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2.2 PAPEL DE CDK5 EN LOS PROCESOS NEURODEGENERATIVOS
This thesis examines the association between bank CS, financial and nonfinancial variables and bank FSR and discriminates and predicts bank FSR group membership using financial and nonfinancial variables. It is worth mentioning that Öğüt et al.’s (2012) empirical findings revealed that the accuracy rates of prediction classifiers are higher with the use of variables
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rather than factor scores. For that reason, the researcher used financial and nonfinancial variables rather than factor scores as input variables.
The equity ratio is a well-known proxy for bank CS. The literature provides evidence that this ratio avoids distortions in the measurement of capital structure, since this ratio measures the amount of protection afforded to the bank by the equity they invested in it (Poon and Firth, 2005). In addition, the researcher further argues that the use of equity ratios avoids a possible contradiction that may arise due to differences between short-term and long –term debt in the banking industry. The effects of bank CS on FSR also are influenced by other aspects or categories of bank performance. It is believed that bank asset quality, liquidity, profitability, credit risk and capital adequacy, as determined by CI37, have an effect on bank FSR. Consequently, the main independent variables are bank CS and various financial variables of each of the above five categories of bank performance. The researcher studied the impact of each category on bank FSR as each category examines an independent bank activity. Each of the five categories includes various measures that are used to discriminate and predict bank FSR group membership. A detailed description of each measure is given in Table 3.3.
Table 3.3: List of bank financial variables examined38
Factors (Predictors of Bank Performance) Variables (Ratio/Proxy) Expected Relationship to Bank FSRs Definition
Asset quality Loan loss provision/Net interest revenue
(LLPNIR)
Negative The ratio of loan loss provision to net interest revenue denotes the relationship between provisions in profit and loss accounts and interest income over the same period. The estimated amount of provision reflects the expected amount of loans becoming non- performing, thus high provisions mean a higher percentage of nonperforming ratio, which indicates poor asset quality. Ideally, this ratio should be as low as possible. In a well-run bank, if the lending book is higher in risk, this is reflected by higher interest margins. If the ratio
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This is based on the CI classification.
38 All definitions within the categories of asset quality, capital, operations and liquidity were obtained from the Bank scope database and CI website.
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deteriorates, this means that risk is not being properly remunerated by the margins.
Loan loss reserve/Impaired loans
(LLRIL)
Positive The ratio of loan loss reserve to impaired loans or non-performing loans. Obviously, banks with high LLRILs are considered more conservative and thus investors will feel more comfortable about its asset quality.
Impaired loans/Gross loans (ILGL)
Negative The ratio of impaired loans to gross loans (loans + loan loss reserve). This ratio measures the proportion of total loans that are doubtful. In the 2000s, banks began to develop and implement advanced strategies and techniques to lower this ratio as much as possible to enhance their asset quality.
Net charge off/Net income before loan loss provision (NCONIBLLP)
Negative The ratio of net charge-off (amount written off from loan loss reserves less recoveries from loans) to net income before loan loss provisions is measured similarly to charge-offs but against income generated in the year. Intrinsically, bank asset quality improves when this ratio deteriorates, other things being equal.
Impaired loans/Equity (ILE)
Negative The ratio of impaired loans to equity. Unreserved impaired
loans/Equity (UILE)
Negative The ratio of unreserved impaired loans to equity. Capital
Adequacy
Tier 1 ratio (TR) Positive A comparison between a bank’s core equity capital and its total risk-weighted assets mainly composed of Tier 1 capital (common stock and disclosed reserves or retained earnings plus sometimes perpetual non-cumulative preference shares) as a percentage of risk-weighted assets measured under Basel rules. This ratio is used mainly by regulators to grade bank capital adequacy as one of the following rankings: well- capitalised, adequately capitalised, undercapitalised, significantly undercapitalised, and critically undercapitalised. This ratio should be at least 4%; otherwise bank is considered to be undercapitalised.
Total capital ratio (TCR) Positive The ratio of total capital (Tier 1 + Tier 2) to risk- weighted asset. The total capital ratio of a bank must be at least 8%. This indicates that 8% of the bank’s risk-weighted assets must be covered by permanent or near permanent capital. Equity/Total assets (CS) Positive This ratio is used as a proxy for the bank’s CS.
This ratio measures the ability of the bank to withstand losses. A declining trend may signal increased risk exposure and possibly a capital adequacy problem.
Equity/Net loans (ENL) Positive This measures the equity cushion available to absorb losses on the bank’s loan book.
Equity/Liabilities (EL) Positive This leverage ratio is another way to consider equity funding of the balance sheet and thus capital adequacy.
Equity/Deposit and short- term funding (EDSF)
Positive This ratio measures the amount of permanent funding relative to short-term, potentially volatile funding. The higher this ratio is, the better from the bank’s risk perspective.
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Capital funds39/Total Assets (CFTA)
Positive The ratio of capital funds to total assets. The capital funds include bank’s equity plus hybrid capital plus subordinated debt.
Capital funds/Net loans (CFNL)
Positive The ratio of capital funds to net loans. Capital funds/Deposit and
short-term funding (CFDSF)
Positive The ratio of capital funds to deposits and short- term funding.
Capital funds/Liabilities (CFL)
Positive The ratio of capital funds to total liabilities. Subordinated debt/Capital
funds (SDCF)
Negative The ratio of subordinate debt to capital funds. This ratio indicates what percentage of total capital funds is provided in the form of subordinated debt.
Equity multiplier (EM) Negative The ratio of total assets to total equity. This ratio measures how many times a dollar of equity is leveraged. A higher EM indicates higher financial leverage, which means the bank relies more on debt to finance its assets.
Profitability Net interest margin (NIM) Positive This ratio is net interest income (interest revenue minus interest expense) expressed as a percentage of earning assets (loans plus other earning assets excluding fixed assets). The higher this ratio, the cheaper the funding or the higher the margin the bank generates. Higher margins and profitability are desirable as long as the asset quality is maintained.
Net interest income/average assets
(NIIAA)
Positive This ratio measures the degree of bank efficiency in generating net interest income with available bank assets.
Other operating income/Average assets
(OIAA)
Positive This ratio indicates to what extent fees and other income make up the bank’s earnings. As long as this is not volatile trading income, it can be seen as a form of income with lower risk. The higher this figure is, the better.
Non-interest expense/average assets
(NIEAA)
Negative This ratio gives a measure of the cost side (overhead plus loan loss provisions) of the bank performance relative to assets invested. The lower this figure is, the better.
Pretax operating income/Average assets
(PTOIAA)
Positive This ratio is a measure of the operating performance of the bank before tax and unusual items (profits before tax plus other). It is a good measure of profitability that is unaffected by non-trading activities.
Non-0perating items and taxes/Average assets
(NOITAA)
Negative This ratio measures costs and tax as a percentage of assets invested. The lower this figure is, the better.
Return on average assets (ROAA)
Positive The ratio of net income to average total assets. This ratio is perhaps the most important ratio in comparing the efficiency and operational
39 This form of debt instrument has been substituted for equity and is a hybrid in the sense that it incorporates both debt and equity features and often includes specific option elements. The main objective of such instruments is to maximise the benefits of both debt and equity holders. Hybrid capital includes a variety of instruments, such as preference shares, that are not pure equity but have traditionally been deemed close enough to it to count toward a bank’s Tier 1 capital ratio.
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performance of banks. This is mainly because it considers returns generated from assets financed by the bank.
Return on average equity (ROAE)
Positive ROE is a measure of the return on shareholder funds (earnings performance). The higher this figure is, the better. However, care must be taken to avoid putting too much weight on this ratio as it may be at the expense of an over- leveraged bank.
Dividend pay-out (DPO) Positive This ratio measures the amount of after-tax profits paid to shareholders. In general, the higher the DPO, the better is bank profitability, but not at the cost of restricting reinvestment in the bank and its ability to grow its business. Income net of
distribution/Average equity (INODAE)
Positive This ratio is effectively the return on equity after deduction of dividends paid from returns. It shows by what percentage the equity has increased from internally generated funds. The higher this figure is, the better.
Non-operating income/Net income
(NOINI)
Positive This ratio denotes the percentage of total net income that is made up of unusual items. This ratio is a proxy that measures bank revenue diversification.
Cost-to-income ratio (CIR)
Negative The ratio of overhead to the sum of net interest revenue and other operating income. This is currently one of the most focused-on ratios as it is used as a proxy measurement of management ability to control expenses. That is, it measures management quality and overhead or costs of running the bank, the major element of which is staff salaries and benefits, rent expenses, equipment expenses and other administrative expenses, stated as a percentage of income generated before provisions. Thus, higher values of this ratio indicate less efficient management. Note that this ratio improves automatically if lending margins in a particular country are very high. Also, this figure can be distorted by high net income from associates or volatile trading income.
Recurring earning power (REP)
Positive The ratio of pre-provision income to average total assets. This ratio is a measure of after-tax profits, including provisions for bad debts, as a percentage of average total assets. This measures ROA performance without deducting provisions. Net profit margin (NPM) Positive The ratio of net income to interest income plus non-interest income. This ratio reflects the effectiveness of bank expense-control programs and service pricing.
Asset utilisation (AU) Positive The ratio of interest income plus non-interest income to total assets. This ratio measures how banks implement efficient management policies for bank portfolio decisions, especially the mix and yield of assets.
Tax management efficiency (TME)
Positive The ratio of net income to pretax operating income. This ratio reflects bank usage of security gains or losses and other tax- management tools (such as buying tax-exempt bonds) to minimise its tax exposure.
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Expense control efficiency (ECE)
Positive The ratio of pretax operating income to interest income plus non-interest income. ECE measures bank effectiveness in controlling operating expenses.
Operating efficiency ratio (OER)
Negative The ratio of interest expense plus non-interest expense plus provisions for loan losses plus taxes to interest income plus non-interest income plus securities gains (or losses).
Credit risk Net charge-off/Average gross loans (NCOAGL)
Negative This ratio represents the net charge-off (i.e., the amount written off from loan loss reserves less recoveries) measured as a percentage of gross loans. This ratio indicates what percentage of today’s loans is written off the book. The lower this figure is, the better, as long as the write-off policy is consistent across comparable banks. Loan loss provisions/Total
loans (LLPTL)
Negative The ratio of provisions for loan losses to total loans. The higher this ratio is, the poorer the quality of loan portfolio.
Loan loss provisions/equity (LLPE)
Negative The ratio of provisions for loan losses to total equity.
Loan loss reserve/Gross loans (LLRGL)
Negative The ratio of loan loss reserve to gross loans (loans plus loan loss reserves) indicates how much of the total loan portfolio is provided for but not charged off. Given a similar charge-off policy, the higher the ratio, the poorer the quality of the loan portfolio.
Loan loss reserve/Total equity (LLRE)
Negative The ratio of reserve for loan losses to total equity.
Liquidity Interbank ratio
(IBR)
Positive This is money lent to other banks (due from other banks) divided by money borrowed from other banks (due to other banks). If this ratio is greater than 1, then it indicates the bank is a net placer rather than a borrower of funds in the market place and therefore more liquid.
Net loans/Total assets (LR)
Negative This liquidity ratio indicates what percentage of bank assets is tied up in loans. The higher this ratio, the less liquid the bank is and hence the lower the bank FSR issued. LR is also known as loan ratio.
Net loans/Deposit and short-term funding
(NLDSTF)
Negative This ratio is another measure of bank liquidity. Apparently, a high figure denotes lower liquidity.
Net loans/Total deposit and borrowing
(NLTDB)
Negative This ratio is similar to NLDSTF except that NLTDB’s denominator only includes deposits and borrowings with the exception of capital instruments (i.e., total deposits and borrowings = customer and short-term funding plus other funding minus hybrid capital and subordinated debt).
Liquid assets40/Deposit and short-term funding
(LADSTF)
Positive This is a deposit run-off ratio. It focuses mainly on the percentage of customers and short-term funds that must be met if they are withdrawn suddenly. The higher this percentage, the more liquid is the bank and the less vulnerable to a run
40 Liquid assets are short-term assets that can be easily converted into cash, such as cash itself and deposits with the central bank, treasury bills, other government securities and interbank deposits.
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on the bank. Liquid assets/Total
deposit and borrowing (LATDB)
Positive This ratio is similar to LADSTF but LATDB shows the amount of liquid assets as a proportion of total deposits and borrowing Source: Developed by the researcher