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Asset Quality-Loans Loss
Published by slang April 25th, 2007 in Banks/Finan.Institutions, Ratio AnalysisTo 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
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