Please follow the format of Chapter 12-Appendix and do a ROE analysis of two different banks.
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Appendix-chapter12.pptx12-‹#›
Application of ROE Analysis
Compare Heartland Bank and Trust (HBT) with Bank of America (BOA)
HBT
HBT is a profitable and efficient retail bank
invests mainly in real estate loans
uses more retail deposits to fund its assets
holds relatively more equity capital than Bank of America
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Application of ROE Analysis
Bank of America (BOA)
BOA is both a retail and a wholesale bank
has a relatively more diversified portfolio than HBT
uses a broader array of deposits and more purchased funds (i.e., fewer core deposits) than HBT
offers a broad spectrum of financial services
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HBT and BOA data
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Application of ROE Analysis
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HBT has a substantially higher ROE.
HBT has a higher ROA and is more highly leveraged (larger equity multiplier)
HBT has a higher ROA.
HBT’s higher ROA is driven by its substantially higher profit margin (PM) ratios.
Even though the interest income to assets ratio is higher at HBT, the AU ratio is lower at HBT because of the substantially lower level of noninterest income to total assets ratio as compared to BOA.
Using the average data from the FDIC, HBT is above the norm in leverage (EM) and beneath the norm in AU measures. HBT’s PM is well above the norm. Their PLL / OI measure is very low, reflecting the low risk nature of their lending. Noininterest expense to OI is about the same as the industry norm but their average tax rate is lower. HBT earns lower amounts of noninterest income in relation to total assets than the typical bank. BOA is well above the average for ROE, ROA and PM. BOA is under the norm in terms of use of leverage (EM) and is slightly beneath the norm for AU. BOA’s PLL/OI ratio is much lower than the norm, indicating better credit quality, and their tax rate is above average. Their interest income to total asset ratio is below the norm.
Some of these differences are due to using numbers from different time periods so be careful using these comparisons.
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Application of ROE Analysis
HBT has a substantially higher ROE.
HBT has a higher ROA and is more highly leveraged (larger equity multiplier)
HBT has a higher ROA.
HBT’s higher ROA is driven by its substantially higher profit margin (PM) & component ratios
Even though the interest income to assets ratio is higher at HBT, the AU ratio is lower at HBT because of the substantially lower level of noninterest income to total assets ratio as compared to BOA
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The Impact of Market Niche and Size
Retail and wholesale commercial banks operate in different market niches that should be noted when performing financial statement analysis
Large banks have greater access to purchased funds and usually maintain more liquid assets
Large banks typically carry lower amounts of equity
At times, the ROA of large banks is less than for small banks because the large banks operate in more competitive markets
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The Impact of Market Niche and Size
Large banks have higher salary expense (%) and typically have higher percentage costs for premises
Large banks have more noninterest income than smaller banks, but they may also have higher noninterest expense
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BOA had much more noninterest income per dollar of assets than WBS due to BOA’s much higher involvement in off balance sheet activities.
