Quiz – Matching Asset Quality Ratios of Banks
Background
Understanding the structure of the balance sheet is critical to analysing a bank. The risks in any bank’s portfolio and the type of lending will affect the amount the amount of impaired or non-performing loans. Another complication is how definitions of impaired loans, and the application of provisioning policies may vary from country to country. This is the result of external influences such as regulators, government bodies and internal policies, such as:
- In the US, the provisioning rules are very tough and include statistically expected losses. They tend also to write off impaired loans very quickly.
- In Spain, their high reserves have been eroded by problems in the property sector
- Banks in Italy have underprovided and had hidden some of its NPL’s to avoid having to raise more equity.
This quiz is designed to demonstrate the differences which can be observed between four banks.
Click to learn more about Analyse Performance of Commercial Banks.
Quiz
The table below shows four asset quality ratios.
Please match the institution with the ratio and give an explanation as to your results.
| Loan Loss Reserve/Impaired Loans | Impaired Loans/Gross Loans | Loans/Assets | Unreserved Impaired Loans/Equity | Bank (1, 2, 3, 4) | |
| A | 73% | 4.6% | 58% | 9.8% | |
| B | 56% | 0.4% | 33% | 0.9% | |
| C | 32% | 15% | 75% | 85.9% | |
| D | 112% | 1.4% | 36% | -0.7% |
- JP Morgan Chase: Large financial services company with strong US retail franchise, global corporate and investment bank franchise.
- Unione di Banche Italiane: Seventh largest commercial bank in Italy.
- UBS: Swiss Global investment bank with some European commercial banking activities with high quality collateral.
- Banco Santander: One of Spain’s two largest banking groups with a strong retail franchise and overseas operations (largely in Latin America)
Here is the answer of this quiz.
