Bank Performance. An International Perspective 2017 [630944]

UNIVERSITATEA BABEȘ – BOLYAI
Facultatea de Științe Economice și Gestiunea Afacerilor
Cluj -Napoca

Bachelor Thesis

Coordinator
Lect.univ.dr. Simona Nistor

Student: [anonimizat]

2017

UNIVERSITATEA BABEȘ – BOLYAI
Facultatea de Științe Economice și Gestiunea Afacerilor
Cluj -Napoca

Bachelor Thesis

Bank performance. An international perspective

Coordinator
Lect.univ.dr. Simona Nistor

Student: [anonimizat]

2017

TABLE OF CONTENTS
CHAPTER 1. BANK PERFORMANCE ………………………….. ………………………….. ………………….. 1
1.1 DEFINING PERFORMANCE ………………………….. ………………………….. ……………………….. 1
1.2 SOURCES OF REVENUES AND EXPENDITURES OF BANKS ………………………….. … 5
1.3 THE NET INTEREST INCOME BUSINESS MODEL ………………………….. ……………….. 10
1.3.1 The Net non -interest income business model ………………………….. ………………………… 12
CHAPTER 2. ASSESSING BANKS PERFORMANCE AND EFFICIENCY ……………………… 15
2.1 PERFORMANCE INDICATORS ………………………….. ………………………….. …………………. 15
2.2 STOCK MARKET BASED PERFORMANCE ………………………….. ………………………….. . 18
2.3 EFFICIENCY INDICATORS ………………………….. ………………………….. ………………………. 20
2.4 PROFIT ABILITY AND SAFETY DILEMMA ………………………….. ………………………….. . 26
CHAPTER 3. CASE STUDY: PERFORMANCE ANALYSIS FOR INVESTMENTS BANKS
………………………….. ………………………….. ………………………….. ………………………….. ………………….. 32
3.1 BANKS & BUSINESS MODELS ………………………….. ………………………….. …………………. 32
3.1.1 General data: J.P. Morgan ………………………….. ………………………….. ………………………. 32
3.1.2 General data: Goldman Sachs ………………………….. ………………………….. …………………. 36
3.2 STRUCTURES OF REVENUES AND EXPENSES ………………………….. …………………… 41
Conclusions ………………………….. ………………………….. ………………………….. ………………………….. … 53
References ………………………….. ………………………….. ………………………….. ………………………….. ….. 53

List of tables, figures and graphics

Table 1 . A simplified bank income statement representation
Table 2 . Studies about bank performance and profitability
Table 3 . History of J.P Morgan Chase & Co
Table 4 . J.P. Morgan: general information
Table 5 . J.P. Morgan: service portfolio
Table 6 . Goldman Sachs: general information
Table 7 . Goldman Sachs: Investment banking
Table 8 . EPS comparison 2016 & 2015
Table 9 . PER comparison 2016
Table 10 . PBR comparison 2016
Table 11 . PBR for the largest U.S. Banks
Figure 1 . Factors of performance diagram
Figure 2 . Service type diagram
Figure 3 . Investment bank activities diagram
Figure 4 . Biggest investment banks worldwide as of July 2016, by revenue (in million U.S.
dollars)
Figure 5. Net interest Margin for all U.S. Banks
Figure 6 . Relations between market structure, competition, profitability and efficienc y
Figure 7 . The balancing act: Profitability vs Liquidity
Figure 8 . The disappearance of investment banks
Figure 9 . The business segments
Figure 10 . Performance indicators Goldman Sachs: ROA & ROE
Figure 11 . Performance indicators J.P Morgan: ROA & ROE
Graph 1 . The business lines in J.P Morgan
Graph 2 . The business lines of Goldman Sachs
Graph 3. J.P. Morgan vs Goldman Sachs: total net revenue
Graph 4 . J.P. Morgan vs Goldman Sachs: total assets
Graph 5 . J.P. Morgan vs Goldman Sachs: net interest income
Graph 6 . J.P. Morgan vs Goldman Sachs: total non -interest revenues
Graph 7 . J.P. Morgan vs Goldm an Sachs: non -interest expenses

Graph 8 . J.P. Morgan vs Goldman Sachs: operating expenses
Graph 9 . J.P. Morgan vs Goldman Sachs: provision losses
Graph 10 . J.P. Morgan vs Goldman Sachs: EPS & Dividends
Graph 11 . J.P. Morgan vs Goldman Sachs: PER & Share va lue
Graph 12 . J.P. Morgan vs Goldman Sachs: PBR

List of abbreviations

CEO Chie Executive Officer
CIB Corporate & Investment Banking
CIR The cost of income ratio
CSR Corporate social responsibility
DEA Data envelopment analysis
EBIT Earnings before interest and taxes
EPS Earnings per share
FED Federal Bank Reserves
IPO Initial public o ffering
KPI Key performance indicators
NIM Net Interest Margin
PBR Price to book r atio
PER Price earnings ratio
PLL Provision for loan losses
RMBS Residential Mortgage -Backed Security
ROA Return on assets
ROE Return on equity
US United States

Introduction

A bank is a financial intermediary whose core activity is to provide loans to borrowers and to
collect deposits from savers. In other words, they act as intermediaries between borrowers and
savers, they collect surplus funds from savers and allocate them to borrowers. (B. Casu, et al. ,
2006)
Banks are essential for each country’s economy, since no growth can be achieved unless savings
are efficie ntly channeled into investment. The competitive business environment of the banking
industry has been develop ing dramatically . The developments have been reinforced by
technological advancements which allowed more efficient delivery and process ing channels as
well as more innovative products and services.
In the recent years, it is likely to observe how much the banks increases in the scale of their
operations, sometimes on the basis of merger and acquisitions, sometimes on the basis o f their
own strengths. This has resulted in an overall increase in the concentration ratios in the banking
industry. As well the tendency of the population which expects from the banks better qualitative
services that make the customers job more easy and practical .
Along the years there has been a lot of commotion in the banking sector. Some banks suffer
stability problems and get bankrupt. Otherwise some banks perform better than others . However,
the intensified competitive pressures faced by the banks come not only from other banks but also
from nontraditional competitors such as non -bank financial intermediaries as well as the capital
markets which are offering similar products and services making the market more competitive.
These customers have become m ore educated, better informed and more internalized. As a result,
banks are required to adopt innovative strategies, technological skills, manage their resources
well to keep up with the changing environment and customers’ requirements.
In the modern banking system s, financial institutions perform a number of functional activities .
They mediate between savers and borrowers and, by providing credit, help overcome imbalances
between production and consumption. Investment banks enable companies to raise c apital, and
thus direct investment to growth areas of the economy. Necessarily, these banks are organized in

a hierarchical system under a government -mandated central bank, which preserves the quality of
national money, and enables the competing banking in stitutions to regulate their dealings with
one another. Banks are largely responsible for the payments system. Electronic payments are
becoming more important as people use less cash. This means that banks are processing more
card payments, transfers , dire ct debits, etc. their volume increasing daily . Banks issue loans to
both people and companies. Without banks, it would be very hard for people to buy a home or
start a business, or for companies to make investments .

Nowadays, banks have evolved greatly, b eing the pillars of the economy, both at the country
level and globally. They were divided into several categories , specializing on certain types of
transactions and on a certain category of clients, thus becoming more efficient and profitable in
the developed activity, growing on as many economic areas.

With the modernization of technology and the society itself, banks have profited and invested
heavily in technology using this to increase their product range and make life easier for
customers by cre ating new operational services and products more efficient.

At the same time, financial markets have deeply evolved and are in a state of increase d
emergence . These bring new investment opportunities for both individuals and businesses. Their
object is t o trade money, particularly capital, in order to balance demand with supply by
effectively targeting cash flows between surplus and deficient agencies.

It is very important for society to keep up with the changes in technology regarding economics,
financial services, investments, mergers & acquisitions and so on, because this will be the future .
The financial system is always in change, coming with new instruments. For example, the cred it
cards, replacing cash transaction with wireless interactions. The new generations are starting to
use cards for all kind of payments, in time probably cash will disappear . Nordic countries fro m
Europe already implement this measure and the percentages of cash are very low. A lot of
countries have developed rapidly because of the transactions on the stock market which bring big
amoun ts of money. Taking into consideration Romania, on this segment , it can be observed that
it did not develop as much, due t o the lack of information and encouragement on this subject.

America is one of the most powerful economy in the world and also some of the worldwide top
banks have them headquarter there as: JPMorgan Chase & Co , Wells Fargo & Co , Bank of
America , Citigroup Inc. , Goldman Sachs Group and Morgan Stanley . All these banks mentioned
above are investing a lot in innovation, technology and performance to be in touch with the
economic evolution. These entities lead by example for other parts of the world wh ich are in
desperate need of improvement and evolution.

Motivation

The objective of this thesis is to illustrate a view upon the emergence and performance of one of
the most innovative banks from the United States of America, JP. Morgan Chase & Co . This
paper will offer an international perspective on the efficiency and i mportance that this enterprise
has in the economic life. To highlight these features the concept of bank performance will be
presented and s ources of revenues and expenditure will be analyzed. Further the focus will be
directed to a ssessing ba nks performance and efficiency through various indicators. Last, the
theoretical study will be concluded with performance analysis of JP. Morgan Chase & Co 2016
financial year but also by underlining its results through a comparison with Goldman Sachs
Grou p, Inc. one of the most powerful investment bank from the world.

Methodology

The first two chapters focus on the theoretical aspects of bank performance from an international
perspective. Observing the large literature, I review the definitions of perfor mance, the
profitability and efficiency formulas, but also the core functioning of commercial and investment
banks and their impact on the social and economic environment due to the development of their
operational services. The third chapter of this thesi s will concentrate on a practical example
using two of the world’s largest investment bank: JP. Morgan Chase & Co and Goldman Sachs
Group, Inc.
For conducting the study, the next objectives are set:
 using the annual reports, the study will follow the evolu tion of indicators (ROA, ROE, EBIT,
Net interest margin, Cost income ratio, Number of employees, Productivity, etc.) on two
financial years 2015 and 2016;
 analyzing the impact of KPI (key performance indicators) in management that demonstrates
how effectiv ely a company is achieving key business objectives;
 making a comparison between JP. Morgan Chase & and Goldman Sachs Group, Inc., to see
the differences in performance of two major banks by comparing the annual results;

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CHAPTER 1. BANK PERF ORMANCE

1.1 DEFINING PERFORMANCE

Performance as a concept can be defined as how well we manage to do something and how
successful is the result. “Performance is not an ascertainment, it’s a building process ”. (A.
Bourguignon, 1995)

Some authors define performance as a result obtained in manage ment, economics, marketing,
etc. which represents the competitiveness, efficiency and effectiveness of the organization and its
procedural and str uctural components. Performance can be regarded as the equivalent of
competitiveness. (Achim, et. all. , 2005)

The concept of performance has a variety of definitions, many of them relate to specific contexts
or functional perspectives. Focusing on a basi c dictionary definition of the word “performance”,
the following meanings were found:

„An act of presenting a play, concert, or other form of entertainment ”; „A display of exaggerated
behavior or a process involving a great deal of unnecessary time and effort ”; „The action or
process of performing a task or function ”; „A task or operation seen in terms of how successfully
it is performed ”1

Performance is a meaningful word and searching through its various definitions it can be concluded
as a very important concept either for the society or also for business because it mainly shows a
measure of success.

From an economic point of view, perfor mance is described as:

„An assessment for an organization of its success in areas related to its assets, liabilities and
overall market strength. Many business operators take regular stock on either a formal or less

1 https://en.oxforddictionaries.com/definition/performance

2
formal basis of the general economic pe rformance of their company to make sure that it remains
on the right track financially”.2

Based on scientific literature the concep t of performance i s determined by a temporal evolution
in terms of its assessment criteria. As a result, we can identify the following time line:
 The 50-80s did not present an exact definition of this concept and used a variety of
performance assessment criteria, such as: productivity, flexibility, adaptability, ability,
environment control, turnover, production costs.
 At the end of 90’s the performance is defined as by the level of achievement of
objectives.
 Later the performance stat ed being more complex, it is defined by efficiency and
effectiv eness of the economic entity
 In the present time, it is defined as the value created by and individual, institution,
company, etc.

Anthony R. N. (1965) gave a gen eral definition and well synthesized definition of performance,
sharing the concept of two primary components, efficacy and effectiveness. Efficiency refers to
performanc e in terms of inputs and outputs so that the resulting higher volume for a given
amount of inputs, means greater efficiency. Effectiveness refers to the performance by the degree
to which planned outcomes are achieved .

The notion of competitiveness can b e retrieved in various meanings on multiples plans, it’s a
concept that doesn’t have a clear definition but in business offers the possibility of comparison
between the performance results obtained and establish es the potential future growth, so has the
ability to bring more prosperity then the competitors on the market.

Figure 1. Factors of performance diagram

2 http://www.businessdictionary.com/definition/performance.html

3

Source: Verboncu and Zalman, 2005:63

From another point of view, the concept of p erformance plays a state of competitiveness by
effectiveness and efficiency which brings high importance at global level . This phenomenon has
a large diversity and it can be defined in many ways, depends of the domain or interest of
everyone. For example , the performance of the companies it’s realized by innovation, production
services efficiency, customers and shareholders. All in all, these values highlight the efficiency
of investments, the objectives that investors focus on, but also the implication of management in
global performance of the company which brings a difference between competitors.

Consid ering the intense competition on all market level s nowadays, performance has a more
significant role on a global level. E conomic, social and environmental c hanges will lead to
changes in mentalities, i deas and patterns of conducting global economic activities . The
competition governs any conducted activity and it is always the ones who have no possibilities to
adapt that are considered the weakest .

In a time when demands are high, it is only those wit h successful management strategies that
maintain their results at peak and adapt to the aggressive market competition, considering the
turbulent environment it is basically shown that without performance growth of economic agents
cannot be achieved. These being added, performance plays a fundamental role in today’s
economy.

The resolution of performance in the economic entities must merge with the new global economy
such as economic liberalization, high competition and new standards of technology. The point of
view and the most important thing is that all these objectives must be accomplished at minimum
effort, while still having maximum impact. As a conclusion, the performant economic entities are
further growing either the non -performant which maintain their position or have a deficient
activity.

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When t alking about e conomi c performance as a factor of impact on the market, we come across
entities on both private and public sector, which as whole influence each other. In the public
sector, it is likely that the performance of banks influences both social and economic
environm ent. The performance of banks has an important role in economic growth, but also in
the development of the global markets, as they help companies and people widen their funds and
investments.

Performance of banks and its determinants are an important due to the significant contribution of
banking to financial sectors across the world , more exactly in emerging economies for which the
“bank -based” label is regularly needed . (Andries et al., 2014 )

All advance economies have come across different sorts o f changes that have occurred in the
financial sector industry which have only increased the importance of performance analysis for
modern banks . The economic environment is characterized by intense com petition and
increasingly market -oriented banking systems.

According to scientific articles, in many countries, the widespread privatization process has had
the effect of weakening political interference in bank management while the objective of
shareholder’s wealth maximization (maximizing the returns to investors holding equity shares in
the bank) is now a priority restrained merely of the environment in which banks operate has
increased the need for prudential regulation. (Casu. et. al., 2006)

Performance analysis is an important tool as there is no performance independent of the goals
and objectives entities have. It is used by various agents operating either interna lly to the bank or
who form part of the bank’s external operating environmen t.

Bank performance can be defined as a measurement of stability in the bank activity having as an
object to reduce the risks and always trying to increase the profit and keep the bank growth on a
safe way. In any type of organization, bank, company, we can achie ve the performance just by a
performance management.

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Bititci . et al. (1 997) define performance management as a “ process by which the company
manages its performance in line with its corporate and functional strategies and objectives ”.

The performance m anagement is presented as a fundamental process which has as a main object
the increase of responsibility of producing results and improving the abilities or competences by
developing a strategy. The whole work system begins with performance management whe n a job
is defined by presenting its tasks, objectives and goals. In an ideal situation, all employees
understand their position and perform at their best to achieve their objectives. As a result, the
system creates a work environment where employees are h elp with increase performance for the
company as a whole.

This process is not just for monitoring and reviewing the results at the end of financial periods, it
is also about management and employees working together and contributing to the wellbeing of
the organization. This process has an ongoing activity, which provides trainings and feedbacks to
everyone involved in order to make sure the goals are reached.

1.2 SOURCES OF REVENUES AND EXPENDITURES OF BANKS

In order to assess the level of bank perfor mance, first we need to identity the balance sheet
positions that generate revenues and expenditures of financial institutions. The main source of
funding for banks is represented by customer deposits, the bank use this founds to invest in loans
or other i nvestments and assets. The bank capital, equity is the difference between total assets
and liabilities. Traditionally banks make profit by charging interest on the loans, the percentage
charged on loans is higher than the interest payed for depositors.

Usually, the business of banks is working as an intermediate between customer’s funds surplus
units and deficit units, making an unknown connection between depositors and borrowers. Banks
provide risk assessments , liquidity services and undertake delegated monitoring.

The whole banking activity can be described as a cycle, as banks allow people to place deposits,
sometimes paying back interest. Afterwards, banks pass these funds to borrows and receive

6
interest from loans. Using this system, the flow of funding remains solid, while profits split
between the interest banks receive from borrower and the rates they pay for the funds. All in all,
acting as the intermediary of interest paid and interest received, and taking on the risks of
offering credit, banks gain profits. (Hans , 2017)

One of the largest sources of funds for banks is deposits, the se are composed by money that
customers give to bank for safekeeping or savings and also receive a small amount of inte rest.
Most people are havi ng core deposits which are used for checking and saving accounts.

Shareholder’s equity plays a significant role in a banks activity, e ven if the deposits are the most
important source of funds for the lending activity . Shareholde rs capital is a reliable resource, as it
will not disappear from the bank’s capital. The bank’s capital can also grow from releasing new
shares or increasing capital itself.

Since the beginning of the commercial banks the main source of income was represe nted by the
revenues associated with credits , which are very important because of their interest and
commission. The other revenues and expenditures from the financial markets activity have an
important role because of the speculation which was to reduce in that period.

Beside the re venues from the interest banks also offer products such as li fe and other types of
insurance. Bank products represent items and services such as special cards or other personalized
packages , foreign exchange selling and buying, charges, ATM card fees, ATM usage and penal
costs, etc.
However, the bank has a lot of sources of revenues which include the interest, commissions and
operational services. The revenues from the interest are provided by the loans and all other
advances granted by the banks such as: working capital, investment capital, house capital, credits
in other currency, credit cards, etc.

The commissions which are taxes imputed by the bank are divided in several types: cards
administration, banks transfers, lending credits, letter of bank gua rantee, credit line. Also, the
operational services are improving and developing from year to year . The income provided by

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them is from brokerage services, cash administration, investment bank services, financial
management and private banking.

The earnin gs of a bank usually are more consistent then expenses, even if this is true the bank
has also an important amount of expenses too. The majority of the bank expenses are composed
by: operational costs, employee salaries and capital costs.

In present times , banks are developing continuously and use a lot of services which constitute
also a lot of costs, for example IT services and software, facilities/maintenance, insurance,
telecommunication, office supplies and equipment, security services, utilities, pro fessional
services, rent/lease, etc.

Balance sheet structures represent a distinction element in the classification of financial
intermediates. Customer deposits represent a source of funding and they are recorded in the
books on as liabilities for the banks that provide this service for customers. These entities record
the other cash, loans and investments as assets. The banks performance is resembled over two
balance sheet periods, on the report known as the income statement which reflects the profit a nd
loss account. (Casu . et al., 2006 :196)

However, a very important factor associated with the financial statements of a bank it’s the
profitability, usually an important key sources of capital generation. Profitability can be defined
as:
“The state or co ndition of yielding a financial profit or gain. It is often measured by price to
earnings ratio. ”3

The profit and loss account is the relation between the balance sheet and the income statement.
Defining a statement which present the revenues, expenses, c osts for a period of time, quarterly

3 http://www.businessdictionary.com/definition/profitability.html

8
or annually . All this together summarize s the bank ability to generate profit by increasing or
decreasing the revenues, expenses and costs.

The income statement is a primary financial statement used to evaluate, det ermine the company
financial position and performance, a source of information on a bank’s profitability. The income
statement also presents the revenues sources and costs in banking activity.

Table:1 . A simplified bank income statement representation
a Interest income
b Interest expenses
c=(a-b) Net interest income (or "spread")
d Provision for loan losses (PLL)
e=(c-d) Net interest income after PLL
f Non-interest income
g Non-interest expenses
h=(f-g) Net non -interest income
I=(e+h) Pre-tax net operating profit
l Securities gains (losses)
m=(i±l) Profit before taxes
n Taxes
o Extraordinary items
p=(m -n-
o) Net profit
q Cash dividends
r=(p-q) Retained profit

Source: B. Casu., 2006:206
Table: 2 . Studies about bank performance and profitability
Authors Sample Period Method Results

9
Source: https: //www.cluteinstitute.com/ojs/index.php/IBER/article/viewFile/3699/3743
There are numerous factors that influence the rate of return earned by financial institutions
nowadays. Some factors are external and others influence the internal elements, however both
shape the earnings performance of institution. Policy implications, credit and deposit g rowth ,
capital a dequacy , asset q uality , profitability and risks are types of explanations behind the
financial results of banks.
Smirlock Over 2,700 -unit
state banks 1985 The author models bank
profitability as a function of
market
share, concentration, and an
interaction term between market
share and concentration The study concluded with the
need to include a measure of
efficiency in the model
Also, efficiency must be
positively related to
concentration and/or market
share
Haslem Member banks
of the US
Federal Reserve
System 1968 –
1969 The author computed balance
sheet and i ncome statement ratios The result shows that most
ratios were related to
profitability, particularly
capital ratios, interest paid and
received, salaries and wages
For improvement, the author
emphasized expense
management
Molyneux Belgian, French,
Italian, Dutch
and Spanish
banking markets 1993 The author used several
independent variables related to
characteristics both internal and
external to bank’s operations, in
order to explain bank profitability
either at an international or
European level The result shows that high
profits earned by firms in a
regulated industry may be
appropriated in the form of
higher payroll expenditures
Also, collusive profits do not
appear to accrue in non -EC
banking markets
Bourke A sample of
seventeen French
banks o ver the
period 1972 to
1981 1989 The author used comparison of
banks profitability The study concluded that the
level of staff expenses appears
to have a negative impact on
banks ROA
Berger A sample of
deposit rates or
loan rates 1995 The author formulated models
that included two measures of
efficiency, X -efficiency and
scale -efficiency, to test the
structure -performance
relationship The result asserts that only
firms with large market shares
and well -differentiated
products are able to exercise
market power in pricing these
products and earn supernormal
profits
Yeats A sample of
Spanish banks
and the structure
conduct
performance 1974 The author studies structure –
performed relationship in bank The study shows banks which
operate in market above some
critical level of concentration
earn monopoly profits while
those in markets below
the breakpoint earns
competitive or near
competitive profits

10

Along time several studies have examined a large range of factors that have a role in imprinting
banks performance and profitability. In the previous, a series of writers and short descriptions of
their studies are highlighted, to present a brief image over the evolutions through time.

1.3 THE NET INTEREST INC OME BUSINESS MODEL

In the last decade, the baking business has developed a lot and benefited to substantial changes,
so the bank business spread in commercial and investment banks. We can define commercial
banks as:

“A bank whose principal functions are to receive demand deposi ts and to make short -term
loans” ; “A bank which is used by the general public, for p rivate and business transaction”4;
“Privately owned financial institution which accepts demand and time deposits ”; “Makes loans
to indivi duals and organizations, and provides services such as documentary collections,
international banking, trade financing ”5

Figure 2 . Service type diagram

Source: https://www.quora.com/How -does-the-payments -ecosystem -work

4 http://www.thefreedictionary.com/commercial+bank
5 http://www.businessdictionary.com/definition/commercial -bank.html

11
Overall, the commercial banks provide internal and external activities, receive money from
individual or business and making loans to them. Also, the commercial banks are very
diversified. They are differentiated by the operational services type that their offer to the
customers.

The evolution of t he commercial banks was very accelerated, due to the fact that the traditional
commercial bank was a base for a communication with all the other institutions in the economic
environment, through channels such as safe deposit boxes, vaults and ATMs. Up to now the
system of commercial banking as defined even physical boundaries, as tra nsactions can be made
online, using gadgets as simple as phones.

Because of the accessibility caused by this evolution, banks pay higher interest rates on
investments, deposits and charge lower fees as they do not have to maintain physical locations
and all the ancillary charges that come along with them such as rent, property taxes and utilities.
(Investopedia)

The main factor of revenue for the commercial banks is the interest rate. In the last decade at an
international level the interest rate registers a very low value because of the restricted capacity
that bank has to establish the interest.

The interest rate is provided from loans a nd all the other services offered by the bank, such as:
investment s, installments, loans, deposits, foreign cu rrency exchange , credit cards, etc. It
includes deposit kept with other financial intermediaries and interest received on the bank’s.

Interest income is normally calculated on an accrual basis, meaning that a bank calculates
interest due over the period of time covered by the income statement, regardless of whether or
not the interest has been paid. Accounting policies should normally require that a loan be placed
in a nonaccrual status if a client is overdue by a specified period of time or deemed to be
potentially unable to pay. (Van Greuning and Brajovic , 2009 :106)

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The net interest income can be defined as a differentiation between the interest revenues from
lending’s and the interest paid for deposits. The net interest income is provided from the sur plus
revenue that is achieved from the interest earned on assets by the interest paid out on deposits.

Net interest income= Interest Earned -Interest paid

The expenses related to interest are represented by the interest that the bank has to pay for the
customer depo sits and the borrowings for the loan portfolio. The interest expenses are divided
offering a deal between the bank sources of funding and the corresponding funding cost. A bank
with small interest expense s and reduced funding costs, it i s obv iously more efficient then a bank
with a high interest, because it has the ability to borrow at the market price, with higher interest
margin.

Also, it’s ve ry important to know that lower interest generally implica te higher operational
expenses, because it’s better to have big deposits with a higher interest rate and a lot of small
deposits with lower interest rate which generate a lot of work, employees and resources that also
have to be paid for this. ( Van Greuning and Brajovic , 2009)

1.3.1 The Net non-interest income business model

The bank who provide income without having a primary source the interest rates are in vestment
banks, these banks are very developed and have a lot of sources of income such as: invest ments
in financial markets, stocks , bonds, foreign exchange, hedging, startup entities, etc. All these
generate income through fees for the bank .

Financial institution that provides large amounts of long -term fixed capital, primarily for
established firms. Investment banks generally take an equity stake in the borrower firm to
exercise some influence on its direction and operations.
They also act (often jointly) as financial intermediaries by underwriting the sale of new
securities.6

6 http://www.businessdictionary.com/definition/investment -bank.html

13

Investment banks usually are working with institution an d companies , they do not use to make
agreements with r etail customers. Their main activity is to assist companies and governments in
raising funds on the capital market. This process is supported through the issue of stock or debt
(bonds).

Figure 3 . Investment bank activities diagram

Source: http://marketbusinessnews.com/financial -glossary/investment -bank/

The differences between commercial and investment bank is very important to be understood.
To shortly summarize, e ach of them have different meanings, the commercial bank has
standardized services which includes all type o cit izens and the investment one i s more specific
just for some categories of customers for example corporations, governments and individuals,
this is why investment banks have few customers then the commercial banks which are having
millions of customers.

Also, the income is provided from different sources , investment bank s has an income based on
fees and trading activities which generate also commission and profit and the commercial banks
are based also on fees and interest income. For example, JPMorgan Chase & Co it’s one of the
top banks in worldwide which is a commercia l bank but also has an investment division which is
one of the biggest in the world.

14
Figure 4 . Biggest investment banks worldwide as of July 2016, by revenue (in million U.S.
dollars)

Source: https://www.statista.com/statistics/371143/leading -global -investment -banks -by-revenue/

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CHAPTER 2. ASSESSING BANKS PERFORMANCE AN D EFFICIENCY

2.1 PERFORMANCE INDICATO RS

The performance indicators can be defined as:

“A quantifiable measure used to evaluate the success of an organization, employee, etc. in
meeting objectives for performance. ”7

“In business, these are used for evaluating specific goals and objectives. ”8

Performance indicators or key performance indicators (KPI) represents a method which is used
by banks, companies or others entities to register the level or achievements of their strategies,
targets and goals. KPIs in present is u sed by a lot of public or private companies in order to
establish their performance, it’s seen as a key of success in implementing the company’s goal’s.

Periodically all bank institution determines a series of indicators which present the fluctuations
in its activities. These indicators can be organized and structured in systems that show the
evolution of the entity at a certain moment in time. Indicators help in making strategic decisions
with the banks by assessing performance and profits through the obt ained results. ( Oprițescu, M.,
2007 )

Further, the focus will be directed to a series of indicators which are most likely used in bank
performance analysis.

Return on assets ( ROA) it’s one of the most important indicator which measueres the profit of a
company based on the amount of total assets. ROA, it’s presented as a percetange and is
computed for determine a company capacity to earn profit from its assets .

7 https://en.oxforddictionaries.com/definition/key_performance_indicator
8 http://www.businessdictionary.com/definition/performance -indicators.html

16

Return on equity (ROE) Is an indicato r that has the measure to reveal the profit of an entity
generated by the shareholder’s investments.

Earnings before interest and taxes (EBIT) it's a measure that shows for a bank a percentage of
incomes which represents the operational profit, it’s subtracts the incomes, before taxes or other
indirect costs such as rent, bonuses, interest etc ., after paying the carriable costs for production,
salaries etc .

EBIT= Revenue -Operating Ex penses or EBIT= Net Income+Interest+Taxes

Net interest Margin (NIM) it’s a measure of differentiation between the interest of a bank or a
financial institution and also the value of the interest rate paid at the customers that have deposits
at the bank, a ll of this reported with their assets value.

Net interest margin equals interest income minus inte rest expense divid ed by average earning
assets. The net interest margins measure the part between what the bank pays the providers of
funds and what the bank gets from firms and oth er users of bank credit. T he net interest margin
focuses on the conventional borrowing and le nding operations of the bank . 9

9 http://siteresources.worldbank.org/DEC/Resources/84797 -1114437274304/dll_jmcb_final.pdf

17

Figure 5 . Net interest Margin for all U.S. Banks

Source: Federal Financial Institutions Examination Council (US)

In the previous figure, it is presented a graphic with the net interest margin for all the U.S Banks
between 1986 -2016. As we can see in the period of economic crises, recessions, the cost of
money is increasing meaning that the interest for the loans is higher and because the inflati on is
higher the Federal Bank Reserves (FED) increase the reference interest rate, as a conclusion the
net interest margin is growing.

The cost of income ratio (CIR) is known as a popular measure which merge the incomes and
expenditures of a bank in conn ection to each other. For banks is very seen as be very efficient
and productive, also it’s an important indicator for the investors. (Andreas B. and Juergen M.,
2008)

Employees productivity it’s a measure which represent the efficiency, profits generated by the
employees of the bank by dividing the net profit at the number of employees.

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2.2 STOCK MARKET BAS ED PERFORMANCE

The financial stocks are well known for the external funding of the companies, which sometimes
determines costs or changes in the lin e of the shareholders and the banks funding determine costs
that make changes in the operational margins. The external funding of the companies is
associated with investment projects and a growth rate of risk. The internal funding of the
companies is limi ted by the ability to generate cash flow from operational activities. (Platt, H., et.
all. 1995)

The stock markets can limit the external funding of some companies because of the transactions
made or bankruptcy risks. Because of the erroneous information is causing a moral hazard
which creates important differences between the costs of the external funding and the internal
one. This problem doesn’t affect all the companies in the same way because the public
information for the small firms it i s not so known as the big companies that are well known in
the society, so the small firms can suffer financial constraints. Anyway, even the big companies
sometimes challenge with problems in obtaining favorable credits. (Platt, H., et. all. 1995)

If the sustainable growth rate of a company grows too fast, it will develop financial needs that
will cannot be satisfy. Platt H. and Platt M. this type of financial problem is the source of 47% of
bankruptcies.

The competitive stock markets require companies t o adjust their strategies and adopt financial
policies adjusted to the business environment to achieve an increase. The majority of the
companies present significant fixed assets in current activities as well as current liabilities used
as funding sources. The stock researches suggest that firms own stocks for deployment in good
conditions of the production flow for avoiding the stock breaks situations. (Aberdeen Group)

If companies cannot obtain external funding or can obtained them thru getting a premi um over
the level of opportunity costs for domestic funds, then investment activities will vary with
internally generated funds. Based on these considerations, it can be established that, in most
cases, growth has to be financed from the operational funds generated internally.

19
The optimum stock size is determined by the marginal benefit of stock ownership and the
marginal cost of the lack of stocks. The marginal benefit includes the benefit of avoiding stock
breaks and the cost includes the cost of financ ing. The optimum of stocks will be determined by
the point where the marginal benefit of holding stocks is equal to marginal cost. Having an
additional unit of inventory reduces the probability of stock breakage. If an enterprise is out of
stock, it is in a situation of a lack of use of an internal resource. (Aberdeen Group)

A phenomenal growth of emerging markets has not only attracted an enormous interest from
international institutional and individual investors, but it has also proved that these markets
cannot be treated in the same way as developed markets.

Hargis and Maloney (1997) point out that emerging markets are often highly concentrated and
subject to speculative manipulation. This means that larger stocks, which make up a huge
proportion of the overall market capitalization, dominate these markets.

The stock market can be defined as:

It is a place where shares of pubic listed companies are traded. The primary market is where
companies float shares to the general public in an initial public offering (IPO) to raise capital.10

The analysis done over the last decades announce that the expansion of the financial system,
stock markets and banks, is an important factor influencing economics . Banks further grow and
develop by creating instruments for diversifying risk and enhancing liquidity . (Levine, 2005)

The magnitude of the stock market is growing day by day being more competitive and challenge
for banks and especially for their banking operations. Companies can satisfy their fina ncing
requirements, issues by issuing stock but also borrowing from banks. The stock market can
replace the bank finance if it’s better developed and has higher values in it. (Ben Naceur &
Goaied, 2008; Kosmidou et al., 2005)

The size of the stock market it’s complementary with the profitability of the bank, allowing
banks to make intelligent lending decision and control the customers loan more easily . Two

10 http://economictimes.indiatimes.com/definition/stock -market

20
studies have supported the relationship between markets and profits by indicating the
complementary r elationship between them , resulting a larger stock market size that increased
bank profits . (Ben Naceur & Goaie d, 2008; Kosmidou et al., 2005)
Usually the investment bank stays behind the financial transactions of the stocks market.

According Irala (2005 ), "EPS is a measurement of the company's per -share performance "

Earnings per share (EPS) is the most important indicator for calculating the profitability of a
company . It represents the portion of a company’s profit that is allocated to each outstanding
share of common stock . Also called net income per share, is a market prospect ratio and more
exactly it measures the amount of money each share of stock would receive if all of the profits
were distributed to the outstanding shares at the end of the year .11

The book to market ratio it’s a ratio that comparing the book value of a company to its market
value, is obtaining the value of the company. The book value can be calculating using the
company’s costs reports or accounting value. When it comes to the stock market, you can
determine market value looking at market capitalization. (Richard Loth )

2.3 EFFICIENCY INDIC ATORS

11 http://www.myaccountingcourse.com

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In economics, the bank performance analysis captures a great attention. The bank performance
analysis is expressed in terms as: efficiency, competition, productivity, profitability and
concentration. The m ain interest in this analysis is the main role of banks in financial
intermediation. Because of the information concerning the production, creating goods and credit
rates are not accessible it’s a very difficult as a customer to observe the level of effici ency and
competition of the bank or other institution, which represent an important fact for the customer
taking in consideration for example a financial investment. (A. Andrie ș, 2009)

One of the most interested parties in maximizing the efficiency of a b ank are the shareholders
because they are the direct beneficiaries of the profit generated by a bank. The general method to
maximize the profit of the bank is to maximizing incomes or minimizing the costs but this also
depends on the market power of the ba nk. Banks can increase the prices of bank products which
are mainly interest charged for loans, or decrease the prices of resources. (A. Andrie ș, 2009)

In theory in a perfectly competitive market, maximization of profit is equivalent with minimizing
of co sts. However, in practice the maximization of profits and/or the minimization of costs are
not always correspondent. Banks are sometimes unable to maximize their profits because they
are recently affected by different factors. There are two categories of f actors, a series of
exogenous factors such as the regulation in the banking sector and economic shocks, factors that
can determine obtaining a below optimal performance. (Bikker and Boos, 2008, 6)

The next thing that can affect the form of maximization of profit is the endogenous factors which
are determined by inefficiency and incorrect incentives. (A. Andrie ș, 2009)

According to an alternative paradigm, the efficiency hypothesis, more efficient b anks increase
their market share by pushing less efficient competitors from the market . (Demsets, 1973)
Efficient banks will experience low costs turned into either increased profits or price reductions,
afterwards they will work on consolidating their com petitiveness and improve their market share.

In general efficiency is determined by the market structure, it’s assumed that the tensions and
competitive between banks bind them to be more efficient.

22

Hicks (1935) assumes a hypothesis, that monopoly will reduce the pressure towards efficiency .
The conclusion is that the banks by obtaining a big profit can reduce their prices and be more
competitive and increase their market share.
Figure 6 . Relations between market structure, competition, profitability and efficiency
Source: http://www.na -businesspress.com/JABE/BikkerWeb.pdf
In the previous figure is presented the connection between the variables and the fact that the
market s tructure, costs and profitability are frequently used as intermediary for competition and
efficiency . Also, the figure emphasizes the fact that measures underlined show distinctive
features of banks and markets .

Farrell (1957) establish the basis to measu re efficiency and productivity studies at the micro
level. His primary contributions consisted in defining the efficiency and productivity, and the
calculation of the benchmark technology and efficiency measures . Inefficiency is defined:
Situation in which, with the given state of technology, it is possible to generate a larger share of
welfare -total from the available resources, the situation where some people can be made better –
off by reallocating the resources or goods without making ot hers worse -off. Also called

23
allocative inefficiency, it indicates that a "just the right balance between pain and gain" has not
been achieved.12
For example, suppose inefficiency is defined as the distance from the frontier line and a referring
criterion , then if the firm’s actua l production stays on the frontier, it is efficient. The efficient
frontier is the set of optimal portfolios that offers the highest expected return for a defined level
of risk or the lowest risk for a given level of expected return. If it lies below the frontier then it is
inefficient. The ratio of the actual to potential production defines the level of efficiency of the
individual firm (Decision Making Unit, DMU). (Estelle Brack and Ramona Jimborean)

In literature, Farrel proposes two categories for defining the efficiency: the technical efficiency
and the allocative efficiency. Technical efficiency shows that the DMU has the ability to
minimize the use of input so that a given amount of output can be produced. Allocative
efficiency shows how DMU has the ability of to use inputs in optimal proportions, taking into
consideration their correspondent prices and production technology. All in all, both these two
measures create a total efficiency measure (Coelli et al., 1997).

It is sta ted that efficiency ratios have values between zero and one. If the DMU is fully efficient
the function will indicate one. If an example an efficiency score measured against a cost frontier
with the value of 90% is taken into perspective, the result will b e that the DMU could have
reduced costs by 10% without altering its output vector (Estelle Brack and Ramona Jimborean) .

DEA (Data envelopment analysis) technique is a nonparametric method and it is focused on the
employer work. Was introduced in 1978 by C harnes et. al., allowing the measurement of the
efficiency of a DMU by comparing it to the most efficient units; these way, the measures of
performance obtained are relative . The first time was used in economy studies after in financial
studies and furthe r in 1985 Sherman and Gold presented as the first application of this method to
banks (Estelle Brack and Ramona Jimborean) . DEA is an efficiency evaluation model which has
its roots on the mathematical programming theory, that focuses on the conversion inp uts into
outputs.

12 http://www.businessdictionary.com/definition/economic -inefficiency.html

24

As part of the DEA model, the returns to scale concept describe s what happens when the scale of
produ ction increases in the long run at a moment when all input levels including
physical capital usage are variable . It presents the behavior of production in relation with the
factors of production in the long run, more exactly the function between the rate of increase
output and the increased inputs. Factors of production are variable and ca be subject to change
due to a given increase in size.

A firm's production func tion could show evidence of different types of returns to scale in
different ranges of output . Usually the results can show increasing returns at low output levels,
decreasing returns at high output levels, but also constant returns at one output level between
those ranges. The mode l results in a constant return to scale, piece -wise linear envelopment
surface with both input and output orientations for projection paths . Constant return to scale
technology is best presented through the linear programming method that shows which of the
decision -making units determines the envelopment surface. More precisely, there is a constant
return to scale if the output increases by that same proportional change as all inputs change. On
the other hand, a variable return to scale shows piece -wise lin ear envelopment surface.
Decreasing and increasing retu rns to scale can also appear if output increases by less than that
proportional change in inputs, respectively if the output increases by more than that proportional
change in inputs . (Estelle Brack an d Ramona Jimborean)

A bank’s efficiency ratio is a measure which has the ability to turn resources into revenues if the
efficiency ratios is increasing indicates that the revenues are decreasing and the cost are
increasing, so lower is better. Anyway, it is good to note that different business models can
generate different bank efficiency ratios for banks with similar revenues. For example, focusing
on customer service could create a lower bank's efficiency ratio but in the same time it could
improve its net profit . Emphasizing more on cost control will obviously generate have a higher
efficiency ratio, but also have lower profit margins . The measurement to which a bank is capable
to leverage the fixed costs can influence the efficiency ratio, that is more predictable a bank is,
the more effective it can become. For these reasons, comparison of efficiency ratios is generally

25
most meaningful among banks within the same model, and the definition of a "high" or "low"
ratio should be made within this context. (investinganswers)

The bank efficiency ratio can be calculated in two ways. The most familiar is the cost to revenue
ratio. This method measures the non -interest expenses as a proportion of operating revenue. The
costs contain administrative expenses, buildings, supplies, technology and salaries. On the other
side revenues are composed fr om net interest income and additional fee income. Anyways The
“cash efficiency ratio” is known by the investors as a measure which deducts the amortization of
intangible assets from non -interest expenses, before computing the efficiency ratio. ( John
Finner an, 2006)

The interpretation of the efficiency ratios has also significant importance. Efficiency at a bank’s
non-interest expense level is reflected by the transformation of inputs into income. A good report
obtained after an efficiency ratio test should be 50% or lower, a bank which is less efficient will
obtain a higher ratio, high then 60% or more. The conclusion is that a low efficiency ratio is
better. ( John Finneran, 2006)

For a lot of companies containing the small businesses too, one of the most important cost is
labor. For the small company’s salaries represent the major expenses but labor also tends to be
reactive to productivity growth. To receive good results and reduce labor costs, managers should
measure the employee efficiency and set some belligerent performance targets to can obtain the
highest workforce that is possible.

The technology is also a very important factor in efficiency. It offers a lot of opportunities to
maximize the operations efficiency by saving a lot of time. Technolog y helps to processing data
faster, reducing/eliminate hand mistakes or errors and helps a lot in reducing the effort and
physical employees. For example, the banks are evolving day by day using technology and being
more efficient. A hypothesis that circula tes around the world is saying that “time means money”
so it is very important to use anything we have to be more efficient and save more time.

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2.4 PROFITABILITY AN D SAFETY DILEMMA

Profitability can be defined as the financial success fulfill by a compa ny in comparison to the
capital invested in it. This measure of success is determined by the net profit accounting
achieved. (Pimentel et al, 2005 p.86).

The main objectives of companies conducting operations in capitalist economies is to achieve a
desired return over the accepted risk in shareholders opinion, because in all investment projects
profit is the element that receives most interest.

In measuring the profitability of a bank, bank regula tors and analysts have used return on assets
(ROA) and return on equity (ROE) to assess industry performance and forecast trends in market
structure as inputs in statistical models to predict bank failures and merger and for a variety of
other purposes whe re a measure of profitability is desired. (Gilbert and Wheelock, 2007)

Probability ratios is a financial metrics which evaluate a business capacity to generate earnings in
comparison to its expenses and other costs from an incurred period of time. Having a higher
value in comparison with a competitor ratio or a better ratio then the previous period of time
result that the company is doing better. (Investopedia , 2010)

For a bank profitability is essential in maintaining the progressing activity and for its
shareholders to achieve equitable returns but also is essential for the supervisory authorities, as it
certificate more resilient solvency ratios , even in a circumstance of a riskier business
environment.

The main indicators of banks profitability are e arnings, risk -taking, efficiency and leverage. The
stakeholders emphasize different aspects of profitability. This aspect had to be take in
consideration by the market participants, when they analyze the method of measuring bank
performance, to satisfy the ir needs. Thus, every different group of market participants own their
chosen set of indicators. (European Central Bank, September 2010)

27
Every bank of the world or company try always being profitability and keep the profits growing
but they also keep an eye on the safety, because for high profits they sacrifice some safety, this
situation creates a dilemma.

The main three indicators of a bank to exist, is to keep the demand balance for: Shareholders,
depositors, regulators, all having the same preoccupation in profitability and safety.

The bank solvency is defined as the ability of the companies to pay their debts when they
become due. I n this manner, the bank maintains the strength of attract customers and financing in
the market. The solvency its very helpful in determine its capacity to achieve long term
investments and service debts. When a bank can’t exceed their obligations regardi ng the
services, lenders or debitters and has the liabilities value higher then value of the assets, the bank
is going to insolvency.

However, also the relation between liquidity and profitability represent an important thing for the
bank financial activi ty. The liquidity represents for a bank the responsibility to fulfill their
comm itments when they are indebted. People save their liquidity in banks or borrow liquidity
from banks, further the bank offers liquidity from two different sources borrowing or s ales.

After all, it is very important for a bank to have a balance between profitability, liquidity and
solvency. Banks are prompt to failure when a deficiency in capital appears due to losses on loans
and securities, however trying to invest in only qual ity assets might not always be profitable.
When assets that do not have liquidity, the bank might face complications, because insolvency
can lead to illiquidity. Failure can appear at liquidity levels also, when a bank cannot afford
releasing the deposits back to its clients.

Shim and Siegel (2000, pp. 46 -47) accounting liquidity it is to measure the capacity of a
company to liquidate the short -term debt by capitalizing on all the current assets of the company.
Sustaining an adequate liquidity, it is more than a goal, it is a condition for the company to reach
a sustainable continuity in business.

28

In a company, it is very important to achieve the suitable equilibrium between the reasonable
return and the adequate liquidity for the company. According to Perobeli, Pereira and David
(2007, p3) the decision about the liquidity level should be based in the following dilemma :
 If resources are mostly applied in currents assets, profitability is lower but also solvency
risk.
 Net working capital al a low -level in creases profitability, however it also increases
solvency risk.

According to economic hypothesis, profitability and risk are certainly related, if the investment is
riskier the profits would be much higher, thus higher liquidity process less risk but of course this
means lower profits.

Figure 7. The balancing act: Profitability v s Liquidity
Source:
http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Working%20capital%20managemen
t.aspx

29
During the crisis, banks with investment portfolios were exposed to risk and banks with liquid
portfolios, less profitable, managed to survive.

A financial crisis it appears when more financial institution, companies can’t be able to cover the
statutory obligations, this situation generate negative effects on the entire financial system
functionality.

The bank crises are generated by a series of micro and macroecon omic factors that are determine
bankruptcies, nationalization, fusions of a group of ba nks or the whole banking system (Drăgan,
O, 2013) . The economic crisis can start from several negative factors as: Stock Market Issues ,
Currency Fluctuations , Credit Con traction , and so on.

The bank crisis, has been generated in different states of the world in different methods,
indifferent about the level of the financial system development. The banking sector representing
a vital sector in the economy without whom th e modern economic couldn’t exercise the role and
the functions, so every country tries to develop and consolidate the banking system to provide
the right framework for the development of monetary relations in the economy.

When the crisis begins a lot of b anks have problems with liquidity because of the decrease of
their loan funding. The financial crisis completely changed the risk premiums on capital markets,
monetary markets and banks refinance evolve in being very expensive with fewer chances to
accompl ish it. If the government of the state don’t have an intervention, announce general
banking guarantees and also the Central Bank, charging the market with liquidity at lower
interest rates, the whole financial system can break down completely. (T. Lindblo m, et all., 2011)

Because of the crisis commercial banking and investment banking have need separated. In the
previous period, 1980 -1990 because of the globalization of the financial markets and new capital
requirements, formed larger companies, allowing the commercial and investment bank in the
same firm, the “Universal Bank”. The biggest universal bank such as JPMorgan (NYSE: JPM),
Citigroup (NYSE:C), Barclays (NYSE: BCS) and UBS (NYSE: UBS) linked investment and

30
comercial banking and use their balance sheets to undertake the traditional investment banks. (B.
Perry, Investopedia)

Returning at the crisis in 2008 because of the great recension the biggest stand -alone investment
banks start to despaired, Goldman Sachs, Morgan Stanley, Lehman Brothers and Bear Stearns .

In 2008 Bear Stearns went almost bankruptcy, J.P Morgan bank, purchased the bank for a low
amount of money, and other investment banks were also got bankruptcy and sold, all this
transaction were facilitated by the Federal Reserves, in speci al Bear Stearns and Lehman
Brothers for guarantee their liabilities. (Investopedia)

Figure 8. The disappearance of investment banks

Source: http://www.investopedia.com/university/credit -crisis/credit -crisis1.asp

While several much smaller investment banks still exist, a lot of them were purchased and
merged during the financial crisis. This drastic change that came after the crisis remodeled the
financial market, but also the bank scenery creating a universal system, where investment
banking is now formed completely out of universal banks. The Glass –Steagall act created almost
84 years ago that separates commercial and investment banking was then broken and all
activities were once again performed by the same firm.

31

From the beginning Wall Street grew into a huge worldwide industry that generate colossal
profits. From its origins, the investment bank dominated Wall Street, making huge amount of
profits by low risk investment banking activities. After all, because of the fact that investment
banks were forced to challenge with the universa l banks which were much larger, the margins in
these businesses firmly declined, a trend that was aggravate in time. Because of the competition
the companies concentrated more on activities with higher -risk for generate maximum profits.
Thru, the risk leve l increased a lot and just get started a credit crisis. ( B. Perry , Investopedia)

32
CHAPTER 3. CASE STUDY : PERFORMANCE ANALYSIS FOR
INVESTMENTS BANKS

3.1 BANKS & BUSINESS MODELS

3.1.1 G eneral data: J.P. Morgan

J.P. Morgan Chase & Co is a commercial and investment banking company, founded by John
Pierpont Morgan and generally known as the “ House of Morgan ”. It was assembled from at
least 1,200 predecessor firms that have combined together over the years into form of the present
company.

Since 1799, many well -known heritage firms include J.P. Morgan & Co., The Chase Manhattan
Bank, Bank One , Manufacturers Hanover Trust Co ., Chemical Bank , The First National Bank of
Chicago , National Bank of Detroit , The Bear Stearns Companies Inc ., Robe rt Fleming Hold ings,
Cazenove Group were acquired in different business transactions , tying them all to increase
innovation and develop financial growth in the US but also other global economies.13

J.P. Morgan is suppling its services to the world's most i mportant corporations, governments and
institutions in a hundred and more countries around the world, making its self a global leader in
financial goods. The worldwide leader in financial services gives up to US$200 million annually
to nonprofit organizati ons and also engages its employees in volunteer service activities in local
communities, offering expertise, access to capital and other resources.

In the table below a short time line for J.P Morgan Chase & Co is presented, highlighting the
main events that influence the company’s activity and the chronological development of it,
which after many years and a lot of merges with other important banks or financial institutions
became one of the largest bank in the world.

13 https://www.jpmorganchase.com/corporate/About -JPMC/our -history.htm

33
Table 3: History of J.P Morgan Chase & Co

Source: https://www.jpmorgan.com/global/company -history

The management of the company works on business basis. The business is spread in four
different segments: Consumer &Community Banking, Corporate & Investment Bank,
Commercial Banking and Asset & Wealth Management (formerly Asset Management), with an 1799 The Manhattan Company, the firm ’s earliest predecessor institution, is chartered.
1824 The Chemical Bank is established.
1848 The Waterbury Bank opens, a predecessor of the Chase Manhattan Bank.
1871 J. Pierpont Morgan and Philadelphia banker Anthony Drexel form a private merchant banking partnership
in New York called Drexel, Morgan & Co. This is the earliest partnership that evolves into J.P. Morgan.
1893 J.P. Morgan is primary financier of U.S. railroads.
1895 J. Pierpont Morgan, Sr. becomes senior partner. The New York firm is renamed J.P. Morgan & Co.
1901 J.P. Morgan creates the world’s first billion -dollar corporation by buying out industrialist Andrew
Carnegie and combining some 33 companies to create United States Steel.
1903 J.P. Morgan & Co. was appointed as fiscal age nt for the newly independent Republic of Panama in 1903
and was subsequently selected by the U.S. Treasury Secretary to arrange the transfer of $40 million from
the U.S. government to the French Panama Canal Co. This was the largest real estate deal at the time.
1906 J.P. Morgan is central to the creation of U.S. Steel, GE and AT&T.
1907 During the financial panic of 1907, J. Pierpont Morgan saves several trust companies and a leading
brokerage house from insolvency, bails out New York City, and rescues the New York Stock Exchange.
1915 J.P. Morgan arranges the biggest foreign loan in history – a $500 million Anglo/French loan.
1927 Guaranty Trust Company, a predecessor firm of J.P. Morgan, pioneers the concept of American
Depositary Receipts (ADRs), wh ich enables Americans to invest in foreign securities directly on U.S.
exchanges.
1929 Two Ohio institutions merge to form City National Bank & Trust, a predecessor of Bank One.
1955 Chase National Bank merges with The Bank of the Manhattan Company to fo rm Chase Manhattan Bank.
1968 The firm launches Euroclear, a system for the orderly settlement of transactions in Eurobonds.
1973 Chase opens a representative office in Moscow, the first Russian presence for a U.S. bank since the
1920s; Chase also becomes the first U.S. correspondent to the Bank of China since the 1949 Chinese
revolution.
1980 Predecessor firm Hambrecht & Quist (H&Q) takes Apple Computer public.
1989 J.P. Morgan ranks among Fortune’s 50 Best Companies for Minorities. The firm is regularly recognized
as a leading employer of women, minorities, and LGBT employees.
1990 J.P. Morgan plays an active role in the negotiations with Mexico to restructure nearly $50 billion in
medium – and long -term commercial bank debt. A first in the mark et, the new bonds become known as
Brady Bonds.
1996 The firm jointly leads the first “century” bond for a sovereign borrower – a 100 -year, $100 million issue
for the People’s Republic of China.
2000 J.P. Morgan merges with The Chase Manhattan Corporation and is named JPMorgan Chase and Co. Four
years later, the company merges with Bank One, creating a global financial services leader.
2008 JPMorgan Chase & Co. acquires The Bear Stearns Companies Inc., strengthening its capabilities across a
broad range o f businesses, including prime brokerage, cash clearing and energy trading globally.
2010 J.P. Morgan Cazenove becomes a wholly -owned part of J.P. Morgan, having originally operated as a joint
venture between J.P. Morgan and the U.K. investment bank Cazenove.
2011 J.P. Morgan celebrates the 90th anniversary of the firm’s presence in China

34
additi onal segment that refers to the corporate side. The classification of business segments is
formed by dividing the types of products and services provided or the type of customer served,
presenting to shareholders the financial information in an accurate ma nner.
The previous table exemplifies t he basis line of business. As presented below, there are four
major business segments Consumer & Community Bankin g, Corporate & Investment Bank,
Commercial Banking and Asset & Wealth Management . The investment banking unit at JP.
Morgan Chase, it is classified in top 5 of the world investment banks.

Figure 9. The business segments

Source: Annual Report 201614

Table 4: J.P. Morgan: general information

14 https://www.jpmorganchase.co m/corporate/About -JPMC/document/shorthistory.pdf Type Subsidiary
Industry Investment banking, commercial banking,
asset management
Founded 1871
Founder J.P Morgan
Fate Merged with Chase Manhattan Bank in
2000
Headquarters New York City, New York, US
Parent JPMorgan Chase
Number of employees 26,314 (2010)

35

Source: Wikipedia15
J.P Morgan is a worldwide known for its investment banking services such as offering strategic
advice and solutions, capital raising, risk management, and trade finance services to
corporations, institutions and governments. The following table below will present a detailed
description of its service portfolio.
Table 5: J.P. Morgan: service portfolio
Mergers & Acquisitions Investment Bank
Industry Coverage Origination, Equity & Debt Capital Markets Corporate Finance Advisory
 In-depth knowledge of
sector and market
dynamics with M&A
bankers based locally
in every major market
globally
 Innovative advice on
valuation, transaction
structures and deal
tactics/negotiations
 Rigorous execution
delivered with
responsive and agile
service
 Comprehensive
financing th rough our
debt and equity
issuance platforms
 Ability to partner with
product experts where
appropriate across our
full range of
competencies
(derivatives, treasury
services, escrow
services and others)
Large portfolios with
clients from the
whole world:

 Consumer &
Retail
 Diversified
Industries
 Energy
 Financial
Institutions &
Governments
 Financial
Sponsors
 Healthcare
 Real Estate &
Lodging
 Technology,
Media &
Telecom Equity Capital
Markets Debt Capital
Markets Syndicated and
Leveraged Finance  Product -agnost ic advice to
help drive value -enhancing
decisions, across all products,
sectors and markets
 One of the largest and most
experienced ratings advisory
teams globally
 Solutions, developed with
various specialized product
groups, that take into account
each cl ient’s tax, accounting,
regulatory and financial goals
and concerns
 Bank advisory solutions
incorporating proprietary risk
models and actionable
solutions that satisfy reporting
and capital requirements
 Initial Public
Offerings
 Follow -on
Common Stock
Issues
 Convertible
Issues
 Private
Placements
 Serving
corporate,
institutional
and
government
clients
 Debt
origination
and
structuring
expertise
 Making an
acquisition
 Effecting a
buy-out
 Repurchasing
shares or
funding a
one-time
dividend or
investment
 Arranges
leveraged
loans
(high -yield or junk
bonds and
mezzanine debt for
clients)

Source: https://www.jpmorgan.com/global/about/investment -banking

The Corporate & Investment Bank (CIB) of J.P Morgan leaded by CEO, Daniel Pinto,
consistently increased or maintained their position keeping up with the market newest trends,
avoiding content attitudes and embracing all challenges with professionalism and high standards
in the industry. Due to these principles CIB has gained excellent results in 2016. The earnings

15 https://ro.wikipedia.org/wiki/J._P._Morgan

36
recorded were $10.8 billion, which is 34% up compared with 2015, and in total revenue reflects
a gain of 5% over the previous year, $35.2 billion. The result showed a superior r eturn on equity
(ROE) of 16% on a capital base of $64 billion. During 2016, the fixed income businesses shown
a ROE above the cost of capital.

Its activity on capital markets generated a record of $2.3 billion of gross investment banking
revenue, but it already had an impressive activity on shared client businesses and its estimated
that over time the company can reach about $3 billion.

On the human resources side, they started investing in innovative trading tools and scalable
platforms which will aid the customers and will bring a high percentage of efficiency in
relationship with them. Overall the managers try to focus on innovation and strategic investments
which will boost the profitability growth in the next year, so they invest for the future.

J.P Morgan based a lot of the employee’s talent and performance, they are always looking to hire
the best bankers from the worldwide. Since 2014, they have hired 60 professional investment
bankers from which 40 were directors or managers which brought a lot of experience and
relations.

J.P Morgan managed to make a very good deal in 2016, they lead the financial advisor Dell Inc.
and Silver Lake partners on Dell’s $67 billion acquisition of EMC Corporation, the largest
technology transaction in history. As J.P Morgan was the financing coordinator on Dell’s $49.5
billion of committed financing associated with this transaction.

3.1.2 G eneral data: Goldman Sachs

The Goldman Sachs Group, Inc. is a leader in global investment banking, securities and
invest ment management firm. The bank offers a substantial diversified services to a wide range
of clients such as corporations, financial institutions, governments and individuals. The public
institution was founded in 1869 and has its headquartered in New York, but also offices spread
around the globe.

37

Providing services over the world, having an important portfolio of clients such as: high net
worth individuals, financial institutions, governments and corporations . Since 1999 they tried to
develop their activ ity on the global market because of the potential growth on the international
markets, having offices in 23 countries and over 13.000 employees outside the United States
where is situated their main office. In present, they activate in more than 73 countri es.

Table 6: Goldman Sachs: general information
Type Public company
Industry Financial Services
Founded 1896
Founder Marcus Goldman, Samuel Sachs
Headquarters 200 West Street, Manhattan, New York City, New York, U.S.
Area served Worldwide
Products  Asset management
 Commercial banking
 Commodities
 Investment banking
 Investment management
 Mutual funds
 Prime brokerage
Operating income US$37.71 billion (2016)
Net income US$10.30 billion (2016)
Total assets US$7.40 billion (2016)
Total equity US$860.1 billion (2016)
Number of employees 34,400 (2016)

Source: Wikipedia16

Nowadays, Goldman Sachs bank is administrated by Loyd C. Blankfein Chairman and Chief
Executive Officer, David M. Solomon President and Co -Chief Operating Officer and Harvey M.
Schwartz President and Co -Chief Operating Officer. The investment banking franchise have
more than 8000 clients on different industries from appr oximately 100 countries.

16 https://ro.wikipedia.org/wiki/Goldman_Sachs

38
In 2016 Goldman Sachs investment banking was ranked as first in global announced and
completed mergers and acquisition, remaining committed to providing financial products and
services across different regions, that has a leadin g platform to customers` satisfaction and
encompassing fixed income, currencies, commodities client execution and equity franchises.

This year, Marcus: By Goldman Sachs was launched, which is a lending platform made to
provide consumer clients with an al ternative to higher -interest rate credit card debt. The
development of digital finance and the past technological focus of the company, together with
risk management gave Goldman Sachs tons of opportunities, adding value to the firm.

While technology rep resents every part of its business, Goldman Sachs invests a lot in the
Marquee platform, which is group of applications for the institutional customers. This platform
gives the possibility of the clients to have access at the market makers used by the bank to see
the analysis and risk management tools.

Technology was applied in the recruiting process too, which makes easier the evaluation of the
candidates. For example, the first round of the interview consists in video interviews this is an
opportunity f or people from other countries to try to apply.

This year, there were already made interviews in which participated candidates from more than
900 schools therefore increased the number for the previous year. Goldman Sachs drawing
attention with their int ernships programs, which had 130.000 applicants for just 5.000 places.
The is a lot of publicity on good working conditions by employees and magazines.

However, the company is very strict in terms of employment being interested only of talents with
backgrounds in math, engineering, technology and science, just to make sure that they are
working with the best of the best in the field, also providing trainings after employment.

The company reports activities in f our business segments: Investment Banking, Institutional
Client Services, Investing & Lending and Investment Management.

39
The investment banking division in 2015 represented 21% of the total company revenues which
is a very significant percentage of the to tal revenues. This division includes financial advisory
and underwriting which are presented in the table below .

40
Table 7: Goldman Sachs: Investment banking

Source: Annual reportSERVICES INDUSTRY SECTORS
Mergers & Acquisition Financing Consumer retail
and healthcare Financial
institutions Financial and
strategic
investors Industrial
(in-depth
transaction
expertise) Municipal
finance Natural
resources Real estate Technology, media
and
telecommunication
s
Longstanding market leader
in M&A advice
 sell-side advice
 raid and activism
defenses
 cross -border M&A
 special committee
assignments
 complicated merger
transactions  Corporate
Derivatives
 Corporate
Finance
Solutions
 Latin America
Financing Group
 Equity Capital
Markets
 Investment
Grade Capital
Markets
 Leveraged
Finance Capital
Markets
 Liability
Management
 Strats
 Structured
Finance Serves clients
across a wide
range of consumer
and retail
industries:
 drug stores
 education
 e-commerce
 branded and
processed
foods
 beverages
 home and
personal care
products
 restaurants
 industries
including
biotechnology Financing and
advisory services
to institutions
worldwide:
 insurance
companies
 banks
 asset
management
firms
 financial
technology
companies
 specialty
finance
institutions. Provides
advisory and
investment
banking services
to:
 institutions
 private
equity
firms
 pension
funds
 sovereign
wealth
funds
 family
offices
 other
investors These
industries
include:
 aerospace
and
defense
 automotiv
e
 building
and
constructi
on
 business
services
 capital
goods
 transporta
tion and
infrastruct
ure Offers:
 tax-
exempt
and
taxable
bond
underwri
ting
 private
placeme
nts
 loans
 interest
rate
derivativ
es
 public
private
partnersh
ips Clients in:
 energy
 power
 infrastruct
ure
 chemicals
 metals
and
mining
and
alternative
energy
fields. Provides:
 financing
and
services to
clients
about wide
range of
real estate –
related
facts
 helps our
clients raise
capital for
their
projects
 commercial
-mortgage –
backed
securities
 leveraged
financing Includes
industries:
onics
 fware
 Internet
 Wireless
 media
 cables
companies.
Transactions as:
 Mergers and
acquisitions
 Divestitures
 Debt
underwriting
 Hybrid
instruments
 Risk
management
 Credit
advisory Provide advice on a full
range of transactions:
 mergers
 sales
 acquisitions
 leveraged buyouts
 raid defenses
 joint ventures
 spin-offs
 divestitures and other
restructurings Clients are
assisted during
the whole
lifecycle of
their
investments.

41
Goldman Sachs is part of the leading M&A advisory companies, frequently in top of
Thomson Financial league tables in si zes of transactions. The firm go t a good reputation
in the mergers and acquisitions segment as it prevents its clients from hostile
incorporations and takeovers. Since 1980, Goldman Sachs was among the only investment
bank with a strict policy regarding initiation of unfavorable mergers and this has increased
the banks reputation in the business world management team back then.

3.2 STRUCTURES OF RE VENUES AND EXPENSES

J.P. M organ Chase & Co and Goldman Sachs Group, Inc. go way back in history,
nowadays they are 2 of the most respected banks in investments and brokerages.

JPMorgan has been associated with investment banking for many years now and its
consume and commercial se gments have remained almost less than half of the institutions
business, since its merge with Chase Bank.

Graph 1. The business lines in J.P Morgan

(Author`s projection)

0 20,000 40,000 60,000 80,000 100,000 120,000
Consumer &
Community
Banking Corporate &
Investment
Bank Commercial
Banking Asset &
Wealth
Management Corporate Total Business lines for J.P Morgan

42
However, with the impact of the recession, Goldman has decided to become a “bank
holding company”, operating on majority as an investment bank firm, having similar
operations to JP Morgan. Despite the similarities the two ends up in different parts of the
industry, Goldman being in the Securities Brokerage Industry and JPMorgan in the Bank
Industry. JPMorgan’s report is built for a consumer, corporate, commercial, management
banking business model.

Graph 2 . The business lines of Goldman Sachs

(Author`s p rojection)

Goldman’s portfolio is based on a securities investment -focused business model; however,
it has a dependency on trading revenues , which as a general rule happens when equities
are thriving . This phenomenon marks the company as unsustainable because of its cyclical
streams in revenue.

If JP Morgan and Goldman Sachs are compared, statistics show both are having some
strong numeric indicators. Goldman Sachs has generated $6.273 billion in revenue from
investment banking while its investment man agement side generated a record $5.788
billion. JP Morgan has focused on commercial banking where it has generated about
$44.915 billion. 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Investment
Banking Institutional
Client Services Investing &
Lending Investment
Management Total Business lines for Goldman Sachs

43
If these two large banks are compared, it can be seen that the net revenues differ, as it is
presented below J.P Morga n has a net revenue of $99.142 billion because it includes also
different types of financial services, but also more subsidiaries. In the below graphic
representation the difference between the two can be seen, as JPMorgan’s values are
visually higher. As the of 2016, JP Morgan has a total net revenue of 99,142.00 (dollars in
millions), while Goldman Sachs has 30,608.00.

Graph 3 . J.P. Morgan vs Goldman Sachs: total net revenue

(Author`s projection)

Graph 4 . J.P. Morgan vs Goldman Sachs: total assets 99,142
30,608
2016 J.P MORGAN GOLDMAN SACHS Total net revenue
2016 2,490,972
860,165
YEAR TOTAL ASSETS (J.P
MORGAN) TOTAL ASSETS
(GOLDMAN SACHS) Total assets

44

(Author`s projection)
Looking at the total assets JP Morgan reaches 2,490,972.00 (dollars in millions) and
Goldman 860,165.00. Comparing the net interest income, it can be observed that the
difference is again quite high, because Goldman Sachs focus on in vestment not on earning
revenues from interest.

Graph 5 . J.P. Morgan vs Goldman Sachs: net interest income

(Author`s projection)

The following graph, presents the non -interest revenues, J.P Morgan having a value of
24,326 million $ and Goldman Sachs 28,021 million $. Goldman Sachs bank focuses more
on additional activities and not on giving credits .

For J.P Morgan non -interest expe nse was $21.4 billion, having a down fall of 8%
compared to the previous year. Thi s decrease was caused by the way business functioning
has developed, creating easier ways to maintain its self, but also because of lower legal
and compensation expenses. 0 2,000 4,000 6,000 8,000 10,000 12,000
2016 2015 2014 Net interest income
Net interest income ( Goldman Sachs) Net interest income ( J.P. Morgan)

45

Graph 6 . J.P. Morgan vs Goldman Sachs: total non -interest revenues

(Author`s projection)

Graph 7 . J.P. Morgan vs Goldman Sachs: non -interest expenses

(Author`s projection) 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
2016 2015 2014 Total non -interest revenues
Non-interest revenues ( Goldman Sachs) Non-interest revenues ( J.P. Morgan)
0 5,000 10,000 15,000 20,000 25,000 30,000
2016 2015 2014 Non-interest Expenses
Non-interest expenses ( Goldman Sachs) Non-interest expenses ( J.P. Morgan)

46

At Goldman Sachs, overhead expenses are not allocated on specific segments, they go to a
directly on a general expense segment. The total operating expenses which also adds net
provisions for litigation and regulatory proceedings has a figure of $396 million in 2016,
$4.01 billion for 2015 and $754 million for 2014. $3.37 billion was related to the
settlement agreement with the RMBS Working Group from the $4.01 billion from 2015.

Below are presented all the operating expenses on all the segments except the CS R
expenditures with charitable donations or other sponsored events, which contribution was
in 2016 of $114 million.

Graph 8 . J.P. Morgan vs Goldman Sachs: operating expenses

(Author`s projection)

J.P Morgan registered in 2016 provision credit losses of $531 million and in the previous
year $332 million, this year was reflected a higher growth of credit losses, which included 0 2,000 4,000 6,000 8,000 10,000 12,000 Investment Banking Institutional Clinet Services Investing & Lending Investment Management Operating Expenses 2016
Goldam Sachs

47
the impact caused by downgrades in the oil & gas portfolio. For Goldman, the provision
losses graph shows $3.37 billion from the RMBS agreement.
Graph 9 . J.P. Morgan vs Goldman Sachs: provision losses

(Author`s projection)

3.3 PERFORMANCE ANAL YSIS

Further the focus will direct on the performance analysis of these two companies, showing
values from 2016 that compare different types of indicators to reflect the financial position
which is important for all shareholders and interested parties. Starting with the return on
assets for Goldman, which indicates what earnings were generated from invested
capital (assets).

On the other hand , ROA provides a good image on how profits are pull ed from assets and
projects the management choose to invest in. The ratio also provides a look into the net
margins and asset turnover that are two key performance drivers. ROA is one fundamental
indicator in analysis that helps investors search for opport unities in stock, while
minimizing the risk of bad investments.

In this particular case, for comparing a company against another, the ROA ratio might not
be the most useful from one point of view, as this ratio takes into account the assets on the 0 1000 2000 3000 4000 5000
2016 2015 Provisions Losses
J.P Morgan Goldman Sachs

48
balance sheet that do not show people, ideas or strategy just amounts. Some companies
might be more profitable and effective on the market, but may be lighter in assets.

Figure 10. Performance indicators Goldman Sachs: ROA & ROE

(Authors projections)

ROA=3,55
30,608/860,165 × 100
Net income= $30,608
million

Total assets= 860,165
𝑅𝑂𝐴=(𝑁𝐸𝑇 𝑃𝑅𝑂𝐹𝐼𝑇)/(𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠)×100

𝑅𝑂𝐸= (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒)/( 𝑆 𝑎𝑟𝑒 𝑜𝑙𝑑𝑒𝑟^′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
)×100
Shareholder's equity = $86,893 million

Net income= $30,608 million
30,608/86,893 × 100

ROE=35,22

49

Figure 11. Performance indicators J.P Morgan : ROA & ROE

(Authors projection)

When analyzing ROE, it is seen how efficient was the capital invested by the
shareholders. If the ROE result is low, the company will not be able to provide the
ROA=3,98
99,142/2,490,972 × 100
Net income= $99,142 million

Total assets= $2,490,972 million
𝑅𝑂𝐴=(𝑁𝐸𝑇 𝑃𝑅𝑂𝐹𝐼𝑇)/(𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠)×100

𝑅𝑂𝐸= (𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒)/( 𝑆 𝑎𝑟𝑒 𝑜𝑙𝑑𝑒𝑟^′ 𝑠 𝐸𝑞𝑢𝑖
𝑡𝑦)×100
Shareholder's equity = $254,190 million

Net income= $99,142
million
99,142/254,190 × 100

ROE=39

50
investors return. Analysis show that if the value of this ratio is less than 12 -14% the result
does not reach expectations, nor any satisfaction, ma ny times having excessive debt
issues. If the company shows a ratio which is over 20% than for sure the result will be
profitable.
Table 8: EPS comparison 2016 & 2015
2016 2015
J.P.
Morgan Goldman
Sachs J.P.
Morgan Goldman
Sachs
Revenue
(m) $90,307 $30,608 $89,716 $33,820
EPS 6.19 16.29 6 12.14
Dividends 1.88 2.6 1.72 2.55

(Authors projection)

For seeing how much of the net result produces a share in the course of financial exercise
the Earnings per share ratios are compared for the both companies. This ratio is important
for the majority shareholders and investors on the long -term analysis of the company’s
results, which will ensure the premises of growth of market value. F rom 2015 to 2016
both companies have experienced growth in this area. Goldman Sachs has revealed an
increase by 4.15 from one year to another, while J.P. Morgan’s growth was slightly
smaller going up with only 0.19. Reporting dividends to the EPS, it is cl ear that J.P.
Morgan has a more profitable business as the dividends and EPS are close in value, having
a 6.19 EPS compared to 1.88. On the other hand, the Goldman Sachs has quite a
difference between the two, reporting only a 2.6 dividend value to a 16.29 EPS.

Graph 10. J.P. Morgan vs Goldman Sachs: EPS & Dividends
0 5 10 15 20
J.P. Morgan Goldman Sachs J.P. Morgan Goldman Sachs
2016 2015 EPS and dividends comparison
EPS Dividends

51

(Authors projection)
Table 9: PER comparison 2016
PER 2016
J.P. Morgan Goldman
Sachs
Share value 86.57 223.23
Price to earnings
ratio 13.99 13.70

(Authors projection)

Price/Earnings Ratio is a widely used stock evaluation measure, precisely this ratio shows
current investor demand for a company share . A high ratio can indicate increased demand
because of the previsions may show a future growth.

Theoretically, for an i nvestor, a smaller PER is more convenient, because it means a faster
recovery through the profit of the investment made initially. However, the PER depends a
lot on the price per action and it depends on the market expectations of the company or the
sector of activity .

Taking the results for the PER ratio for the two companies it can be seen that both values
are quite similar, even though the price per share at 2016 -year don`t have close values, J.P.
Morgan $86.57 and Goldman $223.23, it’s the EPS that mak es the impact .

Graph 11. J.P. Morgan vs Goldman Sachs: PER & Share value
– 50.00 100.00 150.00 200.00 250.00 Share value Price to ernings ratio PER & Share value
2016 2016

52

(Authors projection)

Table 10: PBR comparison 2016
PBR 2016
J.P. Morgan Goldman Sachs
Share value 86.57 223.23
Share book
value 64.06 182.47
Price to book
ratio 1.35 1.22

(Authors projection)

The Price/Book ratio compares the share price with the bank's supporting financial
condition and shows how the shares are being priced, aggressive or carefully. High
differences between the company price per share and the book values are often caused by
over or under valuation. Very high values at the PBR ratio can be a result of either huge
potential of the company or just a very optimist business model. On the other side, a low
ratio result can be a sign of financial or organizational issues that might be faced.

Graph 12. J.P. Morgan vs Goldman Sachs: PBR

(Authors projection) 1.35 1.22 Price to book ratio
2016 J.P. Morgan 2016 Goldman Sachs

53

Table 11: PBR for the largest U.S. Banks
$ Per share Current
Price Book Value P/B
Ratio
U.S. Bancorp 41.03 23.82 172%
Wells Fargo 48.19 34.62 139%
JPMorgan
Chase 63.04 61.29 103%
Goldman Sachs 154.81 173 89%
Morgan Stanley 26.47 35.33 75%
Citigroup 44.81 71.47 63%
Bank of
America 14.46 23.12 63%

(Authors projection)

Taking into account the current 2017 report of the PBR ratios, according to the US
Bancorp statistics, the two banks, both J.P. Morgan and Goldman Sachs have almost tight
results, situated in the middle on the classification with a valid PBR, that indicate s that
their price is not over/under estimated.

CONCLUSIONS

Acum lucrez la ea

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