According to the calculated ratios in Table-1, SSB had the following major trends in profitability during the time of 1991 to 1993:
Decreasing return on equity (ROE) - shareholder return
Gradual & unsteadily decreasing return on assets (ROA) - managerial efficiency Decreasing net non interest margin less profit earned on non-interest banking components Increasing earnings spread have established effective processes of borrowing and lending money with little immediate threat of competitors Unfavorably increasing operating efficiency ratio - there is an excess of operating cost in relation to operating revenues generated by SSB. Declining credit risk/depositor risk decline of bad loans, increased market values of good loans relative to amount of deposits. Increasingly higher interest rate risk - meaning that there is about 30% of excess interest sensitive assets compared to interest sensitive liabilities.
SSB's Major Strengths and Weaknesses in Terms of Profitability at Year-End 1993
According to the calculated ratios in Table-1, SSB had the following strengths and weaknesses.
Slightly increasing net interest margin (NIM): This indicates favorable control and management of interest income and interest expenses, in relation to SSB's total assets. Increased earnings spread: This indicates that SSB has established effective borrowing and lending processes. This also indicates a period of non-increasing competition, so SSB can continue to operate on this strength for a little while. Consistently steady asset utilization ratio: This reflects a consistent portfolio management policy, considering the yield and mix on SSB's assets. When compared to the industry average for SSB's local area, management can determine if any changes should be made in this area. Weaknesses:
Decreased return on equity (ROE): which indicates a decreasing rate of return flowing to shareholders, which is to be a primary area of concern, especially if no significantly unusual circumstances exist, to which one can attribute the ROE decline. Gradually decreasing return on assets (ROA): This indicates a steady decline in managerial efficiency, which isn't of extreme threat right now, but could grow into a bigger problem if not addressed early on by SSB's management. Decreased net profit margin (NPM): This indicates less effective cost control and management of service pricing. Management should carefully examine both areas, looking for areas related to net income and total revenues that can be quickly adjusted, even possibly decreasing costs and restructuring SSB's pricing of services. Decreased net operating margin (NOM): This indicates a need for management and SSB's staff to better manage the revenues generated and operating cost incurred. Unfavorable change in operating efficiency: This indicates that SSB has more expenses compared to profits. It appears that SSB is increasingly sacrificing profits by operating more expensively and less efficiently. High interest rate risk: The interest sensitive assets exceed the interest sensitive liabilities by about 30%, leaving SSB vulnerable to losses incurred from falling interest rates. Opportunities and Threats SSB Faces at Year-End 1993
According to the calculated ratios in Table-1, SSB has the following opportunities and threats. Opportunities:
Targeting a more favorable operating efficiency ratio, even allowing the goal to be a long-term goal to be addressed over the next 3 years. Aggressively continue to better net interest margin (NIM). SSB has so far successfully managed interest income and interest expenses, in relation to SSB's total assets, and should continue to pursue that strength from now on. Focus on increasing earnings spread, since it appears that SSB has mastered an effective process of borrowing and lending money. This is a great strength to carry with...