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CHAPTER 6. CASE STUDIES IN BANK VALUATION AND PERFORMANCE. LEARNING OBJECTIVES. To apply accounting and market performance measures to various financial and bank holding companies, banks, and other financial-services firms - PowerPoint PPT Presentation
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Chapter 6 1
CHAPTER 6
CASE STUDIES IN BANK VALUATION AND PERFORMANCE
Chapter 6 2
LEARNING OBJECTIVES To apply accounting and market performance
measures to various financial and bank holding companies, banks, and other financial-services firms
To understand the financial statements and unique financial characteristics of various financial and bank holding companies, banks, and other financial-services firms
Chapter 6 3
CHAPTER THEME In 1974, a noted bank-stock
analyst said, regarding the first billion-dollar bank failure in the U.S.,
“People who can read a balance sheet were out of there long ago.”
A self-serving statement for sure for an analyst of bank stocks
Chapter 6 4
How To Read a Balance Sheet (and other financial statements)
It’s important to the various stakeholders in a bank including Owners/directors/managers Creditors (uninsured vs. insured) Safety-net managers (regulators and
deposit insurers) Analysts and rating agencies
Chapter 6 5
Analyzing Bank/BHC Financial Statements: Approaches and Caveats
“du Pont” model -- ROE
decomposition analysis
ROE = PM x AU x EM
Pro-Forma Analysis (forecasting)
Chapter 6 6
Analyzing Bank/BHC Financial Statements: Approaches and Caveats
Four Pieces of Accounting DataNeeded to Start ROE Analysis
Net Income (profits) Total Operating Income (“sales”) Total Assets Total Equity Capital
Chapter 6 7
Analyzing Bank/BHC Financial Statements: Approaches and Caveats
Ratio Components of the ROE Model ROE = Net Income / Equity Capital ROA = Net Income / Total Assets PM = Net Income / Operating Income AU = Operating Income / Total Assets EM = Total Assets / Equity Capital
Chapter 6 8
Exercises For the case studies that follow, if
the companies still exist, find the most recent accounting data and, if available, market data and determine how the company has performed compared to the data presented here
Chapter 6 9
CitigroupThe Largest FHC in the United States
Overview of holding company (3-31-00)
Unit Assets Net inc. ROA Citicorp 400.1 8.580 2.15% Salomon226.7 3.952 1.74 Travelers 107.3 2.094 1.95 Citigroup 738.2 14.360 1.95% Note: $ billions for assets and NI
Chapter 6 10
Overview of Travelers (3-31-00) Unit Assets Net inc. ROA Ins. Co. 67.9 0.704 1.04% Life&Annuity 8.5 0.066 0.78 P&C Corp. 30.9 1.324 4.28 Citigroup 107.3 2.094 1.95% Note: $ billions for assets and NI
Chapter 6 11
CitigroupThe Largest FHC in the United States
Total Assets = 738,205
Total Equity Capital = 50,326
Total Operating Income = 95,448
Net Income = 14,360
($ Millions, March 31, 2000)
Chapter 6 12
CitigroupThe Largest FHC in the United States
ROE = 0.2853 = 0.0195 x 14.67
ROA = 0.0195 = 0.1504 x 0.1293
PM = 0.1504
AU = 0.1293
EM = 14.67
Chapter 6 13
Bank of AmericaThe Largest BHC in the United States
Total Assets = 656,113 Total Equity Capital = 45,299 Total Operating Income = 56,528 Net Income = 8,960 ($ Millions, 3-31-00)
Chapter 6 14
Bank of AmericaThe Largest BHC in the United States
ROE = 0.1978 = 0.01367 x 14.48
ROA = 0.0137 = 0.1558 x 0.0862
PM = 0.1585
AU = 0.0862
EM = 14.48
Chapter 6 15
KeycorpA Superregional BHC
Total Assets = 84,412 Total Equity Capital = 6,507 Total Operating Income = 2,186 Net Income = 1,229 ($ Millions, 6-30-00)
Chapter 6 16
KeycorpA Superregional BHC
ROE = 0.1889 = 0.0146 x 12.97
ROA = 0.0146 = 0.2049 x 0.0711
PM = 0.2049
AU = 0.0711
EM = 12.97
Chapter 6 17
Compass BancsharesA Regional BHC
Total Assets = 18.972
Total Equity Capital = 1.325 Total Operating Income = 1.950
Net Income = 0.191
($ Millions, 6-30-00)
Chapter 6 18
Compass BancsharesA Regional BHC
ROE = 0.1442 = 0.0101 x 14.32
ROA = 0.0101 = 0.0979 x 0.1028
PM = 0.0979
AU = 0.1028
EM = 14.32
Chapter 6 19
Market Data The preceding banking companies
have market data available while the ones that follow do not
Tables 6-3 (p. 165) and 6-6 (p. 171) show some of the variables based on market data that can be used to assess bank performance
Chapter 6 20
Variables for Market Profiles Stock price (P) Market capitalization (P x N, where N
= number of shares outstanding) EPS, DPS, and dividend yield (DPS/P)
and payout [DPS/(EPS + DPS)] P/E (P/EPS) and market-to-book ratios Beta Holding-period return (HPR)
Chapter 6 21
First American Bank & TrustA Community Bank
Total Assets = 163.999
Total Equity Capital = 17.722 Total Operating Income = 13.346
Net Income = 2.016
($ Millions, 3-31-00)
Chapter 6 22
First American Bank & TrustA Community Bank
ROE = 0.1138 = 0.0123 x 9.254
ROA = 0.0123 = 0.15 x 0.0814
PM = 0.15
AU = 0.0814
EM = 9.254
Chapter 6 23
Citizens Trust BankA Minority - Owned Bank
Total Assets = 252.736
Total Equity Capital = 19.243 Total Operating Income = 24.294
Net Income = 3.042
($ Millions, 6-30-00)Note: Correction on p. 177 of the text: flow data should
read with decimals point not commas
Chapter 6 24
Citizens Trust BankA Minority - Owned Bank
ROE = 0.1581 = 0.0120 x 13.13
ROA = 0.0120 = 0.1252 x 0.0961
PM = 0.1252
AU = 0.0961
EM = 13.13 Note: Typo on p. 177 of the text, ROE is 0.1581 as shown
above and not 0.1768
Chapter 6 25
NetBankA Pure-Internet Savings Bank
Total Assets = 1,225
Total Equity Capital = 218 Total Operating Income = 21.302
Net Income = 0.408
($ Millions, 12-31-99)
Chapter 6 26
NetBankA Pure-Internet Savings Bank
ROE = 0.0019 = 0.0003 x 5.76
ROA = 0.0003 = 0.0192 x 0.017
PM = 0.0192
AU = 0.017
EM = 5.76
Chapter 6 27
Bankers’ Banks and The Bankers Bank: A Correspondent-Banking Innovation
Qualifications to be a Bankers’ Bank
1.Be organized solely to do business with
other financial institutions
2.Be owned primarily by the financial
institutions with which it does business
3.Not do business with the general public
Chapter 6 28
Bankers’ Banks and The Bankers Bank: A Correspondent-Banking Innovation
Total Assets = 840.414
Total Equity Capital = 48.694 Total Operating Income = 76.812
Net Income = 4.168
($ Millions, 3-31-00)
Chapter 6 29
Bankers’ Banks and The Bankers Bank: A Correspondent-Banking Innovation
ROE = 0.0856 = 0.005 x 17.26
ROA = 0.0050 = 0.0543 x 0.0914
PM = 0.0543
AU = 0.0914
EM = 17.26
Chapter 6 30
Decision-Making Lessons On a pre-tax basis, ROA is driven by
three key factors: 1. Net interest income or its ratio net
interest margin (NIM) – the efficiency of the intermediation business
2. Provision for loan loss – loan quality 3. Net noninterest income (“burden”) –
the efficiency of operations and fee generation
Chapter 6 31
Decision-Making Lessons(continued) A bank’s portfolio and related cash
flows drive its market performance Investors focus on the timing, size, and
riskiness of future cash flows and what they are worth today (present value)
Banks that mismanage credit risk have a difficult maximizing shareholder value
Chapter 6 32
CHAPTER SUMMARY From a giant FHC, like Citigroup,
down to the thousands of community banks, the ROE model provides an analytical framework for analyzing bank performance based on accounting data
When available, market data provide more timely and accurate measures of bank performance
