1 & 2 bank financial management
TRANSCRIPT
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IntroductionIntroduction
totoBank Financial ManagementBank Financial Management
( Session 1 & 2)( Session 1 & 2)
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BankingBanking
Market Changes due toMarket Changes due to LLiberalizationiberalization
PPrivatization andrivatization and
GGlobalizationlobalization ResultingintoResultinginto
Intense competitionIntense competition
Change in expectation of stake holdersChange in expectation of stake holders
Change in Business strategies & organizational structureChange in Business strategies & organizational structure Change in tools and techniques of managementChange in tools and techniques of management
Changes in regulatory practicesChanges in regulatory practices
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Bank Financial ManagementBank Financial ManagementSimilarities and differences between corporate and bank financialSimilarities and differences between corporate and bank financial
managementmanagement
Financial
Management
Bank Financial
ManagementWorking capital decision Liquidity and interest rate management
decisions
Capital budgeting decisions Credit and cost management decisions
Financing decisions Funding decisions
Dividend distribution management
decisions
Capital account management
decisions
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Bank financial managementBank financial management
Balance sheet analysisBalance sheet analysis LiquidityLiquidity
Concentration of assetsConcentration of assets
Current ratioCurrent ratio Debt equity ratioDebt equity ratio
Diversification of assetsDiversification of assets
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Bank financial managementBank financial management
Some key questionsSome key questions Whybanks keep more liquidity?Whybanks keep more liquidity?
How liquidityin banks portfolio comes?How liquidityin banks portfolio comes?
Whybanks are permitted to operate with muchWhybanks are permitted to operate with muchmore financial risk than manufacturingmore financial risk than manufacturing
company?company?
Should capital be linked to ensure bank safety?Should capital be linked to ensure bank safety?
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Bank financial managementBank financial management
Income statement analysisIncome statement analysis Income aspectsIncome aspects
Other incomeOther income
Provision of lossesProvision of losses Non interest expensesNon interest expenses
Net income after taxNet income after tax
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Bank financial managementBank financial management
profitability analysisprofitability analysis Return on assets (ROA)Return on assets (ROA)
Financial leverage (TotalFinancial leverage (Totalassets/equity)assets/equity)
Return on equity (ROE)Return on equity (ROE)
Banking is high leverageand low margin business
BANCOBANCO MACOMACO
ROAROA .6%.6% 6%6%
LfLf 2525 2.52.5
ROEROE 15%15% 15%15%
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Profitability analysis and riskProfitability analysis and risk
measurementmeasurementEconomicEconomicscenarioscenario
RecessionRecession NormalNormal ExpansionExpansion
LeverageLeverage NormalNormal HighHigh NormalNormal HighHigh NormalNormal HighHigh
ROAROA (.3%)(.3%) (.3%)(.3%) .6%.6% .6%.6% .8%.8% .8%.8%
LfLf 2525 3030 2525 3030 2525 3030
ROEROE (7.5%)(7.5%) (9%)(9%) 15%15% 18%18% 20%20% 24%24%
A well managed bank can contain sharp fluctuations' in operational risk
throughout the economic cycle and still achieve a satisfactory return
on its shareholders equityby using financial leverage.
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Profitability analysis and riskProfitability analysis and risk
measurementmeasurement How change in ROE is impacted by change in ROAHow change in ROE is impacted by change in ROA
and financial leverageand financial leverage
How change in ROA is caused by operational risk (How change in ROA is caused by operational risk (
Change in total income, non interest expenses or bothChange in total income, non interest expenses or bothin response to economic conditions)in response to economic conditions)
How change in financial leverage impact financial riskHow change in financial leverage impact financial risk
( to cover interest expense)( to cover interest expense) How change in operational risk and financial riskHow change in operational risk and financial risk
impact total risk ( return to share holders)impact total risk ( return to share holders)
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Bank Financial ManagementBank Financial Management
Broad ObjectivesBroad Objectives Increase net interest margin (NIM)Increase net interest margin (NIM)
Improve ROE (by managing financial leverageImprove ROE (by managing financial leverageand operational risk)and operational risk)
Improve TOP LINE (market share)Improve TOP LINE (market share)
Optimize shareholders wealthOptimize shareholders wealth
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CAMELS MODELCAMELS MODEL
Five critical management variablesFive critical management variablesC Capital Management
A Asset Quality Management
M Over all Management (Hump on the camel)
E Earnings (Profitability Management)
L Liquidity Management
S Systems Management
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Major areas ofMajor areas of
Bank Financial ManagementBank Financial Management Strategic Planning & performance budgetingStrategic Planning & performance budgeting
Treasury operationsTreasury operations
Profitability measurementsProfitability measurements Financial accounting, Management accountingFinancial accounting, Management accounting
and cost accountingand cost accounting
Risk ManagementRisk Management
Regulatory complianceRegulatory compliance
Internal control systemsInternal control systems
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Bank Financial ManagementBank Financial Management
C
urrent trendsC
urrent trends Basel II and III accordBasel II and III accord
Emphasis on corporate governanceEmphasis on corporate governance
Comprehensive guidelines for risk managementComprehensive guidelines for risk managementbyRBIbyRBI
Risk Based supervision guidelinesRisk Based supervision guidelines
Setting of ALCO in each bankSetting of ALCO in each bank Integrated Risk Management CommitteeIntegrated Risk Management Committee