Banks Balance Sheet Format Example How To Analyze

Balance Sheet of a Bank

The balance Sheet for banks is different from other sectors and companies. Several characteristics of the bank’s financial statement highlight how banks’ balance sheets and income statements are created. For example, sales are not measured by ratios like sales turnover and receivables turnover. Once investors are comfortable with the terminology and can grasp the statements, it becomes elementary for them to analyze the trends and understand the statements.

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Banks Balance Sheet Example

Below is the example of the Consolidated balance sheet of Goldman Sachs for the years 2017 and 2016 from their Annual 10K

Balance Sheet Assets

source: Goldman Sachs SEC Filings

We note that the bank’s balance sheet assets are different from what we usually see in other sectors like Manufacturing etc. The classification is not based on current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more, long-term assets, inventory, payables, etc.The key highlight is that bank assets include securities purchased, loans, financial instrumentsFinancial InstrumentsFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more, etc.

Balance Sheet Liabilities

The bank’s balance sheet liabilityBalance Sheet LiabilityLiabilities in financial accounting refer to the amount of money a business owes to the lender. The lender can be anyone, including a bank, services provider, or supplier, while liabilities can be mortgages, loans, or IOUs. It is one of the two important parts of the balance sheet, followed by assets. But unlike assets, liabilities are debts or obligations that require the company to use its economic benefits to write off the owed amount in the future.read more section looks very different from the ordinary liabilities (current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They’re usually salaries payable, expense payable, short term loans etc.read more, long term liabilities, etc.).Here are the key terms to note: deposits, Securities under repurchase agreementsRepurchase AgreementsA repurchase agreement or repo is a short-term borrowing for individuals who deal in government securities. Such an agreement can happen between multiple parties into three types- specialized delivery, held-in-custody repo and third-party repo.read more, short term and long term borrowings, etc.

Components of Banks Balance Sheet

The main components of the above bank’s balance sheet are

#1 – Cash

Holding a large amount of cash is considered a loss in opportunity cost for other sectors. But in the case of a Bank’s Balance Sheet, cash is a source of income and is held on deposit. Sometimes banks also hold cash for other banks, and one of the significant services banks provide is to provide cash on demand.Due to its business and regulatory norms, banks must have a minimum amount of liquid cash. Most often, banks keep excess reservesExcess ReservesExcess reserves are kept or deposited with the central regulatory authority over and above the statutory requirements. If reserves are positive, the bank has held the amount in reserves more than the statutory requirement. In the case of zero value, there is no deficit or surplus reserves balance kept.read more for higher safety. Goldman Sachs has a considerable amount of cash balance.In 2017 it had ~12% of its balance in cash and equivalentsCash And EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more. This is an essential focus for the investors since the chances of receiving a higher amount of dividend or share buyback increasesShare Buyback IncreasesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more

#2 – Securities

These instruments are typically short-term, and banks generate a yield from these kinds of investments. Banks own US Treasuries and municipal bondsMunicipal BondsA municipal bond is a debt security issued by a national, state, or local authority to finance capital expenditures on public projects related to the development and maintenance of infrastructures such as roads, railways, schools, hospitals, and airports.read more.These securities are liquid and can be easily sold in the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more and hence are termed secondary reserves. Goldman has increased its investment in securities in 2017.

#3 – Loans

Lending money and earning interest is the primary business of the bank. Therefore, it can be termed the bread and butter of the bank.

From an investor’s perspective, the increase in loans is essential for the bank’s growth. Along with the increase in loans, bank deposits should also be observed. An increase in loans is alone not sufficient. The quality of creditors should be noted. Poor quality of creditors may lead to a rise in default rates and, in turn, a loss for the banks.On a broad level, banks provide Personal and mortgage loans. Personal loans are given without any security, and hence interest for these loans remains high. In the case of mortgage loans, the loan is given against a mortgage, and the interest is lower. But if the loan taker defaults on its loan, the bank claims the mortgage as per the agreement.Banks also provide loans for business, and real estate loans, which include but are not limited to residential loans, home equity loans and commercial mortgages, consumer loansConsumer LoansA consumer loan is a type of credit given to a consumer to finance specified set of expenditures. The borrower must pledge a specific asset as collateral for the loan, or it may be unsecured depending on the loan’s monetary value.read more, and interbank loans.

#4 – Deposits

Accounting Rules for Valuing Assets in a Bank

Capital is determined by Total Assets and less total liabilities (also known as net worth). However, the recent changes have changed this definition and have made it complex to determine the true value of the bank’s net worthNet WorthThe company’s net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company’s share capital (both equity and preference) as well as reserves and surplus.read more.

Post-2009 crisis, the government took specific initiatives to restore faith in the banking system. The Financial Accounting Standards Board has allowed Banks to value their assets at a Fair Value. Banks are now also allowed to record income on the income statement if the market value of the debt decreases. This change is because the bank could buy its debt in the market and reduce the debt amount.

Important Indicators in Banks Balance Sheet Analysis

The word “Default” means failure to meet interest or payment obligations. Usually, banks use a Non-performance ratio, a percentage indicating the number of loans given on credit is expected to fail. This comparison helps us understand if the bank has sufficient funds to meet future contingencies.

Widely used ratios include –

Non-performing loans / Customer loansNon performing loans / Customer loans + collateralNon-performing loans / Average total assetsOwn Resources / Average total assets

Non-performing assets or loans to loans ratio is used to measure the overall quality of the bank’s entire loan book. Not performing loans are the ones for which interest is overdue for more than three months

The third ratio is especially significant for institutions already in a bad place. When this ratio crosses a benchmark, it is considered a strong sign of insolvencySign Of InsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash flow.read more

The higher fourth ratio indicates that the bank is highly leveraged, and there is lower protection against defaults on the loans mentioned above on the asset side.

Balance Sheet of a Bank#

Banks Balance Sheet Example#

Balance Sheet Assets#

Balance Sheet Liabilities#

Components of Banks Balance Sheet#

#1 – Cash#

#2 – Securities#

#3 – Loans#

#4 – Deposits#

Accounting Rules for Valuing Assets in a Bank#

Important Indicators in Banks Balance Sheet Analysis#

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