some more ratio.pptx

Profitability of Banks

Asset & Liability for bank is defined as:Major Asset:Loans to individuals, business and other organizationsThe securities that it holdsMajor Liability:DepositsMoney that it borrows, either from other banks or by selling commercial paper in the money market

Asset & LiabilityInterest and fees on loans is traditionally the major source of income for commercial banks.Interest paid on deposits is one of the largest expense items. Both of the above follow market rates of interest.Net interest income represents the difference between gross interest income and gross interest expenseBank EarningsNoninterest income includes fees and service charges. This source of revenue has grown significantly in importance.Non interest expense includes salary expenditures.These expenses have also grown in recent yearsBank Earnings: Non InterestTrends in profitability can be assessed by examining Return on Assets(ROA) over time.Another measure of profitability is Return on Equity.Other measures that are widely used are Risk Adjusted Return on Capital (RAROC) and Economic Profit (Economic Value Added).

Bank PerformanceReturn on Asset = (Free income + Net interest income operating cost)/ Average total assetsOrReturn on Asset = Net income/Average total assetIt tells that what an bank is earning on its total asset.

Return on Asset (ROA)Net Interest Income = Interest Received on Assets-Interest Paid on LiabilitiesOrNet Interest income =Interest Earned on Securities & Loans- Interest Paid on Deposits and BorrowingsHigh net interest income and margin indicates a well managed bank and also indicates future profitability.

Net Interest IncomeNet interest income depends partly on theinterest rate spreadInterest Rate Spread =Average Interest Rate Received on Assets Average Interest Rate Paid on LiabilitiesInterest rate spread is difference between the average yield a financial institution receives from loans and other interest-accruing activities and the average rate it pays on deposits and borrowings.Greater the interest rate the more profitable the bank will be.

Interest Rate SpreadIt shows how well the bank is earning income on its assets. Net Interest Margin = Net Interest Income / Average total assetsWhere, Average Total Assets=(Total Assets at End of Fiscal Year +Total Assets at Start of Fiscal Year)/2Net Interest MarginROE=Return on AssetsxLeverage RatioOrROE= Net Income/Bank capitalWhere, Leverage Ratio = Bank assets/ Bank capital

Return on Equity(ROE)The Return on equity is what the bank's owners are primarily interest in because that is the return that they earn on their investment.When a bank increases its liabilities to pay for assets, it is using leverage otherwise a bank's profit would be limited by the fees that it can charge and its interest rate spread.Interest rate spreads are not wide and so a bank can only earn more net interest income by increasing the number of loans that it makes compared with the amount of its bank capital which it does by using leverage.

Return on Equity(ROE)It decomposes cost management and revenue management into narrower categories of cost and revenue to evaluate the source of profits. It includes:Assets utilizationDetermination of net interest income.Efficiency ratioAnalysis of non interest expense.Determination of net interest expense.Profit vs. risk

Profitability AnalysisAsset utilization = (non interest revenue/assets ) + (interest revenue/assets)It Involves:Rate CompositionVolume effectAsset UtilizationIt involves Interest Earning assets as a share of assets which include:Volume Effects = earning assets/total assetsComposition/Mix Effects: Types of interest earning assets.

Determination of Net Interest Income

It include:Personnel ExpensesTotal ExpensesBurden

Analysis of Non Interest ExpenseEarning high profits in good or even normal times will be easier if the bank is willing to take on some risk.This risk may be more problematic in bad times. Important to measure the risk of the banking system as well as the profits.

Profit v/s Risk