The balance sheet of a bank presents information differently compared to other companies.
Great analysts and economists agree that it is very difficult to know what a bank hides behind its balance sheet. In other words, it is very complex to analyze the financial statements of a bank. This is why, although we do not analyze the balance here, we will know the most relevant differences and analyze in a general way what each item refers to.
The balance sheet of a bank is made up of different headings from those of a private or industrial company. The main thing for a bank, and this is reflected in the balance sheet, are both customer loans (assets) and current accounts that customers open with the bank (liabilities).
On the other hand, the headings are presented by liquidity range from more liquid to less liquid and, in addition, another significant difference is the non-distinction between short and long term, since it is considered that it is not relevant information in banks.
Assets of a financial institution
The first thing that catches the attention of a bank's balance sheet is the structure of the headings that comprise it. Assets are structured in a cascade from greater liquidity (cash) to less liquidity ( intangible assets ), unlike industrial companies in which they are structured in the opposite way (first intangibles and finally cash). Furthermore, we observe that in the case of banks neither assets nor liabilities are differentiated between the short and long term
In banking terminology, there are three types of assets: profitable, reserve requirements and unprofitable.
- Profitable assets: Profitable assets are those with which the bank obtains the highest profitability and with which the largest number of transactions are carried out. Later, we will see what types of assets they are exactly.
- Reserve: The reserve requirement is the percentage of money raised from customers that banks must physically reserve. Depending on the products through which the customer deposits their money, a different percentage of cash reserves is required depending on the liquidity of the deposit (more liquid, higher percentage). For example, if we have our money in a checking account, the bank is required to reserve a larger amount than if we deposit it in a savings account, because the money from checking accounts can be withdrawn at any time and could involve a unforeseen for the financial institution.
- Non-profitable: They are those assets that do not provide profitability to the bank because they are not financial in nature, but rather have them for operation and logistics as infrastructure to carry out the activity (tangible fixed assets).
Generally, the thickest heading of an asset in a financial institution is called “loan investments”. In it, credits and loans to customers or money loaned to other banks are registered. That is to say, when we go to buy a car or a house and we ask the bank for money, it is recorded in said heading. This type of asset would be classified as profitable since it is the main activity of the bank and they are the ones that offer the most profitability.
The next heading with the greatest weight is the so-called “financial assets available for sale”. In this it is registered mainly shares and debt securities. When the bank buys debt from the State or shares from a company with the intention of holding them for a long period, they are recorded here.
The rest of the assets are made up of other concepts such as “cash and deposits in central banks” which reflects the amount that the bank has in cash or in the central banks, or “Non-current assets for sale” where foreclosed properties are recorded. through auctions or acquired for the non-payment of mortgage debt of the clients and that the bank offers and expects to sell at a price lower than the market price but in the shortest possible time. These are called reserve requirements because despite being very liquid (they can be transformed into physical money at any time) they do not provide the bank with practically any profitability.
Finally, we can find the unprofitable assets that are basically fixed assets (offices, branches, ATMs, furniture, etc.).
Liabilities and equity of a financial institution
In reference to liabilities and equity, we mainly find the heading "customer deposit" which accounts for most of it. This heading mainly records the savings accounts that clients keep open with the bank. That is, the money that we have in our checking accounts and that we withdraw every time we go to the ATM. This is an obligation for the entity since, as we know, these are amounts of money that customers have but can request it at the desired time and, therefore, it is money that the bank must return.
Regarding equity, there are no significant differences with respect to mercantile companies. It is basically made up of the money contributed by the shareholders and the accumulated profits that are not distributed among the shareholders.