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The importance of the paper relies in the necessity to analyze and diagnostic the income sources of the bank. Banks are the main financial intermediaries their main characteristic is to put into circulation their loans and advances on themselves by increasing the volume of payment means. Over the last decade banks have become more independent. They are important for available capital formation in the economy and allow the coordination of investment process with the purpose of increasing the total volume of resources allocated to the economy. In order to determine why banks are important to the efficient functioning of the financial system we have to look more closely at how banks do business and how they earn profits. Earnings and income are indicators of a bank capacity to increase its capital. Income is one of the most important purposes of the bank activity and it influences the financial result and the performance of it. For a good and performing activity of the bank is necessary to identify and evaluate methods which will make possible the evolution of the bank. So, by using specialized literature, I indented to analyze identification and diversification of income sources of the bank and its actions over the banking performance. The research purpose is to reveal the broad definition of income, wayfinding and assessment of income, their reflection in finance and accounting, analyzing and identify the role of income sources in the bank. Thus, for the research paper purpose fulfillment, I have established several targets to meet: - to analyze the main characteristics of income sources in the banks; - to analyze the income sources classification criteria; - to classify the banks incomes according to their types; - to analyze the performance at a commercial bank from the Republic of Moldova (CB Moldova Agroindbank JSC); - analyze of the income sources of the bank in Moldova and other countries;

Research methodology. I relied on the use of scientific methods and investigations tools related to this field that allows the identification and evaluation of the sources of income of the bank. In elaborating the paper was applied general scientific knowledge of principles of economic phenomena, the concrete-historical and other approaches which allow considering the phenomena and processes in development, to identify contradiction, to relate the essential characteristics and forms of their occurrence. The informational basis consists in regulations of the National Bank of Moldova, annual reports of the commercial banks, balance sheets, income statements, reports on financial activity, and research papers of foreign authors, statistic data and other sources. The structure of this paper comprises introduction, two chapters, conclusion, bibliography and annexes. Chapter I Theoretical aspects of income sources in the bank comprises the definition and classification of income sources according to types of activity and its diversification. Here also is included the essence and peculiarities of banking activity in the commercial banks. Chapter II Directions of income sources diversification at commercial banks in RM comprises the analysis of income sources and bank performance at national and international level also at CB Moldova Agroindbank JSC. In the conclusion of the graduation paper are obtained the main conclusions of the conducted research Bibliography contains legal and normative acts, scientific books as well data sources. Annexes contain income statement, balance sheet, information regarding financial activity of the CB Moldova Agroindbank JSC


Essence and peculiarities of banking activity

The existence of a banking system, through the market economy, requires monetary liquidities leading them to carrying out effective and profitable economic activities. The commercial bank is understood as a financial institution that accepts transferable deposits and invests them in active operations from its name. Commercial banks are the second level of banking system. It concentrate the main part of credit resources, performs a wide range of banking and financial services for legal entities and individuals. Commercial banks are organised as State banks, joint stock companies, limited liability companies, as well as joint banks.1 Bank may also be defined as the institution that mobilizes financial means that it have available, finances and offer credits to individuals and legal entities, elaborates and performs payments and settlements at the national and international levels in order to obtain profit. Bank - financial institution that accept from natural or legal persons deposits or equivalent,transferable throught different payment instruments and using these instruments fully or partially to offer credits or to make investments on its own account and risk.2 Banks as specialized institutions deals with the organization and

implementation of various banking services, who is actually the strategic objective of the bank. Correct and efficient management of these services is one of the basic aim which is always balanced with final one, namely getting the profit. The used tool to achieve these goals and managing banking operations is
1 GOROBE,Ilinca.Moned i credit-Curs de lecii .ASEM, 2002.[online][citat 29.09. 2012] .Disponibil <http://www.ilincagorobet.ase.md/modules/mydownloads/singlefile.php?lid=2 >. 2 Legea instituiilor financiare nr. 550-XIII din 21.07.1995. Monitorul Oficial al R.Moldova. nr.78-81/199 din 13.05.2011[pct.f].[online] [cited on 18.12.2013] Available at:< www.bnm.md.>.

money.Banks are the main intermediaries in economic relations having a decisive mark in economic circuit. Alsothrow this quality the place and role of banks in present, is closely linked to the quality of services they offer. Simultaneoust, they have the quality of monetary intermediaries that have the essential characteristics of realization of monetary creation. Each bank is obliged to disclosure the information about their financial activities in order to stimulate the transparency and to promote the discipline.3 Banks are those that perform all kinds of operations. But as basic operations it uses attracting deposits and offering credits. Commercial banks perform three basic functions:4 - attract resources available to clients (natural and legal persons) as deposits (fundraising); - allow customers to withdraw cash or transfer them to other accounts; - to lend to customers who require loans using deposits (placing funds). According to the specific activity they perform, commercial banks have different functions.5 Deposit function provides: - perform operations on term deposits and the cash account and securities; - attraction of funds from individuals and legal entities to preserve and exploit them; - conducting operations storing valuables owned by individuals and businesses. Investment function provides: - granting loans in national currency and in foreign natural and legal persons in the country and abroad; - making long or short investment in the bank;

Regulation on publishing information on financial activity by licensed banks of the Republic of Moldova approved by Decision of the Council of Administration of the National Bank of Moldova no.392, December 21, 2000.Official Monitor of the Republic of Moldova no.163-165 of December 29, 2000.[Art.446 with further amendments and completions] [online] [cited on 06.12.2013] Available at: <www.bnm.md>. 4 DARDAC Nicolae. Moned i credit.Vol.2 Bucureti,1996. P.15 5 DAMODARAN Aswath . Investment valuation: tools and techniques for determining the value of any asset. New York: JOHN WILEY,2003. ISBN 978-0-8233-7718-4.

- participation as a shareholder in the establishment of banks and non-banks in the country or abroad; - acquisition of financial assets in their own name. Commercial function provides: - realization of receipts and payments in foreign currency generated by the activities of export, import, domestic and international settlement services operations, financial, commercial and other transactions relating to receipts and payments between individuals and businesses in the country and abroad; - buying and selling in the country and abroad , currency , bills denominated in national currency and in foreign currency; - foreign exchange operations and operations of international currency markets arbitrage own or customer account; - participating in external financial transactions and credit payments , ending with banks and financial institutions foreign commitments and consubsidies payments; - issuing bills that: promissory notes , bills of exchange ( drafts ) , checks in favor of beneficiaries in the country and abroad; - rediscount operations and discounting of bills; operations with corporate securities and those issued by the state; - launch bond that ensures mobilization loans by issuing bonds guaranteed issue and place bonds on the secondary market; - banking intertwines with economic activity , penetrating its economic mechanism , having also designed to provide decision-making and taking action in relation to monetary and financial policy of the state. Principles of the banks: - liberalizm the decision; - all customer relationships are formed on the basis of market relations; - banks work must be framed strictly limits imposed by the State in which activate.

Banking activity is characterized to be more different in comparison with the activity of other financial institutions and requires a special treatment, especially when we talk about valuation. In the process of bank valuation a number of factors appear to influence the final result of financial valuation models: the ability of bank management to properly manage the bank's activity, regulation and banking performance, financial market situation. These factors differ depending on the valuation method used and require a more detailed analysis.6 Banks have the following peculiarities: - The available capital of the bank which comprise all the financial means available to the bank at a particular time and who does not belong mostly to the title deed; - Fixed assets participating in the creation of the bank and have very little influence on him. These are information systems.Also a major contribution to the creation of banking products plays bank staff; - The Bank is a public company and are self-authorizing , acting within the limits of its shareholders; - Bank activity is strictly regulated and checked by supervisors. Moldovan banking sector problems Although the banking system of the Republic of Moldova is considered to be one of the safest among countries of the former USSR , and rightly so , as the pace of its development and has exceeded the Moldovan economy as a whole , it can not detach the shortcomings of small economies relatively weak and it works. Among the main problems of the Moldovan banking system are included:7 - The relatively low level of financial intermediation . After banking depth (weight private sector credit to GDP ) in 2010, Moldova was one of the last places among CEE countries , with 37.2 % , just surpassing Georgia , Armenia , Azerbaijan8;

BUSMACHIU Eugenia,BORTA Nadejda.Journal Economica nr.1(75) 2011//Valuation and factors taht affect valuation process in banking activity .Chisinau, ASEM,2011.P.38 7 TOMEA Ion. Journal Viitorul nr.4(28) 2012// Prognoza IDIS "Viitorul". Chisinau, 28octombrie,2012 8

- Relatively high interest rates on loans. Although they fell last year to levels historical minimum size after the real interest rate in the period 2005-2010 , according to the Bank World Moldova was surpassed in the region only Albania and Georgia; - Rigid requirements of banks on the mortgage . Relatively high economic instability, legal imperfect and inefficient judicial system , the lack of alternatives for the marketing secondary to a number of eligible collateral assets ( machinery , agricultural land, etc. ) are the requirements on Moldovan banks pledge to be quite high and rigid . According to a survey of 2009 World Bank , the average value of collateral relative to credit was at 138.6% exceeding the regional average of 134% . For this reason , and because of high rates of interest , according to the same survey , Moldova was a leader in the region by number companies identified access to finance as a major constraint: - High level of concentration and relatively low degree of competition in the banking market. As we already mentioned , Moldova has one of the highest degrees of concentration of assets belonging to the 5 largest banks , and a low share of banks with majority foreign banking assets , factors that determine a relatively low level of competition market; - Offer limited financial resources in the long term , making repayment deadlines bank loans often do not match the timing of the project financed and cash flows of the companies credited (about 87 % of deposits are for up to 1 year , whereas approx. 63 % of loans have a maturity of over one year); - Underdeveloped information infrastructure ( the first and only credit bureau started operate only in 2011) , the lack of quality data and statistical information to analyze credit analysis and market research , public access limited to financial reports for analysis comparative low quality of financial reports prepared by the company;

World Bank Development Indicators.The Bank for International Settlements, 1999. [online] [cited on 06.12.2013]. Available at: <http://www.bis.org/publ/bcbs54.htm> 9


Banking performance management

In terms of financial accounting, bank revenues represent the values or amounts received or receivable from interest on loans and other investments, supply of goods, execution of works, the pre-conditions of services and benefits that the bank has agreed to prime as that the execution of a legal or contractual obligation of third parties, revenue windfalls. In determining income for financial results shall also include revenues from the sale of assets, production and decrease or cancellation provisions. Turnover banking is obtained by summing income from: - Interest and similar income (cash from operations and operational activity) -Interbank reasons of customer operations, the operations of liabilities or other fixed income securities and other interest and similar income); - Income from variable-income securities; - Commissions; - Gains or losses from financial operations (net result from operations with securities transactions, investment and exchange operations); - Other income from operating activities. To receive the revenue it takes into account the work process resource consuming and producing results.9 In order to determine why banks are important to the efficient functioning of the financial system we have to look more closely at how banks do business and how they earn profits. Earnings and income are indicators of a bank capacity to increase its capital. The income statement and balance sheet are a key source of information that reflects the sources of a banks earnings and their quantity also indicates a banks business orientation in future. In this way is important to remember that assets

BIANCA Florentina Preda.Contabilitatea institutiilor bancare.Bucuresti 2013.Editura Fundatia.P.117


operations generate incomes and liabilities generate expenditures. The simples elements in the balance sheet and its utilization in banks are represented in the Table 1.1,, Balance sheet elements of credit institutions Table 1.1 Analysis of the balance sheet elements of credit institutions ASSETS Current assets Interbank placement Portfolio of securities Credits LIABILITIES Borrowings Deposits Operations with securities Own funds

Source:elaborated by the author in the base Moinesccu Bogdan,Codirlau Adrian.Strategii si instrumente de administrare a riscurilor bancare.P344

Sources of income make banks to differ. Some of them are based on business lending, some on household or others on fee-earning activities. Most of them are diversifying into fee-earning activities. Diversification of income across diverse sources of earnings is welcomed for reduction of risk. Profit is the ultimate goal of commercial banks (as financial intermediaries) taking into account the activity done by them: -Ways of getting resources; -Use of these resources through offering credit; -Default risks; Profit is an amount in absolute terms gets form of: gross profit; net profit. Is important to combine the diversification of income sources with financial stability in this way is reflected the following situation: the more unstable is a banks gains, the more risky and non performance institution is and upper. In the banking industry is a conventional rationality that earnings from the fee-base

products are more stable than loan fee-based activities. Banking revenues can be classified depending on the types of activities: - Credit activities or revenue materializes in the form of interest rates and commissions, for granting additional credit up to release; - Discount activity consists of purchasing operations or the execution of instruments of monetary operations: bills and factoring operations revenues materialize as interest for the use or fees for services; - Guarantee 'activities where the bank provides warranty and guarantee revenue materializes in the form of commission, and if the commitment in the form of interest; - Safekeeping or storage when exercising trust and agent operations. Revenues consist of fee income resulting from the following management or value managed; - Activity related to securities, margin revenue consist of the difference between the sale and the purchase and related services privatization in this case consists of fee income on business valuation and preparation of documents; - Work with bank accounts after her bank earns revenue in the form of commission: To open the account - Settlement - For issuing receipts account - For information on balance - to close the account. -Nontraditional activities in their category includes income from leasing activities and information, bank consulting activities that can achieve exceptional income from the following activities: reevaluation of fixed assets and operations with securities. Banking revenues represent the values or amounts received or to be received from the interest on loans and other investments, the supply of goods, performance of works, provision of services and benefits that the bank has agreed to receive execution of a legal obligation or third party contractual amounts as revenue windfalls and other amounts , the production of which is the aim of the bank. The process of creating banking income consists of four very important steps

namely the creation, billing, collection and incorporation.10 Creating revenue is the result when the product is resource intensive activity, such as establishing interest charged to borrowers or the decision to sell assets. Billing is to transfer ownership of the customer banking unit, for example, when granting credit; Collecting is a stage where the result turns cash sold, for example, the actual collection of interest for credit given or sold asset collection; Incorporation is a strict accounting period in which revenues are embedded in absorbing necessary results corresponding expenditure. All proceeds may be classified in income percentage (when is present an interest rate), revenue nonpercentage (when in present a commision) and other types of income or revenue. Also income can be divided into: Stable income (income related to current activities of the bank ), Income unstable (that occur spontaneously, extroordinar). It is therefore important that a larger proportion of total banking revenues to avail those from stable activities. Analysis of bank income is made after following criteria:by volume which is beneficial dynamic growth of revenues regardless of its structute and also by structure which analyze the structure of income in total volume and determines the most profitable types of assets for the bank. Factors influencing the size of revenue:11 - endogenous(represended in the interior structure of the bank) - exogenous ( economic situation in the country , political and macro ) , not under the influence of bank management , therefore in the analysis of revenue growth opportunities to shape an internal two factors: - the possibility of increasing profitable assets volume;

GOROBET Ilinca .Income and bank charges. Faculty ASEM Finance Department:Banking and Stock Exchange,2008.P8 11 SIRBU Ion, GEORGESCU Nicolae.Managementul intreprinderii. Sibiu, 2003. P.23.[online][cited on 12.12.2012] Valabil pe<http://www.scribd.com/doc/25281371/1-Conceptul-de-%E2%80%9Eprofit%E2%80%9D>


- can increase the interest rate assets exist. Acccording to SNC 65, Association recognizes income and expenditure on the basis of specialization exercises, where by expenses are recognized in the period in which they were made , regardless of whether the funds have been paid or not, and income - the period in which they were earned, regardless whether funds were received or not. The sources of income and its diversification are representend in the following figure(fig.1.1.1)

Diversification of income sources

From operating activity: interest income from loans interest income from legal and natural persons From non-operating activity: lending operations investments in securities operations with foreign currencies

interest from placemements

Source:elaborated by the author in the base of E.DemocracyOrg, Journal. [online][cited on 06.12.2013] Available <http://forums.e-democracy.md/>

Fig.1.1.1. Diversification of income sources at the banks

Interest income on loans is interest income from loans and short term . Their size is determined based on the interest rate , amount and term stipulated in the contract . Interest income on loans calculated long association presents the calculated separately for short-term loans . Other interest income includes income from interest on investments in the form of bank deposits, highly liquid securities and other investments . They are evaluated in accordance with contractual terms . Income from settlement of unused provisions include amounts unused provisions for payment of claims for which they were established . Under other operating income includes income from other activities related to the granting of loans ( commissions, fees ).

Revenues from penalties on loans granted and repaid at maturity ( time expired ) and other income from core business. Income from other activities related to provision of loans (commissions, fees ) Commission operations are operations on which banks collect fees and bank charges for services provided to customers. Most banking services involves not engaging balance sheet ( do not contribute to increase the resources and assets do not affect banks), but employ risk , bringing together some income. These operations include:12 1 ) make money transfers; 2) to conduct operations of collection - customers receive various documents (invoices , bills , checks) they send for collection; 3 ) perform operations mandate - are made on behalf of the bank but customer account , which generally refers to the performance of customer operations:selling and buying securities for client portfolio management of securities and even the administration of its property; 4 ) provision of guarantees - involves performing acts which the bank agrees to take on commitments to third parties,the most notable being:a surety (is committed bank that in case of bankruptcy of client or operations to achieve that it has committed an acceptance, endorsement, and endorsement); treaties (are formalities by which the bank undertakes to pay the due bills that have not been honored by client); a documentary letter of credit (bank undertakes to pay the exporter shows the documents required in case the importer does not pay); 5 ) pledges itself; 6)opening of confirmed credit lines - is the commitment of the bank to pay client or under certain conditions, a credit of an amount determined , the credit will be included in the balance sheet at the time that the customer will actually use ; - commitments to buy or sell securities futures;

BASNO C,DARDAC N. Management Bancar.Editura Economic, Bucureti, 2002,P.74 15

- operations related variation and interest rates (are operations that the bank made based on their expectations on the future evolution of interest rates and exchange rates , could be hedge ( protect against risk : swaps - changes to one time a dollar amount to one euro , following as a predetermined future date take place the reverse operation ) or speculative operations ( getting the win )) ;13 - issurance of securities (bank undertakes either to purchase securities issued by the client and the remaining unplaced for her to open a credit line to replace the securities issuance operation. The banking activity which generate profit and mentain the performance of the banks are reflected below in the Fig.2.1.

Guarantee activity Non traditional activity Discount activity

Activity with bank accounts

Income sources

Credit activity

Activity related to security

Storage activity

Source:elaborated by the author in the base Regulament cu privire la activitatea de creditare a bancilor care opereaza n Republica Moldova [online] [cited on 06.12.2013] Available: <www.bnm.md>.

Figure 2.1.1 Sources of income that maintain the performance of the bank As we know the main goal of the bank is to obtain profit which will generate the bank performance. Performance create for the banks the stability and depositar confidence. So is important to obtain a high performance for an effcicient financial

TAINER Evelina.Using Economic indicators to improve Investment Analysis. New York,2008 .Published by WILEY Son.P.7 16

system. Also we can say that if the bank has enought sources of income it become proftable. Profitability is an indicator of a bankss capacity to carry and increase its capital. Supervisors should welcome profitable banks as contributors to stability of the banking system. Profitability ratios should be seen in context and the cost of free capital should be deducted prior to drawing conclusions about the profitability. 14 Although net income gives us an idea of how well a bank is doing, it suffers from one major drawback. It does not adjust for the bank's size, thus making it hard to compare how well one bank is doing relative to another. A basic measure of bank profitability that corrects for the size of the bank is the return on assets (ROA). Secondly, because the owners of a bank must know whether their bank is being managed well, ROA serves as a good method to identify it. ROA is calculated according to formula (1.1)15 ROA = (1.1.1)

The return on assets provides information on how efficiently a bank is being run because it indicates how much profits are generated by each dollar of assets. However, what the bank's owners (equity holders) care about most is how much the bank is earning on their equity investment. This information is provided by the other basic measure of bank profitability, the return on equity (ROE). ROE = (1.1.2)

There is a direct relationship between return on assets (which measures how efficiently the bank is run) and the return on equity (which measures how well the owners are doing on their investment). This relationship is determined by the


GREUNING, Hennie Van, BRATANOVIC, Sonja Brajovic. Analyzing Banking Risk A Framework for Assessing Corporate Governance and Risk Management THIRD EDITION. Washington, D.C.: The WORLD BANK, 2009. ISBN 978-0-8213-7728-4. 15 KOCH Timothy,MACDONALD Cott. Bank Management FIRST EDITION.USA,2009.ISBN 857-1-08213-55472. 17

equity multiplier (EM), the amount of assets per dollar of equity capital. The relationship is presented below: EM = ROE can also be expressed as a multiplication of ROA and EM (1.1.3)



This formula tells us what happens to the return on equity when a bank holds a smaller amount of capital (equity) for a given amount of assets. Another commonly used measure of bank performance is called the net interest margin (NIM). NIM is the difference between interest income and interest expenses as a percentage of total assets.16 NIM = (1.1.5)

One of the bank's primary intermediation functions is to issue liabilities and use the proceeds to purchase income earnings assets. If a bank manager has done a good job of asset and liability management such that the bank earns substantial income on its assets and have low costs on its liability, profits will be high. How well a bank manages its asset and liabilities is affected by the spread between the interest earned on the bank's assets and the interest cost on its liabilities. If the bank is able to raise funds with liabilities that have low interest costs and is able to acquire assets with high interest income, the net interest margin will be high and the bank is likely to be highly profitable. If the interest cost of its liabilities rises relatively to the interest earned on its assets, the net interest margin will fall, and bank profitability will suffer. Asset Utilization (AU - asset UTILISATION ) is a dependent active interest in the market size and structure of bank assets and is calculated as the ratio

KOCH Timothy,MACDONALD Cott. Bank Management FIRST EDITION.USA,2009.ISBN 857-1-08213-55472. 18

percentage from total income from banking operations and total assets and total revenue shows that obtained from the use of assets ( interest income , commissions fees and profit income ) AU - asset UTILISATION= (1.1.6)

Cash return on capital invested (CROCI) is metric that compares the cash generated by a company to its equity. It is also sometimes known as cash return on cash invested. It compares the cash earned with the money invested. This is a cash flow based measure as opposed to earnings based metric. Cash flow based metrics are more important for the investors because it is ultimately the cash that matters to the investors. Cash return on capital invested= (1.1.7)

The return on net assets (RONA) is a comparison of net income with the net assets. This is a metric of financial performance of a company that takes into account earnings of a company with regard to fixed assets and net working capital. The return on net assets (RONA) helps the investors to determine the percentage net income the company is generating from the assets. This ratio tells how effectively and efficiently the company is using its assets to generate earnings.

Return on Net Assets =


The figure for net income can be found in the income statement. Net income is also known as profit after tax. The figure for fixed assets can be found in the balance sheet. Fixed assets include property, plant and equipment, long term investments, and other non-current assets. The net working capital is defined as current assets minus current liabilities.


Chapter II. DIRECTIONS OF INCOME SOURCES DIVERSIFICCATION 2.1Analysis in dynamic of income sources componets at national and international level

As we know the main objectivesof the bank is to optimize and increase profits. In order to mentain these objectives banks are using some indicators of performance. Performance create for the banks the stability and depositar confidence.So is important to obtain a high performance for an effcicient financial system. Also we can say that if the bank has enought sources of income it become proftable. Profitability is an indicator of a bankss capacity to carry and increase its capital. Supervisors should welcome profitable banks as contributors to stability of the banking system. Profitability ratios should be seen in context and the cost of free capital should be deducted prior to drawing conclusions about the profitability.17 In this way the connection between the income and profitability is owerviewed through the link incomes-performance-risk. Banks foing funds follow this connection by accepting funds from depositors and in return they issue claims upon themselves.In order to determine the main major activities of commercial banks we use the maked up information from balance sheet and income statement. At the national level the result obtained from our banks are collected in balance sheet, income statement and are declared quartely and in following formFIN1 balance, Fin2 Profit or loss (prepared in accordance with the instructions the


GREUNING, Hennie Van, BRATANOVIC, Sonja Brajovic. Analyzing Banking Risk A Framework for Assessing Corporate Governance and Risk Management THIRD EDITION. Washington, D.C.: The WORLD BANK, 2009. ISBN 978-0-8213-7728-4. 20

financial statements FINREP individually, applicable to banks), prepared in dynamics -current period and the end of the accounting year; At international level banks are using International accounting Standart in accordance with International Financial Reporting Standards (IFRSs). This Standard does not apply to the structure and content of condensed interim financial statements prepared in accordance with IAS 34 Interim Financial Reporting. However, paragraphs 1535 apply to such financial statements. This Standard applies equally to all entities, including those that present consolidated financial statements and those that present separate financial statements as defined in IAS 27 Consolidated and Separate Financial Statements. Bank management is primarily focused for profit , performance upper bank . The literature but also in banking practice known different measurement instruments and bank performance rendering , but one of the more effective it the indicator system is used for this purpose. In this chapter I present the main theoretical performance evaluation indicators at bank.In next table are shown the main important indicators for bank performance. Table 2.1.1 Analysis of evolution of income and performance indicators in RM for years 2010-2013
(percentage) Indicators ROA ROE Income from interest /Average of interest assets Net interest margin Efficiency indicator
Calculation (%)

2010 0.47 2.61 4.63

2011 1.95 11.51 11.43

2012 1.1 5.6 10.3

01.10.2013 1.5 10.5 9.1

6.44 150.00

6.56 181.85

5.1 112.6

4.0 142.5

Source: Elaborated by the author based on the information Financial Statement of banking system in RM [online] [cited on 28.12.2013]. Available: <www.bnm.md >.


Financial performance indicators help us to assess the economic and financial condition of banks. System performance indicators is composed of the foloowing indicators: Profit,return on assets,return on equity,retunr on capital, gross profit,net profit rate,rate of return, leverage. Next table show us how efficient is national banking system for actual perioad (quater III,2013). Table 2.1.2 Efficiency standing for commercial banks in RM for year 2013,quater III Position Name of CB 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Moldindconbank Moldova Agroindbank Victoriabank Energbank Mobiasbanca Banca Sociala Unibank Banca de finane i comer Procreditbank EuroCreditbank Banca de Economii BCR Comerbank Eximbank

Total Net ROE ROS ROA Position incomes,lei incomes,lei % % % in 2013

833556859 918573197 790123242 155862677 325055146 278655052 224176603 139560641 288704394 41470149 354282529 71927517 59518559 283602753 208978613 242488094 185491725 38015157 56738935 45684341 32713710 18257677 10372072 4555515 17787397 4465622 4342645 -31302052 18.62 25.07 10.98 26.40 11.82 23.48 10.11 24.39 6.56 6.56 9.32 4.89 2.81 2.30 1.97 1.57 1.73 0.00 17.46 16.39 14.59 13.08 3.59 10.9 5.02 6.21 7.30 0.00 0.087 0.076 0.072 0.083 0.086 0.074 0.074 0.078 0.100 0.121 0.051 0.066 0.060 0.063 3 1 2 9 4 5 6 7 13 10 8 12 11 4

Source: http://www.evm.md/public/Clasamente/Ranking%20eficienta%20BCA%20tr%20III%202013ro.pdf

For most of these ratios, a higher value is desirable. A higher value means that the company is doing well and it is good at generating profits, revenues and cash flows. Profitability ratios are of little value in isolation. They give meaningful information only when they are analyzed in

comparison to competitors or compared to the ratios in previous periods. In the next table (Table 2.3 Value of performance indicators of most important commercial banks of RM ) i try to compare and identify the value of this indicators and to appreciate its impact over the banking activity.Also i observed how is done the dynamic according to banking system in RM. Table 2.1.3 Value of performance indicators of most important Commercial Banks of RM for years 2011-2012

Net interest margin 2011 2012 Banca de Economii 6.4 5.1 Banca Social 7.07 6.31 Euro Credit Bank 10.25 10.51 Eximbank Gruppo Veneto 6.58 6.04 Banca FinComBank 4.20 22.64 Moldova-Agroindbank 6.40 5.06 Moldindconbank 6.17 5.10 Victoria Bank 5.63 3.91

CB of RM

ROA 2011 1.8 1.44 2.58 1.67 2.22 3.12 1.78 2.15 2012 1.1 1.87 1.43 -0.48 0.84 2.91 2.29 2.40

ROE 2011 10.6 8.7 5.80 8.38 2012 5.6 9.08 2.72 -1.83

13.0 3.87 16.71 14.62 14.89 17.89 17.79 16.32

Source: Elaborated by the author based on the Information on the Financial banking activity [online] [cited on 16.12.2013] Available <bnm.md>

According to this results the bank which has the biggest value of ROA is ,,Moldova Agroindbank with 2.91% and also inted to increase with 0.25 percentage point in dynamic. The next bank which is also appreciated with a good ROA is ,,Victoriabankand ,,Moldindconbankwhich exceed the level of 2 %.The negative value of ROA is registred at ,,Eximbank with -0.48.As ROA indicates how profitable is the bank relative to total assets we can say what banks has a good management and how is using its assets to generate earnings. If we speak about the ROE the lieder is ,,Moldindconbank registered amount of 17.89% and it increase in comparison with previous year with 3 %,the

second one is ,,Victoriabank which has 16.31% but it decrease in dynamic. Also ,,Banca Sociala has a good indicater of ROE with 9.08%.A negative value is registred by ,,Eximbank -1.83%. ROE represent the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. In review, return on equity measures the rate of return on the ownership interest(shareholders' equity) of common stockholders. Therefore, it shows how well a company uses investment funds to generate earnings growth. Return on assets shows how profitable a company's assets are in generating revenue. Return on assets is equal to net income divided by total assets. If we compare the results we will obtain next figure:
3.5 3 2.5 2 1.5 1 0.5 0 -0.5 -1 -1.5 2011 2012
Banca de Economii Banca Sociala Euro credit Eximbank Fincombank Moldincombank MoldovaAgroindbank Victoriabank

Source: elaborated by author in the base of BNM annual reports [online] [cited on 16.12.2013] Available <bnm.md>

Figure 2.1.1 Evolution of ROA of most important banks in RM for years 2011-2012 If we speak about the international level the evaluation of a bank performance is made by using the balance sheet and report of income to evaluate how well the bank is performing. First one we analyze the financial statement and then we will decide what objectives than bank has.

Bank performance must be directed toward specific objectives. Affair evaluation of any banks performance should start by evaluating whether it has been able to chive the objectives its management and stockholders have chosen. Certainly many banks have their own unique objectives. Some wish to grow faster and achieve some long range growth objective. Other seems to prefer the quiet life minimizing risk conveying the image of a sound bank but with modest rewards for their shareholders.18 While all of foregoing goals have something to recommend them, increasingly banks are finding that they must pay close attention to the value of their stock. Intended, the basic principles of financial management as that science is practiced today, suggest strongly that attempting to maximize a bank stock value is the key objective that should have priority over all others. All banks are corporations which stockholders interested in what happens to the value and yield of their stock. 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. Profitability ratios measure a companys ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed. Some background knowledge of the nature of business of a company is necessary when we analyze profitability ratios. For example sales of some businesses are seasonal and they experience seasonality in their operations. The retail industry is example of such businesses. The revenues of retail industry are usually very high in the fourth quarter due to Christmas. Therefore, it will not be useful to compare the profitability ratios of this quarter with the profitability ratios of earlier quarters.

ROSE Peter. Commercial bank management, THIRD EDITION. New York,2002.P.136 25

For meaningful conclusions, the profitability ratios of this quarter should be compared to the profitability ratios of similar quarters in the previous years. In international practice are used the following profitability ratio : Cash return on capital investees, effective rate of return, gross profit margin, net interest margin, ,DuPont formula, Earnings before interest after taxes, earnings retention ratio, earnings before interest ,tax profitability ratios and other. Table2.1.4 Components of Return on Equity for All Insured U.S banks (2010-2012) Year 2012 2011 2010 2009 2008 ROE 8.54 6.52 5.74 -0.49 -11.61 Net profit margin 3.34 3.57 3.69 3.56 3.33 Assets utilization 1.06 0.75 0.64 -0.05 -1.10

Source: Information about all insured U.S Banks .Available at [www2.fdic.gov/qbp]

This table shows clearly the causes why the industry profit margins surged upward as revenues grew substantially faster than operating expenses, which causes US banking assets utilization ratio to rise as well. Partially offsetting these positive influences the industry equity multiplayer has fallen in recent years as banking equity to use more and also increase faster. One reason was pressure from regulators to use more equity capital and less debt to finance the acquisition of the bank. Is clearly that the year 2008 and 2009 was not so good for banking sector and it reflects the negative value of ROE and ROA it means that is invested too much amount of capital into production while simultaneously receiving little income. The system perpetuates only so long as an ever-larger group of new borrowers can be found to create new money to pay the interest on the old money. That is what makes it a pyramid. More money is created out of thin air in response to a loan, but the total debt still exceeds the total money


supply. That is why the government and media always talk about the growth of the economy. In our situation the year to year growth of income in international banking sector will be represented in the following way:

Source: Quartely Noninterest Income of all banks in US.[online] Available at [ www2.fdic.gov]

Diagram 2.1.2 Evolution of non interest income at international level for years (1985-2014)

Calculation of efficiency indicators necessary for the following reasons: - Allow comparison with the previous period indicators of objective values; - Helps bank management to establish objectives for size compromises between risk and profit to the bank can be profitable; - Comparing the results obtained with the results of similar banks, helps establish the strengths and weaknesses of the bank.


2.2 Diagnostic of ,,Moldova-AgroindbankJSC for years 2010-2013

One of the main objectives of the bank is to optimize its profits. Bank profit is finally essential purpose of the establishment and operation of the bank. It appears as the difference between revenues and expenses. Principle income sources of a bank are interest loans, fees and commissions for different customer operations and profits from commercial operations. The performance achieved by the bank can be accessed from following indicators: - Economic yield expressed as the ratio between total expenditures and total revenues, calculated according to the banks profitability model Economic yield = *100% (2.2.1)

Economic yield
50 40 30 20 10 0 2010 2011 2012 2011 38.4 2012 46.59



Economic yield


= 38.40%

2010 Economic yield 36.76



Source: Elaborated by the author based on the information Raportul annual and Balance sheet [online] [cited on 06.12.2013].Available:<http:/http://www.moldindconbank.com/m/file/2010/2011/2012Raport_ANUAL/Raport_AN UAL.pdf>.

Fig.2.2.1 Economic yield for Moldova Agroindbank It is considered that the profit is higher when the indicator has low values; a factor influencing the situation can be expenses other than those paid for funds raised, it is important to reduce them in order to improve bank performance. In our case the indicator is increasing in dynamic which is not a favorable situation, from 2010 to 2012 it increase with 9.83%.

The share of interest income to total assets=



Share of interest income

4 3 2 1 0 2010 2011 2012 2010 Share of interest income 3.32 2011 3.07 2012 1.52


= 3, 32%

Share of interest


=3, 07%



Source: Elaborated by the author based on the information Raportul annual and Balance sheet[online] [cited on 06.12.2013].Available:<http:/http://www.moldindconbank.com/m/file/2010/2011/2012Raport_ANUAL/Raport_AN UAL.pdf>.

Fig.2.2.2 Share of interest income for Moldova Agroindbank The share of this indicators start to decrease from 2011 by the influence of economical and political factors in the country. The decrease is significantly from 3,07% to 1,52%. -Interest income over assets generating interest-shows the average interest rate on interest bearing assets. The higher the indicator the better is for the financial perspectives.

Interest income/Assets
2012 2011 2010 0

(2.2.3) (2010)= :100%=2, 61 : 100%=3, 30% :100%=2, 57%

2.57 3.3 2.61

(2011)= (2012)=

2 Income/Assets

Source: Elaborated by the author based on the information Raportul anual [online] [cited on 06.12.2013]. Available:<http:/http://www.moldindconbank.com/m/file/2010/2011/2012 Raport_ANUAL/Raport_ANUAL.pdf >.

Fig.2.2.3 Interest income ratio for Moldova Agroindbank


Noninterest income over total assets- helps to understand and analyze the sources of non interest income of the bank. (2.2.4)

Non Interest income/Assets

2012 2011 2010 0 2 Income/Assets 1.75 2.32 3.8

= 2, 32%


=1, 75%



Source: Elaborated by the author based on the information Raportul anual [online] [cited on 06.12.2013]. Available:<http:/http://www.moldindconbank.com/m/file/2010/2011/2012 Raport_ANUAL/Raport_ANUAL.pdf >.

Fig.2.2.4 Noninterest income ratio for Moldova Agroindbank

Interest income on investment securities/Total investment securities: is recommended to be used to determine and analyze the interest rate on these assets Interest income on securities purchased for sales/Total securities purchased for sale is recommended to be used to determine the interest in dynamic. -The rate of profit: this indicator reflects the efficiency of expenditures made by the bank management, expenses related to resource management and investments, risks and ensure the functioning of the bank. The magnitude of this indicator depends primarily on the ratio between income and bank charges and secondly the structure of income and banking cost. -Coverage of operating expenses: reflect the extent to which income from operations covers expenses incurred on behalf of clients own operation

Coverage of operating expenses=


Coverage of operating expenses

2012 2011 2010 0 5 10 5.74 9.13 10.11







Source: Elaborated by the author based on the information Raportul anual [online] [cited on 06.12.2013]. Available:<http:/http://www.moldindconbank.com//file/2010/2011/2012 Raport_ANUAL/Raport_ANUAL.pdf>.

Fig.2.2.5 Noninterest income ratio for Moldova Agroindbank CB,,Moldova Agroindbank consolidated its position as the most efficient bank in the country. According to a new rating of the efficiency achieved by EVM Consulting Investment Agency and published on October, MAIB is first bank after the results in the second quarter of this year. The first place in this rating is reflected by Total income and Net income. Thus, in the second quarter of this year, Moldova Agroindbank recovered the highest net income, which is 166 787 633 lei. The evolution of banks performance at the national level is presented in the next figure:
Efficiency ratios of banking system for year 2013
2.5 2 1.5 1 0.5 0



Banca de

Banca Sociala



Banca de

Efficiency ratios Comerbank Eximbank BCR



Source: Elaborated by author in the base of EVM Consulting Investment Agency[online] [cited on15.11.2013] Available on [www.EVM.MD]

Figure 2.2.6 Performance through the net income in the banking sector



2.3 Directions of bank performance improvement in RM

Moldova is just a small part in Europe, but nevertheless it has achieved some success in building up the framework of a functioning market economy, especially in the banking sector. This framework, however, exists to a much larger degree in written rules than in practice. Although quantitative indices of banking sector soundness appear healthy, several qualitative aspects of the banking system are less comforting. Of particular worry are: The governance problems stemming from the growing role of the government in the banking and insurance system; Other ownership problems, including the opaque ownership of financial institutions and corporations, as well as the near-absence of fit-and-proper strategic investors; The potential adverse impact of exchange rate appreciation (stemming from large Foreign exchange inflows) on the banks balance sheets through their clients; The effects of the recent credit boom, when banks ma y well have granted loans that ultimately could prove to be below par, but which do not yet appear in the classified categories. The analysis of data and stress tests has to be qualified because supervisors are Hampered by other extraneous, oftentimes political constraints and have difficulty in obtaining useful information about some of the ultimate beneficial owners of the banks. The banks, in turn, may have only anecdotal evidence about the shareholders that control many of their borrowers. In view of this opaque ownership structure of many banks and companies, the bank supervisor, the NBM, is unable to ensure that the prudential limits for connected lending and large exposures are observed and has no possibility to hold fully accountable the controlling shareholders of the banks.

In addition to the underlying structural weaknesses, there are several potential macroeconomic problems that increase the vulnerability of the financial system. These include: - the direct financing of the state budget by the central bank against the background of the weak fiscal and external situation; - dependency on remittances; - dollarization, in combination with significant exchange rate volatility. In view of the conflicts between the governments macroeconomic stan ce and the steps that would be needed to handle these vulnerabilities, the ability of the central bank to alleviate the risks inherent in the above factors is limited. On the other hand, the framework of written rules and regulations supporting banks is to a large extent consistent with international standards, although implementation is sometimes less so. In the banking sector prudential rules, accounting and auditing, and much Overall, the banking sector demonstrates impressive levels of earnings, capitalization, and a low level of classified or nonperforming assets. The key financial soundness indicators have strengthened in the past five years, though the smaller banks performance continues to lag behind the sector. Although the smallest five banks have much higher Capital Adequacy Ratio (CAR), they have much lower Return on Assets (ROA) and Return on Equity (ROE) than the largest five banks. The NBM has established a loan classification category loans under supervision as its Category B classification, requiring only a 5 percent provision: such classified loans represent 35.3 percent of total loans, which could be a leading sign of future problems. In the absence of a liquid secondary market, efficient liquidity management remains a challenge, with few available instruments. Overall, banks hold 75 percent of all government securities (although this represents only about 6.5 percent of their total assets) and their liquidity has remained well maintained.


As I observed from what I studied banks operate on the basis of profitability, as any company permanently by following getting net profit in terms of specific risks as general economic developments, restriction imposed by BNM, insolvency, financial structure of the bank s) any bank must consider in doing business sale. Profitability is an indicator of the competitive position of banks and banking markets and ensures the stability and quality banking management. Banking practice that relies on attracting deposits and granting credit our appliances today is today only a part of the specific activity of banks is often less profitable as trading in financial markets and generate income with commissions. Actually banking activity differ from other areas if we look after its functions and characteristics of most its products and services. Therefore in banking management creates the connection between profit and Heavenly proportionally is correlated with iincomes.ROA and ROE are some of the most important calculations that reflect income. Banks sometimes acting under uncertainty more than non-banking organizations both in the resources not take how stability especially in the field of investments that contain a risk factor in nature. Banks obviously want as large a profit from activities and equally to minimizing risk thats why diversification of the bank's income relies first to determine the soundness of the bank, the degree of its exposure against various categories. Therefore financial diagnosis on bank activity has two components: -diagnosis profitability -diagnosis of risk


BIBLIOGRAFY I.Normative acts

1. Instruction on FINREP financial situation at individual level, applicable to banks (Decision of the Council of Administration of the National Bank of Moldova no.292 of December 15, 2011, Official Monitor of the Republic of Moldova no.227-232 of December 23, 2011). [online] [cited on 12.12.2013] Available: <www.bnm.md>. 2. Law on Financial Institutions No. 550-XIII of 21.07.1995[online] [cited on 12.12.2013] Available: <www.bnm.md>. 3. Financial indicators on the banking system of the Republic of Moldova, 2012[online] [cited on 12.12.2013] Available: <www.bnm.md>. 4. Regulation on outsourcing the banks activities and operations, approved by the Decision of the Council of Administration of the National Bank of Moldova no.241 of November 3, 2011, Official Monitor of the Republic of Moldova no.227-232 of December 23, 2011, Art.2099[online] [cited on 12.12.2013] Available: <www.bnm.md>. 5. Regulation on publishing information on financial activity by licensed banks of the Republic of Moldova, approved by Decision of the Council of Administration of the National Bank of Moldova no.392, December 21, 2000, Official Monitor of the Republic of Moldova no.163-165 of December 29, 2000, Art.446 (with further amendments and completions)[online] [cited on 12.12.2013] Available: <www.bnm.md>. 6. Regulament cu privire la activitatea de creditare a bancilor care opereaza n Republica Moldova [Pct. 4.2.1 modificat prin Hot. BNM nr.110 din 14.04.2005, in vigoare 22.04.2005].[online] [cited on 12.12.2013] Available: <www.bnm.md>.


II.Scientifical Papers 7. BESSIS, Joel. Risk management in banking THIRD EDITION. West Sussex: John Wiley and Sons, LTD, 2010. 81 p. 8. BITNER J.W.; GODDARD, R.A. Successful Bank Asset Liability Management, John Wiley & Sons Inc, (1993).New York. 155 p. 9. BLACK Tyron; DANIEL Donnie. Money and Banking. Bussiness Publications, INC,Plano,Texas 75-77 p. 10.BASCO, Cezar; DARDAC, Nicolae. Management bancar. Bucureti: Editura Economic, 2002. 48 p. 1. BRIGHAM E.F.; GAPERSKI. L.C., Financial management. Theory and Practice, 6 th edition, the Dryden Press, U.S.A. (1992) 89 p. 2. DAMODARAN Aswath. Investment valuation: tools and techniques for determining the value of any asset.New York: John Wiley & Sons,2003. 108 p. 3. DARDAC, Nicolae; VASCU, Teodora. Moneda si Credit. Bucuresti: Editura Economica, 1991. 68 p. 4. DARDAC, Nicolae; BARBU, Teodora Cristina. Institutii de credit. Bucuresti: Editura Economica, 1993. 76 p. 5. DNIL, Nicolae; BEREA, Aurel Octavian. Managementul bancar fundamente i orientri. Bucureti: Editura Economic, 2000. 54 p. 6. DEDU, Vasile. Gestiune si audit bancar. Editura Economica, 2003. 72 p. 7. GREUNING, Hennie Van; BRATANOVIC, Sonja Brajovic. Analyzing Banking Risk A Framework for Assessing Corporate Governance and Risk Management THIRD EDITION. Washington, D.C.: The WORLD BANK, 2009. ISBN 978-0-8213-7728-4. P. 101-118 8. TRENCA, Ioan. Metode i tehnici bancare. Cluj Napoca: Editura Casa Crii de tiin, 2006. 123 p. 9. ROTARU, Constantin. Managementul performanelor bancare. Bucureti: Editura Expert, 2001. 88 p. 10.STOICA, Maricica. Management bancar. Bucureti: Editura Economic,1999. 95 p. 11.BRENDEA; DEANU V.E.; ZAMFIRESCU M.Riscul i performana creditului bancar n Romnia, Editura Coresi, Bucureti,2001. 126 p.


III. Statistical sources and data

12 .www.bnm.md 13. www.maib.md 14. www.moldinconbank.md 15. www.investopedia.com 16. www.businessdictionary.com 17. www.bis.com