Financial Ratio analysis For a bank
My Website Contains Useful Information
Bank Financial Analysis
• http://www.westga.edu/~rbest/GSB.html
Graduate School of Banking @ LSU
• Information that will help you complete the home study problem
Ron Best
Professor of Finance
University of West Georgia
– Information about accessing your bank’s UBPR
Richards College of Business
Department of Accounting and Finance
Carrollton, Georgia 30118 rbest@westga.edu 678-839-4812
– Spreadsheet template
2
Overview
Financial Intermediation
• Financial Statements and Ratios
• A bank’s primary purpose is financial intermediation – Accept deposits
• Usually short-term in nature
• Relatively quick interest rate adjustments possible – Make loans
• Variety of maturities
• Fixed and variable rates
– Make money through an interest rate spread and by charging for services provided
• Decomposition of ROE
• Bank Risk
• Putting it all Together
• Review
3
The Goal of Bank Management
4
Purpose of Financial Analysis
• What is the goal of bank management?
• Measure past performance
– Maximize the value of the bank
• Determine starting point for planning
• Asset Value/Price
– Present value of expected future cash flows
– Bank management must determine the
“appropriate” balance between risk and return
• Higher expected profitability often goes handin-hand with additional risk
• Higher profit does not always translate into higher value
• Estimate future performance (What-ifs?)
• Set values
– Predict cashflows
– Determine risk
5
6
1
Why use ratios?
Warning!
• Standardize numbers; facilitate comparisons
• Be careful not to infer too much from a ratio
• The most common comparison norms are:
• Accounting discretion makes a difference
– Changes often affect multiple ratios differently
– Approaches to loan loss expenses & write-offs
– Past performance
– Oth banks (peer or “target” banks; industry (or
Other b k (
“t
Bank Financial Analysis
• http://www.westga.edu/~rbest/GSB.html
Graduate School of Banking @ LSU
• Information that will help you complete the home study problem
Ron Best
Professor of Finance
University of West Georgia
– Information about accessing your bank’s UBPR
Richards College of Business
Department of Accounting and Finance
Carrollton, Georgia 30118 rbest@westga.edu 678-839-4812
– Spreadsheet template
2
Overview
Financial Intermediation
• Financial Statements and Ratios
• A bank’s primary purpose is financial intermediation – Accept deposits
• Usually short-term in nature
• Relatively quick interest rate adjustments possible – Make loans
• Variety of maturities
• Fixed and variable rates
– Make money through an interest rate spread and by charging for services provided
• Decomposition of ROE
• Bank Risk
• Putting it all Together
• Review
3
The Goal of Bank Management
4
Purpose of Financial Analysis
• What is the goal of bank management?
• Measure past performance
– Maximize the value of the bank
• Determine starting point for planning
• Asset Value/Price
– Present value of expected future cash flows
– Bank management must determine the
“appropriate” balance between risk and return
• Higher expected profitability often goes handin-hand with additional risk
• Higher profit does not always translate into higher value
• Estimate future performance (What-ifs?)
• Set values
– Predict cashflows
– Determine risk
5
6
1
Why use ratios?
Warning!
• Standardize numbers; facilitate comparisons
• Be careful not to infer too much from a ratio
• The most common comparison norms are:
• Accounting discretion makes a difference
– Changes often affect multiple ratios differently
– Approaches to loan loss expenses & write-offs
– Past performance
– Oth banks (peer or “target” banks; industry (or
Other b k (
“t