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Financial statements of bank

Financial statements of bank

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Financial statements of bank

  1. 1. Financial Statements of a Bank By Ashra Rehmat
  2. 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. 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. 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. 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. 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. 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. 8. Balance Sheet Assets Liabilities & Equity Deposits Equity Cash Securities Loans Other Assets Other Borrowings Other Liabilities
  9. 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. 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. 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. 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. 13 Balance Sheet Debits Credits Assets Liabilities & Equity At any point in time, balance sheet debits = balance sheet credits
  14. 14. 14 Income Statement Debits Credits Financial Events Over any period of time, all debits = all credits
  15. 15. 15 Income Statement Cost Items Revenue Items Expense Income
  16. 16. 16 Income Statement Cost Items Revenue Items Expense Income Profit
  17. 17. Increase in equity 17 Income Statement Cost Items Revenue Items Expense Income To balance sheet
  18. 18. 18 Income Statement Cost Items Revenue Items Expense Income Increase in asset value Increase in equity
  19. 19. 19 Income Statement Cost Items Revenue Items Expense Income
  20. 20. 20 Income Statement Cost Items Revenue Items Expense Income Loss
  21. 21. 21 Income Statement Cost Items Revenue Items Expense Income Decrease in asset value Decrease in equity
  22. 22. 23 Cash Flow — Sources and Uses • Typical sources of cash: – Sales – Decreases in assets – Increases in liabilities – Increases in capital accounts – Non-cash expenses
  23. 23. 24 Cash Flow — Sources and Uses • Typical uses of cash: – Expenses – Increases in assets – Decreases in liabilities – Decreases in capital accounts
  24. 24. Thank You 

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