Commercial Banking Project

Commerce Bancshares

Group 9

Financial Statement Analysis

PART A: Commercial Bank Financial Analysis

Financial statement analysis is the process of evaluating the financial statements of a company such as the income statements, balance sheets and the profit and loss statements. By analyzing the statements of the business, it helps individuals in identifying the financial health of the firm and the profit it makes in a year (Subramanyam & Wild, 2009). Similarly, the statement analysis helps the owners of the company make better decisions concerning the activities of the firm to ensure it maximizes profit. The following ratio analysis is used to determine the financial statements of the company

· Equity multiplier

· Asset turnover

· Return on assets

· Profit margin

· Return on equity

Financial statement analysis of Commerce Bancshares.

Equity multiplier = total assets/ total equity capital

23881169/2069375 = 11.54%

The Commerce bank uses more debt to finance its assets; this implies that the firm as a higher solvency risk. The owners of the bank choose to have a higher risk that will give them high returns leading to a great profit and hence the firm would have the chance to achieve its objective of profit maximization.

Return on Equity = net income/total equity capital

Non-interest income = 440740

Net interest income= 615003

Less provision for loan losses = (29530)

Total operating income = 1026213

Less non-interest expense = (651629)

Tax = (118 094)

Net income 256490

Therefore, ROE= 256490/2069375 = 0.112%

Return on equity measures the amount of profit the company has made through the money the shareholders have invested in the firm. In the bank, it shows that the shareholders’ equity has not made much profit to the company (Subramanyam &Wild, 2009). This may be because the company offers fewer dividends as compared to other banks and hence individuals choose to invest in those banks that they will receive a greater dividend yield. And also, the bank may be selling its shares at a higher price which most shareholders are not able to raise. The high prices of its shares are because it is a larger bank and has access to the capital markets. Similarly, the bank may not be recognized, and people choose to invest in those banks that are publicly recognized. Also, the rates of the banks are too high for individuals to invest in it for the fear that consumers would not borrow loans from them and hence will have a lower dividend yield.

Asset turnover= total operating income/ total assets

1026213/ 23881169 = 0.04%

The assets of the bank have a lower ability to produce the net income in the year 2014. Therefore, the company does not solely depend on the assets to produce the net income of the firm (Penman, 2007). Commerce bank uses its revenues and expenditures to identify the net profit of the company since it cannot rely on the assets to determine the net profit.

Return on Assets = net income/ total assets

= 256490/23881169 = 0.011%

The management of commerce bank does not use its assets efficiently to generate a profit since it has a lower percentage of 0.011times in the year 2014 (Penman, 2007). This indicates that the bank is using other sources to produce profit such as interests earned from loans it gives to its debtors.

Profit margin= net income/ total operating income

= 256490/ 1026213 = 0.25%

The bank can control its expenses by paying its debts to avoid financial distress. Also, it can adjust its budget by including fewer expenses that are more imperative in running the activities of the bank.

From 2000-2001, ROE of the bank decrease this is due to the decrease in both the net income and the profit margin. The decrease in the net income may have been caused by the decrease in the value of the assets, and the markets may have been less liquid in the year 2001 resulting in a decrease in the return on equity of the bank. And as from 2003-2005, the ROE of the firm increased and maintained a constant value of 0.2% (Penman, 2007). This was due to an increase in the profit margins of those years and a healthy economic growth of the bank in the markets which lead to an increase in the net income.

From 2006-2014, ROE declined significantly leading to a major crisis which weakened the credit markets forcing the company to increase the provision of loans and leases.

The averages of the commerce Bancshares differ slightly with those of the industry. This is because in most cases such as in the equity multiplier, the bank prefers to use more debts to finance its assets as compared to the industry. Also, the company takes high risks with the hope of getting high returns which will generate more profits, unlike the industry which minimizes the use of debts to finance its assets. Similarly, on the return on equity, the industry gives a negative curve.

Fig. 1: Graph showing the Return on Equity

(Source: Gruenberg, et al., 2017)

Table 1 : showing data of Return on Equity

year Commerce Industry
2000 0.21 13.44
2001 0.19 12.57
2002 0.19 13.46
2003 0.2 15.53
2004 0.22 12.8
2005 0.23 12.26
2006 0.19 12.18
2007 0.17 3.76
2008 0.12 -10.14
2009 0.11 -0.74
2010 0.12 5.78
2011 0.13 6.73
2012 0.13 8.6
2013 0.13 8.54
2014 0.11 8.44

The ROE of the bank remains constant through the years while that of the industry keeps changing. This shows that the industry is more profitable despite its negative ROE in the year 2008. It is possible that the average of the industry was boosted by the performance of various banks which managed to control their expenses hence reducing the financial crisis which would have led to a lower Return on equity of the bank (Gruenberg et al. 2017).Similarly, the ROE of the bank is smaller than that of the industry because t

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