Trend and ratio analysis - a European experience

1
Trend and Ratio analysis of national banking
sectors a European experience
Michael Olsen
St. Petersburg, 8-9 June 2006
The views expressed are mine and do not
necessarily represent those of the European
Central Bank.
2
Outline

• Basis for presentation
• Trend analysis
• Ratio analysis
• Concluding remarks

3
Basis for presentation

• A book in English and in Russian
• Available in electronic format on the websites of
  the European Central Bank http//www.ecb.int/press
  /pr/date/2005/html/pr051013.en.html and the Bank
  of Russia

4
Trend analysis

• What are European banking supervisors looking at
• Trends in quantitative issues such as
• Capital adequacy (composition and quality of
  capital, adequacy, access to capital, repayment
  of capital)
• Liquidity (liquid assets, access to market, the
  liquidity plan)
• Asset quality (composition, concentration,
  provisioning)
• Liability (composition, concentration)
• Earnings (profitability, earning performance, the
  profit plan and budget)
• Risk concentration (key products and markets,
  credit and market risk (etc.) and risk positions)

5
Trend analysis

• What are European banking supervisors looking at
• Trends in and the strength of qualitative issues
  such as
• Management (fit and proper nature, board
  composition, cultural attitude, corporate
  planning and strategy)
• Internal control system (decision-making process,
  risk management framework, limits and standards,
  IT, reporting, staff policy, segregation of
  responsibilities, money laundering controls)

6
Trend analysis

• What are European banking supervisors looking at
• Three lines of defense
• Good management and sufficient profitability to
  absorb losses
• Proper provisioning practices that set aside
  reserves to cover expected losses and
• Adequate capital and equity reserves to cover
  unexpected losses.

7
Ratio analysis

• Ratios used to assess performance related issues
• Profitability (ROE, ROA, net interest margin,
  operating income/total assets)
• Efficiency (cost-to-income ration, cost-to-assets
  ratio, staff costs to total income)
• Income breakdown (interest income to total
  income, fee income to total income, trading
  income to total income, non-interest income to
  total income)
• Margins (net interest margin, fee income margin,
  trading margin, income margin, operating cost
  margin, operating result margin, risk provision
  margin, pre-tax profit margin)

8
Ratio analysis

• Ratios used to assess risks, buffers and
  structure
• Credit risk (risk provisions to total customer
  loans, risk provisions to risk-weighted assets,
  risk provisions to net interest income,
  non-performing loans to customer loans, coverage,
  risk-weighted assets to total assets)
• Capital (tier 1 ratio, total capital ratio,
  equity ratio)
• Balance sheet structure (customer loans to total
  loans, interest-earning assets to total assets,
  trading assets to total assets, deposits to total
  assets, loan deposit ratio, interbank ratio,
  liquidity ratio)

9
Ratio analysis

• Ratios used for assessment of growth
• Change in customer loans
• Change in customer deposits
• Change in total assets
• Change in pre-provision operating profit
• Change in pre-tax profit
• Change in net profit

10
Concluding remarks

• Is trend and ratio analysis useful?
• For banking supervisors
• For the banking sector
• Thank you for your attention!