Chapter 7 – Quiz Answers
1. What are the objectives of bank performance analysis? • evaluate progress towards meeting the goals and objectives set out by management, and • compare a bank’s performance relative to other banks • highlight strengths and weaknesses • for management to take appropriate remedial action 2. What are the main external forces that have an impact on a bank’s performance? • Deregulation – unleashed competition on both sides of the balance sheet. • Innovation and Globalisation – expanded banks’ balance sheets in both domestic and foreign assets. – Profits as a percentage of assets have declined in most cases as balance sheets expanded and competition put pressure on profitability.
3. What components do regulators use to measure banks? • Capital adequacy • Asset quality • Management quality • Earnings • Liquidity • Sensitivity to market risk 4. Weaknesses of CAMELS? • It is a screening device for regulators to identify problem banks. • Not really a measure a measure of financial performance in the sense of earnings. 5. What additional measures can regulators use? • Share price of bank • CDS spreads • Stress test
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6. What are the types of financial performance measures? • Accounting measures – Net income – ROA – ROE – Market to book • Risk –adjusted performance measures – RAROC - Risk adjusted return on capital – RORAC - Return - Return on risk adjusted capital – Shareholder’s value added – Eva - Economic Value add
7. What is the main problem in using Net Income as a measure of performance? • it does not adjust for the size of the bank • makes it difficult to compare one bank relative to another 8. What is the difference between ROE and ROA • ROE measure the profitability to shareholders • ROA measure the profitability generated by assets used. 9. What is the relationship between ROE & ROA?
10. What does the Equity Multiplier measure? • Measures the bank’s level of leverage – i.e. the level of borrowings relative...
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