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1. v
CHAPTER 3
COMMERCIAL BANKS’ FINANCIAL STATEMENT
AND PERFORMANCE FINANCIAL RATIOS
Banking Business Department
Banking Faculty-Banking Academy

2. Expected learning outcomes
Upon completing this chapter, students are expected to be able
to:
•Explain the importance of commercial bank’s financial statements
•Identify the main assets, liabilities, and off balance sheets of
commercial banks
•Explain the sources of revenue and expenses for commercial banks
•Explain the importance of evaluate bank performance via financial
ratios

3. CONTENTS
3.1. Introduction to commerical banks’ financial statements
•Balance sheet
•Bank’s income statement
3.2. Bank performance and financial ratio analysis
•Profitability ratios
•Asset quality ratios
•Solvency ratios

4. 3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
vBalance sheet
vIncome statement
vCash flow statement
vNotes to the financial statement

5. 3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1 Balance sheet
A COMMERCIAL BANK’S SIMPLIFIED BALANCE SHEET
Unit: mil VND
ASSET
•Cash 27,000
•Securities 86,000
•Loan 271,500
•Fixed assets
and other property 18,600
LIABILITIES AND EQUITIES
•Deposits and loans from other credit
institutions 100,100
•Customer's deposit 250,000
•Valuablepapers33,700
•Equity 19,300
TotalAsset 403,100Total Liabilities 403,100

6. 3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance sheet
The balance sheet is a financial statement of the wealth of a business or other organisationon a
given date. This is usually at the end of the financial year. For commercial banks the balance sheet
lists all the book values of sources and uses of banks’ funds.
Banks’s uses of fundsBanks’ sources of funds
•Cash;
•Liquid assets (securities);
•Short-term money market instruments
•Bank loans;
•Other investments;
•Fixed assets (branch network, computers,
premises).
•The general public (retail deposits):
•Companies (small, medium, and large
corporate deposits);
•Other banks (interbank deposits);
•Equity issues (share issues, conferring
ownership rights on holders);
•Debt issues (bond issues and loans);
•Saving past profits (retained earnings).

7. 3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance Sheet
A commercial bank balance sheet (simplified )
Source: Table 9.1, pp . 260, Casu et. al. (2016)

8. Asset items
Cash and deposits with other depository institutions
vMain purpose
-Liquidity
vSub-items
-Cash and cash equivalents
-Deposits at the central bank
-Deposits and loans to other credit institutions (To meet everyday liquidity)
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance sheet

9. Asset items
Securities
vMain purpose
-Profitability
-Add-on liquidity
vSub-items
-Avaiable-for-sale securities
-Held-to-maturity securities
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance sheet

10. Asset item
Bank loans
vMain purpose
-Profitability
vIngredient
-Loans to other credit institutions
-Retail loans
-Corporate loans
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance sheet

11. vOther asset items
-Capital contribution, long-term investment
-Fixed assets: Tangible fixed assets (Headquarters, equipment, etc.),
intangible fixed assets
-Receivables, interest, fees receivable, deferred corporate income tax
assets
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance sheet

12. Liabilities items
vDeposits from customers
-Current deposit account
-Time (saving) deposit
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance sheet

13. Liabilities items
vDeposits and loans from other credit institutions
vSponsored capital, investment trust
vIssuing valuable papers
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
Balance sheet

14. Liabilities items
Equity
vCharter capital
vSurplus premium
vReserves
vRetained profits
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.1. Balance sheet

15. 3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS3.1.1. Balance sheet
Source: Casu et. al (pp. 316, 2016)

16. 3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTSOff balance sheet items
OFF BALANCE SHEET ITEMS OF BANKS
vCredit guarantees
vForeign exchange commitments
vL/C
vLoan sales
vOther commitments
v…

17. INCOME STATEMENT OFCOMMERCIAL BANK
1.Interestincomeandsimilarincome
2.Interestexpenseandsimilarexpenses
I.Netinterestincome
3.Feeandcommissionincome
4.Feeandcommissionexpenses
II.Netfeeandcommissionincome
III.Netgainfromtradingofforeignexchange
IV.Net(loss)/gainfromtradingsecurities
V.Net(loss)/gainfrominvestmentsecurities
5.Otherincome
6.Otherexpenses
V.Netotherincome
VI.TOTALOPERATIONINCOME
VII.OPERATIONEXPENSES
VIII.Netoperatingprofitbeforeallowanceforcreditlosses
IX.Allowanceforcreditlosses
PROFITBEFORETAX
Tax
PROFITAFTERTAX
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS

18. InterestIncome
•Interestincomeistheincomegeneratedonallbanks’assets,suchasloans,
securitiesanddepositslentouttootherinstitutions,householdsandotherborrowers.
Characteristics
•Mainsourceofbankrevenue
•Sensitivetointerestrate
•Creditrisk
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.2. Income Statement

19. InterestExpense
•Interestexpenseisthethesumofinterestpaidonallinterest-bearingliabilities,
suchasalldepositaccounts,CDs,short-termborrowingandlong-termdebt
Characteristics
•Itisthebiggestexpenseofthebank
•Dependingonfluctuationsinmarketinterestrates,customerpsychology,economic
cycle,legalcorridor...
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.2. Income Statement

20. Non-interestIncome
•Non-interestincomeincludestheincomegeneratedbyfeeincome,deposit
servicecharges,commissions(Bancasurance)andtrading(loss)/gain..
Characteristics
•Accountforarelativelylowproportionbuthasbecomeimportantinrecentyears
•Lowrisk
•Lessdependentonmarketinterestratefluctuations
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.2. Income Statement

21. Non-interestExpenses
•Non-interestexpensesaresalariesandfringebenefitspaidtoemployees,property
andequipmentexpenses,andothernon-interestexpenses(suchasdepositinsurance
premiumsanddepreciation)..
•Characteristics
•Arelativelylowshareofthetotalcost
•Lessdependentonmarketinterestratefluctuations
3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.2. Income Statement

22. 3.1. INTRODUCTION OF COMMERCIAL BANKS’
FINANCIAL STATEMENTS
3.1.2. Income Statement
•Allowanceforcreditlossesisanon-cashexpenseitem,whichtheamount
chargedagainstearningstoestablishareservesufficienttoabsorbexpectedloan
losses.

23. The importance of the evaluation of financial statements
and performance ratios

Discussion: Who is interested
in bank performance?
What are the benefits of
understanding bank financial
statements ad bank
performance?
Source: Casu2015
3.2. BANK PERFORMANCE AND FINANCIAL RATIO ANALYSIS

24. •For the bank:
•More intense competition, greater pressures for banks to control costs and
manage risks while at the same time maximiserevenues.
•The objective of shareholders’ wealth maximisation(maximisingthe returns to
investors holding equity shares in the bank) is still a priority.
•Therefore banks need to evaluate the performance to make informed decisions.
•For other stakeholders:
•Performance analysis is an important tool used by various agents either
operating not only internally to the bank (e.g. managers, above points), but
also who form part of the bank’s external operating environment (e.g. regulators)
3.2. BANK PERFORMANCE AND FINANCIAL RATIO ANALYSIS
The importance of the evaluation of financial statements
and performance ratios

25. 3.2. BANK PERFORMANCE AND FINANCIAL RATIO ANALYSIS
Profitability
Asset qualitySolvency

26. 3.2. BANK PERFORMANCE AND FINANCIAL RATIO ANALYSIS
3.2.1 Profitability Ratios
vROA (Return-on-asset)
vROE (Return-on-equity)
vNIM (Net interest margin)
vC/I (Cost-income)

27. 3.2. BANK PERFOERMANCE AND FINANCIAL RATIO ANALYSIS
3.2.1. Profitability Ratios
ROA (Return-on-asset)
ROA is the return-on-assets calculated as net income/total assets; this
ratio indicates how much net income is generated per $ of assets.
ROA = net income/ total assets

28. 3.2. BANK PERFOERMANCE AND FINANCIAL RATIO ANALYSIS
3.2.1. Profitability Ratios
ROE (Return-on-equity)
ROEisprobablythemostimportantindicatorofabank’sprofitabilityandgrowth
potential.Itistherateofreturntoshareholdersorthepercentagereturnoneach$
ofequityinvestedinthebank.
ROE = net income/ total equity

29. 3.2. BANK PERFOERMANCE AND FINANCIAL RATIO ANALYSIS
3.2.1. Profitability Ratios
ROE (Return-on-equity)
Source: Casu et. al (pp. 328, 2016)
The ROE decomposition

30. 3.2. BANK PERFOERMANCE AND FINANCIAL RATIO ANALYSIS
3.2.1. Profitability Ratios
NIM (Net income margin)
NIM is net interest margin and measures the net interest income relative to
the bank’s total, average or earning assets.
NIM = [(interest income –interest expense)/total assets]

31. 3.2. BANK PERFOERMANCE AND FINANCIAL RATIO ANALYSIS
3.2.1. Profitability Ratios
C/I (Cost-income ratio)
Cost–income ratio (C/I) is a quick test of efficiency that reflects bank
non-interest costs as a proportion of income
C/I = non-interest expenses/(interest income + non–interest income)

32. 3.2. BANK PERFORMANCE AND FINANCIAL RATIO ANALYSIS
3.2.2 Assetquality
Provision for loan losses/total operating income
Provision for loan losses/total loans
Provision for loan losses/total assets
Non-Performing loans/total loans

33. 3.2. BANK PERFOERMANCE AND FINANCIAL RATIO ANALYSIS
3.2.3 Solvency ratios
CAR (Capital Adequacy ratio) =("#$%&'()#*(+,"#$%-'()#*(+)
/#012$#34*$5600$*0
TheBaselAccordrequiresbankstoholdaminimumoverallrisk-weighted
capitalratioof8percentofwhichatleast50percentisintheformofequity
(knownasTier1)capital.Morespecifically,Tier1capitalshouldbeatleast4
percent.TotalcapitaladequacyratiomeasuresTier1capital+Tier2capital;
thisratioshouldbeatleast8%

34. 3.2. BANK PERFOERMANCE AND FINANCIAL RATIO ANALYSIS
3.2.4 Limitationsof financial ratios
1)Generally one year’s figures are insufficient to evaluate the performance
of banks
2)Precise comparisons between similar banks may be difficult as they often
compete in different markets, have varying product features and customer
bases, and so on.
3)Ratios do not stand in isolation, they are interrelated