Commercial Banking

The Financial Statements of Banks and Their

Principal Competitors

Topic 4

Chapter 3

2

Motivation

• An overview of the balance sheets and income

statements of banks and other financial firms

• Tool for managements

• Focus on parts specific to banks

• Just as banks and all firms have finance statements, you

can also have financial statements tracking your balance

(assets and liabilities) and income.

3

Introduction to income statement and balance sheet

• https://www.khanacademy.org/economics-financedomain/core-finance/money-and-banking/banking-andmoney/

• Banking 2- A bank's income statement [11:58]

4

Introduction to income statement and balance sheet

• Banking 2- A bank's income statement [11:58]

• Deposits are basically loans

• Note $1m cash saved for liquidity

• Done voluntarily in this example

• Change of balance sheet over time in relation to the

income statement

• Note the ROE calculation

• We will add to the basic versions of the statements used

in the video

5

Naming convention

• Financial statements

• Report of condition –> Balance sheet (BS)

• Report of income –> Income statement (IS)

• For our class, you can think of

• Revenue == income

• Profit == net income

• Note that the BB&T Corporation balance sheet and

income statement in your textbook (and in the

following slides) contain errors and do not add up.

6

Outline

• >>Income statement

• Items on the income statement

• Misc topics: ratio analysis, financial leverage

• Balance sheet

• Items on the balance sheet (primary/secondary

reserves)

• Misc topics: ratio analysis, off-balance sheet items

• Financial statement of bank competitors

7

Income statement

• The statement of revenues (income), expenses, and

profits for a firm over a period of time

• For banks

• Shows the cost it incurred to acquire funds (interest

expense) and the revenues generated from the uses of

those funds

• Shows the non-interest revenues generated by...