PERFORMANCE

ANALYSIS TOOLS
For
BANKS
By Rahul kumar

PERFORMANCE
ANALYSIS FACTORS
OPERATING EXPENSES PER BRANCH
(PSBs)
PROFIT PER BRANCH
BUSINESS PER EMPLOYEE (PSBS)
EFFICIENCY AT EMPLOYEE LEVEL
(PSBS)

 ESTABLISHMENT EXPENSES PER

EMPLOYEE (PSBS)
Establishment expenses (staff costs) include
expenses made on salaries,
allowances, provident fund, bonus, etc
CREDIT - DEPOSIT RATIOS (PSBS)
PROFIT PER EMPLOYEE
PROFITABILITY INDICATORS (PSBS)

PROFITABILITY INDICATORS (PSBS)

RETURN ON ASSETS (PSBS)
RETURN ON EQUITY (PSBS)
NON INTEREST INCOME AS
PERCENTAGE OF TOTAL INCOME (PSBS)
(i)Commission, exchange and Brokerage,
(ii) Profit on 'sale of investments (net),
(iii) Profit on revaluation of investments,
(iv) Profit/loss on sale of land, buildings and other
asserts,
(v) Profit on exchange transactions (net),

1. CAMEL RATINGS
Performance Evaluation Technique used
by most banks across the world
undertakes all the important criteria, i.e.
(CAMEL)
Capital
Assets
Management
Earnings; and
Liquidity
Internal supervisory tool for evaluating soundness of banks and for identifying
those banks which require special
supervisory attention or concern

Recommended by Padmanabhan Committee (1995)

- rated on a five point scale (A to E)

Evaluation Parameters (Ratios)

a) Capital Adequacy : Capital to Risk-Weighted
Assets . A sound capital base strengthens
confidence of depositors
b) Asset Quality : Non-Performing Loans to Total
loans . Indicative of quality of Bankers` credit
decisions. It is indicative of poor credit decisionmaking
c) Management : Non-interest expenditures to
total assets . Measures working of the
management. Expenses, such as payroll, workers
compensation and training investment, reflects the
management policy stance.

(d) Earnings : Return on Asset

(e) Liquidity : Cash maintained by banks

and balances with RBI, to Total Asset
ratio
It is an indicator of bank's liquidity.
Banks with a larger volume of liquid
assets are perceived safe, allow banks to
meet unexpected withdrawals.

RATING SYMBOLS

A -Bank is sound in every respect

B - Bank is fundamentally sound but with
moderate weaknesses
C - financial, operational or compliance
weaknesses that give cause for
supervisory concern
D - Serious or immoderate finance,
operational and managerial weaknesses
that could impair future viability
E - critical financial weaknesses and there
is high possibility of failure in the near
future.

2. Evaluating bank Performance

1. A Framework for Evaluating Bank Performance
Internal Performance
External Performance
Presentation of Bank Financial Statements
2. Analyzing Bank Performance with Financial Ratios
Profit Ratios
Risk Ratios
3. Internal Performance Evaluations Based on
Economic Profit
RAROC (Risk-Adjusted Return on Capital)
EVA (Economic Value Added)

Internal Performance
Bank planning (policy formulation)
Goals, budgets, strategic planning
Technology
Computers, communications, payments
Personnel development
Challenges (personal selling and geographic
expansion)
Job satisfaction (training and compensation)

1. A Framework for Evaluating Bank Performance

External Performance
Market share
Earnings effects
Role of technology
Regulatory compliance
Capital
Lending
Securities
Public confidence
Deposit safety
Bank image

Presentation of Bank Financial Statements

Balance sheet
Assets: cash assets, loans, and securities
Liabilities: deposit funds and non-deposit funds
Capital: equity capital, subordinated notes and
debentures, loan loss reserves
Income Statement
Interest income
Non-interest income
Interest expenses
Non-interest expenses (including provision for loan
losses)
Net profit

2. Analyzing Bank Performance with Financial Ratios

Profit ratios
Rate of return on equity
ROE = NI/TE (net income after taxes/total equity)
Rate of return on assets
ROA = NI/TA (net income after taxes/total assets)
Other profit measures
Net interest margin
NIM = (Total interest income - Total interest expense)/Total assets
Note: municipal bond interest is not taxable, such that it must be
grossed up to a pre-tax equivalent basis by dividing municipal
interest earned by the factor (1 - tax rate of bank).

Analyzing Bank Performance with

Financial Ratios
Profit ratios
Unraveling profit ratios
ROE = ROA x TA/TE (total assets/total equity or equity
multiplier). where ROE (return on equity.)
Thus, by decreasing equity, a bank can increase ROE based on any
given level of ROA.

ROE = NI/OR x OR/TA x TA/TE (where OR is operating

revenue).
The NI/OR ratio is the profit margin, while OR/TA reflects asset
utilization. By using this breakdown, one can make inferences
concerning the reason for say increases in ROE. If asset utilization
and equity multiplier did not change, the profit
margin must
have
increased due to cost savings pushing this ratio up.

Analyzing Bank Performance with

Financial Ratios
Risk ratios
Capitalization
Leverage ratio
Total equity/Total assets
Total capital ratio
(Total equity + Long-term debt + Reserve for loan
losses)/Total assets
Note: book values and market values likely are different and
yield different results.

Analyzing Bank Performance with Financial

Ratios

Risk ratios

Asset quality
Provision for loan loss ratio
= PLL/TL (provision for loan losses/total loans and leases)
Loan ratio
= Net loans/Total assets
Loss ratio
= Net charge-offs on loans (gross charge-offs minus
recoveries)/Total loans and leases
Reserve ratio
= Reserve for loan losses (reserve for loan losses last year
minus gross charge-offs plus PLL and recoveries)/Total
loans and leases
Non-performing ratio
= Nonperforming assets (nonaccrual loans and
restructured
loans)/Total loans and leases

Analyzing Bank Performance with

Financial Ratios
Risk ratios
Operating efficiency (cost control)
Wages and salaries/Total expenses
Fixed occupancy expenses/Total expenses
Liquidity
Temporary investments ratio
= (Fed funds sold, short-term securities, cash, trading account
securities)/Total assets
Volatile liability dependency ratio
= (Total volatile liabilities - Temporary investments)/Net loans
and leases
Note: This ratio gives an indication of the extent to which hot
money is being used to fund the riskiest assets of the bank.

Analyzing Bank Performance with

Financial Ratios
Other financial ratios
Tax rate = Total taxes paid/Net income before taxes
Dollar gap ratio
= Interest rate sensitive assets - Interest-rate sensitive liabilities
Total assets
where rate-sensitive means short-term with maturities of less than
one year (or repriced in less than one year).

3. Internal Performance Evaluations

Based on Economic Profit
EVA (Economic value added)
= Adjusted earnings Opportunity cost of capital,
where adjusted earnings is net income after taxes, and the opportunity
cost of capital equals the cost of equity times equity capital.

RAROC and EVA

Both methods are beneficial in assessing managerial performance
and developing incentive compensation schemes compatible with
shareholder wealth goals.
RAROC has a short-run perspective (i.e., business unit profit is
compared to the units capital at risk)
EVA has a long-run perspective (i.e., business unit profit is
compared to the cost of capital of the bank)

Risk-adjusted return on
capital (RAROC) is a Risk-based
profitability measurement framework for
analysing risk-adjusted financial
performance and providing a consistent
view of profitabilty across businesses

Ratio Analysis
Ratio Analysis is an effective tool of analysis
of financial statements. In the present study
following selected ratios are calculated to
have in-depth analysis and interpretation of
vital areas of accounting and finance, likeprofitability, current obligation, solvency,
efficiency and risk. Under each of these five
categories six different ratios are calculated.

Net worth ratio or Return on Shareholders funds

Net worth ratio or Return on Shareholders

funds This ratio measures the returns
available to the shareholders on the capital
invested by them in the enterprise. As this
ratio reveals how well the capital of a firm
is being used, so higher ratio is considered
as better.
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