商业银行学答案第八版罗斯（英语）

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CHAPTER6

MEASURINGANDEVALUATINGTHEPERFORMANCEOFBANKSANDTHEIRPRINCIPALCOMPETITORS

GoalofThisChapter:Thepurposeofthischapteristodiscoverwhatanalyticaltoolscanbeappliedtoabank’sfinancialstatementssothatmanagementandthepubliccanidentifythemostcriticalproblemsinsideeachbankanddevelopwaystodealwiththoseproblems

KeyTopicsinthisChapter

StockValuesandProfitabilityRatios

MeasuringCredit,Liquidity,andOtherRisks

MeasuringOperatingEfficiency

PerformanceofCompetingFinancialFirms

SizeandLocationEffects

Appendix:UsingFinancialRatiosandOtherAnalyticalToolstoTrackFinancialFirmPerformance-TheUBPRandBHCPR

ChapterOutline

I.Introduction:

IIEvaluatingPerformance

A.DeterminingLong-RangeObjectives

B.MaximizingtheValueoftheFirm:AKeyObjectiveforNearlyAllFinancial-Service

Institutions

C.ProfitabilityRatios:ASurrogateforStockValues

1.KeyProfitabilityRatios

2.InterpretingProfitabilityRatios

D.UsefulProfitabilityFormulasforBanksandOtherFinancial-ServiceCompanies

E.ReturnonEquityandItsPrincipalComponents

F.TheReturnonAssetsandItsPrincipalComponents

G.WhataBreakdownofProfitabilityMeasuresCanTellUs

H.MeasuringRiskinBankingandFinancialServices

1.CreditRisk

2.LiquidityRisk

3.MarketRisk

4.PriceRisk

5.InterestRateRisk

6.ForeignExchangeandSovereignRisk

7.Off-Balance-SheetRisk

8.Operational(Transactional)Risk

9.LegalandComplianceRisks

10ReputationRisk

11.StrategicRisk

12.CapitalRisk

I.OtherGoalsinBankingandFinancial-ServicesManagement

III.PerformanceIndicatorsamongBanking’sKeyCompetitors

IV.TheImpactofSizeonPerformance

A.Size,LocationandRegulatoryBiasinAnalyzingthePerformanceofBanksand

CompetingFinancialInstitutions

V.SummaryoftheChapter

AppendixtotheChapter-UsingFinancialRatiosandOtherAnalyticalToolstoTrackFinancial-FirmPerformance-TheUBPRandBHCPR

ConceptChecks

6-1. Whyshouldbanksandothercorporatefinancialfirmsbeconcernedabouttheirlevelofprofitabilityandexposuretorisk?

BanksintheU.S.andmostothercountriesareprivatebusinessesthatmustattractcapitalfromthepublictofundtheiroperations.Ifprofitsareinadequateorifriskisexcessive,theywillhavegreaterdifficultyinobtainingcapitalandtheirfundingcostswillgrow,erodingprofitability.Bankstockholders,depositors,andbankexaminersrepresentingtheregulatorycommunityareallinterestedinthequalityofbankperformance.Thestockholdersareprimarilyconcernedwithprofitabilityasakeyfactorindeterminingtheirtotalreturnfromholdingbankstock,whiledepositors(especiallylargecorporatedepositors)andexaminerstypicallyfocusonbankriskexposure.

6-2. Whatindividualsorgroupsarelikelytobeinterestedinthesedimensionsofperformanceforafinancialinstitution?

Theindividualsorgroupslikelytobeinterestedinthedimensionsi.e.,BankprofitabilityandRiskare–Otherbankslendingtoaparticularbank,borrowers,largedepositors,holdersoflong-termdebtcapitalissuedbybanks,bankstockholders,andtheregulatorycommunity.

6-3. Whatfactorsinfluencethestockpriceofafinancial-servicescorporation?

Abank'sstockpriceisaffectedbyallthosefactorsaffectingitsprofitabilityandriskexposure,particularlyitsrateofreturnonequitycapitalandrisktoshareholderearnings.Researchevidenceovertheyearshasfoundthatthestockpricesoffinancialinstitutionsissensitivetochangesinmarketinterestrates,currencyexchangerates,andthestrengthorweaknessoftheeconomy.Abankcanraiseitsstockpricebycreatinganexpectationinthemindsofinvestorsofgreaterearningsinthefuture,byloweringthebank'sperceivedriskexposure,orbyacombinationofincreasesinexpectedearningsandreducedrisk.

6-4. Supposethatabankisexpectedtopayanannualdividendof$4pershareonitsstockinthecurrentperiodanddividendsareexpectedtogrow5percentayeareveryyear,andtheminimumrequiredreturn-to-equitycapitalbasedonthebank'sperceivedlevelofriskis10percent.Canyouestimatethecurrentvalueofthebank'sstock?

Inthisconstantdividendgrowthrateproblemthecurrentvalueofthebank'sstockwouldbe:

Po=D1/(r–g)=$4/(0.10–0.05)=$80.

6-5. Whatisreturnonequitycapital,andwhataspectofperformanceisitsupposedtomeasure?Canyouseehowthisperformancemeasuremightbeusefultothemanagersoffinancialfirms?

ReturnonequitycapitalistheratioofNetIncome/TotalEquityCapital.Itrepresentstherateofreturnearnedonthefundsinvestedinthebankbyitsstockholders.Financialfirmshavestockholders,whotooareinterestedinthereturnonthefundsthattheyinvested.

6-6 Supposeabankreportsthatitsnetincomeforthecurrentyearis$51million,itsassetstotal$1,144million,anditsliabilitiesamountto$926million.Whatisitsreturnonequitycapital?IstheROEyouhavecalculatedgoodorbad?Whatinformationdoyouneedtoanswerthislastquestion?

Thebank'sreturnonequitycapitalshouldbe:

ROE=

NetIncome

=

$51million

=0.234or23.39percent

TotalequityCapital

$1,144mill.-$926mill.

Inordertoevaluatetheperformanceofthebank,youhavetocomparetheROEtotheROEofsomemajorcompetitorsorsomeindustryaverage.

6-7 Whatisthereturnonassets(ROA),andwhyisitimportant?MighttheROAmeasurebeimportanttobanking’skeycompetitors?

ReturnonassetsistheratioofNetIncome/TotalAssets.Therateofreturnsecuredonabank'stotalassetsindicatestheefficiencyofitsmanagementingeneratingnetincomefromalloftheresources(assets)committedtotheinstitution.Thiswouldbeimportanttobanksandtheirmajorcompetitors.

6-8. Abankestimatesthatitstotalrevenueswillamountto$155millionanditstotalexpenses(includingtaxes)willequal$107millionthisyear.Itsliabilitiestotal$4,960millionwhileitsequitycapitalamountsto$52million.Whatisthebank'sreturnonassets?IsthisROAhighorlow?Howcouldyoufindout?

Thebank'sreturnonassetswouldbe:

ROA=

NetIncome

=

$155mill.-$107mill.

=0.0096or0.96percent

TotalAssets

$4,960mill.+$52mill.

Thesizeofthisbank'sROAshouldbecomparedwiththeROA'sofotherbankssimilarinsizeandlocationtodetermineifthisbank'sROAishighorlow.

6-9. Whydothemanagersoffinancialfirmsoftenpaycloseattentiontodaytothenetinterestmarginandnoninterestmargin?Totheearningsspread?

Thenetinterestmargin(NIM)indicateshowsuccessfulthebankhasbeeninborrowingfundsfromthecheapestsourcesandinmaintaininganadequatespreadbetweenitsreturnsonloansandsecurityinvestmentsandthecostofitsborrowedfunds.IftheNIMrises,loanandsecurityincomemustberisingortheaveragecostoffundsmustbefallingorboth.AdecliningNIMisundesirablebecausethebank'sinterestspreadisbeingsqueezed,usuallybecauseofrisinginterestcostsondepositsandotherborrowingsandincreasedcompetitiontoday.

Incontrast,thenoninterestmarginreflectsthebanksspreadbetweenitsnoninterestincome(suchasservicefeesondeposits)anditsnoninterestexpenses(especiallysalariesandwagesandoverheadexpenses).Formostbanksthenoninterestmarginisnegative.Managementwillusuallyattempttoexpandfeeincome,whilecontrollingcloselythegrowthofnoninterestexpensesinordertomakeanegativenoninterestmarginlessnegative.

Theearningsspreadmeasurestheeffectivenessofthebank'sintermediationfunctionofborrowingandlendingmoney,which,ofcourse,isthebank'sprimarywayofgeneratingearnings.Ascompetitionincreases,thespreadbetweentheaverageyieldsonassetsandtheaveragecostofliabilitieswillbesqueezed,forcingthebank'smanagementtosearchforalternativesourcesofincome,suchasfeesfromvariousservicesthebankoffers.

6-10. Supposeabankertellsyouthathisbankintheyearjustcompletedhadtotalinterestexpensesonallborrowingsof$12millionandnoninterestexpenseof$5million,whileinterestincomefromearningassetstotaled$16millionandnoninterestrevenuestotaled$2million.Supposefurtherthatassetsamountedto$480million,ofwhichearningassetsrepresented85percentofthattotalwhiletotalinterest-bearingliabilitiesamountedto75percentoftotalassets.Seeifyoucandeterminethisbank'snetinterestandnoninterestmarginsanditsearningsbaseandearningsspreadforthemostrecentyear.

Thebank'snetinterestandnoninterestmarginsmustbe:

NetInterest

=

$16mill.-$12mill.

Noninterest

=

$2mill.-$5mill.

Margin

$480mill.

Margin

$480mill.

=0.00833

=-0.00625

Thebank'searningsspreadandearningsbaseare:

Earnings

=

$16mill.

-

$12mill.

Spread

$480mill*0.85

$480mill.*0.75

=0.0392

=0.0333

=

0.0059

EarningsBase

=

$480mill.–($480mill.*0.15)

=

0.85or85percent

$480mill.

6-11. WhataretheprincipalcomponentsofROE,andwhatdoeseachofthesecomponentsmeasure?

TheprincipalcomponentsofROEare:

a.Thenetprofitmarginornetafter-taxincometoTotaloperatingrevenueswhichreflectstheeffectivenessofabank'sexpensecontrolprogramandservicepricingpolicies;

b.ThedegreeofassetutilizationorratioofTotaloperatingrevenuestoTotalassetswhichmeasurestheeffectivenessofmanagingthebank'sportfoliomanagementpolicies,especiallythemixandyieldonassets;and,

c.TheequitymultiplierorratioofTotalassetstoTotalequitycapitalwhichmeasuresabank'suseofleverageinfundingitsoperations:sourceschosentofundthefinancialinstitution(debtorequity).

6-12. SupposeabankhasanROAof0.80percentandanequitymultiplierof12X.WhatisitsROE?Supposethisbank'sROAfallsto0.60percent.WhatsizeequitymultipliermustithavetoholditsROEunchanged?

Thebank'sROEis:

ROE=0.80percent*12=9.60percent.

IfROAfallsto0.60percent,thebank'sROEandequitymultipliercanbedeterminedfrom:

ROE=9.60%=0.60percent*EquityMultiplier

EquityMultiplier=9.60percent=16X.

0.60percent

6-13. Supposeabankreportsnetincomeof$12,pre-taxnetincomeof$15,operatingrevenuesof$100,assetsof$600,and$50inequitycapital.Whatisthebank'sROE?Tax-managementefficiencyindicator?Expensecontrolefficiencyindicator?Assetmanagementefficiencyindicator?Fundsmanagementefficiencyindicator?

Thebank'sROEmustbe:

ROE==0.24or24percent

Itstax-management,expensecontrol,assetmanagement,andfundsmanagementefficiencyindicatorsare:

TaxManagement

=

$12

ExpenseControl

=

$15

Efficiencyindicator

$15

EfficiencyIndicator

$100

=0.8or80percent

=0.15or15percent

AssetManagement

=

$100

FundsManagement

=

$600

EfficiencyIndicator

$600

EfficiencyIndicator

$50

=0.1667or16.67percent

=12x

AlternativeCalculationforROE=0.8×0.15×0.1667×12

=0.24or24%

6-14. WhatarethemostimportantcomponentsofROA,andwhataspectsofafinancialinstitution’sperformancedotheyreflect?

TheprincipalcomponentsofROAare:

a.TotalInterestIncomeLessTotalInterestExpensedividedbyTotalAssets,measuringabank'ssuccessatintermediatingfundsbetweenborrowersandlenders;

b.ProvisionforLoanLossesdividedbyTotalAssetswhichmeasuresmanagement'sabilitytocontrolloanlossesandmanageabank'staxexposure;

c.NoninterestIncomelessNoninterestExpensesdividedbyTotalAssets,whichindicatestheabilityofmanagementtocontrolsalariesandwages,othernoninterestcostsandgeneratetheincome;

d.NetIncomeBeforeTaxesdividedbyTotalAssets,whichmeasuresoperatingefficiencyandexpensecontrol;and

e.ApplicableTaxesdividedbyTotalAssets,whichisanindexoftaxmanagementeffectiveness.

6-15. Ifabankhasanetinterestmarginof2.50%,anoninterestmarginof-1.85%,andaratioofprovisionforloanlosses,taxes,securitygains,andextraordinaryitemsof-0.47%,whatisits

ROA?

Thebank'sROAmustbe:

ROA=Netinterestmargin+Noninterestmargin–Ratioofprovisionforloan losses,taxes,securitygains,andextraordinaryitems

ROA=2.5percent+(-1.85percent)–(-.47percent)=1.12percent

6-16. Towhatdifferentkindsofriskarebanksandtheirfinancial-servicecompetitorssubjectedtoday?

a.CreditRisk-theprobabilitythattheloansandsecuritiesthebankholdswillnotpayoutaspromised.

b.LiquidityRisk-theprobabilitythatthebankwillnothavesufficientcashonhandinthevolumeneededpreciselywhencashdemandsarise.

c.MarketRisk-theprobabilitythatthemarketvalueofassetsheldbythebankwilldeclineduetofallingmarketprices.

d.PriceRisk–theprobabilityorpossibilitythatthevalueofbondportfoliosandstockholders’equitymaydeclineduetomarketpricesmovementagainstthefinancialfirm.

e.Interest-RateRisk-thepossibilityorprobabilitythattheinterestrateswillchange,subjectingthebanktolowerprofitsoralowervalueforthefirm’scapital.

f.ForeignExchangeandSovereignRisk–theuncertaintythatduetofluctuationincurrencyprices,assetsdenominatedinforeigncurrenciesmayfall,forcingthewrittendownoftheseassetsonitsBalanceSheet.

g.Off-Balance-SheetRisk–theprobabilitythatthevolumeofoff-balance-sheetcommitmentsfarexceedsthevolumeofconventionalassets.

h.OperationalRisk–theuncertainlyregardingafinancialfirm’searningsduetofailuresincomputersystems,employeemisconduct,floods,lighteningstrikesandothersimilarevents.

i.LegalandComplianceRisk–theuncertaintyregardingafinancialfirm’searningsduetoactionstakenbyourlegalsystemorduetoaviolationofrulesandregulations.

j.ReputationRisk–theuncertaintyduetopublicopinionorthevariabilityinearningsduetopositiveornegativepublicityaboutthefinancialfirm.

k.StrategicRisk–theuncertaintyinearningsduetoadversebusinessdecisions,lackofresponsivenesstoindustrychangesandotherpoordecisionsbymanagement.

k.CapitalRisk–theriskthatthevalueoftheassetswilldeclinebelowthevalueoftheliabilities.Alloftheotherriskslistedabovecanaffectearningsandthevalueoftheassetsandliabilitiesandthereforecanhaveaneffectonthecapitalpositionofthefirm.

6-17. Whatitemsonabank'sbalancesheetandincomestatementcanbeusedtomeasureitsriskexposure?Towhatotherfinancialinstitutionsdotheseriskmeasuresseemtoapply?

Thereareseveralalternativemeasuresofriskinbankingandfinancialservicefirms.Capitalriskisoftenmeasuredbybankcapitalratios,suchastheratiooftotalcapitaltototalassetsortotalcapitaltoriskassets.Creditriskcanbetrackedbysuchratiosasnetloanlossestototalloansorrelativetototalcapital.Liquidityriskcanbefollowedbyusingsuchratiosascashassetstototalassetsorbytotalloanstototalassets.Interest-rateriskmaybeindicatedbysuchratiosasinterest-sensitiveliabilitiestointerest-sensitiveassetsortheratioofmoney-marketborrowingstomoney-marketassets.

Theseriskmeasuresalsoappliestothosenonbankfinancialinstitutionsthatareprivate,profitmakingcorporations,includingstockholder-ownedthriftinstitutions,insurancecompanies,financeandcredit-cardcompanies,securitybrokeranddealerfirms,andmutualfunds.

6-18. Abankreportsthatthetotalamountofitsnetloansandleasesoutstandingis$936million,itsassetstotal$1,324million,itsequitycapitalamountsto$110million,anditholds$1,150millionindeposits,allexpressedinbookvalue.Theestimatedmarketvaluesofthebank'stotalassetsandequitycapitalare$1,443millionand$130million,respectively.Thebank'sstockiscurrentlyvaluedat$60persharewithannualper-shareearningsof$2.50.Uninsureddepositsamountto$243millionandmoney-marketborrowingstotal$132million,whilenonperformingloanscurrentlyamountto$43millionandthebankjustchargedoff$21millioninloans.Calculateasmanyoftheriskmeasuresasyoucanfromtheforegoingdata.

NetLoansandLeases

=

$936mill.

UninsuredDeposits

=

$243mill.

TotalAssets

$1,324mill.

TotalDeposits

$1,150mill.

=0.7069or70.69percent

=0.2113or21.13percent

EquityCapital

=

$130mill.

StockPrice

=

$60

TotalAssets

$1,443mill.

EarningsPerShare

$2.50

=0.0901or9.01percent

=24X

NonperformingAssets

=

$43mill.

=0.0459or4.59percent

NetLoansandLeases

$936mill.

Charge-offsofloans

=

$21

PurchasedFunds

=

$243mill.+$132mill.

TotalLoansandLeases

$936

TotalLiabilities

$1,324mill.-$110mill.

=0.0224or2.24percent

=0.3089or30.89percent

BookValueofAssets

=

$1324

=0.9175or91.75percent

MarketValueofAssets

$1443

ProblemsandProjects

6-1. AninvestorholdsthestockofForemostFinancialsandexpectstoreceiveadividendof$5.75pershareattheendoftheyear.Stockanalystsrecentlypredictedthatthebank’sdividendswillgrowatapproximately3percentayearindefinitelyintothefuture.Ifthisistrue,andiftheappropriaterisk-adjustedcostofcapital(discountrate)forthebankis12.25percent,whatshouldbethecurrentpricepershareofForemostFinancials’stock?

6-2. SupposethatstockbrokershaveprojectedthatYorktownSavingswillpayadividendof$3pershareonitscommonstockattheendoftheyear;adividendof$4.50pershareisexpectedforthenextyear,and$5.50pershareinthefollowingtwoyear.Therisk-adjustedcostofcapitalforbanksinYorktown’sriskclassis15percent.IfaninvestorholdingYorktown’sstockplanstoholdthatstockforonlyfouryearsandhopestosellitatapriceof$60pershare,whatshouldthevalueofthebank’sstockbeintoday’smarket?

P0=$47.08pershare.

6-3 BluebirdSavingsAssociationhasaratioofequitycapitaltototalassetsof9percent.Incontrast,CardinalSavingsreportsanequity-capital-to-assetratioof7percent.Whatisthevalueoftheequitymultiplierforeachoftheseinstitutions?SupposethatbothinstitutionshaveanROAof0.85percent.Whatmusteachinstitution’sreturnonequitycapitalbe?Whatdoyourcalculationstellyouaboutthebenefitsofhavingaslittleequitycapitalasregulationsorthemarketplacewillallow?

BluebirdSavingsAssociationhasanequity-to-assetratioof9percentwhichmeansitsequitymultipliermustbe:

1/(EquityCapital/Assets)==1/0.09=11.11x

Incontrast,CardinalSavingshasanequitymultiplierof:

1/(EquityCapital/Assets)==14.29x

WithanROAof0.85percentBluebirdSavingsAssociationwouldhaveanROEof:

ROE=0.85x11.11x=9.44percent.

WithanROAof.85percentCardinalSavingswouldhaveanROEof:

ROE=0.85x14.29x=12.14percent

InthiscaseCardinalSavingsismakinggreateruseoffinancialleverageandisgeneratingahigherreturnonequitycapital.

6-4. ThelatestreportofconditionandincomeandexpensestatementforHappyMerchantsNationalBankareasshowninthefollowingtables:

HappyMerchantsNationalBank

IncomeandExpenseStatement(ReportofIncome)

Interestandfeesonloans

$44

Interestanddividendsonsecurities

6

Totalinterestincome

50

Interestpaidondeposits

32

Interestonnondepositborrowings

6

Totalinterestexpense

38

Netinterestincome

12

Provisionforloanlosses

1

Noninterestincomeandfees

16

Noninterestexpenses:

Salariesandemployeebenefits

10*

Overheadexpenses

5

Othernoninterestexpenses

2

Totalnoninterestexpenses

17

Netnoninterestincome

-1

Pretaxoperatingincome

10

Securitiesgains(orlosses)

2

Pretaxnetoperatingincome

12

Taxes

2

Netoperatingincome

10

Netextraordinaryincome

-1

Netincome

9

*Note:thebankcurrentlyhas40FTEemployees.

HappyMerchantsNationalBank

ReportofCondition

Assets

Liabilities

Cashanddepositsduefrombanks

$100

Demanddeposits

$190

Investmentsecurities

150

Savingsdeposits

180

Federalfundssold

10

Timedeposits

470

Netloans

670

Federalfundspurchased

60

(Allowanceforloanlosses=25)

Totalliabilities

900

(Unearnedincomeonloans=5)

Equitycapital

Plantandequipment

50

Commonstock

20

Surplus

25

Totalassets

980

Retainedearnings

35

TotalCapital

80

TotalEarningsAssets

830

Interest-bearingdeposits

650

Fillinthemissingitemsontheincomeandexpensestatement.Usingthesestatements,calculatethefollowingperformancemeasures:

ROEAssetutilization

ROAEquitymultiplier

NetinterestmarginTaxmanagementefficiency

NetnoninterestmarginExpensecontrolefficiency

NetoperatingmarginAssetmanagementefficiency

EarningsspreadFundsmanagementefficiency

NetprofitmarginOperatingefficiencyratio

WhatstrengthsandweaknessesareyouabletodetectinHappyMerchants’performance?

Strengths

ROE:Positivevalue,reflectsahighrateofreturnflowingtoshareholders.

Netnoninterestmargin:Negativevalue(-.10%),reflectsthatnetnoninterestincomeisinlinewithnoninterestcost.

Netprofitmargin:Positivevaluereflectseffectivenessofmanagementincostcontrollingandservicepricingpolicies.

Assetutilization:Positivevaluereflectsagoodportfoliomanagementpoliciesandyieldonassets.

Equitymultiplier:Positivevaluereflectsefficientfinancialpolicies.

Expensecontrolefficiency,assetmanagementefficiencyratio,fundsmanagementefficiencyratio,Operatingefficiencyratioalsoreflectsahighoperatingefficiencyandexpensecontrol.

Tax-managementefficiencyratio:Positiveratioreflectingtheuseofsecuritygainsorlossesandothertax-managementtools(suchasbuyingtax-exemptbonds)tominimizetaxexposureetc.

Weaknesses

ROA:Positivevalue(0.92%),reflectsmanagerialefficiencyandhowsuccessfulmanagementhasbeeninconvertingassetsintonetearnings.Sincethepositivevalueisonly0.92%itactsasaweaknessfortheHappyMerchantsNationalBank.

Netinterestmargin:Positivevalue(1.22%),reflectsthatmanagementisnotsuccessfulinachievingclosecontroloverearningassetsandinutilizingthecheapestsourcesoffunding.Sincethepositivevalueisonly1.22%itactsasaweaknessfortheHappyMerchantsNationalBank.

Earningsspread:Positivevalue(.67%),reflectsahighcompetition,forcingmanagementtotryandfindotherwaystomakeupforanerodingearningsspread.

6-5. ThefollowinginformationisforBlueSkyNationalBank:

Interestincome

$2,200

Interestexpense

$1,400

Totalassets

$45,000

Securitieslossesorgains

$21

Earningassets

$40,000

Totalliabilities

$38,000

Taxespaid

$16

SharesofCommonStockoutstanding

5,000

Noninterestincome

$800

Noninterestexpense

$900

Provisionforloanlosses

$100

Pleasecalculate:

ROE--------------

ROA

Netinterestmargin--------------

Earningspershare--------------

Netnoninterestmargin--------------

Netoperatingmargin--------------

ROE

=

$605

ROA

=

$605

$45,000-$38,000

$45,000

=0.0864or8.64percent

=0.0134or1.34percent

NetInterest

=

$2,200-$1400

=

$800

=0.02or2percent

Margin

$40,000

$40,000

Earnings

=

$605

=$.121pershare

PerShare

5,000

NetNoninterest

=

$800-$900

=

-$100

=-0.0025or-0.25percent

Margin

$40,000

$40,000

NetOperating

=

($2,200+$800)–($1,400+$900+$100)

=

$600

=0.0133or1.33percent

Margin

$45,000

$45,000

AlternativeScenarioa:

Supposeinterestincome,interestexpenses,noninterestincome,andnoninterestexpenseseachincreaseby5percent,withallotherrevenueandexpenseitemsshownintheprecedingtableremainunchanged.WhatwillhappentoBlueSky’sROE,ROA,andearningspershare?.

Interestincome

$2,310

Interestexpense

$1,470

Totalassets

$45,000

Securitieslossesorgains

$21

Earningassets

$40,000

Totalliabilities

$38,000

Taxespaid

$16

SharesofCommonStockoutstanding

5,000

Noninterestincome

$840

Noninterestexpense

$945

Provisionforloanlosses

$100

ROE

=

$640

ROA

=

$640

$45,000-$38,000

$45,000

=0.0914or9.14percent

=0.0142or1.42percent

NetInterest

=

$2310-$1470

=

$840

=0.021or2.10percent

Margin

$40,000

$40,000

Earnings

=

$640

=$.128pershare

PerShare

5,000

NetNoninterest

=

$840-$945

=

-$105

=-0.00263or-.26percent

Margin

$40,000

$40,000

NetOperating

=

($2310+$840)–($1,470+$945+$100)

=

$635

=0.0141or1.41percent

Margin

$45,000

$45,000

AlternativeScenariob:

Ontheotherhand,supposeBlueSky’sinterestincomeandinterestexpensesaswellasitsnoninterestincomeandexpensesdeclineby5percent,againwithallotherfactorsheldconstant.Howwouldthebank’sROE,ROA,andper-shareearningschange?

Interestincome

$2,090

Interestexpense

$1,330

Totalassets

$45,000

Securitieslossesorgains

$21

Earningassets

$40,000

Totalliabilities

$38,000

Taxespaid

$16

Sharesofcommonstockoutstanding

5,000

Noninterestincome

$760

Noninterestexpense

$855

Provisionforloanlosses

$100

ROE

=

$570

ROA

=

$570

$45,000-$38,000

$45,000

=0.0814or8.14percent

=0.012667or1.27percent

NetInterest

=

$2090-$1330

=

$760

=0.019or1.90percent

Margin

$40,000

$40,000

EarningsPerShare

=

$570

=$.114pershare

5000

NetNoninterest

=

$760-$855

=

-$95

=-0.00238or-.24percent

Margin

$40,000

$40,000

NetOperating

=

($2090+$760)–($1,330+$855+$100)

=

$565

=0.0126or1.26percent

Margin

$45,000

$45,000

6-6.WashingtonGroupholdstotalassetsof$12billionandequitycapitalof$1.2billionandhasjustpostedanROAof1.10percent.Whatisthefinancialfirm’sROE?

ROE=ROA*=0.011*($12/1.2)==0.11or11%

AlternativeScenarioa:

SupposeWashingtonGroupfindsitsROAclimbingby50percent,withassetsandequitycapitalunchanged.WhatwillhappentoitsROE?Why?

R0Aincreasesby50%,wi