To assess the Asset Quality of Banks/Financial Institutions,the following ratios need to be analyzed:
- LOANS LOSS
- Non-performing loans to Total Loans
- Loans Recoveries Ratio
- Loans Loss Reserves
- Earnings coverage
- Capital Adequacy
- Capital Formation Ratio
Capital to Assets Growth
- Gross Capital to Average Assets plus Reserves
LOANS LOSS:
Poor asset quality is reflected in the loans written off or loans loss ratio,the greater the losses,the poorer the quality of the assets.
Ratio | Measure | Formula |
| Loans Loss | · To give an analyst an idea of the quality of the assets of the bank.· If this ratio is low,it suggests that a bank has a reasonably sound portfolio and is able to recover its losses. | Net write offs ——————–Average loans |
Simple Illustration:
Details of ABC Bank:
Bank has an average loan | $900 m |
| During the year loans written off | $ 25m |
| During the year loans recovery | ($ 1m) |
| Loans Loss Ratio | = (25-1)/900= 2.7% |
On average most banks should have a loan loss ratio lesser than 0.5 %. The loss ratio of ABC Bank is very high and reflects badly on asset quality
- Asset Quality – Adequacy Of Loan Loss Reserves
- Asset Quality-Non Performing Loans To Total Loans
- Asset Quality –Earnings Coverage
- Asset Quality Of Banks And Financial Institutions- Introduction
- What Is Meant by Asset-based Finance? What Are some of the differences between Asset-based finance and Cash Flow-based Loans/Finance
- Asset And Interest Cover
- Quality Of Earnings
FCCA,CA(MIA)with more than 26 years of post-qualifying working experiences. Previous working stints with one of the big accounting four,Regional GFC & Group Treasurer in a group of Malaysian and Group CFO in Singapore public listed concern.Also author to another very popular free educational accounting cum finance blog:http://basiccollegeaccounting.com under the branding of College Accounting Coach.
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