Earnings Analysis

Earnings and Losses

  • If interest rates change and devalue an asset, for example, by 22, then the loss must be reflected immediately in the earnings report.
  • The focus should be on the bottom-line result.
  • The key questions to ask:
    • Are you getting the desired result (assessing your bank)?
    • Does the result make sense (assessing another entity)?
  • Earnings have the capacity to absorb losses.

Earnings Quality

  • Determine if the earnings are a one-time occurrence or sustainable.

Return on Average Assets (ROA)

  • ROA is calculated as return on average assets.
  • It is a right-size ratio, meaning it normalizes for the size of the institution. For example, whether assets are 200,000,000200,000,000 or 200,000,000,000200,000,000,000, ROA conveys the same information regarding efficiency.
  • ROA indicates what an entity can do with its available assets.
  • To be considered a top performer ('one' or 'super strong' on earnings), an entity should be in the top quartile for ROA.

Deposit Service Charges

  • Deposit service charges may include income from overdraft fees.