Bank Financial Statements

An Introduction

2

Course Outline

Basic accounting Basic reports Basic ratios

3

Special Topics

How retail and wholesale banks differ Why some growth is good and some is bad How assets and liabilities affect earnings How inflation affects a bank How loan loss accounting works Why budgets and forecasts are difficult

4

Course Perspective

Bank financial statements as used in US– Teacher: Does not know VN practices– Students: Compare US practices to VN– Students: Apply concepts to VN– Students: Ask questions

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Basic Reports

Balance sheet Income statement Notes Ratios Cash flow statement Average balance sheet

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Basic Accounting

Balance Sheet = “Stock” items– Things of value measured at a point in time

Income Statement = “Flow” items– Financial events measured during a period of time

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Basic Accounting – Balance Sheet

Debits Credits

Assets Liabilities & Equity

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Basic Accounting – Balance Sheet

Whatis

owned

Whoowns

it

Assets Liabilities & Equity

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Basic Accounting – Balance Sheet

Worthof

things

Who theworth is owed to

Assets Liabilities & Equity

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Basic Accounting – Balance Sheet

Worthof

things

Owed to outsiders

Assets Liabilities & Equity

Owed to insiders

Liabilities

Equity

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Basic Accounting – Balance Sheet

Asset category flow:– Most liquid → least liquid– Most tangible → least tangible (intangible)– Most specific → least specific (miscellaneous)

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Basic Accounting – Balance Sheet

Liabilities and Equity category flow:– Owed to outsiders → owed to insiders– Owed soonest → owed latest– Most specific → least specific (miscellaneous)

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Basic Accounting – Balance Sheet

Assets Liabilities & Equity

Deposits

Equity

Cash

Securities

Loans

Other Assets

Other Borrowings

Other Liabilities

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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.

15

Basic Accounting – Off Balance Sheet

What does “off balance sheet” mean? Why do off balance sheet items exist? Why aren’t they on the balance sheet?

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Basic Accounting – 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

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Basic Accounting – Balance Sheet

Debits Credits

Assets Liabilities & Equity

At any point in time,balance sheet debits

=balance sheet credits

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Basic Accounting – Income Statement

Debits Credits

Financial Events

Over any period of time,all debits

=all credits

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Basic Accounting – Income Statement

Debits Credits

Financial Events

Flow Items

Stock Items

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Basic Accounting – Income Statement

Debits Credits

Financial Events

Income Statement

Balance Sheet

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Basic Accounting – Income Statement

CostItems

RevenueItems

Expense Income

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Basic Accounting – Income Statement

CostItems

RevenueItems

Expense Income

Profit

Increase in equity

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Basic Accounting – Income Statement

CostItems

RevenueItems

Expense Income

To balance sheet

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Basic Accounting – Income Statement

CostItems

RevenueItems

Expense Income

Increase in asset value

Increase in equity

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Basic Accounting – Income Statement

CostItems

RevenueItems

Expense Income

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Basic Accounting – Income Statement

CostItems

RevenueItems

Expense Income

Loss

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Basic Accounting – Income Statement

CostItems

RevenueItems

Expense Income

Decrease in asset value

Decrease in equity

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Basic Accounting – Income Statement

Income statement category flow:– Income (revenues)

→ expenses (costs) → net income (profit)

– Core activities → non-core activities– Ongoing operations → discontinued operations– Major items → minor items

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Basic Accounting – Accrual

Accrual accounting versus cash accounting– Personal versus business– Accrual accounting: Better matching of timing of

revenues and costs than cash accounting– Accrual accounting: More complicated than cash

accounting

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Basic Reports – Balance Sheet

Where is risk to value … among assets? Cash

– Credit quality of banks holding deposits Investment securities

– Exposure to rising interest rates– Credit quality of debt obligors– Market liquidity

Loans– Credit quality of borrowers– Exposure to prepayment

Other assets– ???

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Basic Reports – Balance Sheet

Where is risk to value … among liabilities? Noninterest-bearing deposits

– Deterioration in bank’s reputation Interest-bearing deposits

– Exposure to rising interest rates Borrowings

– Exposure to rising interest rates– Deterioration in bank’s credit quality

Other liabilities– ???

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Cash Flow — Sources and Uses

Typical sources of cash:– Sales– Decreases in assets– Increases in liabilities– Increases in capital accounts– Non-cash expenses

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Cash Flow — Sources and Uses

Typical uses of cash:– Expenses– Increases in assets– Decreases in liabilities– Decreases in capital accounts

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Cash Flow Calculation

in Balance Sheet Accountsand Effect on Cash FlowAccount Cash Flow

Assets:+ –– +

Liabilities:+ +

– –

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Wholesale versus Retail