Appendix_2B - Appendix 2B Commercial Banks Financial...

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Unformatted text preview: Appendix 2B Commercial Banks Financial Statements and Analysis 1 Appendix 2B Commercial Banks Financial Statements and Analysis WHY EVALUATE THE PERFORMANCE OF COMMERCIAL BANKS? Unlike other private corporations, commercial banks (CBs) are unique in the spe- cial services they perform (e.g., assistance in the implementation of monetary policy) and the level of regulatory attention they receive. CBs are, as a result, unique in the types of assets and liabilities they hold. Like any for-profit corpo- ration, however, the ultimate measure of a CBs performance is the value of its common equity to its shareholders. This appendix discusses the financial state- ments of these institutions. Managers, stockholders, depositors, regulators, and other parties use performance, earnings, and other measures obtained from finan- cial statements to evaluate commercial banks. For example, the In The News box looks at how regulators use financial statement data to evaluate the overall safety and soundness of a bank. As we proceed through the appendix, notice the extent to which regulators evaluation of the overall safety and soundness of a bank (or their assignment of a so-called CAMELS rating) depends on financial statement data. Given the extensive level of regulation and the accompanying requirements for public availability of financial information, the financial statements of com- mercial banks are ideal candidates to use in examining the performance of deposi- tory institutions. This appendix uses commercial banks to illustrate a return on equity (ROE) framework as a method of evaluating depository institutions profitability. The ROE framework decomposes this frequently used measure of profitability into its various component parts to identify existing or potential financial management and risk exposure problems. 1 The fact that bank size and/or niche (i.e., the finan- cial market segment the bank specializes in servicing) may affect the evaluation of financial statements is also highlighted. FINANCIAL STATEMENTS OF COMMERCIAL BANKS Financial information on commercial banks is reported in two basic documents. The report of condition (or balance sheet) presents financial information on a banks assets, liabilities, and equity capital. The balance sheet reports a banks condition at a single point in time. The report of income (or the income state- ment) presents the major categories of revenues and expenses (or costs) and the net profit or loss for a bank over a period of time. Financial statements of com- mercial banks must be submitted to regulators and stockholders at the end of each calendar quarterMarch, June, September, and December. The Federal Financial Institutions Examination Council (FFIEC), based in Washington, D.C., prescribes uniform principles, standards, and report forms for depository institutions....
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This note was uploaded on 03/01/2012 for the course FINS 3630 taught by Professor Yip during the Three '09 term at University of New South Wales.

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Appendix_2B - Appendix 2B Commercial Banks Financial...

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