Chapter06_1

Chapter Six

Measuring and Evaluating the Performance of Banks and Their Principal Competitors

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Key Topics•Stock Values and Profitability Ratios •Measuring Credit, Liquidity, and Other

Risks •Measuring Operating Efficiency •Performance of Competing Financial Firms •Size and Location Effects •The Uniform Bank Performance Report

(UBPR) and Comparing Performance

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Value of the Bank’s Stock

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Value of a Bank’s Stock Rises When:

•Expected Dividends Increase•Risk of the Bank Falls•Market Interest Rates Decrease•Combination of Expected Dividend

Increase and Risk Decline

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Value of Bank’s Stock if Earnings Growth is Constant

g -r

D P

1

0

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An investor holds the stock of Foremost Financials and expects to receive a dividend of $5.75 per share at the end of the year. Stock analysts recently predicted that the bank’s dividends will grow at approximately 3 percent a year indefinitely into the future. If this is true, and if the appropriate risk-adjusted cost of capital (discount rate) for the bank is 12.25 percent, what should be the current price per share of Foremost Financials’ stock?

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Po = D1 / (r – g) = $5.75 / (0.1225 -0.03) = $62.16

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Suppose that stockbrokers have projected that Yorktown Savings will pay a dividend of $3 per share on its common stock at the end of the year; a dividend of $4.50 per share is expected for the next year, and $ 5.50 per share in the following two year. The risk-adjusted cost of capital for banks in Yorktown’s risk class is 15 percent. If an investor holding Yorktown’s stock plans to hold that stock for only four years and hopes to sell it at a price of $60 per share, what should the value of the bank’s stock be in today’s market?

McGraw-Hill/IrwinBank Management and Financial Services, 7/e

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Po = 3 / (1 + 0.15) + 4.5 l/(1 + 0.15)2 + 5.5 /(1 + 0.15)3 + 5.5 /(1 + 0.15)4 + 60 /(1 + 0.15)4 = 2.60 + 3.40 + 3.62 + 3.15 + 34.40 = $47.08

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Key Profitability Ratios in Banking

Assets Total

IncomeInterest Net

Assets Total

expense)Interest -

income(Interest

Margin Interest Net

Assets Total

Incomet NoninteresNet

Assets Total

expensest Noninteres-

PLLL-

revenuet Noninteres

Margin t NoninteresNet

Net IncomeReturn on Equity Capital (ROE) =

Total Equity Capital

Net IncomeReturn on Assets (ROA) =

Total Assets

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Key Profitability Ratios in Banking (cont.)

Assets Total

Expenses Operating Total

- Revenues Operating Total

Margin OperatingBank Net

gOutstandin SharesEquity Common

TaxesAfter IncomeNet (EPS) SharePer Earnings

Total Interest Income __ Total Interest ExpenseEarnings Spread = Total Earning Assets Total Interest Bearing Liability

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The following information is for Blue Sky National Bank: Interest income = $2200Interest expense = $1400Total assets = $45,000 Securities losses or gains = $21 Earning assets = $40,000 Total liabilities = $38,000 Taxes paid = $16 Shares of Common Stock outstanding =5,000 Noninterest income = $800 Noninterest expense = $900 Provision for loan losses = $100

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Please calculate:ROE --------------ROANet interest margin --------------Earnings per share --------------Net noninterest margin --------------Net operating margin -------------- 

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ROE = 605 / (45000 – 38000) = 8.64%ROA = 605 / 45000 = 1.3 %Net interest margin =(2200 – 1400) / 40000 = 2%Earning per share = 605 / 5000 = 0.121 per shareNet noninterest margin = (800-100- 900) / 40000 = - 0.5%Net operating margin = (2200 + 800 ) – (1400 + 900 + 100) / 45000 = 1.33%

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Breaking Down ROE

N et P ro fit M arg in =N et In com e/To ta l O p era tin g R even u e

A sse t U tiliza tion =To ta l O p era tin g R even u e /To ta l A sse ts

R O A =N et In com e/To ta l A sse ts

E q u ity M u lt ip lie r =To ta l A sse ts /E q u ity C ap ita l

R O E = N e t In com e/ To ta l E q u ity C ap ita l

x

x

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