Project a bank's CF Statement? modeling help
Hi, I'm prep for my FIG interview. I have the BS and IS down, but still confused abgt CF statement. 1) do analysts actually model CF statements in FIG group, especially for banks? I've seen some models that just use cash as a plug number to balance the BS.... is that right?
2) also a Q on charge offs.... I know it helps calculate the ending allowance balance... but the charge off $$ doesn't hit any IS or BS line items?? this just feels weird...
You are correct about not forecasting CF. I use cash as a plug as well.
hmm interesting. curious are you currently in FIG?
Total waste of time to try and model cash flows for banks or insurers. You only need to model the balance sheet and income statement.
Why do you think charge offs do not show up on the IS?
Charge offs only affect the balance sheet whereas loan loss provisions are taken through the income statement.
For example, let's take a bank that has $1000 of loans of which $10 are non-performing loans (NPLs). The bank might hold hold $5 of loan loss reserves (a counterbalance, similar to accumulated depreciation held against gross PP&E). If the bank charges off a bad loan, the NPL balance declines by 5 while the loan loss reserve also declines by 5. This has zero income statement impact.
In this same example, let's say the bank decides to increase its loan loss reserves to $10. It takes a $5 charge to the income statement and builds up its loan loss reserves to $10. This has both an income statement and balance sheet impact.
See page 4 http://files.shareholder.com/downloads/ONE/1102086948x0x854371/74E84F83…
In your example, yes, it the LLR release perfectly offsets the charge off, then yes the net impact is 0. In practice though, they rarely if ever completely offset each other.
Both a charge off and an increase to the the LLR have a negative impact on the income statement.
I hope for your clients sake that you do not work in fig
Did I say that they always completely offset each other?
By your own admission, that's not always true. Hence why banks have reserve builds and reserve drawdowns.
Is there a way to forecast cash flow statement without IS and BS? (Originally Posted: 02/19/2013)
Can I simply forecast cash flow statement without projecting income statement and balance sheet? Thanks
Where would you get numbers for operating activities (net income, D&A, etc) and working capital (current assets / liabilities)? Even if you wind up sourcing the numbers from somewhere, your model would then turn into just a pretty assortment of numbers.
More experienced monkeys, please feel free to chime in.
I mean, you could, but it would be pretty meaningless I would imagine.
sure man, you can do whatever you want. go for it.
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