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Balance Sheets of Commercial Banks
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Balance Sheets of Commercial Banks

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Balance Sheets of Commercial Banks Balance Sheets of Commercial Banks Presentation Transcript

  • ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS Wali Memon Wali Memon 1
  • BALANCE SHEET ANALYSIS OF COMMERCIAL BANKSWali Memon 2
  • ANNUAL REPORTOFBANKS Wali Memon 3
  • ANNUAL REPORT 1. AUDITOR’S REPORT (AR) 2. FINANCIAL STATEMENTS (F/S) 3. NOTES TO F/SWali Memon 4
  • AUDITOR’S REPORTINDEPENDENT“AUDITOR’S REPORT” Wali Memon 5
  • 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 Wali Memon 6
  • 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 Wali Memon 7
  • 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. Wali Memon 8
  • 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. Wali Memon 9
  • AUDITORS’ OPINIONIn our opinion, the F/S referred to above present fairly, in all materialrespects, 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 Wali Memon 10
  • FINANCIALSTATEMENTSOFCOMMERCIAL BANKS Wali Memon 11
  • FINANCIAL STATEMENTS 1. BALANCE SHEET 2. STATEMENT OF INCOME 3. STATEMENT OF SHAREHOLDER’S EQUITY 4. SOURCES & USES OF FUNDS STATEMENT Wali Memon 12
  • 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 PracticeWali Memon 13
  • BALANCE SHEETSHOWS As at a specific date. The Financial Position of a Bank As of Dec. 31,1998 Wali Memon 14
  • BALANCE SHEET EQUATION = 100 100 = LIABILITIESASSETS = + Plus Equals SHAREHOLDER’S EQUITY Wali Memon 15
  • BALANCE SHEET Assets Liquid Assets 150 Loans 400 Marketable Securities 200 Investment Securities 50 Fixed Assets 100 Accrued Interest 70 Other Assets 80 Total Assets 1050 Wali Memon 16
  • BALANCE SHEET Liabilities Deposits 400 Bank Borrowings 150 Accrued Expenses 100 Other Liabilities 80 Bonds Issued 70 Shareholder’s Equity 250 Total Liabilities & S/HE 1050 Wali Memon 17
  • SHAREHOLDER’S EQUITY Share Capital 100 Legal Reserves 30 Retained Earnings 50 Revaluation Surplus 20 Share Premiums 10 Net Income 40 Total S/H Equity 250 Wali Memon 18
  • ASSET VALUATION GAAP & IAAP LOWER OF Generally Accepted & Internationally Accepted COST OR Accounting Principles MARKET Wali Memon 19
  • ASSET CLASSIFICATION TOTAL ASSETS NON INTEREST EARNING INTEREST EARNING ASSETS ASSETSWali Memon 20
  • LIABILITY CLASSIFICATION TOTAL LIABILITIES INTEREST BEARING NON INTEREST BEARING LIABILITIES LIABILITIESWali Memon 21
  • BALANCE SHEET DOES NOT SHOW Interest Rates Interest Sensitivity Due Dates Foreign Currency breakdown CollateralWali Memon 22
  • STATEMENT OF INCOMESHOWS For the period between two The results of operations of a dates. bank. For the year ended Dec. 31 , 1998 Wali Memon 23
  • NET PROFIT NET PROFIT TOTAL TOTAL INCOME EXPENSEWali Memon 24
  • TOTAL INCOME TOTAL INCOME NET NET INTEREST NON-INTEREST INCOME INCOMEWali Memon 25
  • NET INTEREST INCOME NET INTEREST INCOME INTEREST INTEREST INCOME EXPENSE (+) (-)Wali Memon 26
  • NET INTEREST INCOME NET INTEREST INCOME INTEREST INTEREST INCOME EXPENSE P/L P/L INTEREST INTEREST EARNING BEARING ASSETS LIABILITIES B/S B/SWali Memon 27
  • NET NON-INTEREST INCOME NET NON-INTEREST INCOME NON NON INTEREST INTEREST INCOME EXPENCE (+) (-)Wali Memon 28
  • STATEMENT OF INCOME Interest Income 1000 Interest Expense (700) Net I.Income 300 Non Interest Income 220 Operating Expenses (450) Pre-Tax Profit 70 Tax Provision (30) Net Income 40 Wali Memon 29
  • ANALYSIS OF PROFIT NET PROFIT (NP) PROFIT FROM PROFIT FROM PROFIT FROM BANKING OPERATIONS EXTRAORDINARY SECURITY (NET OPERATING INCOME) TRANSACTIONS TRANNSACTIONS (NOI) (PEXT) (PST)Wali Memon 30
  • BANKINGRISKS Wali Memon 31
  • BANKING RISKS C AMEL A M E LWali Memon 32
  • CAMEL Capital AdequacyWali Memon 33
  • AMEL C Asset QualityWali Memon 34
  • CA MEL Managemen t QualityWali Memon 35
  • EL CAM Earning s EfficiencyWali Memon 36
  • L CAME Liquidit y RiskWali Memon 37
  • CAMEL RISKS Capital Adequacy Asset Quality Management Earnings LiquidityWali Memon 38
  • 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 Wali Memon 39
  • 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 Wali Memon 40
  • 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 Wali Memon 41
  • RATIO ANALYSISNumerator______________________Denominator Wali Memon 42
  • RATIO ANALYSIS Balance Sheet Income Statement __________________ ________________ Balance Sheet Balance Sheet Wali Memon 43
  • RATIO ANALYSIS What is the What is the LEVEL ? TREND ? Wali Memon 44
  • RATIO ANALYSIS 1. Capital Adequacy 2. Asset Quality 3. Management 4. Earnings & Efficiency 5. Liquidity Wali Memon 45
  • RATIO ANALISIS CAPITAL ADEQUACY “The Capital of a Bank protects the Bank against unexpected future losses.”Wali Memon 46
  • RATIO ANALYSISCAPITAL ADEQUACY 1. Shareholders’ Equity ------------------------------------ Total Assets The ability of the present Capital to support the further growth of Assets Wali Memon 47
  • RATIO ANALYSISCAPITAL ADEQUACY 2. Shareholders’ Equity ------------------------------------ Risk Weighted Assets Wali Memon 48
  • RATIO ANALYSISCAPITAL ADEQUACY 3. Shareholders’ Equity ------------------------------------ Risk Weighted Assets + RW Contingent Liabilities Wali Memon 49
  • RATIO ANALYSISCAPITAL ADEQUACY 4. Total Debt ------------------------------------ Shareholder’s Equity The ability to raise additional Debt Capital Wali Memon 50
  • RATIO ANALYSISCAPITAL ADEQUACY 5. Financial Leverage : Total Assets ------------------------------------ Shareholder’s Equity Wali Memon 51
  • RATIO ANALYSISCAPITAL 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 Wali Memon 52
  • RATIO ANALISISASSET QUALITY 1. Loans -------------------------------- Total Assets Wali Memon 53
  • RATIO ANALISISASSET 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. Wali Memon 54
  • RATIO ANALISISASSET QUALITY 3. Non Performing Loans ------------------------------------- Total Loans Indicates how much of the loan portfolio is non performing. Wali Memon 55
  • RATIO ANALISISASSET 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. Wali Memon 56
  • RATIO ANALISISASSET QUALITY 5. Loan Loss Provision ------------------------------------- Average Loans Shows current income reduction in anticipation of loan losses. Wali Memon 57
  • RATIO ANALISISASSET QUALITY 6. Net Charge - Offs ------------------------------------- Average Loans Shows current income reduction in anticipation of loan losses. Wali Memon 58
  • RATIO ANALISISASSET QUALITY 7. Interest Earning Assets ------------------------------------------------- Total Assets Wali Memon 59
  • RATIO ANALISISASSET QUALITY 8. Non Interest Earning Assets ------------------------------------------------- Total Assets Wali Memon 60
  • RATIO ANALISIS EARNINGS & EFFICIENCY “A Bank with no profit is like a human body with no blood.”Wali Memon 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 Wali Memon 62
  • RATIO ANALISISEARNINGS & EFFICIENCY 1. Return on Assets ( ROA ) Net Income -------------------------------------------- Total Average Assets Wali Memon 63
  • RATIO ANALISISEARNINGS & EFFICIENCY 2. Return on Equity ( ROE ) Net Income -------------------------------------------- Average Shareholder’s Equity Wali Memon 64
  • RATIO ANALISISEARNINGS & EFFICIENCY 3. Return on Equity ( ROE ) ROE = ROA * Equity Multiplier ROE = ( NI / AST ) * ( AST / SHEQ ) Wali Memon 65
  • RATIO ANALISISEARNINGS & EFFICIENCY 4. Interest Income -------------------------------------------- Average Interest Earning Assets Wali Memon 66
  • RATIO ANALISISEARNINGS & EFFICIENCY 5. Net Interest Income -------------------------------------------- Average Total Assets Wali Memon 67
  • RATIO ANALISISEARNINGS & EFFICIENCY 6. Interest Income on Loans -------------------------------------------- Average Total Loans Wali Memon 68
  • RATIO ANALISISEARNINGS & EFFICIENCY7. Total Operating Expense ------------------------------------------------- Total Operating Income Wali Memon 69
  • RATIO ANALISISEARNINGS & EFFICIENCY 8. Efficiency Ratio Non Interest Expense ---------------------------------------------------- Net Interest Income + Fees Commissions Wali Memon 70
  • RATIO ANALISISEARNINGS & EFFICIENCY 9. Break Even Ratio Total Expenses - Non Interest Income ---------------------------------------------------- Total Average Interest Earning Assets Wali Memon 71
  • RATIO ANALISISEARNINGS & EFFICIENCY 10. Net Free Funds Ratio Non Paying Liabilities - Non Earning Assets -------------------------------------------------- Interest Earning Assets Wali Memon 72
  • RATIO ANALISISEARNINGS & 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 Wali Memon 73
  • RATIO ANALISISEARNINGS & EFFICIENCY 12. Interest Rate Sensitivity Gap Ratio : Interest Rate Sensitive Assets ------------------------------------------------- Interest Rate Sensitive Liabilities Wali Memon 74
  • RATIO ANALYSIS LIQUIDITY “Inadequate Liquidity of a Bank may cause an accident similar to an airplane crash !”Wali Memon 75
  • RATIO ANALISISLIQUIDITY 1. Loans ------------------------- Deposits Wali Memon 76
  • RATIO ANALISISLIQUIDITY 2. Liquid Assets ------------------------- Deposits Wali Memon 77
  • RATIO ANALISISLIQUIDITY 3. Liquid Assets -------------------------------- Deposits + Borrowings Wali Memon 78
  • RATIO ANALISISLIQUIDITY 4. Assets Due for the Period ----------------------------------------- Liabilities Due for the Period Wali Memon 79
  • RATIO ANALISISLIQUIDITY 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. Wali Memon 80
  • RATIO ANALISISLIQUIDITY 6. Liquid Assets ----------------------------------------- Large Liabilities Measures the assets readily available to cover a loss of large liabilities. Wali Memon 81
  • RATIO ANALISISLIQUIDITY 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. Wali Memon 82
  • RATIO ANALISISLIQUIDITY 8. Brokered Deposits ----------------------------------------- Earning Assets Measures the extent to which a bank is funding assets with high- priced and volatile brokered deposits. Wali Memon 83
  • MATURITY ANALISIS Days 0-10 10-30 30-60 60-90 Cash 100 200 300 50 Loans 200 500 200 100 300 700 500 150 Deposit 400 300 800 20 Borrow 150 200 200 30 550 500 1000 50Wali Memon 84
  • MATURITY ANALYSIS Days 0-10 10-30 30-60 60-90 Asset 100 500 1000 2000 Liab 300 200 1500 700 Short - -200 -500 Long + +300 1300Wali Memon 85
  • OFF - BALANCE SHEET RISK 1. Loan Commitments ----------------------------------------- Average Assets Shows the extent of a bank’s obligation to make loans. Wali Memon 86
  • OFF - BALANCE SHEET RISK 2.Contingent Liabilities & Commitments ---------------------------------------------------- Average Assets Shows the extent of a bank’s commitments & contingent liabilities. Wali Memon 87
  • BANK ANALYSISCHECKLIST Wali Memon 88
  • BANK ANALYSIS CHECKLIST EARNINGS 1. Is earnings at an adequate level ? 2.Does valid reporting exist for earnings? Wali Memon 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 Wali Memon 90
  • 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 Wali Memon 91
  • 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 Wali Memon 92
  • 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 Wali Memon 93
  • 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 ? Wali Memon 94
  • INTEREST MARGININCREASING THEINTEREST MARGIN % Wali Memon 95
  • INCREASING INTEREST MARGIN Interest Income…………..200 Interest Expense…………( 50 ) ---------- INTEREST MARGIN….. 150 ---------- Wali Memon 96
  • INCREASING THE INTEREST MARGIN BANK STRATEGY TO INCREASE THE INTEREST MARGIN INCREASE CHANGE ALTER SIZE INTEREST ASSET/LIABILITY SPREAD MIXWali Memon 97
  • INCREASING THEINTEREST MARGIN BANK STRATEGY ACTION 1.Expand Assets 2.Reduce Fixed Assets Increase Size 3.Increase Equity Base Wali Memon 98
  • INCREASE THEINTEREST MARGIN BANK STRATEGY ACTION 1.Re-Price Change Asset Portfolio 2.Re-Price Interest Liability Portfolio Spread Wali Memon 99
  • INCREASE THEINTEREST MARGIN BANK STRATEGY ACTION 1.Plan Taxes 2.Reduce Liquidity Alter 3.Increase Aggressiveness Asset / 4.Change Asset Yield Sensitivity Liability 5.Change Liability Mix Cost Sensitivity Wali Memon 100
  • INCREASE THEINTEREST MARGIN IMPLEMENTATION 1.Offer new Products and Services 2.New Loans/Deposits BANK STRATEGY Increase Size 2.Open new Branches 3.Expand Promotion Budget ACTION Expand Assets 4.Reduce Interest Spread Wali Memon 101
  • EXPAND ASSETS IMPLEMENTATION REPERCUSSION 1.Offer new Products 1.Increase operating and Services Expenses 2.New Loans/Deposits 2.Need for Capital 3.Open new Branches 3.F/A Regulations 4.Expand Promotion 4.Decrease Capital Budget Ratio 5.Reduce Interest 5.Reduce ROA Spread Wali Memon 102
  • INCREASE THEINTEREST MARGIN IMPLEMENTATION BANK STRATEGY 1.Reduce Dividend Increase Size pay out 2.Offer Dividend reinvestment ACTION Increase 3.Sell Stock Equity Base 4.Establish Employee Stock Ownership PL Wali Memon 103
  • INCREASE EQUITY BASE REPERCUSSIONS IMPLEMENTATION 1.Hurt shareholders 1.Reduce Dividend pay out 2.Double taxation S/H 3.Reduce ability to 2.Offer Dividend leverage ROA, reinvestment dilution of earnings 3.Sell Stock 4.Continued Employee 4.Establish Employee Expectations Stock Ownership PL Wali Memon 104
  • INCREASE INTEREST MARGIN IMPLEMENTATION 1.Increase rates on Loans BANK STRATEGY Change Interest Spread 2.Compound return more frequently 3.Reduce rates on ACTION Deposits Re-price Portfolio 4.Compound cost less frequently Wali Memon 105
  • REPRICE PORTFOLIO REPERCUSSIONS IMPLEMENTATION 1.Lose business 1.Increase rates on Loan quality decrease Loans 2.Increase operations 2.Compound return Client dissatisfaction more frequently 3.Lose business 3.Reduce rates on Liquidity problem Deposits 4.Increase operations 4.Compound cost less Client dissatisfaction frequently Wali Memon 106
  • INCREASE INTEREST MARGIN IMPLEMENTATION 1.Minimize cash 2.Minimize due from 3.Sell Securities & BANK STRATEGY Bonds Alter Asset/Liability Mix 4.Increase short term Deposits ACTION Reduce Liquidity Wali Memon 107
  • REDUCE LIQUIDITY IMPLEMENTATION 1.Minimize cash 2.Minimize due from REPERCUSSION 3.Sell Securities & Bonds 1.Liquidity Risk 4.Increase short term 2.Lose correspondent Deposits 3.Incur book losses 4.Increase volatility of deposits Wali Memon 108
  • INCREASE INTEREST MARGIN BANK STRATEGY IMPLEMENTATION Alter Asset/Liability Mix 1.Increase loan/deposit ratio 2.Increase highest yielding loans ACTION 3.Increase highest yielding Increase Aggressiveness securities Wali Memon 109
  • INCREASE AGGRESSIVENESS REPERCUSSION IMPLEMENTATION 1.Increase need for 1.Increase loan/deposit capital ratio 2.Increase loan losses 2.Increase highest yielding loans 3.Increase highest yielding 3.Increase security losses securities Wali Memon 110
  • INCREASE INTEREST MARGIN BANK STRATEGY Alter Asset/Liability Mix IMPLEMENTATION 1.Increase S/T & variable rate assets if rates will increase 2.Decrease S/T & variable ACTION rate assets if rates will Change Asset Yield decrease Sensitivity Wali Memon 111
  • CHANGE ASSET YIELD SENSITIVITY IMPLEMENTATION REPERCUSSION 1.Increase S/T & variable rate 1.Wrong estimate of interest assets if rates will increase movement, thereby reducing 2.Decrease S/T & variable interest spread rate assets if rates will decrease Wali Memon 112
  • INCREASE INTEREST MARGIN BANK STRATEGY IMPLEMENTATION Alter Asset/Liability Mix 1.Decrease S/T & variable rate liabilities if rates will increase ACTION 2.Increase S/T & variable rate liabilities if rates will Change Liability Cost decrease Sensitivity Wali Memon 113
  • CHANGE LIABILITY COST SENSITIVITY IMPLEMENTATION REPERCUSSION 1.Decrease S/T & variable rate liabilities if rates will 1.Wrong estimate of interest increase movement, thereby reducing interest spread 2.Increase S/T & variable rate liabilities if rates will decrease Wali Memon 114
  • CONSOLIDATED FINANCIAL STATEMENTS Wali Memon 115
  • CONSOLIDATED BALANCE SHEET PARENT BANK CONSOLIDATE EQUITY ACCOUNTING COST BASIS Ownership Ownership Ownership > 50% Btw 50% - 20% < 20 % BANK A BANK B BANK CWali Memon 116