Professional Documents
Culture Documents
Financial Analysis of A Bank
Financial Analysis of A Bank
Meaning
1.5-2.49
Satisfactor
y
2.50-3.49
Fair
3.50-4.49
Marginal
4.50-5.00
Unsatisfact
ory
2. Liabilities
Bills Payables
Borrowing from Financial Institutions
Deposits and Other Accounts
3. Shareholders Equity
Ordinary Share Capital or Head Office Account (in case of foreign
bank)
Reserves
Un-appropriated Profit/Loss
4. Income
Interest Earned
Interest Expenses
Non-interest Income (Fiduciary activities and service charges)
Non-interest Expense (Personal Expense, Occupancy expense and
other operating expense)
Profit/Loss Before Tax
Profit or loss after Tax
CAPITAL ADEQUACY
- It is a measurement of a bank to determine if solvency can be maintained due to
risks that have been incurred as a course of business. Capital allows a financial
institution to grow, establish and maintain both public and regulatory
confidence, and provide a cushion (reserves) to be able to absorb potential loan
losses above and beyond identified problems. A bank must be able to generate
capital internally, through earnings retention, as a test of capital strength. An
increase in capital as a result of restatements due to accounting standard
changes is not an actual increase in capital.
Ratios in Examining Capital Adequacy
1. Capital Adequacy Ratio
-This ratio indicates the margin of protection available to both depositors and
creditors against unanticipated losses that may be incurred by the bank.
-The calculation of this ratio involves weighing each category of assets for
risks, deducting intangibles from assets, and adding contingent liabilities in
risk weighted assets.
-It is generally believed that commercial banks should maintain a minimum
capital adequacy ratio of 8%
2. Earning Assets to Total Asset Ratio
-It will reveal the extent to which bank's assets are put into productive
3. Texas Ratio
Deliquent Loans+ Non Performing Assets
Capital+ Loan Loss Reserves
If the ratio is 100% or higher, then the bank is in imminent danger. If it
is between 50-100% then a capital infusion is necessary.
4. Loan Loss Provision to Total Loans Ratio
This ratio will give useful insight into the quality of a bank's loan
portfolio.
ASSET QUALITY
It evaluates risk (and there must be some risk to earn a return),
controllability, adequacy of loan loss reserves, and acceptable
earnings; and the effect of off-balance sheet earnings and loss. The
quality of a bank's assets hinges on their ability to be collected during
and at maturity.
Ratios in Examining Asset Quality
1. Loan Loss Provision to Total Loans Ratio
This ratio will give useful insight into the quality of a bank's loan
portfolio.
3. Interest Spread
Spread is the difference between the rate earned on income producing
assets and the rate on interest bearing liabilities.
3. Cash Ratio
This ratio relates the sum of cash in hand and at banks including the
Central Bank to total deposits.