Ashish Jain

How banks’ financial modelling is done? The financial modelling of a bank starts by punching in the income statement and balance sheet numbers. Post this, I make some adjustments to the income statement. The first adjustment is to segregate the reported operating revenue into different categories of income like net interest income, net commission income, net trading income, insurance income, etc. The second adjustment is to remove any one-time expense or income, to make it comparable with previous years. I then calculate liquid asset base, earning asset base and funding asset base for the bank in a particular year. For liquid asset calculation and earning asset calculation, I first have to draw the maturity schedules of important balance sheet line items e.g. financial assets at profit and loss, financial assets at other comprehensive income, etc. Post which, I calculate the liquid assets in each of these line items by taking liquid assets with less than 1 year maturity. Similarly, earnings assets are calculated by removing all the equity assets. Funding base comprised of shareholders’ equity, borrowed funds and deposit from customers. Shareholder’s equity and customer deposits is given in the balance sheet, while borrowed funds are calculated by adding parts of loans to banks, subordinated liabilities, securitized liabilities, financial liabilities designated at profit or loss, etc. Post all these things, I calculate important banking ratios like net interest margin, cost-to-income ratio, NPL ratio, coverage ratio, etc. which are then used for writing financial analysis