Uniform Bank Performance Report - Anderson School of Management

The net interest margin (NIM) is an extremely important ratio for a bank. It represents the amount a
bank generates in interest compared to the amount of interests paid to its investors. This margin
represents the successfulness of a bank’s management to make a profit by carrying out banking’s most
basic functions, borrowing and lending. It also analyzes a bank’s ability to manage interest rate risk, and
shows insight into the bank’s ability to cover provisions for losses. This ratio is highly dependent on
interest expenses, therefore the lower the interest expenses are in comparison to the amount of returns
generated through investments, the more attractive the NIM, and the more efficient its investments are.
JP Morgan’s NIM has been increasing at a constant rate through 2007, 2008, and the second quarter of
2009. B of A shows a very similar NIM to JPMC, while Wells Fargo shows a much higher NIM than both of
them. The NIM of all three banks remains steady over the years indicating successful, but not
outstanding, management of interest rates.
CAMELS
CAMELS, is an acronym that stands for the six general categories of performance measured under the
Uniform Financial Institution Rating System. This is the official system used by federal regulators when
assessing the financial condition of banks. The categories are: Capital adequacy, Asset quality,
Management quality, Earnings, Liquidity, and Sensitivity to market risk. The examination of each of
these categories will provide a good understanding of the overall financial condition of a bank.
Capital Adequacy
This component looks into the capital of a bank, and brings out ratios that tell how well capitalized it is.
The function of bank capital is to reduce risk. It does so in three basic ways:
Provides a cushion that allows firms to absorb losses and remain solvent.
Provides ready access to financial markets and thus guards against liquidity problems
caused by deposit outflows.
Constrains growth and limits risk taking.
The Capital Adequacy ratio calculation is: (Tier 1 + Tier 2)/Risk weighted assets.