copyright © 2004 by thomson southwestern all rights reserved. 4-1 depository institution...

Copyright © 2004 by Thomson Southwestern All rights reserved.

4-1

Depository Institution Performance and Risk

Analysis Chapter 4


4-2

Why Financial Analysis Is Important?

Financial services industry is becoming more competitive

Achieving financial goals is critical to survival and is aided by• An affective planning process• Establishing performance criteria• Measuring progress towards those criteria

It is required by the disclosures laws for publicly held firms


4-3

Sources of Industry Information

Federal Financial Institutions Examination Council (FFIEC) Website

Uniform Bank Performance Report ( UBPRs)National Information Center (NIC) Call ReportsFDIC Bank Data & Statistics WebsiteNational Credit Union Administration WebsiteOther Federal Reserve Bank WebsiteBank Rating Services Other Sources of Financial InformationEnforcement Actions and Orders


4-4

Commercial Bank Report of Income

Interest incomeLess Interest expense = Net Interest income (NII)Less Provision for loan losses (PLL)Less Burden (non-interest expenses –

noninterest income)Equals Traditional Operating Profit, orTraditional Operating Profit = NII – PLL –

Burden


4-5Types of Assets and Liabilities

Held by All FDIC - Insured Banks on Average

PANEL A: ASSETS ON AVERAGE FOR FDIC-INSURED BANKS

All Other Assets 7.59%

Trading Account Assets 5.51%

Fixed Assets & OREO 1.16%

Cash and Due 5.10%

Securities 23.00%

Net Loans and Leases 57.20%


4-6

Types of Assets and Liabilities Held by All FDIC - Insured Banks

on AveragePANEL B: LIABILITIES ON AVERAGE FOR FDIC - INSURED BANKS

Subdordinated Debt, 1.31%

Other Borrowed Funds and Trading Liabilities 12.60%

Federal Funds Purchased and

Repurchase Agreements 7.50%

Equity Capital 9.12%

Total Deposits 65.78%

All Other Liabilities 3.69%


4-7Trends in Balance Sheet Composition: 1950 to

2003Over this period

• Percent of assets held as loans has increased• Percent of assets financed by deposits has

decreased• Banks lost deposits to money market funds

and mutual funds• Banks equity-to-asset ratio increased


4-8

Types of Bank Assets

Cash and dueInvestment securitiesFed funds sold & reverse repo agreementsAssets in Trading AccountsLoans (as a percentage of assets) 58.28%

• Individuals 09.36%• Commercial & Industrial 11.76%• Real Estate 30.41%• Farm 00.62%• Other 06.11%


4-9

Types of Liabilities & Equity

Bank Liabilities• Deposits 66%• Other liabilities 25%◦ Short term◦ Long term

Equity Capital 9%• Common stock• Surplus• Undivided profits• Other equity & reserves


4-10

Layout of the Income Statement

Interest revenueInterest expenseNet interest income (NII)Provision for loan losses (PLL)Noninterest revenue (NIR)Noninterest expense (NIE)Burden (BUR = NIE – NIR)Pretax net operating income (NII – PLL – BUR)Gains (Losses) on Securities and Net

Extraordinary ItemsNet Income


4-11

ROA & ROE

Effect on ROA of NIM, Provision for Loan Losses, and Burden• NI=(NII – PLL – Burden) (1-t)

• ROA = (NIM – PLL% - Burden%) (1-t)

• ROE = ROA * EM


4-12

Figure 4.6

Page 145


4-13Figure 4.7

Page 146


4-14

Forecasting NIM Based on a Target ROA

Target ROA = (NIM – PLL% - Burden%)(1 – t)

Pretax ROA = after-tax ROA/(1 – t)

Pretax ROA = (NIM – PPL% - Burden%)

Target NIM = [ROA/(1 – t)] + PPL% + Burden%

NIM = IR% - IE% Given any two, you can solve for the remaining

one.


4-15

Forecasting NIM Based on a Desired Target of ROE

ROE = ROA * EM

Target NIM = {[ROE/(1 – t)]/EM} + PPL% + Burden%


4-16

Analyzing Trends over Time

Table 4.4 (page 148)• NPM * AU = ROA• ROA * EM = ROE

Trends in ROA, EM, and ROE over time• Components of ROA and ROE reveal◦ Sources of change in performance

measures◦ Areas which need improvement


4-17Table 4.4

Page 148


4-18

Overview of a Depository Institution’s Performance

using a UBPR A More Detailed Analysis of a Depository Institution

using UBPRS

I. Overall Profitability Ratios

II. Earnings and Profitability Analysis

III. (NIM) Margin Analysis

IV. Yield or Cost of Analysis

V. Balance Sheet % Composition of Assets and Liabilities

VI. Analysis of Noninterest Expenses as a Percent of Average Assets


4-19

UPBR Risk Ratios

Credit Risk• Composition of asset portfolio• Net loan rates, net charge-offs, noncurrent

loan rates• Loan loss provision, earnings coverage, loan

loss allowance

Liquidity riskCapital riskInterest rate risk

See Table 4.6


4-20

A Performance and Risk Evaluation Illustrated for

Wells FargoWells Fargo Peer Comparison for 2002 and 2003:

DuPont Analysis See Table 4.7Earnings and Profitability Analysis: Peer Comparison

2002 and 2003NIM Overview

• Yields to Assets• Cost of (Interest Paid on) Liability Rates

Asset and Liability Mix Analysis• Asset Mix• Liability Mix Analysis• Burden


4-21

A Performance and Risk Evaluation Illustrated for

Wells FargoRisk Comparison with Peers See Table 4.8

• Credit Risk• Liquidity Risk• Capital Risk• Interest Rate Risk• Off-balance-Sheet Activities That Reduce Interest Rate

and Liquidity Risk• Interest Rate Derivative Off-Balance-Sheet (OBS) Items• State Peer Bank Comparison

Summary of Analysis of Wells Fargo’s Performance and Risk Relative to the Peer Average


4-22

Trend Analysis for Wells Fargo in 2002 and 2003

Explaining the Low ROA

The Decline in the NIM

Trends in Risk Ratios

Summary of Trends

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