Southwest State Bank Case - Profitability/Swot Analysis

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According to the calculated ratios in Table-1, SSB had the following major trends in profitability during the time of 1991 to 1993: Decreasing return on equity (ROE) – shareholder return Gradual & unsteadily decreasing return on assets (ROA) – managerial efficiency Decreasing net non interest margin ? less profit earned on non-interest banking components Increasing earnings spread ? have established effective processes of borrowing and lending money with little immediate threat of competitors Unfavorably increasing operating efficiency ratio – there is an excess of operating cost in relation to operating revenues generated by SSB. Declining credit risk/depositor risk ? decline of bad loans, increased market values of good loans relative to amount of deposits. Increasingly higher interest rate risk – meaning that there is about 30% of excess interest sensitive assets compared to interest sensitive liabilities. SSB’s Major Strengths and Weaknesses in Terms of Profitability at Year-End 1993 According to the calculated ratios in Table-1, SSB had the following strengths and weaknesses. Strengths: Slightly increasing net interest margin (NIM): This indicates favorable control and management of interest income and interest expenses, in relation to SSB’s total assets. Increased earnings spread: This indicates that SSB has established effective borrowing and lending processes. This also indicates a period of non-increasing competition, so SSB can continue to operate on this strength for a little while. Consistently steady asset utilization ratio: This reflects a consistent portfolio management policy, considering the yield and mix on SSB’s assets. When compared to the industry average for SSB’s local area, management can determine if any changes should be made in this area. Weaknesses: Decreased return on equity (ROE): which

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