The document discusses bank balance sheet analysis techniques. It begins by defining a bank balance sheet and its key components - assets, liabilities, and equity. Assets include cash, securities, and loans/advances. Liabilities include deposits and debt. Equity includes stockholder equity. Bank balance sheets are analyzed differently than other industries, focusing on liquidity, solvency, and profitability. Key ratios like non-performing loans to total assets are used to measure default risk. The document also discusses income statements, risks to banks like interest rate and credit risk, and sources and uses of funds statements.

1. BANK BALANCE
SHEET ANALYSIS
TECHNIQUES
SOURCES AND
APPLICATION OF
FUNDS
Submitted By
Jyotirmaya maharana – 2203038
Jandhyala Rupes - 2203037

2. Bank Balance sheet
Definition
A banks Balance Sheet can be defined as a part of a bank’s financial statements which represent the
financial position, i.e., financial health of a banking entity at a certain point of time, usually at the end
of the accounting period (quarterly, annually as per applicable regulations) prepared strictly in
compliance with the applicable banking rules and regulations of the country providing insights about
the bank’s assets, liability and its capital.
Banks operate on storing customer deposits and lending money out from those deposits. As such, they
earn income from the difference between the interest they earn on lending and the cost of storing
customer deposits.
Bank’s Balance sheet comprises of three parts assets, liability, and equity. The main function of a bank
is to attract investors and lend the credit or loan to eligible clients.

3. simplified bank's balance
sheet may look something
like this:
Assets
- Cash
- Purchased Securities
- Customer Loans
- Central Bank Deposits
Liabilities
- Customer Deposits
- Securities Sold
- Debt
Equity
- Stockholder's Equity
Assets
An asset is something that will generate economic benefits in the future. Mentioned
below are some important items forming part of assets are-
 Cash and Cash Equivalents: A bank is required to maintain a certain amount
of cash as a reserve in comparison with its liabilities. The amount of cash reserves
a bank must hold is determined by the federal reserve, which ensures the safety
of banks and allows the regulatory bank to affect the monetary policy. Excess
reserves are kept for greater safety; vault cash that is kept in ATM and bank
premises to be used by the customers has to be maintained by the banks, cash
equivalents include short-term assets such as demand deposits. T-bills and
commercial paper.
 Securities: Basic securities that banks own are treasuries and municipal bonds.
When a bank needs more cash, the bonds can be easily sold in the secondary
market. Hence these are also known as secondary reserves after cash and cash
equivalents. Banks also hold many asset-backed securities and derivatives.
 Loans & Advances: Loans and advances form a major part of banks’ Balance
sheets as these are the assets on which banks earn interest and other income.
Many times, these loans and advances are also traded in between financial
institutions.

4. Liabilities
Liabilities are obligations which will results in the outflow of economic resources in the future.
 Checkable Deposits: These are deposits under which the depositor can withdraw at its will any time from
the bank, and it includes all checking accounts.
 Non-Transaction Deposits: These are saving accounts and time deposits such as certificates of deposits.
These are the liabilities for the bank which if not sufficiently held and maintained, hampers the growth of
the bank.
 Debt: Debt are money borrowed from other banks or regulatory banks, federal fund markets, on-
depository institutions such as insurance companies and pension funds, etc. Sometimes bank also borrows
from the federal reserve at the time of financial stress or crises as they could not get funding elsewhere.
Equity:
Stockholder Equity It is the fund introduced by the initial investors and shareholders of the banks adjusted
with the net earnings, reserves and surplus, losses, etc.

5. Bank Balance Sheet technique
Bank’s Balance Sheet is different from a manufacturing industry’s or any other non-financial organization
balance sheet. Analysis of Bank’s B/S is done primarily considering the following three factors: –
 Liquidity: Ensuring enough cash availability at any point to meet out its obligations
 Solvancy: Concerned with creditworthiness, ensuring sufficiency and quality of bank assets
 Profitability: Bank’s profit-making capability in accordance with available resources.
The basic purpose of analyzing the bank’s balance sheet is to ascertain the bank’s default risk to meet the
interest or its payment obligations. Banks typically use non-performance ratio as a tool to measure its
default capacity and its preparedness to meet future contingencies. Some widely used ratios are as follows:
–
 Non-Performing Loan / Customer Loan: Used to measure overall quality of the bank’s loan book.
 Non- Performing Loans / Average Total Assets: Used for banks which are facing tough situations when
a certain benchmark is crossed by the ratio, the situation is considered as a signal for insolvency.
 Own Resources / Average Total Assets: This ratio indicates the bank’s use usage of its own resources
employed for investment in assets in comparison with borrowed funds.

6. Income Statement
A bank's income statement contains two general categories: interest income and non-interest income. Interest income, as discussed prior, is the money
earned from lending out customer deposits and the interest earned on the financing. Non-interest income encompasses all the other business activities
that a bank engages in. These may include credit card fees, underwriting fees, fees from overdrawn accounts, transaction fees, and any other non-
interest income that a bank earns.
A bank's income statement will also include interest expense, which is the expense related to storing customer deposits, which would be deducted
from interest-related revenue. Another important item on a bank's income statement is the "provisions" line item. Provisions relate to loans that have
defaulted and will not be paid. This will be found in the income statement usually as "loan loss provision."
Risks to Banks
Every company has to deal with risks in its operations. Depending on the type of business, the industry, and the economic environment, risks will be
different for each company. For a bank, two of the most important risks it has to deal with are interest rate risk and credit risk.
Interest Rate Risk
Banks earn interest on the deposits they lend out as loans. The amount a bank earns as revenue depends on how much interest it can charge. Depending
on the current economic environment, the interest rate environment can be beneficial or detrimental to a bank's profits. In high-interest rate
environments, banks earn more on their loans whereas, in low-interest-rate environments, they will earn less.
Credit Risk
Credit risk arises when a bank makes a loan to an individual or company. The risk is that the borrower may default and not be able to pay the loan back.
Banks perform a thorough analysis of a borrower before making a loan to mitigate credit risk, yet, unforeseen defaults still occur. A default results in
losses for a bank, though they do set aside reserves to meet these losses.

7. Sources of funds and Application of Funds
What is a Sources and Application of Funds Statement?
A sources and uses of funds statement is a summary of a firm’s changes in financial position from one period
to another. It is also called a flow of funds statement or a statement of changes in financial position. It has been
replaced by the cash flow statement (1989) in US audited annual reports.
The cash flow statement shows a business’s cash inflow and cash outflow over an accounting period, normally
a quarter or a year. A cash flow statement provides information about the changes in cash and cash equivalents of a
business by classifying cash flows into operating, investing, and financing activities. It is a key report to be prepared for each accounting
period for which financial statements are presented by a Bank/enterprise.
What the Sources and Uses of Funds Statement Indicate
The cash flow statement indicates where an organisation got its money from and how it was spent. All cash
received (inflows) by the company and spent (outflows) by the company is shown in this statement.
The cash flow statement shows how changes in balance sheet accounts can affect the cash which is available to
a business. The projections in the statement help businesses, especially when planning short-term goals or
investments, to see the current cash available for such actions. Management or investors can use the cash flow
statement to pick up healthy or unhealthy trends regarding a company’s trading activities.

8. What the Statement is Composed Of
Generally, the statement consists of two sections: the source (where the money has come from) and the application
(where the money has gone).
The sources of funds originate from:
 A decrease in liabilities or an increase in assets
 Net income after tax
 The disposal or revaluation of fixed assets
 Proceeds of loans obtained
 Proceeds of shares that were issued
 Repayments received on loans previously granted by the company
 Any increase in net working capital
The application of funds includes:
 Losses to be met by the company
 The purchase of fixed assets/investments
 The full or partial payment of loans
 Granting of loans
 Liability for taxes
 Dividends paid or proposed
 Any decrease in net working capital