BK3 - Topics in Commercial Bank Management Lecture THREE...

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MANA130107 Bank Management 1 Lecture THREE Bank Risks and Assets-Liability Management (chap 6-7 ) Topics in Commercial Bank Management MANA130107 Bank Management 2 Bank Risks & Assets-Liability Management ± Topics covered in this lecture ² Breakdown financial ratios ² Measuring bank risks ² Interest-Sensitive Gap Management MANA130107 Bank Management 3 ± Equity Multiplier (EM) ² Leverage or financing policies (risk and return trade-off) ± Net Profit Margin (NPM) ² Effectiveness of expense management ± Asset Utilization (AU) ² Portfolio management policies ( mix and yield on assets) Breaking Down ROE Net Profit Margin = Net Income/Total Operating Revenue Asset Utilization = Total Operating Revenue/Total Assets ROA = Net Income/Total Assets Equity Multiplier = Total Assets/Equity Capital ROE = Net Income/ Total Equity Capital x x ROE Depends On: Where to look to when there is a decline in ROE
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MANA130107 Bank Management 4 A Variation break down on ROE Net Income Pre-Tax Net Operating Income ROE = Pre-Tax Net Operating Income Total Operating Revenue ×× Total Operating Revenue Total Assets Total Assets Total Equity Capital × ROE = Tax Management Efficiency Expense Control Efficiency Asset Management Efficiency Funds Management Efficiency × × × Use of security gains or losses and tax management tools to save tax ± Net Profit Margin (NPM) (total expense management) is further broke down into tax and expense control efficiency The amount revenue left after operating expenses are deducted. Operating efficiency & expense control Asset Utilizati on (AU) Equity Multiplier (EM) MANA130107 Bank Management 5 Breaking Down ROA Net Interest Income Net Noninterest Income ROA = Total Assets Total Assets PLL-Security Gain(Losses)+Taxes-Extraordinary Gains - Total Assets + ROA = Net Interest Margin + Special Transactions Affecting Net Income - ± Sources of superior profitability ² Proper use of financial and operating leverages ² Good expenses control and leaving more revenue for net income ² Booming economy (greater demand for services) ² Good assets management maintaining liquidity as well high yield ² Careful about risk exposures MANA130107 Bank Management 6 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 Returns to Shareholders ROE = NI / TE Degree of Leverage EM =TA / TE Bank Performance Model
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MANA130107 Bank Management 7 Measuring Banking Risks ± Banks face uncertainties inside or outside the bank, such as economic condition, competition, law and regulations ± Normal overall risk measures: standard deviation or variation of stock price, net income, ROA, ROE ± Higher volatility indicates higher risk exposure ± Risks include ² Credit Risk ² Liquidity Risk ² Market Risk ² Interest Rate Risk ² Operational Risk ² Legal and Compliance Risk ² Reputation Risk ² Strategic Risk ² Capital Risk MANA130107 Bank Management 8 Credit Risk ± The probability that a bank
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This note was uploaded on 10/17/2011 for the course FINANCE CFA 201 taught by Professor Leo during the Spring '09 term at Fudan University.

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BK3 - Topics in Commercial Bank Management Lecture THREE...

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