Discussion Assignment was…
The ROA for financial institutions such as banks is typically quite low as compared to non-financial firms. Why? With such a low ROA, how can banks attract stockholders?
Please write responses to the students posts below. Example response from another student on a discussion below…
EX) “Hi my good buddy! I hope you are doing well. As always, you have done a great job on our assignment this week! I like that you added that the risk associated with junk bonds can make them more affordable. This has been a very interesting topic to learn about. :)”
This is not the best example because the responses need to include some knowledge. on the topic from the dicussion not just “great job.”
Student A Disussion Post:
Hi Everyone!
“Return on Assets for banking is defined as Net Income divided by Total Assets. Net Income = Fee income + Interest income – operating expense. Total Assets = Deposit Accounts + Bank Capital” (Mpiinc, 2022). The business of banking involves taking capital from customers then lending it out to other customers at a higher rate. The higher rate allows the bank to make money. “The typical structure of a balance sheet for a bank is: Assets (property, trading assets, loans to customers, and deposits to the central bank). Liabilities (loans from the central bank, deposits from customers, trading liabilities, and miscellaneous debt). Equity (common and preferred shares)” (Corporate Finance Institute, 2022). There are reserve regulations that do not allow the bank to use the entire asset base. Banks attract stockholders due to the equity.
References
Corporate Finance Institute. (2022, February 9). Financial statements for banks. https://corporatefinanceinstitute.com/resources/knowledge/accounting/financial-statements-for-banks/
Mpiinc. (2022). Increasing bank Roa (Return on assets). Mercantile Processing Inc. https://www.mpiprocessing.com/increasing-bank-roa-return-on-assets/
RESPONSE NEEDED!
Student B Discussion Post:
Hello everyone!
The ROA is low because in order for a bank to generate significant NPV and ROA, it is necessary to have a large amounts of paper assets. Which will be your loans and securities. Banks are the only ones that are allowed to issue loans and accept deposits. Banks will most of time, if not all the time still attract stack holders. The reason for this is because it is the nature of the business that is such a very little equity involved from the stockholders themselves. The borrowed amount is only used to lend to others and hence equity is intact.
Reference: https://www.chegg.com/homework-help/questions-and-answers/roa-financial-institutions-banks-typically-quite-low-compared-non-financial-firms-low-roa–q75244524
Response needed!
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