Question

7. How does a NOW account differ from a demand deposit? 10. What are the major categories of off-balance-sheet activities? 15. A security analyst calculates the following ratios for two banks. How should the analyst evaluate the financial health of the two banks? 20. How does a bank’s asset size affect its financial ratios?

1. Bank A	Bank B
   Return on equity	22%	24%
   Return on assets	2%	1.5%
   Equity multiplier	11×	16×
   Profit margin	15%	14%
   Asset utilization	13%	11%
   Spread	3%	3%
   Interest expense ratio	35%	40%
   Provision for loan-loss ratio	1%	4%

Answer 1

1. NOW account is Negotiable order of withdrawal wherein one can check the balance of interest earned on demand deposit. Under NOw account amount can be withdrawn at any time as the provision of the account is such.

2. Off balance sheet activities are such which do not form part of balance sheet items.

Examples of off balance sheet items are operating lease, lease agreements, contingent liabilities etc.

3. Financial ratios are important in order to understand financial health of a bank. In the given scenario; finacial health of Bank A is better compared to that of Bank B, due to following ratios;

-return on asset is high

-profit margin is high

-interest expense ratio is less

4. Asset can be in form of cash, investment, or other fixead asset, higher the assets, higher will be bank's capability to pay off its debts.