Bank Financial Management Strategies For Evaluating Bank Performance

Understanding bank financial management is helpful in order to determine whether the bank is performing to an acceptable level. Problems have surfaced in the banking industry, brought on by a heavy concentration in derivative products; the banking system is under close scrutiny and evaluating a bank's performance has become more important than ever.

Diversification of a Bank’s Portfolio
The bank’s holdings are a good indicator of how the bank is performing. In their annual report, review the assets a bank holds and where their revenue is derived. The higher the concentration of a bank’s income in investment type activities that are non-traditional the more cautious you may become.

A bank’s portfolio should have a diversified balance of income and revenue activities and should not be heavily concentrated in any one area. A bank with a diversified portfolio is in a better position to manage risk and weather the market’s volatility.  Diversified investing and activities produces a stable income that is not subject to wild swings or fluctuations.

A bank that takes no risks or is not well diversified is subject to the potential for concentration risk where a downturn in that area will lead to losses.

Bank’s Profitability
How profitable a bank is another indicator of a bank’s performance. This measure however is wrought with some pitfalls, as profitability alone can be an imperfect measure, particularly if that profitability is focused in one area or derived from one revenue source. Companies such as Lehman Brothers, Bears Sterns, Citicorp and Washington Mutual were highly profitable based on their sub-prime investing and derivative market activities, but succumbed loss and failure. A bank’s profitability can be viewed a measure of success and good management.  Reliance solely on a bank’s profitability can be dangerous and lead to financial ruin.

Bank’s Investment Decisions
Where, and how, a bank decides to invest its money can be viewed as a good measure of the bank’s management and performance. Much like diversification, the types of investments that a bank makes should be based on sound investing principles and employ the prudent person fiduciary rule, with respect to the stewardship of other people’s money.

Sound investment principles based on prudent investment choices will yield good results for the bank and improve the bank’s performance.  This measure can provide a false impression of the bank’s performance if relied on as a sole measure of a bank’s performance.