Financial statements of bank
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Financial statements of bank
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Financial statements of bank
- 1. Financial Statements of a Bank By Ashra Rehmat
- 2. Introduction Financial statements for banks present a different analytical problem than statements for manufacturing and service companies. As a result, analysis of a bank's financial statements requires a distinct approach that recognizes a bank's unique risks.
- 3. • As financial intermediaries, banks assume two primary types of risk as they manage the flow of money through their business. • Interest rate risk • Credit risk
- 4. Introduction to Balance Sheets and Income Statements The balance sheet summarizes the financial position of an organization at a given moment, it is a snapshot of the firm. The balance sheet reflects the status of the organization’s assets, (the economic resources owned by the organization), liabilities (debts owned to creditors), and equity (the owner’s investment in the organization).
- 5. Balance Sheet As its name implies the balance sheet should indicate that these elements are in balance. Assets = Liabilities + Equity This fundamental relationship must always exist, because the assets represent the things owned by the organization and the liabilities and equity indicate how much was supplied by both creditors and owners.
- 6. The Bank Balance Sheet • A bank’s balance sheet lists sources of bank funds (liabilities) and uses to which they are put (assets) • Banks invest these liabilities (sources) into assets (uses) in order to create value for their capital providers
- 7. Income Statement In contrast to the balance sheet, the income statement shows the organization's financial progress over a given period of time. The income statement is also based on equation: Revenues - Expenses = Profit (or Loss)
- 8. Balance Sheet Assets Liabilities & Equity Deposits Equity Cash Securities Loans Other Assets Other Borrowings Other Liabilities
- 9. The Bank Balance Sheet Pay no interest Secondary reserves 74% of Assets Lowest cost source of funds-- payable on demand Deposit with no check writing Discount loans Fed Funds, Corporate Loans have grown by factor of 10 since 1960 as % of Liab Bank Equity = Assets - Liabilities, listed as Liab because Bank owes this to owners. Also includes Loan Loss Reserves
- 10. 10 Point of View: Bank vs. Customer • Customers hear bankers say, “The bank will credit your deposit account.” • Customers view their deposits as assets. • Therefore, customers think credits = assets.
- 11. 11 Off Balance Sheet • What does “off balance sheet” mean? • Why do off balance sheet items exist? • Why aren’t they on the balance sheet?
- 12. 12 Off Balance Sheet • Off balance sheet items: – Things that a business has possession of (or responsibility for) but does not actually own – Commitments that a business has made but is not yet scheduled to fulfill – Obligations a business has committed to depending on the outcome of contingent events
- 13. 13 Balance Sheet Debits Credits Assets Liabilities & Equity At any point in time, balance sheet debits = balance sheet credits
- 14. 14 Income Statement Debits Credits Financial Events Over any period of time, all debits = all credits
- 17. Increase in equity 17 Income Statement Cost Items Revenue Items Expense Income To balance sheet
- 18. 18 Income Statement Cost Items Revenue Items Expense Income Increase in asset value Increase in equity
- 21. 21 Income Statement Cost Items Revenue Items Expense Income Decrease in asset value Decrease in equity
- 23. 23 Cash Flow — Sources and Uses • Typical sources of cash: – Sales – Decreases in assets – Increases in liabilities – Increases in capital accounts – Non-cash expenses
- 24. 24 Cash Flow — Sources and Uses • Typical uses of cash: – Expenses – Increases in assets – Decreases in liabilities – Decreases in capital accounts
- 25. Thank You
Notas do Editor
- Nontransaction Deposits: are the overall primary source of bank liabilities (74%) and are accounts from which the depositor cannot write checks; examples include savings accounts and time deposits (also known as CDs or certificates of deposit) Nontransaction deposits are generally a bank’s highest cost funds because banks want deposits which are more stable and predictable and will pay more to the depositors (funds suppliers) in order to achieve such attributes. Certain borrowings can be more volatile than other liabilities, depending on market conditions. They currently make up about 12% of bank liabilities, but have been as high as 26% (2004) and as low as 2% (1960) in recent history. Borrowings: banks obtain funds by borrowing from the Federal Reserve System, other banks, and corporations; these borrowings are called: discount loans/advances (from the Fed), fed funds (from other banks), interbank offshore dollar deposits (from other banks), repurchase agreements (a.k.a., “repos” from other banks and companies), commercial paper and notes (from companies and institutional investors) Bank Capital: is the source of funds supplied by the bank owners, either directly through purchase of ownership shares or indirectly through retention of earnings (retained earnings being the portion of funds which are earned as profits but not paid out as ownership dividends). This is about 6% of assets. Since assets minus liabilities equals capital, capital is seen as protecting the liability suppliers from asset devaluations or write-offs (capital is also called the balance sheet’s “shock absorber,” thus capital levels are important). Securities: these are either U.S. government/agency debt, municipal debt, and other (non-equity) securities. These make-up about 17% of assets. Short-term Treasury debt is often referred to as secondary reserves because of its high liquidity. Loans: representing 74% of assets, these are a bank’s income-earning assets, such as business loans, auto loans, and mortgages. These are generally not very liquid. Most banks tend to specialize in either consumer loans or business loans, and even take that as far as loans to specific groups (such as a particular industry).