ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS

ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS
AD-477 BANK MANAGEMENT Instructor……Bülent Şenver BS Trainig Services

BALANCE SHEET ANALYSIS
OF COMMERCIAL BANKS BS Trainig Services

BS Trainig Services bsenver@superonline.com
ANNUAL REPORT OF BANKS BS Trainig Services

ANNUAL REPORT 1. AUDITOR’S REPORT (AR) 2. FINANCIAL STATEMENTS (F/S) 3. NOTES TO F/S BS Trainig Services

“INDEPENDENT AUDITOR’S REPORT”
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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

WHAT IS AUDITED ? We have audited : 1. The Balance Sheet as of Dec31’ and Statement of Income 3. Statement of Shareholders’ Statement of Cash Flows for the year then ended BS Trainig Services

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

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

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

FINANCIAL STATEMENTS OF COMMERCIAL BANKS BS Trainig Services

FINANCIAL STATEMENTS 1. BALANCE SHEET 2. STATEMENT OF INCOME 3. STATEMENT OF SHAREHOLDER’S EQUITY 4. SOURCES & USES OF FUNDS STATEMENT BS Trainig Services

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

BALANCE SHEET SHOWS The Financial Position of a Bank As at a specific date. As of Dec. 31,1998 BS Trainig Services

BALANCE SHEET EQUATION
= ASSETS = Equals = 100 LIABILITIES + Plus SHAREHOLDER’S EQUITY BS Trainig Services

BALANCE SHEET Assets Liquid Assets Loans Marketable Securities Investment Securities Fixed Assets Accrued Interest Other Assets Total Assets BS Trainig Services

BALANCE SHEET Liabilities
Deposits Bank Borrowings Accrued Expenses Other Liabilities Bonds Issued Shareholder’s Equity Total Liabilities & S/HE BS Trainig Services

SHAREHOLDER’S EQUITY Share Capital Legal Reserves Retained Earnings Revaluation Surplus Share Premiums Net Income Total S/H Equity BS Trainig Services

ASSET VALUATION GAAP & IAAP Generally Accepted & Internationally Accepted Accounting Principles LOWER OF COST OR MARKET BS Trainig Services

ASSET CLASSIFICATION BS Trainig Services

LIABILITY CLASSIFICATION
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BALANCE SHEET DOES NOT SHOW
Interest Rates Interest Sensitivity Due Dates Foreign Currency breakdown Collateral BS Trainig Services

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

NET PROFIT BS Trainig Services

TOTAL INCOME BS Trainig Services

NET INTEREST INCOME BS Trainig Services

NET NON-INTEREST INCOME
BS Trainig Services

STATEMENT OF INCOME Interest Income Interest Expense (700) Net I.Income Non Interest Income Operating Expenses (450) Pre-Tax Profit Tax Provision (30) Net Income BS Trainig Services

ANALYSIS OF PROFIT BS Trainig Services

BANKING RISKS BS Trainig Services

BANKING RISKS C AMEL A M E L BS Trainig Services

CAMEL Capital Adequacy BS Trainig Services

CAMEL Asset Quality BS Trainig Services

CAMEL Management Quality BS Trainig Services

CAMEL Earnings Efficiency BS Trainig Services

CAMEL Liquidity Risk BS Trainig Services

CAMEL RISKS Capital Adequacy Asset Quality Management Earnings Liquidity BS Trainig Services

BANKING RISKS CAMEL 6. Credit Risk 7. Interest Rate Risk 8. Interest Rate Sensitivity Risk 9. Foreign Exchange Availability Risk 10. F/X Position Risk BS Trainig Services

BANKING RISKS 11. Accounting & Reporting Risk 12. Computer Risk 13. Capital Market Operations Risk 14. Money Market Operations Risk 15. Country (Sovereign) Risk 16. Pricing Risk BS Trainig Services

BANKING RISKS 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 BS Trainig Services

Numerator ______________________ Denominator
RATIO ANALYSIS Numerator ______________________ Denominator BS Trainig Services

RATIO ANALYSIS Balance Sheet __________________ Balance Sheet Income Statement ________________ Balance Sheet BS Trainig Services

RATIO ANALYSIS What is the LEVEL ? What is the TREND ? BS Trainig Services

RATIO ANALYSIS 1. Capital Adequacy 2. Asset Quality 3. Management 4. Earnings & Efficiency 5. Liquidity BS Trainig Services

RATIO ANALISIS CAPITAL ADEQUACY
“The Capital of a Bank protects the Bank against unexpected future losses.” BS Trainig Services

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

2. Shareholders’ Equity Risk Weighted Assets BS Trainig Services

3. Shareholders’ Equity Risk Weighted Assets RW Contingent Liabilities BS Trainig Services

4. Total Debt Shareholder’s Equity The ability to raise additional Debt Capital BS Trainig Services

5. Financial Leverage : Total Assets Shareholder’s Equity BS Trainig Services

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

RATIO ANALISIS ASSET QUALITY
1. Loans Total Assets BS Trainig Services

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

Non Performing Loans Total Loans Indicates how much of the loan portfolio is non performing. BS Trainig Services

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

Loan Loss Provision Average Loans Shows current income reduction in anticipation of loan losses. BS Trainig Services

Net Charge - Offs Average Loans Shows current income reduction in anticipation of loan losses. BS Trainig Services

7. Interest Earning Assets Total Assets BS Trainig Services

8. Non Interest Earning Assets Total Assets BS Trainig Services

RATIO ANALISIS EARNINGS & EFFICIENCY
“A Bank with no profit is like a human body with no blood.” BS Trainig Services

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

1. Return on Assets ( ROA ) Net Income Total Average Assets BS Trainig Services

2. Return on Equity ( ROE ) Net Income Average Shareholder’s Equity BS Trainig Services

3. Return on Equity ( ROE ) ROE = ROA * Equity Multiplier ROE = ( NI / AST ) * ( AST / SHEQ ) BS Trainig Services

4. Interest Income Average Interest Earning Assets BS Trainig Services

5. Net Interest Income Average Total Assets BS Trainig Services

6. Interest Income on Loans Average Total Loans BS Trainig Services

7. Total Operating Expense Total Operating Income BS Trainig Services

8. Efficiency Ratio Non Interest Expense Net Interest Income + Fees Commissions BS Trainig Services

9. Break Even Ratio Total Expenses - Non Interest Income Total Average Interest Earning Assets BS Trainig Services

10. Net Free Funds Ratio Non Paying Liabilities - Non Earning Assets Interest Earning Assets BS Trainig Services

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

12. Interest Rate Sensitivity Gap Ratio : Interest Rate Sensitive Assets Interest Rate Sensitive Liabilities BS Trainig Services

RATIO ANALYSIS LIQUIDITY
“Inadequate Liquidity of a Bank may cause an accident similar to an airplane crash !” BS Trainig Services

RATIO ANALISIS LIQUIDITY
1. Loans Deposits BS Trainig Services

2. Liquid Assets Deposits BS Trainig Services

3. Liquid Assets Deposits + Borrowings BS Trainig Services

4. Assets Due for the Period Liabilities Due for the Period BS Trainig Services

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

Liquid Assets Large Liabilities Measures the assets readily available to cover a loss of large liabilities. BS Trainig Services

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

Brokered Deposits Earning Assets Measures the extent to which a bank is funding assets with high-priced and volatile brokered deposits. BS Trainig Services

MATURITY ANALISIS BS Trainig Services

MATURITY ANALYSIS BS Trainig Services

OFF - BALANCE SHEET RISK
Loan Commitments Average Assets Shows the extent of a bank’s obligation to make loans. BS Trainig Services

OFF - BALANCE SHEET RISK
2.Contingent Liabilities & Commitments Average Assets Shows the extent of a bank’s commitments & contingent liabilities. BS Trainig Services

BANK ANALYSIS CHECKLIST BS Trainig Services

BANK ANALYSIS CHECKLIST
EARNINGS 1. Is earnings at an adequate level ? 2.Does valid reporting exist for earnings? BS Trainig Services

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

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

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

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

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

INCREASING THE INTEREST MARGIN %
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INCREASING INTEREST MARGIN
Interest Income…………..200 Interest Expense…………( 50 ) INTEREST MARGIN… BS Trainig Services

INCREASING THE INTEREST MARGIN
BS Trainig Services

INCREASING THE INTEREST MARGIN
BANK STRATEGY Increase Size ACTION 1.Expand Assets 2.Reduce Fixed Assets 3.Increase Equity Base BS Trainig Services

INCREASE THE INTEREST MARGIN
BANK STRATEGY Change Interest Spread ACTION 1.Re-Price Asset Portfolio 2.Re-Price Liability Portfolio BS Trainig Services

ACTION 1.Plan Taxes 2.Reduce Liquidity 3.Increase Aggressiveness 4.Change Asset Yield Sensitivity 5.Change Liability Cost Sensitivity BANK STRATEGY Alter Asset / Liability Mix BS Trainig Services

IMPLEMENTATION 1.Offer new Products and Services 2.New Loans/Deposits 2.Open new Branches 3.Expand Promotion Budget 4.Reduce Interest Spread BANK STRATEGY Increase Size ACTION Expand Assets BS Trainig Services

EXPAND ASSETS IMPLEMENTATION 1.Offer new Products and Services 2.New Loans/Deposits 3.Open new Branches 4.Expand Promotion Budget 5.Reduce Interest Spread REPERCUSSION 1.Increase operating Expenses 2.Need for Capital 3.F/A Regulations 4.Decrease Capital Ratio 5.Reduce ROA BS Trainig Services

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

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

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

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

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

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

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

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

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

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

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

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 BS Trainig Services

CONSOLIDATED FINANCIAL STATEMENTS BS Trainig Services

CONSOLIDATED BALANCE SHEET
BS Trainig Services

ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS

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ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS

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