Bank Financial statements are very tricky to understand for a layman because banks’ financial statements are to be analysed in a different technique than other manufacturing or service companies. So while analysing banks’ financial we need to undertake and take into account the unique risks involved.The main functions of bank are to accept deposits and give loans.Both transactions involve inclusion of INTEREST which ultimately has a huge impact on the banks’ financial statements.The difference between interest charged and interest paid is called SPREAD.
4 Keys for reading Banks’ Financial Statements
Types of financial statements
Firstly,one needs to know that four main types of banks’ financial statements exist which are cash flow, shareholder’s equity, income, and balance sheet.
Balance Sheets show information about the shareholder’s equity, assets, and liabilities. It is one of the most important banks’ financial statements.
These reflect the revenue on the banks’ financial position over a period of time. It also shows clearly the costs incurred.
Cash Flow Statements
They show the banks’ outflows and inflows of money in the form of cash. It is of great importance because the banks need money to buy assets and also to pay off expenses.
Precautions to be kept in mind while reading banks’ financial statements:
All interest entries need to be checked
Earning from Drafts or other services should be added
Deductible expenses must be recognized accurately
Assets side should be monitored as per classification of assets such as bad assets,doubtful assets,and other non-performing assets.
Provision for contingent liabilities is to be made
Hence a reader must not only know about basics but should be a little bit aware about bank’s working.
When we carefully review banks’ financial statements we are able to identify the key factors that must be considered before making a trading or investing decision in the banks’ finance or stocks.An investors would have to have a good understanding of the banking business cycle and the yield curve of the banking sector. Interest rate risk and credit risk are the primary factors to consider as banks’ financial performance follows the yield curve.Credit risk can be the largest contributor to the negative performance of a bank, even causing it to lose money. In addition, management of credit risk is a subjective process that can be manipulated in the short term. Investors in banks need to be aware of these factors before they commit their capital.