Commercial Banks

This guide introduces the basics of how commercial banks are different from normal companies. Here, commercial banks do not include insurance, investment banks, wealth management, investment firms and specialty finance. Commercial banks’ business model revolves around getting money from you the consumer, in terms of deposits, and then loaning it out to other parties. They make money based on the difference in interest rates. The interest spread between what they’re lending out, and making money on, and what they’re paying to you in terms of your checking account, or your savings account at the bank.

Write-up of this guide assumes you already have some basic knowledge about financial statements of normal companies. However, after you learnt the key differences, you will start to change your perspective in assessing a commercial bank.

Analyse Performance of Commercial Banks

You will learn a methodology to assess performance of banks: FACE - Funding and Liquidity, Asset Quality, Capitalisation and Leverage, Earnings and Profitability

FACE-Funding-and-Liquidity

Analyse Funding and Liquidity of Commercial Banks

Due to maturity transformation, banks must ensure adequate liquidity to match their liabilities. We must analyse a bank’s ability to sustain its liquidity position and the stability of its funding.

FACE Asset Quality

Analyse Asset Quality of Commercial Banks

Credit quality in the loan book is the predominant source of risk. We must analyse other on- and off-balance sheet exposures to the extent these are relevant for an assessment of a bank’s asset quality.

FACE Capitalisation and Leverage

Analyse Capitalisation and Leverage of Commercial Banks

Loans are very risky because people could default, pay back Loans late, “disappear”, etc. We must assess whether banks have sufficient equity capital to cover unexpected losses due to black swan events.

FACE Earnings and Profitability

Analyse Earnings and Profitability of Commercial Banks

We must assess recurring earnings power of a bank to find out how efficiently a bank is using its assets, as well as assess profitability to understand management’s ability to control the cost base.

Basel Framework in Layman Terms

A set of international banking regulations designed to promote financial stability by establishing minimum capital requirements, risk management standards, and supervisory guidelines for banks.

ECL - Movement between stages

How does IFRS 9 Expected Credit Loss work and how to analyse ECL?

Learn about how IFRS 9 Expected Credit Loss work and how to analyse ECL from retail investor perspective.

Management Return on Equity

Management of Return on Equity (ROE) of Banks

Ever wonder how to assess management style of a bank in a more quantitative way? One way to assess management of a bank is through the Dupont analysis of Return on Equity, aka Management of Return on Equity.

How do commercial banks raise cash and how quickly?

Banks add value and earn money from their lending (Assets) and depositing (Liabilities) activities. So, banks must ensure adequate liquidity to match their liabilities. You will learn how banks raise cash.

Recourse obligations on loans and financing sold to Cagamas

What is recourse obligation on loans and financing sold to Cagamas/investors?

Learn about what recourse obligation on loans and financing sold to Cagamas/investors is.

Evolution of post-crisis bank regulations and controlling tools: A systematic review from a historical aspect

What is regulatory capital for?

Why does Regulatory Capital exists? A bank must always maintain a certain amount of regulatory capital to cover unexpected losses quickly. You will learn how does Regulatory Capital cover losses.

Capital adequacy ratio

Decipher capital adequacy ratios

A bank must always maintain a certain amount of regulatory capital based on the bank’s equity for unexpected loss. You will learn the key concepts of Numerator and Denominator of the capital adequacy ratios.

Example of debt instruments

What are debt instruments that commercial banks commonly offer?

Learn the debt instruments that commercial banks commonly offer.

What are public debts that commercial banks commonly issue?

Learn the debt instruments that commercial banks commonly offer.

equity instruments

What are equity instruments that commercial banks commonly issue?

Learn the equity instruments that commercial banks commonly offer.

Daily VaR trading portfolios

Value at Risk VaR – Measures Market Risk in Trading Transactions

Value at Risk is the estimation of a maximum loss within a given confidence level. Commercial banks commonly use VaR to measure market risk in trading transactions.

The big short

How do short positions in securities trading work?

Learn about how short positions in securities trading work and how do banks classify them in the Balance Sheet.

Repurchase Agreement

How do repurchase agreement and reverse repurchase agreement work?

Learn about how repurchase agreement (Repo) and reverse repurchase agreement (Reverse Repo) work

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