GROUP 10

FINANCIAL ANALYSIS OF A BANK

Measuring the profitability Indicating the trend of Achievements Assessing the growth potential of the business Comparative position in relation to other firms Assess overall financial strength Assess solvency of the firm

IMPORTANCE OF FINANCIAL ANALYSIS

Balance sheet- Report of income- reports a bank’s condition at a single

point in time

Income Statement- Report of Condition- reports a bank’s condition over a

period of time

TWO BASIC FINANCIAL STATEMENTS USED IN FINANCIAL ANALYSIS

Cross-sectional analysisIt is also known as inter firm comparison. This analysis

helps in analyzing financial characteristics of an enterprise with financial characteristics of another similar enterprise in that accounting period. Time Series analysis

The basis of comparison may be :– Comparison of the financial statements of different years of the same business unit.– Comparison of financial statement of a particular year of different business units.

Cross-sectional and time series analysisThis analysis is intended to compare the financial characteristics of two or more enterprises for a defined accounting period. It is possible to extend such a comparison over the year. This

TYPES OF ANALYZING FINANCIAL STATEMENT

It is used as an internal tool to measure risk and allocate resources for supervision purposes. Its purpose is to provide an accurate and consistent assessment of a credit union’s financial condition in the following areas:

Capital adequacy -20%Asset quality – 20%Management – 25%Earnings – 15%Liquidity – 10%Sensitivity to market risk – 10%

CAMELS RATING SYSTEM

Rating

Composite Range

Description

Meaning

1 1.00-1.49 Strong Basically sound in every aspect Findings are of minor nature and can be handled

routinely Resistant to external economic and financial

disturbances2 1.5-2.49 Satisfactory Fundamentally sound

Findings are of minor nature Stable and can withstand business fluctuations Supervisory concerns are limited to the extent that

findings are corrected3 2.50-3.49 Fair Financial, operational or compliance weaknesses

ranging from moderately severe to unsatisfactory

Vulnerable to the onset of adverse business conditions

Easily deteriorate if actions are not effective in correcting weaknesses

Supervision concern and more than normal supervision to address deficiencies

4 3.50-4.49 Marginal Immoderate volume of serious financial weaknesses Unsafe High potential for failure Close supervision surveillance and a definite plan for

correcting deficiencies5 4.50-5.00 Unsatisfacto

ry High immediate or near term probability failure Severity of weaknesses is so critical that urgent

aid from stockholders or other financial resources is necessary

Without immediate corrective actions, will likely require liquidations, merger or acquisition.

ANALYSIS OF FINANCIAL STATEMENTS

COMPARATIVE STATEMENTSIt shows the different assets and liabil ities of the firm on different dates to make comparison of balances from one date to another

TREND RATIOSIt is a technique of studying several financial statements over a series of years. In this analysis the trend percentages are calculated for each item by taking the figure of that item for the base year taken as 100. Generally the first year is taken as a base year. The analyst is able to see the trend of figures, whether moving upward or downward.

ANALYSIS OF FINANCIAL STATEMENTS

COMMON SIZE STATEMENTSA statement where balance sheet items are expressed in the ratio of each asset to total assets and the ratio of each liability is expressed in the ratio of total liabilities is called common size balance sheet. For the common size statement balance sheet, each account balance is divided by total assets. For the common size balance sheet, the base is net sales.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL RATIOS

NET INTEREST MARGIN

SPREAD

OVERHEAD EFFICIENCY

OTHER FINANCIAL RATIOS

CAPITAL ADEQUACY RATIO

EARNING PER SHARE

INTEREST COVERAGE

OTHER FINANCIAL RATIOS

CURRENT RATIO

DEBT TO EQUITY RATIO

BOOK VALUE PER SHARE

OTHER FINANCIAL RATIOS