Lecture 2

Balance Sheet
41. Financial statements to be submitted to Bank.

Asset
Cash 38. Maintenance of liquid assets 36. Maintenance of reserve fund. Loans 60. Grant of secured and unsecured credit facilities. 61. Restriction of credit to single customer. 62. Prohibition of credit facilities to director and officer. 63. Restriction on giving of credit facilities. Investment 66. Restrictions on investments. Other Assets 39. Maintenance of assets in Malaysia

Liabilities
Deposits 25. Receiving, taking or acceptance of deposits prohibited except under and in accordance with a valid licence granted under section 6 (4). 34. Deposits to be subject to specified minimum or maximum period, minimum or maximum amount, and other specified terms and conditions.

Equity
37. Maintenance of capital funds.

Why have a Balance Sheet?

To extract information for

Crisis prevention

Identify risk faced

(a) Crisis Prevention

Before the Financial Crisis 1997/98, Malaysia had a large current account deficit of 5% of its GDP. Malaysia was a popular investment destination,
reflected in KLSE activity which was regularly the most active stock exchange in the world

turnover exceeding even markets with far higher capitalization like the NYSE.

Economic Contraction

1997 = 1200 1997 = 1200

July 1998 = 250+

Financial Crisis
Expectations at the time were that the growth rate would continue, propelling Malaysia to a Developed Country status by 2020, a government policy articulated in Wawasan 2020. At the start of 1997:
the KLSE Composite index was above 1,200, the ringgit Ringgit 2.50 to the dollar, Overnight rate was below 7%.

(b) Crisis Identification

Types of risk

Maturity mismatch risk

Maturity mismatch risk arises typically when assets are long term and liabilities are short term. Maturity mismatches create rollover risk:
maturing debts will not be refinanced,

debtor will have to pay the obligation in cash.

Credit Risk
Non Performing Loans
3 months vs 6 months

interest and principle

Commercial Bank
Finance Company Merchant Bank

Example Non-Performing Loans

Currency Risk

Examples of Banks Financial Statement

Refer to Hong Public Bank Berhad

Balance Sheet
Income Statement

Balance Sheet Balance Sheet

Refer to Public Bank Bhd

Observe the asset composition (uses of fund)
Observe the liabilities ( sources of fund) Observe the capital structures

Income Statement Income Statements

Observe the revenue structures

Interest vs non interest

Observe the net interest income and net interest margin Observe the provisions for losses

Assingment
Based on the example of PBB Annual Report, state the purpose of the balance sheet and the income statement Identify the key features of the financial statements of banks. Identify the differences between items reported in the financial statement of Hong Leong Islamic Bank and PBB (conventional bank)

Takeaways o Importance of a banks financial statement o Bank vs non-bank financial statement o Items reported in the financial statement o Reasons for bank regulation

Thank You