商业银行管理ROSEe课后答案chapter.docx

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商业银行管理ROSEe课后答案chapter

CHAPTER6

MEASURINGANDEVALUATINGTHEPERFORMANCEOFBANKSANDTHEIRPRINCIPALCOMPETITORS

GoalofThisChapter:

Thepurposeofthischapteristodiscoverwhatanalyticaltoolscanbeappliedtoabank’sfinancialstatementssothatmanagementandthepubliccanidentifythemostcriticalproblemsinsideeachbankanddevelopwaystodealwiththoseproblems

KeyTopicsinThisChapter

∙StockValuesandProfitabilityRatios

∙MeasuringCredit,Liquidity,andOtherRisks

∙MeasuringOperatingEfficiency

∙PerformanceofCompetingFinancialFirms

∙SizeandLocationEffects

∙TheUBPRandComparingPerformance

ChapterOutline

I.Introduction:

II.EvaluatingaBank'sPerformance

A.DeterminingLong-RangeObjectives

B.MaximizingTheValueoftheFirm:

AKeyObjectiveforNearlyAllFinancial-ServiceInstitutions

C.ProfitabilityRatios:

ASurrogateforStockValues

1.KeyProfitabilityRatios

2.InterpretingProfitabilityRatios

D.UsefulProfitabilityFormulasforBanksandOtherFinancialServiceCompanies

E.BreakingDownEquityReturnsforCloserAnalysis

F.Break-DownAnalysisoftheReturnonAssets

G.WhataBreakdownofProfitabilityMeasuresCanTellUs

H.MeasuringRiskinBankingandFinancialServices

1.CreditRisk

2.LiquidityRisk

3.MarketRisk

4.Interest-RateRisk

5.OperationalRisk

6.LegalandComplianceRisk

7.ReputationRisk

8.StrategicRisk

9.CapitalRisk

I.OtherGoalsinBankingandFinancialServicesManagement

III.PerformanceIndicatorsamongBanking’sKeyCompetitors

IV.TheImpactofSizeonPerformance

A.Size,LocationandRegulatoryBiasinAnalyzingThePerformanceofBanksandCompetingFinancialInstitutions

B.UsingFinancialRatiosandOtherAnalyticalToolstoTrackBankPerformance--TheUBPR.

V.SummaryoftheChapter

AppendixtotheChapter-ImprovingthePerformanceofFinancialFirmsThroughKnowledge:

SourcesofInformationontheFinancial-ServicesIndustry

ConceptChecks

6-1.Whyshouldbanksandothercorporatefinancialfirmsbeconcernedabouttheirlevelofprofitabilityandexposuretorisk?

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

6-2.Whatindividualsorgroupsarelikelytobeinterestedinthesedimensionsofperformanceforabankorotherfinancialinstitution?

Theindividualsorgroupslikelytobeinterestedinbankprofitabilityandriskincludeotherbankslendingtoaparticularbank,borrowers,largedepositors,holdersoflong-termdebtcapitalissuedbybanks,bankstockholders,andtheregulatorycommunity.

6-3.Whatfactorsinfluencethestockpriceofafinancial-servicescorporation?

Abank'sstockpriceisaffectedbyallthosefactorsaffectingitsprofitabilityandriskexposure,particularlyitsrateofreturnonequitycapitalandrisktoshareholderearnings.Abankcanraiseitsstockpricebycreatinganexpectationinthemindsofinvestorsofgreaterearningsinthefuture,byloweringthebank'sperceivedriskexposure,orbyacombinationofincreasesinexpectedearningsandreducedrisk.

6-4.Supposethatabankisexpectedtopayanannualdividendof$4pershareonitsstockinthecurrentperiodanddividendsareexpectedtogrow5percentayeareveryyear,andtheminimumrequiredreturntoequitycapitalbasedonthebank'sperceivedlevelofriskis10percent.Canyouestimatethecurrentvalueofthebank'sstock?

Inthisconstantdividendgrowthrateproblemthecurrentvalueofthebank'sstockwouldbe:

Po=D1/（k–g）=$4/（0.10–0.05）=$80.

6-5.Whatisreturnonequitycapitalandwhataspectofperformanceisitsupposedtomeasure?

Canyouseehowthisperformancemeasuremightbeusefultothemanagersoffinancialfirms?

ReturnonequitycapitalistheratioofNetIncome/TotalEquityCapital.Itrepresentstherateofreturnearnedonthefundsinvestedinthebankbyitsstockholders.Financialfirmshavestockholders,toowhoareinterestedinthereturnonthefundsthattheyinvested.

6-6Supposeabankreportsthatitsnetincomeforthecurrentyearis$51million,itsassetstotally$1,144million,anditsliabilitiesamountto$926million.Whatisitsreturnonequitycapital?

IstheROEyouhavecalculatedgoodorbad?

Whatinformationdoyouneedtoanswerthislastquestion?

Thebank'sreturnonequitycapitalshouldbe:

ROE=

NetIncome

=

$51million

=.098or9.8percent

EquityCapital

$1,444mill.-$926mill.

Inordertoevaluatetheperformanceofthebank,youhavetocomparetheROEtotheROEofsomemajorcompetitorsorsomeindustryaverage.

6-7Whatisthereturnonassets（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'sROAishighorlowrelativetotheaveragefor

comparablebanks.

6-9.Whydothemanagersoffinancialfirmsoftenpaycloseattentiontodaytothenetinterestmarginandnoninterestmargin?

Totheearningsspread?

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

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$16millionandnoninterestrevenuesaddedtoatotalof$2million.Supposefurtherthatassetsamountedto$480millionofwhichearningassetsrepresented85percentoftotalassets,whiletotalinterest-bearingliabilitiesamountedto75percentoftotalassets.Seeifyoucandeterminethisbank'snetinterestandnoninterestmarginsanditsearningsbaseandearningsspreadforthemostrecentyear.

Thebank'snetinterestandnoninterestmarginsmustbe:

NetInterest

=

$16mill.-$12mill.

Noninterest

=

$2mill.-$5mill.

Margin

$480mill.

Margin

$480mill.

=.00833

=-.00625

Thebank'searningsspreadandearningsbaseare:

Earnings

=

$16mill.

-

$12mill.

Spread

$480mill*0.85

$480mill.*0.75

=.0392

=.0333

EarningsBase

=

$480mill.-$480mill.*0.15

=

0.85or85percent

$480mill.

6-11.WhataretheprincipalcomponentsofROEandwhatdoeachofthesecomponentsmeasure?

TheprincipalcomponentsofROEare:

a.Thenetprofitmarginornetafter-taxincometooperatingrevenueswhichreflectstheeffectivenessofabank'sexpensecontrolprogram;

b.Thedegreeofassetutilizationorratioofoperatingrevenuestototalassetswhichmeasurestheeffectivenessofmanagingthebank'sassets,especiallytheloanportfolio;and,

c.Theequitymultiplierorratiooftotalassetstototalequitycapitalwhichmeasuresabank'suseofleverageinfundingitsoperations.

6-12.SupposeabankhasanROAof0.80percentandanequitymultiplierof12x.WhatisitsROE?

Supposethisbank'sROAfallsto0.60percent.WhatsizeequitymultipliermustithavetoholditsROEunchanged?

Thebank