Learning Objectives:

  • Understand the structure of a bank’s balance sheet.

  • Analyse a bank’s income statement.

  • Apply key performance ratios to evaluate bank performance.

7.1 The Bank Balance Sheet

The University of Sussex module covers “banks’ balance sheet and income structure” . The National University Library’s FIN453 module identifies “Chapter 1: Banking, bank business and financial statements” as a core textbook chapter .

Assets: How the bank uses its funds.

  • Cash and Due from Banks: The most liquid assets, including reserves held at the central bank and balances with other banks.

  • Investment Securities: Government bonds, corporate bonds, and other securities held for liquidity and income.

  • Loans and Advances: The largest asset category, including mortgages, commercial loans, and consumer credit.

  • Derivatives and Trading Assets: Financial instruments held for trading or hedging.

Liabilities: How the bank funds its assets.

  • Deposits: The primary funding source, including demand deposits, savings deposits, and time deposits.

  • Borrowings: Funds borrowed from other banks or through issuing debt securities.

Equity: The owners’ stake, serving as a buffer against losses. Components include share capital, reserves, and retained earnings.

7.2 The Bank Income Statement

The National University Library’s FIN453 module identifies “Chapter 1: Banking, bank business and financial statements” as covering bank financial statements .

Key Components:

  • Interest Income: Revenue from loans and securities.

  • Interest Expense: Costs of deposits and borrowings.

  • Net Interest Income (NII): The difference between interest income and expense, a primary driver of profitability.

  • Non-Interest Income: Fee-based revenue from services such as advisory, trade finance, and account maintenance.

  • Non-Interest Expense: Operating costs including salaries, technology, and overheads.

  • Provision for Loan Losses: Funds set aside to cover expected credit losses.

7.3 Key Performance Ratios

The BUSN 1180 course covers “calculating and measuring financial performance” as a learning outcome . Key ratios include:

Profitability Ratios:

  • Return on Equity (ROE): Net income ÷ Shareholders’ equity.

  • Return on Assets (ROA): Net income ÷ Total assets.

  • Net Interest Margin (NIM): NII ÷ Average earning assets.

  • Efficiency Ratio: Non-interest expenses ÷ Revenue.

Liquidity Ratios:

  • Loan-to-Deposit Ratio: Total loans ÷ Total deposits.

  • Liquidity Coverage Ratio (LCR): HQLA ÷ Net cash outflows over 30 days.

Capital Adequacy Ratios:

  • Common Equity Tier 1 (CET1) Ratio: CET1 capital ÷ Risk-Weighted Assets.

  • Tier 1 Capital Ratio: Tier 1 capital ÷ RWA.

  • Total Capital Ratio: Total capital ÷ RWA.

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