Chapter 20
Bank Performance
Outline
Valuation of a Commercial Bank
Factors That Affect Cash Flows
Factors That Affect the Required Rate of Return by Investors
Impact of the Credit Crisis on Bank Valuation
Assessing Bank Performance
Interest Income and Expenses
Noninterest Income and Expenses
Evaluation of a Bank’s ROA
Converting ROA to ROE
Application
Key Concepts
1. Explain with the use of an income statement that the return on a bank’s assets is primarily a function
of net interest margin, noninterest income and expenses, and loan losses.
2. Explain how performance is influenced by management decisions, which is influenced by their
abilities to recognize risk and their incentives to take risk.
3. Explain how to evaluate a bank’s performance.
POINT/COUNTER-POINT:
Does a Bank’s Income Statement Clearly Indicate the Bank’s Performance?
POINT: Yes. The bank’s income statement can be partitioned to determine its performance and the
underlying reasons for its performance.
COUNTER-POINT: No. The bank’s income statement can be manipulated because the bank may not
fully recognize loan losses (will not write off loans that are likely to default) until a future period.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: There is some degree of manipulation that is possible for banks, but regulatory oversight may
limit the inaccurate financial reporting. The accounting irregularities in recent years have been in other
industries.