Difference between Banking and Non-Banking FS

Balance Sheet categories

The Financial assets are classified into:
 Loans and Advances to clients
 Financial assets and liabilities at fair value through profit and loss
 Financial assets and liabilities held for trading
 Financial assets and liabilities held to maturity/ at amortized cost
Loss/gain in FS
 Income Statement

Net Interest Income = (Interest Income – Interest Expense)

It is the difference between interest earned on customers advances, loans and
trading assets – Interest paid on customers deposits, Trading liabilities, and
Long-short term Debt.
Non-Interest Revenue
Service fees like application, account maintenance fees, advisory, commission,
broker fees, markup on security underwriting, sales and trading, Profit on sale
of Investments, ATM fees, cheques issuing, fees for account closures and
insufficient fund charges
Non-Interest expense includes all the operating expenses of the bank. It
includes pay roll, G&A etc.
Operating Efficiency Ratio
This ratio shows the bank’s efficiency by comparing non-interest expense to net
interest income and other income.
Operating efficiency ratio = non-Interest expenses/ Net interest income + Other
Income
So, if Operating efficiency ratio is 85%, then it costs 85 cents to earn 1 dollar.

Asset Liability Matching

It is the practice of investing, buying, liquidating and allocating one’s assets to
cover its liabilities when needed. As a treasury manager, one needs to carefully
manage assets in a portfolio and ensure there is sufficient liquidity to cover cash
needs. It mainly focuses on:
 Reduce interest rate risk and liquidity risk
 Ensure the bank meets the medium- and long-term financing needs
 Minimize the risk of losses due to movement in interest rates
The management of interest rate risk can be done by matching the maturity and
interest rates of loans with that of customer deposits and other investments.
Securitization
Securitization is a risk management tool used to reduce idiosyncratic
(unsystematic risk) risk associated with the default of individual assets. Banks
use securitization to lower their exposure to risk and reduce their size of overall
BS. Securitization process can be broken down to two steps:
1. The bank combines multiple assets into a single compound asset which
generates a return equivalent to the weighted average return of the individual
assets
2. The banks sell the compound assets to third party investors as securities
(bonds/CDOs)