Analyzing a Bank’s Financial Statements: An Example
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Banks’ financial statements are unique, especially when analyzing revenue. Unlike most companies, banks have no accounts receivable or inventory to gauge whether sales are rising or falling. Below, we analyze a bank’s 2024 financial statements.
Key Takeaways
- A bank’s financial statements differ from most companies, especially when it comes to revenue.
- Banks accept deposits from consumers and businesses and pay interest in return.
- When the interest a bank earns from loans exceeds the interest paid on deposits, it generates income.
- In the U.S., multiple agencies regulate banks, including the Federal Reserve System (FRS) and the Federal Deposit Insurance Corporation (FDIC).
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How Banks Make Money
Banks accept deposits from consumers and businesses and pay interest in return. Banks invest those funds in securities or extend loans to companies and consumers. When the interest a bank earns from loans exceeds the interest paid on deposits, it generates income from the interest rate spread. The size of this spread is a determinant of a bank’s profit.
Banks also earn interest from investing cash in short-term securities like U.S. Treasuries and from fees charged for their products and services such as wealth management advice, checking account fees, overdraft fees, ATM fees, interest, and credit cards.
Example: Bank of America
The table below combines Bank of America’s 2024 balance sheet and income statement to display the yield generated from earning assets and interest paid to customers on interest-bearing deposits. Most banks provide a similar table in their annual reports.
- In GREEN: Interest or yield is shown that Bank of America earned from their investments and loans. Loans are assets because the bank earns interest income from loans.
- In RED: Interest expense and the interest rate paid to depositors are shown on their interest-bearing accounts. A deposit is a liability on a bank’s balance sheet.
The balance sheet items are average balances for each line item rather than the balance at the end of the period. Average balances provide a framework for the bank’s financial performance. There is a corresponding interest-related income, or expense item, and the yield for the period. Bank of America earned $147.2 billion in interest income from loans and investments while paying out $90.5 billion for deposits.
Income Statement
Bank of America’s 2024 income statement is shown below with the following highlights:
- Net interest income totaled $56.1 billion, which is the spread between interest earned from loans and the interest paid to depositors.
- Non-interest income totaled $45.8 billion and includes fee income for products and services such as bank account and service fees, trust income, loan and mortgage fees, brokerage fees and wealth management services income, and income from trading operations.
- Net income of $27.1 billion was the profit earned.
A bank’s revenue is the total of the net interest income and non-interest income.
Balance Sheet
Bank of America’s 2024 balance sheet includes the following:
- Cash held as deposits was approximately $290 billion.
- Securities are typically interest-bearing short-term investments that include U.S. Treasuries and government agencies.
- Loans are commonly the largest asset on the balance sheet. In 2024, Bank of America had $1.082 trillion in loans.
- Deposits are the largest liability for the bank and include money-market accounts, savings, and checking accounts. Both interest-bearing and non-interest-bearing accounts are included.
Important
Although a liability on a bank’s balance sheet, deposits are critical to the bank’s lending ability.
Who Regulates Banks?
Banking is a highly leveraged business requiring regulators to dictate minimal capital levels to help ensure the solvency of each bank and the banking system. In the U.S., banks are regulated by:
What Is Interest Rate Risk for Banks?
Interest rate risk is the spread between interest paid on deposits and interest received on loans over time. Deposits are typically short-term investments and adjust to current interest rates faster than the rates on fixed-rate loans.
If interest rates rise, banks can charge a higher rate on their variable-rate loans and a higher rate on their new fixed-rate loans. If interest rates rise, banks tend to earn more interest income, but when rates fall, banks are at risk as interest income declines.
How Do Rising Interest Rates Affect a Bank’s Revenue?
Changes in interest rates may affect the volume of certain types of banking activities that generate fee-related income. The volume of residential mortgage loan originations typically declines as interest rates rise, resulting in lower originating fees. Banks tend to earn more interest income on variable-rate loans since they can increase the rate they charge borrowers, as in the case of credit cards.
Why Are a Bank’s Loans Important to Investors?
Investors can monitor loan growth to determine whether a bank is increasing its loans and using bank deposits to earn a favorable yield.
How Do Banks Handle Loss from Loan or Lease Defaults?
Credit risk reflects the potential that a borrower will default on a loan or lease, causing the bank to lose potential interest earned and the principal loaned to the borrower.
Banks maintain an allowance for loan and lease losses. This allowance is a pool of capital specifically set aside to absorb estimated loan losses and should be adequate to absorb the estimated amount of probable losses in the institution’s loan portfolio. The loan loss provision is located on a bank’s income statement.
The Bottom Line
The financial statements of banks differ from those of non-financial companies. Analysts look at net interest margin income and other fundamentals to value bank shares. Banks accept deposits from consumers and businesses and pay interest in return. They use deposits to issue loans and earn interest. A bank generates income when the interest it earns from loans exceeds the interest paid on deposits.
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