While the general structure of financial statements for banks isn’t that much different from a regular company, the nature of banking operations means that there are significant differences in the sub-classification of accounts. Banks use much more leverage than other businesses and earn a spread between the interest income they generate on their assets (loans) and their cost of funds (customer deposits).
The main operations and source of revenue for banks are their loan and deposit operations. Customers deposit money at the bank for which they receive a relatively small amount of interest. The bank then lends funds out at a much higher rate, profiting from the difference in interest rates.
As such, loans to customers are classified as assets. This is because the bank expects to receive interest and principal repayments for loans in the future and thus generate economic benefit from the loans.
Deposits, on the other hand, are expected to be withdrawn by customers or also pay out interest payments, generating an economic outflow in the future. Deposits from customers are, thus, classified as liabilities.
Loans from Central Bank and Deposits to Central Bank
In the questions of financial statements for banks, where do these banks store their money? It’s like the age-old question: do barbers cut their own hair?
Most countries have a central bank, where most (or all) national banks will store their money and profits. Deposits from a bank in a central bank are considered assets, similar to cash and equivalents for a regular company. This is because the bank can withdraw these deposits rather easily. It also expects to receive a small interest payment, using the central bank’s prime rate.
Loans from the central bank are considered liabilities, much like normal debt.
Trading Assets and Liabilities
Banks may hold marketable securities or certain currencies for the purposes of trading. These will naturally be considered trading assets. They may have trading liabilities, which consists of derivative liabilities and short positions.
Typical Income Statement for Banks
Again, the overall structure of an income statement for a bank doesn’t stray too far from a regular income statement. The top of the income statement is revenue and the bottom is net income.
However, revenue is derived differently from that of regular companies. The income statement will generally look as follows:
Financial Statements for Banks: Income Statement
Again, let’s walk through the unique line items not found in common income statements.
Interest revenue captures the interest payments the bank receives on the loans it issues. Sometimes, this line item will only state gross interest revenue. Other times, this line will consolidate gross interest revenue and deduct interest expense to find net interest revenue. This interest expense is the direct interest expense paid to the deposits used to fund the loans, and does not include interest expense from general debt.
Credit Loss Provisions
Just like accounts receivables and bad debt expense, a company must prepare in the event that borrowers are not able to pay off their loans. These bad pieces of credit are written off in the income statement as a provision for credit loss.