This guide introduces the basics of how commercial banks are different from normal companies. Here, commercial banks do not include insurance, investment banks, wealth management, investment firms and specialty finance. Commercial banks’ business model revolves around getting money from you the consumer, in terms of deposits, and then loaning it out to other parties. They make money based on the difference in interest rates. The interest spread between what they’re lending out, and making money on, and what they’re paying to you in terms of your checking account, or your savings account at the bank.
Write-up of this guide assumes you already have some basic knowledge about financial statements of normal companies. However, after you learnt the key differences, you will start to change your perspective in assessing a commercial bank.
Analyse Performance of Commercial Banks
You will learn a methodology to assess performance of banks: FACE - Funding and Liquidity, Asset Quality, Capitalisation and Leverage, Earnings and Profitability
Analyse Funding and Liquidity of Commercial Banks
Due to maturity transformation, banks must ensure adequate liquidity to match their liabilities. We must analyse a bank’s ability to sustain its liquidity position and the stability of its funding.
Analyse Asset Quality of Commercial Banks
Credit quality in the loan book is the predominant source of risk. We must analyse other on- and off-balance sheet exposures to the extent these are relevant for an assessment of a bank’s asset quality.
Basel Framework in Layman Terms
A set of international banking regulations designed to promote financial stability by establishing minimum capital requirements, risk management standards, and supervisory guidelines for banks.
Management of Return on Equity (ROE) of Banks
Ever wonder how to assess management style of a bank in a more quantitative way? One way to assess management of a bank is through the Dupont analysis of Return on Equity, aka Management of Return on Equity.
How do commercial banks raise cash and how quickly?
Banks add value and earn money from their lending (Assets) and depositing (Liabilities) activities. So, banks must ensure adequate liquidity to match their liabilities. You will learn how banks raise cash.
What is regulatory capital for?
Why does Regulatory Capital exists? A bank must always maintain a certain amount of regulatory capital to cover unexpected losses quickly. You will learn how does Regulatory Capital cover losses.
Decipher capital adequacy ratios
A bank must always maintain a certain amount of regulatory capital based on the bank’s equity for unexpected loss. You will learn the key concepts of Numerator and Denominator of the capital adequacy ratios.