Chapter14 - Chapter 14 Bank Management and Profitability...

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Chapter – 14 Bank Management and Profitability
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Analyzing Bank Earnings Interest and Fees on Loans – major source of revenues Higher % of assets for small banks Investment Income - also more important for small banks INTEREST EXPENSE cost of getting money into the bank 70% of interest expense depositors Small banks emphasis on depositor funds Large banks borrowed funds
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Net interest income = gross interest - gross interest NII and fee income expense (also called net interest margin NIM) NII Larger for small banks Changes as interest rates change
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PROVISION FOR LOAN LOSSES (PLL) Take a write-off (expense) on the income statement in anticipation of credit problems in loan portfolio Adds to bank’s loan loss reserve contra asset on balance sheet PLL; higher for large banks due to credit card losses Significant losses in mortgages in 2008-09 NON-INTEREST INCOME Growing source of revenue for all banks Fees and service charges Very big item for large banks
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NON-INTEREST EXPENSE Salaries and employee benefits Marketing expenses Merger restructuring fees (especially for large banks) MEASURING BANK PERFORMANCE ROAA Return on average assets = Net Income Average Total Assets ROAE Return on Average Equity = Net Income Average Equity Capital
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From DuPont Analysis ROAE = ROAA x Equity Multiplier Total Assets Equity Capital more leverage means less equity bigger equity multiplier ROAA very low in banking < 2% ROAE much higher 12-14 %
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MANAGING BANK RISKS LIQUIDITY RISK INTEREST RATE RISK
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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Chapter14 - Chapter 14 Bank Management and Profitability...

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