For Reference

1. Bank Financial Statements
An Introduction

2. 2
Course Outline
 Basic accounting
 Basic reports
 Basic ratios

3. 3
Special Topics
 How retail and wholesale banks differ
 Why some growth is good and some is bad
 How assets and liabilities affect earnings
 How inflation affects a bank
 How loan loss accounting works
 Why budgets and forecasts are difficult

4. 4
Course Perspective
 Bank financial statements as used in US
– Teacher: Does not know VN practices
– Students: Compare US practices to VN
– Students: Apply concepts to VN
– Students: Ask questions

5. 5
Basic Reports
 Balance sheet
 Income statement
 Notes
 Ratios
 Cash flow statement
 Average balance sheet

6. 6
Basic Accounting
 Balance Sheet = “Stock” items
– Things of value measured at a point in time
 Income Statement = “Flow” items
– Financial events measured during a period of time

7. 7
Basic Accounting – Balance Sheet
Debits Credits
Assets Liabilities & Equity

8. 8
Basic Accounting – Balance Sheet
What
is
owned
Who
owns
it
Assets Liabilities & Equity

9. 9
Basic Accounting – Balance Sheet
Worth
of
things
Who the
worth is
owed to
Assets Liabilities & Equity

10. 10
Basic Accounting – Balance Sheet
Worth
of
things
Owed to
outsiders
Assets Liabilities & Equity
Owed to
insiders
Liabilities
Equity

11. 11
Basic Accounting – Balance Sheet
 Asset category flow:
– Most liquid → least liquid
– Most tangible → least tangible (intangible)
– Most specific → least specific (miscellaneous)

12. 12
Basic Accounting – Balance Sheet
 Liabilities and Equity category flow:
– Owed to outsiders → owed to insiders
– Owed soonest → owed latest
– Most specific → least specific (miscellaneous)

13. 13
Basic Accounting – Balance Sheet
Assets Liabilities & Equity
Deposits
Equity
Cash
Securities
Loans
Other Assets
Other Borrowings
Other Liabilities

14. 14
Point of View: Bank vs. Customer
 Customers hear bankers say, “The bank will
credit your deposit account.”
 Customers view their deposits as assets.
 Therefore, customers think credits = assets.

15. 15
Basic Accounting – Off Balance
Sheet
 What does “off balance sheet” mean?
 Why do off balance sheet items exist?
 Why aren’t they on the balance sheet?

16. 16
Basic Accounting – Off Balance
Sheet
 Off balance sheet items:
– Things that a business has possession of (or
responsibility for) but does not actually own
– Commitments that a business has made but is not
yet scheduled to fulfill
– Obligations a business has committed to depending
on the outcome of contingent events

17. 17
Basic Accounting – Balance Sheet
Debits Credits
Assets Liabilities & Equity
At any point in time,
balance sheet debits
=
balance sheet credits

18. 18
Basic Accounting – Income
Statement
Debits Credits
Financial Events
Over any period of time,
all debits
=
all credits

19. 19
Basic Accounting – Income
Statement
Debits Credits
Financial Events
Flow Items
Stock Items

20. 20
Basic Accounting – Income
Statement
Debits Credits
Financial Events
Income Statement
Balance Sheet

21. 21
Basic Accounting – Income
Statement
Cost
Items
Revenue
Items
Expense Income

22. 22
Basic Accounting – Income
Statement
Cost
Items
Revenue
Items
Expense Income
Profit

23. Increase in
equity
23
Basic Accounting – Income
Statement
Cost
Items
Revenue
Items
Expense Income
To balance
sheet

24. 24
Basic Accounting – Income
Statement
Cost
Items
Revenue
Items
Expense Income
Increase in
asset value
Increase in
equity

25. 25
Basic Accounting – Income
Statement
Cost
Items
Revenue
Items
Expense Income

26. 26
Basic Accounting – Income
Statement
Cost
Items
Revenue
Items
Expense Income
Loss

27. 27
Basic Accounting – Income
Statement
Cost
Items
Revenue
Items
Expense Income
Decrease in
asset value
Decrease in
equity

28. 28
Basic Accounting – Income
Statement
 Income statement category flow:
– Income (revenues)
→ expenses (costs)
→ net income (profit)
– Core activities → non-core activities
– Ongoing operations → discontinued operations
– Major items → minor items

29. 29
Basic Accounting – Accrual
 Accrual accounting versus cash accounting
– Personal versus business
– Accrual accounting: Better matching of timing of
revenues and costs than cash accounting
– Accrual accounting: More complicated than cash
accounting

30. 30
Basic Reports – Balance Sheet
 Where is risk to value … among assets?
 Cash
– Credit quality of banks holding deposits
 Investment securities
– Exposure to rising interest rates
– Credit quality of debt obligors
– Market liquidity
 Loans
– Credit quality of borrowers
– Exposure to prepayment
 Other assets
– ???

31. 31
Basic Reports – Balance Sheet
 Where is risk to value … among liabilities?
 Noninterest-bearing deposits
– Deterioration in bank’s reputation
 Interest-bearing deposits
– Exposure to rising interest rates
 Borrowings
– Exposure to rising interest rates
– Deterioration in bank’s credit quality
 Other liabilities
– ???

32. 32
Cash Flow — Sources and Uses
 Typical sources of cash:
– Sales
– Decreases in assets
– Increases in liabilities
– Increases in capital accounts
– Non-cash expenses

33. 33
Cash Flow — Sources and Uses
 Typical uses of cash:
– Expenses
– Increases in assets
– Decreases in liabilities
– Decreases in capital accounts

34. 34
Cash Flow Calculation
∆ in Balance Sheet Accounts
and Effect on Cash Flow
Account ∆ Cash Flow
Assets:
+ –
– +
Liabilities:
+ +
– –

35. 35
Wholesale versus Retail