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Bank Management And Financial Services 9th Edition PDF | blogger.com
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Bank management and financial services pdf free download
To browse Academia. Skip to main content. Log In Sign Up. Financial Statements and Financial Firm. Akinola Akinwale. Financial Statements 6. What do we mean by the word perform when it comes to financial firms? In this case performance refers to how adequately a financial firm meets the needs of its stockholders ownersemployees, depositors and other creditors, and borrowing customers. At the same time, financial firms must find a way to keep government regulators satisfied that their operating policies, loans, and investments are sound, bank management and financial services pdf free download, protecting the public interest.
The success or lack of success of these institutions in meeting the expectations of others is usually revealed by a careful study of their financial statements. Why are financial statements under such heavy scrutiny today? One key reason is that banks and other financial institutions now depend heavily upon the open market to raise the funds they need, selling stocks, bonds, and short-term IOUs including deposits.
In J. Morgan Chase, the second largest banking company in the United States, became a prominent example. Subsequently, bank management and financial services pdf free download, J. At the same time, as we saw in Chapters 1—4, competition for traditional loan and deposit customers has increased dramatically.
Credit unions, money market funds, insurance com- panies, brokerage firms and security dealers, and even chain stores are fighting for a bigger slice of nearly every credit or deposit market. Bankers have been called upon to continually reevaluate their loan and deposit policies, review their plans for growth and expansion, and assess their returns and risk exposure in light of this new competitive environment.
The chapter centers on the most important dimensions of perfor- mance—profitability and risk. Aggressive pursuit of such an objective requires a financial firm to be continually on the lookout for new opportunities for revenue growth, greater efficiency, and more effective planning and control. The pages that follow examine the most important measures of return and risk for banks and some of their toughest competitors.
What do we look at to help decide if a financial institution is facing serious prob- lems that its management should deal with? Determining Long-Range Objectives The first step in analyzing financial statements is to decide what objectives the bank or other financial firm is seeking. Performance must be directed toward specific objectives. Certainly many financial institutions have their own unique objectives. Some wish to grow faster and achieve some long-range growth objective.
Others seem to prefer the quiet life, minimizing risk and conveying the image of a sound institution, but with modest rewards for their shareholders. If the stock fails to rise in value com- mensurate with stockholder expectations, current investors may seek to unload their shares and the financial institution will have difficulty raising new capital to support its future growth. The value of the stream of future stockholder dividends is expected to increase, due per- haps to recent growth in some of the markets served or perhaps because of profitable acquisitions the organization has made.
Expected dividend increases are combined with declining risk, as perceived by investors. Research evidence over the years has found the stock values of financial institutions to be especially sensitive bank management and financial services pdf free download changes in market interest rates, currency exchange rates, and the strength or weakness of the economy that each serves.
Most capital-market investors have a limited time horizon, however, and plan to sell the stock at the end of their planned investment horizon. Why should banks and other corporate financial 6—4. Can you estimate the current 6—3. This fact forces the financial analyst to fall back on surro- gates for market-value indicators in the form of various profitability ratios. By out- nearly every service they offer. As electronic data processing sourcing computer facilities and people, bank management and financial services pdf free download, these leading financial- of financial information becomes more and more integral to the service firms hope to save money and time while improving functions of financial-service firms, their managers can realize overall accuracy.
Often the vendors and staff are not being fully utilized. Interpreting Profitability Ratios Each of the foregoing ratios looks at a slightly different aspect of profitability. Thus, return on assets ROA is primarily an indicator of managerial efficiency; it indicates how capable management has been in converting assets into net earnings.
Return on equity ROEbank management and financial services pdf free download, on the other hand, is a measure of the rate of return flowing to shareholders. It approximates the 2 Many authorities prefer to use total earning assets in the denominator of the net interest margin and noninterest margin.
Earning assets are those generating interest or fee income, principally loans and security investments. The reasoning is that net interest income as well as net noninterest income should be compared, not to all assets, but rather to those assets that account for the majority of all income. The net operating margin, net interest margin, and net noninterest margin are efficiency measures as well as profitability measures, indicating how well management and staff have been able to keep the growth of revenues which come primarily from loans, investments, and service fees ahead of rising costs principally the interest on deposits and other borrow- ings and employee salaries and benefits.
The net interest margin measures how large a spread between interest revenues and interest costs management has been able to achieve by close control over earning assets and pursuit of the cheapest sources of funding. The net non- interest margin, in contrast, bank management and financial services pdf free download, measures the amount of noninterest revenues stemming from service fees the financial firm has been able to collect relative to the amount of noninterest costs incurred including salaries and wages, repair and maintenance of facilities, and loan- loss expenses.
Typically, the net noninterest margin is negative: Noninterest costs generally outstrip fee income, though fee income has been rising rapidly in recent years as a percent- age of all revenues. Greater competition tends to squeeze the difference between average asset yields and average liability costs, bank management and financial services pdf free download. If other factors are held constant, the spread will decline as competition increases, forcing management to try to find other ways such as generating fee income from new services bank management and financial services pdf free download make up for an eroding earnings spread.
Concept Check 6—5. Can Is this ROA high or low? How could you find out? Why do the managers of financial firms often pay useful to the managers of financial firms? Suppose a bank reports that its net income for the noninterest margin? To the earnings spread? Suppose further that assets important? Who usually sells break down some of these profitability ratios into their key components.
For example, it is or liquidates the failed institution? Answer: A easy to see that ROE and ROA, two of the most popular profitability measures in use failure declaration must today, are closely related. Both use the same numerator: net income. In fact, the ROE—ROA relationship illustrates quite clearly the fundamental trade-off the managers of financial-service firms face between risk and return. In other words: 0.
For example, the trade-off table on page indicates that a financial firm with a 5-to-1 assets-to-capital ratio can expect a a 2. In contrast, with a 20 to 1 assets-to-capital ratio a financial firm can achieve a 10 percent ROE simply by earning a modest 0.
Clearly, as earnings efficiency represented by ROA declines, the firm must take on more risk in the form of higher leverage to have any chance of achieving its desired rate of return to its shareholders Bank management and financial services pdf free download. See Exhibit 6—1. If any of these ratios begins to decline, management needs to pay close attention and assess the reasons behind that change. For example, of these three financial ratios the equity multi- plier EMor assets to equity ratio, is normally the largest, averaging about 15X or larger for most banks.
Bigger banks often operate with multipliers of 20X or more. Because equity must absorb losses on assets, the larger the multiplier, the U. However, the larger the multiplier, the less than 1 or 2 percent greater the potential for high returns for the stockholders. It reminds us that financial- service corporations can bank management and financial services pdf free download their earnings and the returns to their stockholders by successfully controlling expenses and maximizing revenues.
Similarly, by carefully allo- cating assets to the highest-yielding loans and investments while avoiding excessive risk, management can raise the average yield on assets AU, or asset utilization. An interesting case in point is the recent track record of average ROE for all FDIC- insured depository institutions between andshown in Table 6—1.
Careful perusal of the figures in this table reveals very attractive ROEs for FDIC-insured deposi- tory institutions covering more than a decade. The lowest earnings over this period for depository institutions, as measured by ROE, were a very acceptable The average ROE for the industry gradually increased over the years, reaching What created such healthy ROEs between and ?
Operating revenues expanded significantly faster than operating expenses. Why did these latter two ratios AU and EM decline? The equity multiplier EM fell because equity capital increased due to record profits and encouragement from government regulators that depository institutions use more equity and less debt to finance their purchases of assets.
At the same time banks managed to slow their asset growth by making much heavier use of off-balance-sheet transactions as we saw in Chapter 5 and by increasing revenues from the sale of fee-based services rather than booking so many new assets. The FDIC charged revenue survive after operating expenses are removed—a measure of operating efficiency and expense control. In the banking example shown above, if the ratio of net income to pretax net operating income falls from 0.
If pretax net operating income to operating revenue drops from 0. And if the ratio of operating revenues to assets plummets from 0. Why did ROA for — keep getting better and better? Concept Check 6— What are the principal components of ROE and Expense control efficiency indicator?
Asset man- what does each of these components measure? Funds management 6— Suppose a bank has an ROA of 0. What is its ROE? Suppose 6— If a bank has a net interest margin of 2. What is the dinary items of —0. Tax-management efficiency indicator? The foregoing analysis reminds us that Which banks in the achieving superior profitability for a financial institution depends upon several crucial factors: industry tend to have the biggest net interest 1.
Bank 4.0 and the Future of Financial Services
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