Understanding Bank Financial Statements: A Reader's Guide

Purpose

Licensed banks publish financial statements in line with legal and regulatory requirements. These statements are a primary source of information about a bank's size, financial health and performance. This guide is intended for journalists, students, business customers, investors and others who wish to read them with understanding. It is general in nature and does not describe any particular bank.

Why bank accounts look different

A bank's financial statements differ from those of a trading company. A bank's main assets are loans to customers and investments, and its main liabilities are deposits, which are money it owes to customers. Its business is to manage the difference between the return earned on assets and the cost of funding them, while managing credit, liquidity and other risks. Banks operate with much higher leverage than most companies, which is why regulators require them to hold capital and liquid assets.

The statement of financial position

Often called the balance sheet, this shows what the bank owns and owes at the reporting date.

Assets

• Cash and balances with the Central Bank: notes and coins, and reserves held at the Central Bank.
• Balances with other banks: placements and deposits with other financial institutions.
• Investment securities: typically government securities, held for liquidity and income.
• Loans and advances to customers: amounts lent, shown net of allowances for expected credit losses.
• Property, equipment and other assets.

Liabilities

• Deposits from customers: current, savings and term deposits, usually the largest liability.
• Borrowings and balances due to other banks.
• Other liabilities, such as accrued expenses and tax payable.

Equity

Shareholders' funds comprise share capital, retained earnings and reserves. Equity absorbs losses and protects depositors, which is why it is central to any assessment of a bank's soundness.

The income statement

• Interest income: earned on loans and investments.
• Interest expense: paid on deposits and borrowings.
• Net interest income: the difference between the two, and for most banks the main source of income.
• Fee and commission income: from transactions, accounts, trade finance and other services.
• Other operating income: including income from foreign exchange.
• Impairment charges: the cost of expected credit losses on loans and other assets.
• Operating expenses: staff costs, premises, technology and administration.
• Profit before and after tax.

The notes

The notes are often the most informative part of the accounts. They explain accounting policies, break down loans by sector and by credit quality, show movements in impairment allowances, describe exposures to liquidity, interest-rate and foreign-exchange risk, and disclose related-party transactions, contingent liabilities and capital. Readers should consult them before drawing conclusions from headline figures.

Key ratios

Capital adequacy ratio

What it measures. Regulatory capital as a proportion of risk-weighted assets. Following the approach of the Basel framework, assets are weighted according to their riskiness, so that a loan to a business carries a higher weight than a holding of government securities.

How to read it. A higher ratio indicates a larger buffer to absorb losses. Banks must maintain capital above the minimum set in the Central Bank's prudential requirements.

Liquidity ratio

What it measures. Liquid assets, such as cash, balances with the Central Bank and short-term government securities, relative to short-term liabilities, principally deposits.

How to read it. It indicates the bank's capacity to meet withdrawals and other obligations as they fall due. Minimum levels are set in the Central Bank's prudential requirements.

Non-performing loan ratio

What it measures. Non-performing loans as a proportion of gross loans. A loan is generally classified as non-performing when payments are significantly overdue or full repayment is doubtful, under the classification rules that apply.

How to read it. A rising ratio may signal deteriorating credit quality. Readers should also consider how far non-performing loans are covered by impairment allowances.

Return on assets

What it measures. Profit after tax as a proportion of average total assets.

Illustration. A hypothetical bank with average assets of 1,000 and profit after tax of 20 would have a return on assets of 2 per cent. The measure shows how efficiently the balance sheet as a whole generates profit.

Return on equity

What it measures. Profit after tax as a proportion of average shareholders' equity.

How to read it. Return on equity reflects returns to shareholders, but a high figure can result from thin capital as well as strong performance, so it should be read alongside the capital adequacy ratio.

Other useful measures

• Cost-to-income ratio: operating expenses as a proportion of operating income, an indicator of efficiency.
• Loan-to-deposit ratio: loans as a proportion of deposits, an indicator of how far deposits are being lent on.
• Net interest margin: net interest income relative to average interest-earning assets.

Reading with care

• Check the reporting period and whether the figures have been audited.
• Look at trends over several periods rather than a single result.
• Read the auditor's report and note any qualification or emphasis of matter.
• Be cautious when comparing banks of different sizes or business models.
• Remember that ratios summarise, while the notes explain.

Further information

Information on the regulation and supervision of banks is published by the Central Bank of The Gambia at https://www.cbg.gm.