analyzing a bank
TRANSCRIPT
-
7/28/2019 Analyzing a Bank
1/15
Analyzing A Bank's Financial StatementsOctober 27 2012| Filed Under Balance Sheet,Banking Industry,Federal Reserve
Board,Financial Statements,Fundamental Analysis,Income Statement,Office of Thrift
Supervision
Financial statements for banks present a differentanalyticalproblem than statements for
manufacturing and service companies. As a result, analysis of a bank's financial statements
requiresa distinct approachthat recognizes a bank's unique risks.
Banks takedepositsfrom savers and pay interest on some of these accounts. They pass
these funds on to borrowers and receive interest on the loans. Their profits are derived from
the spread between the rate they pay for funds and the rate they receive from borrowers.
This ability to pool deposits from many sources that can be lent to many different borrowers
creates the flow of funds inherent in the banking system. By managing this flow of funds,
banks generate profits, acting as the intermediary of interest paid and interest received,
and taking on the risks of offering credit.
Leverage and Risk
Banking is a highlyleveragedbusiness requiring regulators to dictate minimal capital levels
to help ensure thesolvencyof each bank and the banking system. In the U.S., a bank's
primary regulator could be theFederal Reserve Board, the Office of theComptroller of the
Currency, theOffice of Thrift Supervisionor any one of 50 state regulatory bodies,depending on the charter of the bank. Within the Federal Reserve Board, there are 12
districts with 12 different regulatory staffing groups. These regulators focus on compliance
with certain requirements, restrictions and guidelines, aiming to uphold the soundness and
integrity of the banking system.
As one of the most highly regulated banking industries in the world, investors have some
level of assurance in the soundness of the banking system. As a result, investors can focus
most of their efforts on how a bank will perform in different economic environments.
Below is a sample income statement and balance sheet for a large bank. The first thing to
notice is that the line items in the statements are not the same as your typical
manufacturing or service firm. Instead, there are entries that represent interest earned or
expensed, as well as deposits and loans.
http://www.investopedia.com/tags/balance_sheet/http://www.investopedia.com/tags/balance_sheet/http://www.investopedia.com/tags/balance_sheet/http://www.investopedia.com/tags/banking_industry/http://www.investopedia.com/tags/banking_industry/http://www.investopedia.com/tags/banking_industry/http://www.investopedia.com/tags/federal_reserve_board/http://www.investopedia.com/tags/federal_reserve_board/http://www.investopedia.com/tags/federal_reserve_board/http://www.investopedia.com/tags/federal_reserve_board/http://www.investopedia.com/tags/financial_statements/http://www.investopedia.com/tags/financial_statements/http://www.investopedia.com/tags/financial_statements/http://www.investopedia.com/tags/fundamental_analysis/http://www.investopedia.com/tags/fundamental_analysis/http://www.investopedia.com/tags/fundamental_analysis/http://www.investopedia.com/tags/income_statement/http://www.investopedia.com/tags/income_statement/http://www.investopedia.com/tags/income_statement/http://www.investopedia.com/tags/office_of_thrift_supervision/http://www.investopedia.com/tags/office_of_thrift_supervision/http://www.investopedia.com/tags/office_of_thrift_supervision/http://www.investopedia.com/tags/office_of_thrift_supervision/http://www.investopedia.com/terms/f/fundamentalanalysis.asphttp://www.investopedia.com/terms/f/fundamentalanalysis.asphttp://www.investopedia.com/terms/f/fundamentalanalysis.asphttp://www.investopedia.com/articles/basics/06/financialreporting.asphttp://www.investopedia.com/articles/basics/06/financialreporting.asphttp://www.investopedia.com/articles/basics/06/financialreporting.asphttp://www.investopedia.com/terms/d/deposit.asphttp://www.investopedia.com/terms/d/deposit.asphttp://www.investopedia.com/terms/d/deposit.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/s/solvency.asphttp://www.investopedia.com/terms/s/solvency.asphttp://www.investopedia.com/terms/s/solvency.asphttp://www.investopedia.com/terms/f/frb.asphttp://www.investopedia.com/terms/f/frb.asphttp://www.investopedia.com/terms/f/frb.asphttp://www.investopedia.com/terms/c/controller.asphttp://www.investopedia.com/terms/c/controller.asphttp://www.investopedia.com/terms/c/controller.asphttp://www.investopedia.com/terms/c/controller.asphttp://www.investopedia.com/terms/o/ots.asphttp://www.investopedia.com/terms/o/ots.asphttp://www.investopedia.com/terms/o/ots.asphttp://www.investopedia.com/terms/o/ots.asphttp://www.investopedia.com/terms/c/controller.asphttp://www.investopedia.com/terms/c/controller.asphttp://www.investopedia.com/terms/f/frb.asphttp://www.investopedia.com/terms/s/solvency.asphttp://www.investopedia.com/terms/l/leverage.asphttp://www.investopedia.com/terms/d/deposit.asphttp://www.investopedia.com/articles/basics/06/financialreporting.asphttp://www.investopedia.com/terms/f/fundamentalanalysis.asphttp://www.investopedia.com/tags/office_of_thrift_supervision/http://www.investopedia.com/tags/office_of_thrift_supervision/http://www.investopedia.com/tags/income_statement/http://www.investopedia.com/tags/fundamental_analysis/http://www.investopedia.com/tags/financial_statements/http://www.investopedia.com/tags/federal_reserve_board/http://www.investopedia.com/tags/federal_reserve_board/http://www.investopedia.com/tags/banking_industry/http://www.investopedia.com/tags/balance_sheet/ -
7/28/2019 Analyzing a Bank
2/15
Figure 1: The Income Statement
-
7/28/2019 Analyzing a Bank
3/15
Figure 2: The Balance Sheet
Asfinancial intermediaries, banks assume two primary types of risk as they manage the
flow of money through their business.Interest rate riskis the management of the spread
between interest paid on deposits and received on loans over time.Credit riskis the
likelihood that a borrower will default on a loan or lease, causing the bank to lose any
potential interest earned as well as the principal that was loaned to the borrower. As
investors, these are the primary elements that need to be understood when analyzing a
bank's financial statement.
Interest Rate Risk
The primary business of a bank is managing the spread between deposits (liabilities, loans
and assets). Basically, when the interest that a bank earns from loans is greater than the
interest it must pay on deposits, it generates a positive interest spread or net interest
http://www.investopedia.com/terms/f/financialintermediary.asphttp://www.investopedia.com/terms/f/financialintermediary.asphttp://www.investopedia.com/terms/f/financialintermediary.asphttp://www.investopedia.com/terms/i/interestraterisk.asphttp://www.investopedia.com/terms/i/interestraterisk.asphttp://www.investopedia.com/terms/i/interestraterisk.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/i/interestraterisk.asphttp://www.investopedia.com/terms/f/financialintermediary.asp -
7/28/2019 Analyzing a Bank
4/15
income. The size of this spread is a major determinant of the profit generated by a bank.
This interest rate risk is primarilydetermined by the shape of the yield curve.
As a result, net interest income will vary, due to differences in the timing of accrual changes
and changing rate and yield curve relationships. Changes in the general level of market
interest rates also may cause changes in the volume and mix of a bank's balance sheet
products. For example, when economic activity continues to expand while interest rates are
rising, commercial loan demand may increase while residentialmortgageloan growth and
prepayments slow.
Banks, in the normal course of business, assume financial risk by making loans at interest
rates that differ from rates paid on deposits. Deposits often have shorter maturities than
loans and adjust to current market rates faster than loans. The result is a balance sheetmismatch between assets (loans) and liabilities (deposits). An upward sloping yield curve is
favorable to a bank as the bulk of its deposits are short term and their loans are longer
term. This mismatch of maturities generates the net interest revenue banks enjoy. When
theyield curve flattens, this mismatch causes net interest revenue to diminish.
A Banking Balance Sheet
The table below ties together the bank's balance sheet with the income statement and
displays the yield generated from earning assets and interest bearing deposits. Most banks
provide this type of table in their annual reports. The following table represents the same
bank as in the previous examples:
http://www.investopedia.com/articles/basics/06/invertedyieldcurve.asphttp://www.investopedia.com/articles/basics/06/invertedyieldcurve.asphttp://www.investopedia.com/terms/m/mortgage.asphttp://www.investopedia.com/terms/m/mortgage.asphttp://www.investopedia.com/terms/m/mortgage.asphttp://www.investopedia.com/terms/f/flatyieldcurve.asphttp://www.investopedia.com/terms/f/flatyieldcurve.asphttp://www.investopedia.com/terms/f/flatyieldcurve.asphttp://www.investopedia.com/terms/f/flatyieldcurve.asphttp://www.investopedia.com/terms/m/mortgage.asphttp://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp -
7/28/2019 Analyzing a Bank
5/15
Figure 3: Average Balance and Interest Rates
First of all, the balance sheet is an average balance for the line item, rather than the
balance at the end of the period. Average balances provide a better analytical framework to
help understand the bank's financial performance. Notice that for each average balance item
there is a corresponding interest-related income, or expense item, and the average yield for
the time period. It also demonstrates the impact that a flattening yield curve can have on a
bank's net interest income.
The best place to start is with the net interest income line item. The bank experienced lower
-
7/28/2019 Analyzing a Bank
6/15
net interest income even though it had grown average balances. To help understand how
this occurred, look at the yield achieved on total earning assets. For the current period, it is
actually higher than the prior period. Then examine the yield on the interest-bearing assets.
It is substantially higher in the current period, causing higher interest-generating expenses.
This discrepancy in the performance of the bank is due to the flattening of the yield curve.
As the yield curve flattens, the interest rate that the bank pays on shorter-term deposits
tends to increase faster than the rates it can earn from its loans. This causes the net
interest income line to narrow, as shown above. One way banks try to overcome the impact
of the flattening of the yield curve is to increase the fees they charge for services. As these
fees become a larger portion of the bank's income, it becomes less dependent on net
interest income to drive earnings.
Changes in the general level of interest rates may affect the volume of certain types of
banking activities that generate fee-related income. For example, the volume of residential
mortgage loanoriginationstypically declines as interest rates rise, resulting in lower
originating fees. In contrast, mortgage-servicing pools often face slower prepayments when
rates are rising, since borrowers are less likely to refinance. As a result, fee income and
associated economic value arising from mortgage servicing-related businesses may increase
or remain stable in periods of moderately rising interest rates.
When analyzing a bank, you should also consider how interest rate risk might act jointlywith other risks facing the bank. For example, in a rising rate environment, loan customers
may not be able to meet interest payments because of the increase in the size of the
payment or a reduction in earnings. The result will be a higher level of problem loans. An
increase in interest rates exposes a bank with a significant concentration in adjustable rate
loans to credit risk. For a bank that is predominately funded with short-term liabilities, a rise
in rates may decrease net interest income at the same time that credit quality problems are
on the rise.
Credit Risk
Credit risk is most simply defined as the potential of a bank borrower or counterparty to fail
in meeting its obligations in accordance with agreed terms. When this happens, the bank
will experience a loss of some or all of the credit it provided to its customer. To absorb
these losses, banks maintain an allowance for loan andleaselosses.
http://www.investopedia.com/terms/o/origination.asphttp://www.investopedia.com/terms/o/origination.asphttp://www.investopedia.com/terms/l/lease.asphttp://www.investopedia.com/terms/l/lease.asphttp://www.investopedia.com/terms/l/lease.asphttp://www.investopedia.com/terms/l/lease.asphttp://www.investopedia.com/terms/o/origination.asp -
7/28/2019 Analyzing a Bank
7/15
In essence, this allowance can be viewed as a pool of capital specifically set aside to absorb
estimated loan losses. This allowance should be maintained at a level that is adequate to
absorb the estimated amount of probable losses in the institution's loan portfolio.
Actual losses are written off from the balance sheet account "allowance" for loan and lease
losses. The allowance for loan and lease losses is replenished through the income statement
line item "provision" for loan losses. Figure 4 shows how this calculation is performed for the
bank being analyzed.
Figure 4: Loan Losses
Investors should consider a couple points from Figure 4. First, the actualwrite-offswere
more than the amount management included in the provision for loan losses. While this in
itself isn't necessarily a problem, it is suspect because the flattening of the yield curve has
likely caused a slowdown in the economy and put pressure on marginal borrowers.
Arriving at the provision for loan losses involves a high degree of judgment, representing
management's best evaluation of the appropriate loss to reserve. Because it is a
management judgment, the provision for loan losses can be used to manage a bank's
earnings. Looking at the income statement for this bank shows that it had lower net income
due primarily to the higher interest paid on interest-bearing liabilities. The increase in the
provision for loan losses was 1.8%, while actual loan losses were significantly higher. Had
the bank's management just matched its actual losses, it would have had a net income that
was $983 less (or $1,772).
An investor should be concerned that this bank is not reserving sufficient capital to cover its
future loan and lease losses. It also seems that this bank is trying to manage its net
income. Substantially higher loan and lease losses would decrease its loan and lease reserve
account to the point where this bank would have to increase the future provision for loan
losses on the income statement. This could cause the bank to report a loss in income. In
addition, regulators could place the bank on a watch list and possibly require that it take
http://www.investopedia.com/terms/p/provision.asphttp://www.investopedia.com/terms/p/provision.asphttp://www.investopedia.com/terms/p/provision.asphttp://www.investopedia.com/terms/w/write-off.asphttp://www.investopedia.com/terms/w/write-off.asphttp://www.investopedia.com/terms/w/write-off.asphttp://www.investopedia.com/terms/w/write-off.asphttp://www.investopedia.com/terms/p/provision.asp -
7/28/2019 Analyzing a Bank
8/15
further corrective action, such as issuing additional capital. Neither of these situations
benefits investors.
The Bottom Line
A careful review of a bank's financial statements can highlight the key factors that should be
considered before making a trading or investing decision. Investors need to have a good
understanding of the business cycle and the yield curve - both have a major impact on the
economic performance of banks. Interest rate risk and credit risk are the primary factors to
consider as a bank's financial performance follows the yield curve.
When it flattens or becomesinverted, a bank's net interest revenue is put under greater
pressure. When the yield curve returns to a more traditional shape, a bank's net interest
revenue usually improves. Credit risk can be the largest contributor to the negativeperformance of a bank, even causing it to lose money. In addition, management of credit
risk is a subjective process that can be manipulated in the short term. Investors in banks
need to be aware of these factors before they commit their capital.
Banks are important to the efficient functioning of the financial system. Learn the basics of banks
balance sheet and understand the meaning of items that are generally shown in the balance sheet of
a commercial bank. Understand the basics of commercial banking from an accountants
perspective.
As we have discussed in the earlier article that commercial banking is a business and banks play a
role by providing a service and they earn a profit by charging customers for that service. The key
commercial banking activities are taking in deposits from savers and making loans to households
and firms. We also discussed how bank makes profits by receiving funds from depositors and giving
them on higher interest to the borrowers.
In this article, we will look at thebalance sheetitems of commercial banks; will explain the items
that come under banks sources of funds and the items where these funds may be applied. And
finally how these items are summarized on its balance sheet.
The Bank Balance Sheet
A balance sheet is a statement that shows an individuals or a firms financial position on a particular
day. Learn more about Balance Sheet under General Ledger Tutorials. Balance sheet sheets show
monetary values for each entry expressed in terms of currency of the market in which bank is
registered. The typical layout of a balance sheet has liabilities on one site and assets shown on the
other side and is based on the following accounting equation:
http://www.investopedia.com/terms/i/invertedyieldcurve.asphttp://www.investopedia.com/terms/i/invertedyieldcurve.asphttp://www.investopedia.com/terms/i/invertedyieldcurve.asphttp://www.technofunc.com/index.php/leadership-skills/team-leadership/item/trial-balancehttp://www.technofunc.com/index.php/leadership-skills/team-leadership/item/trial-balancehttp://www.technofunc.com/index.php/leadership-skills/team-leadership/item/trial-balancehttp://www.technofunc.com/index.php/leadership-skills/team-leadership/item/trial-balancehttp://www.investopedia.com/terms/i/invertedyieldcurve.asp -
7/28/2019 Analyzing a Bank
9/15
Assets = Liabilities + Shareholders equity
The accounting equation tells us that the left side of a firms balance sheet must always have the
same value as the right side. We can think of a banks liabilities and its capital as the sources of its
funds, and we can think of a banks assets as the uses of its funds.
The Banks Equity:
Shareholders equity is the difference between the value of a firms assets and the value of its
liabilities. Bank capital, also called shareholders equity, or bank net worth, is the difference between
the value of a banks assets and the value of its liabilities. Shareholders equity represents the dollar
amount the owners of the firm would be left with if the firm were to be closed, its assets sold, and its
liabilities paid off.
For a public firm, the owners are the shareholders. Shareholders equity is also referred to as the
firms net worth. In banking, shareholders equity is usually called bank capital. Bank capital is thefunds contributed by the shareholders through their purchases of the banks stock plus the banks
accumulated, retained profits.
The Banks Liabilities:
A liability is something that an individual or a firm owes, or, in other words, a claim on an individual
or a firm. A liability, in financial terms, is a cash obligation. The most important bank liabilities are
the funds a bank acquires from savers. Have you ever wondered if these deposit a form of bank
income? Actually not, as the money received as deposits, does not really belong to the bank.
For banks, deposits are liabilities. Depositors have the right to request their funds, and the bank
must pay them. The bank is liable to pay this money back to the depositors on demand. The bank
uses the funds to makes investments or loans to borrowers. Banks offer a variety of deposit
accounts because savers have different needs. Money the bank borrowed is also a liability, a debt to
be paid.
Note: You may not like to think of your savings account as a problem for the bank, but it is one in
theory. As explained below, all the deposits are payable on demand, means, depositors can ask for
payback of their money at any time and if depositors simultaneously want all their money from all
their accounts, banks would be in trouble. In such a case, the bank must either break its promise to
depositors or pay until its reserves are gone. If the bank fails, unpaid depositors lose their money.
The bank's liquidity depends on this principle and is based on the assumption that depositors will not
demand their money quickly. A bank's liabilities exceed its reserves. The money is loaned out, and
the reserves do not match the total of deposits (liabilities). However, the money is out working,
financing businesses and expanding the economy.
-
7/28/2019 Analyzing a Bank
10/15
The Bank Assets:
An asset is anything of value. An asset is something of value that an individual or a firm owns. In
financial terms, that usually means money. A liquid asset is anything that can readily be exchanged,
like cash. A bank's assets are its loans and investments, which may be less liquid by contract thandeposits. Deposits may have to be returned any time, but assets can arrive in small amounts over a
long period.
Banks, like people and other corporations, make money on investments. They invest in stock
markets and some types of securities and government bonds. While investing their money in
instruments other than government bonds, they face the same risks as other investors. They hire
professional investment staff to maximize their return on investments. Investments are assets for the
banks.
A bank's liabilities are more liquid than its assets. A bank must give depositors their money if they
request it. The bank's assets, however, may be less liquid because they are tied up in longer-termloans or investments, so the bank cannot get them as quickly.
The balance sheet of a commercial bank is a statement of its assets and liabilities. Assets are what
others owe the bank, and what the bank owes others constitutes its liabilities. The business of a
bank is reflected in its balance sheet and hence its financial position as well.
The balance sheet is issued usually at the end of every financial year of the bank. The balance sheet
of the bank comprises of two sides; the assets side and the liabilities side. It is customary to record
liabilities on the left side and assets on the right side. The following is the proforma of a balancesheet of the bank.
Balance Sheet of the BankLiabilities Assets
1. Capital 1. Cash
a. Authorised capital a. Cash on hand
b. Issued capital b. Cash with central bank and other ba
c. Subscribed capital
-
7/28/2019 Analyzing a Bank
11/15
Liabilities Assets
d. Paid-up-capital
2. Reserve fund 2. Money at call and short notice
3. Deposits 3. Bills discounted
4. Borrowings from other banks 4. Bills for collection
5. Bills payable 5. Investments
6. Acceptances and endorsements 6. Loans and advances
7. Contingent liabilities 7. Acceptances and endorsement
8. Profit and loss account 8. Fixed assets
9. Bills for collection
Liabilities
Liabilities are those items on account of which the bank is liable to pay others. They denote others
claims on the bank. Now we have to analyse the various items on the liabilities side.
CapitalThe bank has to raise capital before commencing its business. Authorised capital is the maximum
capital upto which the bank is empowered to raise capital by the Memorandum of Association.
Generally, the entire authorised capital is not raised from the public.
That part of authorised capital which is issued in the form of shares for public subscription is called
the issued capital. Subscribed capital represents that part of issued capital which is actually
subscribed by the public. Finally, paid-up capital is that part of the subscribed capital which the
subscribers are actually called upon to pay.
-
7/28/2019 Analyzing a Bank
12/15
Reserve FundReserve fund is the accumulated undistributed profits of the bank. The bank maintains reserve fund
to tide over any crisis. But, it belongs to the shareholders and hence a liability on the bank. In India,
the commercial bank is required by law to transfer 20 per cent of its annual profits to the Reserve
fund.
DepositsThe deposits of the public like demand deposits, savings deposits and fixed deposits constitute an
important item on the liabilities side of the balance sheet. The success of any banking business
depends to a large extent upon the degree of confidence it can instill in the minds of the depositors.
The bank can never afford to forget the claims of the depositors. Hence, the bank should always
have enough cash to honour the obligations of the depositors.
Borrowings from Other BanksUnder this head, the bank shows those loans it has taken from other banks. The bank takes loans
from other banks, especially the central bank, in certain extraordinary circumstances.
Bills PayableThese include the unpaid bank drafts and telegraphic transfers issued by the bank. These drafts and
telegraphic transfers are paid to the holders thereof by the banks branches, agents and
correspondents who are reimbursed by the bank.
Acceptances and EndorsementsThis item appears as a contra item on both the sides of the balance sheet. It represents the liability
of the bank in respect of bills accepted or endorsed on behalf of its customers and also letters of
credit issued and guarantees given on their behalf.
For rendering this service, a commission is charged and the customers to whom this service is
extended are liable to the bank for full payment of the bills. Hence, this item is shown on both sides
of the balance sheet.
Contingent LiabilitiesContingent liabilities comprise of those liabilities which are not known in advance and are
unforeseeable. Every bank makes some provision for contingent liabilities.
-
7/28/2019 Analyzing a Bank
13/15
Profit and Loss AccountThe profit earned by the bank in the course of the year is shown under this head. Since the profit is
payable to the shareholders it represents a liability on the bank.
Bills for CollectionThis item also appears on both the sides of the balance sheet. It consists of drafts and hundies
drawn by sellers of goods on their customers and are sent to the bank for collection, against delivery
documents like railway receipt, bill of lading, etc., attached thereto.
All such bills in hand at the date of the balance sheet are shown on both the sides of the balance
sheet because they form an asset of the bank, since the bank will receive payment in due course, it
is also a liability because the bank will have to account for them to its customers.
AssetsAccording to Crowther, the assets side of the balance sheet is more complicated and interesting.
Assets are the claims of the bank on others. In the distribution of its assets, the bank is governed by
certain well defined principles.
These principles constitute the principles of the investment policy of the bank or the principles
underlying the distribution of the assets of the bank. The most important guiding principles of the
distribution of assets of the bank are liquidity, profitability and safety or security.
In fact, the various items on the assets side are distributed according to the descending order ofliquidity and the ascending order of profitability. Now, we have to analyse the various items on the
assets side.
CashHere we can distinguish cash on hand from cash with central bank and other banks cash on hand
refers to cash in the vaults of the bank. It constitutes the most liquid asset which can be immediately
used to meet the obligations of the depositors. Cash on hand is called the first line of defence to the
bank.
In addition to cash on hand, the bank also keeps some money with the central bank or other
commercial banks. This represents the second line of defence to the bank.
-
7/28/2019 Analyzing a Bank
14/15
Money at Call and Short NoticeMoney at call and short notice includes loans to the brokers in the stock market, dealers in the
discount market and to other banks. These loans could be quickly converted into cash and without
loss, as and when the bank requires. At the same time, this item yields income to the bank.
The significance of money at call and short notice is that it is used by the banks to effect desirable
adjustments in the balance sheet. This process is called Window Dressing. This item constitutes
the third line of defence to the bank.
Bills DiscountedThe commercial banks invest in short term bills consisting of bills of exchange and treasury bills
which are self-liquidating in character. These short term bills are highly negotiable and they satisfy
the twin objectives of liquidity and profitability.
If a commercial bank requires additional funds, it can easily rediscount the bills in the bill market and
it can also rediscount the bills with the central bank. Bills for Collection: As mentioned earlier, this
item appears on both sides of the balance sheet.
InvestmentsThis item includes the total amount of the profit yielding assets of the bank. The bank invests a part
of its funds in government and non-government securities.
Loans and AdvancesLoans and advances constitute the most profitable asset to the bank. The very survival of the bank
depends upon the extent of income it can earn by advancing loans. But, this item is the least liquid
asset as well.
The bank earns quite a sizeable interest from the loans and advances it gives to the private
individuals and commercial firms.
Acceptances and EndorsementsAs discussed earlier, this item appears as a contra item on both sides of the balance sheet.
Fixed AssetsFixed assets include building, furniture and other property owned by the bank. This item includes the
total volume of the movable and immovable property of the bank.
-
7/28/2019 Analyzing a Bank
15/15
Fixed assets are referred to as dead stocks. The bank generally undervalues this item deliberately
in the balance sheet. The intention here is to build up secret reserves which can be used at times of
crisis.
Balance sheet of a bank acts as a mirror of its policies, operations and achievements. The liabilities
indicate the sources of its funds; the assets are the various kinds of debts incurred by a bank to its
customers. Thus, the balance sheet is a complete picture of the size and nature of operations of a
bank.
Key financials and performance ratios for banks
Credit Risk provides extensive financial data including pre-calculated ratios on global banks and financial
institutions from the last four years, enabling you to accurately assess new and existing counterparty risk.
Financial data is derived directly from Annual Reports, however some ratio calculations may vary according to each
bank or financial institution, country regulations or regional variations.
Total assets
Total equity
Pre-tax profits
Post-tax profits
Pre-tax profits / total assets (av)
Pre-tax profits / total equity (av)
Tier 1 capital ratio
Total capital ratio
Total equity / net loans
Net loans / total deposits
Loan loss reserves / gross loans (av)
Loan loss reserves / net loans
Loan loss reserves / net loans (av)
Total deposits / net loans ratio
http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-assets/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-assets/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-equity/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-equity/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/pre-tax-profits/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/pre-tax-profits/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/post-tax-profits/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/post-tax-profits/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/return-on-assets/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/return-on-assets/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/return-on-equity/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/return-on-equity/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/tier-1-capital/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/tier-1-capital/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-capital/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-capital/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/Loan-to-deposit-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/Loan-to-deposit-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/Loan-to-deposit-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/Loan-to-deposit-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-gross-loans/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-gross-loans/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-net-loans/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-net-loans/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-net-loans-average/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-net-loans-average/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/equity-net-loans-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/equity-net-loans-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/equity-net-loans-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-net-loans-average/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-net-loans/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/loan-loss-gross-loans/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/Loan-to-deposit-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/Loan-to-deposit-ratio/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-capital/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/tier-1-capital/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/return-on-equity/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/return-on-assets/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/post-tax-profits/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/pre-tax-profits/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-equity/http://www.bankersaccuity.com/financial-counterparty-kyc/kyc-onboarding/credit-risk/financial-spreads/performance-ratios/total-assets/