PERFORMANCE ASSESSMENT

Performance Analysis

Return Analysis ROE analysis Matrix analysis Data Envelopment Analysis

Risk Analysis Credit risk Liquidity risk Market risk Price risk Interest rate risk Operational risk

Capital Adequacy Analysis

ROE ANALYSIS

ROE Analysis

ROE = ROA X Equity Multiplier ROA = Net Profit / Total Assets Equity Multiplier = Total Assets / Total Equity ROA = Net Profit Margin x Asset Utilization Net Profit Margin = Net Profit / Operating Revenue Asset Utilization = Operating Revenue / Total Assets

ROA Analysis

Net Interest Margin = (Interest income Interest

expense)/ Total assets

Net Non-interest Margin = (Non-interest income Non-

interest expense) / Total assets

Net Operating Margin = (Total operating income Total

operating expense) / Total Assets

Earnings Spread

Profitability Ratios

Break-even yield ratio

Break-Even Yield =((Interest Expense + Non-Interest

Expense - Non-Interest Income) / Average Earning Assets)

X 100

Cost of funds ratio = (Interest on Borrowings / Total Borrowings)

Return on advances ratio = (Income from Advances / Total

Advances)

Return on advances adjusted for cost of funds ratio = (Income

from Advances Interest on Borrowings) / Total Advances)

Sub-Categorization Analysis

Interest

Rate analysis

Composition analysis

Volume analysis

Non-interest

Fees as a percentage of non-interest income

Trading profits as a percentage of non-interest income

Other income as a percentage of non-interest income

ROE Analysis

Tax Management Efficiency

Net income / Pre-tax net operating income

Expense Control Efficiency

Pre-tax net operating income / Total Operating revenue

Asset Management Efficiency

Total operating revenue / Total assets

Funds Management Efficiency

Total Assets / Total Equity Capital

Operating Efficiency

Operating Income as a Percent of Working Funds

Fund based Income as a Percent of Operating Income

Fee based Income as a Percent of Operating Income

Business Efficiency

Demand Deposit of Total Deposits

Saving Deposit of Total Deposits

Time Deposit of Total Deposits

Deposits within India as Percent to Total Deposits

Deposits Outside India as Percent to Total Deposits

Employee Efficiency

Business per Employee

Profit per Employee

Wages / Total Expenses

Operating Income per Employee

Operating Profit per Employee

Administrative Expenses per Employee

Deposits per Employee

Fund Advances per Employee

Branch Efficiency

Operating Income per Branch

Operating Profit per Branch

Net Profit per Branch

Personnel Expenses per Branch

Administrative Expenses per Branch

Financial Expenses per Branch

Borrowings per Branch

Advances per Branch

Deposits per Branch

Risk Analysis

Standard Deviation / Variance Net income ROE ROA Market return

Beta Equity beta Income beta Operating beta

Credit Risk

Gross non performing assets / Total loans & leases

Net non performing assets / Total loans & leases

Net non performing assets / Equity

Net NPA

Net NPA = Gross NPA less Provision for NPA

NPA is a loan for which the interest or the principal or

both remain unpaid for two quarters or more.

Gross NPA

Poor credit recovery

Little legal support

Lengthy legal proceedings

Sticky loans

Net NPA

Banks in some countries provide for NPAs as a general provision and write off losses by identifying them at an early stage. In such countries, banks would carry very little NPAs in their books since recovery measures are expedited so as to avoid bankruptcy. Gross NPA and Net NPA is absent in these countries.

In India, owing to the time lag involved in the recovery, banks tend to hold on to advances considered irrecoverable in their books. In a normal scenario these should be completely written off from the books. This leads to gross NPAs.

Liquidity Risk

Liquid funds / Total assets

Cash and due from banks / Total assets

Cash and Government securities / Total assets

Market Risk

Price risk

Book value of assets / Market value of assets

Interest Rate risk

Interest sensitive assets / Interest sensitive liabilities

Other Risk

Operational risk

Legal risk

Reputation risk

Strategic risk

Capital risk

Market price / EPS

Net worth / Total assets

CRAR

Capital Adequacy Ratio

Computation of CAR

Tier I capital

Tier II capital

Risk Weighted Assets (RWA)

Capital to Risk Weighted Asset Ratio (CAR or CRAR)

Capital Adequacy Ratio:

Capital Adequacy Ratio = (Tier I capital + Tier II capital) /

Risk Weighted Assets

Case Analysis of Bank Performance

Financial Data Analysis Relating to a Public Sector

Bank is Presented Here

ROE Analysis

ROE = Net profit / Equity = 28% ROE = ROA x Equity Multiplier = 0.42% x 66.83 ROA = Asset utilization x Net Profit = 0.0951 x

4.42% OM = (OI-OE)/Assets = 8.03% NIM = (II IE)/Assets = 1.80% NNIM = (NII NIE)/Assets = -0.36% Earnings spread = 2.45%

Breakeven Yield Ratio

Total expense = Interest Expense + Non Interest Expense

Desired Interest Income = Total Expense - Non-Interest Income

Average Assets Breakeven yield = 7.32% Cost of Deposits = 6.97% Cost of Borrowings = 1.89% Cost of funds = 6.92% Return on advances = 14.77% Return on advances adjusted to cost of capital = 7.85%

Return on Equity Analysis

Tax Management Efficiency = 33.50% Expense control Efficiency = 13.20% Asset Management Efficiency = 9.52% Funds Management Efficiency = 66.83

Operating Efficiency

Operating Income Efficiency = 9.51% Fee Based Efficiency = 5.96% Fund Based Efficiency = 93.36%

Business Efficiency

Demand Deposit of Total Deposits = 7.59%

Saving Deposit of Total Deposits = 16.45%

Time Deposit of Total Deposits = 75.97%

Deposits within India to Total Deposits = 100%

Deposits Outside India to Total Deposits = 0%

Employee Efficiency

Business per employee = 751.60

Profit per employee = 2.19

Wages / Total expenses = 5.00

Operating Income per Employee = 49.58

Operating Profit per Employee = 41.85

Administrative Expenses per Employee = 2.73

Deposits per Employee = 455.41

Fund Advances per Employee = 295.19

Branch Efficiency

Operating Income per Branch = 563.78 Operating Profit per Branch = 475.97 Net Profit per Branch = 24.93 Personnel Expenses per Branch = 56.74 Administrative Expenses per Branch = 31.07 Financial Expenses per Branch = 1.11 Borrowings per Branch = 58.81 Deposits per Branch = 5179.05

Risk Analysis

Coefficient of Variation Interest income / Total assets = 0.0633 ROE = 0.4716 ROA = 0.4585 Net NPA / Net Advances = 0.2025

Credit Risk

Gross NPA / TA = 1.95% Net NPA / TA = 0.82% Net NPA / Equity = 31.31%

Liquidity Risk

Liquid funds / Assets = 11.85 Cash and due from banks / Assets = 9.19% Cash and Government securities / Assets =

32.11%

Market Risk

Interest sensitivity = 95.83% Capital adequacy ratio = 13.15%