INTERPRETATION OF BALANCE SHEET OF A BANK ADVANCED FINANCIAL MANAGEMENT

SUBMITTED BY : PANKAJ SACHDEV (121) SNEHA VALECHA (118)

Balance Sheet of a Bank Liabilities Capital Reserves and Surplus Deposits Borrowings Other Liabilities and Provisions Contingent Liabilities Assets Cash and Balances at RBI Balance with banks and money at call and short notice Investments Advances Fixed Assets Other Assets
2

BANKS LIABILITIES
    

Capital Reserve and surplus Statutory reserve Capital reserve Deposit Demand deposit Saving deposit Term deposit

Borrowing Other liabilities and provisions Bills payable Interest accrued Others Contingent liabilities

  

BANKS ASSETS
 

    

Cash and balance Cash in hand Balances with RBI Balances with banks and money at call and short notice Investment G-sec Shares Debentures and bonds Subsidiaries, Joint ventures Other investments

Advances (secured /unsecured)  Secured by tangible assets  Unsecured advances Sectorial advances  Priority sector  Public sector advances Fixed assets Other assets  Tax paid in advance

ASSET LIABILITY MANAGEMENT

ALM is an integral part of the financial management process of bank. ALM is concerned with strategic balance sheet management involving risks caused by changes in the interest rates, exchange rates and the liquidity position of the bank. ALM is a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. It takes into consideration interest rates, earning power and degree of willingness to take on debt.

RISKS IN ALM

Interest Rate Risk: It is the risk of having a negative impact on a banks future earnings and on the market value of its equity due to changes in interest rates. Liquidity Risk: It is the risk of having insufficient liquid assets to meet the liabilities at a given time. Forex Risk:It is the risk of having losses in foreign exchange assets and liabilities due to exchanges in exchange rates among multi-currencies under consideration.

THE ALM PROCESS RESTS ON THREE PILLARS

 

ALM information systems Management Information System Information availability, accuracy, adequacy and expediency ALM organization Structure and responsibilities Level of top management involvement Role of ALCO ALM process Risk parameters, identification, measurement & management. Mainly to cover Interest rate & credit risk

  

PROFITABILITY DRIVERS
Increasing Revenue (Shareholders wealth) Operational & Transaction Cost Savings Cross-selling Customer retention A/C opening through referrals Debit card usage

PERFORMANCE METRICS

CAMELS RATING MODEL

C
A M E L S CAPITAL ADEQUACY ASSET QUALITY MANAGEMENT QUALITY EARNINGS LIQUIDITY SENSITIVITY TO MARKET RISK

CAPITAL ADEQUACY

Indicative of banks capacity to maintain Capital to meet risks. ParametersSize of the Bank Volume of the inferior quality assets Growth experience, plans & prospects Quality of capital Access to capital markets Non-ledger assets , values not shown in books

     

ASSET QUALITY

Magnitude of credit risk ParametersQuality of loans, advances, investments & offbalance sheet activities. Level , trend & comparison of non-accrual & renegotiated loans

MANAGEMENT QUALITY

Ability of BoD & Senior Management to identify, measure, monitor, control various risks. Parameters Technical competence, leadership skills, etc  Compliance with banking laws & regulations  Ability to plan & respond to changing situations  Adequacy of directors  Willingness to serve the credit needs of a community

EARNINGS

Current trend in earnings , also expected future growth Parameters ROA (Peer group averages + Banks own trends) Income & Expenses Quality of earnings Provision for loan losses Dividend Payout Ratio

LIQUIDITY

Banks current potential sources of liquidity ParametersPresent & Future needs Readily convertible to cash w/o loss Access to money market Level of diversification of funding sources Trend & stability of deposits

    

SENSITIVITY TO MARKET RISK

Degree to which changes in the interest rates, exchange rates, commodity prices, equity prices impact the earnings & capital. Parameters: Net earnings, EVA interest rates in stress environments. Volatility of Forex rates exposure taken Volatility in market & equity exposure

 

RATING ANALYSIS & INTERPRETATION

Rating Analysis Score 1.0 to 1.4 1.6 to 2.4 2.6 to 3.4 3.6 to 4.4 4.6 TO 5.0 Interpretation STRONG SATISFACTORY FAIR (WATCH CATEGORY) MARGINAL (SOME RISK OF FAILURE) UNSATISFACTORY (HIGH DEGREE OF FAILURE EVIDENT)

A B C D E

FURTHER CHARACTERISTICS
CAMELS For Domestic Banks Now, CRAMELS CACS Capital Adequacy, Asset Quality, Compliance & Systems For Foreign Banks Used by RBI since 1995

FEW OTHER MODELS

Total operating Revenue Stock market based performance measures Customer centric performance measures

SBI
- to D+ Ranking dropped from C
CAMEL rating dropped from B to B

Low asset quality Increase in NPAs Earnings affected due to high provisioning against bad loans Lowering of hybrid debt rating (Ba3 from Ba2) Overseas borrowings affected Tier 1 capital requirement defaulted

SUMMARY
Financial Statements to be prepared in accordance with Schedule III of Sec 29 of Banking Regulation Act. (12 schedules-B/S; 13-16 Income Statement) Sources of Funds Short- term (Payable on demand) High financial leverage, hence high risk Fixed assets proportion very low ; Low operating leverage High degree of interest rate of volatility Revenue = Interest income + Non-Interest Income

REFERENCES
Books:  Management of Banking & Financial Services Justin Paul & Padmalatha Suresh  Asset Liability Management T.Ravi Kumar 2nd Edition Websites:  www.dnaindia.com  www.business-standard.com/india  www.statebankofindia.com

THANK YOU