Banks Balance Sheet

Definition of Banks Balance Sheet

A banks Balance Sheet can be defined as a part of a bank’s financial statements which represent the financial position, i.e., financial health of a banking entity at a certain point of time, usually at the end of the accounting period (quarterly, annually as per applicable regulations) prepared strictly in compliance with the applicable banking rules and regulations of the country providing insights about the bank’s assets, liability and its capital.

Explanation

Banks do not operate as the regular company does; hence the bank’s balance sheet is different from other non-financial institutions. Bank’s Balance sheet comprises of three parts assets, liability, and equity. The main function of a bank is to attract investors and lend the credit or loan to eligible clients.

• Assets: Assets, accordingly, in the banking world, assets are usually money granted by a bank, a loan, or other means.
• Liabilities: Liabilities now where does the money come into the bank? Mostly it’s the money of savers/ depositors etc.; therefore, the amount deposited by the saver into the bank is a liability for banks. Both the asset and liability are reflected in the bank’s balance sheet. The asset includes three categories –  earning asset, non-earning assets, and cash and cash equivalents.
• Capital: Capital equity is a bank’s own resources that consist of capital contributed by shareholders and the retained earnings of the bank.

Example of Banks Balance Sheet

Following are the examples of a balance sheet are given below:

Example #1

National Bank started the business with a capital of $50,000 and carried out the following transactions. Prepare balance sheet based on given facts and figures: –

Balance fig. will be bank’s net profits from operations

Solution:

 Notes: The issue of a bank guarantee of $20,000 does not amount to financial transactions and, therefore, will be disclosed as a contingent liability and not reported in the balance sheet.

Banks Balance Sheet Items

Banks balance sheet comprises of three components –

1. Assets

An asset is something that will generate economic benefits in the future. Mentioned below are some important items forming part of assets are-

• Cash and Cash Equivalents: A bank is required to maintain a certain amount of cash as a reserve in comparison with its liabilities. The amount of cash reserves a bank must hold is determined by the federal reserve, which ensures the safety of banks and allows the regulatory bank to affect the monetary policy. Excess reserves are kept for greater safety; vault cash that is kept in ATM and bank premises to be used by the customers has to be maintained by the banks, cash equivalents include short-term assets such as demand deposits. T-bills and commercial paper.
• Securities: Basic securities that banks own are treasuries and municipal bonds. When a bank needs more cash, the bonds can be easily sold in the secondary market. Hence these are also known as secondary reserves after cash and cash equivalents. Banks also hold many asset-backed securities and derivatives.
• Loans & Advances: Loans and advances form a major part of banks’ Balance sheets as these are the assets on which banks earn interest and other income. Many times, these loans and advances are also traded in between financial institutions.

2. Liabilities

Liabilities are obligations which will results in the outflow of economic resources in the future.

• Checkable Deposits: These are deposits under which the depositor can withdraw at its will any time from the bank, and it includes all checking accounts.
• Non-Transaction Deposits: These are saving accounts and time deposits such as certificates of deposits. These are the liabilities for the bank which if not sufficiently held and maintained, hampers the growth of the bank.
• Borrowings: Borrowings are money borrowed from other banks or regulatory banks, federal fund markets,non-depository institutions such as insurance companies and pension funds, etc. Sometimes bank also borrows from the federal reserve at the time of financial stress or crises as they could not get funding elsewhere.
• Banks Capital: It is the fund introduced by the initial investors and shareholders of the banks adjusted with the net earnings, reserves and surplus, losses, etc.

Banks Balance Sheet Analysis

Bank’s Balance Sheet is different from a manufacturing industry’s or any other non-financial organization balance sheet. Analysis of Bank’s B/S is done primarily considering the following three factors: –

• Liquidity: Ensuring enough cash availability at any point to meet out its obligations
• Solvancy: Concerned with creditworthiness, ensuring sufficiency and quality of bank assets
• Profitability: Bank’s profit-making capability in accordance with available resources.

The basic purpose of analyzing the bank’s balance sheet is to ascertain the bank’s default risk to meet the interest or its payment obligations. Banks typically use non-performance ratio as a tool to measure its default capacity and its preparedness to meet future contingencies. Some widely used ratios are as follows: –

• Non-Performing Loan / Customer Loan: Used to measure overall quality of the bank’s loan book.
• Non- Performing Loans / Average Total Assets: Used for banks which are facing tough situations when a certain benchmark is crossed by the ratio, the situation is considered as a signal for insolvency.
• Own Resources / Average Total Assets: This ratio indicates the bank’s use usage of its own resources employed for investment in assets in comparison with borrowed funds.

Loans and Advances in Banks Balance Sheet

Bank’s B/S loans and advances are not similar to non-financial institution loans and advances. For non-financial institutions, these are generally borrowings undertaken and presented on the liability side of B/S, whereas, in the case of Bank’s B/s, these are usually sources of income and therefore presented on the assets side. As the main purpose of the bank is lending and earning on such lended funds, loans and advances form the part of the asset base.

Banks are required to classify loans and advances based on performance criteria as performing and non-performing assets (NPAs). NPAs are further classified as standard, sub-standard lost based on performance. Accordingly, banks are required to create provisions for loss on such assets.

Advantages

Some of the advantages are given below:

• Balance sheets act as a source document by different stakeholders like investors, creditors to analyze and understand the financial health of banks.
• Banks balance sheet provides information about the sustainability and growth of the business over time. Also, it determines the risk involved in investing in the bank and the return it will offer on the capital invested.
• When accounting ratios are applied to B/S figures, it helps in analyzing the bank’s liquidity, solvency profitability, and operational efficiency.
• Balance Sheet prepared on standard formats helps in comparing different bank’s financial statement to make further economic decisions.

Conclusion

Bank Balance sheet terminologies are different from regular balance sheet prepared by non-financing institutions. Understanding a bank’s B/S is not an easy task. Bank BS provides insights about its various capital like tier I, tier II capital, meeting capital adequacy norms and standards, liabilities like time deposits, savings deposits, etc., assets like cash and its equivalent, loans, and advances, etc. Applying various ratios, the user can analyse Bank’s B/S.

Recommended Articles

This is a guide to Bank’s Balance Sheet. Here we also discuss the definition and loans and advances in banks balance sheet along with the example. You may also have a look at the following articles to learn more –

1. How to Read a Balance Sheet?
2. Balance Sheet Analysis
3. Balance Sheet Ratios
4. Long Term Debt in Balance Sheet