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Evaluating Bank Performance PDF

This document analyzes how banks work by discussing their balance sheets, income statements, financial ratios, and CAMELS ratings system. It explains that banks facilitate funds flow from savers to borrowers. Their balance sheets include equity, deposits, investments, loans and other assets/liabilities. Their income comes from interest on loans and investments, while expenses include interest on deposits and operating costs. Key financial ratios assess efficiency, risk, liquidity, and returns using metrics like net interest margin, loan ratios, and DuPont analysis. Regulators also use the CAMELS ratings to evaluate banks.

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Seema Behera
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
72 views

Evaluating Bank Performance PDF

This document analyzes how banks work by discussing their balance sheets, income statements, financial ratios, and CAMELS ratings system. It explains that banks facilitate funds flow from savers to borrowers. Their balance sheets include equity, deposits, investments, loans and other assets/liabilities. Their income comes from interest on loans and investments, while expenses include interest on deposits and operating costs. Key financial ratios assess efficiency, risk, liquidity, and returns using metrics like net interest margin, loan ratios, and DuPont analysis. Regulators also use the CAMELS ratings to evaluate banks.

Uploaded by

Seema Behera
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Analyzing banks

Prof. Neerav Nagar


What do banks do?
• Facilitate the flow of funds from savers to
borrowers
How are banks different?
• Regulated
• Few fixed assets
• Few fixed costs
• Less equity, more debt
• Several liabilities are payable on demand or carry
short-term maturities
• Credit default and interest rate risks
Balance Sheet
Capital and liabilities
• Equity or preferred capital
• Reserves and surplus
• Deposits
• Demand deposits
• Savings bank deposits
• Term deposits
• Borrowings
• From the Reserve Bank of India (RBI)
• From others
• Other liabilities
Assets
• Cash and balances
• Cash in hand
• Balances with RBI
• Balances with banks
• Investments
• Government securities
• Shares
• Debentures
• Advances
• Short-term
• Long-term
• Fixed assets
• Other assets
Income Statement
Income
• Interest earned
• Advances
• Investments
• Balances with RBI and others
• Other income
• Commission, exchange and brokerage
• Profit/loss on sale of investments/assets
• Interest and dividend income
Expenses
• Interest expended
• Deposits
• RBI
• Inter-bank borrowings
• Operating expenses
• Provisions for loan losses
• Income taxes
Financial analysis
Income statement: Burden and
efficiency
• Interest income (II)
• Other income (OI)
• Interest expended (IE)
• Operating expenses (OE)
• Provisions for loan losses (PL)
• Income taxes (IT)

Net interest income (NII) = Interest income (II) –


Interest expended (IE)
Interest income
• Rate
• Duration of loan
• Creditworthiness of borrowers
• Type of industry
• Volume
• Earning assets/TA (EA/TA)
• Composition of earnings assets
Other income
• Type
• Fee
• Commission
• Profit/loss on sale of investments, etc.
• Frequency
• Recurring
• Non-recurring
Interest expended
• Rate
• Duration of deposits
• Own risk
• Market interest rates
• Volume
• Interest-bearing liabilities/TA (IBL/TA)
• Composition of interest-bearing liabilities
Operating expenses
• Salaries
• Rent
• Other overheads
Ratios
Efficiency
• Net Interest Margin = NII/EA
• Spread = II/EA – IE/IBL
• Burden ratio = (OE – OI)/TA
• Efficiency ratio = OE/(NII + OI)
Risk
• Leverage ratio = TA/Shareholders’ Equity (TA/SE)
• Loan ratio = Total loans/TA (TL/TA)
• Provision for loss ratio = PL/TL
• Loss ratio = Loan losses/TL
• Non-deposit borrowings ratio
= Non-deposit borrowings/Total assets
• Capital adequacy ratio = Capital/Risk weighted
assets
Liquidity
• Demand-to-time deposits ratio
= Demand deposits/Time deposits
• Cash-to-demand deposits ratio
= Cash and bank balances/Demand deposits
• Cash ratio = Cash/TA
DuPont analysis
Return on Equity (ROE) = Net Income/Shareholders’ Equity
ROE = NI/SE

ROE = Net Income * Average Total Assets


Average Total Assets Average Total Equity

ROE = ROA * Leverage


DuPont analysis

ROE = NI/(II+OI) * (II+OI)/TA * TA/SE


DuPont analysis
Net Income (NI) = II+OI-IE-OE-PL-IT

NI/TA = II/TA+OI/TA–IE/TA–OE/TA–PL/TA–IT/TA
CAMELS Ratings
• Capital adequacy
• Asset quality
• Management
• Earnings
• Liquidity
• Sensitivity to market risk

Source: Uniform Financial Institutions Rating System (Available at https://www.fdic.gov/regulations/laws/federal/ufir.pdf)

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