!

3. The Results of DuPont Analysis

In this paper we present the course of profitability ratios during 2005-2012 of the following 24^th World Systemic Banks using the DuPont Analysis. All the calculations in the bellow tables (2-25) became using the publication of the financial statements of the world systemic banks. Some financial elements have drawn from Bank scope and Bloomberg data bases.

1. DEUTSCHE BANK

2. HSBC

3. BARCLAYS

4. BNP PARIBAS

5. BANK OF NEW YORK MELLOW

6. CREDIT SUISSE

7. MORGAN STANLEY

8. ROYAL BANK OF SCOTLAND

9. UBS

10. NORDEA

11. SOCIETE GENERALE

12. CITIGROUP

13. JP MORGAN CHASE

14. BANK OF AMERICA

15. BANK OF CHINA

16. BBVA

17. CREDIT AGRICOLE

18. ING GROUP

19. STANTANDER

20. STATE STREET CORPORATION

21. UNICREDIT GROUP

22. WELLS FARGO

23. MIZUHO FG

24. SUMITOMO

The results of profitability of it’s of the above global systemic bank are described below.

From the tables and diagrams in the Appendix we can distinguish 5 main categories for the course of ROE ratio.

1. Stable but low course of ROE ratio. The first category comprises four banks. These banks are Deutsche Bank, Barclays, Morgan Stanley, and Unicredit Group.

2. Fluctuations with a negative rate of ROE after the financial crisis. The second category includes nine banks. These banks are New York Mellon, Credit Agricole, ING, Mizuho FG, Credit Suisse, UBS, Royal Bank of Scotland, Société Générale, and Citigroup.

3. Fluctuations with a negative rate of ROE before the financial crisis. The third category has three banks. These banks are HSBC, BNP Paribas, and Sumitomo.

4. Fluctuations with a positive rate of ROE before and after the financial crisis. The fourth category includes five banks. These banks are Nordea, Bank of China, Banco de Santander, State Street Corporation and Wells Fargo.

5. Downward trend of the index ROE before the financial crisis. The fifth category comprises three banks. These three banks are JP Morgan Chase, Bank of America and BBVA.

From the diagrams below we also observe that the ROA ratio prices of all of the banks are between -7% to +5%.

Conclusions

This paper presents a model for the financial analysis of a bank based on the DuPont system of financial analysis as presented in Saunders (2000).

Equity returns are supplied to shareholders from banks who utilize shareholders’ capital to offer loans to the banks clients.

The DuPont model is an analysis that calculates the ROE ratio. The ROE ratio is decomposed into net profit margin, total asset turnover and the equity multiplier. The DuPont model also show us how many times ROE ratio is bigger than the ROA ratio.

This model is applied to World Systemic Banks which are the largest banks in the world. The DuPont system of financial analysis shows the impact of the financial crisis that hit the world and mainly the South Countries of Euro zone in 2008 on the financial performance of World Systemic Banks.

In its simplest form, we can say that if a bank wants to improve the ROE ratio the only choices has is to increase operating profits, become more efficient in using existing assets to generate sales, recapitalize to make better use of debt and/or better control the cost of deposit and lending money, or find ways to reduce the tax liability of the firm. Each of these choices leads to a different financial strategy.

For example, to increase operating profits one bank must either increase sales (in a higher proportion than the cost of generating those sales) or reduce expenses. Since it is generally more difficult to increase sales than it is to reduce expenses, a small bank can try to lower expenses by offering innovating products and a big bank can do this by mergers and acquisitions.

Alternatively, to become more efficient, one big bank must either increase sales with the same level of assets or produce the same level of sales with fewer assets. A big bank might then try to determine: 1) if it is feasible to expand hours by staying open later or on weekends, or 2) if a less expensive piece of equipment is available that could replace an existing (more expensive) piece of equipment, or 3) if there is a more practical way to produce and/or deliver services than is presently being used.

Further, big banks can determine if they are using deposits loans and investments wisely.

The ROE and ROA indexes are the most comprehensive measure of profitability of a bank. It considers the operating and investing decisions made as well as the financing and tax-related decisions.

In the future, the financial institutions should find different sources of profitability, since the intermediation spread is expected to fall as the economies stabilize, the interest rates fall and the competition among banks increase. The financial institutions should seek for these new sources of profitability in the retail banking and the asset management, while they should try to increase their market share. On the other hand they should control their operating expenses and expand their activities quite careful, in order to minimize their losses from bad loans.

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www.financialstabilityboard.org