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Commercial Banking 6F:114 Commercial Banking Fall 2018 Leighton Smith [email protected] 319.325.4928 (m)
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Commercial Banking Commercial Banking Week 6 Asset Liability Management
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Commercial Banking Homework From Last Week Do you understand ‘your’ bank’s financial statements? How do the financial statements of your national and your local bank differ? Can you analyze a bank’s performance? Can you evaluate the kinds of risk that a bank is taking?
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Commercial Banking Overview Mastering : Stock Values and profitability ratios Measuring credit, liquidity, and other risks Measuring operating efficiency Relevance and effects of size, type of bank Beginning to consider : What makes this bank a ‘good’ or less effective one? What kinds of risks is the bank taking? Would you buy shares of stock in this bank?
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Commercial Banking Teaching Objectives Learn a framework for analyzing bank performance Distinguish between types of bank risk: Credit risk Liquidity risk Interest rate risk Capital risk Operational risk Learn about how banks differ as a function of size (type of bank)
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Commercial Banking Review: Three Characteristics of Commercial Bank Financial Statements Few fixed assets Short duration liabilities Many payable on demand Very high leverage Less equity capital than non-financial companies
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Commercial Banking Review: Deregulation Has Encouraged larger, riskier loan portfolios Greater loan losses Changed the way banks view branch offices Forced banks to cut operating expenses
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Commercial Banking Key Profitability Ratios in Banking Capital Equity Total Taxes After Income Net (ROE) Capital Equity on Return Assets Total Taxes After Income Net (ROA) Assets on Return Assets Total Income Interest Net (NIM) Margin Interest Net Assets Total Income t Noninteres Net (NNIM) Margin t Noninteres Net
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Commercial Banking Key Profitability Ratios in Banking (cont.) Notes: NOM includes PLL and taxes in operating expenses Sometimes e.o.y. assets/equity used Sometimes average assets/equity used Consistency is important Assets Total Expenses Operating Total - Revenues Operating Total (NOM) Margin Operating Bank Net g Outstandin Shares Equity Common Taxes After Income Net (EPS) Share Per Earnings
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Commercial Banking Bank Risks Why is this of special concern? / http:// aign=videoplayer&utm_medium=fullplayer&utm_source=relatedlink Unique nature of banks and ‘fat tails’ http://
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Commercial Banking Bank Risks Credit Risk Assets will decline in value because of risk or default Liquidity Risk Insufficient cash for withdrawals and other needs Market Risk Asset values decline because of increasing interest rates Interest Rate Risk Changes in net income due to interest rate changes Earnings Risk Total risk to net income Capital Risk Risk to equity
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