Study of bank Balance Sheet and P& L a/c

By, Shweta Wadodkar

Study of balance sheet & P&L a/c-- Lect 3

Annual report
An annual report is a document produced annually by

companies designed to portray a true and fair view of the companys annual performance, with audited financial statements prepared in accordance with company law and other regulatory requirements, and also containing other non-financial Similar to accounts payable, this term is used to describe a bank's indebtedness to other banks. In other words, bills payable is the money a bank borrows, mainly on a short-term basis, and owes to other banksinformation.

Study of balance sheet & P&L a/c-- Lect 3

Cont..
The Companies Act 1985/9 requires

companies to publish their annual report and accounts. It should include: A balance sheet A profit and loss account A cash flow statement A Directors Report

Study of balance sheet & P&L a/c-- Lect 3

Bank balance sheet

Banks are required to prepare Balance sheets on

annual basis in a format specified in the third schedule of Banking Regulation Act 1949 as per provisions of Sec 29 of the Act. The balance sheetmust follow the following formula: Assets = Liabilities + Shareholders' Equity
Form

Study of balance sheet & P&L a/c-- Lect 3

Balance Sheet (overview) A balance sheet is a statement of the total

assets and liabilities of an organization at a particular date - usually the last date of an accounting period.
The balance sheet is split into two parts: I) Application of funds II) Sources of funds.

Study of balance sheet & P&L a/c-- Lect 3

Capital and liabilities

1. Capital
A bank's capital is equal to its assets minus its liabilities. It is the margin by

which its creditors would be covered if assets were liquidated and its liabilities paid off. A measure of a bank's financial health is its capital/asset ratio, which is required to be above a prescribed minimum

2. Reserve fund and other Reserves: An account set aside by an individual or business to

meet any unexpected costs that mayarise in the future as well as the future costs of upkeep. In most cases, the fund is simply a savings account or another highly liquid asset, as it is impossible to predict when an unexpected cost may arise.

Study of balance sheet & P&L a/c-- Lect 3

 3.Deposits and other accounts Fixed deposit: In simple terms, a fixed deposit is the money

you put with the bank for a fixed term.

Savings bank deposit: a/c in which you deposit your money that is lent by the bank

against which bank pays the a/c holder an interest. .Savings accounts have one major limitation you can only make six withdrawals per every monthly statement .

4. Borrowings from other banking companies

etc

Study of balance sheet & P&L a/c-- Lect 3

5. Bills payable:
Similar

to accounts payable, this term is used to describe a bank's indebtedness to other banks. In other words, bills payable is the money a bank borrows, mainly on a short-term basis, and owes to other banks.

6. Other liabilities. 7. Profit and loss

Study of balance sheet & P&L a/c-- Lect 3

Property and Assets

Cash Balances with other Banks Money at call and short notice:
One of the assets that appears in the balance sheet of a

bank. It includes funds lent to discount houses, money brokers, the stock exchange, bullion brokers, corporate customers, and increasingly to other banks. At call money is repayable on demand, whereas short notice money implies that notice of repayment of up to 14 days will be given. After cash, money at call and short notice are the banks' most liquid assets. They are usually interest-earning secured loans but their importance lies in providing the banks with an opportunity to use their surplus funds and to adjust their cash and liquidity requirements.
Study of balance sheet & P&L a/c-- Lect 3

 Investments Investments in India in A. Held to maturity B. Available for sale C. Held for trading Gross value of investments Less Depreciation

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Study of balance sheet & P&L a/c-- Lect 3

 Advances: Bank loans to their customers. These may be unsecured

loans, but are often secured by the bank holding stocks and shares or life insurance policies owned by the borrower. In short a loan given by a bank to its customer.

Premises less depreciation Furniture and fixtures less depreciation Other assets Non banking assets acquired in satisfaction of claims Profit and loss

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Study of balance sheet & P&L a/c-- Lect 3

Items outside the balance sheet

Contingent liabilities: Liabilities that might occur or not occur

against which provisions are made. Eg: pending court cases.

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Study of balance sheet & P&L a/c-- Lect 3

RBI guidelines on balance sheet

A. Investments are to be classified

as

Held to maturity Available for sale Held for trading

B. Securities are to be classified as Government securities Other approved securities Shares Debentures and bonds Subsidiaries and jv Others ( CP, MF units etc)
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Profit and loss account/ Income statement

The income statement is a historical record

of the trading of a business over a specific period (normally one year). It shows the profit or loss made by the business which is the difference between the firms total income and its total costs.

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Study of balance sheet & P&L a/c-- Lect 3

 The income statement serves several important purposes:

Allows shareholders/owners to see how the business

has performed and whether it has made an acceptable profit (return)

Helps

identify whether the profit earned by the business is sustainable (profit quality)

Enables comparison with other similar businesses (e.g.

competitors) and the industry as a whole

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Study of balance sheet & P&L a/c-- Lect 3

Allows providers of finance to see whether

the business is able to generate sufficient profits to remain viable (in conjunction with the cash flow statement)
Allows the directors of a company to satisfy

their legal requirements to report on the financial record of the business

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Study of balance sheet & P&L a/c-- Lect 3

Income:
Interest earned Other income

Expenditure:
Interest expended Operating expenses

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Study of balance sheet & P&L a/c-- Lect 3

Provisions
A provision takes into account an expected expense, showing it as a

liability on the balance sheet. A company will create a provision in the current period when the likely liability becomes apparent, thus reducing the reported profit.
For example, consider a company that has entered into a contract on

which it then becomes evident it will make a loss. The loss will only actually occur (i.e. the payments that will make it unprofitable will only happen) in a future year. However, if once it is known that the loss is probably a provision must be made in the accounts and this will reduce the profits in the year the period in which the provision is made. and contingencies

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Study of balance sheet & P&L a/c-- Lect 3

Appropriations
Transfer to Statutory reserve: A legally required reserve .
Capital reserve: A type of account on a municipality's orcompany's balance sheet that is reserved for long-term capital investment projects or any otherlarge and anticipatedexpense(s)that willbeincurred in thefuture. This type of reserve fund is set aside to ensure that the company or municipality has adequate fundingto at least partially finance theproject. Revenue reserve: The portion of a business' profits retained by the company for investment in future growth, and are not redistributed to the shareholders through regular or special dividends.
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Investment Fluctuation ReSpecial reserve u/s 36 (1)

(viii) of IT Act (creating special reserve for Bad and doubtful debts, long term lending to housing, etc)
Transfer as proposed dividend: This is created when

a company proposes an amount of dividend.

Tax on dividend: A dividend tax is an income tax on dividend payments to the stockholders (shareholders) of a company Balance carried over to Balance sheet

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Study of balance sheet & P&L a/c-- Lect 3

Average working funds means Monthly

average of total assets Operating profit means Profit before tax, provisions and contingencies Assets means total assets of balance sheet Business means deposits excluding inter bank deposits plus advances

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Study of balance sheet & P&L a/c-- Lect 3

ANALYSIS OF ANNUAL REPORT

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Study of balance sheet & P&L a/c-- Lect 3

MISSION VISION CURRENT ECONOMIC CONDITION ABOUT THE BANK FROM THE DIRECTORS REPORT

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Study of balance sheet & P&L a/c-- Lect 3

CAPITAL STRUCTURE
Authorised capital:
The authorised capital of a company is the maximum

amount of share capital that the company is authorised by its constitutional documents (MOA and AOA)to issue to shareholders.
Subscribed capital/ Issued share capital:
The total of a companys shares that are held by

shareholders . A company can, at any time, issue new shares up to the full amount of authorized share capital . Also called subscribed capital , or subscribed share capital.

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Study of balance sheet & P&L a/c-- Lect 3

Called up Share capital:

The value of the issued shares that have

remained fully or partially unpaid, and whose holders have now been called upon to pay the balance.
Issued share capital The issued share capital of a company is the

total nominal value of the shares of a company which have been issued to shareholders .
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Paid up capital :
The total amount of shareholder capital that

has been paid in full by shareholders./ Paid-up capital is essentially the portion of authorized stock that the company has issued and received payment for.

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Study of balance sheet & P&L a/c-- Lect 3

KEY FINANCIAL PARAMETERS

Particulars Equity share capital Reserves and surpluses Total assets FIXED OTHERS Borrowed funds Total Deposits Total Income Interest and dividends earned Other income

Net profit EPS

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Study of balance sheet & P&L a/c-- Lect 3

KEY RATIOS AND THEIR INTERPRETATION RETURN ON EQUITY = NET INCOME (NOI) * 100 TOTAL EQUITY CAPITAL

The Return on Equity ratio is perhaps the most important of all the financial ratios to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in the company

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Study of balance sheet & P&L a/c-- Lect 3

 RETURN ON ASSETS= NET INCOME

*100 TOTAL ASSETS

The Return on Assets ratio is an important profitability ratio

because it measures the efficiency with which the company is managing its investment in assets and using them to generate profit. It measures the amount of profit earned relative to the firm's level of investment in total assets

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Study of balance sheet & P&L a/c-- Lect 3

NET INTEREST MARGIN (%) = TOTAL INTEREST INCOME TOTAL INTEREST EXPENSE *100 AVERAGE EARNING ASSETS

A performance metric that examines howsuccessful a firm's

investmentdecisions are compared to its debt situations.A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returnsgenerated by investments.

Average earning assets: An asset that produces

money for a company without any work needing to be done. Earning assets include such things as stocks, bonds, certificates of deposit, and generally anything that earns interest or dividend

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Study of balance sheet & P&L a/c-- Lect 3

ASSET QUALITY

PROVISION FOR LOSSES RATIO =

PROVISION FOR LOAN LOSSES TOTAL LOAN LOSSES * 100

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Study of balance sheet & P&L a/c-- Lect 3

 Non-Performing Loans = Amount of Non-Performing loans

/ Gross Loan
Gross loan is the total amount of issued credits given to banks

during the accounting period. Liquidity of the bank can be judged upon the amount of its gross loans. Liquidity of the credit institutions is directly related to the refinancing needs. Gross loan is the total amount of loans, refinanced by credit institutions subject to the Central Bank. The Central Bank, as the lender of last resort, provides loans (credits) to commercial banks and other credit institutions, when the banks themselves have completely depleted their internal resources and are unable to maintain their solvency through other means.

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Study of balance sheet & P&L a/c-- Lect 3

PROFITABILITY RATIO NET PROFIT RATIO NET PROFIT/ INTEREST EARNED

NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment.

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Study of balance sheet & P&L a/c-- Lect 3

LIQUIDITY RATIO

CURRENT RATIO CURRENT ASSETS/ CURRENT LAIBILITIES

Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as "working capital ratio". It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities.

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Study of balance sheet & P&L a/c-- Lect 3

A relatively high current ratio is an indication that the firm is

liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. An increase in the current ratio represents improvement in the liquidity position of the firm while a decrease in the current ratio represents that there has been a deterioration in the liquidity position of the firm. A ratio equal to or near 1.33 : 1 is considered as a standard or normal or satisfactory

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Study of balance sheet & P&L a/c-- Lect 3

STRUCTURAL RATIOS EQUITY TO NET FIXED ASSETS CAPITAL+RESERVES/ NET FIXED ASSETS

DEBT EQUITY RATIO DEBT/ EQUITY

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Study of balance sheet & P&L a/c-- Lect 3

TURNOVER RATIOS= NET SALES * 100 TOTAL ASSETS

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Study of balance sheet & P&L a/c-- Lect 3

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Study of balance sheet & P&L a/c-- Lect 3