Capital Adequacy
Capital adequacy is vital to a bank’s financial stability and health. It gauges a bank’s capacity to withstand losses and keep a safe level of capital to fund operations. The capital adequacy ratio (CAR), a crucial metric for assessing a bank’s capital status, is employed. The CAR is determined by dividing the bank’s capital by risk-weighted assets. For most nations, 8% is the minimum regulatory standard for CAR (Smith, 2023).
A good capital position is indicated by the bank’s capital adequacy ratio of 19.8% in the instance of Česká Spořitelna (Česká Spořitelna, n.d.). This shows that the bank has ample cash to cover losses, weather economic downturns, and continue lending operations. Česká Spořitelna is better positioned to absorb credit losses, offer liquidity, and support expansion when it has a higher CAR.
Comparatively speaking, Bank of America has a capital adequacy ratio of 12.6% higher than the legal minimum (BAC, n.d.). This demonstrates that the bank has sufficient capital to pay out potential losses and keep its doors open. However, Bank of America’s capital position is comparatively lower when compared to Česká Spořitelna.
Asset Quality
The stability and health of a bank’s finances heavily depend on its asset quality. It speaks to the caliber of a bank’s holdings, such as its loans and investments, and the chance that those holdings would eventually produce cash flows. The non-performing loan (NPL) ratio is the most often used indicator for assessing the asset quality metric.
A 2.7% NPL ratio indicates that just 2.7% of the total amount of loans held by the bank are non-performing, according to Česká Spořitelna (n.d.). This NPL ratio is relatively low, which suggests that the asset quality is substantial. A low NPL ratio is generally seen favorably since it shows that the bank has a lower risk of loan losses and is better prepared to manage credit risk.
On the other hand, the NPL ratio for Bank of America is 0.48%, demonstrating an even higher level of asset quality (Ghatasheh et al., 2020). Accordingly, only 0.48% of the bank’s overall loan portfolio is non-performing (Ghatasheh et al., 2020). This low NPL ratio demonstrates Bank of America’s ability to manage credit risk and recover loans.
Management Quality
The Management Quality metric evaluates a bank’s leadership, governance, and risk management processes. Additionally, it assesses the bank’s governance framework, internal controls, and risk management procedures. According to Ghatasheh et al. (2020), the bank Česká Spořitelna received a high rating for its management quality.
The bank has a well-defined governance structure, with a Board of Directors in charge of regulating the management and activities of the bank. The Board’s diversity of experiences and specialties ensures that choices made by the bank are made with a broad viewpoint (Ghatasheh et al., 2020). The bank also has robust risk management procedures, such as a risk management committee that recognizes, evaluates, and reduces risks.
Bank of America is an excellent example of a bank with suitable management procedures. With various skills and experience, the bank’s Board of Directors supervises management and operations. A risk management committee is tasked with locating, evaluating, and reducing risks as part of the bank’s risk management strategy (Ghatasheh et al., 2020).
Additionally, the bank’s internal solid control architecture includes ongoing audits and evaluation of its procedures. The bank’s code of conduct outlines its ethical standards and the demands of its employees. To guarantee that these standards are upheld, the bank offers training and education programs to all its staff members.
Earnings
Earnings are an essential statistic for evaluating the success and health of a bank’s finances. Return on assets and return on equity are two metrics that can be used to assess a bank’s profitability. While ROE gauges a bank’s capacity to generate returns for its shareholders, ROA gauges how effectively a bank uses its assets to generate profits. The ROA and ROE of Česká Spořitelna, respectively, are 0.85% and 10.7%, according to Česká Spořitelna (n.d.).
According to these findings, Česká Spořitelna effectively uses its assets to create profits and gives its shareholders a sufficient return. The bank’s ROE is marginally above average, while its ROA is comparable to the industry average. The ROA and ROE of Bank of America are 1.4% and 12.6%, respectively (Ghatasheh et al., 2020).
These findings suggest that Bank of America uses its assets to create profits more effectively than Česká Spořitelna. Additionally, Bank of America offers its shareholders higher returns than Česká Spořitelna. The bank is doing well compared to its competitors because its ROA and ROE are higher than the industry average.
Liquidity
Liquidity is a vital indicator of a bank’s financial health, quantifying its capacity to fulfill its immediate obligations. The two main metrics used to assess a bank’s liquidity are the net stable funding ratio (NSFR) and the liquidity coverage ratio (LCR). The bank’s LCR is 173%, according to Ledhem and Mekidiche (2020), which shows that Česká Spořitelna has strong liquidity. This indicates that, even under pressure, the bank can comfortably satisfy its short-term obligations.
Conversely, the Bank of America has a relatively strong liquidity position, although not as strong as Česká Spořitelna. It has an LCR of 124%, which is still above the regulatory requirement of 100%, indicating that the bank can cover its short-term obligations under stressed conditions (Ghatasheh et al., 2020). However, compared to Česká Spořitelna’s LCR of 173%, Bank of America’s LCR is lower, which suggests that Česká Spořitelna has a stronger liquidity position (Ghatasheh et al., 2020). It is worth noting that the LCR is just one measure of liquidity, and other factors can impact a bank’s liquidity position.
Sensitivity to Market Risk
The CAMELS examination, which assesses the bank’s exposure to several types of market risk, including interest rate and credit risk, includes a crucial component called sensitivity to market risk. To retain its financial stability in the face of turbulent market conditions, the bank must be able to manage and monitor these risks (Ghatasheh et al., 2020). Banks determine their net interest income (NII) sensitivity to interest rate changes to quantify the sensitivity to interest rate risk. The bank is more exposed to interest rate risk if the NII sensitivity increases.
Bank of America and Česká Spořitelna have extensive risk management processes that track and control market risk. The bank’s net interest income, with an NII sensitivity of 0.5%, is usually consistent even when interest rates change, according to Ledhem and Mekidiche (2020). According to the bank’s total assets, its credit exposure is only CZK 240 billion, which is comparatively modest (Česká Spořitelna, n.d.). According to the bank’s 17.5% credit risk capital ratio (Česká Spořitelna, n.d.), it has enough capital to cover potential credit losses.
In comparison to Česká Spořitelna, Bank of America has a higher NII sensitivity, 2.6%, as of 2021 (Česká Spořitelna, n.d.). However, the bank’s exposure to credit risk is $873 billion, which is considerable compared to its overall assets (Česká Spořitelna, n.d.). Despite this, Bank of America has a 13.2% credit risk capital ratio, which shows it has enough capital to withstand any possible credit losses (Ghatasheh et al., 2020). Both banks can typically manage losses effectively without having their operations jeopardized.
References
Bank of America. (n.d.). Investor relations: Bank of America Corporation. Web.
Česká Spořitelna. (n.d.). Personal Finance. Web.
Ghatasheh, N., Faris, H., AlTaharwa, I., Harb, Y., & Harb, A. (2020). Business analytics in telemarketing: cost-sensitive analysis of bank campaigns using artificial neural networks. Applied Sciences, 10(7), 2581. Web.
Ledhem, M. A., & Mekidiche, M. (2020). Economic growth and financial performance of Islamic banks: A CAMELS approach. Islamic Economic Studies, 28(1), 47-62. Web.
Smith, V. (2023). Managing in the corporate interest: Control and resistance in an American bank. University of California Press.