1 & 2 Bank Financial Management

8/3/2019 1 & 2 Bank Financial Management

1/13

IntroductionIntroduction

totoBank Financial ManagementBank Financial Management

( Session 1 & 2)( Session 1 & 2)


2/13

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


3/13

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


4/13

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


5/13


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?


6/13


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


7/13


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%


8/13

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.


9/13

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)


10/13

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


11/13

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


12/13

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


13/13

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

1 & 2 Bank Financial Management

Documents

Transcript of 1 & 2 Bank Financial Management