Analysing Banks Financial Statements

A comprehensive 4-day course for banking experts that will help you to: Understand the principles of IFRS accounting Identify the most important performance ratios Analyse the P/L, margin, and trading income Forecast provisions for the different asset classes Apply the balance sheet analysis with fair value and accrued income accounting Understand the new equity rules under Basel III Use derivative and hedge accounting Assess the liquidity situation and calculate the new liquidity ratios Understand the importance of mismatches The global financial crisis, the collapse of major financial institutions and an unprecedented volatility in the credit and financial markets have highlighted the importance of bank balance sheet analysis. This course provides a comprehensive overview of the most important trends and developments in bank reporting. The programme starts with an introduction to the key principles of IAS/ IFRS accounting principles and policies; the major disclosure requirements and most recent developments will be discussed. The difference between book valuation, accrual accounting and the fair value methodology will be described. In the second part, an in depth understanding of the asset side of the balance sheet will be developed. Particular emphasis will be laid on the treatment of financial instruments, securities, loans and hedge accounting. Delegates will learn how to apply and forecast the credit cycle and the related provisions for credit losses. The discussion of the liability side will focus the accounting principles regarding long- term liabilities, derivatives and the different equity positions under the new Basel III guidelines. The difference between nominal shareholder funds, regulatory and economic equity will be explained and key items as “Revaluation reserves” are interpreted. On the third day, the major elements of the P& L statement are introduced with a particular emphasize on interest income, understanding gap analysis and mismatches, forecasting fee income. Delegates will learn how to treat trading income and forecast appropriate provision levels for the different asset classes. The different expense categories will be described. Finally, the cash flow statement will be developed out of the operating, non- operating income and the changes in assets and liabilities. On the last day, delegates will translate their accounting knowledge into financial ratio analysis in order to assess the strength and weaknesses of a financial institution. They will apply their knowledge to the principal valuation techniques for banks The programme features The course applies to professionals and managers who are involved in the accounting, controlling or analysis of financial statements of banks. They are introduced to the latest developments in accounting and representing financial statements in accordance with IFRS principles. The key issues of valuing financial assets and liabilities, loans, derivatives and hedges are discussed in examples. A particular emphasis is given to the new Basel III equity requirements. The methodologies of book accounting and fair value principle are explained. The key value drivers for banks are highlighted and transformed in valuation methodologies for financial institutions. Participants will learn to apply various methodologies of valuing banks, understand their different results and their successful application to real life situations.
Day 1 Analysing the bank’s profit and loss statement Welcome and introduction Programme overview Delegates’ expectations Understanding bank strategies The Banking industry after the financial crisis New regulatory requirements under Basel III Recent developments in mature and emerging markets Assessing the strategic position of a financial institution Understanding the value drivers in - Corporate banking - Retail banking - Investment Banking Workshop: SWOT analysis of an emerging market bank IFRS rules for disclosure of banks The application of rules Accounting policies under IFRS - General rules and principals Presentation of bank’s financial statements - Balance sheet - Profit & loss statement - Cash flow statements Disclosures requirements - Classification of financial assets and liabilities - Maturities of assets and liabilities - Hedging assets/ liability mismatch and derivatives - Off- balance sheet items - Other disclosures Deficiencies and proposed changes Workshop: Analysing key components of a bank’s financial statement Analysing the asset side Understanding the asset side of banks Introduction to book value, accrual accounting and fair market value Different classifications for financial assets and liabilities - FVtPL, AfS, Loans and receivables, held to maturity - Differences in accounting treatments - Reclassification of financial assets - The economic outcome Understanding fair value - Determining fair value - Application and risk in fair value - Level I- III assets Treatment of Financial instruments - Derivatives - Swaps, options, futures, forwards Categories of investment securities Hedge accounting - Fair value hedges - Cash flow hedges Case studies: 1. Applying hedge accounting 2. Different categories for securities: a practical guide Day 2 Analysing the balance sheet Analysis of loans and advances General principles Types of loans and advances - Book and fair market value implications Calculating expected losses on loans Forecasting the provisioning level - Assessing the appropriate NPL level - Determining write- offs - The loan coverage ratio Valuing collateral and derivatives Write- offs and loan loss reserves Determining general and special provisions - Retail portfolio Workshop: Charting provisions for different asset classes Market valuation of assets Introduction to the concept of cash flow valuation Catching interest rate risk Determining the cash flow - Coupon vs. discount rate - Time to maturity Different types of loans - Term loans - Instalment loans - Adjustable- rate loans - Leasing The appropriate discount rate Case study: Comparing book accounting with cash flow valuation Other assets and off- balance sheet items Investment in subsidiaries Property, plant and equipment Intangible assets - The treatment of goodwill Pledged assets Other assets Analysing the liability side General accounting rules The new liquidity ratios under Basel III - LCR - NSFR Short- term and long- term funding - Inter banking - Retail deposits - Depositors - Bonds and other securities - The market value of long- term bonds Derivative and contingent liabilities Deferred tax liabilities Other liabilities Workshop: Valuation of long- term liabilities under IFRS The importance of equity The new equity requirements under Basel III Different layers of tier 1 equity - Core tier 1equity - Retained earnings - Additional tier 1 - Regulations for Sifis The new regulations for tier 2 equity - General reserves - Provisions - The diminishing importance of revaluation reserves (OCI) - Fair market valuation - Hedge accounting - Other tier 2 instruments The new importance of equity derivatives - Loss protection - Risk mitigating - The diminishing importance of OCI equity Case study: Analysis of revaluation reserves Day 3 Analysing the profit & loss statement Understanding net interest income, fees and provisions Introduction to P& L accounting - General rules and principles Analysing net interest income - Margin income - Interest expenses Understanding the margin contribution Understanding mismatches and GAP analysis The outcome of cash flow hedges Forecasting non interest income - fee income - trading income - the importance of Var - assessing risk in the trading portfolio Other operating income Case studies: 1. Calculating an interest mismatch 2. Understanding ALM management Determining expenses Operating expenses - Compensation and benefits - Amortisation and depreciation - Impairment of intangible assets - Other expenses Extraordinary items Bad debt charges assessment Individually vs. collectively provisions Case study: Analysis of financial ratios for the P/L Day 4 Identifying value drivers Calculating equity cash flow The rationale for equity cash flow Composition of equity cash flow - Operating cash flow - Changes in assets - Changes in liabilities - Non operating income Applying cash flow in the bank analysis Case study: Calculating equity cash flow and comparing key value drivers Using financial ratios Introduction Identifying a peer group Decomposing the bank’s performance Ratio analysis - Profitability - Liquidity - Solvency - Asset quality Decomposing RoA and RoE Case study: Calculating equity cash flow and comparing the different performance ratios The valuation of banks Rationale for valuation Why are bank valuations different Different methodologies - Discounting equity cash flow - Dividend discount model - Market multiples - Performance ratios Case study: Bank valuation using equity cash flow and financial ratios Course overview and close