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BANKS FINANCIAL STATEMENT

ANALYSIS

Dr. K. Sriharsha Reddy


Associate Professor
Finance and Accounting
IMT Hyderabad

1
A banks financial statements are quite
different from those of a firm in any other
industry.
In their roles as financial intermediaries,
banks have to take considerable financial
risks, and their financial statements merely
reflect these risks
ASSETS
LIABILITIES
cash and balances
capital with Central bank
reserves balances with
deposits banks and money
at call
borrowings
investments
other liabilities and loans and
provisions advances
fixed assets
other assets
Analyze any banks balance sheet
What are the striking features?
What constitutes bank liabilities? What are
their features?
What constitutes bank assets? What are their
features?
What are the risks of having this type of
balance sheet?
Major asset in banks balance sheets
Major source of revenue for banks
Operational features - different loan
covenants, maturities, interest rates,
repayments amounts and modes,
currencies,industries, purposes etc
Help to earn interest
help to meet liquidity needs
low transaction costs
speculate on interest rate movements and
profit on price changes [trading ]
part of banks dealer functions - at
purchase, objective to be designated - held-
to-maturity, trading or available for sale
Vault cash
deposits with Central bank [reserve
requirements]
deposits with other banks
cash items in the process of collection [float
funds]
Depreciated value of banks premises and
equipment
interest accrued [receivable]
prepaid expenses
non banking assets acquired in satisfaction of
claims
Savings and demand [current] deposits
no set maturity
low / no cost
Time deposits
set maturity - short term / long term
deregulated interest rates
From the central bank
Other banks / FI s
Commercial paper
Bonds
Other long term borrowings
Borrowings abroad
This is an off balance sheet item
It signifies a possible obligation that
depends on the occurrence of some uncertain
event.
In good times, contingent liabilities can
generate substantial income for banks
To ascertain banks financial condition,
contingent liabilities will have to be analyzed
INCOME EXPENSES
interest earned interest paid
[advances, [deposits, RBI/inter
investments, bank borrowings]
balances with RBI operating expenses
& other banks] provisions
other income taxes
[commission,excha
nge,profit on
exchange etc]
How is bank income computed?
What are the components of bank income?
What are the components of bank expenses?
What are the variables banks net income
depend on?
What are the risks that could impact bank net
income [profit]?
NI [Net Income]=Net Interest Income-
Burden- Provisions+/- Gains from
investments-Taxes
The banks strategy can be inferred from
the contributory factors to net income
Some commonly used profitability measures:
NIM= NII/ EARNING ASSETS

Spread= Percent yield on interest earning assets


less percent cost on interest bearing funds
Burden ratio= non interest income/non interest
expense
Efficiency ratio= non interest income/ net total
income
Liabilities Assets
Cash and bank
Capital balances with RBI

Reserves and Balances with


surplus banks and money
at call
Deposits Investment

Borrowings Advances

Other liabilities & Fixed assets


provisions
Contingent Other assets
liabilities
Income Expenses

Interest Interest
earned expended

Other income Operating


expenses
Provisions
and
contingencie
s
To ensure transparency in operations and
financial condition, banks have to disclose
substantial information to stakeholders in
Notes to accounts
RBI specifies the list of such disclosures from
time to time
Traditional models of bank performance are
based on the Return on Assets [ROA]
approach.
Some others such as CAMELS rating models
follow a rating approach based on various
parameters.
There are also more sophisticated models
based on risk rating criteria
CAPITAL ADEQUACY
ASSET QUALITY
MANAGEMENT
EARNINGS
LIQUIDITY
SENSITIVITY TO MARKET RISK
1 TO 1.4 SOUND
OVER 5- RISKY