Financial Statements for Banks

How banks differ from typical businesses

Financial Statements for Banks

While the general structure of financial statements for banks isn’t that much different from a regular company, the nature of banking operations means that there are significant differences in the sub-classification of accounts. Banks use much more leverage than other businesses and earn a spread between the interest income they generate on their assets (loans) and their cost of funds (customer deposits).

Typical Balance Sheet

A typical balance sheet consists of the core accounting equation, assets equal liabilities plus equity. Under these accounts, non-banking companies may have other large classes such as PP&E, intangible assets, current assets, accounts receivables, accounts payables, and such.

A bank, however, has unique classes of balance sheet line items that other companies won’t. The typical structure of a balance sheet for a bank is:

• Assets
  • Property
  • Trading assets
  • Loans to customers
  • Deposits to the central bank
• Liabilities
  • Loans from the central bank
  • Deposits from customers
  • Trading liabilities
  • Misc. debt
• Equity
  • Common and preferred shares

Recall from CFI’s Balance Sheet Guide that ASSETS = LIABILITIES + EQUITY.

Financial Statements for Banks: Balance Sheet

A bank’s balance sheet has certain unique items. We visit each unique line item in the subsections below.

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Loans to Customers and Deposits from Customers

The main operations and source of revenue for banks are their loan and deposit operations. Customers deposit money at the bank for which they receive a relatively small amount of interest. The bank then lends funds out at a much higher rate, profiting from the difference in interest rates.

As such, loans to customers are classified as assets. This is because the bank expects to receive interest and principal repayments for loans in the future and thus generate economic benefit from the loans.

Deposits, on the other hand, are expected to be withdrawn by customers or also pay out interest payments, generating an economic outflow in the future. Deposits from customers are, thus, classified as liabilities.

Loans from Central Bank and Deposits to Central Bank

In the questions of financial statements for banks, where do these banks store their money? It’s like the age-old question: do barbers cut their own hair?

Most countries have a central bank, where most (or all) national banks will store their money and profits. Deposits from a bank in a central bank are considered assets, similar to cash and equivalents for a regular company. This is because the bank can withdraw these deposits rather easily. It also expects to receive a small interest payment, using the central bank’s prime rate.

Loans from the central bank are considered liabilities, much like normal debt.

Trading Assets and Liabilities

Banks may hold marketable securities or certain currencies for the purposes of trading. These will naturally be considered trading assets. They may have trading liabilities, which consists of derivative liabilities and short positions.

Typical Income Statement for Banks

Again, the overall structure of an income statement for a bank doesn’t stray too far from a regular income statement. The top of the income statement is revenue and the bottom is net income.

However, revenue is derived differently from that of regular companies. The income statement will generally look as follows:

Financial Statements for Banks: Income Statement

Again, let’s walk through the unique line items not found in common income statements.

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Non-interest Revenue

Non-interest revenues consist of ancillary revenue the bank makes in supporting its services. This can consist of:

• Broker fees
• Commissions and fees from products and services
• Underwriting fees
• Gain on sale of trading assets
• Other customer fees (NSF fees, swipe fees, overdrawn fees)

These revenues come from anything that does not constitute interest revenue.

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Interest Revenue

Interest revenue captures the interest payments the bank receives on the loans it issues. Sometimes, this line item will only state gross interest revenue. Other times, this line will consolidate gross interest revenue and deduct interest expense to find net interest revenue. This interest expense is the direct interest expense paid to the deposits used to fund the loans, and does not include interest expense from general debt.

Credit Loss Provisions

Just like accounts receivables and bad debt expense, a company must prepare in the event that borrowers are not able to pay off their loans. These bad pieces of credit are written off in the income statement as a provision for credit loss.

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Learn More

Thank you for reading CFI’s guide to financial statements for banks. To advance your career, these additional CFI resources will be helpful:

• Three Financial Statement Model
• How the Three Models are Linked
• How to Be a Great Financial Analyst
• Incremental Cash Flow
• Account Statement
• See all accounting resources