SC3-Chapter 12-RATIO Performance Analysis pt3 - Other Decomposition Approaches Bank Performance Model Rate Interest Composition(mix Volume Returns to

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

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3/17/11 Other Decomposition Approaches
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3/17/11 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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3/17/11 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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3/17/11 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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3/17/11 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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3/17/11 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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3/17/11 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
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