FIN3109 Lecture Notes - Lecture 3: Income Statement, Legal Risk, United States Treasury Security
FIN3109 – Module 3
- Key Return Measures for and ADI
oBanks main objective: Maximising the value of shareholder’s investment
oThis will involve incurring risk in order to generate returns
oWe will begin by looking at various measures of return
oThe following is a list of standard measures of return for a bank
- Interest Margin =
oMeasures how efficiently the ADI generates a ‘spread’ by borrowing from surplus units and
lending to deficit units
- Net Margin (After Tax) =
oMeasures the ADI;s ability to pay expenses and generate profit from interest and non-
interest income
- Asset Utilisation =
oThis reflects management’s ability to generate incomes (both interest and non-interest)
from its earning assets
- Return on Assets =
oThis reflects management’s ability to use financial and real resources (assets) to generate
net revenue
oMany regulators believe ROA is the best measure of ADI efficiency
- Leverage Multiplier:
oReflects the extent to which assets are funded with equity relative to debt. The higher the
value, the higher the proportion of debt
- Return on Equity =
oA key return measure: Overall profitability per dollar pf equity.
oThe best overall measure of how well the ADI is maximising shareholder wealth
- 4 Key Risk Measures for and ADI
oWe will look at a range of risks faced by ADIs during the course. The following are 4 key
measures that affect profitability:
Liquidity Risk
Interest Rate Risk
Credit Risk
Capital Risk
- Liquidity Risk: The risk that and ADI will have insufficient funds to pay out on account withdrawals,
new lending and clearing obligations in a timely and cost effective manner. We can consider liquidity
in relation to different time periods: intra-day, daily, weekly etc.
oThere are 2 main aspects to Liquidity Risk:
Funding Risk: The inability to borrow liquid finds
Marketability Risk: The inability to sell assets for fair market value
oThere are a number of methods used to measure liquidity risk. For example:
The formula given in the formula sheet (taken from 3.5) is:
- Interest Rate Risk: The risk that a change in interest rates will adversely affect an ADIS net interest
revenue (interest revenue less interest expense) and the market value of its assets and liabilities.
oA beginning measure of interest rate risk is:
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Document Summary
Interest margin : measures how efficiently the adi generates a spread" by borrowing from surplus units and lending to deficit units. Net margin (after tax) : measures the adi;s ability to pay expenses and generate profit from interest and non- interest income. Asset utilisation : this reflects management"s ability to generate incomes (both interest and non-interest) from its earning assets. Return on assets : this reflects management"s ability to use financial and real resources (assets) to generate net revenue, many regulators believe roa is the best measure of adi efficiency. Leverage multiplier: reflects the extent to which assets are funded with equity relative to debt. The higher the value, the higher the proportion of debt. Return on equity : a key return measure: overall profitability per dollar pf equity, the best overall measure of how well the adi is maximising shareholder wealth.
