In banking industry, when we talk about balance sheet growth. There are many confusion arise in the mind of investors which I am sharing with you.
1st : Return on Assets and Return on Equity
Suppose, any CEO presents his balance sheet growth on the basis of return on assets and return on equity. It means company has achieved high return on limited assets. On the other side, when, he or she told that we get more return on limited equity capital by publishing in media. Both declarations create confusion because main assets of banks are 'given loan'. Main source of earning of bank is interest. It means company has given limited loan and earned high interest on it. This is high return on assets. Yes! But credit risk is also with this. Means, borrowers will be unable to repay interest and principal as specified in the loan contract. A bank never explains detail of expected defaulters. It is ok, we can find unplayable money from bank's balance sheet. But, it is most difficult to get idea of expected default borrowers in bank's balance sheet. Financial crisis in USA financial market is also the example of my confusion. All are showing high return on assets but what happened when they become liquidated. So, showing return on assets in which given loans are included, is not better way for showing company's progress.
2nd : High Amount of Deposits
Bank's main aim is to get cheap money in the form of deposits and invest by giving loan at high rate of interest. It means, deposits in banks is treated just like loan to bank. Now, bank starts to do trading on equity. But, depositors have rights to withdraw money. So, by showing high growth of deposits is the way of high return on equity is also one of big confusion. Read more leverage effect on ROE.
3rd : Off - Balance Sheet Items
There may be lots of liabilities which can not be mentioned in bank's balance sheet. Wikipedia's Off-balance-sheet content's given example is the best proof of this.
Related : Importance of Balance Sheet
1st : Return on Assets and Return on Equity
Suppose, any CEO presents his balance sheet growth on the basis of return on assets and return on equity. It means company has achieved high return on limited assets. On the other side, when, he or she told that we get more return on limited equity capital by publishing in media. Both declarations create confusion because main assets of banks are 'given loan'. Main source of earning of bank is interest. It means company has given limited loan and earned high interest on it. This is high return on assets. Yes! But credit risk is also with this. Means, borrowers will be unable to repay interest and principal as specified in the loan contract. A bank never explains detail of expected defaulters. It is ok, we can find unplayable money from bank's balance sheet. But, it is most difficult to get idea of expected default borrowers in bank's balance sheet. Financial crisis in USA financial market is also the example of my confusion. All are showing high return on assets but what happened when they become liquidated. So, showing return on assets in which given loans are included, is not better way for showing company's progress.
2nd : High Amount of Deposits
Bank's main aim is to get cheap money in the form of deposits and invest by giving loan at high rate of interest. It means, deposits in banks is treated just like loan to bank. Now, bank starts to do trading on equity. But, depositors have rights to withdraw money. So, by showing high growth of deposits is the way of high return on equity is also one of big confusion. Read more leverage effect on ROE.
3rd : Off - Balance Sheet Items
There may be lots of liabilities which can not be mentioned in bank's balance sheet. Wikipedia's Off-balance-sheet content's given example is the best proof of this.
Related : Importance of Balance Sheet
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