1. ANALYSIS OF THE
BALANCE SHEETS OF
COMMERCIAL BANKS
AD-477 BANK MANAGEMENT
Instructor……Bülent Şenver
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2. BALANCE SHEET
ANALYSIS
• OF
• COMMERCIAL
BANKS
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3. ANNUAL REPORT
OF
BANKS
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4. ANNUAL REPORT
• 1. AUDITOR’S
REPORT (AR)
• 2. FINANCIAL
STATEMENTS (F/S)
• 3. NOTES TO F/S
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5. AUDITOR’S
REPORT
“INDEPENDENT
AUDITOR’S REPORT”
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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
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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
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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.
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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.
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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
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11. FINANCIAL
STATEMENTS
OF
COMMERCIAL BANKS
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12. FINANCIAL STATEMENTS
• 1. BALANCE SHEET
• 2. STATEMENT OF INCOME
• 3. STATEMENT OF
SHAREHOLDER’S EQUITY
• 4. SOURCES & USES OF FUNDS
STATEMENT
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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
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14. BALANCE SHEET
SHOWS
• The Financial Position • As at a specific date.
of a Bank
• As of Dec. 31,1998
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15. BALANCE SHEET
EQUATION
• 100 = • = 100
• ASSETS = • LIABILITIES
• Equals • + Plus
• SHAREHOLDER’S
EQUITY
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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
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17. BALANCE SHEET Liabilities
• Deposits 400
• Bank Borrowings 150
• Accrued Expenses 100
• Other Liabilities 80
• Bonds Issued 70
• Shareholder’s Equity 250
• Total Liabilities & S/HE 1050
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18. SHAREHOLDER’S 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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19. ASSET VALUATION
• GAAP & IAAP
• Generally Accepted & • LOWER OF
Internationally • COST OR
Accepted Accounting • MARKET
Principles
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20. ASSET CLASSIFICATION
TO TAL
ASSETS
N O N IN T E R E S T E A R N IN G IN T E R E S T E A R N IN G
ASSETS ASSETS
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21. LIABILITY
CLASSIFICATION
TO TAL
L IA B IL IT IE S
IN T E R E S T B E A R IN G N O N IN T E R E S T B E A R IN G
L IA B IL IT IE S L IA B IL IT IE S
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22. BALANCE SHEET
DOES NOT SHOW
• Interest Rates
• Interest Sensitivity
• Due Dates
• Foreign Currency
breakdown
• Collateral
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23. STATEMENT OF INCOME
SHOWS
• The results of • For the period between
operations of a bank. two dates.
• For the year ended
Dec. 31 , 1998
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24. NET PROFIT
N E T P R O F IT
TO TAL TO TAL
IN C O M E EXPEN SE
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25. TOTAL INCOME
TO TAL
IN C O M E
N ET N ET
IN T E R E S T N O N - IN T E R E S T
IN C O M E IN C O M E
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26. NET INTEREST INCOME
N ET
IN T E R E S T
IN C O M E
IN T E R E S T IN T E R E S T
IN C O M E EXPEN SE
(+ ) (-)
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27. NET INTEREST INCOME
N ET
IN T E R E S T
IN C O M E
IN T E R E S T IN T E R E S T
IN C O M E EXPEN SE
P /L P /L
IN T E R E S T IN T E R E S T
E A R N IN G B E A R IN G
ASSETS L IA B IL IT IE S
B /S B /S
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28. NET NON-INTEREST
INCOME
N ET
N O N - IN T E R E S T
IN C O M E
N O N N O N
IN T E R E S T IN T E R E S T
IN C O M E EXPEN C E
(+ ) (-)
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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
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30. ANALYSIS OF PROFIT
NET
P R O F IT
(N P )
P R O F IT F R O M P R O F IT F R O M P R O F IT F R O M
B A N K IN G O P E R A T IO N S E X T R A O R D IN A R Y S E C U R IT Y
(N E T O P E R A T IN G IN C O M E ) T R A N S A C T IO N S T R A N N S A C T IO N S
( N O I) (P E X T ) (P S T )
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31. BANKING
RISKS
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32. BANKING RISKS
•C AMEL
• A
• M
• E
• L
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33. CAMEL
• Capital
Adequacy
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34. C AMEL
• Asset
Quality
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35. CA MEL
• Management
Quality
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36. CAM EL
• Earnings
Efficiency
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37. CAME L
• Liquidity
Risk
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38. CAMEL RISKS
• Capital
Adequacy
• Asset Quality
• Management
• Earnings
• Liquidity
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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
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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
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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
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42. RATIO ANALYSIS
Numerator
______________________
Denominator
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43. RATIO ANALYSIS
• Balance Sheet • Income Statement
__________________ ________________
Balance Sheet Balance Sheet
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44. RATIO ANALYSIS
• What is the • What is the
• LEVEL ? • TREND ?
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45. RATIO ANALYSIS
• 1. Capital Adequacy
• 2. Asset Quality
• 3. Management
• 4. Earnings & Efficiency
• 5. Liquidity
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46. RATIO ANALISIS
CAPITAL ADEQUACY
• “The Capital of a
Bank protects the
Bank against
unexpected future
losses.”
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47. RATIO ANALYSIS
CAPITAL ADEQUACY
• 1.
• Shareholders’ Equity
------------------------------------
• Total Assets
• The ability of the present Capital to support
the further growth of Assets
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48. RATIO ANALYSIS
CAPITAL ADEQUACY
• 2.
• Shareholders’ Equity
------------------------------------
• Risk Weighted Assets
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49. RATIO ANALYSIS
CAPITAL ADEQUACY
• 3.
• Shareholders’ Equity
------------------------------------
• Risk Weighted Assets
+
RW Contingent Liabilities
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50. RATIO ANALYSIS
CAPITAL ADEQUACY
• 4.
• Total Debt
------------------------------------
• Shareholder’s Equity
• The ability to raise additional Debt Capital
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51. RATIO ANALYSIS
CAPITAL ADEQUACY
• 5. Financial Leverage :
• Total Assets
------------------------------------
• Shareholder’s Equity
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52. 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
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53. RATIO ANALISIS
ASSET QUALITY
• 1.
• Loans
--------------------------------
• Total Assets
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54. 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.
•
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55. RATIO ANALISIS
ASSET QUALITY
• 3. Non Performing Loans
-------------------------------------
• Total Loans
• Indicates how much of the loan portfolio is
non performing.
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56. 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.
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57. RATIO ANALISIS
ASSET QUALITY
• 5. Loan Loss Provision
-------------------------------------
• Average Loans
• Shows current income reduction in
anticipation of loan losses.
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58. RATIO ANALISIS
ASSET QUALITY
• 6. Net Charge - Offs
-------------------------------------
• Average Loans
• Shows current income reduction in
anticipation of loan losses.
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59. RATIO ANALISIS
ASSET QUALITY
• 7.
• Interest Earning Assets
-------------------------------------------------
• Total Assets
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60. RATIO ANALISIS
ASSET QUALITY
• 8.
• Non Interest Earning Assets
-------------------------------------------------
• Total Assets
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61. RATIO ANALISIS
EARNINGS & EFFICIENCY
• “A Bank with no
profit is like a human
body with no blood.”
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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
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63. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 1. Return on Assets ( ROA )
• Net Income
--------------------------------------------
• Total Average Assets
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64. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 2. Return on Equity ( ROE )
• Net Income
--------------------------------------------
• Average Shareholder’s Equity
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65. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 3. Return on Equity ( ROE )
• ROE = ROA * Equity Multiplier
• ROE = ( NI / AST ) * ( AST / SHEQ )
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66. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 4.
• Interest Income
--------------------------------------------
• Average Interest Earning Assets
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67. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 5.
• Net Interest Income
--------------------------------------------
• Average Total Assets
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68. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 6.
• Interest Income on Loans
--------------------------------------------
• Average Total Loans
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69. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 7.
• Total Operating Expense
-------------------------------------------------
• Total Operating Income
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70. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 8. Efficiency Ratio
• Non Interest Expense
----------------------------------------------------
• Net Interest Income + Fees Commissions
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71. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 9. Break Even Ratio
• Total Expenses - Non Interest Income
----------------------------------------------------
• Total Average Interest Earning Assets
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72. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 10. Net Free Funds Ratio
• Non Paying Liabilities - Non Earning
Assets
--------------------------------------------------
• Interest Earning Assets
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73. 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
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74. RATIO ANALISIS
EARNINGS & EFFICIENCY
• 12. Interest Rate Sensitivity Gap Ratio :
• Interest Rate Sensitive Assets
-------------------------------------------------
• Interest Rate Sensitive Liabilities
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75. RATIO ANALYSIS
LIQUIDITY
• “Inadequate
Liquidity of a Bank
may cause an
accident similar to an
airplane crash !”
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76. RATIO ANALISIS
LIQUIDITY
• 1.
• Loans
-------------------------
• Deposits
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77. RATIO ANALISIS
LIQUIDITY
• 2.
• Liquid Assets
-------------------------
• Deposits
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78. RATIO ANALISIS
LIQUIDITY
• 3.
• Liquid Assets
--------------------------------
• Deposits + Borrowings
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79. RATIO ANALISIS
LIQUIDITY
• 4.
• Assets Due for the Period
-----------------------------------------
• Liabilities Due for the Period
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80. 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.
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81. RATIO ANALISIS
LIQUIDITY
• 6. Liquid Assets
-----------------------------------------
• Large Liabilities
• Measures the assets readily available to
cover a loss of large liabilities.
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82. 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.
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83. 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.
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84. MATURITY ANALISIS
Days 0-10 10-30 30-60 60-90
Cash 100 200 300 50
Loans 200 500 200 100
300 700 500 150
Deposit 400 300 800 20
Borrow 150 200 200 30
550 500 1000 50
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85. MATURITY ANALYSIS
Days 0-10 10-30 30-60 60-90
Asset 100 500 1000 2000
Liab 300 200 1500 700
Short - -200 -500
Long + +300 1300
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86. OFF - BALANCE SHEET
RISK
• 1. Loan Commitments
-----------------------------------------
• Average Assets
• Shows the extent of a bank’s obligation to
make loans.
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87. OFF - BALANCE SHEET
RISK
• 2.Contingent Liabilities & Commitments
----------------------------------------------------
• Average Assets
• Shows the extent of a bank’s commitments
& contingent liabilities.
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88. BANK ANALYSIS
CHECKLIST
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89. BANK ANALYSIS
CHECKLIST
• EARNINGS
• 1. Is earnings at an adequate level ?
• 2.Does valid reporting exist for earnings?
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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
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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
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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
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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
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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 ?
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95. INTEREST MARGIN
INCREASING THE
INTEREST MARGIN
%
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96. INCREASING INTEREST
MARGIN
• Interest Income…………..200
• Interest Expense…………( 50 )
----------
• INTEREST MARGIN….. 150
----------
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97. INCREASING THE
INTEREST MARGIN
BAN K STR ATEG Y TO
IN C R E A S E T H E
IN T E R E S T M A R G IN
IN C R E A S E C H AN G E ALTER
S IZ E IN T E R E S T A S S E T /L IA B IL IT Y
SPR EAD M IX
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98. INCREASING THE
INTEREST MARGIN
• BANK STRATEGY • ACTION
• 1.Expand Assets
• 2.Reduce Fixed Assets
• Increase Size
• 3.Increase Equity Base
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99. INCREASE THE
INTEREST MARGIN
• BANK STRATEGY • ACTION
• 1.Re-Price
Asset Portfolio
• Change
• 2.Re-Price
Interest Spread Liability Portfolio
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100. INCREASE THE
INTEREST MARGIN
• ACTION
• BANK STRATEGY
• 1.Plan Taxes
• 2.Reduce Liquidity
• 3.Increase
• Alter Aggressiveness
Asset / Liability • 4.Change Asset Yield
Mix Sensitivity
• 5.Change Liability
Cost Sensitivity
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101. INCREASE THE
INTEREST MARGIN
• IMPLEMENTATION
• 1.Offer new Products
• BANK STRATEGY and Services
Increase Size • 2.New Loans/Deposits
• 2.Open new Branches
• ACTION • 3.Expand Promotion
Expand Assets Budget
• 4.Reduce Interest
Spread
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102. EXPAND ASSETS
• REPERCUSSION • IMPLEMENTATION
• 1.Increase operating • 1.Offer new Products
Expenses and Services
• 2.Need for Capital • 2.New Loans/Deposits
• 3.F/A Regulations • 3.Open new Branches
• 4.Decrease Capital • 4.Expand Promotion
Ratio Budget
• 5.Reduce ROA • 5.Reduce Interest
Spread
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103. INCREASE THE
INTEREST MARGIN
• IMPLEMENTATION
• BANK STRATEGY • 1.Reduce Dividend
Increase Size pay out
• 2.Offer Dividend
• ACTION reinvestment
Increase • 3.Sell Stock
Equity Base • 4.Establish Employee
Stock Ownership PL
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104. INCREASE EQUITY BASE
• REPERCUSSIONS • IMPLEMENTATION
• 1.Hurt shareholders • 1.Reduce Dividend
pay out
• 2.Double taxation S/H • 2.Offer Dividend
3.Reduce ability to reinvestment
leverage ROA, • 3.Sell Stock
dilution of earnings • 4.Establish Employee
• 4.Continued Employee Stock Ownership PL
Expectations
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105. INCREASE INTEREST
MARGIN
• IMPLEMENTATION
• BANK STRATEGY • 1.Increase rates on
Change Interest Loans
Spread • 2.Compound return
more frequently
• ACTION • 3.Reduce rates on
Re-price Portfolio Deposits
• 4.Compound cost less
frequently
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106. REPRICE PORTFOLIO
• REPERCUSSIONS • IMPLEMENTATION
• 1.Lose business • 1.Increase rates on
Loan quality decrease Loans
• 2.Increase operations • 2.Compound return
Client dissatisfaction more frequently
• 3.Lose business • 3.Reduce rates on
Liquidity problem Deposits
• 4.Increase operations • 4.Compound cost less
Client dissatisfaction frequently
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107. INCREASE INTEREST
MARGIN
• IMPLEMENTATION
• BANK STRATEGY
• Alter Asset/Liability • 1.Minimize cash
Mix • 2.Minimize due from
• 3.Sell Securities &
Bonds
• ACTION • 4.Increase short term
• Reduce Liquidity Deposits
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108. REDUCE LIQUIDITY
• REPERCUSSION • IMPLEMENTATION
• 1.Liquidity Risk • 1.Minimize cash
• 2.Lose correspondent • 2.Minimize due from
• 3.Incur book losses • 3.Sell Securities &
Bonds
• 4.Increase volatility of • 4.Increase short term
Deposits
deposits
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109. INCREASE INTEREST
MARGIN
• BANK STRATEGY • IMPLEMENTATION
• Alter Asset/Liability • 1.Increase loan/deposit
Mix
ratio
• 2.Increase highest
• ACTION yielding loans
• Increase • 3.Increase highest
yielding securities
Aggressiveness
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110. INCREASE
AGGRESSIVENESS
• REPERCUSSION • IMPLEMENTATION
• 1.Increase need for • 1.Increase loan/deposit
capital
• 2.Increase loan losses ratio
• 2.Increase highest
• 3.Increase security yielding loans
losses • 3.Increase highest
yielding securities
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111. INCREASE INTEREST
MARGIN
• BANK STRATEGY • IMPLEMENTATION
• Alter Asset/Liability • 1.Increase S/T &
Mix variable rate assets if
rates will increase
• 2.Decrease S/T &
• ACTION variable rate assets if
rates will decrease
• Change Asset Yield
Sensitivity
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112. CHANGE ASSET YIELD
SENSITIVITY
• REPERCUSSION • IMPLEMENTATION
• 1.Wrong estimate of • 1.Increase S/T &
interest movement, variable rate assets if
thereby reducing rates will increase
interest spread • 2.Decrease S/T &
variable rate assets if
rates will decrease
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113. INCREASE INTEREST
MARGIN
• BANK STRATEGY • IMPLEMENTATION
• Alter Asset/Liability • 1.Decrease S/T &
Mix variable rate liabilities
if rates will increase
• 2.Increase S/T &
• ACTION variable rate liabilities
if rates will decrease
• Change Liability
Cost Sensitivity
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114. CHANGE LIABILITY COST
SENSITIVITY
• REPERCUSSION • IMPLEMENTATION
• 1.Wrong estimate of • 1.Decrease S/T &
interest movement, variable rate liabilities
thereby reducing if rates will increase
interest spread • 2.Increase S/T &
variable rate liabilities
if rates will decrease
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115. CONSOLIDATED
FINANCIAL
STATEMENTS
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116. CONSOLIDATED BALANCE
SHEET
PAR EN T
BAN K
C O N S O L ID A T E E Q U IT Y A C C O U N T IN G C O S T B A S IS
O w n e r s h ip O w n e r s h ip O w n e r s h ip
> 50% B tw 5 0 % - 2 0 % < 20 %
BAN K A BAN K B BAN K C
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