week 6 - Evaluating Bank Performance - CHAPTER SIX Measuring and Evaluating the Performance of Banks and Their Principal Competitors 6-2 Key Topics

week 6 - Evaluating Bank Performance - CHAPTER SIX...

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CHAPTER SIX Measuring and Evaluating the Performance of Banks and Their Principal Competitors
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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 6-2
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Evaluating Bank Performance Performance refer to how adequately a financial firm meets the needs of Stockholder Employee Depositors and creditors Borrowing customers Performance are under heavy scrutiny: Banks depend heavily upon the open market to raise funds In 2002 J.P.Morgan Chase’s credit rating came under review In 2007, Citigroup,Countrywide and Washington Mutual 6-3
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Evaluating Bank Performance Two important dimensions of performance: Profitability Risk Objective: to maximize the value of the shareholders’ wealth at an acceptable level of risk. 6-4
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Value of the Bank’s Stock 6-5
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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 6-6
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Value of Bank’s Stock if Earnings Growth is Constant 6-7 A stock whose dividends are expected to grow forever at a constant rate, g. D 1 = D 0 (1+g) 1 D 2 = D 1 (1+g) =D 0 (1+g) 2 D t = D t-1 (1+g) =D 0 (1+g) t If g is constant, the discounted dividend formula converges to: g r D g r g D P 1 0 0 1
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Value of Bank’s Stock if Earnings Growth is Constant 6-8 For example, a bank is expected to pay a dividend of $5 per share in period 1, and dividends are expected to grow at 6% forever, and the discount rate to reflect risk is 10%, then the stock price could be valued at:
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Value of Bank’s Stock if Earnings Growth is Constant 6-9 However, most capital-market investors have a limited time horizon and plan to sell the stock at the end of their investment horizon: Suppose investors expect a bank to pay dividend of $5 at the end of period 1, $10 at the end of period 2 and sell the stock for a price of $150 per share:
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Key Profitability Ratios in Banking Assets Total Income Interest Net Assets Total expense) Interest - income (Interest Margin Interest Net Assets Total Income t Noninteres Net Assets Total expenses t Noninteres - PLLL - revenue t Noninteres Margin t Noninteres Net Net Income Return on Equity Capital (ROE) = Total Equity Capital Net Income Return on Assets (ROA) = Total Assets 6-10
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Key Profitability Ratios in Banking (cont.)
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  • Fall '15
  • Revenue, Generally Accepted Accounting Principles, total assets, Total Equity Capital, financial firm

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