Financial Statements Analysis for Banks
Accounting rules are supposed to help investors understand the companies whose shares they buy. Yet current disclosure requirements don't illuminate banks' financial statements; instead, they let the banks turn out the lights. And in that darkness, all sorts of unsavory practices can breed.
The Atlantic, January 2, 2013
The analysis of a company's financial statements is the first step of the valuation process. Considering the inherent complexity of financial business, such analysis is even more critical for banks. Financial statements of banks are not dissimilar to those of non-financial companies. They include the following documents: Balance Sheet, Income Statement, Statement of Shareholders' Equity, Statement of Cash Flows, Notes to the Accounts, and Management Analysis.
While all the documents convey useful information and insights for the valuation, analysis of the first two is paramount for assessment/preparation of the business plan, which in turn, is necessary to apply most valuation models.
2.1 BALANCE SHEET
Balance Sheets provide readers with information regarding the current financial situation of a bank and support the various bank stakeholders in making decisions. In the last two decades, the latter role of the Balance Sheet has gained in importance as it has transformed from a mere reporting document into a relationship management tool for a larger and wider audience of stakeholders – made of customers, investors, ...