managing financial intermediaries
TRANSCRIPT
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Department of Economics
Managing FinancialIntermediariesText: Chapters 15 17, 22Rose: Chapters 4 & 5
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Goal for the day Develop a basic understanding of bank
management
Learn to interpret a banks financial information
Get ready for our guest speakers and yourbank projects
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Management objectives
Maximize shareholder wealth
Profitability
Liquidity Solvency
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Managements Challenges Size of bank, trade area, product mix
Portfolio of assets and liabilities
Efficiency in operations
Non-interest activities Pricing of assets and services
Acquisition of loanable funds
Risk management
Interest rate
Default
Credit
Tax management
Human resources
Others?
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Understanding bank management
through financial statements
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Basic financial statements Report of condition
Report of income
Funds flow statement Statement of stockholder equity
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Report of condition
Financial Outputs(assets, funds)
Financial Inputs (liabilities,equity)
Loans and leases Deposits from public
Investment in securities Non-public borrowings
Cash and deposits elsewhere Equity from stockholders
Facilities and other assets
Total Total
Assets = Liabilities + Equity
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Report of income
Financial Outputs(revenues)
Financial Inputs(costs)
Loan income Deposit interest costs
Security income Costs of non-deposit borrowings
Income from other deposits Overhead expenses
Income from fees and services Taxes
Total Total
Net Income after Taxes = Total Revenues Total Costs
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ASSESS THE FINANCIAL CONDITIONAND PERFORMANCE OF FIRSTNATIONAL BANK OF WAVERLY, IOWA
TTYN
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Measuring bank performance using
DuPont analysis
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DuPont analysis for banks
Definitions
ROE = NIAT/Equity
ROA = NIAT/Assets ROE = ROA x Assets/Equity
Assets/Equity = equity multiplier = EM
EM = leverage, funding sources for bankFNB Waverly example
ROA = 0.8%, EM = $258.9/$24.7 = 10.5
ROE = 0.8% x 10.5 = 8.4%
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If the equity multiplier is 10.5
Can you translate that into a more familiarmeasure of leverage say the D/A ratio?
D/A = 90.5
What does this leverage position tell us aboutbank management?
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More DuPont analysis
PM = NIAT/Total operating income PM = profit margin
Effectiveness of expense management andservice pricing
Total operating income = interest income +
non-interest incomeAU = Total operating income/Assets
AU = asset utilization
Portfolio management, mix of bank products
ROE = PM x AU x EM
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FNB Waverly example
Total operating income ($million)
$13.2 + $1.4 = $14.6
NIAT = $2.1Assets = $259.5
PM = $2.1/$14.6 = 14.2%
AU = $14.6/$259.5 = 5.6%ROE = .142 x .056 x 10.5 = 8.4%
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Risk management measures
Credit risk
Assets decline in value
Non-performing loans to total loans Net charge offs to total loans
Liquidity risk Insufficient liquidity reserves, need to borrow at
higher rates
Loan to deposit ratio
Purchased funds to total assets
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Risk management measures
Interest rate risk
Rate sensitive assets to rate sensitive liabilities
GAP analysis
Market risk
Financial market volatility impact on assetvalues
Ratio of fixed rate loans and securities to
floating rate
Duration analysis
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Risk management measures
Earnings risk
Impact of earnings volatility on banks value
Historical variability in ROA and ROE
Solvency or default risk
Risk of banks survival Equity to total assets
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Questions?