ANALYSIS OF THE BALANCESHEETS OF COMMERCIAL BANKS 1 BALANCE SHEET ANALYSIS • OF • COMMERCIAL BANKS 2 ANNUAL REPORT OF BANKS 3 AUDITOR’S REPORT (AR) • 2. NOTES TO F/S 4 .ANNUAL REPORT • 1. FINANCIAL STATEMENTS (F/S) • 3. AUDITOR’S REPORT “INDEPENDENT AUDITOR’S REPORT” 5 . FINANCIAL STATEMENTS OF COMMERCIAL BANKS 6 . SOURCES & USES OF FUNDS STATEMENT 7 . STATEMENT OF SHAREHOLDER’S EQUITY • 4.FINANCIAL STATEMENTS • 1. BALANCE SHEET • 2. STATEMENT OF INCOME • 3. 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 8 . • As of 9 .BALANCE SHEET SHOWS • The Financial Position of a Bank • As at a specific date. BALANCE SHEET EQUATION • • ASSETS • 100 = Equals = • = 100 • LIABILITIES • + Plus • SHAREHOLDER’S EQUITY 10 . ASSET VALUATION • GAAP & IAAP • Generally Accepted & Internationally Accepted Accounting Principles • LOWER OF • COST OR • MARKET 11 . ASSET CLASSIFICATION TO TAL ASSETS N O N IN T E R E S T E A R N IN G ASSETS IN T E R E S T E A R N IN G ASSETS 12 . LIABILITY CLASSIFICATION TO TAL L IA B IL IT IE S IN T E R E S T B E A R IN G L IA B IL IT IE S N O N IN T E R E S T B E A R IN G L IA B IL IT IE S 13 . BALANCE SHEET DOES NOT SHOW • • • • Interest Rates Interest Sensitivity Due Dates Foreign Currency breakdown • Collateral 14 . STATEMENT OF INCOME SHOWS • The results of operations of a bank. • For the period between two dates. 31 15 . • For the year ended Dec. NET PROFIT N E T P R O F IT TO TAL IN C O M E TO TAL EXPEN SE 16 . TOTAL INCOME TO TAL IN C O M E N ET IN T E R E S T IN C O M E N ET N O N .IN T E R E S T IN C O M E 17 . 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 C O M E (+ ) IN T E R E S T EXPEN SE (-) 18 . 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 C O M E P /L IN T E R E S T EXPEN SE P /L IN T E R E S T E A R N IN G ASSETS B /S IN T E R E S T B E A R IN G L IA B IL IT IE S B /S 19 . IN T E R E S T IN C O M E N O N IN T E R E S T IN C O M E (+ ) N O N IN T E R E S T EXPEN C E (-) 20 .NET NON-INTEREST INCOME N ET N O N . ANALYSIS OF PROFIT NET P R O F IT (N P ) P R O F IT F R O M B A N K IN G O P E R A T IO N S ( N E T O P E R A T IN G IN C O M E ) (N O I) P R O F IT F R O M E X T R A O R D IN A R Y T R A N S A C T IO N S (P E X T ) P R O F IT F R O M S E C U R IT Y T R A N N S A C T IO N S (P S T ) 21 . BANKING RISKS 22 . BANKING RISKS •C AMEL • • • • A M E L 23 . CAMEL • Capital Adequacy 24 . C AMEL • Asset Quality 25 . CA MEL • Management Quality 26 . CAM EL • Earnings Efficiency 27 . CAME L • Liquidity Risk 28 . CAMEL RISKS • Capital Adequacy • Asset Quality • Management • Earnings • Liquidity 29 . 4. Interest Rate Risk 8.2. F/X Position Risk 30 .CAMEL 6.5.BANKING RISKS • • • • • • 1. Foreign Exchange Availability Risk 10. Credit Risk 7.3. Interest Rate Sensitivity Risk 9. Accounting & Reporting Risk 12. Money Market Operations Risk 15. Pricing Risk 31 .BANKING RISKS • • • • • • 11. Country (Sovereign) Risk 16. Capital Market Operations Risk 14. Computer Risk 13. Theft Risk 18. Reputation Risk 22.BANKING RISKS • • • • • • • • • • • 17. Large Loans / Deposits Risk 27. Transaction Risk 25. Concentration Risk 32 . Strategic Risk 21. Regulatory / Compliance Risk 26. Market Risk 23. Fiduciary Risk 24. Fraud & Defalcations Risk 19. Natural Disasters 20. RATIO ANALYSIS Numerator ______________________ Denominator 33 . RATIO ANALYSIS • Balance Sheet __________________ Balance Sheet • Income Statement ________________ Balance Sheet 34 . RATIO ANALYSIS • What is the • What is the • LEVEL ? • TREND ? 35 . Liquidity 36 . Capital Adequacy 2. Management 4. Earnings & Efficiency 5. Asset Quality 3.RATIO ANALYSIS • • • • • 1. RATIO ANALISIS CAPITAL ADEQUACY • “The Capital of a Bank protects the Bank against unexpected future losses.” 37 . • • Shareholders’ Equity -----------------------------------Total Assets • The ability of the present Capital to support the further growth of Assets 38 .RATIO ANALYSIS CAPITAL ADEQUACY • 1. • • Shareholders’ Equity -----------------------------------Risk Weighted Assets 39 .RATIO ANALYSIS CAPITAL ADEQUACY • 2. RATIO ANALYSIS CAPITAL ADEQUACY • 3. • • Shareholders’ Equity -----------------------------------Risk Weighted Assets + RW Contingent Liabilities 40 . RATIO ANALYSIS CAPITAL ADEQUACY • 4. • • Total Debt -----------------------------------Shareholder’s Equity • The ability to raise additional Debt Capital 41 . RATIO ANALYSIS CAPITAL ADEQUACY • 5. Financial Leverage : • • Total Assets -----------------------------------Shareholder’s Equity 42 . Dividends to be paid • The internal growth of Equity Capital 43 .RATIO ANALYSIS CAPITAL ADEQUACY • 6. Capital Formation Rate : • Retained Net Income (RNI) -------------------------------------------------• Average Shareholder’s Equity • RNI = Net Income . RATIO ANALISIS ASSET QUALITY • 1. • • Loans -------------------------------Total Assets 44 . • 45 .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. • Non Performing Loans ------------------------------------Total Loans • Indicates how much of the loan portfolio is non performing. 46 .RATIO ANALISIS ASSET QUALITY • 3. 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. 47 . 48 .RATIO ANALISIS ASSET QUALITY • 5. • Loan Loss Provision ------------------------------------Average Loans • Shows current income reduction in anticipation of loan losses. 49 .RATIO ANALISIS ASSET QUALITY • 6. • Net Charge .Offs ------------------------------------Average Loans • Shows current income reduction in anticipation of loan losses. • Interest Earning Assets ------------------------------------------------• Total Assets 50 .RATIO ANALISIS ASSET QUALITY • 7. RATIO ANALISIS ASSET QUALITY • 8. • Non Interest Earning Assets ------------------------------------------------• Total Assets 51 . RATIO ANALISIS EARNINGS & EFFICIENCY • “A Bank with no profit is like a human body with no blood.” 52 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 53 RATIO ANALISIS EARNINGS & EFFICIENCY • 1. Return on Assets ( ROA ) • • Net Income -------------------------------------------Total Average Assets 54 Return on Equity ( ROE ) • • Net Income -------------------------------------------Average Shareholder’s Equity 55 .RATIO ANALISIS EARNINGS & EFFICIENCY • 2. RATIO ANALISIS EARNINGS & EFFICIENCY • 3. Return on Equity ( ROE ) • ROE = ROA * Equity Multiplier • ROE = ( NI / AST ) * ( AST / SHEQ ) 56 . RATIO ANALISIS EARNINGS & EFFICIENCY • 4. • • Interest Income -------------------------------------------Average Interest Earning Assets 57 . RATIO ANALISIS EARNINGS & EFFICIENCY • 5. • • Net Interest Income -------------------------------------------Average Total Assets 58 . • • Interest Income on Loans -------------------------------------------Average Total Loans 59 .RATIO ANALISIS EARNINGS & EFFICIENCY • 6. RATIO ANALISIS EARNINGS & EFFICIENCY • 7. • • Total Operating Expense ------------------------------------------------Total Operating Income 60 . RATIO ANALISIS EARNINGS & EFFICIENCY • 8. Efficiency Ratio • Non Interest Expense ---------------------------------------------------• Net Interest Income + Fees Commissions 61 . RATIO ANALISIS EARNINGS & EFFICIENCY • 9.Non Interest Income ---------------------------------------------------• Total Average Interest Earning Assets 62 . Break Even Ratio • Total Expenses . Net Free Funds Ratio • Non Paying Liabilities .Non Earning Assets -------------------------------------------------• Interest Earning Assets 63 .RATIO ANALISIS EARNINGS & EFFICIENCY • 10. 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 64 . RATIO ANALISIS EARNINGS & EFFICIENCY • 12. Interest Rate Sensitivity Gap Ratio : • • Interest Rate Sensitive Assets ------------------------------------------------Interest Rate Sensitive Liabilities 65 . RATIO ANALYSIS LIQUIDITY • “Inadequate Liquidity of a Bank may cause an accident similar to an airplane crash !” 66 RATIO ANALISIS LIQUIDITY • 1. • • Loans ------------------------Deposits 67 RATIO ANALISIS LIQUIDITY • 2. • • Liquid Assets ------------------------Deposits 68 RATIO ANALISIS LIQUIDITY • 3. • • Liquid Assets -------------------------------Deposits + Borrowings 69 . RATIO ANALISIS LIQUIDITY • 4. • • Assets Due for the Period ----------------------------------------Liabilities Due for the Period 70 . • Measures the extent to which net earning assets would be effected by the loss of a bank’s large liabilities. Net Large Liabilities ----------------------------------------• Net Earning Assets • Both numerator & denominator are net of short-term assets.RATIO ANALISIS LIQUIDITY • 5. 71 . 72 .RATIO ANALISIS LIQUIDITY • 6. • Liquid Assets ----------------------------------------Large Liabilities • Measures the assets readily available to cover a loss of large liabilities. 73 .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. • Brokered Deposits ----------------------------------------Earning Assets • Measures the extent to which a bank is funding assets with high-priced and volatile brokered deposits.RATIO ANALISIS LIQUIDITY • 8. 74 . MATURITY ANALISIS Days Cash Loans 0-10 100 200 300 Deposit 400 Borrow 150 550 10-30 200 500 700 300 200 500 30-60 300 200 500 800 200 1000 60-90 50 100 150 20 30 50 75 . -200 Long + -500 +300 1300 76 .MATURITY ANALYSIS Days 0-10 10-30 30-60 60-90 Asset Liab 100 300 500 200 1000 1500 2000 700 Short . OFF . 77 . • Loan Commitments ----------------------------------------Average Assets • Shows the extent of a bank’s obligation to make loans.BALANCE SHEET RISK • 1. OFF .BALANCE SHEET RISK • 2.Contingent Liabilities & Commitments ---------------------------------------------------• Average Assets • Shows the extent of a bank’s commitments & contingent liabilities. 78 . BANK ANALYSIS CHECKLIST 79 . Is earnings at an adequate level ? • 2.Does valid reporting exist for earnings? 80 .BANK ANALYSIS CHECKLIST • EARNINGS • 1. BA CHECKLIST EARNINGS • • • • • • • • IF POOR. Mismanaging taxes 7. High overhead costs 81 . High cost of funds 3. ASCRIBABLE TO : 1. High loan charge off s 5. Low asset yield 2. Inadequate non interest income 4. High loan loss provisions 6. Adequate non .interest income 4. Low cost of funds 3. Strong asset yield 2. Low overhead costs 82 . ASCRIBABLE TO : 1. Adequate taxes 7.BA CHECKLIST EARNINGS • • • • • • • • IF STRONG. High loan loss provisions 6. High loan charge off s 5. Is there pressure to pay high dividends 83 .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 bank dependent on bought money ? 2. Is this dependence traditional or recent 3.BANK ANALYSIS CHECKLIST • • • • LIQUIDITY 1. Is volatile funds significant to assets 84 . Is core deposit growth proportionate to asset growth ? • 4. off s reasonable ? 2. Is management slow to charge off loans 3. Do earnings comfortably cover loan losses ? 85 .BANK ANALYSIS CHECKLIST • • • • • • ASSET QUALITY 1. Are net charge . Is loan growth reasonable ? 4. Is loan loss reserve level adequate ? 5. INTEREST MARGIN INCREASING THE INTEREST MARGIN % 86 . 150 ---------- 87 .INCREASING INTEREST MARGIN • Interest Income…………...200 • Interest Expense…………( 50 ) ---------• INTEREST MARGIN…. 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 S IZ E C H AN G E IN T E R E S T SPR EAD ALTER A S S E T /L IA B IL IT Y M IX 88 . Increase Equity Base 89 .Reduce Fixed Assets • 3.Expand Assets • 2.INCREASING THE INTEREST MARGIN • BANK STRATEGY • Increase Size • ACTION • 1. INCREASE THE INTEREST MARGIN • BANK STRATEGY • ACTION • Change Interest Spread • 1.Re-Price Asset Portfolio • 2.Re-Price Liability Portfolio 90 . Reduce Liquidity 3.Plan Taxes 2.Change Liability Cost Sensitivity 91 .Increase Aggressiveness • 4.INCREASE THE INTEREST MARGIN • BANK STRATEGY • Alter Asset / Liability Mix • • • • ACTION 1.Change Asset Yield Sensitivity • 5. Offer new Products and Services • 2.Expand Promotion Budget • 4.INCREASE THE INTEREST MARGIN • BANK STRATEGY Increase Size • ACTION Expand Assets • IMPLEMENTATION • 1.Open new Branches • 3.New Loans/Deposits • 2.Reduce Interest Spread 92 . Decrease Capital Ratio • 5.Open new Branches • 4.F/A Regulations • 4.Reduce ROA • IMPLEMENTATION • 1.Reduce Interest Spread 93 .Expand Promotion Budget • 5.EXPAND ASSETS • REPERCUSSION • 1.Need for Capital • 3.Offer new Products and Services • 2.New Loans/Deposits • 3.Increase operating Expenses • 2. Offer Dividend reinvestment • 3.Sell Stock • 4.INCREASE THE INTEREST MARGIN • BANK STRATEGY Increase Size • ACTION Increase Equity Base • IMPLEMENTATION • 1.Establish Employee Stock Ownership PL 94 .Reduce Dividend pay out • 2. Reduce ability to leverage ROA.Hurt shareholders • 2.INCREASE EQUITY BASE • REPERCUSSIONS • 1.Reduce Dividend pay out • 2.Offer Dividend reinvestment • 3. dilution of earnings • 4.Establish Employee Stock Ownership PL 95 .Double taxation S/H 3.Sell Stock • 4.Continued Employee Expectations • IMPLEMENTATION • 1. Reduce rates on Deposits • 4.Compound return more frequently • 3.Increase rates on Loans • 2.Compound cost less frequently 96 .INCREASE INTEREST MARGIN • BANK STRATEGY Change Interest Spread • ACTION Re-price Portfolio • IMPLEMENTATION • 1. Increase rates on Loans • 2.Lose business Loan quality decrease • 2.Increase operations Client dissatisfaction • IMPLEMENTATION • 1.Compound return more frequently • 3.Increase operations Client dissatisfaction • 3.Compound cost less frequently 97 .REPRICE PORTFOLIO • REPERCUSSIONS • 1.Reduce rates on Deposits • 4.Lose business Liquidity problem • 4. Minimize due from • 3.Sell Securities & Bonds • 4.Minimize cash • 2.Increase short term Deposits 98 .INCREASE INTEREST MARGIN • IMPLEMENTATION • BANK STRATEGY • Alter Asset/Liability Mix • ACTION • Reduce Liquidity • 1. Sell Securities & Bonds • 4.Incur book losses • 1.Lose correspondent • 3.Minimize due from • 3.Liquidity Risk • 2.REDUCE LIQUIDITY • REPERCUSSION • IMPLEMENTATION • 1.Increase volatility of deposits 99 .Increase short term Deposits • 4.Minimize cash • 2. INCREASE INTEREST MARGIN • BANK STRATEGY • Alter Asset/Liability Mix • ACTION • Increase Aggressiveness • IMPLEMENTATION • 1.Increase loan/deposit ratio • 2.Increase highest yielding securities 100 .Increase highest yielding loans • 3. Increase need for capital • 2.Increase loan losses • 3.Increase loan/deposit ratio • 2.Increase highest yielding securities 101 .INCREASE AGGRESSIVENESS • REPERCUSSION • 1.Increase highest yielding loans • 3.Increase security losses • IMPLEMENTATION • 1. Decrease S/T & variable rate assets if rates will decrease 102 .Increase S/T & variable rate assets if rates will increase • 2.INCREASE INTEREST MARGIN • BANK STRATEGY • Alter Asset/Liability Mix • ACTION • Change Asset Yield Sensitivity • IMPLEMENTATION • 1. CHANGE ASSET YIELD SENSITIVITY • REPERCUSSION • 1. thereby reducing interest spread • IMPLEMENTATION • 1.Decrease S/T & variable rate assets if rates will decrease 103 .Wrong estimate of interest movement.Increase S/T & variable rate assets if rates will increase • 2. Increase S/T & variable rate liabilities if rates will decrease 104 .Decrease S/T & variable rate liabilities if rates will increase • 2.INCREASE INTEREST MARGIN • BANK STRATEGY • Alter Asset/Liability Mix • ACTION • Change Liability Cost Sensitivity • IMPLEMENTATION • 1. CHANGE LIABILITY COST SENSITIVITY • REPERCUSSION • 1.Decrease S/T & variable rate liabilities if rates will increase • 2. thereby reducing interest spread • IMPLEMENTATION • 1.Wrong estimate of interest movement.Increase S/T & variable rate liabilities if rates will decrease 105 . CONSOLIDATED FINANCIAL STATEMENTS 106 . 2 0 % O w n e r s h ip < 20 % BAN K A BAN K B BAN K C 107 .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 > 50% O w n e r s h ip B tw 5 0 % .