Balance Sheet

ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS
AD-477 BANK MANAGEMENT InstructorBlent enver
BS Trainig Services bsenver@superonline.com
BALANCE SHEET ANALYSIS

OF
COMMERCIAL BANKS
ANNUAL REPORT
OF
BANKS
BS Trainig Services bsenver@superonline.com 3
ANNUAL REPORT
1. AUDITORS REPORT (AR) 2. FINANCIAL STATEMENTS (F/S) 3. NOTES TO F/S
AUDITORS REPORT
INDEPENDENT
AUDITORS REPORT
INDEPENDENT AUDITORS REPORT

1.What is done ? 2.What is audited ? 3.What is the auditors & managements responsibility ? 4.Audit is done based on what standard ? 5.Auditors opinion based on IAS
WHAT IS AUDITED ?
We have audited : 1. The Balance Sheet as of Dec31 1998 and 2. Statement of Income 3. Statement of Shareholders 4. Statement of Cash Flows for the year then ended
HOW IS THE F/S AUDITED ?

We conducted our audit in accordance with International Standards on Auditing (ISA)
We plan & perform the audit to obtain reasonable assurance that F/S are free of material misstatement.
HOW IS THE F/S AUDITED ?

An audit includes assessing the accounting principles used & significant estimates made by management, as well as evaluating the overall F/S presentation. We believe our audit provides a reasonable basis for our opinion.
AUDITORS OPINION
In our opinion, the F/S referred to above present fairly, in all material respects, the financial position of A Bank & the results of its operations, changes in its cash flows for the year then ended, in accordance with International Accounting Standards. Arthur Andersen & Co
FINANCIAL STATEMENTS
OF COMMERCIAL BANKS
11
FINANCIAL STATEMENTS
1. BALANCE SHEET 2. STATEMENT OF INCOME 3. STATEMENT OF SHAREHOLDERS EQUITY 4. SOURCES & USES OF FUNDS STATEMENT
B/S ANALYSIS DEPENDS ON

Available Data Standard Reporting Practice Use of Internationally Accepted Accounting Standards Use of Internationally Accepted Auditing Standards Use of External & Internal Audit Practice
BALANCE SHEET SHOWS

The Financial Position of a Bank As at a specific date. As of Dec. 31,1998
14
BALANCE SHEET EQUATION
ASSETS
100
= Equals
= 100
LIABILITIES + Plus SHAREHOLDERS EQUITY
15
BALANCE SHEET Assets

Liquid Assets Loans Marketable Securities Investment Securities Fixed Assets Accrued Interest Other Assets Total Assets
150 400 200 50 100 70 80 1050

16
BALANCE SHEET Liabilities

Deposits Bank Borrowings Accrued Expenses Other Liabilities Bonds Issued Shareholders Equity Total Liabilities & S/HE
400 150 100 80 70 250 1050

17
SHAREHOLDERS EQUITY
Share Capital Legal Reserves Retained Earnings Revaluation Surplus Share Premiums Net Income Total S/H Equity
100 30 50 20 10 40 250
18
ASSET VALUATION
GAAP & IAAP
Generally Accepted & Internationally Accepted Accounting Principles
LOWER OF COST OR MARKET
19
ASSET CLASSIFICATION
TOTAL ASSETS
NON INTEREST EARNING ASSETS INTEREST EARNING ASSETS
20
LIABILITY CLASSIFICATION
TOTAL LIABILITIES
INTEREST BEARING LIABILITIES NON INTEREST BEARING LIABILITIES
21
BALANCE SHEET DOES NOT SHOW

Interest Rates Interest Sensitivity Due Dates Foreign Currency breakdown Collateral
22
STATEMENT OF INCOME SHOWS

The results of operations of a bank. For the period between two dates. For the year ended Dec. 31 , 1998
23
NET PROFIT
NET PROFIT
TOTAL INCOME TOTAL EXPENSE
24
TOTAL INCOME
TOTAL INCOME
NET INTEREST INCOME NET NON-INTEREST INCOME
25
NET INTEREST INCOME

NET INTEREST INCOME
INTEREST INTEREST INCOME EXPENSE (+) (-)
NET INTEREST INCOME

NET INTEREST INCOME INTEREST INCOME P/L
INTEREST EARNING ASSETS B/S
INTEREST EXPENSE P/L INTEREST BEARING LIABILITIES B/S
27
NET NON-INTEREST INCOME

NET NON-INTEREST INCOME
NON NON INTEREST INTEREST INCOME EXPENCE (+) (-)
STATEMENT OF INCOME
Interest Income Interest Expense Net I.Income Non Interest Income Operating Expenses Pre-Tax Profit Tax Provision Net Income
1000 (700) 300 220 (450) 70 (30) 40

29
ANALYSIS OF PROFIT
NET PROFIT
(NP)
PROFIT FROM BANKING OPERATIONS (NET OPERATING INCOME) (NOI)
PROFIT FROM EXTRAORDINARY TRANSACTIONS (PEXT)
PROFIT FROM SECURITY TRANNSACTIONS (PST)
30
BANKING RISKS
BANKING RISKS
C AMEL
A M E L
CAMEL
Capital
Adequacy
33
AMEL
Asset
Quality
34
CA
MEL
Management Quality
35
CAM
EL
Earnings
Efficiency
36
CAME
Liquidity
Risk
37
CAMEL RISKS
Capital Adequacy Asset Quality Management Earnings Liquidity
BANKING RISKS
1.2.3.4.5.CAMEL 6. Credit Risk 7. Interest Rate Risk 8. Interest Rate Sensitivity Risk 9. Foreign Exchange Availability Risk 10. F/X Position Risk
BANKING RISKS
11. Accounting & Reporting Risk 12. Computer Risk 13. Capital Market Operations Risk 14. Money Market Operations Risk 15. Country (Sovereign) Risk 16. Pricing Risk
BANKING RISKS
17. Theft Risk 18. Fraud & Defalcations Risk 19. Natural Disasters 20. Strategic Risk 21. Reputation Risk 22. Market Risk 23. Fiduciary Risk 24. Transaction Risk 25. Regulatory / Compliance Risk 26. Large Loans / Deposits Risk 27. Concentration Risk
RATIO ANALYSIS
Numerator ______________________ Denominator
RATIO ANALYSIS
Balance Sheet __________________ Balance Sheet
Income Statement ________________ Balance Sheet
43
RATIO ANALYSIS
What is the
What is the
LEVEL ?
TREND ?
44
RATIO ANALYSIS
1. Capital Adequacy 2. Asset Quality 3. Management 4. Earnings & Efficiency 5. Liquidity
45
RATIO ANALISIS CAPITAL ADEQUACY

The Capital of a Bank protects the Bank against unexpected future losses.
46
RATIO ANALYSIS CAPITAL ADEQUACY

1.
Shareholders Equity -----------------------------------Total Assets
The ability of the present Capital to support the further growth of Assets

2.
Shareholders Equity -----------------------------------Risk Weighted Assets
48

3.
Shareholders Equity -----------------------------------Risk Weighted Assets + RW Contingent Liabilities

4.
Total Debt -----------------------------------Shareholders Equity
The ability to raise additional Debt Capital


5. Financial Leverage :
Total Assets -----------------------------------Shareholders Equity
51

6. Capital Formation Rate :
Retained Net Income (RNI) ------------------------------------------------- Average Shareholders Equity RNI = Net Income - Dividends to be paid The internal growth of Equity Capital
RATIO ANALISIS ASSET QUALITY

1.
Loans -------------------------------Total Assets
53

2. Non Performing Loans = a) Loans past due more than 90 days b) Loans not accruing interest c) Loans with low interest rates d) Loans on which repayment terms have been renegotiated.

3.
Non Performing Loans ------------------------------------Total Loans
Indicates how much of the loan portfolio is non performing.
55

4. Reserves for Non Performing Loans --------------------------------------------- Non Performing Loans
Indicates the ability of the loan loss reserve to absorb potential losses from currently non performing loans.

5.
Loan Loss Provision ------------------------------------Average Loans
Shows current income reduction in anticipation of loan losses.
57

6.
Net Charge - Offs ------------------------------------Average Loans
Shows current income reduction in anticipation of loan losses.
58

7.
Interest Earning Assets ------------------------------------------------Total Assets
59

8.
Non Interest Earning Assets ------------------------------------------------Total Assets
60
RATIO ANALISIS EARNINGS & EFFICIENCY

A Bank with no profit is like a human body with no blood.
61
THE PRIMACY OF EARNINGS

A bank can not sustain itself long without a positive cash flow. Earnings are essential to : 1.Absorb loan losses 2.Finance internal growth of capital 3.Attract investors to supply capital

1. Return on Assets ( ROA )
Net Income -------------------------------------------Total Average Assets


2. Return on Equity ( ROE )
Net Income -------------------------------------------Average Shareholders Equity


3. Return on Equity ( ROE )
ROE = ROA * Equity Multiplier
ROE = ( NI / AST ) * ( AST / SHEQ )
65

4.
Interest Income -------------------------------------------Average Interest Earning Assets


5.
Net Interest Income -------------------------------------------Average Total Assets


6.
Interest Income on Loans -------------------------------------------Average Total Loans


7.
Total Operating Expense ------------------------------------------------ Total Operating Income


8. Efficiency Ratio
Non Interest Expense --------------------------------------------------- Net Interest Income + Fees Commissions


9. Break Even Ratio
Total Expenses - Non Interest Income --------------------------------------------------- Total Average Interest Earning Assets

10. Net Free Funds Ratio
Non Paying Liabilities - Non Earning Assets ------------------------------------------------- Interest Earning Assets
72

11. Interest Rate Sensitivity Gap : Interest Rate Sensitive Assets ( minus ) Interest Rate Sensitive Liabilities Shows the net amount to be effected by the future change of interest rates in the market

12. Interest Rate Sensitivity Gap Ratio :
Interest Rate Sensitive Assets ------------------------------------------------Interest Rate Sensitive Liabilities
74
RATIO ANALYSIS LIQUIDITY

Inadequate Liquidity of a Bank may cause an accident similar to an airplane crash !
75
RATIO ANALISIS LIQUIDITY

1.
Loans ------------------------Deposits
76

2.
Liquid Assets ------------------------Deposits
77

3.
Liquid Assets -------------------------------Deposits + Borrowings
78

4.
Assets Due for the Period ----------------------------------------Liabilities Due for the Period
79

5. Net Large Liabilities ---------------------------------------- Net Earning Assets Both numerator & denominator are net of short-term assets. Measures the extent to which net earning assets would be effected by the loss of a banks large liabilities.

6.
Liquid Assets ----------------------------------------Large Liabilities
Measures the assets readily available to cover a loss of large liabilities.
81

7.
Core Deposits ----------------------------------------Earning Assets
Indicates the extend to which earning assets are funded by those deposits considered stable and not subject to interest rate disintermediation.

8.
Brokered Deposits ----------------------------------------Earning Assets
Measures the extent to which a bank is funding assets with high-priced and volatile brokered deposits.
MATURITY ANALISIS
Days Cash Loans 0-10 100 200 300 Deposit 400 Borrow 150 550 10-30 200 500 700 300 200 500 30-60 300 200 500 800 200 1000 60-90 50 100 150 20 30 50
84
MATURITY ANALYSIS
Days Asset Liab 0-10 100 300 10-30 500 200 30-60 1000 1500 -500 +300
60-90 2000 700
Short - -200 Long +
1300
85
OFF - BALANCE SHEET RISK

1. Loan Commitments ----------------------------------------Average Assets
Shows the extent of a banks obligation to make loans.

OFF - BALANCE SHEET RISK

2.Contingent Liabilities & Commitments --------------------------------------------------- Average Assets
Shows the extent of a banks commitments & contingent liabilities.

BANK ANALYSIS
CHECKLIST
88
BANK ANALYSIS CHECKLIST

EARNINGS
1. Is earnings at an adequate level ? 2.Does valid reporting exist for earnings?
89
BA CHECKLIST EARNINGS
IF POOR, ASCRIBABLE TO : 1. Low asset yield 2. High cost of funds 3. Inadequate non interest income 4. High loan charge off s 5. High loan loss provisions 6. Mismanaging taxes 7. High overhead costs
BA CHECKLIST EARNINGS
IF STRONG, ASCRIBABLE TO : 1. Strong asset yield 2. Low cost of funds 3. Adequate non - interest income 4. High loan charge off s 5. High loan loss provisions 6. Adequate taxes 7. Low overhead costs

CAPITAL ADEQUACY 1. Is level of capital high enough ? 2. Is capital growing proportionate to assets ? 3. Can additional debt be raised if needed 4. Is there pressure to pay high dividends

LIQUIDITY 1. Is bank dependent on bought money ? 2. Is this dependence traditional or recent 3. Is core deposit growth proportionate to asset growth ? 4. Is volatile funds significant to assets

ASSET QUALITY 1. Are net charge - off s reasonable ? 2. Is management slow to charge off loans 3. Is loan growth reasonable ? 4. Is loan loss reserve level adequate ? 5. Do earnings comfortably cover loan losses ?
INTEREST MARGIN
INCREASING THE
INTEREST MARGIN %
INCREASING INTEREST MARGIN

Interest Income..200 Interest Expense( 50 ) --------- INTEREST MARGIN.. 150 ----------
96
INCREASING THE INTEREST MARGIN

BANK STRATEGY TO
INCREASE THE INTEREST MARGIN
INCREASE SIZE
CHANGE INTEREST SPREAD
ALTER ASSET/LIABILITY MIX
97
INCREASING THE INTEREST MARGIN

BANK STRATEGY ACTION
1.Expand Assets 2.Reduce Fixed Assets 3.Increase Equity Base
Increase Size
98

BANK STRATEGY ACTION
1.Re-Price Asset Portfolio 2.Re-Price Liability Portfolio
Change Interest Spread
99

BANK STRATEGY
ACTION 1.Plan Taxes 2.Reduce Liquidity 3.Increase Aggressiveness 4.Change Asset Yield Sensitivity 5.Change Liability Cost Sensitivity
100
Alter Asset / Liability Mix

BANK STRATEGY Increase Size ACTION Expand Assets IMPLEMENTATION 1.Offer new Products and Services 2.New Loans/Deposits 2.Open new Branches 3.Expand Promotion Budget 4.Reduce Interest Spread
101
EXPAND ASSETS
REPERCUSSION 1.Increase operating Expenses 2.Need for Capital 3.F/A Regulations 4.Decrease Capital Ratio 5.Reduce ROA IMPLEMENTATION 1.Offer new Products and Services 2.New Loans/Deposits 3.Open new Branches 4.Expand Promotion Budget 5.Reduce Interest Spread
102

BANK STRATEGY Increase Size ACTION Increase Equity Base
IMPLEMENTATION 1.Reduce Dividend pay out 2.Offer Dividend reinvestment 3.Sell Stock 4.Establish Employee Stock Ownership PL
103
INCREASE EQUITY BASE

REPERCUSSIONS 1.Hurt shareholders 2.Double taxation S/H 3.Reduce ability to leverage ROA, dilution of earnings 4.Continued Employee Expectations IMPLEMENTATION 1.Reduce Dividend pay out 2.Offer Dividend reinvestment 3.Sell Stock 4.Establish Employee Stock Ownership PL
104
INCREASE INTEREST MARGIN

BANK STRATEGY Change Interest Spread ACTION Re-price Portfolio
IMPLEMENTATION 1.Increase rates on Loans 2.Compound return more frequently 3.Reduce rates on Deposits 4.Compound cost less frequently
105
REPRICE PORTFOLIO
REPERCUSSIONS 1.Lose business Loan quality decrease 2.Increase operations Client dissatisfaction 3.Lose business Liquidity problem 4.Increase operations Client dissatisfaction IMPLEMENTATION 1.Increase rates on Loans 2.Compound return more frequently 3.Reduce rates on Deposits 4.Compound cost less frequently
106

IMPLEMENTATION
BANK STRATEGY Alter Asset/Liability Mix 1.Minimize cash 2.Minimize due from 3.Sell Securities & Bonds 4.Increase short term Deposits
107
ACTION Reduce Liquidity
REDUCE LIQUIDITY
REPERCUSSION
1.Liquidity Risk 2.Lose correspondent 3.Incur book losses
IMPLEMENTATION
1.Minimize cash 2.Minimize due from 3.Sell Securities & Bonds 4.Increase short term Deposits
108
4.Increase volatility of deposits

BANK STRATEGY Alter Asset/Liability Mix IMPLEMENTATION 1.Increase loan/deposit ratio 2.Increase highest yielding loans 3.Increase highest yielding securities
ACTION Increase Aggressiveness
109
INCREASE AGGRESSIVENESS
REPERCUSSION 1.Increase need for capital 2.Increase loan losses
3.Increase security losses
IMPLEMENTATION 1.Increase loan/deposit ratio 2.Increase highest yielding loans 3.Increase highest yielding securities
110

BANK STRATEGY Alter Asset/Liability Mix IMPLEMENTATION 1.Increase S/T & variable rate assets if rates will increase 2.Decrease S/T & variable rate assets if rates will decrease
ACTION Change Asset Yield Sensitivity
111
CHANGE ASSET YIELD SENSITIVITY

REPERCUSSION 1.Wrong estimate of interest movement, thereby reducing interest spread IMPLEMENTATION 1.Increase S/T & variable rate assets if rates will increase 2.Decrease S/T & variable rate assets if rates will decrease
112

BANK STRATEGY Alter Asset/Liability Mix IMPLEMENTATION 1.Decrease S/T & variable rate liabilities if rates will increase 2.Increase S/T & variable rate liabilities if rates will decrease
ACTION Change Liability Cost Sensitivity
113
CHANGE LIABILITY COST SENSITIVITY

REPERCUSSION 1.Wrong estimate of interest movement, thereby reducing interest spread IMPLEMENTATION 1.Decrease S/T & variable rate liabilities if rates will increase 2.Increase S/T & variable rate liabilities if rates will decrease
114
CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET

PARENT BANK
CONSOLIDATE
Ownership > 50%
EQUITY ACCOUNTING
Ownership Btw 50% - 20%
COST BASIS
Ownership < 20 %
BANK A
BANK B
BANK C
116

Balance Sheet

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ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS

AD-477 BANK MANAGEMENT InstructorBlent enver

BS Trainig Services bsenver@superonline.com

BALANCE SHEET ANALYSIS

BS Trainig Services bsenver@superonline.com

BS Trainig Services bsenver@superonline.com

INDEPENDENT AUDITORS REPORT

HOW IS THE F/S AUDITED ?

BS Trainig Services bsenver@superonline.com

HOW IS THE F/S AUDITED ?

BS Trainig Services bsenver@superonline.com

B/S ANALYSIS DEPENDS ON

BALANCE SHEET SHOWS

BS Trainig Services bsenver@superonline.com

BALANCE SHEET EQUATION

LIABILITIES + Plus SHAREHOLDERS EQUITY

BS Trainig Services bsenver@superonline.com

BALANCE SHEET Assets

150 400 200 50 100 70 80 1050

BALANCE SHEET Liabilities

400 150 100 80 70 250 1050

Generally Accepted & Internationally Accepted Accounting Principles

LOWER OF COST OR MARKET

BS Trainig Services bsenver@superonline.com

BS Trainig Services bsenver@superonline.com

BS Trainig Services bsenver@superonline.com

BALANCE SHEET DOES NOT SHOW

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STATEMENT OF INCOME SHOWS

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NET INTEREST INCOME

NET INTEREST INCOME

INTEREST EXPENSE P/L INTEREST BEARING LIABILITIES B/S

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NET NON-INTEREST INCOME

1000 (700) 300 220 (450) 70 (30) 40

PROFIT FROM BANKING OPERATIONS (NET OPERATING INCOME) (NOI)

PROFIT FROM EXTRAORDINARY TRANSACTIONS (PEXT)

PROFIT FROM SECURITY TRANNSACTIONS (PST)

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BS Trainig Services bsenver@superonline.com

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Balance Sheet __________________ Balance Sheet

Income Statement ________________ Balance Sheet

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RATIO ANALISIS CAPITAL ADEQUACY

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RATIO ANALYSIS CAPITAL ADEQUACY

RATIO ANALYSIS CAPITAL ADEQUACY

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RATIO ANALYSIS CAPITAL ADEQUACY

RATIO ANALYSIS CAPITAL ADEQUACY

The ability to raise additional Debt Capital

RATIO ANALYSIS CAPITAL ADEQUACY

BS Trainig Services bsenver@superonline.com

RATIO ANALYSIS CAPITAL ADEQUACY