afm Bank BS

8/3/2019 afm Bank BS

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ADVANCED FINANCIAL MANAGEMENT

SUBMITTED BY :

PANKAJ SACHDEV (121)

SNEHA VALECHA (118)

INTERPRETATION OF

BALANCE SHEET OF A

BANK


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2

Liabilities Assets

Capital Cash and Balances at RBI

Reserves and Surplus

Deposits

Borrowings InvestmentsOther Liabilities and Provisions Advances

Contingent Liabilities Fixed Assets

Other Assets

Balance with banks and money

at call and short notice

Balance Sheet of a Bank


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BANKS LIABILITIES

Capital

Reserve and surplus

Statutory reserve Capital reserve

Deposit

Demand deposit Saving deposit

Term deposit


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Borrowing

Other liabilities and provisions

Bills payable

Interest accrued

Others

Contingent liabilities


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BANKS ASSETS

Cash and balance

Cash in hand

Balances with RBI

Balances with banks and money at call and shortnotice

Investment

G-sec Shares

Debentures and bonds

Subsidiaries, Joint ventures

Other investments


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Advances (secured /unsecured)

Secured by tangible assets

Unsecured advances

Sectorial advances

Priority sector

Public sector advances

Fixed assets

Other assets

Tax paid in advance


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ASSET LIABILITY MANAGEMENT

ALM is an integral part of the financialmanagement process of bank.

ALM is concerned with strategic balance sheetmanagement involving risks caused by changesin the interest rates, exchange rates and theliquidity position of the bank.

ALM is a risk management technique designedto earn an adequate return while maintaining acomfortable surplus of assets beyond liabilities.It takes into consideration interest rates, earning

power and degree of willingness to take on debt.


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RISKS IN ALM

Interest Rate Risk: It is the risk of having anegative impact on a banks future earnings andon the market value of its equity due to changes ininterest rates.

Liquidity Risk: It is the risk of having insufficientliquid assets to meet the liabilities at a given time.

Forex Risk:It is the risk of having losses in foreignexchange assets and liabilities due to exchangesin exchange rates among multi-currencies underconsideration.


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THE ALM PROCESS RESTS ON THREE

PILLARS

ALM information systems

Management Information System

Information availability, accuracy, adequacy and expediency

ALM organization

Structure and responsibilities

Level of top management involvement

Role of ALCO

ALM process

Risk parameters, identification, measurement &

management.

Mainly to cover Interest rate & credit risk


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PROFITABILITY DRIVERS

Increasing Revenue (Shareholders wealth)

Operational & Transaction Cost Savings

Cross-selling

Customer retention

A/C opening through referrals

Debit card usage


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PERFORMANCEMETRICS


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CAMELS RATING MODEL

CC

AA

MM

EE

LL

SS SENSITIVITY TO MARKET RISKSENSITIVITY TO MARKET RISK

LIQUIDITYLIQUIDITY

EARNINGSEARNINGS

CAPITAL ADEQUACYCAPITAL ADEQUACY

ASSET QUALITYASSET QUALITY

MANAGEMENT QUALITYMANAGEMENT QUALITY


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Indicative of banks capacity to maintainCapital to meet risks.

Parameters- Size of the Bank

Volume of the inferior quality assets

Growth experience, plans & prospects Quality of capital

Access to capital markets

Non-ledger assets , values not shown in books

CC CAPITAL ADEQUACYCAPITAL ADEQUACY


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Ability of BoD & Senior Management to identify,

measure, monitor, control various risks.

Parameters- Technical competence, leadership skills, etc

Compliance with banking laws & regulations

Ability to plan & respond to changing situations Adequacy of directors

Willingness to serve the credit needs of a

community

MM MANAGEMENT QUALITYMANAGEMENT QUALITY


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Current trend in earnings , also expected future

growth

Parameters- ROA (Peer group averages + Banks own trends)

Income & Expenses

Quality of earnings Provision for loan losses

Dividend Payout Ratio

EE EARNINGSEARNINGS


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Banks current potential sources of liquidity

Parameters- Present & Future needs

Readily convertible to cash w/o loss

Access to money market Level of diversification of funding sources

Trend & stability of deposits

LL LIQUIDITYLIQUIDITY


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Degree to which changes in the interest rates,exchange rates, commodity prices, equity

prices impact the earnings & capital.

Parameters:

Net earnings, EVA interest rates in stress

environments. Volatility of Forex rates exposure taken

Volatility in market & equity exposure

SS SENSITIVITY TO MARKET RISKSENSITIVITY TO MARKET RISK


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RATING ANALYSIS & INTERPRETATION

Rating Analysis Score Interpretation

A 1.0 to 1.4 STRONG

B 1.6 to 2.4 SATISFACTORY

C 2.6 to 3.4 FAIR (WATCH CATEGORY)

D 3.6 to 4.4 MARGINAL (SOME RISK OF

FAILURE)

E 4.6 TO 5.0 UNSATISFACTORY (HIGHDEGREE OF FAILURE

EVIDENT)


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FURTHER CHARACTERISTICS

CAMELS For Domestic Banks

Now, CRAMELS

CACS Capital Adequacy, Asset Quality,Compliance & Systems For Foreign Banks

Used by RBI since 1995


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FEW OTHER MODELS

Total operating Revenue

Stock market based performance measures

Customer centric performance measures


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SBI

Ranking dropped from C- to D+

CAMEL rating dropped from B to B-

Low asset quality

Increase in NPAs

Earnings affected due to high provisioning

against bad loans

Lowering of hybrid debt rating (Ba3 from Ba2)

Overseas borrowings affected

Tier 1 capital requirement defaulted


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SUMMARY

Financial Statements to be prepared inaccordance with Schedule III of Sec 29 of BankingRegulation Act. (12 schedules-B/S; 13-16 Income Statement)

Sources of Funds Short- term (Payable ondemand)

High financial leverage, hence high risk

Fixed assets proportion very low ; Low operatingleverage

High degree of interest rate of volatility

Revenue = Interest income + Non-Interest Income


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REFERENCES

Books:

Management of Banking & Financial Services

Justin Paul & Padmalatha Suresh

Asset Liability Management T.Ravi Kumar 2nd

Edition

Websites:

www.dnaindia.com

www.business-standard.com/india

www.statebankofindia.com


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THANK YOU

Documents

afm Bank BS