Importance Of Financial Analysis Of Banks

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Analysis of banks: why? Financial reporting is the activity that provides pertinent information for making important business decisions. The role of financial reporting for banks is crucial importance for the efficiency of banks' operations. Data needed for adequate financial reporting are found in the financial statements. In recent years, there has been a growing need for calculating performance of banks by using the information from the financial report. Importance of a specific analysis for banks: Financial accounting is providing solid information basis that helps banks to reach important business decisions. The reason for that lies in the fact that complex business activities of banks are presented in financial statements standing for…show more content…
The quality of these financial statements affects the interest of investors. That is the reason why a good analysis of banks is crucial. Sources: course "The European Banking and Insurance Market“, Professor Dr. Matthias Fischer; “Management de la banque”, Michel ROUX ; “Bank Management & Financial Services” Peter S. Rose Most important components of the financial report of a bank Balance Sheet: It is a two-sided outline of bank's assets and liabilities at a specific moment. Assets include bank's investments, while the liabilities include bank sources of funding. Balance sheet‘s liabilities focus on the formation of bank funds, while assets focus on their use. Income Statement: It provides an overview of income and expense, as a form of intermediate results, over a specified period of…show more content…
It helps to maintain depositors’ confidence and to prevent the bank from going bankrupt. Asset Quality evaluates the strength of bank. The prime goal is to determine the non-performing assets as a percentage of the total assets. ManagementEfficiencyisanimportantelement.Itinvolves subjective analysis to measure the efficiency and effectiveness of management. Earning Quality determines the ability of a bank to earn consistently. It determines the profitability of bank and demonstrates its growth in earnings in future. Liquidity: Bank has to take a proper care to hedge the liquidity risk; at the same time ensuring that an important part of funds are invested in high return generating securities: the goal is to generate profit with provision liquidity to the depositors. Sensitivity to Market Risk refers to the risk that changes in market conditions could impact earnings and/or capital. The most important risk is Interest Rate Risk. Banks are rated by the regulators from 1 (best rating) to 5 (worst rating) following these criteria. An overall rating is also assigned to

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