Cash & Balances with Central Bank - Assignment Example

Executive Summary Balance sheet forms an important aspect for every organization. The importance of it increases in the banking sector. Banks lay more emphasis on the asset side an ensure that the deposits from the public is mobilized in a manner which helps them to increase the money supply at the same time earn interest on it. The report looks into the assets side of a balance sheet and sees the manner the different factors have contributed towards the growth and whether the increase in the value of assets is good or bad. The report looks into various assets like current, non-current and fixed. It then presents the manner it has contributed towards the growth and a recommendation for each individual asset is provided for. This will thus help the bank to ensure efficient management and improve its functioning. Table of Contents Introduction 3 Purpose of the report 3 Current assets 3 Cash & balance with central bank 4 Deposit and balances due from bank 5 Trading Securities 6 Other Assets 7 Non-Current Assets 8 Loans & advances 8 Investment Securities 10 Investment in associates 11 Fixed assets 12 Derivative Financial Instrument 12 Investment Properties 13 Property & equipment 14 References 16 Introduction Financial statement forms an important aspect for all organization and the importance multiplies for banks as they mobilize the savings of people into loans. The report hereby presents the manner in which the funds were mobilized by analyzing the asset side to check the efficiency of the management and to find out whether the increase is good or bad. This will thereby help the bank to take the necessary steps to ensure that it is able to grow and win public confidence. Purpose of the report To look into the assets side of the bank financial statement and see whether it has grown or decreased in comparison with the previous year To identify whether the increase or decrease is good and why is it so To provide recommendation to the bank to improve its working by taking necessary steps for each individual assets Current Assets Currents assets are those “assets which can be converted into liquid cash within an operational cycle”. (Hafez, 2010) Operating cycle differs on the nature of business as some business has it less than a year and some more than a year. Normally assets which are converted into cash in a year is considered as current assets. This is an important aspect for every business because it determines the manner a business has liquidity. Current assets thus are in the following forms Cash form Will be realized as cash in short term like debtors Stocks or other units which will be converted into cash within an operating cycle or one year Every organization has to maintain current assets irrespective of its size. This is true for the banking sector as they provide liquidity by providing money to the borrowers. It is important to maintain liquidity and assets which will be shortly converted to cash. The current assets held by banks are as follows Cash & Balances with Central Bank This is the amount which banks have parked with the central bank. Every bank is required to deposit a certain percentage of cash with the central bank as the reserve requirements. Every country has prescribed a certain percentage of money which has to be kept with the central bank to ensure liquidity. This helps the economy as it ensures that banks don’t fail. (Heller & Lengwiler, 2003) Central bank pays interest on the reserves kept with it by other banks. The analysis of the cash and balances with central bank looks as follows 2009 = 4,139,015,000 (in AED) 2008 = 3,911,009,000 (in AED) Increase = 2009 – 2008 = 4,139,015,000 – 3,911,009,000 = 228,006,000 (in AED) Percentage Increase = (Increase / 2008) *100 = (228,006,000 / 3,911,009,000) * 100 = 5.83% The figures show that there has been a growth in cash and balances with central bank which shows that the reserve requirement has grown. This is due to the fact that banks deposit and loans have grown. The money circulation has grown which makes it mandatory for banks to keep a certain percentage with the central bank. This is a good sign and needs to continue similarly. This signals that the bank has grown in its operation which has increased the size of deposit with the central bank. Another factor which could lead towards an increase is the growth in the reserve requirement. This forces banks to park more funds with the central bank. This reduces the lending capacity for banks and acts as a drawback as their lending power falls. On the other hand it ensures that banks don’t fail as the reserve requirement helps to ensure liquidity and bank failures reduces. On the overall analysis it is seen that it is a good sign for the bank as increase in the cash and balances with central bank is signifying that the business operations are increasing at the same time the bank is able to ensure enough liquidity and reduce their chances of failure. The bank should continue in a similar manner as it will help the bank to grow and ensure they have liquidity. Deposit and balances due from bank These are the funds a bank has to pay another funds on a short term basis. These arise due to interbank transfers and are normally settled on a fortnight basis. (Hafez, 2010) This is a mechanism where different banks deal with each other. The transfer of funds happen due to settlement of securities transactions, cheques drawn on other banks, transfer of participating loans funds, and sale or purchase of Federal funds. (Hafez, 2010) It forms an important part of the bank financial statement as it helps to understand the bank transaction with other banks. The analysis of deposit and balances due from banks looks as follows 2009 = 18,348,988,000 (in AED) 2008 = 17,528,422,000 (in AED) Increase = 2009 – 2008 = 18,348,988,000 – 17,528,422,000 = 820,566,000 (in AED) Percentage Increase = (Increase / 2008) * 100 = (820,566,000 / 17,528,422,000) * 100 = 4.68% The financial statement shows that deposit and balances due from banks have grown in the tune of 820,566,000 AED which is a 4.68% percentage growth over the previous year. It is a good sign and shows the growth in business with other banks. It also highlights that the bank has entered into transaction with different banks and has made the current assets grow. It provides the signal that the bank has a lot of deposit in other bank which will help to ensure liquidity. It the bank needs additional cash it can withdraw from these banks and ensure liquidity. This is a good sign and presents a bright picture for the bank as it will be able to lend money and ensure liquidity. The bank needs to continue similarly as it will help them ensure liquidity. Also having an increase in deposit and balances due from banks will help the bank to increase its transaction with other banks and maintain a good reputation. The bank needs to perform similarly and ensure that steps are taken to ensure liquidity in this direction. Trading Securities Trading securities are “securities which are held for a short time period with the intention to earn profits after selling the securities”. (Miranda, 2010) These securities can be held in the form of equity or debt. Generally trading securities are held as the risk is less and the returns are more. Despite brokerage firms recommending securities for long term trading securities are held for a short tenure. It is purchased when the prices are low and sold when it is high to earn profits. (Miranda, 2010) The analysis of the trading securities looks as follows 2009 = 86,561,000 (in AED) 2008 = Nil Increase = 2009 – 2008 = 86,561,000 (in AED) The above findings show that trading securities have increase by 86,561,000 AED as compared to 2008 because the bank didn’t have any investment in trading securities. This is a good sign and shows diversification by the bank. This will help the bank to ear additional income though there is a risk associated with it and could lead towards the original sum be reduced. The bank looking towards investment in trading securities should be cautious and should take steps to ensure that the risk involved is not high as it could lead towards over exposure of the deposits of the people. This is a concern and special precaution needs to be maintained if a bank indulges into trading securities as there is a risk associated with it. Banks have to be wary of the situation and take measures to ensure that the risk involved in the trading securities is not high. Other assets Other assets are those assets which cannot be classified as current, fixed or non-current assets. Other assets consist of advances made to officers, cash surrender value of insurance, cost of building in the process of construction and funds for held for special purposes. (Hafez, 2010) This constitutes an important part of the balance sheet and helps to ensure that these assets are converted into cash easily. The analysis of other assets is as follows 2009 = 5,774,287,000 (in AED) 2008 = 2,233,680,000 (in AED) Increase = 2009 – 2008 = 5,774,287,000 – 2,233,680,000 = 3,540,607,000 (in AED) Percentage Increase = (Increase/2008)*100 = (3,540,607,000/2,233,680,000)*100 = 158.51% The analysis of other assets has grown by 3,540,607,000 AED in 2009 as compared to 2008 which shows a growth158.51%. This is a good sign and shows an increase in current assets. The worrying factor here is the percentage increase which is substantial. It highlights the investment in assets which cannot be distinguished easily. Banks need to reduce the investment in other assets as there is no clear distinction of the type of asset it is. Banks need to ensure that steps are taken to reduce the investment in current assets so that the funds can be used for other purposes like lending and improving the efficiency of the working of the bank. Non-Current Assets Non Current assets are those assets which are neither current nor fixed. These are assets which are in between fixed and current and require a relative large period of time to be converted into cash. Banks and other institutions are seen to have an increase in the non-current assets as they are held midway and helps business units to ensure that some sort of liquidity can be maintained by disposing of these assets. Loans and Advances Loans and advances forms the most important part for banks as these is the “money that has been lent to private institutions, people, business houses and government bodies”. (Smith, 2010) This is a major function of banks and banks lay special attention towards it to ensure that it grows. Banks provide loans and advances though overdraft facility, borrowing, loan, and credit financing and other mechanism. This is the most important constituent for a banking sector and special attention needs to be paid to ensure that it grows. The analysis of loans and advances looks as follows 2009 = 116,610,292,000 (in AED) 2008 = 109,081,089,000 (in AED) Increase = 2009 – 2008 = 7,529,203,000 (in AED) Percentage Increase = (Increase/2008)*100 = (7,529,203,000/109,081,089,000)*100 = 6.90% The analysis shows that loans and advances have grown by 7,529,203 in 2009 as compared to 2008 and having a growth of 6.9% which is a good sign. It shows that borrowing from the bank has grown. This can also be seen from the fact that bank has been able to mobilize the deposit of the customers better. Banks look towards increasing the loans and advances and are a good sign. It shows that the bank has strong fundamentals and has been able to divert the deposits received from the public towards borrowings. This shows increase in the size of business and presents a good picture. Bank need to continue similarly and ensure that they are able to increase loans and advances as it will help the bank to improve its core sector and will ensure that the bank is able to deliver proper finance. These promises for a bright future ahead and bank should look towards similar growth which will help the bank to increase its customer base and the circulation of money in the system. Investment Securities Investment securities are those “which are not meant to be sold in a short term but rather held for an investment purpose”. (Investment Securities, 2010) This are securities which are in the form of bonds, certificate of deposits, treasury bills, zero coupon bonds, and similar other investment securities. Banks are seen to invest in it as the risk involved is less due to bonds and securities which are backed by government so chances of failure are less. The analysis of Investment Securities is as follows 2009 = 4,372,744,000 (in AED) 2008 = 3,422,794,000 (in AED) Increase = 2009 -2008 = 4,372,744,000 – 3,422,794,000 = 949,950,000 (in AED) Percentage increase = (increase/2008)*100 = (949,950,000/3,422,794,000)*100 = 27.75% The analysis shows that investment securities have increased by 949,950,000 which is 27.75% growth rate. This shows that the bank has fared well and has enough liquid cash due to deposit from the public to be invested in investment securities. It shows a bright picture considering the manner the bank has been able to mobilize their funds towards growth. The bank needs to continue similarly and ensure that steps are taken to continue similarly. This will help the bank to increase investment securities and will ensure a better balance sheet where there are securities with less risk. Investment in Associates Investment in Associates is defined as “the investment in an enterprise where the investor has influence but is not a joint venture”. (Investment in Associates, 2010) Here the investment is made in a company where the investor has some control. This helps business to ensure that they control a subsidiary and can help them in the long run. The analysis of Investment in Associates is as follows 2009 = 4,582,659,000 (in AED) 2008 = 4,427,529,000 (in AED) Increase = 2009 – 2008 = 4,582,659,000 – 4,427,529,000 = 155,130,000 (in AED) Percentage Increase = (Increase/2008)*100 = (155,130,000/4,427,529,000)*100 = 3.50% The analysis shows that investments in Associates have increased by 115,130,000 which suggest a 3.5% growth rate. This factor hasn’t grown substantially suggesting that the bank has been able to concentrate on its core activity. This shows proper management of the funds and the shows that the deposits were mobilized into loans which are a good sign. The bank should continue similarly and ensure that they are able to continue similar performance as it will help them to concentrate on their core activity and ensure that resources are properly used. Fixed Assets Fixed assets are those assets which have been acquired for long term functioning and are not meant for sale. (Hafez, 2010) These are assets like land and building, the bank premise, computers, and other equipments like furniture. These are assets which are acquired to ensure long term earning for the business units. Derivative Financial Instrument Derivative Financial Instrument is “those instruments which are held for a long purpose and the value of the instrument is derived from the value of the underlying assets”. (Porterfield, 1994) These are instruments like puts, calls, swaps and, options. Financial institutions invest in it due to the probability of fetching a higher return in the long term. The analysis of Investment Properties is as follows 2009 = 4,953,019,000 (in AED) 2008 =6,617,613,000 (in AED) Decrease = 2009-2008 = 4,953,019,000 – 6,617,613,000 = 1,664,594,000 (in AED) Percentage Decrease = (Decrease/2008)*100 = (1,664,594,000 /6,617,613,000)*100 = 25.15% The analysis shows that investments in Derivative Financial Instrument have increased by 1,664,594,000 which suggest a 25.15% growth rate. This shows a lot of investment has been made in Derivative Financial Instrument. This shows that the bank has lot of liquidity and was invested in Derivative Financial Instrument. The bank needs to ensure that the investment is safe as it could lead towards a loss in the long term. Bank needs to ensure that steps are taken to ensure that the risk associated with investment in Derivative Financial Instrument is not high. This would make the investment risky and might result in failures. This is a concern and steps need to be taken to ensure that investment in Derivative Financial Instrument doesn’t happen to a tune of 25%. An increase in investment is important but the magnitude should be reduced considering the risk involved. Investment Properties Investment Properties are “properties which are purchased with the intention of earning profits while selling off the asset”. (Investment Properties, 2010) This can take various forms like purchase of flat, building, land, and other properties. The profit by investment in these properties can be through rent received on them, capital income when they are sold, and both. The analysis of Investment Properties is as follows 2009 = 549,492,000 (in AED) 2008 = 632,492,000 (in AED) Decrease = 2009 -2008 = 549,492,000 – 632,492,000 = 83,000,000 (in AED) Percentage Decrease = (Decrease/2008)*100 = (83,000,000/632,492,000)*100 = 13.12% The analysis shows that Investment Properties have decreased by 83,000,000 which suggest a 13.12% fall over previous year. This is a concern as the fall has been phenomenon and can be due to selling of the assets. Bank needs to ensure that they have a proper mix of all assets so that they are able to fetch maximum return on those. This investment will help ban in the long run as it will be able to mould their resources by selling to ensure liquidity. Bank need to raise it as it has fallen showing a decrease in assets that will earn regular income. Steps needs to be taken to increase its which will facilitate in the long run. Property and equipment Property and equipment are “assets which are long of long term and are acquired to ensure income through the usage of it”. (Kennon, 2010) These are pure long term assets and are acquired to help business units earn revenue in the future. Some of the types of assets are furniture, fittings, premises, land and building, and other office equipments. Normally a certain percentage of assets have to be acquired to ensure daily work. The analysis of property and equipment is as follows 2009 = 791,721,000 (in AED) 2008 = 575,841,000 (in AED) Increase = 2009 – 2008 = 791,721,000 – 575,841,000 = 215,880,000 (in AED) Percentage Increase = (Increase/2008)*100 = (215,880,000/575,841,000)*100 = 37.49% The analysis shows that property and equipment have increased by 215,880,000 which suggest a 37.49% growth over previous year. It shows that the bank has invested in a lot of fixed assets which is due to increase in its branches. This is a good sign and shows that the bank has opened new centres which promise a better future for the bank. It needs to continue similarly as it will ensure that the bank is able to expand itself. It will provide the bank with lot of growth avenues and help to earn more and mobilize the savings of the people. This will help the bank to grow and will ensure a bright prospect in the future. References Hafez Z, “Analysis of financial statement – liquidity of short term assets”, the New York Times Company, 2010 Heller D & Lengwiler Y, “Payment obligations, reserve requirements, and the demand for central bank balances”, Journal of Monetary Economies, Volume 50, Issue 2, pg 419-432, 2003 Investment Securities, “Investment Securities”, Economy, Investment & Finance Reports, Economy Watch, 2010 Investment in Associates, “Accounting of Investment in Associates”, IAS 28, Deloitte, 2010 Investment Properties, “Investment Properties “, Economy, Investment & Finance Reports, Economy Watch, 2010 Kennon J, “Property, plant & equipment”, analyzing a balance sheet, about.com, 2010 Porterfield L, “Derivative financial instrument: time for better disclosure”, the CPA Journal, 1994 Miranda K, “What is trading securities”, Personal Finance, ehow.com, 2010 Smith G, “Loans & advances”, Ideal cash advances, 2010, retrieved on October 22, 2010 from www.idealcashadvancs.com Read More