Financial Statements for Banks

How banks differ from typical businesses

Financial Statements for Banks

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).

 

bank balance sheet example

 

Typical Balance Sheet

A typical balance sheet consists of the core accounting equation, assets equal liabilities plus equity. Under these accounts, some companies may have other large classes such as PP&E, intangible assets, current assets, accounts receivables, accounts payables and such.

A bank, however, has unique classes of balance sheet line items that other companies won’t. The typical structure of a balance sheet for bank is:

 

  • Assets
    • Property
    • Trading assets
    • Loans to customers
    • Deposits to central bank
  • Liabilities
    • Loans from central bank
    • Deposits from customers
    • Trading liabilities
    • Misc. debt
  • Equity

 

Financial Statements for Banks: Balance Sheet

A banks balance sheet has certain unique items. We visit each unique line item in these subsections below.

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Loans and Deposits to Customers

The main operation and source of revenue for banks are their loan and deposit operations. Customers deposit money at the bank, for which they receive small interest ranging in the tens of basis points. 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Deposits, on the other hand, are expected to be withdrawn by customers or also pay out interest payments, generating an economic outflow in the future.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 to customers are thus, classified as liabilities.

 

Loans 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?

The answer isn’t too crazy. 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 is also expected 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.

 

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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 regular companies. The income statement will generally look as follows:

financial statements for banks

Financial Statements for Banks: Income Statement

Again, let’s walk through the unique line items not found in common income statements.

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Non-interest Revenue

Non-interest revenues consist of ancillary revenue the bank makes in supporting its services. This can consist of:

  • Broker fees
  • Commissions and fees from products and services
  • Underwriting fees
  • Gain on sale of trading assets
  • Other customer fees (NSF fees, swipe fees, overdrawn fees)

These revenues come from anything that does not constitute interest revenue.

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Interest Revenue

Interest revenue will capture the interest payments the bank makes 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 will be the direct interest expense paid to the deposits used to fund the loans, and will 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.

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