Present value of future

cash flows

Size of cash flows

Determinants of stock
Stock values Timing of cash flows
looking price per share, based price
on future expected growth and
earnings.
Valuation using P/E Riskiness of cash flows
ratio

Backward looking earnings based on

Vo = CF1 + CF2 + CF3 + … + CFn
historical data.
(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n

Credit
ROE = Net income /
Profitability analysis
Total equity

Liquidity

Non-performing assets
include nonaccrual
Market Risk factors banks face
loans,

Price
restructured loans, and
other real-estate owned
Interest rate
Credit risk
Loss ratio= Net chargeoffs on loans/ Total loans and leases
Funds available to
meet cash demand
Reserve ratio =Reserves for loan losses/
for loans and
Total loans and leases
deposit withdrawal

Loan and lease ratio= Net loans and

Temporary investments
leases/Total assets
ratio=liquid assets/total assets
Liquidity risk
Chapter 6: Measuring
and Evaluating Value of bond portfolios and equity capital
Trend toward less
Bank Performance most at risk
liquidity Price risk
with fast changes in market values of
bonds
Book − to − Market=Book value of
assets/Market value of assets
Impact on profit due to changes
Market risk in interest rates
Risk due to failing
computer systems,
Dollar gap ratio= Interest rate sensitive assets
errors, misconduct
Operational risk - Interest rate sensitive liabilities/Total assets
by employees,
floods, tornadoes, Interest rate risk
lightning strikes
Liabilities > assets => bank at higher risk with
rising rates

Uncertainty due to
public opinion as it
Assets > liabilities => bank at higher risk with
pertains to
Reputation risk falling rates
confidence of
customers and
creditors Legal risk – legal system
creates adverse
outcomes
P/E ratio Legal and compliance
risk
Compliance risk –
Equity to total assets
Impact of all the violations to the rules
previous risks affects and regulations
capital Capital risk
Purchases funds to total
and the bank’s survival
liabilities
chances Variation in earnings
Strategic risk due to poor
business decisions
Equity capital to risk
assets