Question

Based on the ratios/growth rates of a bank. what can you say about the financial health of the bank?

(mostly talk about the totat debt/assets ratio, common equity/assets ratio and the total shareholders equity/total assets ratio. explain the meaning of each for this bank.

Growth Rates (2018-2019) Cash & Due from Banks Growth (2018-2019) Investments Growth Loans - 1 Yr Growth Rate Assets-Total Growth Deposits Growth Long Term Debt Growth Total Debt/Total Assets Common Equity/Total Assets Total Shareholders' Equity/Total Assets 1375.2696 -14.1556 -1.8196 1.3596 0.7396 23.0796 14.2696 9.7896 9.7898 Figure 2

Answer 1

The financial health of the bank seems fine in general, however, there are certain factors like where the bank needs to focus. The bank has seen a negative growth rate in investments and loans made, this shows bank is quite cautious in disbursing loan or may be the demand in the economy might not be much, which has a impact on the loan and investment book of bank.

Total Debt / Asset Ratio : The total debt of the bank is around 14.30% of the total assets, which is quite good and manageable. However, the growth of long term debt is very high at 23%. The assets of the company are quite enough to handle the debt of company.

Common Equity / Total Assets : The common equity of the bank stood at 10% of total assets which can be a bit risky for the bank and it is not a good common equity to asset ratio. This is because bank's business involves lending money and there is always a risk of higher NPA which can easily deplete equity capital, if it is not adequate. For banks, Common Equity to asset ratio should be at least 15% or more.

Total Shareholder's equity / Total assets: This ratio depicts the level of total common equity as well as any other form of equity like preferred shares etc. as compared with total asset of the company. The total shareholder's equity to total asset ratio is equal to total common equity to total asset ratio, which means there is no other form of equity except common equity. The company is not issuing much equity and is relying more on debt for the purpose of funding its assets.