Appendix_2B

# Cross sectional analysis analysis of financial

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cross-sectional analysis Analysis of financial statements comparing one firm with others.

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Net income Total equity capital Ratio 1 ROE Total assets Total equity capital Ratio 3 Equity Multiplier Net income Total operating income Ratio 4 Profit Margin ROA Total operating income Total assets Ratio 5 Asset Utilization Interest expense Total operating income Ratio 9 (components) (Ratios 13–20) (Ratios 24–31) (Ratios 32–44) (Ratios 45–53) Provision for loan losses Total operating income Ratio 10 Noninterest expense Total operating income Ratio 11 (components) (Ratios 21–23) (Ratios 54–56) (Ratios 57–59) Income taxes Total operating income Ratio 12 Interest income Total assets Ratio 60 (components) (Ratios 62–71) (Ratios 72–81) (Ratios 82–95) (Ratios 96–105) (Ratios 106–111) Noninterest income Total assets Ratio 61 (components) (Ratios 112–115) (Ratios 116–119) Net income Total assets Ratio 2 FIGURE 2B 4 Classification of Ratios Listed in Tables 2B 5 through 2B 7 22 Appendix 2B Commercial Banks’ Financial Statements and Analysis financing, the decreased capital ratio is good for the bank. Managers and investors should be concerned, on the other hand, if a decreased capital-to-asset ratio is the result of declining profits. Looking at one bank’s financial ratios, even through time, gives managers, ana- lysts, and investors only a limited picture of bank performance. Ratio analysis almost always includes a comparison of one bank’s ratios relative to the ratios of other firms in the industry, or cross-sectional analysis. Key to cross-sectional analysis is identify- ing similar banks in that they compete in the same markets, have similar assets sizes, and operate in a similar manner to the bank being analyzed. Since no two banks are identical, obtaining such a comparison group is no easy task. Thus, the choice of
Appendix 2B Commercial Banks’ Financial Statements and Analysis 23 companies to use in cross-sectional analysis is at best subjective. A tool available to assist in cross-sectional analysis is the Uniform Bank Performance Report (UBPR) maintained by the Federal Financial Institutions Examination Council. The UBPR summarizes performance of banks for various peer groups (banks similar in size and economic environment), for various size groups, and by state. Figure 2B–4 summarizes the return on equity (ROE) framework. 17 The ROE framework starts with the most frequently used measure of profitability, ROE, and then breaks it down to identify strengths and weaknesses in a bank’s performance. The resulting breakdown provides a convenient and systematic method to iden- tify strengths and weaknesses of a bank’s profitability. Identification of strengths and weaknesses, and the reasons for them, provides an excellent tool for bank managers as they look for ways to improve profitability. Table 2B–4 summarizes the role of ROE and the first two levels of the ROE framework (from Figure 2B–4) in analyzing an FI’s performance.

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