Ata divide each side by ata er exp ie oe pll ata ata

aTA
Divide each side by aTA : ER = EXP = IE + OE + PLL
aTA. aTA. aTA. aTA
i.e. ER = Interest expense ratio (IE) + Non-Interest Expense Ratio (OE) + Provision for loan losses (PLL)
(AU) Asset Utilisation
TR = II + OI + SG
Divide each side by aTA: AU = TR = II + OI + SG
aTA. aTA. aTA. aTA
(OE) Non-Interest Expense
OE can change due to changes in:
 Personnel Expenses
 Occupancy Expenses
 Technology Expenses
 Other Overhead Expenses
(OI) Non-Interest Income
OI can change due to changes in:
 Fees
 Trust Activities
 Service Charges
 Other Non-Interest Income
Quiz: What is the return on equity for a bank that has an equity multiplier of 14, an interest expense
ratio of 4%, and a return on assets of 90%?

Aggregate Profitability Measures
Net interest Margin (NIM)
 Net Interest Income / Average Earning Assets
Spread
 Interest Income / Average Earning Assets - Interest
Expense / Average Interest Bearing Liabilities
Burden
 (Non-Interest Expense – Non-interest Income) / Average Total Assets.
Lower numbers are better
Efficiency Ratio
 Non-interest Expense / (Net Interest income + Non-interest Income)
Lower numbers are better
Earning Base = aEA
aTA
EA = Balances with central banks + Interbank Lending + (Total trading securities and other financial
assets designated at fair value – Aus equity securities – Other securities – Aus equity securities) +
(Available for sale securities at fair value – Aus equity securities – Overseas equity securities –
Unlisted securities) + Total net loans + regulatory deposits with central banks overseas.
Net interest Margin = Net Interest income
aEA

3.7 Risk Analysis
 Credit Risk
 Liquidity Risk
 Market Risk
 Operational Risk
 Reputation Risk
 Legal Risk
Credit Risk
Historical Loss Rate
 The potential variation in net income and market value of equity resulting from this non-
payment or delayed payment.