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Risk Management Report: Saint Charles Bank - Coursework Example

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Risk Management Report: Saint Charles Bank

However, the limitations of this method coupled with advances in management sciences have led to the development of alternate methods such as non-parametric DEA and parametric Stochastic Frontier Approach (Berger and Humphrey,1997) . Berger & Humphrey (1997) assert that the whole idea of measuring bank performance is to separate banks that are performing well from those which are doing poorly. They further indicated that, “evaluating the performance of financial institution can inform government policy by assessing the effects of deregulation, mergers and market structure on efficiency” (p175). Bank regulators screen banks by evaluating banks’ liquidity, solvency and overall performance to enable them to intervene when there is need and to gauge the potential for problems (Casu et al, 2006). On a micro-level, bank performance measurement can also help improve managerial performance by identifying best and worst practices associated with high and low measured efficiency. When looking to improve their performance, banks compare the performance of their peers and evaluate the trend of their financial performance over time. I will therefore use financial ratios were used to evaluate the performance of Saint Charles Bank. .The most common measure of bank performance is profitability. Profitability is Measured using the following criteria: Return on Assets (ROA) = net profit/total assets shows the ability of management to acquire deposits at a reasonable cost and invest them in profitable investments (Erick, 2002) . This ratio indicates how much net income is generated per ? of assets. The higher the ROA, the more the profitable the bank. Return on Equity (ROE) = net profit/ total equity. ROE is the most important indicator of a bank’s profitability and growth potential. It is the rate of return to shareholders or the percentage return on each ? of equity invested in the bank. Cost to Income Ratio (C/I) = total cost /total income measures the income generated per ? cost. That is how expensive it is for the bank to produce a unit of output. The lower the C/I ratio, the better the performance of the bank. In banking the risk-reward trade off is constantly present. Risk taking generates higher expected earnings through various mechanisms. For example granting high margin loans to risky customers may increase earnings in the short term but it also increases the credit risk profile and the probability of future losses (Hull, 2012). The analysis of the bank ratio’s show a constant profitability trend from 2009 to 20011 with a slight increase in 2010. Return on assets reduced to 1.23% in 2009 to 1.05% in 2010 to 1 17% in 2011. The Return on Equity increased from 18.81% IN 2009 to 20.13% in 2010 and dropped to 18.45% in 2011Loans and advances were the main contributors to the increase in assets mainly due to increase in mortgage loans . The higher ratios indicate a better prospective as the high net interest margin was feeding through greater net income thus boosting ROA and ROE . The decline in the C/I ratio is as a result of cost efficiency levels. These results are compared to Barclays performance for the same period shows that Barclays has an increasing trend as it experienced a and increase form 7.5% in 2009 to 9.9% in 2010 to 14.9% in 2011% ...Show more

Summary

Risk Management Report A case study of Saint Charles Bank Institution: Name: Question 1 Comment on the financial situation of the bank as presented on the Exhibits 1 and 2. (LO2, LO5) With the deteriorating health of the banking institutions and the recent surge of bank failures as a result of the current global financial crisis, it is justified that bank performance receives increased investigation from both scholars and industry specialists …
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