Thread by @FincademyIn

How to analyse the Bank’s Cash Flow Statement ?

A Thread 🧵👇

1/ The Cash Flow statement of a bank is quite different from that of normal businesses. The primary reason being that the bank’s operation is that of accepting deposits and advancing loans. This usually forms the Cash Flow from the Financing part for other businesses.

2/ For a Bank, Cash Flow for Operations (CFO) contains adjustments related to the Bank's core operations, i.e, accepting deposits, and advancing loans. Giving out more loans means an outflow of cash, hence advancing loans reduce the cash flow from operations.

3/ Getting more deposits means an inflow of cash into the bank, hence it increases the cash flow from operations. Bank’s also have treasury operations, where it buys and sells various government and other securities. Buying reduces cash and selling increases cash.

4/ Cash Flow from Operations also contains adjustments related to non-cash items such as Depreciation and Provisions created for NPA’s and in some cases even for standard accounts. Both Depreciation and Provisions are added back to the PAT and hence result in an increase in CFO.

5/ What would be the right way to look at the cash flow statement of a bank ? The answer to this is not straight. If a bank is getting more deposits, it would result in a higher CFO, but Growth for a Bank would come from advancing loans, which would reduce the CFO.

6/ So to come to a conclusion, it would be best to also evaluate the Balance Sheet of the bank : its liquidity position and the break-up of the liability side. Deposits which banks get are usually of a short-term nature, while the loans it advances are for a longer-term.

7/ In this context, it is necessary to evaluate if the bank would face a liquidity crunch during bad times when depositors line-up to take their money back. So, if a bank is aggressively growing its advances, it is necessary to look at how it is funding those advances.

8/ Whether it is funding it by issuing debt securities, raising equity capital, by the deposits it is getting or the profits it is generating. Information regarding debt securities issued/redeemed and equity capital raised is found in Cash Flow from Financing (CFF).

9/ Issuing debt and equity securities result in an inflow of cash, thereby increasing the CFF and the cash balance of the bank. Banks would have to raise funds either to meet regulatory requirements or to fund its growth. Repayment would result in outflow, hence reducing CFF.

10/ Dividends paid reduces CFF but, because money is the raw material for banks, banks do not usually give out big dividends, it would rather keep it to build up its arsenal for bad times and accelerate growth during good times.

11/ Unpopular Fact - Loans given out during good times, turn NPA during bad times. Being back loaded in nature, it is important to evaluate the management and past lending track record also.

12/ CFF also includes adjustments related to finance availed by banks by way of refinancing from other financial institutions. An increase in re-finance results in cash inflow and reduction/repayment results in an outflow of cash.

13/ Cash flow from Investing Activities is similar to other businesses, cash outflow due to purchase of fixed assets, investments made reduces CFI while cash inflow due to sale of assets, dividends from subsidiaries, etc increase cash balance and CFI.

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