Bank BS Analysis

7/31/2019 Bank BS Analysis

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BS Trainig Services 1

ANALYSIS OF THEANALYSIS OF THE

BALANCE SHEETS OFBALANCE SHEETS OFCOMMERCIAL BANKSCOMMERCIAL BANKS

AD-477 BANK MANAGEMENT

InstructorBlent enver


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BALANCE SHEETBALANCE SHEET

ANALYSISANALYSIS

OF

COMMERCIAL

BANKS


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ANNUAL REPORTANNUAL REPORTOFOF

BANKSBANKS


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ANNUAL REPORTANNUAL REPORT

1. AUDITORS

REPORT (AR)

2. FINANCIAL

STATEMENTS (F/S)

3. NOTES TO F/S


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AUDITORS REPORTAUDITORS REPORTINDEPENDENT

AUDITORS REPORT


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INDEPENDENT AUDITORSINDEPENDENT AUDITORS

REPORTREPORT 1.What is done ?

2.What is audited ?

3.What is the auditors & managements

responsibility ?

4.Audit is done based on what standard ?

5.Auditors opinion based on IAS


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WHAT IS AUDITED ?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


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HOW IS THE F/S AUDITED ?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.


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HOW IS THE F/S AUDITED ?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 reasonablebasis for our opinion.


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AUDITORS OPINIONAUDITORS OPINION

In our opinion, the F/S referred to above

present fairly, in all material respects, the

financial position of A Bank & the results

of its operations, changes in its cash flowsfor the year then ended,

in accordance with International

Accounting Standards. ArthurAndersen&Co


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FINANCIALFINANCIAL

STATEMENTSSTATEMENTSOFOF

COMMERCIAL BANKSCOMMERCIAL BANKS


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FINANCIAL STATEMENTSFINANCIAL STATEMENTS

1. BALANCE SHEET

2. STATEMENT OF INCOME

3. STATEMENT OF

SHAREHOLDERS EQUITY

4. SOURCES & USES OF FUNDSSTATEMENT


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B/S ANALYSIS DEPENDS ONB/S ANALYSIS DEPENDS ON Available Data

Standard ReportingPractice

Use of Internationally

Accepted AccountingStandards

Use of Internationally

Accepted Auditing

Standards Use of External &

Internal Audit Practice


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SHOWSSHOWS

The Financial Positionof a Bank

As at a specific date.

As of Dec. 31,1998


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EQUATIONEQUATION 100 =

ASSETS =

Equals

= 100

LIABILITIES

+ Plus

SHAREHOLDERSEQUITY


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BALANCE SHEET AssetsBALANCE 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


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BALANCE SHEET LiabilitiesBALANCE SHEET Liabilities

Deposits 400

Bank Borrowings 150

Accrued Expenses 100

Other Liabilities 80

Bonds Issued 70 Shareholders Equity 250

Total Liabilities & S/HE 1050


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SHAREHOLDERS EQUITYSHAREHOLDERS EQUITY

Share Capital 100

Legal Reserves 30

Retained Earnings 50

Revaluation Surplus 20

Share Premiums 10 Net Income 40

Total S/H Equity 250


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ASSET VALUATIONASSET VALUATION

GAAP & IAAP

Generally Accepted &

Internationally

Accepted AccountingPrinciples

LOWER OF

COST OR

MARKET


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ASSET CLASSIFICATIONASSET CLASSIFICATION

N O N I N T E R E

A S S E T S

I N T E R E S T E

A S S E T S

T O T A LA S S E T S


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LIABILITYLIABILITY

CLASSIFICATIONCLASSIFICATION

I N T E R E S T B

L I A B I L I T I E

N O N I N T E R E

L I A B I L I T I E

T O T A LL I A B I L I T I


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DOES NOT SHOWDOES NOT SHOW

Interest Rates

Interest Sensitivity

Due Dates

Foreign Currency

breakdown Collateral


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STATEMENT OF INCOMESTATEMENT OF INCOME

SHOWSSHOWS

The results ofoperations of a bank.

For the period betweentwo dates.

For the year ended

Dec. 31 , 1998


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NET PROFITNET PROFIT

T O T

I N C O

T O T

E X P E

N E T P


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TOTAL INCOMETOTAL INCOME

N E T

I N T E RI N C O M

N E T

N O N - I NI N C O M

T O T A

I N C O


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NET INTEREST INCOMENET INTEREST INCOME

I N T EI N C O

( + )

I N T EE X P E

( - )

N E T

I N T E

I N C O


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NET INTEREST INCOMENET INTEREST INCOME

I N T E RE A R N

A S S E

B / S

I N T E R

I N C O

P / L

I N T EB E A R

L I A B I

B / S

I N T E R

E X P E

P / L

N E T

I N T E R

I N C O


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NET NON-INTERESTNET NON-INTEREST

INCOMEINCOME

N O N

I N T EI N C O

( + )

N O N

I N T EE X P E

( - )

N E T

N O N - I N

I N C O M


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STATEMENT OF INCOMESTATEMENT 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


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ANALYSIS OF PROFITANALYSIS OF PROFIT

P R O F I T F R

B A N K I N G O P

( N E T O P E R A T

( N O I )

P R O F I T F R

E X T R A O R D

T R A N S A C T

( P E X T )

P R O F I T F R

S E C U R I T Y

T R A N N S A C

( P S T )

N E TP R O F I

( N P )


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BANKINGBANKING

RISKSRISKS


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BANKING RISKSBANKING RISKS

CC AMELAMEL

AA

MM

EE

LL


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CAMEL CapitalCapital

AdequacyAdequacy


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CAMEL AssetAsset

QualityQuality


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CAMEL ManagementManagementQualityQuality


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CAMEL EarningsEarnings

EfficiencyEfficiency


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CAMEL LiquidityLiquidity

RiskRisk


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CAMEL RISKS

CapitalCapital

AdequacyAdequacy

Asset QualityAsset Quality

ManagementManagement

EarningsEarnings LiquidityLiquidity


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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


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11. Accounting & Reporting Risk

12. Computer Risk

13. Capital Market Operations Risk

14. Money Market Operations Risk

15. Country (Sovereign) Risk

16. Pricing Risk


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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


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RATIO ANALYSISRATIO ANALYSISNumerator

______________________Denominator


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RATIO ANALYSISRATIO ANALYSIS

Balance Sheet__________________

Balance Sheet

Income Statement________________

Balance Sheet


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What is the

LEVEL ?

What is the

TREND ?


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1. Capital Adequacy

2. Asset Quality

3. Management

4. Earnings & Efficiency

5. Liquidity


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RATIO ANALISIS

CAPITALCAPITALADEQUACYADEQUACY

The Capital of aBank protects the

Bank against

unexpected future

losses.


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RATIOANALYSIS

CAPITAL ADEQUACYCAPITAL ADEQUACY 1.

Shareholders Equity

------------------------------------

Total Assets

The ability of the present Capital to support

the further growth of Assets


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RATIOANALYSIS


Shareholders Equity------------------------------------

Risk Weighted Assets


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RATIOANALYSIS


Shareholders Equity------------------------------------

Risk Weighted Assets

+RW Contingent Liabilities


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RATIOANALYSIS

CAPITAL ADEQUACYCAPITAL ADEQUACY 5. Financial Leverage :

Total Assets------------------------------------

Shareholders Equity

RATIO ANALYSIS


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RATIOANALYSIS

CAPITAL ADEQUACYCAPITAL ADEQUACY

6. Capital Formation Rate :

Retained Net Income (RNI)

--------------------------------------------------

Average Shareholders Equity RNI = Net Income - Dividends to be paid

The internal growth of Equity Capital


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RATIO ANALISIS

ASSETASSETQUALITYQUALITY 1.

Loans

--------------------------------

Total Assets


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RATIO ANALISIS

ASSETASSETQUALITYQUALITY

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.


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RATIO ANALISIS

ASSETASSET

QUALITYQUALITY

3. Non Performing Loans

-------------------------------------

Total Loans

Indicates how much of the loan portfolio is

non performing.


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RATIO ANALISIS

ASSETASSETQUALITYQUALITY

4. Reserves for Non Performing Loans

----------------------------------------------

Non Performing Loans

Indicates the ability of the loan loss reserve

to absorb potential losses from currentlynon performing loans.


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RATIO ANALISIS

ASSETASSET

QUALITYQUALITY

5. Loan Loss Provision

-------------------------------------

Average Loans

Shows current income reduction in

anticipation of loan losses.


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RATIO ANALISIS

ASSETASSET

QUALITYQUALITY

6. Net Charge - Offs

-------------------------------------

Average Loans

Shows current income reduction in

anticipation of loan losses.


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RATIO ANALISIS

ASSETASSETQUALITYQUALITY 8.

Non Interest Earning Assets

-------------------------------------------------

Total Assets


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY

A Bank with noprofit is like a human

body with no blood.


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THE PRIMACY OFTHE PRIMACY OF

EARNINGSEARNINGS 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


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY 1. Return on Assets ( ROA )

Net Income

--------------------------------------------

Total Average Assets


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY 2. Return on Equity ( ROE )

Net Income

--------------------------------------------

Average Shareholders Equity


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY 3. Return on Equity ( ROE )

ROE = ROA * Equity Multiplier

ROE = ( NI / AST ) * ( AST / SHEQ )


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY 4.

Interest Income

--------------------------------------------

Average Interest Earning Assets


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RATIO ANALISIS


Interest Income on Loans

--------------------------------------------

Average Total Loans


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RATIO ANALISIS


Total Operating Expense

-------------------------------------------------

Total Operating Income


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY 8. Efficiency Ratio

Non Interest Expense

----------------------------------------------------

Net Interest Income + Fees Commissions


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY 9. Break Even Ratio

Total Expenses - Non Interest Income

----------------------------------------------------

Total Average Interest Earning Assets


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RATIO ANALISIS

EARNINGSEARNINGS&&EFFICIENCYEFFICIENCY 10. Net Free Funds Ratio

Non Paying Liabilities - Non Earning

Assets

--------------------------------------------------

Interest Earning Assets

RATIO ANALISIS


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RATIO ANALISIS


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

RATIO ANALISIS


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RATIO ANALISIS


12. Interest Rate Sensitivity Gap Ratio :

Interest Rate Sensitive Assets

-------------------------------------------------

Interest Rate Sensitive Liabilities


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RATIO ANALYSIS

LIQUIDITYLIQUIDITY

InadequateLiquidity of a Bank

may cause an

accident similar to an

airplane crash !


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RATIO ANALISIS

LIQUIDITYLIQUIDITY 1.

Loans-------------------------

Deposits


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RATIO ANALISIS

LIQUIDITYLIQUIDITY 2.

Liquid Assets-------------------------

Deposits


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RATIO ANALISIS


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RATIO ANALISIS

LIQUIDITYLIQUIDITY

6. Liquid Assets

-----------------------------------------

Large Liabilities

Measures the assets readily available to

cover a loss of large liabilities.

RATIO ANALISIS


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RATIO ANALISIS

LIQUIDITYLIQUIDITY

7. Core Deposits

-----------------------------------------

Earning Assets

Indicates the extend to which earning assets

are funded by those deposits consideredstable and not subject to interest rate

disintermediation.

RATIO ANALISIS


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RATIO ANALISIS

LIQUIDITYLIQUIDITY

8. Brokered Deposits

-----------------------------------------

Earning Assets

Measures the extent to which a bank is

funding assets with high-priced and volatilebrokered deposits.


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BANK ANALYSISBANK ANALYSIS


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CHECKLISTCHECKLIST EARNINGS

1. Is earnings at an adequate level ?

2.Does valid reporting exist for earnings?


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CHECKLISTCHECKLIST CAPITAL ADEQUACY

1. Is level of capital high enough ?

2. Is capital growing proportionate toassets ?

3. Can additional debt be raised if needed

4. Is there pressure to pay high dividends


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INCREASING THEINCREASING THE


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INTEREST MARGININTEREST MARGINB A N K S T R A T E G Y T O

I N C R E

S I Z E

C H A N

I N T E R

S P R E

A L T E

A S S E T /

M I X

I N C R E A

I N T E R E S



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INTEREST MARGININTEREST MARGIN BANK STRATEGY

Increase Size

ACTION

1.Expand Assets

2.Reduce Fixed Assets

3.Increase Equity Base


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EXPAND ASSETSEXPAND ASSETS


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REPERCUSSION 1.Increase operating

Expenses

2.Need for Capital 3.F/A Regulations

4.Decrease Capital

Ratio

5.Reduce ROA

IMPLEMENTATION 1.Offer new Products

and Services

2.New Loans/Deposits

3.Open new Branches

4.Expand Promotion

Budget

5.Reduce Interest

Spread


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INCREASE EQUITY BASEINCREASE EQUITY BASE


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INCREASE EQUITY BASEINCREASE EQUITY BASE

REPERCUSSIONS

1.Hurt shareholders

2.Double taxation S/H

3.Reduce ability to

leverage ROA,

dilution of earnings 4.Continued Employee

Expectations

IMPLEMENTATION

1.Reduce Dividend

pay out

2.Offer Dividend

reinvestment

3.Sell Stock

4.Establish Employee

Stock Ownership PL


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INCREASEINCREASE


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INCREASEINCREASE

AGGRESSIVENESSAGGRESSIVENESS REPERCUSSION 1.Increase need for

capital

2.Increase loan losses

3.Increase security

losses

IMPLEMENTATION

1.Increase loan/deposit

ratio

2.Increase highest

yielding loans

3.Increase highestyielding securities


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INCREASE INTERESTINCREASE INTEREST


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INCREASE INTERESTINCREASE INTEREST

MARGINMARGIN BANK STRATEGY Alter Asset/Liability

Mix

ACTION

Change Liability

Cost Sensitivity

IMPLEMENTATION

1.Decrease S/T &

variable rate liabilities

if rates will increase

2.Increase S/T &

variable rate liabilities

if rates will decrease


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