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ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS

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For the period between two dates. For the year ended. Dec. 31 , 1998 ... c) Loans with low interest rates. d) Loans on which repayment terms. have been renegotiated. ... – PowerPoint PPT presentation

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Title: ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL BANKS


1
ANALYSIS OF THE BALANCE SHEETS OF COMMERCIAL
BANKS
  • AD-477 BANK MANAGEMENT
  • InstructorBülent Senver

2
BALANCE SHEETANALYSIS
  • OF
  • COMMERCIALBANKS

3
ANNUAL REPORT
  • OF
  • BANKS

4
ANNUAL REPORT
  • 1. AUDITORS REPORT (AR)
  • 2. FINANCIAL STATEMENTS (F/S)
  • 3. NOTES TO F/S

5
AUDITORS REPORT
  • INDEPENDENT
  • AUDITORS REPORT

6
INDEPENDENT AUDITORS REPORT
  • 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

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

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.

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.

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

11
FINANCIAL STATEMENTS
  • OF
  • COMMERCIAL BANKS

12
FINANCIAL STATEMENTS
  • 1. BALANCE SHEET
  • 2. STATEMENT OF INCOME
  • 3. STATEMENT OF SHAREHOLDERS EQUITY
  • 4. SOURCES USES OF FUNDS STATEMENT

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

14
BALANCE SHEET SHOWS
  • The Financial Position of a Bank
  • As at a specific date.
  • As of Dec. 31,1998

15
BALANCE SHEETEQUATION
  • 100
  • ASSETS
  • Equals
  • 100
  • LIABILITIES
  • Plus
  • SHAREHOLDERSEQUITY

16
BALANCE 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

17
BALANCE SHEET Liabilities
  • Deposits 400
  • Bank Borrowings 150
  • Accrued Expenses 100
  • Other Liabilities 80
  • Bonds Issued 70
  • Shareholders Equity 250
  • Total Liabilities S/HE 1050

18
SHAREHOLDERS EQUITY
  • Share Capital 100
  • Legal Reserves 30
  • Retained Earnings 50
  • Revaluation Surplus 20
  • Share Premiums 10
  • Net Income 40
  • Total S/H Equity 250

19
ASSET VALUATION
  • GAAP IAAP
  • Generally Accepted Internationally Accepted
    Accounting Principles
  • LOWER OF
  • COST OR
  • MARKET

20
ASSET CLASSIFICATION
21
LIABILITY CLASSIFICATION
22
BALANCE SHEETDOES NOT SHOW
  • Interest Rates
  • Interest Sensitivity
  • Due Dates
  • Foreign Currencybreakdown
  • Collateral

23
STATEMENT OF INCOMESHOWS
  • The results of operations of a bank.
  • For the period between two dates.
  • For the year endedDec. 31 , 1998

24
NET PROFIT
25
TOTAL INCOME
26
NET INTEREST INCOME
27
NET INTEREST INCOME
28
NET NON-INTEREST INCOME
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

30
ANALYSIS OF PROFIT
31
BANKING
  • RISKS

32
BANKING RISKS
  • C AMEL
  • A
  • M
  • E
  • L

33
CAMEL
  • Capital Adequacy

34
CAMEL
  • Asset Quality

35
CAMEL
  • Management Quality

36
CAMEL
  • Earnings Efficiency

37
CAMEL
  • Liquidity Risk

38
CAMEL RISKS
  • Capital Adequacy
  • Asset Quality
  • Management
  • Earnings
  • Liquidity

39
BANKING RISKS
  • 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

40
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

41
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

42
RATIO ANALYSIS
  • Numerator
  • ______________________
  • Denominator

43
RATIO ANALYSIS
  • Balance Sheet__________________Balance Sheet
  • Income Statement________________Balance Sheet

44
RATIO ANALYSIS
  • What is the
  • LEVEL ?
  • What is the
  • TREND ?

45
RATIO ANALYSIS
  • 1. Capital Adequacy
  • 2. Asset Quality
  • 3. Management
  • 4. Earnings Efficiency
  • 5. Liquidity

46
RATIO ANALISISCAPITAL ADEQUACY
  • The Capital of a Bank protects the Bank against
    unexpected future losses.

47
RATIO ANALYSISCAPITAL ADEQUACY
  • 1.
  • Shareholders Equity
    ------------------------------------
  • Total Assets
  • The ability of the present Capital to support
    the further growth of Assets

48
RATIO ANALYSISCAPITAL ADEQUACY
  • 2.
  • Shareholders Equity
    ------------------------------------
  • Risk Weighted Assets

49
RATIO ANALYSISCAPITAL ADEQUACY
  • 3.
  • Shareholders Equity
    ------------------------------------
  • Risk Weighted Assets
    RW Contingent Liabilities

50
RATIO ANALYSISCAPITAL ADEQUACY
  • 4.
  • Total Debt
    ------------------------------------
  • Shareholders Equity
  • The ability to raise additional Debt Capital

51
RATIO ANALYSISCAPITAL ADEQUACY
  • 5. Financial Leverage
  • Total Assets
    ------------------------------------
  • Shareholders Equity

52
RATIO ANALYSISCAPITAL 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

53
RATIO ANALISISASSET QUALITY
  • 1.
  • Loans
    --------------------------------
  • Total Assets

54
RATIO ANALISISASSET 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.

55
RATIO ANALISISASSET QUALITY
  • 3. Non Performing Loans
    -------------------------------------
  • Total Loans
  • Indicates how much of the loan portfolio is non
    performing.

56
RATIO ANALISISASSET 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.

57
RATIO ANALISISASSET QUALITY
  • 5. Loan Loss Provision
    -------------------------------------
  • Average Loans
  • Shows current income reduction in anticipation of
    loan losses.

58
RATIO ANALISISASSET QUALITY
  • 6. Net Charge - Offs
    -------------------------------------
  • Average Loans
  • Shows current income reduction in anticipation of
    loan losses.

59
RATIO ANALISISASSET QUALITY
  • 7.
  • Interest Earning Assets
    -------------------------------------------------
  • Total Assets

60
RATIO ANALISISASSET QUALITY
  • 8.
  • Non Interest Earning Assets
    -------------------------------------------------
  • Total Assets

61
RATIO ANALISISEARNINGS EFFICIENCY
  • A Bank with no profit is like a human body with
    no blood.

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

63
RATIO ANALISISEARNINGS EFFICIENCY
  • 1. Return on Assets ( ROA )
  • Net Income
    --------------------------------------------
  • Total Average Assets

64
RATIO ANALISISEARNINGS EFFICIENCY
  • 2. Return on Equity ( ROE )
  • Net Income
    --------------------------------------------
  • Average Shareholders Equity

65
RATIO ANALISISEARNINGS EFFICIENCY
  • 3. Return on Equity ( ROE )
  • ROE ROA Equity Multiplier
  • ROE ( NI / AST ) ( AST / SHEQ )

66
RATIO ANALISISEARNINGS EFFICIENCY
  • 4.
  • Interest Income
    --------------------------------------------
  • Average Interest Earning Assets

67
RATIO ANALISISEARNINGS EFFICIENCY
  • 5.
  • Net Interest Income
    --------------------------------------------
  • Average Total Assets

68
RATIO ANALISISEARNINGS EFFICIENCY
  • 6.
  • Interest Income on Loans
    --------------------------------------------
  • Average Total Loans

69
RATIO ANALISISEARNINGS EFFICIENCY
  • 7.
  • Total Operating Expense
    -------------------------------------------
    ------
  • Total Operating Income

70
RATIO ANALISISEARNINGS EFFICIENCY
  • 8. Efficiency Ratio
  • Non Interest Expense
    -------------------------------------------------
    ---
  • Net Interest Income Fees Commissions

71
RATIO ANALISISEARNINGS EFFICIENCY
  • 9. Break Even Ratio
  • Total Expenses - Non Interest Income
    -------------------------------------------------
    ---
  • Total Average Interest Earning Assets

72
RATIO ANALISISEARNINGS EFFICIENCY
  • 10. Net Free Funds Ratio
  • Non Paying Liabilities - Non Earning
    Assets
    -------------------------------------------------
    -
  • Interest Earning Assets

73
RATIO ANALISISEARNINGS 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

74
RATIO ANALISISEARNINGS EFFICIENCY
  • 12. Interest Rate Sensitivity Gap Ratio
  • Interest Rate Sensitive Assets
    -------------------------------------------------
  • Interest Rate Sensitive Liabilities

75
RATIO ANALYSISLIQUIDITY
  • Inadequate Liquidity of a Bank may cause an
    accident similar to an airplane crash !

76
RATIO ANALISISLIQUIDITY
  • 1.
  • Loans
    -------------------------
  • Deposits

77
RATIO ANALISISLIQUIDITY
  • 2.
  • Liquid Assets
    -------------------------
  • Deposits

78
RATIO ANALISISLIQUIDITY
  • 3.
  • Liquid Assets
    --------------------------------
  • Deposits Borrowings

79
RATIO ANALISISLIQUIDITY
  • 4.
  • Assets Due for the Period
    -----------------------------------------
  • Liabilities Due for the Period

80
RATIO ANALISISLIQUIDITY
  • 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 banks large
    liabilities.

81
RATIO ANALISISLIQUIDITY
  • 6. Liquid Assets
    -----------------------------------------
  • Large Liabilities
  • Measures the assets readily available to cover a
    loss of large liabilities.

82
RATIO ANALISISLIQUIDITY
  • 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.

83
RATIO ANALISISLIQUIDITY
  • 8. Brokered Deposits
    -----------------------------------------
  • Earning Assets
  • Measures the extent to which a bank is funding
    assets with high-priced and volatile brokered
    deposits.

84
MATURITY ANALISIS
85
MATURITY ANALYSIS
86
OFF - BALANCE SHEET RISK
  • 1. Loan Commitments
    -----------------------------------------
  • Average Assets
  • Shows the extent of a banks obligation to make
    loans.

87
OFF - BALANCE SHEET RISK
  • 2.Contingent Liabilities Commitments
    --------------------------------------------------
    --
  • Average Assets
  • Shows the extent of a banks commitments
    contingent liabilities.

88
BANK ANALYSIS
  • CHECKLIST

89
BANK ANALYSIS CHECKLIST
  • EARNINGS
  • 1. Is earnings at an adequate level ?
  • 2.Does valid reporting exist for earnings?

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

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

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

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

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
    ?

95
INTEREST MARGIN
  • INCREASING THE
  • INTEREST MARGIN

96
INCREASING INTEREST MARGIN
  • Interest Income..200
  • Interest Expense( 50 )
    ----------
  • INTEREST MARGIN.. 150
    ----------

97
INCREASING THE INTEREST MARGIN
98
INCREASING THEINTEREST MARGIN
  • BANK STRATEGY
  • Increase Size
  • ACTION
  • 1.Expand Assets
  • 2.Reduce Fixed Assets
  • 3.Increase Equity Base

99
INCREASE THEINTEREST MARGIN
  • BANK STRATEGY
  • ChangeInterest Spread
  • ACTION
  • 1.Re-Price Asset Portfolio
  • 2.Re-Price Liability Portfolio

100
INCREASE THEINTEREST MARGIN
  • ACTION
  • 1.Plan Taxes
  • 2.Reduce Liquidity
  • 3.Increase Aggressiveness
  • 4.Change Asset Yield Sensitivity
  • 5.Change Liability Cost Sensitivity
  • BANK STRATEGY
  • AlterAsset / LiabilityMix

101
INCREASE THEINTEREST MARGIN
  • IMPLEMENTATION
  • 1.Offer new Products and Services
  • 2.New Loans/Deposits
  • 2.Open new Branches
  • 3.Expand Promotion Budget
  • 4.Reduce Interest Spread
  • BANK STRATEGYIncrease Size
  • ACTIONExpand Assets

102
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

103
INCREASE THEINTEREST MARGIN
  • BANK STRATEGYIncrease Size
  • ACTIONIncreaseEquity Base
  • IMPLEMENTATION
  • 1.Reduce Dividend pay out
  • 2.Offer Dividend reinvestment
  • 3.Sell Stock
  • 4.Establish Employee Stock Ownership PL

104
INCREASE EQUITY BASE
  • REPERCUSSIONS
  • 1.Hurt shareholders
  • 2.Double taxation S/H3.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

105
INCREASE INTEREST MARGIN
  • BANK STRATEGYChange Interest Spread
  • ACTIONRe-price Portfolio
  • IMPLEMENTATION
  • 1.Increase rates on Loans
  • 2.Compound return more frequently
  • 3.Reduce rates on Deposits
  • 4.Compound cost less frequently

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

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

108
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

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

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

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

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

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

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

115
CONSOLIDATED
  • FINANCIAL STATEMENTS

116
CONSOLIDATED BALANCE SHEET
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