Advanced Bank Analysis: Evaluating Complex Financial Statements

Course Objectives

• Recognise how and the extent to which more complex banking businesses are reflected in the balance sheet and how the risk profile is evidenced in the income statement
• Identify and quantify exposures where all or part of the exposure is off-balance sheet, including derivatives and structured finance vehicles
• Understand how the new accounting and reporting conventions under both US GAAP and IFRS impact differently the financial statements of banks and investment banks
• Use the information provided to evaluate the bank's risk profile and appetite.

Target Audience

Experienced analysts, regulators, risk and fixed income professionals with a good understanding of the analysis of financial institutions. This workshop is a follow-on from our intermediary level workshops: Intensive Bank Analysis, Emerging Market Bank Analysis and Non-Bank Financial Institutions. Other complementary workshops include Risk Management in Banks & the Capital Implications and Early Warning Signals in Banks.

Content

OVERVIEW

Products

• Complex banking products: risk profiles and analytic challenges - cash, derivative and structured products
• Transaction flows: securities and derivatives trading products, other investment banking activities.

Accounting

• Accounting for securities and derivatives transactions
• Overview of new accounting principles
• Impact of FAS 133 and IAS 39 on financial instrument and derivatives accounting
• Key differences between US GAAP and IFRS
• Impact of Basel II on the financial statements and disclosure.

STATEMENT LOGIC

Cash market transactions

• Long and short positions in equities, bonds and commodities
• Loan and loan commitments: fair valuation and cost plus impairment techniques; banks who use a mix of fair value and cost accounting; contingent liabilities
• Financing transactions: stock borrowing and lending, repos and reverse repos
• Re-hypothecation of client balances – liquidity challenges
• Where these items will be reflected in the financial statements.

Derivative transactions

• Treatments of trading and hedging transactions under FAS 133 and IAS 39
• Methodologies for quantifying credit risk: factors affecting potential future exposure (PFE) calculations
• Expected disclosures and key additional questions to ask.

Structured finance transactions

• Types of transaction: securitization, other structured credit products, other off-balance sheet vehicles e.g. SIVs, ABCP
• Different risk profiles: what went wrong?
• When and where these will come on balance sheet
• Role of investment banks in the originating, securitizing, trading and investing in RMBS liquid and non-liquid (equity) tranches
• Quantifying exposure to CDO’s, MBS, and SIV’s: valuing securities marked to model when market values can not be established.

FINANCIAL STATEMENT ANALYSIS

Securities and derivatives activities

• Using the financial statements to assess trading and market risk
• Relating market risks to the success of the business model: key sensitivities to different markets
• Reliance on, and volatility of, trading profits
• Measuring VaR levels: benchmarking performance against peers
• Other disclosures about market risk: back testing, stress testing, other risk measures

Lending and underwriting activities

• Using the financial statements to assess credit risk: insights and limitations of traditional impaired loans and provisioning ratios
• Impact of derivatives on credit risk: credit derivatives used for hedging and potential future exposure on all derivative positions
• Best practice: need for global systems (limits and outstandings), models that accommodate correlated variables; Credit VaR
• Case: credit risk on- and off-balance sheet activities and derivatives.

Financing activities

• Using the balance sheet to assess liquidity risk and capital adequacy
• Relating transaction flows to liquidity
• Impact of different business lines on liquidity: trading, broking, prime brokerage, etc.
• Liquidity regulations
• Legal structure: implications of double leverage
• Off-balance sheet exposures and their implications; window dressing
• Capital adequacy: differences between core and hybrid capital
• Distinction between a liquidity and solvency crisis
• Ratios: what they mean and how they should be used
• Case: liquidity risks, quality of capital and early warning signals.