BANK CHARACTERISTIC & MACROECOMICS

Bank Characteristics

Net Interest Margin: interest income minus interest expenses over total assets
Net Profit/TA: before tax profit over total assets
Equity/TA: book value of equities (assets minus liabilities) over total assets
Loan/TA: total loans over total assets
Non-interest earning assets/TA: cash, non-interest earning deposit at other banks, and
other non-interest assets
Customer & Short term funding/TA: all short term and long term deposits plus other
non-deposit short term funding over total assets
OVERHEAD/TA: personnel expenses and some other non-interest expenses over total
assets
Asset Quality

Loan Loss Res / Gross Loans: The loan loss reserve over gross loan ratio indicator how
much of the total portfolio has been provided for but not charged off. It is a reserve for
losses expressed as percentage of total loans. Given a similar charge-off policy, the
higher the ratio the poorer will be the quality of the loan portfolio.

Loan Loss Prov / Net Int Rev: Loan loss provision over net interest revenue presents the
relationship between provisions in the profit and loss account and the interest income
over the same period. Ideally this ratio should be as low as possible. In a well-run bank,
if the lending book is higher in risk, this would be reflected by higher interest margins.
If the ratio deteriorates this means that risk is not being properly remunerated by
margins

Loan Loss Res / Impaired Loans: The loan loss reserve over impaired loans (non-
performing loans) ratio relates loan loss reserves to non-performing or impaired loans.
The higher this ratio is the better provided the bank is and the more comfortable we
will feel about the assets quality.

Impaired Loans / Gross Loans: This is a measure of the amount of total loans which are
doubtful. The lower this figure is the better the assets quality

NCO / Average Gross Loans: Net charge off or the amount written-off from loan loss
reserves less recoveries is measured as a percentage of the gross loans. It indicates
what percentage of todays loans have been finally been written off the books. The
lower this figure the better as long as the write off policy is consistent across
comparable bank

NCO / Net Inc Bef Ln Lss Prov: Net charge-off over net income before loan loss provision
ratio is measured similar to charge-offs but against income generated in the year. The
lower this ratio is the better, other things being equal.

Capital
Equity / Tot Assets: This ratio measures the ability of the bank to withstand losses. A
declining trend in this ratio may signal increased risk exposure and possibly capital
adequacy problem.

Equity / Net Loans: this ratio measures the equity cushion available to absorb losses on
the loan book

Equity / Cust & ST Funding: This ratio measures the amount of permanent funding
relative to short term potentially volatile funding. The higher this ratio is the better.

Equity / Liabilities: This leverage ratio is simply another way of looking at the equity
funding of the balance sheet and is another way of looking at capital adequacy.

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BANK CHARACTERISTIC & MACROECOMICS

Cap Funds / Tot Assets:

Cap Funds / Net Loans:
Cap Funds / Cust & ST Funding:
Cap Funds / Liabilities:
Subord Debt / Cap Funds: this ratio indicates what percentage of total capital funds is
provided in the form of subordinated debt.

Operations
Net Interest Margin: This ratio is the net interest income expressed as a percentage of
earning assets. The higher this ratio, the cheaper the funding or the higher the margin
the bank is commanding. Higher margins and profitability are desirable as long as the
asset quality is being maintained

Net Int Rev / Avg Assets: Net Interest Income over average assets indicates that the
item is averaged using the net income expressed as a percentage of the total balance
sheet

Oth Op Inc / Avg Assets: Other operating income over average assets. When compared
to the above ratio, this indicates to what extent fees and other income represent a
greater percentage of earnings of the bank. As long as this is not volatile trading income
it can be seen as a lower risk form of income. The higher this figure is the better

Non Int Exp / Avg Assets: Non interest expenses or overheads plus provisions give a
measure of the cost side of the banks performance relative to the assets invested.

Pre-Tax Op Inc / Avg Assets: This is a measure of the operating performance of the bank
before tax and unusual items. This is a good measure of profitability unaffected by one
off non trading activities.

Non Op Items & Taxes / Avg Ast: This ratio measures costs and tax as a percentage of
assets.
Return On Avg Assets (ROAA)
Return On Avg Equity (ROAE)

Dividend Pay-Out: This is a measure of the amount of post tax profits paid out to
shareholders. In general the higher the ratio the better but not if it is at the cost of
restricting reinvestment in the bank and its ability to grow its business.

Inc Net Of Dist / Avg Equity: This ratio is effectively the return on equity after deducting
the dividend from the return and it shows by what percentage the equity has increased
from internally generated funds. The higher the better.

Non Op Items / Net Income: This denotes what percentage of total net income consists
of unusual items.

Cost to Income Ratio: This is one of the most focused on ratios currently and measures
the overheads or costs of running the bank, the major element of which is normally
salaries, as percentage of income generated before provisions. It is a measure of
efficiency although if the lending margins in a particuar country are very high then the
ratio will improve as a result. It can be distorted by high net income from associates or
volatile trading income.

Recurring Earning Power: This ratio is a measure of after tax profits adding back
provisions for bad debts as a percentage of Total Assets. Effectively this is a return on
assets performance measurement without deducting provisions.

Profitability Ratios:
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BANK CHARACTERISTIC & MACROECOMICS

Return on asset (ROA) = Profit after tax/ total asset

Return of equity (ROE) = Profit after tax/ equity capital
Profit expense ratio (PER) = profit/total expense. A high PER indicates that a bank is
cost efficient and makes higher profit with a given expense.

ROA and ROE are the indicators of measuring managerial efficiency

ROA is net earning per unit of a given asset. It shows how a bank can convert its asset
into net earnings. The higher ratio indicates higher ability and therefore is an indicator
of better performance.
ROE is net earnings per dollar equity capital. The higher ratio is an indicator of higher
managerial performance.

Liquidity Ratios
Bank and other depository institutions share liquidity risk because transaction
deposits and saving accounts can be withdrawn at any time. Thus when withdrawal
exceeds new deposit significantly over a short period, banks get into liquidity trouble.
There are several measures for liquidity.

Cash deposit ratio (CDR) = cash/deposit. Cash in a bank vault is the most liquid asset of
a bank. Therefore, a higher CDR indicates that a bank is relatively more liquid than a
bank which has lower CDR. Depositors'trust to bank is enhanced when a bank
maintains a higher cash deposit ratio.

Loan deposit ratio (LDR) = Loan/deposit. A higher loan deposit ratio indicates that a
bank takes more financial stress by making excessive loan. Therefore, lower loan
deposit ratio is always favorable to higher loan deposit ratio.

Current ratio = Current asset (CA) / current liability (CL) It indicates how the bank
management has been able to meet current liability i.e. demand deposit with the
current asset. A high ratio is an index that shows bank has more liquid asset to pay back
the trust (deposit) of the depositors. When withdrawals significantly exceed the new
deposits banks usually recourse to replace this shortage of funds by selling securities.
Government securities are easily sold and are considered liquid. As such the current
ratio as measured above is expected to be more preferable to lower current ratio.

Current asset ratio (CAR) = current asset/total asset. A high CAR indicates that a bank
has more liquid asset. A lower ratio is a sign for illiquidity as more of the assets are long
term in nature.

Interbank Ratio: this is money lent to other banks divided by money borrowed from
other banks. If this ratio is greater than 100 then it indicates the bank is net placer
rather than a borrower of funds in the market place, and therefore more liquid.

Net Loans / Tot Assets: This liquidity ratio indicates what percentage of the assets of the
bank are tied up in loans. The higher this ratio the less liquid the bank will be.

Net Loans / Cust & ST Funding: This loans to deposit ratio is a measure of liquidity in
as much as high figures denotes lower liquidity.

Net Loans / Tot Dep & Bor: This similar ratio has as its denominator deposits and
borrowings with the exception of capital instruments.

Liquid Assets / Cust & ST Funding: This is a deposit run off ratio and looks at what
percentage of customer and short term funds could be met if they were withdrawn
suddenly, the higher this percentage the more liquid the bank is and less vulnerable to
a classic run on the bank.

Liquid Assets / Tot Dep & Bor: This ratio is similar to the mentioned above but looks at
the amount of liquid assets available to borrower as well as depositors.

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BANK CHARACTERISTIC & MACROECOMICS

Risk and Solvency Ratios

A bank is solvent when the total value of its asset is greater than its liability.
A bank becomes risky if it is insolvent.

Debt equity ratio (DER) = Debt/equity capital. Bank capital can absorb financial shock.
In case asset values decrease or loans are not repaid bank capital provides protection
against those loan losses. A lower DER ratio is a good sign for a bank.

Debt to total asset ratio(DTAR) = Debt/total asset indicates the financial strength of a
bank to pay its debtor. A high DTAR indicates that a bank involves in more risky
business.

Equity multiplier (EM) = total assets/share capital. It is the amount of assets per dollar
of equity capital. A higher EM indicates that the bank has borrowed more funds to
convert into asset with the share capital. The higher value of EM indicates greater risk
for a bank.

Loan to deposit ratio (LDR) = loans/deposit measures liquidity as well as credit risk for
a bank. A high value indicates a potential source of illiquidity and insolvency.

Macro Indicators
GDP/CAP: real GDP per capital

Real Interest: the nominal interest rate minus rate of inflation. Where available,
nominal rate is the lending rate. Otherwise, deposit rate is used

Data onGDP, population and interest rate are from International Financial Statistic
(IFS).

Taxation
Reserves: Reserve of the banking system over deposit of the banking system (time,saving and
demand deposit) multiplied by Customer & Short Term Funding/TA for eachbank.

Financial Structure

BANK/GDP: Total deposit (time, demand and saving) of banking system divided by
GDP.
Total Assets (TA): Total assets of each bank in a given year

Commitment to Economy and Muslim Community

Long term loan ratio (LTA) = long term loan/total loans. A high LTA indicates a bank
commitment for supporting long term development project.

Government Bond Investment (GBD)=Deposit invested in government bond/Total

Deposit. A higher GBD indicates high liquidity and less risk.

Mudaraba-Musharaka Ratio (MM/L)=Mudaraba-Musharaka/Total Loans. A higher

percentage of MM/L indicates a greater commitment to community developments.

Investement Risk Reserves

Investement Risk Reserves / Total Investement

( ( Provisions for Cash and its Equivalents + Provisions for Islamic Modes of Finance ) / Total
Investments ) * 100

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BANK CHARACTERISTIC & MACROECOMICS

This ratio indicated how much of the total portfolio has been provided for but not charged off.
It is a reserve for losses expressed as percentage of total loans. Given a similar charge-off
policy the higher the ratio the poorer the quality of the loan portfolio will be.

Investment Risk Provisions / Revenues from Financing and Investment Activities

( ( Provisions for Cash and its Equivalents + Provisions for Islamic Modes of Finance ) /
Income from Financing and Investments Activities ) * 100
This is the relationship between provisions in the profit and loss account and the interest
income over the same period. Ideally this ratio should be as low as possible and in a well run
bank if the lending book is higher risk this should be reflected by higher interest margins. If
the ratio deteriorates this means that risk is not being properly remunerated by margins.

Equity / Total Assets

( Total Share Holders' Equity / Total Assets ) * 100

As Equity is a cushion against asset malfunction, this ratio measures the amount of protection
afforded to the bank by the Equity they invested in it. The higher this figure the more
protection there is.

Equity / Investments

( Total Shareholders' Equity / Total Investments ) * 100

Similarly this ratio measures the Equity cushion available to absorb losses on the loan book.

Equity / Liabilities

(Total Shareholders' Equity / Total Liabilities ) * 100

This leverage ratio is simply another way of looking at the Equity funding of the balance sheet
and is another of looking at capital adequacy.

Net Revenue Margin

(Income from Financing and Investments Activities / Total Investments ) * 100

This ratio is the net income expressed as a percentage of earning assets. The higher this
figures the cheaper the funding or the higher the margin the bank is commanding. Higher
margins and profitability are desirable as long as the asset quality is being maintained.

Earning Power ( Assets Turnover )

( Total Income / Total Assets ) * 100

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BANK CHARACTERISTIC & MACROECOMICS

This ratio measures costs and tax as a percentage of assets.

Fee Income / Assets

( Fees and Commissions for Banking Services / Total Assets ) * 100

This ratio indicates fixed income opportunities. The higher is the ratio, the higher is the
stability of the Bank.

Return on Assets (ROA)

( Profit before Taxes and Zakah / Total Assets ) * 100

This is perhaps the most important single ratio in comparing the efficiency and operational
performance of banks as it looks at the returns generated from the assets financed by the
bank.

Return on Equity (ROE)

( Profit before Taxes and Zakah / Total Shareholders' Equity ) * 100

The return on equity is a measure of the return on shareholder funds. Obviously here the
higher the figure the better but one should be careful in putting too much weight on this ratio
as it may be at the expense of an over leveraged balance sheet.

Dividend Pay-Out

( Profit/Dividends Payable / Total Distributable Profit ) * 100

This is a measure of the amount of post tax profits paid out to shareholders. In general the
higher the ratio the better but not if it is at the cost of restricting reinvestment in the bank and
its ability to grow its business.

Recurring Earning Power

(( Provisions + Profit before Taxes and Zakah ) / Total Assets ) * 100

This ratio is a measure of before tax profits adding back provisions for bad debts as a
percentage of Total Assets. Effectively this is a return on assets performance measurement
without deducting provisions.

Earning Per Share

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BANK CHARACTERISTIC & MACROECOMICS

(Total Distributable Profit / Average Number of Shares ) * 100

This ratio gives total earnings which will be distributed among the shareholders.

Interbank Ratio

( Balances with Banks and other Institutions / Due to Banks and other Financial Institutions )
* 100

This is money lent to other banks divided by money borrowed from other banks. If this ratio
is greater than 100 then it indicates the bank is net placer rather than a borrower of funds in
the market place, and therefore more liquid.

Total Investments / Total Assets

(Total Investments / Total Assets ) * 100

This liquidity ratio indicates what percentage of the assets of the bank are tied up in loans.
The higher this ratio the less liquid the bank will be.

Total Investments / Customer and Short Term Fund

( Total Investments / ( Customers' Funds + Due to Banks and other Financial Institutions ) ) *
100

This loan to deposit ratio is a measure of liquidity in as much as high figures denotes lower
liquidity.

Liquid Assets Ratio

((Cash and Its Equivalents + Investments in Bonds, Bills, and Securities) / Total Assets) * 100

This is a deposit run off ratio and looks at what percentage of customer and short term funds
could be met if they were withdrawn suddenly, the higher this percentage the more liquid the
bank is and less vulnerable to a classic run on the bank.

Liquidity Cushion Ratio

((Cash and it's Equivalents + Investments and Bonds, Bills, and Securities) / (Customers'
Funds + Due to Other Creditors)) * 100

This ratio provides an indication of liquidity of the institution.

Deployment Ratio

( Total Investments ) / ( Customers' Funds + Total Shareholders' Equity ) * 100

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 BANK CHARACTERISTIC & MACROECOMICS

This ratio reflects how best the Bank is making use of its financial resources for earning
income.

Cost to Income Ratio

( Total Expenses & Provisions / Total Income ) * 100

This is one of the most focused on ratios currently and measures the overheads or costs of
running the bank, the major element of which is normally salaries, as percentage of income
generated before provisions. It is a measure of efficiency although if the lending margins in a
particular country are very high then the ratio will improve as a result. It can be distorted by
high net income from associates or volatile trading income.

Basic Financial Definitions

Asset Quality Capital

Bank Characteristics

(1.1) Net Interest Margin (2.1) (3.1)

= Interest income Interest expenses Loan Loss Reserve Equity
Total Asset Gross Loans Total Asset

(1.2) (2.2) (3.2)

Net Profit Loan Loss Provision Equity
Total Asset Net Income Revenue Net Loan

(1.3) (2.3) (3.3)

Equity Loan Loss Reserve Equity
Total Asset Impaired Loans Customer & Shorterm Funding

(1.4) (2.4) (3.4)

Loan Impaired Loans Equity
Total Asset Gross Loans Liability

(1.5)
(3.5)
Non Interest
Capital Funding
Earning Asset
Total Asset
Total Asset

(1.6) (3.6)
Customer & Shorterm Funding Cap Funds
Total Asset Net Loans
(1.7) (3.7)
Overhead Cap Funds
Total Asset Cust & ST Funding
(3.8)
Cap Funds
Liabilities

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BANK CHARACTERISTIC & MACROECOMICS

(3.9)
Subordinated Debt
Capital Fund

Liquidity Earnings

(5.1)
(4.1)
Earnings Before Tax
Interbank Ratio
Total Asset

(4.2) (5.2)
Net Loans Earnings Before Tax
Total Assets Total Equity

(4.3)
(5.3) Capital Base
Net Loans
=Total Capital - Investment
Cust & ST Funding

(4.4) (5.4) Total Risk W Asset

Net Loans =Capital Base
Total Deposit & Borrow CWCR

(4.5) (5.5) Risk W Capital Ratio

Liquid Assets =TIER + TIER 2
Cust & ST Funding TRWA

(4.6)
Liquid Assets
Total Deposit & Borrow

Capital Risk Other

(6.1) Capital Adequacy Ratio (7.1) (8.1) Probability of Default

= Total Capital TRWA = Loan Loss Provision
Total Asset Total Asset Total Loan
(6.2)CAR (7.2) (8.2) Probability of Default
= TIER 1 Non Performing Loan = Non Performing Loan
TRWA Total Asset Total Loan
(6.3) CAR (7.3) (8.3) TRR
= TIER 1 Loan Loss Provision = Recovery (RR)
Total Assets Total Asset Loan Loss Provision 1
(6.4) CAR (7.4)
(8.4) Non Bank Deposit (NBD)
= Total Capital NPL
= TA DFC Shareholder Fund
TRWA Total Loans
(7.5) Lending (8.5) Total Provision
= Total Loan = General Provision + Spesific
Total Assets Provision

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BANK CHARACTERISTIC & MACROECOMICS

Operation Profitability ratio

(9.1) net interest margin (10.1) ROA

=profit after tax
Total aset
(9.2) net interest rev. (10.2) ROE
Average assets =profit after tax
Equity capital
(9.3) net interest expenses (10.3) Profit expenses ratio
Average assets =profit
Total expenses
(9.4) ROAA
= Profit
Average aset
(9.5) ROAE
= Profit
Average equity

Liquidity ratio Risk and solvency ratio

(11.1) cash deposit ratio (12.1) equity multiplier

= cash = total asset

deposit Share capital

(11.2) loan deposit ratio (12.2) loan to deposit ratio

= loan = loan
deposit deposit

(11.3) current ratio

= total asset
Total liability

(11.4) current asset ratio

= current asset
Total asset

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BANK CHARACTERISTIC & MACROECOMICS

Basic Financial Definitions for Islamic Banking

Asset Quality Capital

Bank Characteristics

(1.2) Net Interest Margin

(2.1) (3.1)
= Interest income Interest
Profit Equalization Reserve Equity
expenses
Gross Financing Total Asset
Total Asset
(1.2) (2.2) (3.2)
Net Profit Allowance for impairment Equity
Total Asset Net Income Revenue Net Financing

(1.3) (2.3) (3.3)

Equity Profit Equalization Reserve Equity
Total Asset Impaired Financing Customer & Shorterm Funding

(1.4) (2.4) (3.4)

Financing Impaired Financing Equity
Total Asset Gross Financing Liability

(1.5)
(3.5)
Non Interest
Capital Funding
Earning Asset
Total Asset
Total Asset
(1.6)
(3.6)
Customer & Shorterm
Cap Funds
Funding
Net Financing
Total Asset
(1.7) (3.7)
Overhead Cap Funds
Total Asset Cust & ST Funding
(3.8)
Cap Funds
Liabilities
(3.9)
Subordinated Financing
Capital Fund

Liquidity Earnings

(5.1)
(4.1)
Earnings Before Tax
Interbank Ratio
Total Asset

(4.2) (5.2)
Net Financing Earnings Before Tax
Total Assets Total Equity

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BANK CHARACTERISTIC & MACROECOMICS

(4.3)
(5.3) Capital Base
Net Financing
=Total Capital - Investment
Cust & ST Funding

(4.4) (5.4) Total Risk W Asset

Net Financing =Capital Base
Total Deposit & Borrow CWCR

(4.5) (5.5) Risk W Capital Ratio

Liquid Assets =TIER + TIER 2
Cust & ST Funding TRWA

(4.6)
Liquid Assets
Total Deposit & Borrow

Capital Risk Other

(6.1) Capital Adequacy Ratio (7.1) (8.1) Probability of Default

= Total Capital TRWA = Allowance for impairment
Total Asset Total Asset Total Financing
(6.2)CAR (7.2) (8.2) Probability of Default
= TIER 1 Impaired Financing = Impaired Financing
TRWA Total Asset Total Financing
(7.3)
(6.3) CAR (8.3) TRR
Allowance for
= TIER 1 = Recovery (RR)
impairment
Total Assets Allowance for impairment
Total Asset
(6.4) CAR (7.4)
(8.4) Non Bank Deposit (NBD)
= Total Capital Impaired Financing
= TA DFC Shareholder Fund
TRWA Total Financing
(7.5) Lending (8.5) Total Provision
= Total Financing = Collectively Assesses+ Individually
Total Assets Assessed

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BANK CHARACTERISTIC & MACROECOMICS

Operation Profitability ratio

(9.3) non interest expenses (10.1) ROA

Average assets =profit after tax
Total aset
**non interest expenses =
overhead+provision
(9.4) ROAA (10.2) ROE
= Profit =profit after tax
Average aset Equity capital
(9.5) ROAE (10.3) Profit expenses ratio
= Profit =profit
Average equity Total expenses

Liquidity ratio Risk and solvency ratio

(11.1) cash deposit ratio (12.1) equity multiplier

= cash
deposit = total asset
Share capital

(11.2) loan deposit ratio (12.2) loan to deposit ratio

=financing = financing
deposit deposit
(11.3) current ratio

= total asset
Total liability
(11.4) current asset ratio
= current asset
Total asset

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