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1、1 Chapter 20 Bank Performance Financial Markets and Institutions, 7e, Jeff Madura Copyright 2006 by South-Western, a division of Thomson Learning. All rights reserved. 2 Chapter Outline Valuation of a commercial bank Performance evaluation of banks Risk evaluation of banks How to evaluate a banks pe
2、rformance Bank failures 3 Valuation of a Commercial Bank The value of a commercial bank is the present value of its future cash flows: The value should change in response to changes in its expected cash flows and to changes in the required rate of return: n t t t k CFE V 1 )1( )( - ),( kCFEfV 4 Valu
3、ation of a Commercial Bank (contd) Factors that affect cash flows Change in economic growth During periods of strong economic growth: Loan demand is higher Commercial banks provide more loans Demand for other bank products tends to be higher Fewer loan defaults occur Expected cash flows should be hi
4、gher ? - ),()(MANABINDUSRECONfCFE f 5 Valuation of a Commercial Bank (contd) Factors that affect cash flows (contd) Change in the risk-free interest rate If the risk-free rate decreases and other market rates decline, there may be stronger demand for the banks loans Banks cost of funds decreases whe
5、n the risk-free rate decreases Change in industry conditions If regulators reduce the constraints imposed on commercial banks, expected cash flows should increase Technical innovation can improve efficiencies and enhance cash flows A high level of competition may reduce the banks volume of business
6、or reduce the prices it can charge for its services 6 Valuation of a Commercial Bank (contd) Factors that affect cash flows (contd) Change in management abilities Managers can attempt to make internal decisions that will capitalize on the external forces that the bank cannot control Skillful manager
7、s will recognize how to revise the composition of the banks assets and liabilities to capitalize on existing economic or regulatory conditions 7 Valuation of a Commercial Bank (contd) Factors that affect the required rate of return by investors Change in the risk-free rate When the risk-free rate in
8、creases, so does the return required by investors: ),(RPRfk f - ),(DEFMSECONINFfRf 8 Valuation of a Commercial Bank (contd) Factors that affect the required rate of return by investors (contd) Change in the risk premium When the risk premium increases, so does the return required by investors: Impac
9、t of the September 11 Crisis on commercial bank values Commercial bank valuations declined as a result because economic conditions were weakened and the volume of bank loans declined - ? - ),(MANABINDUSECONfRP 9 Performance Evaluation of Banks In the recessions of 1982, the early 1990s, and the earl
10、y 2000s, banks were adversely affected The international debt crisis of the 1980s had a major impact on the largest banks with loans to less developed countries 10 Performance Evaluation of Banks (contd) Interest income and expenses Gross interest income is interest income generated from all assets
11、Affected by market rates and the composition of assets held by banks Gross interest income on small and medium banks is typically higher than that of other banks Gross interest expenses represent interest paid on deposit and on other borrowed funds Affected by market rates and the composition of the
12、 banks liabilities In recent years, gross interest expenses have been similar among banks 11 Performance Evaluation of Banks (contd) Interest income and expenses (contd) Net interest income is the difference between gross interest income and interest expenses and is measured as a percentage of asset
13、s The net interest margin of all banks in aggregate has remained somewhat stable Net interest margin has generally been highest for the small banks and lowest for money center banks 12 Performance Evaluation of Banks (contd) Noninterest income and expenses Noninterest income results from fees charge
14、d on services provided Has consistently risen over time for all banks in aggregate Usually higher for money center, large, and medium banks than for small banks because larger banks provide more services The loan loss provision is a reserve account established in anticipation of future loan losses S
15、hould increase in recessionary periods Was high for most banks during the early 1990s recession but declined for the next several years 13 Performance Evaluation of Banks (contd) Noninterest income and expenses (contd) Noninterest expenses include salaries, office equipment, and other expenses Gener
16、ally increased over time Securities gains and losses result from a banks sale of securities Have been negligible in the aggregate Income before tax is obtained by summing net interest income, noninterest income, and securities gains and subtracting the provision for loan losses and noninterest expenses In recent years, bank income was enhanced by the increase in noninterest i