335
80,820
867,978
40,627
142,551
576,387
784,763
1,852,618
3,213,768
1,318,713
244,984
159,008
613,883
4,880,002
726,102
5,839,064
20,979
880,809
Percentage
Change
10.91%
42.66
10.56
0.87
5.37
2.87
68.25
53.07
13.01
31.86
1113563.64
14.16
8.91
169.37
32.98
13.92
1.46
30.34
188
52,974,916
II. Financial Statements
and Financial Firm
Performance
46,276,022
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
6,698,894
14.48
The McGrawHill
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among the least expensive sources of funds. Overall, total deposits (item 9) increased by
13.01 percent or $3.2 billion. As interest rates began to rise, NCB increased its borrowings
with maturities greater than one year (item 14) which soared upward by nearly $5 billion.
As market interest rates increased the growth in core deposits subsided and NCB apparently worked to lock in longer-term nondeposit borrowings.
NCB reported substantial growth in security investments, driven by a sharp advance
(137.85 percent) in Federal funds sold and resale agreements (Table 65, item 16) and a
very large gain in interest-bearing bank balances (item 15). NCB apparently increased the
liquidity of its investment portfolio by changing its composition while nearly doubling the
overall size of that portfolio. Liquidity choices on the asset side of the balance sheet
teamed up with increases in long-term nondeposit borrowings as sources of bank funds to
help this large banking firm get ready for rising market interest rates.
Table 67 shows the composition of assets and liabilities held by NCB, using averages
across the four quarters of the year, and presents analogous information for a peer group
of banks. The peer group used for NCB consists of all national banks with average assets
in excess of $3 billion, including the largest 170 banks in 2004 and biggest 163 banks in
2003. The changes in assets and liabilities that we discussed in Tables 65 and 66 are
based on year-end numbers whereas the percentages in Table 67 represent averages
that tend to reduce the effects of seasonality and window dressing. From this point on, our
dis-cussion will focus on average data for NCB and its peers.
For NCB we see relatively small changes in asset composition in Table 67. Net loans
and leases as a percentage of average assets (line 4) increased from 78.41 percent at the
end of 2003 to 81.34 percent as 2004 endeda 3.74 percent increase in net loans and
leases relative to average assets. However, in both years larger percentages of assets
were accounted for by loans at NCB than was true for its peer group who reported ratios
of net loans and leases to average assets of only 58.47 percent in 2003 and 58.91 percent
in 2004. Because loans often represent the highest-yielding assets a bank can hold,
NCBs higher loan-asset ratio would be expected to produce relatively higher earnings
than the average earnings for the peer group.
NCB has slightly decreased its holdings of liquid assets (short-term securities and cash
assets). If we sum the percentages for items 5, 6, 7, 9, and 11 in Table 67, we find that
interest-bearing liquid assets and cash assets accounted for 13.25 percent of assets in
2003 and 11.61 percent of assets in 2004. In contrast, the peer group has about twice the
por-tion of liquid assets relative to total assets. In 2003 and 2004, liquid assets accounted
for 28.11 percent and 27.17 percent of assets at peer institutions. Could NCBs
management be accepting greater liquidity risk (i.e., the possibility of a cash-out) than is
warranted? Banks, like other firms, want to have enough liquid assets to meet their needs
without oppressing profitability with excessive funds invested in relatively low-yielding
instru-ments. Their needs for funds are usually derived from their customers needs for
funds where the customer draws down loan commitments (off-balance-sheet items that
become on-balance-sheet assets) or withdraws deposits.
On the sources of funds side, we note from Table 67 that NCB holds a significantly
smaller proportion of core deposits (item 22) than the peer group of banks. Core deposits,
as reported in the UBPR, include demand deposits, negotiable order of withdrawal (NOW)
accounts, regular savings deposits, money market deposits, and time deposits of less
than $100,000. The difference is derived for the most part from money market deposit
accounts (MMDAs) (in item 19). The cost of MMDAs is comparable to the cost of many
nondeposit sources of funds. Given that their checkable deposits are comparableNCB
has 8.48 percent (sum of items 17 and 18) and the peer group reports 8.56 percentthe
lower proportion of core deposits does not necessarily indicate excessive funding costs.
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 189
TABLE 67 Percentage Composition of Assets and Liabilities for National City Bank and Its
Peer Group (all figures are percentages of average total assets)
Source: Uniform Bank Performance Reports (www.ffiec.gov).
NCB
12/31/04
Peer
12/31/04
NCB
12/31/03
Peer
12/31/03
82.50%
0.01
1.17
81.34
1.18
1.85
0.53
0.00
4.62
89.52
3.43
1.06
0.01
5.98
10.48
100.00
58.22%
1.03
0.80
58.91
0.76
2.37
0.34
2.01
21.02
90.08
2.68
1.09
0.05
5.82
9.92
100.00
79.65%
0.02
1.26
78.41
0.03
2.19
0.63
0.00*
6.55
87.81
3.85
1.03
0.02
7.29
12.19
100.00
57.68%
1.19
0.86
58.47
0.87
2.61
0.39
1.45
21.11
89.84
3.13
1.08
0.05
5.49
10.16
100.00
8.05
0.43
17.91
9.38
5.30
41.07
2.80
9.86
53.73
8.12
2.62
21.97
22.47
4.03
90.46
2.90
6.64
99.99
6.65
1.91
24.34
8.42
8.36
54.67
8.99
1.94
68.35
8.00
4.63
2.64
22.84
2.10
89.83
0.62
9.39
100.00
9.28
0.42
19.34
9.83
6.40
45.27
3.95
4.75
53.97
10.83
2.34
17.77
26.39
5.46
90.36
3.14
6.50
99.99
6.59
1.81
22.00
8.73
9.59
53.93
9.02
2.04
67.82
8.16
4.81
2.84
22.85
2.46
90.24
0.71
8.93
100.00
When we look at nondeposit liabilities, we see that total other borrowings are
significantly higher for NCB than for the peer group. To some extent, NCB has
substituted nondeposit borrowings for money market deposits compared to its peers.
Turning to NCBs statement of earnings and expenses (Table 68), we must recall the
changing interest rate environment from the beginning of 2003 to the conclusion of 2004.
Interest rates hit bottom in 2003 and then began to rise slowly. The federal funds rate
dropped below 1 percent in December 2003 and then climbed to 2.28 percent by year-end
2004. The 30-year home mortgage interest rate dropped to a low of 5.23 percent in June
2003, rose to a high of 6.29 percent in June 2004, and ended that year at 5.71 percent.
While total interest income (item 16) increased by 11.56 percenta favorable resulttotal
interest expenses also increased. In an ideal world we would like income to
RoseHudgins: Bank
II. Financial Statements
Management and Financial and Financial Firm
Services, Seventh Edition Performance
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
12/31/2004
12/31/2003
Percentage Change
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
$2,170,542
102
2,071
976
2,171,620
2,333
73,379
13
35,919
27
111,644
4,968
19,225
5,393
4,310
2,317,160
88,743
36,021
156,541
61,140
208,472
0
34,627
585,544
1,731,616
802,999
2,534,615
1,243,716
147,147
1,143,752
0
5,992
1,149,744
421,806
989
0
422,795
726,949
0
726,949
150,000
576,949
$1,927,084
86
1,998
909
1,928,079
7,812
69,222
11
50,196
25
127,241
493
15,239
1,688
4,351
2,077,091
33,449
43,248
188,654
64,926
162,851
0
25,019
518,147
1,558,944
783,373
2,342,317
1,160,735
422,562
759,020
0
3,639
762,659
208,817
920
0
209,737
552,922
0
552,922
300,000
252,922
12.63%
18.60
3.65
7.37
12.63
70.14
6.01
18.18
28.44
8.00
12.26
907.71
26.16
219.49
0.94
11.56
165.31
16.71
17.02
5.83
28.01
0.00
38.40
13.01
11.08
2.51
8.21
7.15
65.18
50.69
0.00
64.66
50.75
102.00
7.50
0.00
101.58
31.47
0.00
31.47
50.00
128.11
go up and expenses to go down. This ideal situation is similar to the famous directive to
investors to Buy Low and Sell Highsimplistic in theory but hard to apply, especially
when we are talking about interest income and expenses and both items are correlated
with market interest rates. (We will soon be exploring the effects of these correlations in
Chapter 7.) Most interest income items (items 1 through 15 in Table 68) increased and,
while the signs were mixed for individual interest expense items (items 1723), the overall effect was an increase in NCBs total interest expenses (item 24).
RoseHudgins: Bank
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Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 191
Factoid
Beginning in 1997 federal law allowed banks and other corporate
financial institutions that qualify to become Subchapter S
corporations, which are
NCB
s
net
interest
income
(item
25)
increase
d
by
11.08
percent
during
the year.
When
net
interest
income
is
measure
d
relative
to
average
total
assets,
the net
interest
margin
(NIM)
increase
s slightly
as
illustrate
d by the
following
:
Interest income
from loans andInterest expense on
security investments
treated like partnerships for federal tax
purposes.
Avera
ge
assets
borrowed funds
Net interest margin
TABLE 69
Relative Income
Statement and Margin
Analysis for National
City Bank and Its Peer
Group (all figures are
percentages of average
total assets)
Source: Uniform Bank
Performance Reports
(www.ffiec.gov).
NCB
2004
1. Total interest income (tax-equivalent basis)
2. Less: Interest expense
3. Equals: Net interest income (tax-equivalent basis)
4. Plus: Noninterest income
5. Minus: Noninterest expense
6. Minus: Provision for loan and lease losses
7. Equals: Pretax operating income
(tax-equivalent basis)
8. Plus: realized gains/losses on securities
9. Equals: Pretax net operating income
(tax-equivalent basis)
10. Net operating income
11. Adjusted net operating income
12. Net income adjusted for Subchapter S status
13. Net income
Peer Group
2003
4.82%
1.22
3.61
1.67
2.59
0.31
4.46%
1.20
3.23
1.73
2.89
0.14
4.67%
1.17
3.51
1.76
2.61
0.95
4.57%
1.29
3.23
1.83
2.95
0.27
2.38
0.01
1.97
0.02
1.71
0.01
1.89
0.05
2.39
1.51
1.43
2.00
1.31
1.29
1.31
1.31
1.72
1.24
1.37
1.95
1.28
1.29
1.28
1.28
1.51
1.24
RoseHudgins: Bank
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192
6. Measuring and
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Performance of Banks and
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Competitors
The McGrawHill
Companies, 2008
EPS
Net income
Common equity shares outstanding
2004
$726,949,000
646,749,650 $1.12 per share
2003
$552,922,000
605,996,120 $0.91 pe
How did NCB do relative to its peer group with regard to income and expenses?
Table 69 provides a glimpse of an answer for this question. NCB improved its
performance in 2004. It outperformed its peer group on interest income (item 1) and
noninterest expense (item 5) in both 2003 and 2004. Outperformed means NCBs
interest income was higher as a percentage of its average assets and its noninterest
expenses were lower as a percent-age of its average assets than comparable banks.
The lower noninterest expense indicates that management has succeeded in
controlling overhead costs relative to its peer group. Overall, the successes regarding
interest income and noninterest expenses illustrated in the upper portion of Table 69
led to both higher net operating income (item 10) and higher net income (item 13)
relative to average total assets for NCB versus its peer group of banks in 2004.
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
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Performance of Banks and
Their Principal
Competitors
The McGrawHill
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Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 193
NCB looks good relative to its peers and the profitability ratios are getting
better. ROA increased by 21.77 percent. We can explore NCBs earnings further
using Equa-tions (611), (614), and (618) discussed earlier in this chapter.
Equation (611) pro-vides the following breakdown using quarterly average
figures for Report of Condition items:
ROE
Average
assets
ROA
Average
equity capital
ROE
0
.
0
1
5
1
1
5
.
0
6
0
.
2
2
8
0
o
r
2
2
.
8
0
%
ROE
0
.
Cle
arly,
NCB
s
ROE
increa
sed
becau
se its
ROA
a
meas
ure of
mana
gerial
efficie
ncy
impro
ved.
At the
same
time
NCB
s use
of
levera
ge
(i.e.,
the
propo
rtion
of its
asset
s supporte
d by
debt)
decre
ased.
Mana
Net income
ROE
ROE
$
726,949
$ 3,120,159
$
3,120,159 $
$ 48,025,306
48,025,306
$
3,188,880
Average assets
Avera
ge
assets
.80%we ROA is item 13 from Table 69
and for balance sheet items
re:
we use average assets as
NC
(1) reported in the UBPR and
Bs
NC derive average equity capital
RO
from item 33 in Table 67. For
Bs 2004 average equity capital
E
in
risi equaled 6.64 percent of
average assets where
20
ng average assets were
03.
net $48,025,306.
7
7
pro Total operating revenue is item
ROEfit
ma
$
2,860,464
$
44,445,794
$ 44,445,794
$
rgi
n,
whi
ch
0.1933
inc
se
19.14%
W
hat
fact
ors
in
the
se
ear
nin
1
5
gs
rela
tion
ship
cau
sed
NC
Bs
retu
rn
to
stoc
8
0
its
khol
der
s
(RO
E)
rise
to
?
2
2
0.0644
15.38rea 0.1914 or
The
key
fact
ors
d
by
20.
54
per
ce
nt,
an
d
(2)
the
ne
arl
y 1
per
ce
nt
ris
e
in
NC
Bs
as
set
utili
zat
ion
rati
o
(op
era
tin
g
6
RoseHudgins: Bank
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194
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Competitors
The McGrawHill
Companies, 2008
revenues to average assets). These positive effects were mitigated to some extent by
the 2.08 percent decline in the equity multiplier from 15.38 times to 15.06 times.
ROE
$
726,949
$ 1,149,744
0.6323
$ 1,149,744
$
3,120,159
0.3685
$
3,120,159
$ 48,025,306
0.0650
$ 48,025,306
$
3,188,880
15.06
0.2280 or 22.80%
NCBs ROE in 2003:
ROE
$ 552,922
$
762,659
0.7250
$
762,659
$ 2,860,464
0.2666
$
2,860,464
$ 44,445,794
0.0644
$ 44,445,794
$
2,888,977
15.38
0.1914 or 19.14%
A glance at the breakdown of ROE above shows a decline in tax-management efficiency
with net income to pretax operating income decreasing from 72.50 percent in 2003 to 63.23
percent in 2004. For every dollar of pretax operating income NCB paid out about 27 cents in
taxes in 2003, which rose further to nearly 37 cents in 2004. On a brighter note, however, the
measure of expense-control efficiency (pretax net operating income to total operating revenue)
advanced by more than 38 percent, pointing to improved expense control.
In conclusion, we have utilized the tools developed in this chapter and NCBs UBPR to
get a better picture of the operations and management of this bank. NCB appears to be
more focused on the traditional business of lending than is the average large bank today.
Its operations have generated higher revenues and lower expenses than its peers and this
performance superiority generally broadened between 2003 and 2004.
8
www.mhhe.com/rose7e
S
u
m
m
a
r
y
RoseHudgins: Bank
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Services, Seventh Edition
6. Measuring and
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Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 195
2 For
the largest profit-oriented financial institutions the market value of their stock
(equities) is usually the best overall indicator of profitability and risk exposure.
3 For smaller financial firms whose stock is not actively traded every day a
number of key profitability ratios (such as return on assets, return on equity
capital, net interest margin, noninterest margin, and earnings spread) become
important performance measures and significant managerial targets.
4 Pursuit
6 The chapter concludes with a discussion of the Uniform Bank Performance Report
(UBPR) available from the Federal Financial Institutions Examination Council. This
financial report on individual FDIC-insured commercial and savings banks has
become one of the most widely used performance summaries available to
bankers, regulators, customers, and the general public.
www.mhhe.
Key Terms
net
prof
it
mar
gin,
170
ass
et
utili
zati
on,
170
equ
ity
mul
tipli
er,
170
cre
dit
risk,
177
liqui
dity
risk,
178
mar
ket
risk,
178
inte
rest
rate
risk,
179
operati
onal
risk,
179
legal
risk,
180
compli
ance
risk,
180
reputat
ion
risk,
180
strateg
ic risk,
180
capital
risk,
180
UBPR,
185
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RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
196
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
What is the value of the equity multiplier for each of these institutions?
Suppose that both institutions have an ROA of 0.85 percent. What must
each institutions return on equity capital be? What do your calculations tell
you about the benefits of having as lit-tle equity capital as regulations or the
marketplace will allow?
4. The latest report of condition and income and expense statement for
Galloping Mer-chants National Bank are as shown in the following
tables:
Galloping Merchants National Bank
Income and Expense Statement (Report of Income)
www.mhhe.com/rose7e
$100
150
10
670
50
980
830
Liabilities
Demand deposits
Savings deposits
Time deposits
Federal funds purchased
Total liabilities
Equity capital
Common stock
Surplus
Retained earnings
Total capital
Interest-bearing deposits
Fill in the missing items on the income and expense statement. Using
these statements, calculate the following performance measures:
ROE
Asset utilization
ROA
Net interest margin
efficiency
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 197
Interest income
Interest expense
Total assets
Security losses or gains
Earning assets
Total liabilities
Taxes paid
Shares of comon stock outstanding
Noninterest income
Noninterest expense
Provision for loan losses
2
2
Please calculate:
ROE
ROA
Net interest margin
Earnings per share
Net noninterest margin
Net operating margin
Alternative scenarios:
_____
_____
_____
_____
_____
_____
2. On the other hand, suppose Shallows interest income and expenses as well as its
noninterest income and expenses decline by 5 percent, again with all other factors
held constant. How would the banks ROE, ROA, and per-share earnings change?
6. Blue and White National Bank holds total assets of $1.69 billion and equity capital of
$139 million and has just posted an ROA of 1.10 percent. What is the banks ROE?
Alternative scenarios:
1. Suppose Blue and White Bank finds its ROA climbing by 50 percent, with
assets and equity capital unchanged. What will happen to its ROE? Why?
2. On the other hand, suppose the banks ROA drops by 50 percent. If total assets
and equity capital hold their present positions, what change will occur in ROE?
3. If ROA at Blue and White National remains fixed at 0.0076 but both total
assets and equity double, how does ROE change? Why?
4. How would a decline in total assets and equity by half (with ROA still at
0.0076) affect the banks ROE?
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remain fixed?
7.
8. Suppose
10. Lochiel Commonwealth Bank and Trust Company has experienced the
following trends over the past five years (all figures in millions of
dollars):
Year
Net Income
After-Tax
Total Operating
Revenues
Total Assets
To
1
2
3
4
5
$2.70
3.50
4.10
4.80
5.70
$26.50
30.10
39.80
47.50
55.90
$293.00
382.00
474.00
508.00
599.00
Determine the figures for ROE, profit margin, asset utilization, and equity
multiplier for this bank. Are any adverse trends evident? Where would you
recommend that management look to deal with the banks emerging
problem(s)?
11. Wilmington Hills State Bank has just submitted its Report of Condition and
Report of Income to its principal supervisory agency. The bank reported net
income before taxes and securities transactions of $27 million and taxes of $6
million. If its total operating
Alternative
scenarios:
1.
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 199
revenues were $780 million, its total assets $2.1 billion, and its equity capital
$125 million, determine the following for Wilmington:
3. What effect would a 20 percent higher level of equity capital have upon
Wilmingtons ROE and its components?
12. Using this information for Lochness International Bank and Trust Company (all figures
in millions), calculate the banks net interest margin, noninterest margin, and ROA.
Interest income
Interest expense
Provision for loan losses
Security gains (or losses)
Noninterest expense
Noninterest income
Extraordinary net gains
Total assets
13. Valley Savings reported these figures (in millions) on its income statement for the past
five years. Calculate the institutions ROA in each year. Are there any adverse trends?
Any favorable trends? What seems to be happening to this institution?
Current
Year
One Year
Ago
Two Years
Ago
Three Years
Ago
$40
24
4
8
2
1
2
385
$41
23
4
7
1
1
1
360
$38
20
3
7
1
0
0
331
$35
18
2
6
0
1
1
319
14. An analysis of the UBPR reports on NCB was presented in this chapter. We examined a
wide variety of profitability measures for that bank, including ROA, ROE, net profit mar-gin,
net interest and operating margins, and asset utilization. However, the various mea-sures
of earnings risk, credit risk, liquidity risk, market risk (price risk and interest rate risk), and
capital risk were not discussed in detail. Using the data in Tables 65 through 69,
calculate each of these dimensions of risk for NCB for the most recent two years and
Fou
discuss how the banks risk exposure appears to be changing over time. What steps would
you recommend to management to deal with any risk exposure problems you observe?
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www.mhhe.com/rose7e
to be growing faster and why. Which would you recommend as a possible takeover target and why?
2. A guest speaker visiting your class contends that Bank of America is one
of the most profitable banks of its size in the United States. Your
instructor says thats really not true; it tends to be a middle-of-the-road
performer. Check these claims out on the Web (for example, at
www.bankofamerica.com and www.fdic.gov). Who is right and what
makes you think so?
20
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1. You can depend on S&P Industry Surveys concluding with sections on How to Analyze a Company and a Comparative Company Analysis. To access these surveys
use the Industry tab, and the drop-down menu supplies several subfinancial-service
indus-try selections, such as Asset Management & Custody Banks, Consumer
Finance, Diver-sified Banks, Diversified Capital Markets, Insurance Brokers,
Investment Banking and Brokerage, Life & Health Insurance, Multiline Insurance,
Property & Casualty Insur-ance, Regional Banks, and Thrifts & Mortgage Finance.
Once an industry has been selected you will find downloadable S&P Industry
Surveys, covering such key financial-services sectors as Banking, Investment
Services, Financial Services Diversified, Insur-ance: Property and Casualty,
Insurance: Life and Health, and Savings and Loans. Please download S&P Industry
Surveys for two of these financial sectors and review the How to Analyze and
Comparative Company Analysis write-ups on each. In each category of financial
firms found in the Comparative Company Analysis, identify the firm with the highest
return on equity capital (ROE). How do the ROEs compare across categories and
subindustries? Are there any other performance measures that could be compared
across financial-service sectors?
Internet Exercises
2. Today
1.
businesses are battling for many of the same customers and for many of the same
sources of capital to sup-port their growth and expansion. As a result there is keen
interest today in the compara-tive financial performance of firms in these four
competing industries. Using S&Ps Market Insight, Educational Version, see if you
can determine which of these financial-service industries are outperforming the
others in terms of returns on equity capital and risk exposure. You may find it useful
to select certain firms from the Market Insight file to com-pare performances across
these industries. For example, you can compare the financial statements of such
companies as MetLife Insurance Inc. (MET), Capital One Financial Group (COF),
Goldman Sachs Group (GS), and FleetBoston Financial Corp. (FBF).
Amsouth
Bank
(www.amsouth.com
BB&T (
SunTrust
Banks
(www.suntrust.com
Using
the
above
company Web sites
and other appropriate
sites, determine which
of these banks seems
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 201
R E AL N U M B E R S
F O R R EAL BAN K S
2. The
spreadsheet
containing
items
expressed
as
information; (2) comparing your BHC with the group of peer banks using
percentages
developed
Comparisons
what you are about to do. Calculate the dollar changes in Column D
provided
of
assets
for
with
the
for
NCB
1. Write
in
one
paragraph
asset
the
in
that
of
the
peer
2. Write
one
comparing
sources
the
of
funds
composition
for
3. Write
For example, the formula for ROE entered in cell B54 would be:
=B52/B26.
us
in
paragraph
ge
composition
group.
then for the prior year in column C using the formula functions in
ch
an
comparing
2. Calculate the ratios for the most recent year in Column B and
s
p
one
paragraph
comparing
the
components
of
income
and
expenses for your
BHC with that of
the peer group.
g
thi
s
br
ea
kd
o
w
n.
In
co
rp
or
at
Part Two: A
Breakdown of
Returns
1. Open
ba
Year
the Year-toComparisons
th
e
si
6. Rows 66 through 69 provide the framework for a breakdown of ROA (Equation [620] in this chapter). Write one
paragraph discussing the change in ROA and its components for your bank.
www.mhhe.com/rose7e
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Selected
References
For an explanation of measuring and evaluating risk in banking and financial services, see the following studies:
4. Wright,
8. Klee, Elizabeth C., and Fabio M. Natalucci. Profits and Balance Sheet Developments
at U.S. Commercial Banks in 2004. Federal Reserve Bulletin, Spring 2005, pp. 143
74.
9. Wetmore,
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
The McGrawHill
Companies, 2008
Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors 203
Appendix
Improving the Performance of Financial Firms through Knowledge:
Sources of Information on the Financial-Services Industry
Chapter 6 focused on how to measure the performance of
Insurance
banks and some of their closest competitors in todays Information Institute (III)
financial marketplace. However, mere measurement of the at www.iii.org.
dimensions of performance is not enough. Managers must
In addition to the material
have the tools and the knowledge necessary to improve
provided by these and
performance over time. The chapters that follow this one will
other
trade
provide many of the tools needed for suc-cessful numerous
associations,
dozens
of
management of a financial institution, but man-agers will
journals
and
books
are
always need more information than textbooks can provide.
Their problems and solutions may be highly technical and will released each year by book
houses,
shift over time, often at a faster pace than the one at which publishing
textbooks are written. The same difficulty confronts regulators magazine pub-lishers, and
agencies.
and customers. They must often reach far afield to gather government
vital information in order to evaluate their financial-service Among the most impor-tant
of these recurring sources
providers and get the best service from them.
Where do the managers of financial institutions find the are the following:
information they need? One good source is the professional
schools in many regions of the nation. Among the most popularGeneral
of these is the Stonier Graduate School of Banking sponsored by Information on
the American Bankers Association. Other professional schools Banking and
are often devoted to specific problem areas, such as marketing, Competing
consumer lending, and commercial lending. Each offers Financial-Service
educational materials and often supplies homework problems to Industries
solve.
Beyond the professional schools, selected industry trade 1 ABA Banking Journal
(published by the
associations annually publish a prodigious volume of written
American
Bankers
studies and management guidelines for wrestling with important
Association
at
performance problems, such as developing and promoting new
www.banking.com).
services, working out problem assets, design-ing a financial plan,
and so on. Among the most popular trade associations publishing2 Risk
Management
problem-solving information in the financial-services field are:
and
Lending
Professionals Journal
(pub-lished by the
Risk
Management
Association at www.
rmahq.org).
of
Risk Management and Lending Professionals at www.
3 The Canadian Banker
rmahq.org.
(published by the
4 Americas Community Bankers at www.acbankers.org.
Canadian
Bankers
Association
at
5 Credit Union National Association (CUNA) at www. www.cba.ca).
cuna.org.
Bank Marketing
6 American Council of Life Insurance (ACLI) at www.4 ABA
Magazine
at
acli.org.
www.aba.com/Mar7 Investment Company Institute (ICI) at www.ici.org.
ketingNetwork.
Sources
of Data
on
Individual
Banks
and
Competin
g
Financial
Firms
1 Uniform
Bank
Performance Reports
(UBPR)
(published
quarterly by the Federal
Financial
Institutions
Examina-tion Council at
www.fiec.gov).
2 Historical
Bank
Condition and Income
Reports
(avail-able
from
the National
Technical Information
Service
at
www.ntis.org).
3 American
Banker
Online
(banking
industry
newspaper
published
by
the
American
Bankers
Association
at
www.americanbanke
r.com).
4 The
Wall
Street
Journal (published by
Dow Jones & Co.,
Inc., and online at
www.wsj.com).
Economic and
Financial Trends
Affecting Banking
and the Financial
Services Sector
1 Survey
of
Current
Depart-ment
of
Commerce at www.bea.gov/bea/pubs.htm).
2 Federal Reserve Bulletin (published by the Board of Governors of the Federal Reserve System and available at
www.federalreserve.gov/pubs/bulletin).
3 National
Economic
Trends and Monetary
Trends (all pub-lished
by
the
Federal
RoseHudgins: Bank
Management and Financial
Services, Seventh Edition
204
6. Measuring and
Evaluating the
Performance of Banks and
Their Principal
Competitors
1 Federal
Books and Journals Focusing on Laws
and Regulations and International
Developments Affecting Banks and Other
Financial-Service Providers
1 International
Economic Conditions
(published by the
2 The
Reserve System
at
www.federalreserve.gov.
2 Federal
Reserve Bank
of
Minneapolis
at
www.minneapolisfed.org.
Industry Directories
for
many
industries
give
lists
of
businesses in an industry by
Key Regulatory Agencies
name, city, state, and country
1 Office of the Comptroller of the Currency (OCC) at of location. Some of the more
complete directories provide
www.occ.treas.gov.
avenues of contact
2 Board of Governors of the Federal Reserve System essential
for directory users, such as
at www.federalreserve.gov.
the names of key offi-cers
3 Federal Deposit Insurance Corporation (FDIC) at within a firm and the
www. fdic.gov.
companys mailing address,
4 Office of Thrift Supervision at www.ots.treas.gov. tele-phone number, and email address. More detailed
Basic Education in Banking and Financial Services directories have abbreviated
financial statements of the
for Both Bankers and Their Customers
firms listed and may even
have a historical sketch about
Consumer Action at
www.consumeraction.org.
each firm. One common use
The McGrawHill
Companies, 2008
of these directories is to
pursue possible employment
opportunities. Among the
better-known
indus-try
directories are these:
1 The
Bankers Almanac at
www.bankersalmanac.c
om.
3 International
Insurance
Directory
(also
described at www.
insurancenetwork.com).
4 Directory
of Savings
and
Loans
at
www.abbycon.com/
financial.