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Asset Quality – Adequacy Of Loan Loss Reserves
Published by slang April 25th, 2007 in Banks/Finan.Institutions, Ratio AnalysisTo assess the Asset Quality, the following ratios need to be analyzed:
- Loans Loss
- Non-performing loans to total loans
- Loan Recoveries ratio
- LOAN LOSS RESERVES
- Earnings coverage
- Capital Adequacy
- Capital Formation Ratio
- Capital to Assets Growth
- Gross Capital to Average Assets plus Reserves
ADEQUACY OF LOAN LOSS RESERVE
| Ratio | Purpose | Formula | ||||||
| Loan Loss Reserve Ratio |
|
Reserves For Loan Losses
—————————- Total Loans |
||||||
Illustration: Simple Illustration: Details of ABC Bank:
|
||||||||
| Interpretation:If reserves deteriorate as a result of large write offs, perhaps in excess of the provision for loan losses made in the year, then the quality of the assets will be impacted.It is not always possible to state whether this is adequate, since it depends on the quality of the assets, industry concentration of loans and the write off history of the bank. | ||||||||
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