Ch5 - Chapter 5 Measuring and Evaluating Bank Performance

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Chapter 5 Measuring and Evaluating Bank Performance Evaluating a Bank’s Performance The Impact of Bank Size on Performance Watching Out for Size, Location, and Regulatory Bias  in Analyzing Bank Performance
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Evaluating a Bank’s Performance - Banks today are under great pressure to perform – to  meet the  objectives  of their stockholders, employees, depositors, borrowing  customers, while  keeping  government regulators satisfied  that the  bank’s policies, loans and investments are sound. - Banks’ entry into the open market to raise funds due to inadequate  funds from deposits requires that their financial statements are  increasingly being scrutinized by investors and by the general public.  - The dramatic increase in competition for banks’ traditional loan and  deposit customers forces the bankers to continually review their loan  and deposit polices, review their plans for expansion and growth, and  assess their return and risk.
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Evaluating a Bank’s Performance Determining the Bank’s Long Range Objectives: - Bank performance must be directed toward specific objectives. - A fair evaluation of any bank’s performance should start by evaluating  whether it has been able to achieve the objectives its management  and stockholders have chosen. - Each bank has their own unique objectives. 
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Evaluating a Bank’s Performance Maximizing the Value of the Firm: - Attempting to maximize a bank’s stock value is the key objective that  should have priority over all others. - If the stock fails to rise in value commensurate with stockholder  expectations, current investors may seek to unload their shares and  the bank will have difficulty in raising new capital to support its future  growth. - Each bank’s stock price is a function of: Value of the  bank’s stock  (P 0 ) Expected stream of future  stockholder dividends Discount factor = = E(D t ) (1+r) t t=0
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Maximizing the Value of the Firm: The value of the bank’s stock will tend to rise in any of the following  situations: 1. The value of the stream of future stockholder dividends is expected  to increase, due perhaps to recent growth in some of the markets  served by the bank or perhaps because of profitable acquisitions the  banking organization has made. 2. The banking organization’s perceived level of risk has fallen, due  perhaps to an increase in bank’s capital reserves, a decrease in its  loan losses, or the perception of investors that the bank is less risky  overall and therefore has a lower equity risk premium. 3.
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This note was uploaded on 04/22/2011 for the course BBA FIN 441 taught by Professor Dewanmostafiz during the Fall '10 term at BRAC University.

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Ch5 - Chapter 5 Measuring and Evaluating Bank Performance

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