BS Trainig Services 6 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
BS Trainig Services 7 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
BS Trainig Services 8 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.
BS Trainig Services 9 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.
BS Trainig Services 10 AUDITORS’ 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 flows for the year then ended, in accordance with International Accounting Standards. Arthur Andersen & Co
BS Trainig Services 11 FINANCIAL STATEMENTS OF COMMERCIAL BANKS
BS Trainig Services 12 FINANCIAL STATEMENTS 1. BALANCE SHEET 2. STATEMENT OF INCOME 3. STATEMENT OF SHAREHOLDER’S EQUITY 4. SOURCES & USES OF FUNDS STATEMENT
BS Trainig Services 13 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 Practice
BS Trainig Services 14 BALANCE SHEET SHOWS The Financial Position of a Bank As at a specific date. As of Dec. 31,1998
BS Trainig Services 22 BALANCE SHEET DOES NOT SHOW Interest Rates Interest Sensitivity Due Dates Foreign Currency breakdown Collateral
BS Trainig Services 23 STATEMENT OF INCOME SHOWS The results of operations of a bank. For the period between two dates. For the year ended Dec. 31, 1998
BS Trainig Services 24 NET PROFIT
BS Trainig Services 25 TOTAL INCOME
BS Trainig Services 26 NET INTEREST INCOME
BS Trainig Services 27 NET INTEREST INCOME
BS Trainig Services 28 NET NON-INTEREST INCOME
BS Trainig Services 29 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
BS Trainig Services 30 ANALYSIS OF PROFIT
BS Trainig Services 31 BANKING RISKS
BS Trainig Services 32 BANKING RISKS C AMELC AMEL A M E L
BS Trainig Services 33 C AMEL Capital AdequacyCapital Adequacy
BS Trainig Services 34 C A MEL Asset QualityAsset Quality
BS Trainig Services 35 CA M EL Management QualityManagement Quality
BS Trainig Services 36 CAM E L Earnings EfficiencyEarnings Efficiency
BS Trainig Services 37 CAME L Liquidity RiskLiquidity Risk
BS Trainig Services 46 CAPITALADEQUACY RATIO ANALISIS CAPITAL ADEQUACY “The Capital of a Bank protects the Bank against unexpected future losses.”
BS Trainig Services 47 CAPITAL ADEQUACY RATIO ANALYSIS CAPITAL ADEQUACY 1. Shareholders’ Equity Total Assets The ability of the present Capital to support the further growth of Assets
BS Trainig Services 48 CAPITAL ADEQUACY RATIO ANALYSIS CAPITAL ADEQUACY 2. Shareholders’ Equity Risk Weighted Assets
BS Trainig Services 49 CAPITAL ADEQUACY RATIO ANALYSIS CAPITAL ADEQUACY 3. Shareholders’ Equity Risk Weighted Assets + RW Contingent Liabilities
BS Trainig Services 50 CAPITAL ADEQUACY RATIO ANALYSIS CAPITAL ADEQUACY 4. Total Debt Shareholder’s Equity The ability to raise additional Debt Capital
BS Trainig Services 51 CAPITAL ADEQUACY RATIO ANALYSIS CAPITAL ADEQUACY 5. Financial Leverage : Total Assets Shareholder’s Equity
BS Trainig Services 52 CAPITAL ADEQUACY RATIO ANALYSIS CAPITAL 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
BS Trainig Services 53 ASSETQUALITY RATIO ANALISIS ASSET QUALITY 1. Loans Total Assets
BS Trainig Services 54 ASSETQUALITY RATIO ANALISIS ASSET 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.
BS Trainig Services 55 ASSETQUALITY RATIO ANALISIS ASSET QUALITY 3. Non Performing Loans Total Loans Indicates how much of the loan portfolio is non performing.
BS Trainig Services 56 ASSETQUALITY RATIO ANALISIS ASSET 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.
BS Trainig Services 57 ASSETQUALITY RATIO ANALISIS ASSET QUALITY 5. Loan Loss Provision Average Loans Shows current income reduction in anticipation of loan losses.
BS Trainig Services 58 ASSETQUALITY RATIO ANALISIS ASSET QUALITY 6. Net Charge - Offs Average Loans Shows current income reduction in anticipation of loan losses.
BS Trainig Services 59 ASSETQUALITY RATIO ANALISIS ASSET QUALITY 7. Interest Earning Assets Total Assets
BS Trainig Services 60 ASSETQUALITY RATIO ANALISIS ASSET QUALITY 8. Non Interest Earning Assets Total Assets
BS Trainig Services 61 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY “A Bank with no profit is like a human body with no blood.”
BS Trainig Services 62 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
BS Trainig Services 63 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 1. Return on Assets ( ROA ) Net Income Total Average Assets
BS Trainig Services 64 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 2. Return on Equity ( ROE ) Net Income Average Shareholder’s Equity
BS Trainig Services 66 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 4. Interest Income Average Interest Earning Assets
BS Trainig Services 67 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 5. Net Interest Income Average Total Assets
BS Trainig Services 68 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 6. Interest Income on Loans Average Total Loans
BS Trainig Services 69 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 7. Total Operating Expense Total Operating Income
BS Trainig Services 70 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 8. Efficiency Ratio Non Interest Expense Net Interest Income + Fees Commissions
BS Trainig Services 71 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 9. Break Even Ratio Total Expenses - Non Interest Income Total Average Interest Earning Assets
BS Trainig Services 72 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 10. Net Free Funds Ratio Non Paying Liabilities - Non Earning Assets Interest Earning Assets
BS Trainig Services 73 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & 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
BS Trainig Services 74 EARNINGS&EFFICIENCY RATIO ANALISIS EARNINGS & EFFICIENCY 12. Interest Rate Sensitivity Gap Ratio : Interest Rate Sensitive Assets Interest Rate Sensitive Liabilities
BS Trainig Services 75 LIQUIDITY RATIO ANALYSIS LIQUIDITY “Inadequate Liquidity of a Bank may cause an accident similar to an airplane crash !”
BS Trainig Services 79 LIQUIDITY RATIO ANALISIS LIQUIDITY 4. Assets Due for the Period Liabilities Due for the Period
BS Trainig Services 80 LIQUIDITY RATIO ANALISIS LIQUIDITY 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.
BS Trainig Services 81 LIQUIDITY RATIO ANALISIS LIQUIDITY 6. Liquid Assets Large Liabilities Measures the assets readily available to cover a loss of large liabilities.
BS Trainig Services 82 LIQUIDITY RATIO ANALISIS LIQUIDITY 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.
BS Trainig Services 83 LIQUIDITY RATIO ANALISIS LIQUIDITY 8. Brokered Deposits Earning Assets Measures the extent to which a bank is funding assets with high-priced and volatile brokered deposits.
BS Trainig Services 84 MATURITY ANALISIS
BS Trainig Services 85 MATURITY ANALYSIS
BS Trainig Services 86 OFF - BALANCE SHEET RISK 1. Loan Commitments Average Assets Shows the extent of a bank’s obligation to make loans.
BS Trainig Services 87 OFF - BALANCE SHEET RISK 2.Contingent Liabilities & Commitments Average Assets Shows the extent of a bank’s commitments & contingent liabilities.
BS Trainig Services 88 BANK ANALYSIS CHECKLIST
BS Trainig Services 89 BANK ANALYSIS CHECKLIST EARNINGS 1. Is earnings at an adequate level ? 2.Does valid reporting exist for earnings?
BS Trainig Services 90 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
BS Trainig Services 91 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
BS Trainig Services 92 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
BS Trainig Services 93 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
BS Trainig Services 94 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 ?
BS Trainig Services 101 INCREASE THE INTEREST MARGIN BANK STRATEGY Increase Size ACTION Expand Assets IMPLEMENTATION 1.Offer new Products and Services 2.New Loans/Deposits 2.Open new Branches 3.Expand Promotion Budget 4.Reduce Interest Spread
BS Trainig Services 102 EXPAND ASSETS 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
BS Trainig Services 103 INCREASE THE INTEREST MARGIN BANK STRATEGY Increase Size ACTION Increase Equity Base IMPLEMENTATION 1.Reduce Dividend pay out 2.Offer Dividend reinvestment 3.Sell Stock 4.Establish Employee Stock Ownership PL
BS Trainig Services 104 INCREASE 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
BS Trainig Services 105 INCREASE INTEREST MARGIN BANK STRATEGY Change Interest Spread ACTION Re-price Portfolio IMPLEMENTATION 1.Increase rates on Loans 2.Compound return more frequently 3.Reduce rates on Deposits 4.Compound cost less frequently
BS Trainig Services 106 REPRICE PORTFOLIO REPERCUSSIONS 1.Lose business Loan quality decrease 2.Increase operations Client dissatisfaction 3.Lose business Liquidity problem 4.Increase operations Client dissatisfaction IMPLEMENTATION 1.Increase rates on Loans 2.Compound return more frequently 3.Reduce rates on Deposits 4.Compound cost less frequently
BS Trainig Services 107 INCREASE INTEREST MARGIN BANK STRATEGY Alter Asset/Liability Mix ACTION Reduce Liquidity IMPLEMENTATION 1.Minimize cash 2.Minimize due from 3.Sell Securities & Bonds 4.Increase short term Deposits
BS Trainig Services 108 REDUCELIQUIDITY REDUCE LIQUIDITY REPERCUSSION 1.Liquidity Risk 2.Lose correspondent 3.Incur book losses 4.Increase volatility of deposits IMPLEMENTATION 1.Minimize cash 2.Minimize due from 3.Sell Securities & Bonds 4.Increase short term Deposits
BS Trainig Services 109 INCREASE INTEREST MARGIN BANK STRATEGY Alter Asset/Liability Mix ACTION Increase Aggressiveness IMPLEMENTATION 1.Increase loan/deposit ratio 2.Increase highest yielding loans 3.Increase highest yielding securities
BS Trainig Services 110 INCREASE AGGRESSIVENESS 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 highest yielding securities
BS Trainig Services 111 INCREASE INTEREST MARGIN BANK STRATEGY Alter Asset/Liability Mix ACTION Change Asset Yield Sensitivity IMPLEMENTATION 1.Increase S/T & variable rate assets if rates will increase 2.Decrease S/T & variable rate assets if rates will decrease
BS Trainig Services 112 CHANGE ASSET YIELD SENSITIVITY REPERCUSSION 1.Wrong estimate of interest movement, thereby reducing interest spread IMPLEMENTATION 1.Increase S/T & variable rate assets if rates will increase 2.Decrease S/T & variable rate assets if rates will decrease
BS Trainig Services 113 INCREASE INTEREST MARGIN 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
BS Trainig Services 114 CHANGE LIABILITY COST SENSITIVITY REPERCUSSION 1.Wrong estimate of interest movement, thereby reducing interest spread IMPLEMENTATION 1.Decrease S/T & variable rate liabilities if rates will increase 2.Increase S/T & variable rate liabilities if rates will decrease