Keystone National Bank Analyses

Running head: KEYSTONE NATIONAL BANK ANALYSES
Keystone National Bank Analyses
Name
Institution

KEYSTONE NATIONAL BANK ANALYSES 2
Introduction
Analysing the financial performance of commercial banks is done to meet the
objectives of respective stakeholders. For instance, bank regulatory is interested in
understanding the financial challenges facing commercial banks and the measures that have
been put in place to counter them. Shareholders use financial performance analysis to
determine whether or not to invest with a bank. Lastly, banks also evaluate their financial
performance to develop sustainability goals and viable management decisions.
This report is divided into five sections. The first section analyses Keystone's relative
earning performance with its peers between 1989 and 1900 using financial profitability
rations. The second section analyses the financial risks undertaken by the bank to attain its
returns. The third section examines the Keystone's interest- sensitivity. The fourth section
evaluates Keystone's liquidity needs over the first quarter of 1991. The fifth section provides
specific recommendations to the management of the Keystone National Bank for improving
the bank's earnings performance and financial strength.
Question 1: Compare the relative earnings performance of Keystone National Bank
with its peers in 1989 and 1990
Earnings are also known as bottom line refers to a company's net income after tax
deduction. Earnings determine a company's profitability and share price. Earnings is a mostly
studied element of financial statements because it shows the profitability performance of a
company relative to its peers in the market or based on the pre-established guidance. The
earning performance of Keystone National Bank is indicated under Exhibit 3 on Key
financial ratios. The key earnings ratios under study are Return on assets, Net profit margin,
Asset yield, Return on equity, and leverage (Bailey, 2005).

KEYSTONE NATIONAL BANK ANALYSES 3
Return on assets (ROA) is a profitability measure used to evaluate a company's net
income generated from its total assets. In a relative analysis between a company and its
competitor(s) in the market, the one with the highest ROA is considered to be more
profitable. Keystone's ROA decreased from 0.95% in 1989 to 0.91% in 1990 compared to the
Peer Group's increase from 1.02% in 1989 to 1.04% in 1990 (Ghosh, 2012).
Net profit margin is a profitability ratio that indicates the percentage of a company's net
profit produced by its revenue during a specific period. Net profit margin ratio is calculated
by dividing the net profit by total revenue then expressing the ratio as a percentage (English,
2011). In a relative analysis between a company and its competitor(s) in the market, the one
with the highest Net profit margin is considered to be more profitable. Keystone's net profit
margin increased from 8.04% in 1989 to 8.36% in 1990 compared to the Peer Group's
increase from 8.80% in 1989 and 9.70% in 1990.
Asset yield indicates the amount of investment income and dividend that a company
yield from investments and loans offered to its customers. The higher the yield on assets, the
larger the income generated from loan and investment options offered to customers (Tracy,
2012). In a relative analysis between a company and its competitor(s), the one with the
highest Net profit margin is considered to be more profitable. Keystone's asset yield
decreased from 11.81% in 1989 to 10.88% in 1990 compared to the Peer Group's decrease
from 11.59% in 1989 to 10.72% in 1990. Generally, Keystone performed better compared to
its peers.
Return on Equity (ROE) is a profitability measure used to evaluate a company's net
income generated from shareholders' equity. In a relative analysis between a company and its
competitor(s) in the market, the one with the highest ROE is considered to be more profitable

KEYSTONE NATIONAL BANK ANALYSES 4
(Tracy, 2012). Keystone's ROE decreased from 14.73% in 1989 to 13.82% in 1990 compared
to the Peer Group's increase from 14.41% in 1989 to 14.90% in 1990.
Leverage/ equity multiplier is a profitability ratio used to calculate a company's
leverage. The ratio is calculated by dividing a company's total assets by its total equity. A
high equity multiplier ratio shows that a company uses more debts compared to equity to
finance its assets (English, 2011). Keystone's equity multiplier decreased from 15.50x in
1989 to 15.20x in 1990 compared to the Peer Group's increase from 14.12x in 1989 to 14.33x
in 1990.
Question 2: Evaluate the financial risks which Keystone National Bank has taken to
attain these returns
Commercial banks are associated with a number of risks. When the value of net leases
and loans is huge compared to core deposits, a bank is considered to have poor utilisation of
resources as well as low liquidity level. Banks consider both consumers and commercial
loans when determining the degree of risks associated with their operations. Banks with high
loan portfolio level is exposed to a high degree of default risks. In 1990, Keystone's loan
portfolio decreased by 10% which reduced its ability to maximise shareholders' equity (Zagst,
2013).
Keystone National Bank held the higher provision for leases and loans when compared
to the peer group. This shows that Keystone had anticipated an increased level of credit risks
which would subsequently increase the degree of loan defaulters. However, the tangible
amounts that the bank charged against the actual defaulted loans were lower compared to that
of its peer group between 1989 and 1990 (Sierra, 2004). The analysis presents Keystone as a
bank with the ability to maintain a low rate of loan default. Keystone uses its excellent ability
to control its loans and leases accounts to improve its capital base and income generation.