HTML Preview Bank Financial Statement Analysis page number 1.
Sr.No. /FIGB Channel/Analysis of Financial Statement of Bks.-Updated/Aug.2007/Eng./9
pgs./Version 1
RESERVE BANK OF INDIA
COLLEGE OF AGRICULTURAL BANKING
GANESHKHIND ROAD, PUNE-411 016
ANALYSIS OF FINANCIAL STATEMENTS OF BANKS –
PROFIT, PROFITABILITY AND BREAK EVEN LEVEL
BUSINESS – RATIO ANALYSIS
1. INTRODUCTION
The banks, acting as financial intermediaries, mobilize savings of the society and
supplement their resources through borrowings for providing credit to the needy sectors.
They have to pay interest on their deposits and borrowings. They have to pay salaries to
their staff and incur other overhead expenses in the course of their business operations.
They are also required to make provisions for any potential erosion in their assets. After
all this, they may have to pay a reasonable divided to their shareholders. The banks will,
therefore, have to earn profit. Only a profit earning bank inspires confidence in its
customers.
2. FACTORS AFFECTING PROFITABILITY
2.1 While profit is excess of income over expenditure during any accounting period,
profitability I a relative term expressed as a percentage to average working funds.
The following five important factors determine the profitability of a bank.
i) Amount of working funds deployed
ii) Cost of funds
iii) Yield on funds
iv) Burden Management cost, and
v) Risk cost
2.2. Working funds
Working Funds are the funds deployed by a bank in its business. The amount of working
funds so deployed is usually arrived at by subtracting the aggregate amount of contra
items from the total liabilities of the balance sheet. However, for analyzing the
profitability, the balance sheet showing balance based on weekly/monthly average should
prepared. Based on this balance sheet, the average working funds should be ascertained
by netting the total of contra items from the total of the balance sheet.
2.3. Cost of funds