Financial Statements of Banks and Ratio Analysis

Financial statements of a bank under NFRS

Nepal Rastra Bank (NRB) has prescribed an NFRS-based Format of Financial Statements for "A" class commercial banks (June 2018). The year ends on Asar end, and figures are given for both the Group and the Bank. The set consists of:

1. Statement of Financial Position (the balance sheet)
2. Statement of Profit or Loss
3. Statement of Other Comprehensive Income
4. Statement of Changes in Equity
5. Statement of Cash Flows (operating, investing and financing activities)
6. Notes, including significant accounting policies

Statement of Financial Position

For a bank, deposits are liabilities and loans are assets. Contingent liabilities and commitments (guarantees, letters of credit) are shown below the statement, not inside it.

Statement of Profit or Loss

The format builds profit in steps:

• Interest income - Interest expense = Net interest income
• Add net fee and commission income, net trading income and other operating income = Total operating income
• Less impairment charge/(reversal) for loans and other losses = Net operating income
• Less operating expense (personnel expenses, other operating expenses, depreciation and amortisation) = Operating profit
• Add or less non-operating income and expense = Profit before income tax
• Less income tax (current and deferred) = Profit for the period

Basic and diluted earnings per share are shown at the foot.

Capital adequacy

NRB's Capital Adequacy Framework 2015 (Basel III, for "A" class banks) defines:

• Tier 1 (core) capital = Common Equity Tier 1 (CET1) + Additional Tier 1
• Capital fund = Tier 1 + Tier 2 (supplementary) capital
• Capital adequacy ratio (CAR) = Eligible total capital / Total risk-weighted exposure (RWE)
• Total RWE = Credit risk RWE + Market risk RWE + Operational risk RWE + supervisory adjustments under Pillar II

Example: CET1 Rs 6.3 billion, Additional Tier 1 Rs 0.9 billion, Tier 2 Rs 1.8 billion, RWE Rs 90 billion. Tier 1 ratio = 7.2 / 90 = 8%; CAR = 9.0 / 90 = 10%.

Other ratios examined

• NRB treats pass and watch list loans as performing; substandard, doubtful and loss loans are non-performing.
• The Monetary Policy for 2021/22 abolished the earlier credit to core-capital-and-deposit (CCD) ratio and required a CD ratio of not more than 90 percent by mid-July 2022.

Example: loans Rs 180 billion and deposits Rs 225 billion give a CD ratio of 80%.

Exam pointers

• Balance sheet = Statement of Financial Position; deposits from customers sit under liabilities.
• Net interest income = Interest income - Interest expense.
• Total operating income less impairment charge = Net operating income.
• CAR = Total capital / Total risk-weighted exposure; minimums are 4.5% CET1, 6% Tier 1, 8.5% total, 11% with buffer.
• Watch list loans are not part of NPL.
• ROA uses total assets and ROE uses shareholders' equity as the denominator.