Analyzing banks is difficult as they are a substantially different business from most other firms. Loans are assets while deposits are liabilities – it’s a topsy-turvy world. You are going to need all the help that you can get. Here are just 3 ratios which are specific to banks.
Provision for Loan Loss Ratio (PLL Ratio)
The PLL ratio is an asset quality ratio that measures a bank’s exposure to credit risk. The Provision for Loan Loss account measures charge-offs for loans which are deemed to be uncollectible by the bank. A higher PPL ratio implies poorer asset quality and a more aggressive, risk-taking behaviour which makes more risky loans. However, different banks may have different ways of determining whether a loan is uncollectible which may skew their PPL ratio in either way. Also, as with most provisions, charge-offs are entirely reversible if the loan is repaid in the future.
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