B A N K P R O F I T A B I L I T Y

1. B A N K P R O F I T A B I L I T Y PROPOSALS FOR A REVISION OF OECD BANKING STATISTICS AND INDICATORS Working Party on Financial Statistics 13-14 October 2008 By Hakan Atasoy, Consultant

2. PURPOSE • Review the list of financial statement items included in “OECD-Bank Profitability” publication in accordance with the IMF’s “Financial Soundness Indicators (FSI)” for deposit takers • Take into account evolving international accounting standards and their impact on banking statistics. Vast implementation of these standards among the member countries (25 over 30 and 2 from 2011 for listed companies) • This document has been presented after taking into account the discussions of the countries’ volunteer experts in electronic discussion group (EDG)

3. BALANCE SHEET

4. ASSETS • Cash and balances with central bank • Loans and receivables due from banks • Loans and receivables due from customers • Financial assets at fair value through profit or loss • Available for sale financial assets • Held to maturity investments • Derivatives-hedge accounting • Tangible and intangible assets • Interest in associates and joint ventures • Other assets

5. ACCOUNTING FOR ASSETS • Loans and receivables: Amortized cost (IAS 39) • Held to maturity investments: Amortized cost (IAS 39) • Financial assets at fair value through profit or loss: Fair value (IAS 39) • Available for sale financial assets: Fair value. Unrealized gains and losses disclosed in total equity (IAS 39) • Derivatives-Hedge accounting: Fair value (IAS 39) • Tangible and intangible assets: Cost model or Revaluation model (IAS 16, 38, 40) • Interest in associates and Joint ventures: Equity method (IAS 28, 31)

6. MODIFICATIONS-ASSETS • Classification based on intentions of management. Similar classification in US GAAP (FASB 115, FASB 159). • Not instrument based approach. However, subdivisions by instruments added (Debt, Equity instrument etc). • Loans and receivables cover both loans and deposit placements in line with bank reporting practices. • Tradable loans or loans that have active market classified as trading, available for sale or held to maturity. Loans can be designated as fair value after initial recognition. • Financial derivatives divided as trading and hedging. Trading derivatives disclosed in Fair Value through Profit or Loss.

7. LIABILITIES • Financial liabilities at fair value through profit or loss • Due to banks • Due to customers • Debt certificates • Subordinated liabilities • Derivatives-hedge accounting • Provisions • Other liabilities • Total equity

8. ACCOUNTING FOR LIABILITIES • Financial liabilities measured at fair value (IAS 39) • Financial liabilities at fair value through profit or loss (trading derivatives, short selling, liabilities intended for repurchase in the short term, liabilities designated at fair value) • Derivatives-hedge accounting • Financial liabilities measured at amortized cost (IAS 39) • Due to banks • Due to customers • Debt certificates • Subordinated liabilities • Provisions (IAS 19, 37)

9. MODIFICATIONS-LIABILITIES • Due to banks and due to customers cover both loan borrowings and deposits in line with bank reporting practices. • Provision for contingencies and charges and subordinated liabilities disclosed separately. • Negative values from trading derivatives disclosed in financial liabilities at fair value through profit or loss; negative values from hedging derivatives disclosed in derivatives-hedge accounting. • Detailed breakdown of total equity: Capital & reserves, Revaluation changes, Net profit or loss and Minority interest. • Goodwill not deducted from total equity but an asset of the acquirer.

10. INCOME STATEMENT

11. INCOME STATEMENT • Total profit or loss from continuing operations • Net interest income: (Interest income – Interest expense) • Net non-interest income: (Dividend income + Net fees & commissions + Gains / Losses on financial instruments + Share of earnings of associates & Joint ventures + Other income) • Operating expenses: (Staff expenses + Administrative expenses + Other expenses) • Impairment losses on financial assets: (Loans + Other) • Tax expense • Total profit or loss from discontinued operations after tax • Net profit

12. MODIFICATIONS-INCOME STATEMENT • Seperation of income statement as continuing and discontinued operations in accordance with IFRS 7. Similar seperation in US GAAP (SFAS 144). • No extraordinary item in accordance with IAS 1. • Fees and commissions shown on a net basis. • New added items • Dividend income • Share of earnings of associates & joint ventures • Administrative expenses.

13. FINANCIAL SOUNDNESS INDICATORS AND MEMORANDUM ITEMS

14. FSI – Capital Adequacy • Regulatory capital to risk weighted assets (ECB + IMF-core) • Regulatory tier 1 capital to risk weighted assets (ECB + IMF-core) • Tier 1 capital to assets (IMF-encouraged; Tier 1 used as numerator for cross-border consolidated data) • Required memorandum items: Regulatory capital, Risk weighted assets, Tier 1 capital • Defer to Basel I and Basel II as the standards for compiling supervisory-based underlying series, acknowledging national variations in implementation.

15. FSI – Asset Quality-I • Nonperforming loans to gross loans (ECB, IMF-core) • Nonperforming loans net of specific provisions to regulatory capital (ECB, IMF-core) • Sectoral distribution of loans to gross loans (ECB, IMF-core) • Residential real estate loans to gross loans (ECB, IMF-encouraged) • Commercial real estate loans to gross loans (IMF-encouraged) • Foreign currency denominated loans to gross loans (IMF-encouraged) • Foreign currency denominated liabilities to total liabilities (IMF-encouraged) • Gross asset/liability position in financial derivatives to tier 1 capital (IMF-encouraged, tier 1 used as denominator for cross-border consolidated data) • Large exposures to regulatory capital (IMF-encouraged)

16. FSI – Asset Quality-II • Required memorandum items: • Gross loans (Gross loans ≠ Loans and receivables) • Non-performing loans (Non-performing loans ≠ Impaired loans) • Specific provisions (Specific provisions ≠ Allowances for impairment) • Sectoral distribution of gross loans • Residential/Commercial real estate loans • Foreign currency denominated loans/liabilities • Large exposures • Definitions of the memorandum items in line with IMF Guide.

17. FSI – Earnings & Profitability-I • Return on equity-Net income to average tier 1 capital (ECB, IMF-core, tier 1 used as denominator for cross-border consolidated data) • Return on assets-Net income to average assets (ECB, IMF-core) • Return on risk weighted assets-Net income to average RWA (ECB) • Total profit or loss before tax from continuing operations to average assets (ECB) • Net interest income to average assets (ECB) • Net non-interest income to average assets (ECB) • Operating expenses to average assets (ECB) • Net impairment losses on financial assets to average assets (ECB)

18. FSI – Earnings & Profitability-II • Net interest income to total income (ECB, IMF-core but a slight difference in definition) • Net non-interest income to total income (ECB) • Net fees and commissions income to total income • Gains (losses) on financial instruments to total income (ECB, IMF-encouraged but a slight difference in definition) • Operating expenses to total income (ECB, IMF-core but a slight difference in definition) • Staff expenses to operating expenses (ECB, IMF-encouraged but a slight difference in definition)

19. FSI – Earnings & Profitability-III • Required memorandum items: • Average assets • Average tier 1 capital • Average risk weighted assets • Slight differences for some ratios: • Total income includes fees and commissions on net basis • Fees and commissions expense not classified as operating expenses in line with reporting practices • Total income and expense excludes profit from discontinued operations.

20. FSI – Liquidity and Sensitivity to Market Risk-I • Core liquid assets to total assets (IMF-core) • Broad liquid assets to total assets (IMF-core) • Core liquid assets to short-term liabilities (ECB, IMF-core) • Broad liquid assets to short-term liabilities (ECB, IMF-core) • Customer deposits to gross non-interbank loans (IMF-encouraged) • Cash and loans to banks to amounts due to banks (ECB) • Net open position in foreign exchange to regulatory capital (IMF-core) • Net open position in equities to regulatory capital (IMF-encouraged)

21. FSI – Liquidity and Sensitivity to Market Risk-II • Required memorandum items: • Core/Broad liquid assets • Short-term liabilities • Customer deposits (Customer deposits ≠ Due to customers) • Net open position in foreign exchange • Net open position in equities • Definitions of the memorandum items in line with IMF Guide.

22. Consolidation and Coverage • IMF : DCCBCS and/or CBCSDI • ECB: CBCSDI excluding insurance sector • IAS 27: Cross sector consolidation basis irrespective of sector • OECD: Proposal in line with IMF • Current Coverage: • Commercial banks, Cooperative banks, Savings banks • Possible Extension of the coverage, in line with IMF: • Development banks, Credit unions, investment banks, mortgage banks, building societies, micro-finance institutions and any other financial institutions that take deposits • Institutions that are banks in legal sense but not deposit takers

23. THANK YOU