XIM UNIVERSITY: CBRM:2021-23

BANK’S PORTFOLIO
&
BALANCE SHEET ANALYSIS

Amulyadhan Rout
CAMELS RATING SYSTEM
➢ CAMELS Rating is a supervisory rating system originally
developed in the U.S. to classify a bank’s overall condition.

➢ It is applied to every bank and credit union in the U.S.

(approximately 8,000 institutions) and is also implemented
outside the U.S. by various banking supervisory regulators.

➢ The CAMELS rating system is a recognized international rating

system that bank supervisory authorities use in order to rate
financial institutions according to six factors represented by the
acronym "CAMELS.“

➢ Supervisory authorities assign each bank a score on a scale, and a

rating of one is considered the best and the rating of five is
considered the worst for each factor.
CAMELS RATING SYSTEM
The acronym CAMELS stand for the following factors that
examiners use to rate bank institutions:

➢ Capital Adequacy
➢ Asset Quality
➢ Management
➢ Earnings
➢ Liquidity (also called asset liability management)
➢ Sensitivity (How sensitive its portfolio is to market risk,
especially interest rate risk)
'CAMELS RATING SYSTEM'
CAPITAL ADEQUACY RATIO
The Capital Adequacy Ratio is calculated by dividing a bank's
capital by its risk-weighted assets. The capital used to calculate
the capital adequacy ratio is divided into two tiers.
CAR =Tier 1 Capital + Tier 2 Capital /Risk Weighted Asset
Tier-1 Capital or core capital, consists of equity capital,
ordinary share capital, intangible assets and audited revenue
reserves.
➢ Tier-1 capital is used to absorb losses and does not require a
bank to cease operations.
➢ Tier-1 capital is the capital that is permanently and easily
available to cushion losses suffered by a bank without it
being required to stop operating.
➢ A good example of a bank’s tier one capital is its ordinary
share capital.
CAPITAL ADEQUACY RATIO
Tier-2 Capital
Tier 2 Capital comprises unaudited retained earnings,
unaudited reserves and general loss reserves.
➢ This capital absorbs losses in the event of a company
winding up or liquidating.
➢ Tier-2 capital is the one that cushions losses in case the bank
is winding up, so it provides a lesser degree of protection to
depositors and creditors.
➢ It is used to absorb losses if a bank loses all its Tier-1 capital.
CAMELS RATING SYSTEM
Ratings are given from 1 (best) to 5 (worst) in each of the above
categories:
Rating 1: Indicates strong performance and risk management
practices that consistently provide for safe and sound
operations.
Rating 2 : Reflects satisfactory performance and risk
management practices that consistently provide for safe and
sound operations. Management identifies most risks and
compensates accordingly.
Rating 3 : Represents performance that is flawed to some
degree and is of supervisory concern. Risk management
practices may be less than satisfactory relative to the bank's or
credit union's size, complexity, and risk profile.
'CAMELS RATING SYSTEM'
Rating 4 : Refers to poor performance that is of serious
supervisory concern. Risk management practices are generally
unacceptable relative to the bank's or credit union's size,
complexity and risk profile. Key performance measures are
likely to be negative.

Rating 5 : Considered unsatisfactory performance that is

critically deficient and in need of immediate remedial
attention. Such performance, by itself or in combination with
other weaknesses, directly threatens the viability of the bank
or credit union. The volume and severity of problems are
beyond management's ability or willingness to control or
correct. Banks and credit unions in this group have a high
probability of failure and will likely require liquidation and
the payoff of shareholders, or some other form of emergency
assistance, merger, or acquisition.
BANK’S BALANCE SHEET
A bank balance sheet is a key way to draw conclusions
regarding a bank’s business and the resources used to be able
to finance lending. The volume of business of a bank is
included in its balance sheet for both assets (lending) and
liabilities (customer deposits or other financial instruments).

The three crucial elements in all financial analyses include:

▪Liquidity: ability to meet the obligations of liquid funds.
▪Solvency: credit quality and adequacy of the bank’s own
resources (indebtedness).
▪Profitability: ability to generate income/profit from
allocated capital.
BALANCE SHEET CONTENTS
▪ The balance sheet is also known as the statement of
financial position or statement of financial condition.
▪ The balance sheet discloses, at a specific point in time,
➢ What an entity owns (or controls),
➢ What it owes, and
➢ What the owners’ claims are.

Assets = Liabilities + Owners’ equity

BALANCE SHEET CONTENTS
Company X : December 31st

Assets Liabilities:
Current Assets: Current Liabilities
Cash 59,770 Notes Payable 48,563
Marketable securities 87,466 Trade accounts payable 207,887
Accounts receivable 559,144 Payrolls & accruable 411,362
Inventory 618,120 Income taxes 124,684
Prepaid Expenses 49,986 Total Current Liabilities 792,496
Total Current Assets 1,374,486 Long-Term Liabilities 431,350
Fixed Assets: Total Liabilities 1,223,846
Land 25,807
Buildings 716,076 Shareholders’ Equity 5,00,000
Machinery & Equipment 1,010,770 Reserve 6,03,190
Less allowances for depreciation 800,103
Total Fixed Assets 952,550
Total Assets 2,327,036 Total Liab & Equity 2,327,036
 BALANCE SHEET CONTENTS
Statutory Reserve
Every banking company incorporated in India is required to
transfer at least 25% of its current profit to its reserve fund. It is
known as statutory reserve.

General Reserves
When any amount is kept separate by a company out of its profit for
future purpose then that is called as general reserves. In other
words the general reserves are the retained earnings of a company
which are kept aside out of company's profits to meet future
(known or unknown) obligation.

Share Premium Account

It represents the difference between the par value of
the shares issued and the subscription or issue price. It's also known
as additional paid-in capital and can be called paid-in capital in
excess of par value. This account is a part of statutory
reserve account, & is non-distributable.
BALANCE SHEET CONTENTS
Amalgamation Reserve
Amalgamation adjustment account arises when certain statutory
reserves need to be maintained by the transferee company which
were previously maintained in the books of transferor company.
Examples of statutory reserves are- investment allowance reserves,
development rebate reserve, export profits reserves etc.

Capital reserve
Capital reserve is created by capital profits of the company which is
not kept for distribution to the shareholders in the form of dividend.
Common example may the goodwill which is created prior to the
incorporation of the entity, profit earned on the issue of debentures
or shares, balance found in the capital reduction account & balance
found in the general reserve account, which is then transferred to
the redemption fund account.
BALANCE SHEET CONTENTS
Investment Reserve
Banks are required to build up of adequate reserves for mark to
market (MTM) losses on investments held in Available For Sale and
Held For Maturity (HFT) with effect from the year 2018-19. The
provisioning for each of these quarters may be spread equally over
up to four quarters, commencing with the quarter in which the loss is
incurred.

Foreign Currency Translation Account

It is the currency translation by which an international bank
/company translates the results of its foreign subsidiaries in its
reporting currency. They convert this to financial statements of
the foreign subsidiary into the parent company's functional currency.
BALANCE SHEET CONTENTS
Liabilities
a. Paid up capital
b. Reserve & Surplus
▪ Statutory Reserve
▪ General Reserve
▪ Balance in P & L account
▪ Share Premium Account
▪ Amalgamation Reserve
▪ Capital Reserve
▪ Investment Reserve
▪ Foreign Currency Translation Account
c. Deposits
d. Borrowings
INCOME STATEMENT CONTENTS

Income Statement

In contrast to the balance sheet, the income statement shows

the organization's financial progress over a given period of
time.

The income statement is also based on equation:

Revenues - Expenses = Profit (or Loss)
INCOME STATEMENT
Company X : For year ending December 31, 12016
Revenues
Net Sales 3,787,248
Other Income 42,579
Total Revenues 3,829,827
Expenses
Cost of Goods Sold 2,796,459
Administrative & Selling Expenses 637,509
Interest Expenses 47,516
Total Expenses 3,503,545
Earnings Before Income Taxes 326,282
Income Taxes 152,039
Net Earnings 174,243
BALANCE SHEET ELEMENTS
▪ Assets : Resources controlled by the company as a result
of past events and from which future economic benefits
are expected to flow to the entity.

▪ Liabilities : Obligations of a company arising from past

events, the settlement of which is expected to result in an
outflow of economic benefits from the entity.

▪ Equity : Represents the owners’ residual interest in the

company’s assets after deducting its liabilities.
BALANCE SHEET :EQUITY
▪ The balance sheet provides important information about a
company’s financial condition.
▪ However, balance sheet amounts of equity (assets, net of
liabilities) should not be viewed as a measure of either the
market or intrinsic value of a company’s equity.
▪ Why?
➢ The balance sheet is a mixed model with respect to
measurement (some items at historical cost, some items at
current value).
➢ Even current value reflects a value that was current at the
end of the reporting period.
➢ Future cash flows, which affect value, are driven by items
excluded from the balance sheet (e.g., reputation,
management skills).
BALANCE SHEET FORMAT

▪ Liquidity
➢ For a company overall, its ability to pay for short-term
obligations
➢ For a particular asset or liability, its “nearness to cash”

▪ Balance sheet ordering according to liquidity

➢ Companies using U.S. GAAP (e.g., Colgate) order items
on the balance sheet from most liquid to least liquid.
➢ Companies using IFRS order balance sheet information
from least liquid to most liquid.
BALANCE SHEET ANALYSIS
▪ EPS is the portion of a company’s profit that is allocated to each
outstanding share of common stock, serving as an indicator of the
company’s profitability.
▪ It is often considered to be one of the most important variables in
determining a stock’s value, and it comprises the “E” part of the P/E
(price-earnings) valuation ratio.

EPS is calculated as:

EPS = Net Income / Average outstanding common shares
▪ For example, Company X reported second quarter 2021 net income of
INR 350 million and had 175 million average shares outstanding. To
calculate EPS, investors can insert these figures into the EPS
calculation:
EPS = 350 million / 175 million = 2
BALANCE SHEET ANALYSIS
Current and Noncurrent Assets and Liabilities
▪ Balance sheet must distinguish between past and present
separately
➢ Current and noncurrent assets
➢ Current and noncurrent liabilities

▪ Exception to the current and noncurrent classifications

requirement, under IFRS:
➢ Current and noncurrent classifications are not required if a
liquidity-based presentation provides reliable and more relevant
information.
➢ In a liquidity-based presentation, all assets and liabilities
presented in order of liquidity.
➢ Liquidity-based presentation are often used by banks.

▪ Classified balance sheet: Balance sheet with separately classified

current and noncurrent assets and liabilities.
BALANCE SHEET ANALYSIS
Current and Noncurrent Assets and Liabilities
▪ Current assets: Assets expected to be sold, used up, or
otherwise realized in cash within one year or one
operating cycle of the business, whichever is greater, after
the reporting period.
▪ Noncurrent assets: Assets not classified as current. Also
known as long-term or long-lived assets.
▪ Current liabilities: Liabilities expected to be settled
within one year or within one operating cycle of the
business.
▪ Noncurrent liabilities: All liabilities not classified as
current.
▪ Working capital: The excess of current assets over
current liabilities.
BALANCE SHEET ANALYSIS
Cash and Cash Equivalents
▪ Cash Equivalents: Highly liquid, short-term investments
that are so close to maturity that the risk of significant
change in value from changes in interest rates is minimal.

Examples:
➢ Demand deposits with banks

➢ Highly liquid investments with original Treasury Bills,

commercial paper, money market funds)

For cash and cash equivalents, amortized cost and fair

value are likely to be immaterially different.
BALANCE SHEET ANALYSIS
Trade receivables:
▪ Amounts owed to a company by its customers for
products and services already delivered.
➢ Also referred to as accounts receivable.

➢ Typically reported at net realizable value, an

approximation of fair value, based on estimates of
collectability.
▪ Aspects of accounts receivable often relevant to an
analyst:
➢ overall level of accounts receivable relative to sales,
➢ allowance for doubtful accounts, and concentration of
credit risk.
BALANCE SHEET ANALYSIS
Intangible assets:
▪ Identifiable nonmonetary assets without physical substance
(e.g., patents, licenses, trademarks).
➢ Goodwill, which arises in business combinations and is not
a separately identifiable asset, is covered separately in
IFRS.

▪ Measurement of intangible assets subsequent to acquisition:

➢ Intangible asset with finite useful life: Amortize over
useful life and assess for impairment when indicated.
➢ Intangible asset with indefinite useful life: Do not
amortize, but assess for impairment.
BALANCE SHEET ANALYSIS: ASSETS

Goodwill
➢ Arises when a company acquires another company for a
price in excess of fair market value of net identifiable assets
acquired.
➢ Is equal to purchase price of business minus fair market
value of net assets acquired.
➢ Represents value of all favorable attributes that relate to a
business enterprise.
➢ Is recorded only when there is an exchange transaction that
involves the purchase of an entire business.
➢ Is not amortized, but must be assessed for impairment.

Accounting goodwill does not equal economic goodwill.

BS: CURRENT LIABILITIES
Common types of Current Liabilities
▪ Trade payables, also known as accounts payable: Amounts that
a company owes its vendors for purchases of goods and
services—in other words, the unpaid amounts of the company’s
purchases on credit as of the balance sheet date.
▪ Notes payable: Financial liabilities owed by a company to
creditors, including trade creditors and banks, through a formal
loan agreement.
▪ Accrued expenses (also called “accrued expenses payable,”
“accrued liabilities,” and other “nonfinancial liabilities”) are
expenses that have been recognized on a company’s income
statement but that have not yet been paid as of the balance sheet
date.
▪ Deferred income (also called “deferred revenue” and “unearned
revenue”) arises when a company receives payment in advance
of delivery of the goods and services associated with the
payment.
BS ANALYSIS: LIABILITIES
Common types of Non - Current Liabilities
▪ Long-term Financial Liabilities: Include loans (i.e., borrowings
from banks) and notes or bonds payable (i.e., fixed-income
securities issued to investors).
➢ Usually reported at amortized cost on the balance sheet.

➢ In certain cases, liabilities, such as bonds, issued by a company

are reported at fair value.

▪ Deferred tax liabilities: Amount of income taxes payable in future

periods with respect of taxable temporary differences.
➢ Result from temporary timing differences between a company’s
income as reported for tax purposes (taxable income) and
income as reported for financial statement purposes (reported
income).
BALANCE SHEET ANALYSIS

▪ Liquidity
➢ A company’s ability to meet its short-term financial
commitments.
➢ Assessment focus: The company’s ability to convert assets to
cash and to pay for operating needs.
▪ Solvency
➢ A company’s ability to meet its financial obligations over the
longer term.
➢ Assessment focus: The company’s financial structure and its
ability to pay long-term financing obligations.
▪ Analytical Tools
➢ Common-size analysis.

➢ Balance sheet ratios.

CONTINGENT LIABILITY
➢ A Contingent Liability is a possible obligation that may
arise in future depending on occurrence or non-
occurrence of one or more uncertain events.
➢ To simplify the definition, a contingent liability is a
potential liability which may or may not become an
actual liability depending on the occurrence of
events. As a result, it is shown as a footnote in the
Balance Sheet and not recognized in par with other
components of financial statements.
➢ The outcome of a long-pending lawsuit, a government
investigation into organizations affairs, a threat of
expropriation etc. some of the common examples of
contingent liabilities. Even a warranty be considered as a
contingent liability.
CONTINGENT LIABILITY
CONTINGENT LIABILITY
Common types of Contingent Liabilities
➢ Bank Guarantee
➢ Deferred Payment Guarantee
➢ Letters of Credit
➢ Letter of Comfort
➢ Letter of Undertaking
BANKS PROFIT & LOSS ACCOUNT

A bank’s profit & Loss Account has the following

components:
Income:
➢ This includes Interest Income and Other Income.

Expenses:
➢ This includes Interest Expended, Operating
Expenses and Provisions & contingencies.
COMPONENTS OF INCOME
Interest Earned
a. Interest on Advances
b. Discount charges on Bills
c. Income on Investments
d. Interest on balances with Reserve Bank
of India and other inter-bank funds
COMPONENTS OF INCOME
Other Income
a. Commission, Exchange and Brokerage
b. Profit on sale of Investments (Net)
c. Profit/(Loss) on Revaluation of Investments\
d. Profit on sale of land, buildings and other assets (Net)
e. Profit on exchange transactions (Net)
f. Income earned by way of dividends etc. from
subsidiaries and Associates abroad/in India
g. Miscellaneous Income
COMPONENTS OF EXPENSES

Interest Expended
a. Interest on Deposits
b. Interest on Reserve Bank of India / Inter-Bank
borrowings
c. Interest paid on borrowings
d. Others
COMPONENTS OF EXPENSES
Operating Expenses
a. Payments to and Provisions for employees
b. Rent, Taxes and Lighting
c. Printing and Stationery
d. Advertisement and Publicity
e. Depreciation on Bank's property
f. Directors' Fees, Allowances and Expenses
g. Auditors' Fees and Expenses (including Branch Auditors)
h. Law Charges
i. Postages, Telegrams, Telephones etc.
j. Repairs and Maintenance
k. Insurance
l. Other Expenditure
FUNDING AVENUES

To satisfy funding needs, a bank must perform one or a

combination of the following:
a. Dispose off liquid assets
b. Increase short term borrowings
c. Decrease holding of less liquid assets
d. Increase liability of a term nature
e. Increase Capital funds
BANKS PERFORMANCE
Banks performance if poor, it is attributable to:
1. Lower yield on assets
2. High cost of funds
3. Lower CASA deposits
4. Inadequate non interest income
5. High operating cost
6. High loan loss provisions
7. Mismanaging taxes
8. High overhead costs
9. In-efficient customer service
10.Slower settlement of funds
BANKS PERFORMANCE
Banks performance if strong /competitive, is attributable to:
1. Investment in high yield assets
2. Distribution of investment in different portfolio
3. Low cost of funds
4. Comparatively higher percentage of CASA deposits
5. Higher non - interest income /fee based income
6. High loan loss provisions
7. Adequate taxes
8. Low overhead costs
9. Better management of assets
10.Good customer services
11.Income from Merchant Banking activities
12.Regular follow up of advances
BANKS PERFORMANCE
Banks performance if strong /competitive, is attributable to:
1. Investment in high yield assets
2. Distribution of investment in different portfolio
3. Low cost of funds
4. Comparatively higher percentage of CASA deposits
5. Higher non - interest income /fee based income
6. High loan loss provisions
7. Adequate taxes
8. Low overhead costs
9. Better management of assets
10.Good customer services
11.Income from Merchant Banking activities
12.Regular follow up of advances
Thank you