How to Asses a Bank?
Posted on January 22, 2016
We are taught since childhood that banks are the most trusted financial institutions. In fact, they say that it is better to entrust our money to our banks, instead of to ourselves. Despite their chequered history of occasional false promises, corruption and mismanagement, we are still motivated enough to give them nearly all of our money. It is said that bank will take some of the risks of owning money. For people who need to put millions of dollars to specific bank, they will need to read those glossy bank brochures to find out whether the bank can be trusted or whether it will provide them with enough interest. In this case, we should be able to judge the soundness of our bank and determine whether our money will be tucked away safely.
Bank’s balance sheet is an important document that allows us to know the financial health of the bank. A trustworthy bank should publish their balance sheet. It should conform to common accounting standards in your country, but reading it may leave a lot to be desired. As an example, we should know whether the financial reports are properly updated. In the United States, the bank should be audited by the Big Six Western. These are six accounting firms that can be trusted to deliver accurate and independent financial reports. Thomson BankWatch – BREE and Fitch-IBCA are among the best rated independent agencies in the banking industry. They do not only rate the financial stability of a bank, but also for the legality of operations. Although it is true that rating won’t tell us the whole picture, we should get a proper estimation whether the bank is healthy and run properly.
Among the thorniest issues to consider when assessing banks is the exchange rates. Some financial reports don’t use updated exchange rates and they could use the prevailing rate on the end of the fiscal year. In a country with volatile and highly fluctuating currency, this will distort the real fact. If the bank isn’t audited with trusted independent agencies, it is quite likely that some of the numbers are inflated or deflated artificially. This allows the bank to show that they are making profits, when in fact, they are losing money. It means that we should be aware of the fictitious growth that the bank wants us to believe. As an example, the bank may use a dubious algorithm that calculates essential banking ratio, which causes sharp increase in the amount of profitability.
Net assets are also often misstated and some of the assets can be performing or non-performing. The prime importance should be to define the maturity distribution of our bank. A bank is healthy if in a very short notice, much of the assets can be withdrawn, without causing them to lose fluidity of their cash flow. In poorly performing banks, the worst-case scenario could cause insolvency; causing many customers not being able to withdraw their money.