Question

Briefly describe how you will evaluate the Bank of America's financial performance.

Answer 1

Some of the key financial ratios investors use to analyze banks include return on assets, return on equity, efficiency ratio and the net interest margin. Use these ratios to look for trends in the bank's own performance, and also to compare financial performance with competitors.

since the collapse of several high-profile banks -- including investment banks Lehman Brothers and Bear Stearns -- capital adequacy has been a hot topic. Banks must have sufficient capital in order to absorb losses and any potential liquidity declines stemming from customers withdrawing funds. Banks with higher risk tolerances are potentially at risk for incurring losses, but also may violate regulatory requirements if insufficient funds are set aside as reserves.

Gap analysis is used to measure a bank's exposure to interest rate risk. Banks try to match the durations of their assets and liabilities. This way, when a certain amount must be paid to a customer, the bank will have adequate cash on hand and will not have to use valuable earnings assets to make the payment.

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