ANALYSIS OF THE BALANCE
SHEETS OF COMMERCIAL
BANKS
AD-477 BANK MANAGEMENT
Instructor……Bülent Şenver
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1
BALANCE SHEET
ANALYSIS
•
OF
• COMMERCIAL
BANKS
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ANNUAL REPORT
OF
BANKS
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ANNUAL REPORT
• 1. AUDITOR’S
REPORT (AR)
• 2. FINANCIAL
STATEMENTS (F/S)
• 3. NOTES TO F/S
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AUDITOR’S
REPORT
“INDEPENDENT
AUDITOR’S REPORT”
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INDEPENDENT AUDITORS’
REPORT
• 1.What is done ?
• 2.What is audited ?
• 3.What is the auditor’s & management’s
responsibility ?
• 4.Audit is done based on what standard ?
• 5.Auditors’ opinion based on IAS
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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
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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.
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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.
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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
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FINANCIAL
STATEMENTS
OF
COMMERCIAL BANKS
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FINANCIAL STATEMENTS
• 1. BALANCE SHEET
• 2. STATEMENT OF INCOME
• 3. STATEMENT OF
SHAREHOLDER’S EQUITY
• 4. SOURCES & USES OF FUNDS
STATEMENT
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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
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BALANCE SHEET
SHOWS
• The Financial Position
of a Bank
• As at a specific date.
• As of Dec. 31,1998
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BALANCE SHEET
EQUATION
•
• ASSETS
•
100
=
=
Equals
• = 100
• LIABILITIES
•
+ Plus
• SHAREHOLDER’S
EQUITY
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BALANCE SHEET Assets
•
•
•
•
•
•
•
•
Liquid Assets
Loans
Marketable Securities
Investment Securities
Fixed Assets
Accrued Interest
Other Assets
Total Assets
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150
400
200
50
100
70
80
1050
16
BALANCE SHEET Liabilities
•
•
•
•
•
•
•
Deposits
Bank Borrowings
Accrued Expenses
Other Liabilities
Bonds Issued
Shareholder’s Equity
Total Liabilities & S/HE
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400
150
100
80
70
250
1050
17
SHAREHOLDER’S EQUITY
•
•
•
•
•
•
•
Share Capital
Legal Reserves
Retained Earnings
Revaluation Surplus
Share Premiums
Net Income
Total S/H Equity
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100
30
50
20
10
40
250
18
ASSET VALUATION
• GAAP & IAAP
• Generally Accepted &
Internationally
Accepted Accounting
Principles
• LOWER OF
• COST OR
• MARKET
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ASSET CLASSIFICATION
TOTAL
ASSETS
NON INTEREST EARNING
ASSETS
INTEREST EARNING
ASSETS
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LIABILITY
CLASSIFICATION
TOTAL
LIABILITIES
INTEREST BEARING
LIABILITIES
NON INTEREST BEARING
LIABILITIES
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BALANCE SHEET
DOES NOT SHOW
•
•
•
•
Interest Rates
Interest Sensitivity
Due Dates
Foreign Currency
breakdown
• Collateral
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STATEMENT OF INCOME
SHOWS
• The results of
operations of a bank.
• For the period
between two dates.
• For the year ended
Dec. 31 , 1998
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NET PROFIT
NET PROFIT
TOTAL
INCOME
TOTAL
EXPENSE
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TOTAL INCOME
TOTAL
INCOME
NET
INTEREST
INCOME
NET
NON-INTEREST
INCOME
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NET INTEREST INCOME
NET
INTEREST
INCOME
INTEREST INTEREST
INCOME EXPENSE
(+)
(-)
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NET INTEREST INCOME
NET
INTEREST
INCOME
INTEREST
INCOME
P/L
INTEREST
EXPENSE
P/L
INTEREST
EARNING
ASSETS
B/S
INTEREST
BEARING
LIABILITIES
B/S
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NET NON-INTEREST
INCOME
NET
NON-INTEREST
INCOME
NON
NON
INTEREST INTEREST
INCOME EXPENCE
(+)
(-)
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STATEMENT OF INCOME
•
•
•
•
•
•
•
•
Interest Income
Interest Expense
Net I.Income
Non Interest Income
Operating Expenses
Pre-Tax Profit
Tax Provision
Net Income
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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)
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PROFIT FROM
SECURITY
TRANNSACTIONS
(PST)
30
BANKING
RISKS
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BANKING RISKS
•C AMEL
•
•
•
•
A
M
E
L
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CAMEL
• Capital
Adequacy
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C
AMEL
• Asset
Quality
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CA
MEL
• Management
Quality
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EL
CAM
• Earnings
Efficiency
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L
CAME
• Liquidity
Risk
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CAMEL RISKS
• Capital
Adequacy
• Asset Quality
• Management
• Earnings
• Liquidity
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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
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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
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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
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RATIO ANALYSIS
Numerator
______________________
Denominator
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RATIO ANALYSIS
• Balance Sheet
__________________
Balance Sheet
• Income Statement
________________
Balance Sheet
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RATIO ANALYSIS
• What is the
• What is the
• LEVEL ?
• TREND ?
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RATIO ANALYSIS
•
•
•
•
•
1. Capital Adequacy
2. Asset Quality
3. Management
4. Earnings & Efficiency
5. Liquidity
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RATIO ANALISIS
CAPITAL ADEQUACY
• “The Capital of a
Bank protects the
Bank against
unexpected future
losses.”
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RATIO ANALYSIS
CAPITAL ADEQUACY
• 1.
•
•
Shareholders’ Equity
-----------------------------------Total Assets
• The ability of the present Capital to support
the further growth of Assets
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RATIO ANALYSIS
CAPITAL ADEQUACY
• 2.
•
•
Shareholders’ Equity
-----------------------------------Risk Weighted Assets
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RATIO ANALYSIS
CAPITAL ADEQUACY
• 3.
•
•
Shareholders’ Equity
-----------------------------------Risk Weighted Assets
+
RW Contingent Liabilities
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RATIO ANALYSIS
CAPITAL ADEQUACY
• 4.
•
•
Total Debt
-----------------------------------Shareholder’s Equity
• The ability to raise additional Debt Capital
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RATIO ANALYSIS
CAPITAL ADEQUACY
• 5. Financial Leverage :
•
•
Total Assets
-----------------------------------Shareholder’s Equity
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RATIO ANALYSIS
CAPITAL ADEQUACY
• 6. Capital Formation Rate :
•
Retained Net Income (RNI)
-------------------------------------------------•
Average Shareholder’s Equity
• RNI = Net Income - Dividends to be paid
• The internal growth of Equity Capital
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RATIO ANALISIS
ASSET QUALITY
• 1.
•
•
Loans
-------------------------------Total Assets
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RATIO ANALISIS
ASSET QUALITY
• 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.
•
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RATIO ANALISIS
ASSET QUALITY
• 3.
•
Non Performing Loans
------------------------------------Total Loans
• Indicates how much of the loan portfolio is
non performing.
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RATIO ANALISIS
ASSET QUALITY
• 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.
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RATIO ANALISIS
ASSET QUALITY
• 5.
•
Loan Loss Provision
------------------------------------Average Loans
• Shows current income reduction in
anticipation of loan losses.
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RATIO ANALISIS
ASSET QUALITY
• 6.
•
Net Charge - Offs
------------------------------------Average Loans
• Shows current income reduction in
anticipation of loan losses.
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RATIO ANALISIS
ASSET QUALITY
• 7.
•
•
Interest Earning Assets
------------------------------------------------Total Assets
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RATIO ANALISIS
ASSET QUALITY
• 8.
•
•
Non Interest Earning Assets
------------------------------------------------Total Assets
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• “A Bank with no
profit is like a human
body with no blood.”
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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
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 1. Return on Assets ( ROA )
•
•
Net Income
-------------------------------------------Total Average Assets
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 2. Return on Equity ( ROE )
•
•
Net Income
-------------------------------------------Average Shareholder’s Equity
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 3. Return on Equity ( ROE )
• ROE =
ROA
* Equity Multiplier
• ROE = ( NI / AST ) * ( AST / SHEQ )
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 4.
•
•
Interest Income
-------------------------------------------Average Interest Earning Assets
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 5.
•
•
Net Interest Income
-------------------------------------------Average Total Assets
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 6.
•
•
Interest Income on Loans
-------------------------------------------Average Total Loans
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 7.
•
Total Operating Expense
------------------------------------------------•
Total Operating Income
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 8. Efficiency Ratio
•
Non Interest Expense
---------------------------------------------------• Net Interest Income + Fees Commissions
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 9. Break Even Ratio
• Total Expenses - Non Interest Income
---------------------------------------------------• Total Average Interest Earning Assets
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 10. Net Free Funds Ratio
• Non Paying Liabilities - Non Earning
Assets
-------------------------------------------------•
Interest Earning Assets
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 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
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RATIO ANALISIS
EARNINGS & EFFICIENCY
• 12. Interest Rate Sensitivity Gap Ratio :
•
•
Interest Rate Sensitive Assets
------------------------------------------------Interest Rate Sensitive Liabilities
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RATIO ANALYSIS
LIQUIDITY
• “Inadequate
Liquidity of a Bank
may cause an
accident similar to an
airplane crash !”
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RATIO ANALISIS
LIQUIDITY
• 1.
•
•
Loans
------------------------Deposits
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RATIO ANALISIS
LIQUIDITY
• 2.
•
•
Liquid Assets
------------------------Deposits
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RATIO ANALISIS
LIQUIDITY
• 3.
•
•
Liquid Assets
-------------------------------Deposits + Borrowings
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RATIO ANALISIS
LIQUIDITY
• 4.
•
•
Assets Due for the Period
----------------------------------------Liabilities Due for the Period
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RATIO ANALISIS
LIQUIDITY
• 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
bank’s large liabilities.
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RATIO ANALISIS
LIQUIDITY
• 6.
•
Liquid Assets
----------------------------------------Large Liabilities
• Measures the assets readily available to
cover a loss of large liabilities.
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RATIO ANALISIS
LIQUIDITY
• 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.
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RATIO ANALISIS
LIQUIDITY
• 8.
•
Brokered Deposits
----------------------------------------Earning Assets
• Measures the extent to which a bank is
funding assets with high-priced and volatile
brokered deposits.
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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
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60-90
50
100
150
20
30
50
84
MATURITY ANALYSIS
Days
0-10
10-30
30-60
60-90
Asset
Liab
100
300
500
200
1000
1500
2000
700
Short - -200
Long +
-500
+300
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1300
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OFF - BALANCE SHEET
RISK
• 1.
•
Loan Commitments
----------------------------------------Average Assets
• Shows the extent of a bank’s obligation to
make loans.
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OFF - BALANCE SHEET
RISK
• 2.Contingent Liabilities & Commitments
---------------------------------------------------•
Average Assets
• Shows the extent of a bank’s commitments
& contingent liabilities.
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BANK ANALYSIS
CHECKLIST
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BANK ANALYSIS
CHECKLIST
• EARNINGS
• 1. Is earnings at an adequate level ?
• 2.Does valid reporting exist for earnings?
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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
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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
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BANK ANALYSIS
CHECKLIST
• 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
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BANK ANALYSIS
CHECKLIST
•
•
•
•
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
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BANK ANALYSIS
CHECKLIST
•
•
•
•
•
•
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 ?
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INTEREST MARGIN
INCREASING THE
INTEREST MARGIN
%
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INCREASING INTEREST
MARGIN
• Interest Income…………..200
• Interest Expense…………( 50 )
---------• INTEREST MARGIN….. 150
----------
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INCREASING THE
INTEREST MARGIN
BANK STRATEGY TO
INCREASE THE
INTEREST MARGIN
INCREASE
SIZE
CHANGE
INTEREST
SPREAD
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ALTER
ASSET/LIABILITY
MIX
97
INCREASING THE
INTEREST MARGIN
• BANK STRATEGY
• ACTION
• Increase Size
• 1.Expand Assets
• 2.Reduce Fixed Assets
• 3.Increase Equity Base
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INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
• ACTION
• Change
Interest Spread
• 1.Re-Price
Asset Portfolio
• 2.Re-Price
Liability Portfolio
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INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
• Alter
Asset / Liability
Mix
•
•
•
•
ACTION
1.Plan Taxes
2.Reduce Liquidity
3.Increase
Aggressiveness
• 4.Change Asset Yield
Sensitivity
• 5.Change Liability
Cost Sensitivity
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INCREASE THE
INTEREST MARGIN
• 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
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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
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INCREASE THE
INTEREST MARGIN
• 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
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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
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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
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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
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INCREASE INTEREST
MARGIN
• IMPLEMENTATION
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Reduce Liquidity
• 1.Minimize cash
• 2.Minimize due from
• 3.Sell Securities &
Bonds
• 4.Increase short term
Deposits
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REDUCE LIQUIDITY
• REPERCUSSION
• IMPLEMENTATION
• 1.Liquidity Risk
• 2.Lose correspondent
• 3.Incur book losses
• 1.Minimize cash
• 2.Minimize due from
• 3.Sell Securities &
Bonds
• 4.Increase short term
Deposits
• 4.Increase volatility of
deposits
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INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Increase
Aggressiveness
• IMPLEMENTATION
• 1.Increase loan/deposit
ratio
• 2.Increase highest
yielding loans
• 3.Increase highest
yielding securities
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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
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INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Change Asset Yield
Sensitivity
• IMPLEMENTATION
• 1.Increase S/T &
variable rate assets if
rates will increase
• 2.Decrease S/T &
variable rate assets if
rates will decrease
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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
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bsenver@superonline.com
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INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Change Liability
Cost Sensitivity
• IMPLEMENTATION
• 1.Decrease S/T &
variable rate liabilities
if rates will increase
• 2.Increase S/T &
variable rate liabilities
if rates will decrease
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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
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CONSOLIDATED
FINANCIAL
STATEMENTS
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CONSOLIDATED BALANCE
SHEET
PARENT
BANK
CONSOLIDATE
EQUITY ACCOUNTING
COST BASIS
Ownership
> 50%
Ownership
Btw 50% - 20%
Ownership
< 20 %
BANK A
BANK B
BANK C
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