Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 20 doc

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Chapter 20
Bank Performance
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Valuation of a commercial bank

Performance evaluation of banks

Risk evaluation of banks

How to evaluate a bank’s performance

Bank failures
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Valuation of a Commercial Bank

The value of a commercial bank is the present
value of its future cash flows:

The value should change in response to
changes in its expected cash flows and to
changes in the required rate of return:
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Valuation of a Commercial Bank
(cont’d)

Factors that affect cash flows

Change in economic growth

During periods of strong economic growth:

Loan demand is higher

Commercial banks provide more loans

Demand for other bank products tends to be higher


Fewer loan defaults occur

Expected cash flows should be higher
++
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Valuation of a Commercial Bank
(cont’d)

Factors that affect cash flows (cont’d)

Change in the risk-free interest rate

If the risk-free rate decreases and other market rates decline, there
may be stronger demand for the bank’s loans

Banks’ cost of funds decreases when the risk-free rate decreases

Change in industry conditions

If regulators reduce the constraints imposed on commercial banks,
expected cash flows should increase

Technical innovation can improve efficiencies and enhance cash
flows


A high level of competition may reduce the bank’s volume of
business or reduce the prices it can charge for its services
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Valuation of a Commercial Bank
(cont’d)

Factors that affect cash flows (cont’d)

Change in management abilities

Managers can attempt to make internal decisions
that will capitalize on the external forces that the
bank cannot control

Skillful managers will recognize how to revise the
composition of the bank’s assets and liabilities to
capitalize on existing economic or regulatory
conditions
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Valuation of a Commercial Bank
(cont’d)

Factors that affect the required rate of
return by investors

Change in the risk-free rate

When the risk-free rate increases, so does the return required
by investors:
++

∆∆=∆

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f
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∆∆∆∆=∆
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Valuation of a Commercial Bank
(cont’d)

Factors that affect the required rate of return by
investors (cont’d)

Change in the risk premium

When the risk premium increases, so does the return required by
investors:

Impact of the September 11 Crisis on commercial bank
values

Commercial bank valuations declined as a result because
economic conditions were weakened and the volume of bank
loans declined
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),,( MANABINDUSECONfRP ∆∆∆=∆