2.2.

Report of Income – The Income Statement

The income statement is the report that measures the success of the bank operations for a specific
period (usually quarterly/annually). Users of financial information use the income statement to
determine profitability and investment value of the bank. It is also used to evaluate
management’s ability to manage the bank. The income statement measures the flow of revenues
and expenses, through this flow, users can estimate the amounts, timing, and uncertainty of
future cash flows.
Bank revenues Bank expenses
is defined as the inflow of assets is defined as outflow or using of
received in exchange for services assets in the earnings process. Some
rendered or from interest earned, examples of expenses items are:
some examples of revenue items - Interest on deposits.
are: - Interest on non-deposit
- Services fees, such as trust borrowing.
services, checking account - Interest on bond issued by the
services, collection of bank.
commercial papers for - Payment of services, such as
customers and lockbox rental. salaries, building rental, and
- Interest earned on commercial utilities expenses.
loans, consumer loans, real - Depreciation of fixed assets.
estate loans, and investment in - Provision for loan losses (bad
debt and equity securities. debts expense).
- Tax expense.

Items included in the bank income statement:

2.2.1. Interest income is the most important source of income, it includes interest & fees
generated from loans, interest on investment securities, interest on trading securities,
interest on reserve funds sold to other banks & securities purchased from other
institutions under resale agreements, and interest on deposits in other banks.
2.2.2. Interest expense is the second major category on a bank’s income statement. Items
listed here come directly from the liability section in the balance sheet (interest on
deposits, NOW accounts, MMDAs & other savings, foreign deposits, CDs, and interest
on subordinate debentures).

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 2.2.3. Net interest income or “interest margin” is the difference between total interest
income & total interest expense. Net interest income is an important tool in assessing
the bank’s ability to generate profits and control interest rate risk.
2.2.4. Provision for loan losses is a non-cash, tax deductible expense equivalent to bad debts
expense for non-bank firms. The provision for loan losses is the current period’s
allocation to the allowance for loan losses listed in the bank’s balance sheet. This item
represents the bank management’s prediction of loans at risk default for the period. The
journal entry for this item is as follows:

Provision for loan losses XXX

Allowance for loan losses XXX

Allowance for loan losses is a contra asset account (loans) and it is equivalent to
allowance for doubtful accounts in a non-bank firm. The balance in this account
represents the estimated uncollectible amount of loans included in the bank’s loan
portfolio. This amount is deducted from the total amount of loans on the balance sheet.
2.2.5. Noninterest income includes all other income received by the bank as a result of its on
and off-balance-sheet activities and is becoming increasingly important as the ability to
attract core deposits and high-quality loan applicants becomes more difficult. It
includes fees earned from trust services, service charges on deposit accounts, &
miscellaneous fees charges for other bank services.
2.2.6. Noninterest expense includes expense items consists mainly of personal expenses &
are generally large relative to noninterest income. Items in this category include salaries
& employee benefits, expenses of premises & fixed assets (e.g., utilities, depreciation,
& deposit insurance), and other expenses of one-time transactions such as losses on sale
of real estate, loans, & premises.
2.2.7. Net noninterest income is the difference between total noninterest income &
noninterest expense.
2.2.8. Income before income tax is the total of net interest income & net noninterest income.

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 2.2.9. Net income after income taxes is the net income before taxes minus the applicable
income taxes.
2.2.10.Net income after income taxes & securities gains (losses) is calculate by adding
securities gains or losses to the previous figure.
2.2.11.Net income (loss) per share of common stock is calculated by dividing the previous
figure by the average number of common shares of stock outstanding during the year.

Example (2)
Bank XXX
Income Statement
For the year ended Dec.31, 2023
Interest income
Interest & fees on loans 5,600,000
Interest on investment securities:
Treasury securities 3,400,000
Other securities 3,800,000
Interest on trading securities 2,360,000
Interest in reserve funds sold & securities 1,600,000
purchased under resale agreements
Interest on deposits at other banks 240,000
Total interest income 17,000,000
Interest expense:
Interest on deposits 3,800,000
Interest on short-term debts 500,000
Interest on long-term debts 600,000
Interest on reserve funds purchased & securities 1,400,000
sold under repurchase agreements
Interest on subordinated debentures 1,900,000
Total interest expense 8,200,000
Net interest income (margin) 8,800,000
(-) provision for loan losses (340,000)
Net interest income after provision for loan losses 8,460,000
Noninterest income
Trust department income 1,270,000
Services fees on customer deposits 430,000

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 Trading profits & commissions 200,000
Other operating income 800,000
Total noninterest income 2,700,000
Noninterest expense
Wages & salaries 1,300,000
Pensions & other employee benefits 460,000
Occupancy & equipment expenses (net) 640,000
Other operating expenses 500,000
Total noninterest expense 2,900,000
Net noninterest income (loss) (200,000)
Income before income taxes 2,700,000
Income taxes 340,000
Net income after taxes 7,920,000
Add: security gains (loss) 348,000
Net income after tax & securities gains 8,268,000
Number of common shares of stock outstanding 12,000,000
Net income (loss) per share of common stock 0.689

Reconciliation of allowance for loan losses:

When the bank calculates its provision for loan losses for the year, it is added to the balance of
allowance for loan losses. The bank must also add any funds recovered on loans previously
charged off as losses to the balance of allowance for loan losses. The bank decides about the
amount current loans as uncollectible & worthless this year. The bad debts are subtracted from
the balance of allowance for loan losses (e.g., charged to the allowance).
Example (3)
Assume that Bank XXX had an allowance for loan losses on 1rst January 2022 of L.E. 6,200,000.
During 2022, the bank recovers loans previously charged off L.E. 230,000. In December 2022 the
bank declared L.E. 300,000 uncollectible loans for this year. The provision for loan losses for the
year is L.E. 400,000. Calculate the balance of allowance for loan losses at the end of the year.
Solution.
Reconciliation of allowance for loan losses for the year 2022 is as follows:
Balance of allowance for loan losses, Jan. 2022 6,200,000
(+) Recoveries on loans previously charged off 230,000
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 (+) Provision for loan losses 400,000
(-) Uncollectible loans 300,000
Allowance for loan losses, Dec. 2022 6,530,000

2.3. Statement of Changes in Stockholders' Equity

Statement of changes in stockholders’ equity presents annual changes in all important capital
accounts showing how owners’ investment funds in the bank has changed during the previous
year. Since stockholders’ equity represents a cushion of financial strength for banks & other
financial institutions that can be used to absorb losses & protect the depositors & other creditors,
changes in a financial institution’s capital account are closely followed by regulators & by its
creditors) Below is an example of bank’s statement of changes in stockholders' equity.
Consolidated Statements of Changes in Stockholder’s Equity
December, 2017

2.4. Cash Flow Statement – Funds Flow Statement

A cash flow statement is a financial report that details how cash entered and left a business during
a reporting period. Since cash flow statements provide insight into different areas a business used
or received cash during a specific period, they are important financial statements when it comes
to valuing a company and understanding how it operates. A typical cash flow statement comprises

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three sections: cash flow from operating activities, cash flow from investing activities, and cash
flow from financing activities.
The first step in preparing a cash flow statement is determining the starting balance of cash
and cash equivalents at the beginning of the reporting period. This value can be found on the
income statement of the same accounting period. The starting cash balance is necessary when
leveraging the indirect method of calculating cash flow from operating activities. However, the
direct method doesn’t require this information.
According to the indirect method of calculating cash flow from operating activities you required
to start with net income from the income statement and adjust the impact of the accruals made
during the reporting period. Some of the most common and consistent adjustments include
depreciation and amortization.
After calculating cash flows from operating activities, you need to calculate cash flows
from investing activities. This section of the cash flow statement details cash flows related to the
buying and selling of long-term assets like property, facilities, and equipment. Keep in mind that
this section only includes investing activities involving free cash, not debt.
The third section of the cash flow statement examines cash inflows and outflows related to
financing activities. This includes cash flows from both debt and equity financing–cash flows
associated with raising cash and paying back debts to investors and creditors.
Funds provided to the bank over a specific = Funds provided from operations +
period decreases in bank’s assets + increase in
financial bank’s liability
Funds used by the bank during a specific = Dividends paid out to stockholders +
period increases in bank’s assets + decreases in
bank’s liabilities
Funds provided to the bank over a specific = funds used by the bank during the same
period time period

Below is an example of bank’s statement of Cash Flow.

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Example (3)
Bank XXX
Separate Statement of Cash Flow
For the Year Ended 31 December 2021
Cash Flow-Operating Activities (EGP Millions)
Net Income 11135
Depreciation 399
Impairment credit losses 2273
Insurance Policyholder's Right Provision 787
Other Non-Cash Items (181)
Dividend Income (46)
Net formed / (reversed) other provisions (1537)
Loans written off during the period 34
Utilized provisions other than loans pro (3)
Translation differences of other provisions 0
(Gain) on sale of Property and Equipment (13)
Trading investments (349)
Translation differences resulting from m 4
Gain on financial investments (8)
Loss of Impairment of AFS Equity --
Shares Based Payments --
Goodwill Amortization --
Provisions --
Revalue-Fin. Invests --
Valuation-Other Inv. --
Sell-Investment --
Due from banks (7448)
Treasury Bills 2069
Loans and credit facilities to customers (9974)
Financial derivatives 62
Other assets (2986)
Due to banks (680)
Customer Deposits 62170
Other liabilities 932
Defined benefits obligation 30
Leased assets - Lease contracts settlement (470)
Income tax paid (3017)
Investment for Trade --
Deposit Certificates --
Recovery from loans previously written o (70)
Operating Activities --
Cash from Operating Activities 53094

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 Cash Flow-Investing Activities (EGP Millions)
Sale of Business 3
Acquisition of financial investments (50633)
Investments in Associates 0
Proceeds from financial investments 8354
Proceeds From Leased Assets --
Sale-Financial Inv --
Payments for Investments --
Acquisition of leased assets --
Dividends Received --
Dividends Received from Inv. from Associate --
Sale-Investment AFS --
Acquisition of Property and Equipment an (728)
Sale of Fixed Assets 13
Dividends Received 45
Dividends from Associates --
Cash from Investing Activities (42946)
Cash Flow-Financing Activities (EGP Millions)
Increase in the Paid-up Capital --
Subordinated Debt --
LT Loan Repay --
Other loans (922)
Maturity-Bonds --
Dividends paid (863)
Financing Activities --
Cash from Financing Activities (1786)
Foreign Exchange Effects --
Net Change in Cash 8362
Net Cash - Beginning Balance 9185
Net Cash - Ending Balance 17547

2.6 Financial Statement Analysis

One way to evaluate the bank’s current performance is by analyzing its financial statements.
Accounting ratio analysis helps to evaluate the change in bank’s performance over time (time
series analysis), and its performance relative to other competitor banks (cross-sectional analysis).
Analyzing ratio trends over time, along with absolute ratio levels, gives managers, analysts, and
investors information about whether a firm’s financial condition is improving or deteriorating.

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2.6.1 Profitability Ratios
a. Return on Equity (ROE)
The ROE framework starts with the most frequently used measure of profitability. It measures the
amount of net income after taxes earned for each dollar of equity capital to the shareholders. ROE
ratio is identified as:
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
ROE =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Example (4)
The following information was taken from bank’s XYZ financial statements, net income after tax
is L.E 319,000 and total equity is 800,000.
319,000
ROE = = 0.399 or 39.87 %
800,000

Thus, ROE came in at 39.87%

b. Return on Assets (ROA)
This ratio measures the efficiency of the management in generating net income from all resources
of the bank. The ROA is identified as:
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠
ROA = or
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Example (5)
The following information was taken from bank’s XYZ financial statements, net income after tax
is L.E 319,000 and total assets is 1,200,000.
319,000
ROA = = 0.266 or 26.58 %
1,200,000

Thus, ROA came in at 26.58 %

c. Net interest Margin (NIM)
Is a measurement comparing the net interest income a bank generates from credit products like
loans and mortgages, with the outgoing interest it pays holders of savings accounts and certificates
of deposit (CDs). The ratio is calculated as follows:

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 𝑁𝑒𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
NIM =
𝐿𝑜𝑎𝑛𝑠

Example (6)
The following information was taken from bank’s XYZ financial statements, net interest income
is L.E 105,000 and loans (net) is L.E 7,290,000.
105,000
NIM = = 0.0144 or 1.44 %
7,290,000

Thus, profits generated from loans is 1.44 % relative to the bank’s deposits.
2.6.2 Solvency and Liquidity Ratios
Business solvency occurs when a bank has enough investment in assets to cover its debt or
liabilities. Solvency ratios measure the extent to which a bank can cover its liabilities in the long
term or during more than one year. Cash flow ratios are more accurate at measuring a firm's
liquidity and solvency than are ratios derived from the income statement or balance sheet.
a. Current Liability Coverage Ratio
This ratio indicates the bank’s liquidity and show how the bank's dividend policy affects the
amount of cash available to meet current debt obligations. The ratio is calculated as follows:
𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠
Current liability coverage =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

If the ratio is less than 1.0, then the bank is suffering a liquidity crisis and is in danger of default.
The higher the ratio, the more liquid the business.
Example (7)
The following information was taken from bank’s XYZ financial statements, net cash flow from
operations is L.E 150,000 and current liabilities is 120,000.
150,000
Current liability coverage = = 1.25
120,000

This bank earns L.E 1.25 from its operating activities, per pound of current liabilities. Thus, it
can cover its current liabilities.

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 b. Price-to-Cash Flow Ratio
It measures the amount of operating cash flow generated per share of stock. This ratio is generally
accepted as being more reliable than the price/earnings ratio, as it is harder for false internal
adjustments to be made by the management. To calculate the price to cash flow ratio, use this
formula:
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
Price-to-cash flow =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Example (8)
The following information was taken from bank’s XYZ financial statements, bank share price is
80 and the operating cash flow per share is 8.
80
Price-to-cash flow = = 10
8

This means that the bank’s share price could be overvalued by the market. In case of low P/CF
ratio, the bank’s share price could be undervalued by the market.

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Questions
Q1. XYL has just submitted its annual reports to the EGX. Fill the missing items for the following
statements (all in millions).
Balance Sheet
Assets Liabilities & equity capital
Cash & deposit due from banks ? Demand deposit 214,000
Investment securities 174,000 Savings deposit & NOW accounts ?
Trading account securities 12,000 Money market deposit accounts 98,000
Reserve funds sold 22,000 Time deposit 454,000
Loan (gross) ? Deposits due to foreign branches 42,000
Allowance for loan losses (38,000) Total deposits 880,000
Unearned discount on loans (12,000) Non-deposit borrowings 82,000
Loans (net) 696,000 Other liabilities 38,000
Plant & Equipment 20,000 Stockholders’ equity capital ?
Customers’ liability on 36,000
acceptances
Miscellaneous assets 86,000
Total Assets 1,100,000 Total liabilities & equity capital 1,100,000

Income Statement
Interest & fees on loans ?
Interest on investment securities 14,000
Other interest income 10,000
Total interest income 360,000
Total interest expense 318,000
Net interest income ?
Provision for loan losses 8,000
Service charges on customer deposit ?
Trust department income 16,000
Other operating income 40,000
Total noninterest income 78,000
Wages, salaries, & benefits ?
Net occupancy & equipment expense 14,000
Other expenses 10,000
Total noninterest expenses 108,000
Net noninterest income ?
Income taxes 4,000
Net income (loss) after taxes ?

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Q2. If you know the following account balances:
Gross loans 174,000 Total liabilities 180,000
Allowance for loan losses 8,400 Preferred stock 11,500
Unearned discount on loans 3,500 Non-deposit borrowings 25,000
Common stock 9,000 Time deposits 80,000
Total equity capital 240,000 Money market deposits 44,000
Cash & due from banks 4,500 Plant assets (net) 14,500
Miscellaneous assets 20,000 Deposits at foreign banks 15,000
Plant assets (gross) 17,000 Customers’ liability on 18,500
acceptances
Trading account securities 1,000 Capital reserve 4,000
Reserve funds sold 18,000 Surplus 5,500
Savings deposits 8,000 Demand deposits 36,500

Calculate the following items:

a. Total assets d. Total deposits
b. Net loans e. Depreciation
c. Investment securities f. Retained earnings

Q3. Prepare MMM Bank income statement based on the following account balances:
Interest & fees on loans 244,000
Interest & dividends on securities 48,000
Noninterest income & fees 28,000
Salaries, wages, & benefits 40,000
Overhead expense 20,000
Interest paid on deposits 169,000
Interest paid on non-deposit borrowings 24,000
Provision for loan losses 8,000
Other noninterest expenses 12,000
Securities gains (loss) 4,000
Income tax expense 4,000
Q.4 Prepare MMM Bank balance sheet based on the following account balances:
Cash deposits at the Central Bank 100,000
Demand deposits 95,000
Deposits due to domestic & foreign banks 80,000
Loan (gross) 500,000
Now deposits 67,000
Retained earnings 90,000
Lease financing receivables 40,000

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 Treasury Bills 150,000
Reserve funds sold 63,700
Investment securities-Trading 46,400
Mortgage indebtedness 200,000
Capital surplus 50,000
Unearned discount on loans 6,300
Common stock 200,000
Time deposits 105,000
Treasury stock 10,000
Interest-bearing deposits in banks 94,000
Subordinated notes 73,400
Goodwill 90,000
Q5. Prepare XYZ Bank balance sheet based on the following account balances:
Cash & due from banks 9,000
Demand deposits 19,000
Now accounts 89,000
Total liabilities 155,000
Investment securities 23,000
Retail CDs 28,000
Other assets 4,000
Debentures 19,000
Repurchase agreements 42,000
Paid-in capital 4,000
Common stock 12,000
Loans 90,000
Retained earnings 12,000
Fixed assets 15,000
Q6. Prepare XYZ Bank income statement based on the following account balances:
Interest on fees & loans 9,000
Interest on deposits 9,000
Interest on debentures 2,000
Provision for loan losses 2,000
Interest on investment securities 4,000
Noninterest income 2,000
Taxes 3,000
Interest on repurchase agreements 6,000
Noninterest expenses 1,000
Interest on deposits in banks 1,000

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Q.7 Use the following information to calculate the required profitability & liquidity ratios.
Interest income 40,000
Interest expenses 20,500
Cash flow from operating activities 600,000
Total assets 1,250,000
Securities gain 5000
Total liabilities 730,000
Noninterest income 6,700
Noninterest expense 5,400
Taxes 4,800
Current liabilities 500,000
Loans (net) 550,000

a. ROA b. ROE
c. Net interest margin d. Current Liability Coverage Ratio

Q.8 If a bank’s share price is 70 and its operating cash flow per share is 4.5, what is the price-
to-cash flow?

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