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Capital Markets Best Practice

Analyzing a Bank’s Financial Performance

by Jyothi Manohar
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Executive Summary

  • The key components of a bank’s basic financial statements.

  • A description of each of the components.

  • How relationships between components are measured and analyzed.

  • The conclusions that can be reached as a result of analyzing these relationships.

  • The capital, asset, management, earnings, liquidity (CAMEL) methodology of analyzing a bank’s financial performance.

Introduction

Individually and collectively, the financial health of banks and the banking system is critical to national and global economies. Central banks or other regulators in various countries monitor financial institutions using rating and evaluation systems that may be unique to those countries. However, there are certain common measures of financial performance and the safety and soundness of a financial institution. No one measure, by itself, is an indicator of the financial health of a bank. It is important to understand each and the interplay among all or many of these measures to properly evaluate a bank’s financial performance.

Analyzing a Bank’s Financial Performance

It is necessary to understand the composition of a bank’s basic financial statements (this is itemized in detail in the Appendix to this chapter) and the business of banking (described in the section “Earnings” below). It is difficult to analyze a bank’s financial performance merely by looking at financial information at a particular point in time. Essential to this analysis is a review of how similar components of a bank’s financial information have trended over time, compared to its own past performance as well as the performance of its peers.

Common measures of financial performance are capital adequacy, asset quality, liquidity, earnings, management capability, risk management, and critical key ratios that serve as tools to analyze a bank’s financial performance.

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Further reading

Book:

  • Golin, Jonathan. The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors. Singapore: Wiley, 2001.

Article:

  • Basel Committee on Banking Supervision. “Basel III: A global regulatory framework for more resilient banks and banking systems.” Bank of International Settlements. Updated June 2011. Online at: www.bis.org/publ/bcbs189.htm

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