bank_management(E)_Chapter2.ppt

1、1/75,Bank ManagementWeek 2 Analyzing Bank Performance,School of Business Central South University,2/75,Analyzing Bank Performance - Using the UBPR(The Uniform Bank Performance Report, 统一银行业务报告),1.Foreword 2.Balance Sheet 3.Income Statement 4.Relationship between Balance Sheet and Income Statement 5.

2、UBPR-Return on Equity Model 6.Banking Risks and Returns 7.CAMELS Ratings 8.Performance Characteristics of Different-sized Banks 9.Financial Statement Manipulation 10.Discuss,3/75,From 1985 to 1990, 1,016 commercial banks failed throughout the USA, a rate of just over 169 bank failure each year. The

3、recent trend had been quite favorable as only 55 banks failed from 1995 to 2004, or over 5 per year.,1.Foreword,4/75,5/75,Questions: Can an objective observer identify problem institutions before they fail? Is it possible to distinguish between strong and weak banks on the basis of reported earnings

4、 and balance sheet figures? How should risk be measured? How can the trade-off between risk and profitability be evaluated?,1.Foreword,6/75,2. Balance Sheet (资产负债表）,It presents financial information comparing what a bank owns with what it owes and the ownership interest of stockholders. Assets = Lia

5、bilities + Equity 资产=负债+股东权益 Balance sheet figures are calculated at a particular point in time and thus represent stock values.,7/75,Balance Sheet (assets): PNC and Community National Bank,8/75,Bank Assets,Cash and due from banks Vault cash (库存现金), deposits held at the Fed and other financial insti

6、tutions, and cash items in the process of collection. Loans The major asset, generate the greatest amount of income, exhibit the highest default risk and some are relatively illiquid. Investment Securities Securities held to earn interest and help meet liquidity needs. Other assets Bank premises and

7、 equipment, other real estate owned, and customers liability to the bank under acceptances(客户向银行承兑的债务),9/75,China Big Four Banks (12/31/2002) v.s. All US Banks (12/31/2002),10/75,PNC Bank (12/31/2000, TA: 63 bn) v.s. Community National Bank (12/31/2000, TA: 0.14bn),11/75,Bank Assets: Loans,Loans are

8、 the major asset in most banks portfolios and generate the greatest amount of income before expenses and taxes. They also exhibit the highest default risk and are relatively illiquid.,12/75,Loans: Categories,Real estate loans Commercial loans Loans to individuals Agricultural loans Other loans and l

9、eases in domestic offices Loans and leases in foreign offices Two adjustments Unearned income（预收收益）; Loan and lease Loss allowance (贷款损失拨备）,13/75,Balance Sheet (assets): PNC and Community National Bank,14/75,PNC and CNB: Loan portfolio (2000.12.31),15/75,PNC and CNB: Loan portfolio,16/75,某银行主营业务,17/

10、75,18/75,19/75,Bank Assets: Investment securities,Investment securities are held to earn interest help meet liquidity needs speculate on interest rate movements Meet pledging(保证) requirements serve as part of a banks dealer (经销商) functions. The administration and transaction costs are extremely low.

11、,20/75,Bank Assets: Investment securities,Short-term investments U.S. Treasury and Agency securities municipal securities Foreign debt securities Long-term investment: notes and bonds Treasury securities and obligations of federal agencies (国债和联邦机构负债） Mortgage-backed securities and foreign and corpo

12、rate bonds municipal securities Other: securities purchased under agreement to resell (repurchased agreements, RPs) 回购协议 Federal funds sold,21/75,Bank Assets: Non-interest cash and due from banks,It consists of vault cash (库存现金) deposits held at Federal Reserve Banks deposits held at other financial

13、 institutions cash items in the process of collection(CIPC) These assets are held to meet customer withdrawal needs meet legal reserve requirements 10% assist in check clearing （票据结算） and wire transfers effect the purchase and sale of Treasury securities,22/75,Bank Assets: Other assets,Other assets

14、are residual assets（剩余资产） of relatively small magnitudes such as bankers acceptances（银行承兑） the depreciated value of bank premises（房地等） and equipment other real estate owned and other smaller amounts Investment in unconsolidated subsidiaries (关联公司投资）,23/75,Balance Sheet (assets): PNC and Community Na

15、tional Bank,24/75,Bank Liabilities,The characteristics of various debt instruments differ in terms of check-writing capabilities interest paid maturity whether they carry FDIC insurance whether they can be traded in the secondary market,25/75,Balance Sheet (liabilities): PNC and Community National B

16、ank,26/75,Bank liabilities: Deposits,Demand deposits transactions accounts that pay no interest Negotiable orders of withdrawal (NOWs) and automatic transfers from savings (ATS) accounts (带息活期存款账户） pay interest set by each bank without federal restrictions Money market deposit accounts (MMDAs) pay m

17、arket rates, but a customer is limited to no more than six checks or automatic transfers each month,27/75,Bank liabilities: Deposits,Savings and time deposits represent the bulk of interest-bearing liabilities at banks. Two general time deposits categories exist: Time deposits of $100,000 or more ar

18、e labeled jumbo certificates of deposit (CDs). Small CDs, considered core deposits which tend to be stable deposits that are typically not withdrawn over short period of time. Deposits held in foreign offices balances issued by a bank subsidiary located outside the U.S. nonfinancial corporations eng

19、aged in international trade and governmental units own most of these deposits.,28/75,Capital: Subordinated notes and debentures Notes and bonds with maturities in excess of one year. Long-term uninsured debt. Most meet requirements as bank capital for regulatory purposes. Unlike deposits, the debt i

20、s not federally insured and claims of bondholders are subordinated to claims of depositors.,29/75,Deposit interest rate:Big banks v.s. Small banks,30/75,Core deposits,Core deposits are stable deposits that are not highly interest rate-sensitive. Core deposits are more sensitive to the fees charged,

21、services rendered, and location of the bank. Core deposits include: demand deposits, NOW accounts, MMDAs, and small time deposits.,31/75,Borrowings (volatile funds),Large, or volatile, borrowings are liabilities that are highly rate-sensitive. Normally issued in uninsured denominations. Their abilit

22、y to borrow is sensitive to the markets perception of their asset quality. Volatile liabilities or net non-core liabilities include: large CDs (over 100,000) deposits in foreign offices federal funds purchased repurchase agreements other borrowings with maturities less than one year,32/75,把银行存款总额划分为

23、长期稳定部分和短期波动部分两部分,长期稳定部分称为核心存款（Core Deposits）；其余部分则称为波动存款(Volatile Deposits)。,33/75,Balance Sheet (liabilities): PNC and Community National Bank,34/75,Capital: Stockholders equity,Ownership interest in the bank. Common and preferred stock are listed at their par values Surplus account (公积金账户） represe

24、nts the amount of proceeds received by the bank in excess of par when it issued the stock.,35/75,Balance Sheet (liabilities): PNC and Community National Bank,36/75,3. Income Statement (损益表）,It is a financial statement showing a summary of a firms financial operations for a specific period A banks in

25、come statement reflects the financial nature of banking, as interest on loans and investments represents the bulk of revenue. Net interest income made up approximately 77 percent of net revenue at a bank in 1981, but only about 58 percent of total net revenue at the end of 2001.,37/75,The Income sta

26、tement,+Interest income (II) -Interest expense (IE) =Net interest Income (NII) +Noninterest income (OI) -Noninterest expense (OE) -Provisions for Loan-loss (PLL) =Operating income before securities transactions and taxes +(-)Realized gains or losses =Pretax net operating income -Taxes =Net income,Bu

27、rden=OE-OI,38/75,39/75,Interest income,is the sum of interest and fees earned on all of a banks assets. Interest income includes interest from: Loans Deposits held at other institutions Municipal and taxable securities Trading account securities,40/75,Interest expense,. Is the sum of interest paid o

28、n all interest-bearing liabilities . It includes interest paid to transactions accounts (NOW, ATS, and MMDA) time and savings deposits short-term non- core liabilities long-term debt Gross interest income minus gross interest expense is net interest income (NII) NII=II-IE The figure (NII) is importa

29、nt because its variation over time indicates how well management is controlling interest rate risk,41/75,Noninterest income,Trust or fiduciary(信托的) income reflects what a bank earns from operating a trust department Fees and deposit service charges reflect charges on checking account activity, safe-

30、deposit boxes, and many other transactions. Trading revenues reflect commissions and profits or gains from operating a trading account Other foreign transactions reflect gains and losses on all foreign transactions Other non-interest income,42/75,Noninterest expense （overhead cost),Personnel expense

31、 Salaries and fringe benefits(附加福利) paid to bank employees Occupancy expense Rent and depreciation on equipment and premises Other operating expenses Technology expenditures Utilities Deposit insurance premiums Noninterest expense far exceeds noninterest income at most bank, hence the label burden,4

32、3/75,Provision for loan and lease losses (PLL),Represent managements estimate of potential lost revenue from bad loans. It is a noncash expense, but indicates managements perception of the quality of a banks loans. Charge-offs indicate loans that a bank formally recognizes as un-collectable and char

33、ges-off against the loss reserve.,Expenses and loan losses directly affect the balance sheet. The greater the size of loan portfolio, the greater is operating overhead and PLL. Consumer loans are usually smaller and hence more costly (non-interest) per dollar of loans.,45/75,Realized securities gain

34、s (or losses),They arise when a bank sells securities from its investment portfolio at prices above (or below) the initial or amortized cost (摊销成本） to the bank. Held-to-maturity securities Available-for-sale securities,Income statement (interest): PNC and Community National Bank,Income statement (no

35、ninterest): PNC and Community National Bank,48/75,Income statement: PNC &CNB, 2000,+Interest income (II)72% & 92% -Interest expense (IE) 38% & 27% =Net interest Income (NII) +Noninterest income (OI)28% & 8% -Noninterest expense (OE)35% & 46% -Loan-loss provisions (PLL) 2.1% & 1.7% =Operating income

36、before securities transactions and taxes +(-)Realized gains or losses 0.3% & 0% =Pretax net operating income -Taxes8.5% & 8.6% =Net income 16.3% & 16.0%,49/75,Income statement: PNC &CNB, 2004,+Interest income (II)53.6% & 84.1% -Interest expense (IE) 15.4% & 12.8% =Net interest Income (NII) +Noninter

37、est income (OI)45.4% & 15.9% -Noninterest expense (OE)56.8% & 65.7% -Loan-loss provisions (PLL) 1.1% & 5.1% =Operating income before securities transactions and taxes +(-)Realized gains or losses 1.1% & 0% =Pretax net operating income -Taxes8.% & 5.7% =Net income 18.7% & 10.7%,50/75,4. Relationship

38、between balance sheet and income statement,Total revenue (total operating income): Total interest income +noninterest income + realized securities gains (losses) Total operating expense: Interest expenses+ noninterest expense +provisions for loan losses NI=NII-Burden-PLL+SG-T NI: net income NII: net

39、 interest income Burden: noninterest expense- noninterest income,51/75,The composition of assets and liabilities and the relationships between different interest rates determine net interest income. The mix of deposits between consumer and commercial customers affects the services provided and the m

40、agnitude of non-interest income and non-interest expense. E.g. Case of retail and wholesale banks The ownership of non-bank subsidiaries increases fee income but often raises non-interest expense.,52/75,5. UBPR - The Return on equity model,The Uniform Bank Performance Report: FDIC for bank superviso

41、ry purposes Profitability and risk information for evaluating banks performance Year-end report: five-year period non-year-end: current quarter, one year prior to the current quarter, three latest year-end period Three basic types of data: bank-level ratios and dollar values, peer group averages and

42、 bank percentile ranks Example: PNC bank page 101-119,INCOME,Return to the Bank ROA = NI / TA,EXPENSES,Rate,Composition (mix),Volume,Interest,Overhead,Prov. for LL,Taxes,Fees and Serv Charge,Trust,Other,Rate,Composition (mix),Volume,Interest,Non Interest,Salaries and Benefits,Occupancy,Other,Bank Pe

43、rformance Model,Returns to Shareholders ROE = NI / TE,Degree of Leverage EM = 1 / (TA / TE),54/75,The Return on equity model ( the basic measure of stockholders returns,ROE = NI / TE ROE is composed of two parts: Return on Assets (ROA = NI / TA) represents the returns to the assets the bank has inve

44、sted in. Equity Multiplier (乘数) (EM = TA / TE) the degree of financial leverage employed by the bank.,55/75,Return on assets (ROA = NI / TA)can be decomposed into two parts: Asset utilization (AU) income generation Expense ratio (ER) expense control,ROA= AU ER TAX = (TR / TA) (TE / TA) (Taxes/TA) TR

45、 = total revenue or total operating income = Int. inc.(II) + non-int. inc.(OI) + SG(L) TE = total expenses = Int. exp.(IE) + non-int. exp.(OE) + PLL + Taxes,56/75,Asset utilization (AU = TR / TA) the ability to generate income.,Interest Income / TA Asset yields (rate) Interest income asset (i) / $ a

46、mount of asset (i) Composition of assets (mix) $ amount asset (i) / TA Volume of Earning Assets Earning assets / TA Non interest income / TA Fees and Service Charges Securities Gains (Losses) Other income,57/75,Expense ratio (ER = Exp / TA) the ability to control expenses.,Interest expense / TA Cost

47、 per liability (rate) Int. exp. liab. (j) / $ amt. liab. (j) Composition of liabilities $ amt. of liab. (j) / TA Volume of debt and equity Non-interest expenses / TA Salaries and employee benefits / TA Occupancy expenses / TA Other operating expense / TA Provisions for loan losses / TA Taxes / TA,58

48、/75,Other aggregate profitability measures,Net interest margin NIM = NII / earning assets (EA) Spread (利差) Spread = (interest income / EA) - (int exp / int-bear. Liab.) Earnings base EB = EA / TA (average earning assets)/ aTA Burden / TA (Noninterest exp. - Noninterest income) / TA Efficiency ratio

49、Non int. Exp. / (Net int. Inc. + Non int. Inc.),59/75,Financial ratiosPNC, 2000,60/75,6. Banking Risks and Returns,Profitability, liquidity, and solvency trade-off The fundamental objective of bank management is to maximize shareholders wealth, i.e., to maximize the market value of the banks common

50、stock. Wealth maximization requires the manager to evaluate and balance the trade-offs between the opportunity for higher returns, the probability of not realizing those returns, and the possibility that the bank might fail. Risk management is the process by which managers identify, assess, monitor,

51、 and control risks associated with a financial institutions activities.,61/75,Fundamental risks,Credit risk Liquidity risk Market risk Operational risk Reputation risk Legal risk Capital or solvency risk,62/75,Credit risk,The potential variation in net income and market value of equity resulting fro

52、m nonpayment or delayed payment. Three basic questions need to be asked: What is the historical loss rate on loans and investments? What are expected losses in the future? How is the bank prepared to weather the losses? A large allowance may indicate both good and bad performance. Three other source

53、s of credit risk Lack of diversification High loan growth Country risk,63/75,Liquidity risk,the variation in net income and market value of equity caused by a banks difficulty in obtaining cash at a reasonable cost from either the sale of assets or new borrowings. Liquidity risk measures indicate bo

54、th the banks ability to cheaply and easily borrow funds and the quantity of liquid assets near maturity or available-for-sale at reasonable prices. Banks can acquire liquidity in two distinct ways: By liquidation of assets Composition of investments Maturity of investments By borrowing Core deposits

55、 Volatile deposits,64/75,Market risk,is the current and potential risk to a financial institutions condition resulting from adverse movements in interest rates, foreign exchange rates, and equity and security prices. Market risk arises from changes in: Interest rates funding GAP duration GAP Foreign

56、 exchange rates Equity and security prices.,65/75,Operational risk,The Basel Committee defines: The risk of loss resulting from inadequate or failed internal processes, people, and system, or from external events A new focus of the Basel II Accord is operational risk,refers to the possibility that o

57、perating expenses might vary significantly from what is expected, producing a decline in net income and from value.,66/75,Operational risk,Typical ratios focus on: assets per employee personnel expense per employee loans per employee net income per employee There is no meaningful way to estimate the

58、 likelihood of fraud or other contingencies from published data A banks operating risk is closely related to its operating policies and processes and whether is has adequate controls,67/75,Reputation risk,Reputation risk is the risk that negative publicity, either true or untrue,adversely affects a

59、banks customer base or brings forth costly litigation（起诉）, hence negatively affecting profitability.,68/75,Legal risk,the risk that unenforceable(不可实施的) contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations, profitability,condition, or solvency(偿付能力) of banking organization,69/75,Capital risk, closely tied to asset quality and a banks overall risk profile It represents the summary of all listed risks. The more risk taken, the greater is the amount of capital requi