FINANCIAL INDICATORS

1) Return on Asset

=Net Income (Net profit after taxes)/ Average Total Asset

* (ROA) has become a basic measure of bank profitability as it captures bank size in
terms of asset holdings. The ROA shows the amount of profits generated by each
dollar of asset. It also provides bank owners more clarity about how efficiently the
bank’s asset is used to generate profit. ROA explains efficiency of managing banking
assets

* Return on asset at 1.7% indicated that $1 of asset was able to generate 1.7 cents of
profit to the bank.

Unit3

2) Return on Equity

=Net Income/ Average Total Equity (equity capital)

Or

= ROA* EM

EM= Asset/Equity Capital

* For example, a ROE of 15% means that the bank is able to generate 15 cents in
profit for each dollar of equity capital. the bank’s owners are more interested to find
out how much profits are generated on their capital investment. Banks generally use
the return on equity (ROE) as an indicator of profitability.

* Both ROA and ROE provide a measure of the bank’s performance, with earnings in
relation to the assets and equity capital of the bank. The two measurements provide
another indicator of performance, namely the equity multiplier (EM), which gives the
amount of assets per dollar of equity capital. This formula gives us additional
information on the bank’s performance with regards to the capital holding.

Ex: For example, Bank X has $500 million of assets and $50 million of equity, which
gives it an equity multiplier of 10 ($500 million/$50 million). Bank Y, in contrast,
has only $25 million of equity and $500 million of assets, which gives it an equity
multiplier of 20 ($500 million/$25 million). Assuming that both banks are run
equally efficient and command similar to ROA, say 1%
The example above indicates that shareholders of Bank Y receive more returns for
each dollar of their equity investment compared to shareholders of Bank X. It is clear
that, given the return on assets, the lower the bank capital; the higher is the return
for the owners of the bank. It is for this reason that many banks would prefer to hold
as little equity capital as possible. This, however, could be dangerous if the bank
takes an aggressive position on making loans and financing.

Unit 3

3) Cost to income

4) Gross Impaired Financing

5) Financing Loss Coverage ratio/Financing Loss Ratio

=Provision for losses/Average Total Asset

6) Financing to fund ratio/ Financing Income Ratio

=Financing Income/Average Total Asset

7) CASA to total deposit ratio (%)

= Casa deposits (Saving account deposit +Current account deposit)/ Total deposit

* If a large part of a bank’s deposits comes from these funds, it means that the
bank is getting those funds at a relatively lower cost. It is generally understood
that a higher current account and savings account ratio leads to higher net
interest income because the interest paid on CASA deposits is lower than on
term deposits hence the NII tends to be higher. Therefore, the higher the CASA
ratio, the better the net interest margin, which means better operating efficiency
of the bank. Current account and savings account deposits are a cheaper source
of raising funds as compared to a certificate of deposits, term deposits which
relatively requires higher interest to be paid.

*A higher CASA ratio means higher portion of the deposits of the bank has come
from current and savings deposit, which is generally a cheaper source of fund.
Many banks don’t pay interest on the current account deposits and money lying
in the savings accounts attracts a mere 3.5% interest rate. Hence, higher the
CASA ratio better the net interest margin, which means better operating
efficiency of the bank.

*example, the CASA ratio of the bank is 46% which means 46% of total deposits
are contributed by low-cost CASA deposits

8) Tawaruq assets to total assets

9) High quality liquid asset (HQLA) to total assets

10) Total capital ratio/Risk-weighted capital ratio (RWCR)

=Equity Capital/Risk- Weighted Assets

*check sebinar 1 slides

11) Equity Capital to Total Assets (%)

=Net worth/ Total asset

12) Debt to equity ratio (point)

=Total Liabilities/Total Shareholders’ Equity

* evaluate a company's financial leverage and is calculated by dividing a
company’s total liabilities by its shareholder equity. The D/E ratio is an
important metric used in corporate finance. It is a measure of the degree to
which a company is financing its operations through debt versus wholly
owned funds. More specifically, it reflects the ability of shareholder equity
to cover all outstanding debts in the event of a business downturn.

* Given that the D/E ratio measures a company’s debt relative to the value
of its net assets, it is most often used to gauge the extent to which a
company is taking on debt as a means of leveraging its assets. A high D/E
ratio is often associated with high risk; it means that a company has been
aggressive in financing its growth with debt.
FORMULAS AND CALCULATIONS

FINANCIAL RATIOS

Formula Dec 2020 Dec 2019 Islamic Banking

system
PROFITABILITY
Return on Asset =Net Income (Net profit =
(%) after taxes)/ Total Asset

Return on Equity =Net Income/ Total

(%) Equity (equity capital)

Or

= ROA* EM

EM= Asset/Equity
Capital
Cost to Income =Operating cost
Ratio (%) /Operating Income

ASSET QUALITY
Gross Impaired =Total Non-performing
Financing Ratio loan/Total outstanding
(%) loan

=Gross impaired
financing/net financing
of customer
Financing Loss =Provision for losses/
Coverage ratio Total Asset
(%)
=

EFFICIENCY
Financing to =Financing Income
available fund /Average Total Asset
ratio/ Financing
Income Ratio (%)

CASA to total = Casa deposits (Saving

account deposit
 deposit ratio (%) +Current account
deposit)/ Total deposit

Tawaruq assets =Tawarruq Asset/ Total

to total assets Asset

High quality liquid =High Quality Liquid

asset (HQLA) to Assets( Level 1, 2A, 2B
total assets Asset)/ Total Asset

CAPITALISATION
Total capital =Equity Capital/Risk-
ratio/Risk- Weighted Asset
weighted capital
ratio (RWCR) (%)

Equity Capital to =Net worth/ Total asset

Total Assets (%)

Debt to equity =Total Liabilities/Total

ratio Shareholders’ Equity

EX:

Measuring Banking Performance: Risk-Based Approach

The financial ratios for Bank Islam Malaysia Berhad (BIMB) presented in Table 1 can be explained from the risk
management perspective with special focus is given to credit risk, capital adequacy, funding risk and
operational risk. BIMB had performed considerably well for year 2020 with return on equity (ROE) at 12.7%
which means that for $1 of equity investment, the bank was able to produce 12.7 cents profit. Return on asset
at 0.8 also shows efficient use of assets in generating profit. It means that for $1 of assets comprising of cash,
loans and securities, bank was able to generate 80 cents of returns. Much of these assets are coming from
loans/financing given that financing to fund ratio (FFR) at 85.7%. This enable the bank to maintain more than
adequate risk weighted capital ratio (RWCR) at 19.3% with minimum statutory requirement at 10.5%. Low
non-performance financing at 0.83% bank was able to maintain strong earnings. It means that for every $1 of
income, the bank provided 0.083 cents as loss provision. The high financing loss coverage ratio (FLCR) at
184.8% is also an encouraging sign of strong bank credit position. It means for $1 of default, the bank holds
$1.84 of earnings and provisions Which means that bank has more than enough money to cover the loss from
default. From a $1 default, the bank still has 0.84 cents of earnings to remain solvent.