It is exceedingly difficult for a non-financial person to understand the true financial picture of their bank - but we will attempt to provide some basic analysis that will allow one to get a sense of potential problems and areas in which they might wish to pursue further with others.
It goes for any firm, bank or non-bank, that if there has been a recent change in auditors that issue is well worth investigating.
With reference to a bank this would be a serious matter if the auditors had raised the issue of 'internal controls.
Bank financial statements read significantly differently than a typical manufacturing or service company.
The 4 key areas that are related to a bank financial statement are: How the bank treats and records its investments Consolidations of all their businesses Loan loss reserves Accrual policies - (How due they treat and record interest income that is due) When a business person or financial analyst looks at a regular firms financials there are some very traditional ways of looking at that financial statement - those ways are leverage, liquidity, profitability,.
There are tens, in fact hundreds of ratios and analytical techniques that one employs to look at a ' typical' firms financial statement.
Unfortunately and here is the challenge, these techniques don't really work on a banks financials.
Thos techniques don't work because it is exceptionally difficult to understand banks asset quality, and many banks present the material in such a way as it is simply even difficult to extrapolate the basics.
They say timing is everything, and because banks assets are literally changing all the time it is difficult for one to put a handle on the values and mixes.
One of the best ways, and somewhat traditional, to analyze a banks financials is to create a format that allows one to track certain data elements over time A spreadsheet is a great tool for this methodology.
Banks, like many Wall Street firms, like to ' window dress ' - That means at key times, i.
a year end, they will often remix assets in order to show more favorable results.
That is why the analyst or customer should take a look at certain key accounts over different periods of time, for example quarterly.
As in looking at any company you want to determine what the bank owns, who it owes money to (i.
you or your business!) and what the total capital number is.
We also want to take a look at the over all liquidity, that is why our spreadsheet is handy, we can track liquid assets over time.
The best liquid assets for a bank are the cash they have on hand, monies that are due them by other banks, and government securities.
The next major category of assets is riskier assets - those are of course loans to customers and other banks.
Also, like any firm, the bank has fixed assets, such as real estate, furniture, computers, etc.
We have taken a look at what the bank has.
What does it owe? Well it owes you and its other customers the money you have on deposit Banks also have their own borrowings of different types, and those need to be analyzed carefully.
Also, it is advisable to track the loan loss reserves to see how dramatically they fluctuate.
In summary, there are a number of different parties very interested today in bank financials, up to an including our government.
And oh yes, there's yourself because in some case your entire life saving might be parked at the bank.
The average person probably has to rely on their financial advisors and others to get a true sense of their banks true condition, but we have hopefully demonstrated that even some basic analysis can lease the average person to get a sense of how their bank is doing.
Concerns about bank financials are growing, and in fact are at the extreme end of the pendulum re overall market concern - so we should all have some sense of interest in how our banks our doing.
When we are caught off guard history has shown it's already too late.