Financial ratio analysis is considered as one of the most important tools that are being used to evaluate the performance of any bank. It is important to note that the financial ratios for a bank are slightly different as compared to the typical ratio analysis for any manufacturing firm. Due to this basic difference, there are some additional ratios that are being computed for evaluating the basic performance of a bank. These ratios include net profit margin, provision for loan losses, loans to assets, capital adequacy etc which are computed in order to provide a deeper insight into the overall financial performance of any bank.
This paper will discuss as to how the performance of a bank is evaluated and what are some of the tools including financial ratio analysis which can be used to effectively evaluate the performance of the bank and the type of data required to make such an analysis.
Financial Ratio analysis is one of the leading tools that are being used to evaluate the performance of a bank. These are common sets of financial ratios that are used to compute various financial indicators and by making either trend analysis or industry comparison, the overall performance of the bank can be evaluated. These ratios are:
Return on assets is computed by dividing the net income earned by the Bank with its total assets. This is an important ratio because it informs us about the overall efficiency of the bank’s assets i.e. how the total assets of the bank are used by the management in producing the desired results for its shareholders.
Return on assets is also considered important ratio because it can be a better judge of the overall efficiency of the bank’s management i.e. if return on assets is low it can indicate that the overall management efficiency in utilizing the assets of the firm is not entirely up to the satisfaction and management shall improve its practices and internal