Title | Week 3:Bank performance |
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Author | Aoe Joe |
Course | Management Of Financial Intermediaries |
Institution | Monash University |
Pages | 3 |
File Size | 242.3 KB |
File Type | |
Total Downloads | 77 |
Total Views | 123 |
Tutorial Question & Answer...
Week 3: Bank performance 1. (a) List 2 measures of profitability based on ratios. Are these better compariso n methods (between banks) or are absolute dollar figures of net profit better? ROA = Net Income/Assets ROE = Net Income/Equity Leverage multiplier = Assets/Equity Ratios are better as banks have different sizes. A bank that has higher $ profit figure may not perform better based on size of equity invested to total assets employed. So we can use it to compare between bigger bank and smaller bank。
(b) Contrast the performance of the banks in Table 1 based on 2016 results. U se additional information to support your analysis.
Bank
Leverage multiplier
ANZ Westpac Bendigo & Adelaide Suncorp Bank of Queensland
13.56x 12.90x 13.40x 17.01x 13.09x
ROA (measures overall operating efficiency): Westpac performs best while Suncorp performs the worst. ROE (measures return to shareholders): Westpac performs the best while Bendigo performs the worst. Leverage multiplier: Westpac has the highest profitability while has the lowest leverage. Suncorp has the second highest profitability which is due to its highest
leverage. (c) What are the three types of comparisons typically used in analysing bank perf ormance? Trends: Comparison relative to bank’s own performance. Targets: Comparison with the bank’s stated targets/objectives. Peers: Compare with other similar banks/industry average. (d) Give an example of how a single comparison may give a misleading indication of a bank’s performance. A bank may perform better than it used to, but not as well as competitors. (E.g. A bank may have an increased ROE which appear positive. But if its peers have all reported even more growth then it is not such a positive outcomes.) 2. Distinguish between ROE and shareholder's rate of return.
3. a) Discuss the inadequacies of financial ratio analysis as a method of assessing bank performance and explain why there is no single measure of bank performance. Inadequacies of financial ratio analysis: Not detailed (Average/Aggregates hide detail) Backward looking, reflective past performance Omissions: No qualitative measure Ratios tend to compartmentalize financial analysis so it is important to consider linkages, e.g. increase in net interest income may reflect increase in credit risk. No off-balance sheet activities
Objective of banks: maximise shareholders’ wealth. There are a number of measures of shareholders’ wealth of risk and return. So there is no single measure of bank performance (b) What other indicators of bank performance might also be used? Financial ratio analysis cannot be used isolated because it needs to be validated. Other indicators: Quantitative measures:
Off-balance sheet/market data (e.g. financial guarantees, loan commitments) and qualitative performance (e.g. contingency liability) Share price data (e.g. share price, market share) Credit rating
Qualitative measures:
Staff turnover/morale Recent change of auditors Approach to corporate governance Award
(c) Monash Bank has recently had an increase in operating costs. List 2 ratios from the Dupont Model that will be impacted by this. Net (profit) margin= ROA=
Net income Revenue
(measures the effectiveness of cost control)
Net income (measures overall operating efficiency) Total assets
Net income= Revenue – Costs, it should be decreased since operating costs have been increased, which result in a lower net (profit) margin and ROA.
4. Please refer to the Major Banks survey at https://home.kpmg.com/au/en/home/industries/banking-capital-markets.html and explain some other measures of bank performance. Market Capitalisation Common Equity Tier 1 (CET1) average capital ratio -How much quality capital the bank has to support itself from losses Major bank survey -www.fips.kpmg.com.au Average cost-to-income ratio -Measures efficiency of costs compare to income Aggregate charge for bad and doubtful debts
Housing credit Net interest income= interest revenue – interest expense Net-non-interest income= non-interest income – non-interest expense
All the banks require to hold ( Capital Adequacy Ratio≫ 8 %=
regulatory capital ) Total RWAs
How do Monash increase its return/profitability by taking higher risk: List 2 possible ways. ROE=ROA −L. M . Taking higher credit risk by lending to risky borrowers
Taking higher capital/insolvency risk by borrowing more & holding less equity capital (Less to absorb capital loss)...