1、Bank ProfitabilityBank ProfitabilitySession 10Profitability & PricingBank ProfitabilityOperating ProfitabilityAsset UtilizationBank FinancingProfitability & PricingOperating ProfitabilityProfitAbsolute profit versus relative profit?What are the major drivers of profit?What are the major impe

2、diments to earning profits?Profit/Gross RevenuesWhat does this tell us?How can we improve the ratio?Operating Revenue/Operating expenseWhat does this tell us?How can we improve the ratio?Profitability & PricingAsset UtilizationPortfolio CompositionImpact on profitability?Impact on risk?Impedimen

3、ts to achieving the composition you desire?Gross revenues/Average total assetsWhat does the ratio tell us?How can you improve the ratio?Profitability & PricingBank FinancingSources of borrowed fundsImpact on interest expense?Impact on flexibility?Impact on interest rate risk?Impact on liquidity?

4、EquityForms of equity?Cost of the different forms of equity?Risks of the different forms of equity?Average Assets/Average EquityWhat does the ratio tell us?Impact on ROE?Impact on financial risk?Profitability & PricingBreakdown of Bank ProfitabilityROE = Profit X Gross Revenue X Average Assets G

5、ross Rev Average Assets Average EquityROE = Profit Margin X Gross Yield X LeverageROA = Profit Margin X Gross YieldProfitability & PricingConcept of Sustainable GrowthObjective:To develop an internally consistent strategy for bank capital growth while recognizing several constraints . . .Profit

6、margin & gross yield generating capabilitiesDesired level of financial leverageDesired dividend payout ratioIssue: What is the maximum growth rate that a bank can sustain on the basis of internally generated capital, without altering its financial leverage or dividend payout ratios?Profitability

7、 & PricingThe Growth CycleInitial ConditionsAssets $_Liabilities $_Equity$_Target leverage ratio_Asset growth target_Funds required to meet growth target_Profitability & PricingThe Growth Cycle (Cont)Asset Yield _%$_Interest Expense_%$_Other Expenses_%$_Taxes_%$_Dividends_%$_Retained Earning

8、s_%$_Funds Required for Growth$_Funds Available for Growth:Equity$_Debt$_Sustainable Growth Rate_%Profitability & PricingRequired Return on EquityNet income/Average EquityImpact of risk & return to the shareholderThe linkages betweenProfits, assets & financingROE in different countriesSh

9、areholder value creationProfitability & PricingBank Stock PricingPrice/Earnings RatioCalculation?How do we interpret the ratio?What is high? What is low?Book/Market RatioCalculation?How do we interpret the ratio?What is high? What is low?Profitability & PricingValuationValueCost of the Asset

10、s? Depreciated book value? Replacement costYield? Capitalized earnings or dividends? Realizable cash flow from: - Liquidation - Going concernMarket? Direct quote ? Inference (P/E + . . . )Bargaining/ArbitrationProfitability & PricingFundamental Stock ValuationCommonStock PriceDepends onEarnings

11、per share (E)Growth rate of earnings per share (G)Dividend payout ratio (DPR)Risk (R)Profitability & PricingGordon Growth Model Where:P - Price of the common stockEPS - Earning per share at time period tDPR - Dividend payout ratiog - Growth rate of the firms dividendsr - Firm specific discount r

12、ateProfitability & PricingGordon Growth ModelPoints to remember:Must always use the cash flow at time period 1, not at time period zeroThe price of the stock is simply the present value of the expected future cash flows to the investor. The investors cash flows are the dividendsProfitability &am

13、p; PricingGordon Growth ModelExample: Assume that the Widget Corporation has earnings per share of $2.00 at time period zero (today). The firms earnings have been growing at 5% per year for the last ten years. The firm has a history of paying out 50% of its earnings in the form of dividends. If the

14、investors required return on equity for holding Widget Corporation common stock is 15%, what price should the investor pay for Widget stock?Profitability & PricingGordon Growth ModelThe solution:The investor should pay $10.50 per share for Widget stockProfitability & PricingGrowth-Valuation

15、MatrixEXPAND ASSETS Look for acquisitions & invest surplus in securitiesEXPAND FINANCINGIssue equity or attract deposit flowsRESTRUCTURE LIABILITIES redeem high cost funds increase dividendsRESTRUCTURE ASSET PORTFOLIO Divest unprofitable activity Refinance to decrease costROE/COEGa/GsGa/GsROE - Return on EquityGa - Actual growth rate of assetsCOE - Cost of EquityGs - Sustainable growth rate of assets1Profitability & PricingDividend PolicyCountry tax rulesDividends & valueSustainable growth againProfitability & PricingElements of the Dividend DecisionSharehol