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Home > Capital Markets Best Practice > Analyzing a Bank’s Financial Performance

Capital Markets Best Practice

Analyzing a Bank’s Financial Performance

by Jyothi Manohar

Appendix: Basic Bank Financial Statements

Balance Sheet

As with any business organization, a bank’s balance sheet comprises assets, liabilities, and capital (stockholders’ equity). The nature of these items reflects the uniqueness of the business of banking.


  • Cash. The cash on hand (usually at various branch locations, in vaults, and in automated teller machines (ATMs)) and required reserves maintained with the respective central bank of the country.

  • Balances maintained with other financial institutions. Includes short-term investments with original maturities of 90 days or less.

The above two balances are aggregated as “Cash and cash equivalents” (CCE).

  • Federal funds sold. Temporary (often overnight) investments of excess funds with other banks.

  • Investment securities. Debt or equity securities held for interest earnings, liquidity, or gains trading. There may be regulatory restrictions on the types of investment a bank can hold.

  • Derivatives. Financial instruments whose price or value is dependent on the changes in value of other underlying assets, which may be stocks, bonds, currencies, commodities, etc. Banks generally use derivative instruments as a means of protecting themselves from interest rate or international currency exchange rate fluctuations. Due to the sophisticated nature of derivative instruments both from a risk and an accounting perspective, derivatives are typically entered into only by those banks that have the resources and expertise to handle them.

  • Advances or loans to customers. Loans made to individuals, businesses, and other organizations for a whole plethora of reasons, ranging from buying a car to funding working capital for business organizations, construction projects, and the like.

  • Advances or loans to banks. Typically, loans made by larger banks to other banks for a variety of reasons; accounted for in much the same manner as advances or loans to customers.

  • Property, plant, and equipment. The bank’s holdings of real estate (the bank’s various locations may be leased or owned), furniture, fixtures, equipment, technology hardware, capitalized leases, or other similar assets that have an estimated useful life and which are used on an ongoing basis.

  • Goodwill and intangible assets. Goodwill arises from the acquisition of another business where the consideration paid exceeds the assets acquired and the liabilities assumed. For a bank, intangibles usually represent items like loan-servicing rights, core deposit premiums, and customer lists, although trade names and computer software (purchased or internally generated) may also be included as intangible assets.

  • Deferred taxes. These balances arise due to temporary differences in the carrying value of assets and liabilities for financial reporting purposes versus tax reporting purposes. Deferred tax assets represent temporary differences that will result in future tax benefits for the bank.

  • Other assets. This could include a multitude of balances including accrued interest receivable, prepaid assets, investments in joint ventures, miscellaneous receivables, and repossessed assets.

  • Off-balance sheet items. Includes items such as commitments, letters of credit, debt financing, off-balance sheet exposure to derivatives, etc.


  • Deposits. These include deposits by customers (current or demand accounts, savings accounts, fixed deposits, also known as term deposit receipts or certificates of deposit) and other banks.

  • Borrowings. These include short- and long-term borrowings from other banks, repurchase agreements, and federal funds purchased. Repurchase agreements are short-term arrangements to sell investment securities with an agreement that they will be repurchased at pre-set prices and in pre-set time frames. Federal funds purchased are temporary (usually overnight) borrowings of excess funds from other banks.

  • Debt securities issued. These are generally longer-term borrowings for specific purposes and include trust preferred issuances and corporate bonds. The debt issuances of larger banks frequently trade on a regular basis and may be readily purchased and sold through investment brokers.

  • Derivatives. See “Assets” section above for definition. Fair-value fluctuations may cause derivative instruments to be classified as liabilities.

  • Deferred taxes. See “Assets” section above for definition. Deferred tax liabilities represent temporary differences that are currently taxable.

  • Accounts payable and accrued expenses. Current liabilities arising out of the routine day-to-day operations of a bank such as bills payable, salaries payable, professional fees payable, etc.

  • Pension and retirement liabilities. Depending on the type of employee benefits plans adopted by a bank, these may represent the actuarial valuation of future benefits payable.

Capital (or Equity)

  • Common capital (or stock). The par value of common shares issued and outstanding.

  • Surplus (share premium or additional paid-in capital). Excess over par of common shares issued and outstanding.

  • Other equity instruments. Typically, different classes of preference (or preferred) shares.

  • Other comprehensive income. This includes net income or loss for the current fiscal period. It also represents an account through which changes in fair values of certain items (e.g. investment securities that are classified as available-for-sale, derivatives that qualify for hedge accounting, foreign currency exchange rates, or actuarial valuations for certain types of deferred compensation plan) are recorded.

  • Retained earnings. The cumulative amount of net income earned or loss incurred since the bank’s inception, adjusted for cash or share dividends paid.

  • Reserves. Banks in some countries are required to maintain statutory reserves as mandated by their regulators or central banks.

Income Statement

The presentation of a bank income statement varies widely from one country to another. Nevertheless, the components are generally the same.

  • Interest income. Interest earned on all interest-bearing assets.

  • Interest expense. Interest paid on all interest-bearing liabilities.

  • Net interest income. The difference between interest income and interest expense.

  • Noninterest income. Income from other sources such as service charges, fee income from the sale of trust services, wealth management services, etc., and gain on sale of investment securities, loans, or other assets.

  • Noninterest expense. Operating expenses such as personnel costs, occupancy expenses, professional services, insurance, data processing, etc., and losses from the sale of investment securities, loans, or other assets.

  • Provisions for losses. Losses such as loan losses, provisions for liabilities such as actuarial liabilities, and provisions for impairment losses such as investment or other asset impairment.

  • Net income or loss before taxes. The excess of total income over total expense or vice-versa.

  • Provision for income taxes. Current tax expense plus changes in deferred tax expense.

  • Net income or loss after taxes. The excess of total income over total expense or vice-versa adjusted for tax expense or tax benefit.

Statement of Changes in Stockholders’ Equity

The statement of changes in stockholders’ equity comprises the activity during the year that resulted in changes in each of the components of capital (or equity) described under “Balance sheet” above.

Cash Flow Statement

The cash flow statement gives a telling picture of how a bank’s cash and cash equivalents changed during the year as a result of the cash inflows and outflows affecting each component of the balance sheet. The cash flow statement is segregated into three sections that indicate the bank’s cash flows generated by or used in operating activities, investing activities, and financing activities. Focusing on the individual components in the cash flow statement gives the analyst an indication of the sources of the bank’s business that are generating cash flows and those that are draining cash. Excessive cash outflows over cash inflows could have an adverse impact on the bank’s liquidity position.

Notes to the Financial Statements

Basic financial statements for any business organization are accompanied by notes to the financial statements. Audited financial statements usually include an indicator that “the accompanying notes are an integral part of the financial statements.” Each account balance on the financial statements is referenced to a note number. Notes to the financial statements usually lead with a summary of the bank’s accounting policies as it relates to all key financial accounts. Thereafter, individual notes detail what comprises the account balance and how the carrying amount of the account came about.

Notes to financial statements contain all the relevant disclosures required by the Generally Accepted Accounting Principles (GAAP), such as International Financial Reporting Standards (IFRS), under which it is presented and enable a financial statement user to better understand the bank’s financial condition and its operations. It is easy to access and read the audited financial statements of most banks across the world under the “Annual report” caption on their respective websites. An example would be, where the annual report for HSBC France can be located by following the link “Informations financières.”

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Further reading


  • Golin, Jonathan. The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors. Singapore: Wiley, 2001.


  • Basel Committee on Banking Supervision. “Basel III: A global regulatory framework for more resilient banks and banking systems.” Bank of International Settlements. Updated June 2011. Online at:


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