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20 Cards in this Set
- Front
- Back
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What is usually a banks main source of income? |
A banks main source of income is usually the net interest income. (Interest receivable less interest payable). |
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Name four other sources of income for a bank and describe them briefly. |
1. Dividend income: Represents the income the bank receives from various equity stakes it has taken in customers. 2. Net fee income: Derives from various services such as corporate finance, insurance, underwriting etc etc. 3. Net trading income: Derives from treasury and capital market services for multinational customer. (fixed income, bonds, derivatives) 4. Other operating income: Comprises rental income on the leasing of assets, valuation gains, sale of assets. |
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A banks core business is to earn interest on the money it lends. One measure of this performance is the Net interest Margin. What is the Net interest Margin formula? |
= Net Interest Margin |
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What is the Return on Equity formula? |
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What is the formula to calculate the return on risk weighted assets (RWA'S)? |
RWA is a composite figure for all a banks assets factored by a weighting index imposed on it by its regulator. An upward trend can be explained by an improved bottom line profit. |
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What is the formula to calculate the earnings per share? |
No matter what industrial, commercial of financial sector is being studied, earnings per share has a seductive hold over most analysts and investors. |
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What is the formula to calculate the earnings per share growth? |
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Bank supervisors are obsessed that banks keep the Tier 1 ratio versus other borrowings at, or above a target percentage. What is the formula for the Tier 1 capital ratio? |
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Name five profitability ratio's that banks use. |
1. Net Interest Margin 2. Return on Equity 3. Return on RWA's 4. Earnings per Share 5. Earnings per Share Growth |
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Name five gearing ratio's that banks use. |
1. Tier 1 capital ratio Tier 1 capital / RWA 2. Risk-weighted asset growth (New RWA - old RWA) / old RWA 3. Loans to equity Closing gross loans and advances / Equity 4. Loans to deposits Closing gross loans and advances / Customer accounts 5. Payout ratio Dividend declared / Net profit after tax |
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It is instructive to consider the aspects of diversity of product offerings and efficiency of operations, when monitor a banks performance. What are the three operational ratio's used by banks to measure these performances? |
1. Non-interest income ratio Non interest income / Net operating income before loan impairment 2. Bad debt charge ratio Loan + Credit risk impairments / Closing gross loans and advances 3. Cost-income ratio Employee and other overhead / Net operating income before loan impairment |
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Which one of the following would not appear in the typical consolidated income statement of a bank? A. Net fee income. B. Cost of sales. C. Loan impairments. D. Interest receivable. |
The correct answer is B. The consolidated income statements of banks do not have the ‘cost of sales’ equivalent that appears in the income statements within most sectors. |
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Which one of the following defines the net interest income of a bank? A. Net fee income + interest receivable. B. Interest receivable – loan impairments. C. Net fee income – interest payable. D. Interest receivable – interest payable. |
The correct answer is D. |
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Which one of the following is not an element in the net trading income of a bank? A. Gains on disposal of operating leases. B. Foreign exchange. C. Treasury services. D. Government fixed income. |
The correct answer is A. Gains on disposals of operating leases is an element of ‘other operating income’ within the income statement of a bank. |
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Which one of the following is not an element in the net fee income of a bank? A. Insurance. B. Foreign exchange. C. Mortgage services. D. Corporate finance. |
The correct answer is B. Foreign exchange is an element of ‘net trading income’ within the income statement of a bank. |
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Which one of the following will be classified under ‘financial assets and derivatives’ in a bank’s balance sheet? A. Cash. B. Treasury bills. C. Loans to customers. D. Bullion. |
The correct answer is B. In the balance sheet of a bank, cash appears under ‘cash’, loans to customers appear within ‘loans and advances to customers’, and bullion appears under ‘other assets’. |
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Which one of the following is defined as a ‘trading asset’ of a bank? A. Loans to customers. B. Loans to other banks. C. Debt and equity instruments. D. Bullion.Answer |
The correct answer is C. In the balance sheet of a bank, loans to customers appear within ‘loans and advances to customers’, loans to other banks appear within ‘loans and advances to banks’ and bullion appears under ‘other assets’. |
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Which one of the following describes how trading assets are carried in a bank’s balance sheet? A. At cost. B. At replacement cost. C. At realisable value. D. At fair value. |
The correct answer is D. Cost is no longer the sole basis of valuation in a balance sheet. While replacement cost has always appeared as conceptually attractive, its identification represents a considerable challenge. There is a similar difficulty with realisable value. Only fair value is acceptable for balance sheet valuations under international accounting standards. |
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Which one of the following is (typically) the principal funding source for a bank? A. Shareholders’ equity. B. Loans to other banks. C. Loans from central government. D. Customer accounts. |
The correct answer is D. It is relevant to observe the relatively low contribution to funding that comes from the shareholders’ equity. |
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Which one of the following is included within the definition of Tier 1 capital employed by the banking regulators? A. Deposits by banks. B. Customer accounts. C. Shareholders’ equity. D. Loans to customers. |
The correct answer is C. Please note that Tier 1 capital also includes minority interests and preference shares with a deduction for goodwill capitalised and intangible assets. |
