CHAPTER 6
CASE STUDIES IN BANK
VALUATION AND
PERFORMANCE
Chapter 6
1
LEARNING OBJECTIVES
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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 financialservices firms
Chapter 6
2
CHAPTER THEME
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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
3
How To Read a Balance Sheet
(and other financial statements)
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It’s important to the various
stakeholders in a bank including
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Owners/directors/managers
Creditors (uninsured vs. insured)
Safety-net managers (regulators and
deposit insurers)
Analysts and rating agencies
Chapter 6
4
Analyzing Bank/BHC Financial
Statements: Approaches and Caveats

“du Pont” model -- ROE decomposition
analysis

ROE = PM x AU x EM
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Pro-Forma Analysis (forecasting)
Chapter 6
5
Analyzing Bank/BHC Financial
Statements: Approaches and Caveats
Four Pieces of Accounting Data
Needed to Start ROE Analysis

Net Income (profits)

Total Operating Income (“sales”)
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Total Assets

Total Equity Capital
Chapter 6
6
Analyzing Bank/BHC Financial
Statements: Approaches and Caveats
Ratio Components of the ROE Model
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ROE = Net Income / Equity Capital
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ROA = Net Income / Total Assets
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PM = Net Income / Operating Income
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AU = Operating Income / Total Assets
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EM = Total Assets / Equity Capital
Chapter 6
7
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
8
Citigroup
The Largest FHC in the United States
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Overview of holding company (3-31-00)
Unit
Assets
Net inc. ROA
Citicorp
400.1
8.580
2.15%
Salomon
226.7
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
9
Overview of Travelers
(3-31-00)
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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
10
Citigroup
The 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
11
Citigroup
The Largest FHC in the United States

ROE = 0.2853 = 0.0195 x 14.67
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ROA = 0.0195 = 0.1504 x 0.1293
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PM = 0.1504
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AU = 0.1293
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EM = 14.67
Chapter 6
12
Bank of America
The 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
13
Bank of America
The Largest BHC in the United States
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ROE = 0.1978 = 0.01367 x 14.48
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ROA = 0.0137 = 0.1558 x 0.0862
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PM = 0.1585
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AU = 0.0862
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EM = 14.48
Chapter 6
14
Keycorp
A Superregional BHC
Total Assets = 84,412
 Total Equity Capital = 6,507
 Total Operating Income = 2,186
 Net Income = 1,229
($ Millions, 6-30-00)
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Chapter 6
15
Keycorp
A Superregional BHC
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ROE = 0.1889 = 0.0146 x 12.97
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ROA = 0.0146 = 0.2049 x 0.0711
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PM = 0.2049
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AU = 0.0711
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EM = 12.97
Chapter 6
16
Compass Bancshares
A Regional BHC
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Total Assets = 18.972
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Total Equity Capital = 1.325
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Total Operating Income = 1.950
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Net Income = 0.191
($ Millions, 6-30-00)
Chapter 6
17
Compass Bancshares
A Regional BHC
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ROE = 0.1442 = 0.0101 x 14.32
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ROA = 0.0101 = 0.0979 x 0.1028
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PM = 0.0979
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AU = 0.1028

EM = 14.32
Chapter 6
18
Market Data
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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
19
Variables for Market Profiles
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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
20
First American Bank & Trust
A Community Bank
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Total Assets = 163.999
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Total Equity Capital = 17.722
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Total Operating Income = 13.346
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Net Income = 2.016
($ Millions, 3-31-00)
Chapter 6
21
First American Bank & Trust
A Community Bank
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ROE = 0.1138 = 0.0123 x 9.254
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ROA = 0.0123 = 0.15 x 0.0814
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PM = 0.15
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AU = 0.0814
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EM = 9.254
Chapter 6
22
Citizens Trust Bank
A Minority - Owned Bank
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Total Assets = 252.736
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Total Equity Capital = 19.243
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Total Operating Income = 24.294
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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
23
Citizens Trust Bank
A Minority - Owned Bank
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ROE = 0.1581 = 0.0120 x 13.13
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ROA = 0.0120 = 0.1252 x 0.0961
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PM = 0.1252
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AU = 0.0961
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EM = 13.13
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Note: Typo on p. 177 of the text, ROE is 0.1581 as shown
above and not 0.1768
Chapter 6
24
NetBank
A Pure-Internet Savings Bank
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Total Assets = 1,225
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Total Equity Capital = 218
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Total Operating Income = 21.302
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Net Income = 0.408
($ Millions, 12-31-99)
Chapter 6
25
NetBank
A Pure-Internet Savings Bank
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ROE = 0.0019 = 0.0003 x 5.76
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ROA = 0.0003 = 0.0192 x 0.017
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PM = 0.0192
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AU = 0.017
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EM = 5.76
Chapter 6
26
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
27
Bankers’ Banks and The Bankers
Bank: A Correspondent-Banking Innovation
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Total Assets = 840.414
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Total Equity Capital = 48.694
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Total Operating Income = 76.812
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Net Income = 4.168
($ Millions, 3-31-00)
Chapter 6
28
Bankers’ Banks and The Bankers
Bank: A Correspondent-Banking Innovation
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ROE = 0.0856 = 0.005 x 17.26
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ROA = 0.0050 = 0.0543 x 0.0914
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PM = 0.0543
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AU = 0.0914
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EM = 17.26
Chapter 6
29
Decision-Making Lessons
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On a pre-tax basis, ROA is driven by
three key factors:
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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
30
Decision-Making Lessons
(continued)
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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
31
CHAPTER SUMMARY

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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
Chapter 6
32