UNIT VI: Evaluation of Bank Performance Flashcards
major services provided by banks to the public
-Acceptance of deposits
-Lending of funds
-Trust services
-Financial services related to international trade
how different are banks from most other businesses?
-have fairly liquid assets and liabs
-high degree of financial leverage (liabilities>capital)
-highly-regulated
banks are regulated by the ______?
Bangko Sentral ng Pilipinas (BSP)
FINANCIAL STATEMENTS OF BANKS
includes assets, liabilities and equity oof the bank
BALANCE SHEET
FINANCIAL STATEMENTS OF BANKS
total amount of cash in the bank’s vault in the form of notes and coins under the custody of the cashier/cash custodian or treasurer, including notes in the possession of tellers and those kept in automated teller machines (ATM)
CASH ON HAND
BALANCE SHEET - ASSETS
total amount of checks and other cash items received after the selected clearing cut-off time until the close of the regular banking hours
CHECKS AND OTHER CASH ITEMS (COCI)
BALANCE SHEET - ASSETS
interest-bearing deposits with BSP to meet reserve requirements and to serve as clearing account for interbank claims
DUE FROM BSP
BALANCE SHEET - ASSETS
deposits to secure forward exchange commitments or to pay matured foreign currency obligations
DUE FROM BSP
BALANCE SHEET - ASSETS
deposits maintained with other banks to facilitate services between banks (EX: check payments, fund transfers)
DUE FROM OTHER BANKS
BALANCE SHEET - ASSETS
accounts extended to other banks overnight or on very short terms to meet legal reserve or other liquidity requirements
INTERBANK LOANS RECEIVABLE
BALANCE SHEET - ASSETS
short term investments
MARKETABLE INVESTMENTS
BALANCE SHEET - ASSET
INVESTMENTS IN MARKETABLE SECURITIES
highly liquid investments in debt and equity securities that can be readily converted into cash
MARKETABLE SECURITIES
BALANCE SHEET - ASSET
INVESTMENTS IN MARKETABLE SECURITIES
debt securities with fixed or determinable payments and fixed maturity dates that a bank intends to keep until the maturity dates of the asset
HELD-TO-MATURITY (HTM)
BALANCE SHEET - ASSET
INVESTMENTS IN MARKETABLE SECURITIES
debt and equity securities that are not classified as loans and receivables, HTM investments, or investments at fair value through profit and loss
AVAILABLE-FOR-SALE SECURITIES
BALANCE SHEET - ASSETS
amounts due from customers or bank borrowers
LOANS OR RECEIVABLES FROM CUSTOMERS
BALANCE SHEET - ASSET
LOANS OR RECEIVABLES FROM CUSTOMERS
-demand loans
-time loans
-bill discounted
-real estate mortgage loans
-credit cards, auto loans
-agri loans
-customers’ liabs under letters of credit
BALANCE SHEET - ASSET
LOANS OR RECEIVABLES FROM CUSTOMERS
loans that a lender can require to be repaid in full at any time
demand loans
BALANCE SHEET - ASSET
LOANS OR RECEIVABLES FROM CUSTOMERS
short-term, 1-6 months, asset-based loans for business payable in one installment on date of maturity
time loans
BALANCE SHEET - ASSET
LOANS OR RECEIVABLES FROM CUSTOMERS
debt instruments sold for an amount less than the face value of the instrument
bills discounted
BALANCE SHEET - ASSETS
real and other properties other than those used for banking purposes or held in the investment portfolio
assets held for sale
BALANCE SHEET - ASSETS
physical capital owned by banks such as buildings and equipments
other assets
BALANCE SHEET - LIABILITIES
funds deposited by the public
deposit liabilities
BALANCE SHEET - LIABILITIES
DEPOSIT LIABILITIES
refers to deposits, subject to withdrawal otherwise known as current or checking accounts
demand deposits
BALANCE SHEET - LIABILITIES
DEPOSIT LIABILITIES
withdrawable deposits
savings deposit
BALANCE SHEET - LIABILITIES
DEPOSIT LIABILITIES
interest-bearing deposits with specific maturity dates
time deposits
BALANCE SHEET - LIABILITIES
funds borrowed from other banks to meet reserve and liquidity needs
interbank loans payable
BALANCE SHEET - LIABILITIES
liab for the bank’s share in the cost of maintaining the appropriate supervision and examination dept of BSP
due to BSP or supervision fee
BALANCE SHEET - LIABILITIES
availments of rediscounting facilities and other borrowings from BSP
bills and acceptance payable
BALANCE SHEET - LIABILITIES
liabs to local banks, private firms, and private individuals
bills and acceptance payable
BALANCE SHEET - LIABILITIES
money market borrowings
bills and acceptance payable
BALANCE SHEET - LIABILITIES
total amount of checks drawn by the bank upon itself payable to the payees named in check
manager’s and treasurer’s check
BALANCE SHEET - LIABILITIES
amount of cash or other assets given by shareholders in the firm in exchange of stocks/shares
paid-in capital stock
BALANCE SHEET - LIABILITIES
PAID-IN CAPITAL STOCK
ownership share that allows its holders voting rights and to receive dividends
common stock
BALANCE SHEET - LIABILITIES
PAID-IN CAPITAL STOCK
holders are given priority over common shareholders in terms of dividends, but have no voting rights and carry fixed annual dividend payments per share
preferred stock
BALANCE SHEET - EQUITY
RESERVES
accumulated amount required from banks to carry to retained earnings 20% of its net profits accruing from trust business since the last preceding dividend declaration until the retained earnings shall amount to 20% of its authorized capital stock
trust business
BALANCE SHEET - EQUITY
RESERVES
accumulated amount set aside to cover losses due to fire, defalcation by and other unlawful acts ng staff
self-insurance
BALANCE SHEET - EQUITY
RESERVES
set aside for possible or unforeseen losses, decrease in assets’ book value, undeterminable liabs not recorded
contingencies
FINANCIAL STATEMENTS OF BANKS
includes revenues and expenses incurred by banks for a given period
INCOME STATEMENT
INCOME STATEMENT
refers to interest earned and/or collected from fin assets of banks
interest income
INCOME STATEMENT
payments and/or monthly accruals of interest on fin liabs of banks
interest expense
INCOME STATEMENT
provide for losses which may arise from non-collection of loans and receivables
provision for credit and impairment losses
RATIO ANALYSIS
measure how much of a bank’s resources are financed by debt and equity
leverage ratios
RATIO ANALYSIS
LEVERAGE RATIOS
measures the contribution of stockholders and indicates the cushion against the risks of using debt and leverage.
equity to total assets ratio
RATIO ANALYSIS
LEVERAGE RATIOS
more popular ratio; measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures.
capital adequacy ratio
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
core capital; permanently and easily available to cushion losses suffered by a bank without it being required to stop operating
TIER ONE CAPITAL
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
capital that cushions losses in case the bank is winding up, so it
provides a lesser degree of protection to depositors and creditors; used to absorb losses if a bank loses all its Tier-1 capital.
TIER TWO CAPITAL
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
calculated by looking at a bank’s loans, evaluating the risk, and then assigning a weight; all the loans the bank has issued are weighted based on their degree of risks.
risk-weighted assets
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
arises from the possibility that borrowers, bond issuers, and counterparties in derivatives transactions may default.
credit risk
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
risk relating to movements in market variables (interest rate, exchange rates, equity prices, commodity prices)
market risk
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events
operational risk
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
a bank that has a good CAR has enough capital to absorb potential ______ (gains or losses). thus, it has _____ (less or more) risk of becoming insolvent and losing depositors’ money.
losses; less
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
TRUE OR FALSE
the higher the bank’s CAR, the higher the degree of protection of depositor’s assets.
TRUE
RATIO ANALYSIS
LEVERAGE RATIOS
CAPITAL ADEQUACY RATIO
the minimum CAR required by the BSP is ______%.
10%
RATIO ANALYSIS
LEVERAGE RATIOS
how much of the customer loans are financed by equity (how much buffer a bank has should the loans become uncollectible)
equity/customer loans ratio
RATIO ANALYSIS
LEVERAGE RATIOS
riskiest assets of a bank, but may also be the biggest asset
customer loans
RATIO ANALYSIS
LEVERAGE RATIOS
Equity/Customer Loans Ratio
cushion against a drop in the value of its
assets
bank’s capital (equity)
RATIO ANALYSIS
measure the ability of a bank to meet its debt requirements as they come due;
liquidity ratios
RATIO ANALYSIS
a bank must have adequate liquid assets to meet the _________ of its depositors
withdrawals
RATIO ANALYSIS
LIQUIDITY RATIOS
cash and other cash items + due from BSP + due from other banks + interbank loans receivables and securities purchased under agreements to resell + trading securities + investment securities
quasi-liquid assets ratio
RATIO ANALYSIS
LIQUIDITY RATIOS
considers loans and advances as less liquid than other financial assets of the banks
loans-deposit ratio
RATIO ANALYSIS
LIQUIDITY RATIOS - LDR
a low LDR (higher deposits relative to loans) indicates _______ (excess or lacking) liquidity and
may also result in ______ (higher or lower) profits for a bank since loans generate interest
income.
excess; lower
RATIO ANALYSIS
LIQUIDITY RATIOS - LDR
high LDR (lower deposits relative to loans) represents liquidity risk as a bank may not have _____________ when depositors withdraw their money
enough cash
RATIO ANALYSIS
LIQUIDITY RATIOS
measure the adequacy of provisioning (allowance for doubtful accounts or ADA) for non-performing loans (NPL) and the extent of these NPL in the total loan portfolio of a bank
coverage ratios
RATIO ANALYSIS
LIQUIDITY RATIOS
compares the fair value of collateral held for NPL and the amount of NPL. this measures the extent of a potential loss a bank may incur with respect to these NPLs.
coverage ratio
RATIO ANALYSIS
measure the ability of a bank to generate income on its investments in excess of costs incurred
profitability ratios
RATIO ANALYSIS
the five profitability ratios
- net interest margin
- OE/net interest income + other income
- OE/ ave. total assets
- return on total assets (ROA)
- return on equity (ROE)
note: OE = operating expenses
RATIO ANALYSIS
PROFITABILITY RATIOS
Net Interest Margin
due from BSP + due from other banks + inter-bank loans receivables and securities purchased under agreements to resell + trading securities + investment securities + loans and advances
earning assets
RATIO ANALYSIS
PROFITABILITY RATIOS
Net Interest Margin
interest income – interest expenses on deposits and other debt issued
net interest income
RATIO ANALYSIS
PROFITABILITY RATIOS
measures the operating efficiency after paying interest or financing costs
OE/net interest income + other income
RATIO ANALYSIS
PROFITABILITY RATIOS
provision for impairment and credit losses + compensation and fringe benefits + occupancy and other equipment-related costs + taxes and licenses + depreciation and amortization + insurance + other OPEX
OE/net interest income + other income
RATIO ANALYSIS
PROFITABILITY RATIOS
measures the rate of return based on total investments prior to consideration of the bank’s financing costs.
return on total assets (ROA)
RATIO ANALYSIS
PROFITABILITY RATIOS
measures the return on the investment of the bank’s stockholders.
return on equity (ROE)
RATIO ANALYSIS
PROFITABILITY RATIOS - ROA
the _________ (lower or higher) the ROA, the greater is bank profitability.
higher
RATIO ANALYSIS
PROFITABILITY RATIOS - ROE
the _________ (lower or higher) the ROE, the greater is bank profitability.
higher
TWO NON-FINANCIAL MEASURES
-density ratio
-population-to-banking offices ratio (customer ratio)
TWO NON-FINANCIAL MEASURES
refers to the ratio of the total population to the total number of domestic banking offices.
population-to-banking offices ratio (customer ratio)
TWO NON-FINANCIAL MEASURES
refers to the ratio of total number of domestic banking offices to the total number of cities/municipalities in the Philippines.
density ratio
