Most often, when evaluating the performance of a financial institution, the emphasis is on annual profit. But this indicator in fact cannot give a quick assessment of activity.
Reporting a credit institution has its own characteristics. Bank liabilities and assets are shown in the balance sheet as liquidity decreases. This is one of the important indicators that you can and should be able to determine yourself.
How to quickly determine the effectiveness of a bank
When analyzing financial statements, you need to pay attention to the following indicators:
- change total income bank;
- ratio of reserve and loan portfolio;
- liquidity level.
Net assets of a bank is the difference between all assets and liabilities. A financial institution may sell part of them at a lower cost to increase profits. But this will negatively affect the level of net assets. The ratio of reserves to loan portfolio shows how long the bank can independently cover losses.
Liquidity is determined by the ability of a financial institution to timely and fully fulfill its obligations. Lack of cash can lead to insolvency, and their excessive volume indicates that a large mass of money is not working. According to the data from the financial statements, you can calculate the net liquidity gaps, and make decisions based on these data.
Bank Assets
The bank balance is divided into funds and sources of their formation. Assets of a commercial bank are property objects that have a monetary value. They are divided into groups according to the level of liquidity and profitability. The more money an asset accumulates, the less liquid it is. Bank assets include: cash, including on accounts with the CB and CB; investments; loans tangible assets.
The first group is used to exchange deposits, provide loans, conduct cash settlement services. This article is for the bank the most liquid, but less profitable. Therefore, management is trying to keep it at a relatively low level. To meet the demand for cash, capital investments are needed in the Central Bank. This group provides low income, but can be easily converted to cash.
More than half of the total value of all assets accounts for loans. The level of their liquidity depends on the timing, goals and borrowers.
For the head of a credit organization, the task is to generate high income while meeting customer needs.
Therefore, the liquidity of a single transaction does not matter. Bank assets have another feature - most of the financial requirements and a small amount of fixed assets. Their specific gravity should not exceed 10% of the total cost.
Some experts identify another group - non-core assets of banks - the property of credit institutions, which is not used to carry out the main activity. They are identified most often in the process of reorganization. In the case of banks, these include equity participation in the enterprise.
Bank liabilities
Liabilities - expressed in money sources of the formation of the bank. From the timing of the attraction and the cost of these indicators depends on the ability of a financial institution to ensure the rational allocation of funds, and the amount of profit. The main sources of financing are deposits, central bank assets, attracted loans, interbank short-term loans, bonds, funds in accounts with other organizations.In the Central Bank of different countries, the ratios of ratios of own and borrowed funds range from 1:10 to 1: 100.
Assets and liabilities Banks act as an intermediary that attracts temporarily available funds and places them in those business entities that need to finance the production process. The main task of modern design bureaus is to provide various types of loans. To ensure it is necessary: to attract funds from various sources, to carry out cash settlement services and operations on the purchase and sale of currency, various active and passive operations.
Management
The asset and liability management process (UAP) consists in the formation of strategies and the implementation of measures aimed at improving the balance sheet structure. Banks consider portfolios of capital, assets and liabilities as a set of funds aimed at achieving a common goal.
UAP involves the regulation of risks of interest rates, liquidity, sources of financing and directions of use of funds. Today, sound UAP is the most effective way to manage design bureau.
Asset Management
This strategy was used until the 60s of the last century, when bankers believed that they themselves could not regulate the volume of liabilities and capital.
The size of these items of income depended solely on the desire of customers to invest in a bank. Management activities were aimed at optimal asset allocation.
Liquidity was provided by a significant amount of cash and short-term loans.
But in an unstable economic situation, when some loans needed restructuring, they had to look for new sources of funds. Such a strategy did not bring much profit.
Liability regulation
In the 60-70s of the last century, banks faced a rapid increase in interest rates. Bankers began to look for new sources. Restructuring of liabilities allowed to increase profits and capital. Regulation of the ratio between the size of deposits made it possible to provide long-term loans.
Assets and liabilities of the bank need to be regulated simultaneously. But forty years ago, the leaders of credit institutions distinguished between these two areas. Units engaged in fundraising had no idea about the directions of their use. The work was carried out on the principle of "the more the better."
This approach takes place during the period of economic recovery, when the demand for credit resources is growing. But during a recession, it can harm a financial institution. The advantage of the strategy is the possibility of increasing revenues, controlling costs and forecasting the need for liquid funds.
Balanced UAP
Today, a balanced approach prevails in world practice. Bank assets and liabilities are considered as a whole. The main task of the manager is to control the volume, structure, income and expenses for each portfolio. The idea of a balanced UAP is that the price of each operation should cover the costs of its implementation. All bank income is no longer generated by assets alone. Liabilities can also be profitable.
Advantages of UAP:
- profit maximization with an acceptable level of risk;
- accurate determination of the need for liquid funds.
Conditions for applying the strategy:
- the ability to accurately predict the direction, magnitude and rate of change in interest rates;
- a large number of complex calculation methods;
- the presence of highly qualified bank managers.
In countries with high inflation, an unstable economic or political situation, this is practically impossible.
Summary
Simultaneous and balanced management of bank assets and liabilities allows you to maximize profits and reduce costs.
