Measuring and Evaluating the Performance of Banks and Their Principal Competitors

Flashcards covering key concepts from a lecture on measuring and evaluating the performance of banks and their principal competitors.

What is a key objective in evaluating the performance of a financial firm?

Maximize the value of the firm.

What are the two main components of an institution’s cost of capital?

The risk-free rate of interest and the equity risk premium.

What situations will cause the value of a financial firm's stock to rise?

The value of the stream of future stockholder dividends is expected to increase, the financial organization’s perceived level of risk falls, market interest rates decrease, and expected dividend increases are combined with declining risk.

In the simplified stock price equation, what do D1, r, and g represent?

D1 is the expected dividend in period 1, r is the rate of discount reflecting the perceived level of risk, and g is the expected constant growth rate at which all future stock dividends will grow each year.

Why is the behavior of a stock's price considered the best indicator of a financial firm's performance?

It reflects the market’s evaluation of that firm.

What does the Return on Assets (ROA) ratio primarily indicate?

An indicator of managerial efficiency reflecting how well management converts assets into net earnings.

What is the Return on Equity (ROE) ratio a measure of?

A measure of the rate of return flowing to shareholders, approximating the net benefit stockholders receive from investing in the firm.

What does the net interest margin measure?

Measures the spread between interest revenues and interest costs achieved by management.

What does the net noninterest margin measure?

Measures noninterest revenues from service fees relative to noninterest costs incurred; typically negative.

What does the earnings spread measure?

Measures the effectiveness of a financial firm’s intermediation function and the intensity of competition in the firm’s market area.

What crucial factors determine superior profitability for a financial institution?

Careful use of financial and operating leverage, control of operating expenses, asset portfolio management, and risk exposure control.

What are the different kinds of risk that banks and their financial-service competitors are subjected to?

Credit Risk, Liquidity Risk, Market Risk, Interest Rate Risk, Operational Risk, Legal and Compliance Risk, Reputation Risk, Strategic Risk, and Capital Risk

What does a rise in the value of the operating efficiency ratio often indicate?

Indicates an expense control problem or a falloff in revenues.

What does a rise in the employee productivity ratio suggest?

Management and staff are generating more operating revenue and/or reducing operating expenses per employee.

How is size often measured when comparing the performance of financial firms?

Total assets or total deposits.

What institutions are the best to use for performance comparison?

Institutions of similar size serving the same market area, and subject to similar regulations and regulatory agencies.

what key information does the Uniform Bank Performance Report (UBPR) report for each bank?

Assets, liabilities, capital, revenues, and expenses.