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Bank has different business than other company. They are selling and buying money. Therefore, measuring bank performance is different from measuring other company.
Things you should know when checking bank performance are:
1. Return on Equity (ROE) and Return on Asset (ROA). Just like other company, you can check these financial ratios to find out whether they are giving enough return or not. Always compare your finding with equal bank in size and business.
2. Net Interest Margin (NIM), measures how large is the spread between interest revenues and interest cost. Find banks with high NIM.
3. Loan to Deposit Ratio (LDR), measures how much loan have the bank gave compared to the deposit it receives. Higher LDR means that the bank is good at distributing the deposit it receives through loan. Loan is the source of income for the bank. More loans given usually mean more revenue.
4. Non Performing Loan (NPL) is loans that are not paid. High NPL means that many of its loans are not paid, causing lower interest revenue. These troubled loans can be handled through making loan-loss provision.
5. Capital Adequacy Ratio (CAR) is capital requirements for facing bank’s credit, market, and operational risk. According to Basel II, the CAR must be no lower than 8%.
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