Because the primary objective of bank management should be the maximization of shareholders wealth, a good starting point in the analysis of Z-BANK’S financial performance is the Return on Equity (ROE) rate. As we can see at the above table in the year 200XX-1 Z-BANK’S ROE (50%) was way much higher that that of the Peer Group (20%), which indicates that at that period the Z-BANK has a better performance and was more competitive than the Peer Group. However, in the year 20XX we can see that Z-BANK had a dramatic decrease in its’ ROE (14. 63%), which is worse than the ROE of the Peer Group (18%). Although both Banks had a decrease in their ROE in 20XX if we compare their growth rates Z-BANKS ROE decreased by 70. 74% while the Peer Groups Roe decreased only by 10%. This dramatic decrease in Z-BANK’S ROE will have a negative effect for the bank.
Firstly, because a relatively lower ROE compared with other banks, will tend to decrease the bank’s access to new capital that may be necessary to expand and maintain a competitive position in the market and secondly, because a low ROE may limit the bank’s growth because regulations require that assets be a certain number of times equity capital. To continuo, another important profitability ratio is the Return on Assets (ROA). ROA measures the ability of management to utilize the real and financial resources of the bank to generate returns. We can see that in 20XX-1, Z-BANK’S ROA is better that that of the Peer Group but again in 20XX we can see that Z-BANK’S ROA have a significant decrease of 69. 73% and now Peer Group has a better ROA. This means that in the year 20XX Z-BANK’S management’s ability to generate returns was much less efficient than in 20XX-1.
The Profit Margin ratio provides information about the ability of management to control expenses, including taxes, given a particular level of operating income. Here we can see that in year 20XX-1 Z-BANK had a better Profit Margin than that of the Peer Group but the year 20XX Peer Group have a better Profit Margin. Net Interest Margin (NIM) is another profit measure ratio. We see that in year 20XX-1 Z-BANK’S NIM is slightly better than that of the Peer Group in 20XX however Z-BANK’S NIM decreases significantly by an amount of 66. 78% and thus this year Pear Group has a much better NIM. Asset Utilization Ratio represents the ability of management to employ assets effectively to generate revenues.
Here we see that from the year 20XX-1 to 20XX we have a slight decrease in Z-BANK’S Asset Utilization Ratio by comparing it with the Peer Group Asset Utilization Ratio we can see that in both 20XX-1 and 20XX Peer Group had a better utilization ratio. To summarize, we can see that although in 20XX-1, from the profitability point of view, Z-BANK was doing much better than Peer Group in year 20XX we have a dramatic decrease in the Z-BANKS profits and we see that the Peer Group is in a much better condition. ROE BREAK DOWN ROE = Profit Margin x Asset Utilization x Equity Multiplier ( Net Income = Net Income x Operating Revenues x Total Assets Total Equity Operating Rev. Total Assets Total Equity Z-BANK (20XX-1): 53. 66% = 1. 302 x 1. 420 x 29. 02 Peer Group (20XX-1): 20% = 0. 7 x 1. 786* x 16
So in 20XX-1 Z-BANK generated a higher ROE primarily because it has a greater profit margin and a higher multiplier. Z-BANK (20XX): 14. 63% = 0. 42 x 1. 338 x 26. 07 Peer Group (20XX): 18% = 0. 65 x 1. 846* x 15 In 20XX Peer Group had a better ROE Primarily because of a greater Asset Utilization as well as a better profit margin. (* although the asset utilization ratio for the peer group wasn’t given we can easily calculate it because all the other components in the equation are known). 3. 1(c) In this part we are going to analyze the Risk Ratios of Z-BANK and compare them with those of the Peer Group. The first Risk Ratio is the Equity Multiplier also known as the financial leverage ratio or leverage ratio.
Equity multiplier is a way of examining how a company uses debt to finance its assets. From the table above we can see that Z-BANK’S Equity multiplier is decreasing from 20XX-1 to 20XX but again in both years Z-BANK’S Equity Multiplier is much higher than that of the Peer Group, which means that Z-BANK uses more debt to finance its’ assets than the Peer Group. Loan Losses Rate is an estimate provided by banks of future loan losses as an expense on its income statement. Here we can see that the Z-BANK had an increase in its Loan losses rate from 20XX-1 to 20XX and by comparing it to the Peer Group we can see that Peer’s Group Loan Losses Rate is better than Z-BANK’S because they are much lower.
Loan Rate indicates the extent to which assets are devoted to loans as opposed to other assets, including cash, securities, and plant and equipment. Her we can see that Z-BANK has both years has a greater loan rate than that of the Peer Group which means that it has a greater exposure to loan (or credit) risk and that may also explain the higher loan losses rate that it has. We can also see that from 20XX-1 to 20XX Z-BANK’s loan rate decreases slightly. By comparing the Z-BANK’S expenses with that of the Peer Group we can see that Z-BANK has much more higher expenses than Peer Group especially interest Expenses and Wage Salaries of Z-BANK are enormous comparing them with those of the Peer Group.
Comparing the liquidity ratios of Z-BANK and the Peer Group we can see that Z-BANK has a higher cash ratio than the Peer Group which is positive and that the Cash and Securities Ratio of Z-BANK are slightly lower than those of the Peer Group. By comparing the tax ratios of Z-BANK and Peer group we can see that in 20XX-1 Z-BANK paid lass taxes than the Peer Group and in 20XX both Z-BANK and Peer Group had the same tax ratio. Dollar Gap Ratio is the difference between the interest-sensitive assets and liabilities. Here we can see that Z-BANK both in 20XX-1 and in 20XX has a much larger Dollar Gap Ratio than that of the Peer Group, which means that in an increase in the interest rate the profitability of the Z-BANK will be negatively affected.
The same will happen and to the Peer Group because the also have a negative Gap but to a lower extent because they have a lower dollar Gap. From the above analysis we can derive information about the Z-BANK’S strengths and weaknesses. First of all we can see that Z-BANK is more Risky than the Peer Group. A weakness of Z-BANK is that it has a very high negative Dollar Gap Ratio and that means that a change in interest rate will affect its profitability much more than the peer group. Another weakness is the high loan loss rate which indicates that the bank expects not to collect a higher amount of the loans that what the peer group expect. Strength of Z-BANK is that they have a higher loan rate than that of the Peer Group.
Although this indicates that they are facing greater risk they also expecting to receive more interest from those loans. Moreover, another strength of Z-BANK it has better liquidity ratios which means that if a problem occurs they can repair more easily their debts. 3. 1(d) Because Z-BANK has a larger negative Dollar Gap Ratio relative to its Peer Group this suggests that its profitability will be affected much more than its Peers in a change in interest rates. More specifically if interest rates increase then Z-BANK will face a dramatic decrease in its profits and the opposite; if interest rate decreases they will have a great increase in their profits.