SC3-Chapter 12-RATIO Performance Analysis pt3 - Other...

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Other Decomposition
Approaches

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INCOME
Return to the Bank
ROA = NI / TA
EXPENSES
Rate
Composition (mix)
Volume
Interest
Overhead
Prov. for LL
Taxes
Fees and Serv Charge
Trust
Other
Rate
Composition (mix)
Volume
Interest
Non Interest
Salaries and Benefits
Occupancy
Other
Bank Performance Model
Returns to
Shareholders
ROE = NI / TE
Degree of Leverage
EM =1 / (TE / TA)

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Return on equity (ROE = NI / TE)
… the basic measure of stockholders’
returns
•
ROE is composed of two parts:
–
Return on Assets (ROA = NI / TA),
•
represents the returns to the assets the bank has
invested in
–
Equity Multiplier (EM = TA / TE),
•
the degree of financial leverage employed by the bank

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Return on assets (ROA = NI / TA)
…can be decomposed into two parts:
Asset Utilization (AU) → income generation
Expense Ratio (ER) → expense control
•
ROA = AUR - ER
= (TOI / TA) - (TOE / TA)
Where:
TOI= total revenue or total operating income
= Int. inc. + Non-int. inc. (+ SG) and
TOE= total expenses
= Int. exp. + Non-int. exp. + PLL + Taxes(+SL)

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ROA is driven by the bank’s ability to:
…generate income (AU) and control expenses
(ER)
TA
losses) ( gains Sec
TA
Inc. int. Non.
TA
Inc. Int.
AUR + + =
TA
PLL
TA
. Exp . int Non
TA
. Exp . Int
ER
*
+
-
+ =

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Expense ratio (ER = Exp / TA)
… the ability to control expenses.
•
Interest expense / TA
–
Cost per liability (avg. rate paid)
•
Int. exp. liab. (j) / $ amt. liab. (j)
–
Composition of liabilities
•
$ amt. of liab. (j) / TA
–
Volume of int. bearing debt and equity
•
Non-interest expense / TA
–
Salaries and employee benefits / TA
–
Occupancy expense / TA
–
Other operating expense / TA
•
Provisions for loan losses / TA
•
Taxes / TA

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Asset utilization (AUR = TR / TA):
… the ability to generate income.
•
Interest Income / TA
–
Asset yields (avg. rate earned)
•
Interest income asset (i) / $ amount of asset (i)
–
Composition of assets (mix)
•
$ amount asset (i) / TA
–
Volume of Earning Assets
•