MindMap Gallery Measuring and Evaluating Bank Performance

Measuring and Evaluating Bank Performance

Measuring and evaluating bank performance is essential for assessing the financial health and operational efficiency of financial institutions. This mind map aims to provide a comprehensive overview of the key metrics and methodologies used to measure and evaluate bank performance. By exploring the various aspects of bank performance evaluation, this mind map will offer valuable insights into the factors that drive the success and stability of banks.

Edited at 2023-11-16 18:06:01

Thai Thuy Duong

Measuring and Evaluating Bank Performance

Thai Thuy Duong

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Outline

Chapter 6: Measuring and Evaluating Bank Performance

Stock Values

Stakeholders of bank performance

Stockholders

Bank management

Regulators

Depositors

Business community

External performance

Market value

Regulatory compliance

Public confidence

Shareholders’ Wealth: Value of stock

Present value of future cash flows

Determinants:

Size

Timing

Riskiness

Changes in

Value due to

dividends

discount rate

Using P/E ratio

P/E=Price per share/Earnings per share

Profitability ratios

ROE

ROE= Net Income / Total Equity Capital

ROA

ROA= Net Income / Total Assets

The lower ROA, the higher it must push its leverage to achive a target ROE

Net interest margin

Net non-interest margin

Nonperforming ratio = Nonperforming assets/Equity capital

The Du Pont Identity

Profitability

Operating efficiency

Asset use efficiency

Financial leverage

Expense control

wage ratio = Wages and salaries / total expenses

fixed cost ratio = fixed occupancy costs/ total expenses

Measuring credit, liquidity, and other risks

Credit risk

Nonperforming ratio = Nonperforming assets/Total loans and leases

Nonperforming ratio=Nonperforming assets/Equity capital

include nonaccrual loans, restructured loans, and other real-estate owned

Loss ratio = Net chargeoffs on loans / Total Loans and leases = (Grossprofit chargeoffs - recoveries)/Total loans and leases

Provision for loan lossratio = Provision for loan loss / Gross loans and leases

Reserve ratio: Reserves for loan losses / Total Loans and Leases

Loan and lease ratio = Net loans and leases / Total Assets

Liquidity risk

Funds available to meet cash demand for loans and deposit withdrawal

Liquidity ratio

Temporary investment ratio = Liquid assets / Total assets

Volatile liability dependency ratio = (total volatile liabilities - temporary investments)/net loans and leases & long term leases

Liability mgt replacing asset mgt

Higher rates of return

Lower holdings of U S Treasury securities

Higher credit risk

Market risk

Price risk

Book - to- market = Book value of assets / Market value of assets

Book-to-market= Book value of equity / Market value of equity

Market-to-book= Market value of bonds/Book value of bonds

Interest rate risk

Dollar gap ratio=(Interest rate sensitive assets - Interest rate sensitive liabilities) /Total assets

Interest rate-sensitive means short-term with maturities of less than one year

Liabilities > assets, bank at higher risk with rising rates

Assets > liabilities, then bank at higher risk with falling rates

Operational risk

Risk due to failing computer systems, errors, misconduct by employees, floods, tornadoes, lightning strikes

Legal and compliance risk

Legal risk – legal system creates adverse outcomes, e.g., unenforceable contracts, adverse lawsuit judgments

Compliance risk – violations to the rules and regulations, e.g., insufficient capital

Reputation risk

Uncertainty due to public opinion as it pertains to confidence of customers and creditors

Strategic risk

Variation in earnings due to poor business decisions, improper implementation of decisions, lack of responsiveness to industry changes or public expectations.

Capital risk

Impact of all the previous risks affects capital and the bank’s survival chances