Asset Quality

Overview

Asset quality refers mostly to the likelihood that a banks assets will retain or grow value. Since a banks assets are largely composed of loans, this mostly means that the banks loans are not likely to default, or to be written down due to declining credit quality. This is mostly a function of the banks underwriting standards.

A bank may model their asset quality through credit modeling. For information on credit modeling, please see: credit corner

For analysts trying to assess the asset quality of a bank, the banks internal information on loan and loan default history will not be available, so the analyst has to make due with information published in the banks financial statements or call reports.

Call Report Ratios

• NPL Ratio - Nonperforming loans to total loans
• nonperforming assets to total loans
• NPL Coverage ration - Loan loss reservers to nonperforming loans