By the Numbers
Banking and Financial Services
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Types of Analysis
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Balance
sheet
analysis
Ratio
analysis
CAMELS
model
Risk
analysis
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Balance Sheet Vocabulary
Balance Sheet – a financial document that shows a
company’s assets, liabilities, and stockholder’s
equity
Assets – things that are owned by the bank
Liabilities – debts that are owed by the bank
Stockholder’s Equity – the difference between
assets and liabilities, also known as capital
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Ratio Analysis - NIM
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Ratio Analysis – a method of making comparisons to
make numbers meaningful
Net Interest Margin (NIM)– measures how much
interest is being earned on assets
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Net interest income – while net income is the difference
between income and expenses, net interest income is the
difference between interest earned and interest paid
(NIM) = (Interest Income – Interest Expense)/Total Assets X 100
* * The higher the percent, the better, preferably over 5%. As
an example, this means that a bank is paying less interest on
deposits and is earning more interest from loans.
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Ratio Analysis - ROA
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Return on Assets (ROA)– measures how much profit a
bank earns for each dollar value of its assets
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ROA = Net Income/Total Assets X 100
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This ratio shows how well a bank’s
assets are generating profits.
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Net Income =
Income - Expenses
* * The higher the percent, the better,
preferably more than 1%.
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Ratio Analysis - ROE
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Return on Equity (ROE) – measures how well a bank
can make a return for its investors, or stockholders
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Stockholders Equity = Assets – Liabilities
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ROE = (Net Income/Stockholders Equity) X 100
Net Income =
Income - Expenses
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* * The higher the percent, the better, preferably more than
10%
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Spread
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Spread is actually not a ratio
Spread – the difference between what the bank
receives from customers in loan interest and what it
pays out in interest on its customers’ deposits
* * The higher the spread percentage, the better,
preferably greater than 5%.
The largest income for a bank is interest from loans,
and the largest expense is interest paid on deposits.
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CAMELS Model
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CAMELS Model –
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an international bank rating system
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originally developed in 1979 in the U. S. and
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called the Uniform Financial Institutions Rating System
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renamed CAMELS by the Federal Reserve and Office of the
Comptroller of the Currency in 1995.
Each of six factors is rated on a scale of 1to 5, with 1 being the
best rating
Only available to management, not to the public
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CAMELS Acronym
C
•Capital Adequacy
A
•Asset Quality
M
•Management
E
•Earnings
L
•Liquidity
S
•Sensitivity to Market Risk
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C - Capital Adequacy
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Having enough capital to help cover losses, if any
Capital ratio – a measure of the amount of capital a
financial institution has compared to its assets
Capital ratio = (total capital/total assets) X 100
Good ratio is greater than 10% and bank receives a
better rating
Less than 5% can mean bank is undercapitalized,
meaning not enough capital to handle any losses
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A - Asset Quality
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Bank assets consist of the loans they make and the
investments they make.
If loans are not repaid, the bank cannot make the
income it expects. If investments are too risky, the
returns may not be what is expected either.
Asset quality – the risks associated with the bank’s
assets
Good asset quality shows that a bank can continue
making income with its loans and investments.
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M - Management
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Difficult to measure
Holding a financial institution’s Board of Directors
more accountable
Must be able to take corrective action in possible
crisis situations
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E - Earnings
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Good rating created with positive earnings
A positive trend in earnings also creates a good
rating.
Earnings that have consistent projections for the
future are positive, such as from loans, fees, and
investments.
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L - Liquidity
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Liquidity – having enough cash on hand
Reserve requirements exist to ensure there is a
minimum percentage of deposits on hand for
customer withdrawals.
New customer deposits are harder to predict than
long-term customer deposits.
Does the bank have assets on hand that can quickly
be converted to cash or will it have to borrow from
the Federal Reserve?
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S – Sensitivity to Market Risk
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Market risk – the possibility of a change in an asset’s
value depending upon market conditions
Market risk, as well as a bank’s profitability, can be
affected by the state of the economy.
The less risk, the better for a bank or other financial
institution.
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Risk Analysis
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Risk – the probability of an event occurring which
may include the likelihood of profit or loss due to the
level of the risk
Credit
Liquidity
InterestRate
Types
of Risk
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Risk Comparison
Interest-Rate Risk
Liquidity Risk
Risk of changes in
interest rates reducing
income for banks
Risk that a bank
cannot raise enough
cash when needed
Risk that a borrower
may not be able to
repay a loan
If interest rates decline
on deposits, can lead
to less revenue
Federal Reserve
requires minimum 10%
cash on hand
This risk can also be
affected by the
economy.
Better forecasting or
planning for interestrate fluctuation
Invest in more liquid
securities in case they
need to be sold for
cash
Better credit analysis of
each customer
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Credit Risk
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Independent Practice Assignments
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Ratio Analysis Assignment #1 – Have students go online and locate financial statements for a bank of the
student’s choosing. Using the appropriate financial statements, students will calculate the ratios presented
in this lesson. Then they will summarize their results explaining which ratios are favorable and which ones
are not. They should create a chart of their results. They may do this manually or on the computer
depending on whether or not there is lab access.
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Spread Calculation Report Assignment #2 – To help students understand the concept of a spread, students
will research a bank web site and determine what the average interest rate charged on a home loan is
and then the average rate on savings accounts. Then they will take the difference between the rates. This
is the spread. In a one-page report they will explain this process, the interest-rate calculations for the
mortgage and savings rates, and the difference. Then they will summarize the importance of spread to the
income or profit of a bank.
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CAMELS Comic Strip Assignment #3 – Students will create a six-eight panel comic strip demonstrating their
knowledge of the CAMELS rating system. They will include speaking bubbles that show discussions into
what the acronym stands for, what countries may use the rating system, what the ratings mean, and any
other information they can include in their comic strip.
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