Assignment: Do a Bank Performance & Risk Analysis for Great Western Bank
Overview: At the time of this case in 2021, Great Western Bank’s holding company was Great Western Bancorp, Inc. Great Western Bank is a regional bank headquartered in Sioux Falls, South Dakota in the United States. It has 170 locations in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. The Bank was established on 08/15/1935, and is currently in Peer Group 2, commercial banks with assets between $10 billion and $100 billion. Great Western Bank has total assets of $12.988 billion. The number of banks in its Peer Group 2 (PG2) for comparison on its Uniform Bank Performance Report (UBPR) is 112 banks. Great Western is primarily a Real Estate Lender with 63.82% of its loans real estate loans, 9.03% agricultural loans, 16.80% commercial & industrial loans, 8.43% municipal loans, 1.41% non-depository and other loans, and just 0.51% loans to individuals (consumer) loans.
Later as of Feb. 1, 2022, Great Western Bank was acquired and became a division of First Interstate Bank, a Financial Holding Company headquartered in Billings Montana.
The Financial Information for your Analysis from Great Western’s Uniform Bank Performance Reort (UBP$) is posted in Module 4 as an Excel Spreadsheet: “GreatWesternBKUBPR Spreadsheet.xlsx” The tabs on the Spreadsheet (EarningsProfitabilityAnalysis; Burden Analysis, NIM Analysis, Risk Analysis show the information you need for each section of the analysis:
Format for Great Western Bank’s Performance & Risk Analysis:
- Introduction: Give a brief introduction about Great Western Bank and the types of loans it makes including the percentages for different types of loans the Bank makes provided in the overview .
- Performance Analysis for 9/30/21 and 9/30/20 (Note all ratios are
you need are provided on the Excel spreadsheet under the tab “Earnings and
Profitability Analysis”—so no calculations are necessary except for
AU, NPM, and EM discussed in “C. Dupont analysis” below).
- OROA Trend Analysis for Great Western Bank. Use the information provided on the spread sheet in the first tab “ Earnings and Profitability Analysis: which is a common size income statement with each item as a % of average total assets.
In your analysis, explain why Great Western’s (BANK) OROA improved in 9/30/21 compared to 9/30/20 based on the trends for NIM (including trends in the IR% and IE% and type of funding gap the Bank has), Burden% (including trends in the NIR% and NIE%), and PLL%.
- OROA Peer Comparison for 9/30/21 and for 9/30/20. Explain why the OROA for the Bank versus the PG2 is different each year (including differences in NIM (IR% and IE%), their Burden % (including differences in NIR% and NIE%), and differences in PLL% between the Bank and the PG2 for each respective year. Based on this comparison, what strengths and weaknesses does Great Western Bank have compared to its peers in 9/30/21 ?
- OROA Trend Analysis for the Peers (PG2). explain why the PG2’s OROA improved in 9/30/21 compared to 9/30/20 based on the trends for NIM (IR% and IE%), Burden% (NIR% and NIE%), and PLL%. What type of funding gap does the PG2 appear to have over this period?
- Dupont Trend and PG2 Comparison Analysis: Calculate the Asset Utilization ratios (AU), Net Profit Margins (NPM), and Equity Multipliers (EM) and OROEs for the Bank and the PG2 for each year, based on the OROAs provided, and put them in a table. 1. Explain based on trends in NPM, AU, and EM why respectively the OROE for Great Western went up in 2021 and why the OROE went up for the PG2 in 2021. 2. For just 2021, compare the NPM, AU, and EM for Great Western to the PG2, and what strengths/weaknesses are revealed?
Calculation for AU & NPM & EM Example:
Suppose OROA is 1%, Tier 1 Leverage Capital is 8%,
IR% = 6% and NIR% = 1%, what are the AU, NPM, EM, and ROE for the Bank?
AU = IR% of 6% + NIR% of 1% = 7%.
NPM = ROA / AU as a fraction = 1% / .07 = 14.29%
EM = 1 /Tier 1 Capital as a fraction = 1 / .08 = 12.5
ROE = ROA x EM = 1% x 12.5 = 12.5%.
(Check: ROE = NPM x AU x EM = 14.29% x .07 x 12.5 = 12.5%)
- Burden Analysis (see tab “Burden Analysis” on the Excel Spreadsheet)
- Do a Trend Burden Analysis for Great Western Bank to explain why its Burden % improved in 9/30/21 by examining the trends in its overhead expense %, and respective personnel, occupancy, and other operating expense %s, and its trends in non-interest income, overhead less noninterest income, its efficiency ratio, and its per employee average expense, and assets per employee.
- Do a Peer Comparison Burden Analysis for respectively 9/30/20 and 9/30/21 to explain why Greater Western has a higher Burden % for each respective year than the PG2, by examining differences in the expense %s and other ratios described in A above. What weaknesses/strengths does this analysis reveal for Great Western vs. the PG2?
- Net Interest Margin (see the NIM Analysis Tab on the Excel Spreadsheet)
This analysis examines why the Bank’s NIM changed in 9/30/21 based on why its IR% and IE% changed and why the Bank’s NIM differs from its Peers (PG2).
- Margin Analysis:
- Earnings Assets and % of Net Loans & Leases: Explain how the change in earning assets and % net loans helps to explain why Great Western’s IR% fell in 9/30/21. Explain how the differences in the % earnings assets and % net loans help to explain why Great Western Bank has a higher IR% in 9/30/21 than the PG2.
- Ave Int. Bearing Funds % (i.e. % of Interest Bearing Liabilities): Explain how changes in the % of Average Interest Bearing funds helps to explain why Great Western’s IE% fell in 9/30/21. Explain how the differences in the % of average interest-bearing funds helps to explain why Great Western Bank has a similar IE% to the PG2 in 9/30/21.
B. Asset and Liability Rate Mix Effects
- Asset Mix: Looking at differences in asset mix and differences in Loan Mix, explain how these differences help to explain differences in the Bank’s IR% versus the PG2 and how it affected changes in the Bank’s IR% in 2021.
- Asset Rates: Looking at differences in loan rates, explain how these differences help to explain why the Bank’s IR% is different from the PG2 and how it affected changes in the Bank’s IR% in 2021.
- Liability Mix: Looking at differences in liability mix, explain how these differences help to explain differences in the Bank’s IE% versus the PG2 and how it affected changes in the Bank’s IE% in 2021.
- Liability Rates: Looking at differences in liability rates, explain how these differences help to explain differences in the Bank’s IE% versus the PG2 and how it affected changes in the Bank’s IE% in 2021.
- Risk Analysis: See the “Risk Analysis Tab” on the Excel Spreadsheet,
That shows the different risk ratios for each category of risk.
Do a respective credit risk analysis (looking at net loan losses, types of loans, and earnings coverage and other ratios provided , liquidity risk (on both the asset side, liability side, and off-balance sheet side), off balance sheet risk, capital risk, and interest- rate risk for Great Western Bank in 9/30/21 compared to the PG2, and
summarize which types of risk are less than or greater than the PG2.
- Summary/Conclusion: Based on your analysis above, give a summary of your profitability and risk analysis for Great Western Bank including strengths and weaknesses that you found in your analysis. Be sure to be consistent with your analysis that you did for summarizing why Greater Western Bank’s performance improved and its strengths and weaknesses compared to the PG2 in terms of both its performance and risks, and any suggestions for improvement.
