MAIN RATIOS

MAIN RATIOS

Term Definition Remarks (e.g. ING specifics, drivers

etc) Net ROA: Return on Assets shows the profit a

company generates in a period of time on the total assets invested in it.

1Net Profit/Average Total Assets 2Net Profit/Total Assets

In banking, an ROA of 1 percent or better is a standard benchmark of superior performance.

In my calculations I will use the first formula because it is used more often in business and literature.

Net ROE: The return on equity shows the profit the company generates in a period on the capital invested in it by its owners (shareholders).

1 ROE = Net profit / Average shareholders equity.

2 ROE = Net profit / Total Shareholders equity

Investors often look for 15 percent or higher. A return of more than 20 percent is considered excellent

By relating the earnings generated to the shareholder's equity, an investor can quickly see how much cash is created from the existing assets. If the return on equity is 20%, for instance, then twenty cents of assets are created for each dollar that was originally invested.

Debt/equity ratio Measures how much the creditors/lenders have put into the company versus the shareholders. The result you get after dividing debt by equity is the percentage of the company that is indebted (or

"leveraged").

1 Long term debt / Shareholders' equity.

Long term debt: Loans and obligations with a maturity of longer than one year;

usually accompanied by interest payments.

2 Total Liabilities / Shareholder's Equity

3 Debt/(debt + equity)

The lower the %, the greater the company's financial safety and operating freedom.

Generally, any Bank that has a debt to equity ratio of over 20% should be looked at more carefully to make sure there are no liquidity problems. (20%

is maximum)

In my calculations I will use the first formula because it is used more often in business and literature.

Efficiency ratio The efficiency ratio gives us a measure of how effectively a bank is operating.

Non-interest expense

(administrative expenses) / Total income

Administrative expenses: staff and other administrative expenses

ING is using first definition

An increase means the company is losing a larger percentage of its income to expenses. If it is getting lower, it is good for the bank and its shareholders.

Cost / Income ratio

1 Total expenses (with adjustments) / Total income

2 Total expenses(excluding Value adjustments to receivables and Transfer to the fund for general banking risk)/Total Income

An increase means the company is losing a larger percentage of its income to expenses. The lower the % the better company’s performance.

The difference between two formulas is in adjustments which are excluded from the second formula.

In my calculations I will use both formulas because it will give us more detail information about ING Bank performance.

I noticed that Cost / Income ratio around 65 - 70 % is considered to be good but I still have to check this information

Addition:

ADDITIONAL RATIOS

Profitability Ratios

Net result / Total

income This ratio shows the share of Net Profit in the Total income of the Bank.

There are two variables that can influence Net Result: Expenses and Taxes. If we compare Banks that are operating in different tax environments it would be better to adapt this formula. Instead of Net Result, Result before taxes should be taken.

The higher is this % the better for the companies

From the 37 biggest Dutch banks this ratio is between 88,8% (Nederlandse Waterschapsbank) and – 60,5 % (KBC Bank). ING Bank has 5,8% and ABN AMRO 12,1%.

Total income /

Number of employees

Shows the share of Total Income per employee.

This ratio is important because it allow us to relate number of employees to the income. First of all we can see the amount of income allocated on each employee. Second we can compare between companies income and number of employees. If company is operating at the same market environment but with less amount of employees and receives more profit it means that this company is more efficient.

The higher is this ratio the better.

Expenses ratios

Staff cost / Number of employees

This ration shows the proportion between staff cost and number of employees. In other words staff cost per person.

Banks are interested in keeping this ratio low because increase in staff cost will have a negative influence not only on Efficiency Ratio but also on Result before taxes.

ING Bank has 78 000 Euro staff cost per employee and ABN AMRO has 67.000 Euro

Staff cost / Total expenses

Ratio allows us to see what is the share of staff cost in Total expenses of the Bank.

Both ING Bank and ABN AMRO Bank have 56%.

This ratio is important because Staff Cost influence Efficiency ratio.

Taxation on operating result / gross

operating result

Different countries are having different taxes for the business.

This ratio calculate what % from the Result before taxes should be paid to the government.

Capital Adequacy ratios (Solvency)

This ratio shows the proportion between Total Equity and Total Assets.

Total Equity consists of Shareholders Equity and Minority Interests. Shareholders Equity is the biggest part of the Total Equity.

Shareholders' Equity / Total Assets

This ratio shows the share of Shareholders capital in Total Assets of the company.

If there is increase in share of the Shareholders capital in the Total Banking Assets this good for the company. This means increase in owners capital in comparison with Liabilities.

It is important for the organization to monitor changes in this ratio.

Capital base / Total Assets

Capital base includes:

-Subordinated loans

-Fund for general banking Risks -Share capital

-Reserves

-Third party interests

ING gives the highest priority to strengthening its capital base. That’s why it is important to see changes in Capital Base in comparison with Total Assets.

Strengthening the Capital base can have a negative influence on Debt / Equity ratio. Both ratios should be carefully monitored.

ASSETS quality

Loans and advances / Total asset

This ratio shows the share of loans in Total Assets of the Bank.

Loans and advances: Includes loans and advances, lease receivables net of unearned income, receivables from related parties, and are net of any specific provisions for bad debts and country risks

Loans and advances is subject to credit risk, which means the risk of suffering losses following default by a debtor or counterpart. That’s why is important to see the proportion between loans and Total Assets.