Making sense of a bank's balance sheet - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Making sense of a bank's balance sheet

Feb 9, 2010

In the previous article of this series, we discussed some of the key ratios related to a bank's profit and loss account. We shall take forward our discussion on how the accounts of financial organisations are different as compared to those of non-manufacturing organisations. In this article, we will discuss a bank's other financial statement, the balance sheet.A balance sheet of a manufacturing firm is broadly divided into two parts - 'Sources of funds' and 'Application of funds'. For a bank these are termed as 'Capital and liabilities' and 'Assets' respectively. We shall first discuss the 'Capital and liabilities' portion of the balance sheet.

Capital and Liabilities

The 'capital and liabilities' head, as the name suggests is made up of the three portions - the net worth, which is the 'capital' and the 'reserve and surplus', the liabilities, which is the money that a bank owes. This money is in the form of 'deposits and borrowings'. The third portion is the 'other liabilities and provisions'.

Net worth: Net worth is made up of the 'share capital' and the 'reserves and surplus'. While the net worth of banks is quite similar to that of a non-financial institution, there are some balances that a bank needs to maintain in its balance sheet, which one will not find in a non-financial institution. One such reserve is the 'statutory reserve', which is not a free reserve for the bank. Unlike this there are free reserves that banks maintain, but their proportions are quite subjective as they differ from bank to bank. Such reserves include 'Investment Reserve Account' and 'Foreign Currency Translation Account'.

Liabilities: As it is a bank's business to raise funds and lend the same, the debt to equity ratio is typically 10 to 20 times, much higher than that of non-financial firms. Banks also need funds for investing. The liabilities are usually in various forms. They can either be deposits or borrowings. Deposits are again broadly of three kinds - demand deposits (current accounts), savings bank deposits (saving accounts) and term deposits (fixed deposits).

As compared to the interest paid on fixed deposits (term deposits), the interest offered on demand and savings bank deposits (popularly known as CASA or current account and savings accounts) is very low. As such, when banks mention that they are trying to increase the share of low cost funds, it means that they are trying to garner more funds in the form of CASA. This would eventually help them improve their net interest margins (NIMs).

As for borrowings, they are somewhat similar to the debt that non-financial companies take. Apart from deposits, banks can also borrow funds through loans from other sources. These can include the Reserve Bank of India (RBI) as well as other institutions and agencies, be it domestic or foreign.

Other liabilities and provisions: This head is similar to that of a 'current liabilities' portion of a non-financial company. The items can fall under this head are the short term obligations of a bank during a particular year. The items that can fall under this category include bills payable, interest accrued, provision for dividend, contingent provisions etc.

In the next article of this series, we shall continue our discussion on the financial statements of banks.

Investing: Back to Basics Article Series - Previous article | Investing: Back to Basics Article Series | Next article

Equitymaster requests your view! Post a comment on "Making sense of a bank's balance sheet". Click here!

  

More Views on News

It's Time to Book Profits (Fast Profits Daily)

Nov 27, 2020

In my first video on Equitymaster, I want to introduce you my proprietary greed and fear index. It's telling us to book some profits in the market.

Mirae Asset Large Cap Fund: Participating in High Quality Businesses (Outside View)

Nov 27, 2020

PersonalFN's analysis on the features and performance of Mirae Asset Large Cap Fund.

Create Wealth for Yourself in India's Drone Revolution (Profit Hunter)

Nov 27, 2020

The Chinese drone market is 14 times that of India's. Billions may flow into Indian drone companies too. Don't miss out on this wealth creating opportunity.

Two Very Important Updates For You (Fast Profits Daily)

Nov 26, 2020

In this video, I'll have an update for you on gold and the new member of my team.

Adani Green: A Future Multibagger or a Big, Speculative Bubble podcast (Views On News)

Nov 26, 2020

Rahul Shah discusses the hype around Adani Green Energy and analyses whether it is justified.

More Views on News

Most Popular

Not Infosys or Wipro. India's Next Wealth Creators Could Be Drone Stocks (Profit Hunter)

Nov 25, 2020

India's drones directorate signals the next big defence tech multibaggers.

Stocks that Could Shine More than Gold After Diwali (Profit Hunter)

Nov 17, 2020

If the markets become volatile over the next few months, do this.

How the New Margins Will Impact You (Fast Profits Daily)

Nov 25, 2020

The new rules on margins will come into effect from 1st December. Are you ready?

How to Build the Best Trading System (Fast Profits Daily)

Nov 20, 2020

In this video, I'll show you how to make the best trading system.

An Eraser and Some Pencils (The Honest Truth)

Nov 17, 2020

Ajit Dayal on the road ahead for the world after covid.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Nov 27, 2020 (Close)

MARKET STATS