Financial Analysis for Banking Industry
From the point of view of the Bank’s main activities, several types of analysis of its financial activities are distinguished. Under these types of understanding of the analysis: the dynamics and structure of the bank’s own funds; dynamics and structure of paid means attracted by the bank; dynamics and structure of the bank’s assets; dynamics and structure of the bank’s revenues; dynamics and structure of the bank’s profit; funds in customer accounts; credit and stock portfolios of the bank; the effectiveness of the bank’s operations (and the work of its units); liquidity of the bank and its balance; financial stability of the bank.
According to another criterion, the following types (forms) are distinguished: internal self-analysis of banks, conducted by themselves; remote analysis of banks, including counterpart banks (analysis of activity and its financial results, structure and dynamics of equity capital, resource base and assets, factors of the bank’s financial stability based on its official and published reporting); analysis of banks for the purpose of drawing up their ratings.
Various methods of analyzing the financial performance of the bank are used, among which the most common are: grouping methods; coefficient analysis; index analysis; trend analysis (trend analysis); factor analysis.
The purpose of financial analysis is to ensure the quality management of the development of all the most important economic and financial parameters of the bank’s life, such as the structure of its assets and liabilities; capital and payment turnover (own and attracted funds); profitability of operations; risks of the financial resources portfolio; intra-bank pricing and efficiency of the bank’s divisions.
On methods of financial analysis:
The solution of the above-mentioned and similar managerial tasks presupposes the availability of appropriate scientific and methodological tools,
To analyze and evaluate various aspects of the bank’s activities. The methodological toolkit proposed below is based on an analysis of the models of financial activity of a commercial bank.
- The capital balance equation:
Own capital = Assets – Paid liabilities.
This equation is useful to use for the final evaluation of how skillfully, effectively the bank manages the available aggregate capital from the positions of increment of equity, identifies and uses reserves to increase its profitability (management of bank costs).
- Modified balance equation:
Assets = Liabilities.
The main objective of the analysis in accordance with this formula is to quickly assess how effectively (qualitatively) the bank uses the liabilities at its disposal, observe the prescribed proportions (standards) of optimization of its portfolio or deviate from such proportions (profitability management and liquidity and their balance).
- The main balance equation:
Assets = Equity + Paid liabilities.
The basis of this equation is the principle of ownership and disposal of all assets owned by the bank. The most acceptable directions of its use are assessment of business activity, liquidity, financial stability and efficiency of bank management, as well as preliminary analysis that allows to decide whether it has the opportunity to conduct certain operations (for example, what opportunities for attracting and allocating resources gives the bank its capital base).
- Equation of dynamic balance sheet. On the basis of this equation, which is a profit and loss account, a factor analysis of the profitability of the bank’s activity is carried out (management of its financial performance). Depending on the analytical problem posed, one should choose the model of the equation that best corresponds to the problem being solved.