Evaluating Bank Performance

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FN6012 –COMMERCIAL BANK MANAGEMENT
NATSIOU ALNISA
ASSIGNMENT#2

PROBLEM 3.1 --- CHAPTER 3

3.1(a)

FINANCIAL RATIOS FOR Z-BANK'S
PEER GROUP |  |  | | |FINANCIAL RATIOS FOR Z-BANK * | | | | | | | | | | | | | | |Financial Ratios |  |20XX-1 |20XX | |Financial Ratios |  |20XX-1 |20XX | |Profit Ratios | | | | |Profit Ratios | | | | |Return on Equity (ROE) | |20,00% |18,00% | |Return on Equity (ROE) | |53,66% |14,63% | |Return on Assets (ROA) | |1,00% |0,90% | |Return on Assets (ROA) | |1,85% |0,56% | |Profit Margin | |7,00% |6,50% | |Profit Margin | |13,02% |4,20% | |Net Operating Margin | |2,40% |2,30% | |Net Operating Margin | |29,00% |9,80% | |Net Interest Margin | |5,20% |5,00% | |Net Interest Margin | |5,60% |1,86% | |Asset Utilization | |17.86% |18.46% | |Asset Utilization | |14,20% |13,38% | |Risk Ratios | | | | |Risk Ratios | | | | |Capital | | | | |Capital | | | | |Equity Multiplier | |16,00 |15,00 | |Equity Multiplier | |29,02 |26,07 | |Asset Quality | | | | |Asset Quality | | | | |Loss Rate | |0,35% |0,45% | |Loss Rate | |0,56% |0,66% | |Loan Rate | |55,00% |53,00% | |Loan Rate | |58,82% |56,13% | |Operating Efficiency (%of total assets) | | | | |Operating Efficiency (%of total assets) | | | | |Interest Expense | |6,50% |6,55% | |Interest Expense | |66,67% |70,54% | |Wages and Salaries | |1,72% |1,74% | |Wages and Salaries | |16,67% |13,95% | |Occupancy | |0,48% |0,49% | |Occupancy | |5,00% |4,65% | |PLL | |0,30% |0,32% | |PLL | |3,33% |3,10% | |Other Expenses | |0,85% |0,85% | |Other Expenses | |8,33% |7,75% | |Liquidity | | | | |Liquidity | | | | |Cash Ratio | |17,00% |17,00% | |Cash Ratio | |28,57% |30,87% | |Cash and Securities Ratio | |36,00% |37,00% | |Cash and Securities Ratio | |33,19% |35,36% | |Other Financial Ratios | | | | |Other Financial Ratios | | | | |Tax Rate | |50,00% |50,00% | |Tax Rate | |46,94% |50,00% | |Dollar Gap Rate | | -15,00% | -10,00% | |Dollar Gap Rate | |-34,37% |-29,19% | |

(* The calculations made for deriving the above ratios are shown in the last page)

3.1(b)

In this part, we are going to talk about the Z-BANKS profitability by analyzing the Profitability Ratios that we have calculated to the above table. Moreover, we are going to compare Z-BANK’S performance in the pyear’s 20XX-1 and 20XX with the performance of the Z-BANK’S Peer Group in the same years.

Because the primary objective of bank management should be the maximization of shareholders wealth, a good starting point in the analysis of Z-BANK’S financial performance is the Return on Equity (ROE) rate.

As we can see at the above table in the year 200XX-1 Z-BANK’S ROE (50%) was way much higher that that of the Peer Group (20%), which indicates that at that period the Z-BANK has a better performance and was more competitive than the Peer Group. However, in the year 20XX we can see that Z-BANK had a dramatic decrease in its’ ROE (14.63%), which is worse than the ROE of the Peer Group (18%). Although both Banks had a decrease in their ROE in 20XX if we compare their growth rates Z-BANKS ROE decreased by 70.74% while the Peer Groups Roe decreased only by 10%. This dramatic decrease in Z-BANK’S ROE will have a negative effect for the bank.

Firstly, because a relatively lower ROE compared with other banks, will tend to decrease the bank’s access to new capital that may be necessary to expand and maintain a competitive position in the market and secondly, because a low ROE may limit the bank’s growth because regulations require that assets be a certain number of times equity capital.

To continuo, another important profitability ratio is the Return on Assets (ROA). ROA measures the ability of management to utilize the real and financial resources of the bank to generate returns.

We can see that in 20XX-1, Z-BANK’S ROA is better that that of the Peer Group but again in 20XX we can see that Z-BANK’S ROA have a significant decrease of 69.73% and now Peer Group has a better ROA. This means that...
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