Applicative aspects of bank′s financial reporting: Analytical framework of a single banking report
This paper introduces financial statements of commercial banks and presents a procedure for analyzing bank profitability and risks using historical data. The procedure involves decomposing aggregate profit ratios into their components to help identify key factors that influence performance. This paper presents a procedure for analyzing bank performance using periodic balance sheet and income statement data. It describes the components of financial statements, provides a framework for comparing the trade-off between bank profitability and risk, and compares the performance of a small community bank with that of a large super regional banking organization. It uses data presented in a banks Uniform Bank Performance Report (UBPR) to demonstrate the analysis. Many banks experience dramatic changes in profits from one period to the next or relative to what stock analysts expect. In many cases, profits are lower because of unanticipated loan losses. In other cases, profits are higher because of extraordinary growth in noninterest income. A key point is that it is becoming increasingly difficult to evaluate performance by looking at reported balance sheet and income statement data. Net income can be managed, or manipulated, by bank managers to disguise potential problems. In this paper I examine how banks, the most important of all the financial intermediaries, operate to earn the highest profits possible: how and why they make loans, how they acquire funds and manage their assets and liabilities (debts), and how they earn income.