Question

Select one of the following industries: banks, electric utilities, oil and gas, transportation, insurance, and real estate companies. Discuss the financial analysis concepts that are unique to the industry.

Answer 1

BANKING INDUSTRY AND ITS CONCEPTS ON FINANCIAL ANALYSIS

Banking is an industry that handles cash, credit, and other financial transactions. It provide a safe place to store extra cash and credit. Banks offer savings accounts, certificates of deposit, and checking accounts. Banks use these deposits to make loans. These loans include home mortgages, business loans, and car loans etc. Banks also invest money to build up their reserve of money. Customer's money may be placed in the bank for safe keeping.In most countries the rules for banks are made by the government acting through laws. A central bank adjusts how much money is issued at a particular time. This is a factor in the economy of a country, and the government takes the big decisions.

The nature of banking operations means that there are significant differences in the classification of accounts. Banks use much more leverage than other businesses and earn a spread between the interest income they generate on their assets and their cost of funds.A typical balance sheet consists of the core accounting equation, assets equal liabilities plus equity. Under these accounts, some companies may have other large classes such as PP&E, intangible assets, current assets, accounts receivables, accounts payables etc. A bank, however, has unique classes of balance sheet line items that other companies won’t.The typical structure of a balance sheet for a bank is:

  ASSETS

• Property
• Trading assets
• Loans to customers
• Deposits to the central bank

LIABILITIES

• Loans from the central bank
• Deposits from customers
• Trading liabilities
• Misc. debt

EQUITY

• Common and preferred shares

The reported financial statements for banks are somewhat different from most companies that investors analyze. For example, there are no accounts receivables or inventory to gauge whether sales are rising or falling. But there are several unique characteristics of bank financial statements that include how the balance sheet and income statement should look. However, once investors have a good understanding of how banks earn revenue and how to analyze how the banking system works , then banks financial statements are relatively easy to grasp.