Emirates NBD Bank and American Express Bank Performance, Research Paper Example

Return on Average Assets (ROAA)

The return on average assets essentially measures operational efficiency. This is the level of efficiency at which a given business uses the resources within its disposal. This is integral in helping determine the extent to which the business in question can expand

The information provided depicts the American Express Bank to have a higher operational efficiency that the Emirates Bank. The Return on Average Assets for the American Express Bank appear to be gradually increasing from the FY20111 all through FY2013. This steady growth depicts increase in operational efficiency where the company realizes more income on average assets after considering the change in average assets between the closing and opening periods of a financial year. The Emirates bank posts relatively low operational efficiency with an ROAA below 2.00. This depicts considerably low returns realized on total average assets.

Return on Average Equity (ROAE)

The return on average equity is essentially a measure of a company’s profitability within a given trading period, relative to the value of the shareholders’ equity. This ratio is important in giving an accurate picture of corporate profitability in cases where the shareholders’ equity has changed from the beginning of a trading period to the end of the trading period.

While both banks depict a growing ROAE, the American ExpressBank depicts a superior ROAE to the Emirates Bank. This means that the American Express bank is more profitable than the Emirates bank relative to their total average equity. In essesnce, the American Express bank’s shareholders realize more income per share of stock held as opposed to the Emirates Bank’s shareholders.

Net Interest Margin (NIM)

The net interest margin is a measure of performance that examines a financial institutions investment decisions against its debt situation. It is calculated as;

The American Express bank displays a better net interest margin than the Emirates bank. Both A.E.B. and Emirates showed similar results in terms of their trends in NIM, posting a good result in FY2011, declining in FY2012 and increasing again in FY2013. However, A.E.B. makes better investment decisions relative to its debt situation.

Cost to Income Ratio

The cost to income ratio is a measure of efficiency of a financial institution. It depicts the ability of a financial institution to minimize cost and maximize profits.

The Emirates bank displays a better CIR as compared to A.E.B. A.E.B. displays a growing CIR where the bank realized a considerable growth in the CIR from FY2011 to FY2012. This means that Emirates is more efficient diverting less of its operation income to cover operational costs. A.E.B has more than 50% of its operational income diverted to cover operational costs.

Asset Quality Ratios

For most financial institutions, their asset quality is a key indicator of their performance. Financial institutions tend to expand their provision for most financial products such as insurance and deposits, the quality of their loans is the main element of its asset base. As such, this asset quality ratios are integral in determining the financial viability of a given financial institution.

Impairment Loss Allowance Ratio

This ratio compares the cumulated provisions for non-performing loans (NPLs) against the gross amount of loans within a financial institution’s loan portfolio. This essentially shows the amount of non-performing or impaired loan allowanceas a percentage of the gross amount on the loan portfolio. It is generally accepted that a financial institution with a higher percentage of impairment loss allowance ratio is much safer. This is because a higher ILAR indicates that the financial institution has adopted a conservative approach towards the anticipation of losses incurred as a result of default within its loan portfolio. However, it is vital to put into consideration that a higher impairment loss allowance ratio may depict a financial institution taking on risky assets.

The Emirates bank depicts a much higher and growing impairment loss allowance ratio while A.E.B. depicts a much lower impairment loss ratio. This may be interpreted in two ways;

1. A.E.B has a much riskier position on its loans should a considerable amount of their loans, i.e. above 2%, default in payments. This may cause a considerable upset in its financial position should such an situation be realized. The Emirates bank has a much safer position on its loans should a considerable amount of their loans default. In order for the bank to realize an upset in its financial position, above 8% of its loans have to default in payment.
2. The Emirates bank taking a more cautious approach in creating allowances for losses as a result of taking on risky assets in the form of loans. A.E.B. on the other hand has taken a less cautious approach towards creating allowances for losses on their loans as a result of undertaking less riskier assets.

Capital Ratios

Capital ratios are important in evaluating a financial institution’s financial strength through its equity capital, relative given number of indicatorswithin its financial statements. One of the most commonly used is the Tier 1 Capital Ratio.

Tier 1 Capital Ratio

This ratio compared a financial institution’s core equity relative to the total risk weighted assets. This essentially measures the financial strength of a financial institution based on the total value of its disclosed reserves and equity capital. However, non-cumulative and non-redeemablepreferred stock may be included in this analysis. The value of the risk-weighted assets of a firm includes only those assets that are weighted for credit risk and are held by the financial institution in question.

This ratio is used to rate or grade a financial institution’s capitalization as;

• Critically undercapitalized (? 2%)
• Significantly undercapitalized (< 3%)
• Undercapitalized (? 4%)
• Adequately capitalized (? 5%)
• or well capitalized (? 6% + no dividends or distributions)

Both banks depict a well-capitalized financial institution. Emirates depicts a growing tier 1 capital ratio, while A.E.B depicts a diminishing Tier 1 Capital ratio. This means that Emirates grows in its financial strength while the A.E.B is experiencing diminishing growth in its financial strength.

Conclusion

Considering all the financial ratios employed in the performance analysis of both banks, A.E.B. depicts a better performance compared to the Emirates bank. The bank appears to have a considerable financial strength and realizes more returns relative to its average assets and shareholders’ equity. The bank has adopted a riskier impaired allowance ratio as a result of taking on less riskier assets. This means that the bank rarely experiences default in payments of its loans. This creates a less risky asset base, providing the bank with room for growth of its insurance and loan business. A.E.B. appears to undertake less risky assets depicted by the bank’s adoption of a risky impaired loss allowance ratio. This is evident in the manner in which the bank realizes better operational efficiency. However, the bank consumes a considerable proportion of it operating income to cover operating costs. Operating costs account for more than 50% of operating income.