Financial result of a Bank

Searching the links between the provision for loans and financial result of a Bank. Based on the size of the provision for loans and size of the profit for the period, we can conclude on the adequacy of financial results reflect the bank. Ukrainian banks often do not reflect adequate size of its profit. 

For example, if the bank increased provisions for credit operations, this suggests that the quality (maintenance) is deteriorating loan portfolio (down the quality of the loan repayment and interest thereon). Increasing reserves for lending bank increases its costs (reserves for subprime loans are on bank expenses, the standard - at the expense of profit), so - lowers profit (increases damage). All natural - no return on loans increases, lower interest income, increased reserves for credit transactions (bank expenses), and as a result - with a high proportion of the allowance for credit transactions the bank is zero financial performance or loss.
However, there are times when low allowances for credit transactions, the bank shows little positive financial result. There is a paradoxical situation: small reserves for lending operations (less than 5%) confirm the high quality loan portfolio - the high level of service these loans.

Consequently, for such high-quality portfolio, the bank should receive higher interest income, and in the absence of a significant increase in administrative costs and revaluation of foreign currency (USD), should show a relatively high positive financial result. Everything is logical - as a result of professional management of the bank - a high quality loan portfolio (there are no significant provisions for lending business, increasing costs of the bank), should lead to positive financial results.
In the case where the bank has low reserves for lending operations (less than 5%), while the remaining costs of the bank's articles do not present significant losses, but the financial result is close to zero, there are questions for such a bank.
With a high quality loan portfolio to obtain zero profits may be due to the following reasons:

1. The bank does not want to show losses. The quality of the loan portfolio is shown as high, when in fact - the quality of credit portfolio is low. In this situation, the bank receives insignificant (formal) interest income from such loans. When careful check of NBU inspection or when the bank will be forced to show the real quality of the loan portfolio, the bank's losses immediately increase by several times.

2. The Bank attracts expensive deposits. Interest expenses covers interest income on loans. At the same time also a certain portion of the loan portfolio of high quality shows, such as it is not. The bank attracts deposits expensive to solve short-term liquidity problems. However, if a bank the main problem - it's poor quality loan portfolio, the involvement of expensive short-term deposits only solves the problem, but in the medium term bank solvency problems only increase by several times. Therefore, whenever the bank offers a higher interest rate than the market, it is necessary first to analyze the dynamics of its income and expenditure, as well as the quality of its loan portfolio.

Indicator of the adequacy of the financial result of a bank = 

If the provision for loan not exceeding 5% and at the same time bank’s profit is practically zero (ROE <1%), manipulations in reporting are highly possible.