Chapter 06 - CHAPTER 6 MEASURING AND EVALUATING THE...

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CHAPTER 6 MEASURING AND EVALUATING THE PERFORMANCE OF BANKS AND THEIR PRINCIPAL COMPETITORS Goal of This Chapter: The purpose of this chapter is to discover what analytical tools can be applied to a bank’s financial statements so that management and the public can identify the most critical problems inside each bank and develop ways to deal with those problems Key Topics in This Chapter Stock Values and Profitability Ratios Measuring Credit, Liquidity, and Other Risks Measuring Operating Efficiency Performance of Competing Financial Firms Size and Location Effects The UBPR and Comparing Performance Chapter Outline I. Introduction: II. Evaluating a Bank's Performance A. Determining Long-Range Objectives B. Maximizing The Value of the Firm: A Key Objective for Nearly All Financial- Service Institutions C. Profitability Ratios: A Surrogate for Stock Values 1. Key Profitability Ratios 2. Interpreting Profitability Ratios D. Useful Profitability Formulas for Banks and Other Financial Service Companies E. Breaking Down Equity Returns for Closer Analysis F. Break-Down Analysis of the Return on Assets G. What a Breakdown of Profitability Measures Can Tell Us H. Measuring Risk in Banking and Financial Services 1. Credit Risk 2. Liquidity Risk 3. Market Risk 4. Interest-Rate Risk 5. Operational Risk 6. Legal and Compliance Risk 7. Reputation Risk 8. Strategic Risk 9. Capital Risk I. Other Goals in Banking and Financial Services Management 63
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III. Performance Indicators among Banking’s Key Competitors IV. The Impact of Size on Performance A. Size, Location and Regulatory Bias in Analyzing The Performance of Banks and Competing Financial Institutions B. Using Financial Ratios and Other Analytical Tools to Track Bank Performance-- The UBPR. V. Summary of the Chapter Appendix to the Chapter - Improving the Performance of Financial Firms Through Knowledge: Sources of Information on the Financial-Services Industry Concept Checks 6-1. Why should banks and other corporate financial firms be concerned about their level of profitability and exposure to risk? Banks in the U.S. and most other countries are private businesses that must attract capital from the public to fund their operations. If profits are inadequate or if risk is excessive, they will have greater difficulty in obtaining capital and their funding costs will grow, eroding profitability. Bank stockholders, depositors, and bank examiners representing the regulatory community are all interested in the quality of bank performance. The stockholders are primarily concerned with profitability as a key factor in determining their total return from holding bank stock, while depositors (especially large corporate depositors) and examiners typically focus on bank risk exposure. 6-2.
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This note was uploaded on 08/06/2009 for the course BUSINESS 4444 taught by Professor Dr.dale during the Spring '09 term at University of Texas at Dallas, Richardson.

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Chapter 06 - CHAPTER 6 MEASURING AND EVALUATING THE...

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