Question

Bank A (Dollars in Millions) Balance Statement Assets Liabilities and Equity Cash $ 850 Deposits $6,475 Securities $1,925 Other Borrowings $1,645 Loans $5,400 Equity $1,030 Other assets $ 975 Total Assets $ 9,150 Total Liabilities and Equity $ 9,150 Income Statement: Interest on Loans $ 450 Interest on securities $ 95 Interest Expense $ 246 Noninterest Income $ 78 Noninterest Expense $ 112 Provision for loan loss $ 35 Taxes $ 115 Net Income (NI) $115
A) Determine Bank A’s ROA?
B) Determine Bank A’s ROE ?
C) The bank’s profit margin is ?
D) The bank’s utilization is ?

Answer 1

Answer:

1. ROA = Net Income/Total Assets = $115/$9,150 × 100 = 1.25%
2. ROE = Net Income/Shareholder Equity = $115/1,030 × 100 = 11.16%
3. Profit Margin = Net Income/Net Revenue = $115/($450+$95+$78) $623 × 100 = 18.45%
4. Utilization = Net Revenue/Total Assets = $623/$9,150 × 100 = 6.8%

Explanation:

1. Returns on Assets (ROA): Profit percentage of total revenue earned from assets only. The higher the percentage the better for the company because it shows that company is using it's assets effectively.
2. Return on Equity (ROE): Profit percentage of total revenue earned from shareholder's investment. It's a vital ratio for investors to analyze when they are deciding to invest in a company.
3. Profit Margin: It shows the percentage of the actual profit in the revenue minus all costs.
4. Utilization: It is the percentage to show that how effectively a company has utilized i'ts assets to earn profit.