As in most other industries, bank profits tend to fall during downturns in the economy. However, other factors also affect bank profitability, such as regulation and competition, as well as the portfolio decisions bank managers make. Certain financial ratios crudely measure the amount of financial risk facing any particular bank or nonbank firm.
a. Visit S&P’s Market Insight database at www.mhhe.com/edumarketinsight and obtain data on three “Financial Risk” measures reported there for the industry “Sub-Group: Diversified Banks.” Compare these measures with the benchmark for that sub-group. In making your comparison, you will need to read the definitions for each of the financial risk measures. Which measures indicate that these banks are undertaking more financial risk than the benchmark against which they are being compared? Which suggest that these banks are undertaking less financial risk?
b. Using the S&P Market Insight database select two large banks that are familiar to you. Check to see if they are included in the industry sub-group that you examined in part (a).
c. Find the ticker symbol for the two banks that you chose in part (b) and go to the “Financial Highlights” for those particular banks. Obtain the same financial risk measures for those banks that you previously examined for the whole industry sub-group. Do the two banks you chose appear to be taking on more or less financial risk than the industry sub-group as a whole? Do all the financial risk measures paint a consistent picture of risk exposure? Or do the banks appear to be undertaking less financial risk according to some measures and more risk according to others?
