Answer – Matching Asset Quality Ratios of Banks

This is the answer for Quiz – Matching Asset Quality Ratios of Banks.

Loan Loss Reserve/Impaired LoansImpaired Loans/Gross LoansLoans/AssetsUnreserved Impaired Loans/EquityBank (1, 2, 3, 4)
A73%4.6%58%9.8%Banco Santander
C32%15%75%85.9%Unione di Banche Italiane
D112%1.4%36%-0.7%JP Morgan Chase

A Spanish banking group

  • Sound reserve levels due to conservative policies and Bank of Spain regulations
  • Sizeable impaired loans due to Spanish real estate and consumer sectors

B Global investment bank with substantial commercial banking activities

  • A relatively low level of reserve coverage is explained by management as relating to their broad definition of impaired loans many of which are well collateralised
  • Relatively high quality loan book but very small and as % of assets due to focus on investment banking

C Unione di Banche Italiane seventh largest commercial bank in Italy

  • Very high levels of non-performing loans
  • Very low reserve coverage (possibly due to impact on equity of further increases in reserves), but even so huge unreserved impaired loans to equity
  • Continuing poor economic environment and difficult banking conditions have led to this position

D Global financial services company

  • Strong levels of loan loss coverage as US banks tend to charge off problem loans quickly and provision conservatively
  • Relatively low loan book as % of assets due to investment banking operations but strong retail banking business

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