What is the best way to forecast bank performance with financial statements?

1 Income statement

The income statement shows the revenues, expenses, and net income of a bank over a period of time. To forecast the income statement, you need to project the main drivers of each line item, such as interest income, interest expense, non-interest income, non-interest expense, provision for loan losses, taxes, and net income. You can use historical trends, growth rates, margins, and industry averages to estimate these drivers. For example, you can project interest income by multiplying the average interest rate by the average interest-bearing assets, or you can project non-interest income by applying a percentage to the total assets or revenues.

2 Balance sheet

The balance sheet shows the assets, liabilities, and equity of a bank at a point in time. To forecast the balance sheet, you need to link it with the income statement and the cash flow statement, as well as with some key assumptions and ratios. For example, you can link the loan portfolio with the interest income and the provision for loan losses, or you can link the deposits with the interest expense and the liquidity ratio. You can also use the growth rate of assets, the equity multiplier, the capital adequacy ratio, and the asset quality ratio to project the balance sheet items.

3 Cash flow statement

The cash flow statement shows the sources and uses of cash for a bank over a period of time. It consists of three sections: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. To forecast the cash flow statement, you need to adjust the net income for non-cash items, such as depreciation, amortization, provision for loan losses, deferred taxes, and changes in working capital. You also need to account for the cash inflows and outflows from investing and financing activities, such as purchases and sales of securities, loans, and fixed assets, as well as dividends, share repurchases, and debt issuances and repayments.

5 Forecasting tips

Forecasting bank performance with financial statements is not an exact science, but rather an art that requires judgment, experience, and common sense. To improve accuracy and reliability, it is best to draw from multiple sources of information, such as historical data, industry reports, market trends, and management guidance. Utilizing a range of scenarios, such as base case, optimistic case, and pessimistic case can capture the uncertainty and variability of the future outcomes. Additionally, sensitivity analysis can be used to identify the key drivers and risks of your forecast by changing one or more variables and observing the impact on the results. Finally, benchmarking with the actual results of the bank or its peers can evaluate your forecast performance and adjust your assumptions and drivers accordingly.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?