FINANCIAL STATEMENTS OF COMMERCIAL

BANKS
Naveed Ahmad
Joint Director
Banking Supervision Department - SBP
 Learning Outcome Statements
 LOS 1: Describing the roles of ‘Financial Reporting’ and
‘Financial Statement Analysis’.
 LOS 2: To be able to read the financial statements of the bank,
learn its structure and role of each statement .
 LOS 3: To understand the regulatory reporting requirements for
banks.
 LOS 4: To know what sort of information can be found in the F.Ss,
to what extent and where exactly.
 LOS 5: To be able to read ‘between-the-lines’ through horizontal,
vertical, trend and ratio analysis of financial statements.
 LOS 6: To identify and describe information sources that
supervisory officers can use for analysis.

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 Roles of ‘Financial Reporting’ and ‘Financial
Statement Analysis’.

Financial Reporting provides information on bank’s

performance, its financial position and changes therein .
 So it usually takes the form of Financial Statements,
auditor's report, management’s discussion and
analysis and additional disclosures as required by the
regulator

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 Roles of ‘Financial Reporting’ and ‘Financial
Statement Analysis’.

Financial Statement Analysis can be used to determine

if a bank is profitable, sound and stable, adequately
capitalized and able to meet its short and long term
obligations.
 With an objective to allows analysts to form estimates
or expectations of the bank’s future performance,
risks and direction of the both.

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 Financial Statement

• Financial statements are:

“Structured representation of the financial position and financial
performance of an entity.”

• Objective:
To provide information about:
– the financial position,
– financial performance, and
– liquidity position
of an entity that is useful to a wide range of users in making economic
decisions.

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 Banks vs. Enterprises Accounting

• Banks take deposits from savers and pay interest on some of

these deposits.

• They pass on these funds to borrowers and receive interest

thereon.

• By managing this flow of funds, banks generate profits, acting

as the intermediary of interest paid and interest received, and
taking on the risks of offering credit.

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 Banks vs. Enterprises Accounting

Regulatory Requirements:
• Profound effect on banks' financial statements
Higher capital requirements,
Regulatory provisioning requirements

For example, banks that do not meet SBP’s prescribed

minimum capital requirements are restricted from dividend
payments and make capital expenditures.

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 Banks vs. Enterprises Accounting

• Banks have to satisfy both their depositors, borrowers,

Shareholders and regulator at the same time.
• Operations different from other commercial enterprises,
which result in different accounting and reporting
requirements.
• Different Users of banks financial statements are
interested in different components of financial
statements.

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 Types of Financial Statements and Purpose
• Assets = Liability + Equity • Net Income =
Revenue + other
income – Expenses

Balance Income
Sheet Statement

S. on
Cash
Changes
Flow S.
in Equity

• Increase or decrease in owners • Sources and use

stake in Co. over time
of Cash

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 Other Ancillary Statements

• Statement of Other Comprehensive Income:

– Revenues, expenses, gains and losses that according to IFRS
and/or local regulatory standards are excluded from the income
statement and are amounts that are not realized.
– Supplementary statement to the statement of Changes in Equity
• Financial Statement Notes:
• Important descriptive and policy disclosures
– Basis of preparation, reporting currency, accounting policy, methods and
estimates
• Supplementary information
– Financial risks, related party transactions, write-offs, operating segment’s
performance, CAR statement,
• Management’s Commentary:
– Planned CAPEX, future outlook etc.

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 BALANCE SHEET ASSETS
Bank Enterprise
Cash Current assets:
Balances with treasury banks Cash and Bank Balance
Balances with other banks Stock in Hand
Lending to FIs Account Receivable
Investment
Loans & Advances Long-term investments
Operating Fixed Assets
Fixed assets
Intangible assets
Deferred Tax Assets
Deferred Tax Asset
Total assets
Other Assets
Total Assets
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 BALANCE SHEET LIABILITIES
Bank Enterprise
Bills payable Current liabilities:
Borrowings from financial Short term credits
institutions Accounts Payable
Deposits Long-term liabilities:
Bank Borrowings Loans
Subordinated loans Subordinated loans
Liabilities against assets subject Liabilities against assets subject
to finance lease to finance lease
Other Liabilities Other Liabilities
Deferred tax liability
Deferred tax liability
Total Liabilities
Total Liabilities
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 INCOME STATEMENT
Bank
Mark-up / return / interest
earned
Mark-up / return / interest
expenses
Net mark-up/interest income
Non Interest Income
Operating Expenses
Pre-Tax Profit
Tax and Provision/Write-off
Net Income
Enterprise
Sales - Sales returns=
Net sales - CGS= GP
Selling expenses
Total operating expenses
Income from operations
Other income
Other expense
Income before tax
Income tax expense
Net income
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SBP’s Prescribed Financial Statements and
Formats
 SBP Prescribed Financial Statements
& Formats
• BCO Sec 34: “At the expiration of each calendar year every
banking company incorporated in Pakistan, in respect of all
business transacted by it, and every banking company
incorporated outside Pakistan, in respect of all business
transacted through its branches in Pakistan, shall prepare with
reference to that year a balance-sheet and profit and loss
account as on the last working day of the year in the forms set
out in the Second Schedule* or as near thereto as
circumstances admit.

*BSD Circular No. 3 of 2001.

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 SBP Prescribed Financial Statements
& Formats
• Sub-Section 4 of Section 34 of the Banking Companies
Ordinance, 1962, provides the legal provision to the State
Bank of Pakistan to amended the existing forms of Accounts
and Balance Sheet of banks set out in the second schedule.

• Format prescribed by SBP vide BPRD Circular No. 02 of

2018, January 25, 2018 are in use for Annual financial
accounts.

• For quarterly and half-yearly accounts, the formats have been

prescribed under BPRD Circular Letter No. 05 of 2019
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 Financial Statements

1.Balance Sheet/ Statement of Financial Position

2. Profit and Loss Account
Statement of Income
Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Cash Flow Statement

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 Balance Sheet Assets
• Cash and balances with treasury banks
• Balances with other banks
• Lending to financial institutions
• Investment
• Loans & Advances
• Fixed Assets
• Intangible assets
• Deferred Tax Asset
• Other Assets

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 Balance Sheet Liabilities
• Bills payable
• Borrowings from financial institutions
• Deposits and other accounts
• Liabilities against assets subject to finance lease
• Subordinated debt
• Deferred tax liability
• Other Liabilities
NET ASSETS

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 Shareholder’s Equity

• Share Capital
• Reserves
• Un-appropriated Profit
• Surplus/(deficit) on revaluation of assets

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 Profit & Loss Account
Mark-up / return / interest earned
Mark-up / return / interest expenses
Net mark-up/interest income
Non Interest Income
Operating Expenses
Pre-Tax Profit
Tax and Provision / Write-off
Net Income

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 SBP Prescribed Financial Statements
& Formats
• CASH AND BALANCES WITH TREASURY BANKS:
• In hand
– Local currency
– Foreign currency
• With State Bank of Pakistan in
– Local currency current accounts
– Foreign currency current accounts
– Foreign currency deposit account
• With other central banks in
– Foreign currency current accounts
– Foreign currency deposit accounts
• With National Bank of Pakistan in local currency current accounts
• National Prize Bonds
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 Bank Assets
Balances with other banks
It reflects the credit balances in current, and deposit
accounts due from banks in Pakistan as well as in
foreign countries (Nostro accounts credit balances).

Balances With Other Banks

Inside Pakistan
Outside Pakistan

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 SBP Prescribed Financial Statements
& Formats
• Lending To Financial Institutions
• Investments
• Advances
• Operating Fixed Assets
• Deferred Tax Asset
• Intangible Assets
• Other Assets

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 Bank Assets
Lending to financial institutions
This means credit extension to other financial
institutions. It may be of long-term or short-term
nature with fixed or non-fixed maturity. It normally
includes:
i) Call money lending
ii) Repurchase agreement lending (reverse
repo)

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 Bank Assets

Investments
Investments may include government securities
(MTBs, PIBs, other bonds and Provincial Govt.
Securities), corporate debt securities like Term
Finance Certificates, equity investment, investment
in associates and subsidiaries etc.

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 Bank Assets
• Investments by Types:
– Held for trading
– Available for sale
– Held to maturity
• Investment by Segments
– Federal Govt Securities
– Provincial Govt Securities
– Shares
– …………
– ………….
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 Bank Assets
Advances
Advance or a loan is a financial asset resulting from the
delivery of cash or other assets by a lender to a
borrower in return for an obligation to repay on a
specified date or dates, or on demand, usually with
mark-up or interest. Advances include:
 i) Running finances, cash finances, term loan and any
other financing arrangements.
 ii)Bills discounted and purchased (excluding treasury
bills)

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 Bank Assets
Operating fixed assets
• These are non-earning assets of a bank. The operating fixed
assets include i) Capital work-in progress ii) Property and
equipment. For balance sheet purposes, these assets are
reported net of accumulated depreciation.
• Right-of-use Assets recognized under IFRS 16 against
operating lease of assets. An associated liability is also
recognized, both at the commencement date of the lease
Intangible Assets
• Software and Goodwill

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 Banks Assets
Deferred tax assets
Deferred tax assets on a bank's balance sheet arises when
a it overpaid taxes or paid taxes in advance on its
accounting profit. These taxes are eventually returned in
the form of tax relief. Therefore, overpayment is
considered an asset to the bank. A deferred tax asset is the
opposite of a deferred tax liability, which can increase the
amount of income tax owed by a company. 

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 Banks Assets
Other assets
This miscellaneous category covers all unspecified assets
of the bank. e.g.
Accrued Mark-up
Prepayments (advance rent)
Non banking assets acquired in satisfaction of claims
Mark to market gain on FX forward contracts

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 Bank Liabilities
Bills payable
Bills payable include all types of bills, which are held and
due for payment on demand or at some time in the future.
In general outstanding amounts of Demand Drafts, Pay
Orders, T.T payables, Traveler Cheques payable etc are
included in bills payables.

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 Bank Liabilities
Borrowings from Financial Institutions
All the funds borrowed will be reported under this head
except subordinated loans. Generally include:
Borrowing from SBP (Export Refinance, LTFF etc.)
Repurchase agreement borrowings
Call borrowings
Overdrawn Nostro accounts
Others

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 Banks Assets and Liabilities
Deposits and other accounts
Deposits represent the funds placed with a bank by
customers that a bank is obligated to repay on demand or
after a specific period of time.
• Customer (current, savings, term, others)
• Financial institutions(current, savings, term, others)

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 Banks Assets and Liabilities
Subordinated loans
Funds raised by the bank with the provision that all other liability holders have
priority in the event of failure. Disclosure include:
Issue amount
Issue date
Maturity Date
Rating
Security
Profit Payment frequency
Redemption
Mark up
Call option (if any)
Lock in clause (if any)
Loss absorbency clause

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 Banks Assets and Liabilities
Liabilities against assets subject to finance lease
A finance lease is a lease that transfers substantially all
the risks and rewards incidental to ownership of an asset
to the lessee. Liabilities against assets subject to finance
lease means the minimum lease payments in the lease less
financial charges for future period.

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 Banks Assets and Liabilities
Other liabilities
This miscellaneous category covers all unspecified
liabilities of a bank.e.g.
Mark up/interest payable
Accrued expenses
Lease liability against Right-to-use Assets (IFRS-16)
Provision against off balance sheet obligation

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 Banks Assets and Liabilities

Share capital
Share capital, also called paid-up capital, refers to the
capital actually paid by the shareholders to a bank for
acquiring its shares. It includes shares fully paid in cash,
issued as bonus shares and shares issued for consideration
other than cash.

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 Banks Assets and Liabilities
Reserves
Amount set aside from profits or retained earnings for
specific/general purpose and also to meet statutory requirements.

Un-appropriated / unremitted profit

The profit available for appropriation less appropriations made in the
form of cash dividend/ remittance to Head Office and reserves.

Surplus/ (Deficit) on revaluation of assets

The surplus or deficit is the difference between the market value/
revalued amount and carrying amount of fixed assets and securities.

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 Banks Contingencies and Commitments
Contingent liability means: (a) a possible obligation that arises from past
events and whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control
of the enterprise; or
b)  a present obligation that arises from past events but is not recognized
because:
(i) it is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability .
Commitment
It refers to an irrevocable commitment of a bank either to lend/ borrow money
or to sale/ purchase of foreign exchange etc.
 

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 Banks Income and Expenses
Interest Income
Interest income is the sum of interest earned on all of a
bank’s assets, including :
Loans and Advances
Investments
Lending to FIs
Balances with banks
Others.

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 Banks Income and Expenses

Interest Expense
Interest expense is the sum of interest paid on all interest-
bearing liabilities i.e. deposits and borrowings
Net Interest Income
Gross interest income minus gross interest expense is
labeled net interest income.

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 Banks Income and Expenses
Non-Interest Expense
Non-interest expense is composed primarily of Administrative
expenses, which includes salaries and fringe benefits paid to bank
employees, occupancy expenses, depreciation, depreciation on
right-to-use assets and other operating expense.
Provision for Loan Losses
Provision for loan loss is a deduction from income representing a
bank’s periodic allocation to its loan loss allowance on the balance
sheet. It is a non cash expense but indicates management’s
perception of the quality of the bank’s loans.

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