Calculations

As no recent literature about savings accounts was found, the data collection process and the methodology were designed by the researcher. Hence, the criterion elected to choose if an account will be reported in the database or not was that this type of accounts was present in most of the banks. Also, the “classic” bank accounts are the main accounts studied in this thesis for three reasons. The first one is the presence of these bank accounts or similar ones in almost every bank. The second reason is as they are very similar, they are easily comparable. The third and last one is that there is no restriction for the investors linked to their age or social status.

3.4. Calculations

Performance is a word that has several meanings, hence several ratios needed to be computed and compared to get a complete overview. The ratios chosen are based on the ones used in the two same reference articles evoked previously with some slights differences : return on average assets (ROAA), return on average equity (ROAE), loans to total assets, equity to total assets and several growth measures (total assets, loans, equity, and net income). All these ratios are percentages. The choice of ROAA rather than ROA and ROAE rather than ROE was made because ROAA and ROAE are better indicators for banks and financial institutions than ROA and ROE. This research study’s sub-section aims to define each ratio, why it can be used as a proxy for financial performance and how it can be calculated.

For each ratio, every year from 2014 to 2018 included, and an average of the five years was calculated. All the calculations were done on Microsoft Excel. In a concern of optimal accuracy, the growth ratios’ average over the five years was calculated by computing the growth rate between 2014 and 2018. For the other ratios a simple average of each year’s value was computed.

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The first ratio computed is ROAA. “The ratio shows how well a firm's assets are being used to generate profits. ROAA is calculated by taking net income and dividing it by average total assets. The final ratio is expressed as a percentage of total average assets” (Investopedia, 2019).

It can be calculated as net income divided by the average of the beginning and the end of the period total assets.

𝑅𝑂𝐴𝐴 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

This ratio also demonstrates the firm’s management efficiency. Lastly, ROAA is a good proxy of profitability which is one of the performance components.

The second ratio computed is ROAE. It is one of the most widespread measures. It is the most important profitability metric for shareholders, as it conceptually represents the profit each shareholder could technically get. “Return on average equity (ROAE) is a measure of financial performance calculated by dividing net income by shareholders’ equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROAE could be thought of as the return on net assets” (Investopedia, 2019).. It can be calculated as net income divided by the average of the beginning and the end of the period equity.

𝑅𝑂𝐴𝐸 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠⁷𝑒𝑞𝑢𝑖𝑡𝑦

This ratio is usually used in comparison to a benchmark or a comparison between two companies

The third ratio computed is loans to total assets. This metric aims to display banks’ contribution to the real economy. It also shows the level of diversification of its activities (lending and

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investing in financial markets). But this diversification is here a synonym of risks as universal banks (banks involved in both lending and investing on financial markets’ activities) can suffer from higher losses from “gambling” on financial markets rather than lending money to customers with a relatively small probability of default. It is calculated by dividing net loans by total assets.

𝐿𝑜𝑎𝑛𝑠 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝑁𝑒𝑡 𝑙𝑜𝑎𝑛𝑠 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Hence, this ratio is also used in comparison to other companies in the same industry. Banks which are only involved in lending activities will due to their structural difference with universal banks have a higher loan to total assets ratio. This rate is a complement of the previous ratios measuring the banks’ performance assessment as it also shows the banks’ solvency.

The fourth ratio computed is equity to total assets. It shows the portion of capital a firm has, in comparison to its total assets, and thus his ability to face unexpected losses. It also measures a firm’s financial leverage. It can be calculated by dividing equity by total assets.

𝐸𝑞𝑢𝑖𝑡𝑦 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

The higher this ratio the more secure the company is and the lower his probability of bankruptcy.

Unfortunately, in the banking industry, this ratio is usually quite low due to their ease to get loans from other commercial banks and central banks. Hence, this rate is also a measure of solvency and is an appropriate proxy for sustainability.

The four last ratios are growth ratios. Growth ratios demonstrate the change from a year to another and are short-term performance metrics. These ratios can also be used to assess a firm’s

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riskiness by showing inconsistent growth rates between years, especially if the rate’s sign varies often from positive to negative. A growth ratio is calculated in different ways depending on the previous and actual year’s value sign. If both values are positive or the previous year’s value is positive and the actual year’s value is negative, the growth rate is equal to the subtraction of the actual value by the previous value all divided by the previous value.

𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒) 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒

If both values are negative, the growth rate is the division of the previous year’s value by the actual value and then, minus one.

𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 =𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒 𝐴𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 1

Finally, if the previous year’s value is negative and the actual year’s value is positive, the growth rate is equal to the subtraction of the actual year’s value by the previous value, all divided by the previous year’s absolute value.

𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 =(𝐴𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒) 𝐴𝑏𝑠(𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒)

The various growth rates studied (total assets, equity, loans and net income) are performance indicators. The higher these ratios the more competitive the company is compared from the previous year or compared to its counterparts.

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