Analysis of Financial Institutions

Overview

Course code:
Undergrad: ACCT-GB 6025
Grad: ACCT-GB-3321

Co-taught with Professor Stephen Ryan

Takeaways

• Unique aspects of their business model
• Overview of the key assets and liabilities
• Overview of key revenue and expense items
• Key accounting standards and their impact on financial statements
• Key performance metrics and drivers of ROE and price-to-book ratios

Prerequisites

Core course in Financial Accounting

Materials

We will not require a textbook. We will distribute materials in class. We will go through several financial statements in class. Some of the key companies are listed below:

• Wells Fargo
• Bank of America
• Citigroup
• Silicon Valley Bank

Exams and Grading

There are no in-class quizzes or midterms. There is a final exam.

• Please read about the penalty for missing classes above.
• Assignments: 50%. They will be due at the beginning of each class except the first class.
• Final exam: 50%

Assignments

• Machine-graded spreadsheet-based Almaris assignments: The link is on Brightspace
• Assignments to be turned in on paper: Brightspace

Penalty for missing classes and unapproved use of devices in class

Paper and pencil

Please bring paper and pen/pencil to take notes in class.

Unapproved device usage

Most of us are now addicted to devices, which impedes learning. You are allowed to use devices only when I ask you to use your computer in class. Otherwise, ALL device use is strictly prohibited, unless you have a qualified disability which allows you to use devices in class. Students using devices when not approved will be asked to leave the classroom. Each time you are asked to leave the class, you will be marked absent. This is very painful, awkward, and disruptive, and I hope I never have to do this, but I will not hesitate to enforce this policy.

Reasons for requiring attendance

Attendance is required for several reasons. First, you incorrectly assume you can catch up on a missed class by watching a recording (if available). Videos do not engage your brain as much as a live class. Second, less than 20% of you watch the recording (if available). You are then lost in class, which provides the wrong signals to me as an instructor. Third, your absence hurts class discussions. Fourth, you miss out on feedback if you do not work through the questions I pose in class. Fifth, I lose the feedback since there are fewer questions.

Attendance policy enforced after the add/drop period

The attendance policy below will be in effect only after the add/drop period.

Attendance sheet

After entering the class, please mark yourself present on the OneDrive sheet within the first 20 minutes (link posted on Brightspace after the add/drop period). You will be marked absent if you are more than 20 minutes late, unless it is due to factors beyond your control (traffic, subway delays, or interviews running late). You will also be marked absent if you leave the class early unless you have my permission or get it afterward. You will get an F in the course if you are caught cheating on the attendance sheet.

Mark yourself excused on the attendance sheet for excused absences

Without mandatory attendance, attendance is often below 50%. Therefore, though I dislike doing this, I penalize absences. If you anticipate being absent for good reasons, please email me well in advance. Please enter Excused on the attendance sheet described below to avoid the penalty if approved. You must update it; I will not mark you excused. If you miss a class due to emergencies and cannot tell me in advance, do not panic. Take care of the emergency first, and then email me. I will permit you to change the Absent to Excused. But if you miss a class without a valid reason, there is a penalty, as stated below.

Penalty for missing classes

For sections meeting in 150-190 minute sessions, you will lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY missed session unless you were explicitly excused via email. Thus, if you miss two class sessions, you will lose two grades, and so on.

For sections meeting in 75-80 minute sessions, you will lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY TWO missed sessions unless you were explicitly excused via email. Thus, if you miss four class sessions, you will lose two grades, and so on.

Seating and name tags

Please sit in the same seat in every class and display your name tags. For Zoom classes, you must keep your video on AT ALL TIMES. You must also have a good working headset or mic, as it is extremely rude to be inaudible and force me to ask you to repeat yourself.

Almaris Assignments

• When and how to access the tests: After the first week of class, you can view the online assignments at https://www.almaris.com/assess/ using your official NYU email (no aliases) and the most recent password emailed to you by Almaris. The Almaris password is different from NYU or Stern passwords.
• Support: Almaris staff will reply to your emails only if they pertain to technical issues with the Almaris system, not deadline extensions. Please contact Stern IT for technical issues with your network.
• Password retrieval: To retrieve the password, use your full email with the domain name as it appears in Brightspace. The domain name could be @nyu.edu for some of you, while it could be @stern.nyu.edu for others. I do not control this mess.
• Length: Some assignments are short; others are long. Please manage your time.
• NO EXTENSIONS will be granted for any reason except medical or family emergencies. If you have religious or personal conflicts, please submit the assignments early. The related materials are covered well in advance of the assignments. Please do not email me to request extensions unless you have a medical or family emergency.
• Deadlines: The Almaris system lists the deadlines. I may update the deadlines as the course progresses. You cannot submit after a deadline. Whatever your score is for the last submission before the deadline becomes your final score. Assignments are marked LATE if you do not meet or exceed the passing score described below before the deadline.
• Passing score: Assignments have a passing score of 100% or less.
  • Passing score 100%: I set the passing score to 100% on an assignment if I want you to ace it. In reality, there is no passing score. Whatever score you get on your last attempt is your final score. You are graded on accuracy but not the number of attempts. There is a difference between passing a test and getting full credit. If you get 80/100 on your final attempt, you pass, but you do not score 100.
  • Passing score less than 100%: I set the passing score to less than 100% on an assignment if I do not require you to ace it. Any score above that score is rounded up to 100%. For example, if the passing score is 90%, and you get 93%, your score is rounded up to 100%. I do the rounding up in a separate spreadsheet. You will see only the raw score online.
• Free to you and NYU: Almaris is not affiliated with Stern in any way. It is offering these tests to Stern at no charge.
• Data privacy and no marketing: Your data is not shared with any third party. It is not used for any promotion or marketing.
• No data retention: Your data is not retained. It is deleted in approximately two weeks after the end of the course.

Almaris Exams

• Please log in to Almaris as soon as you receive these instructions via email. You will see inactive links to your exams and instructions.
• Unless communicated to you differently in class, the midterm exam covers topics covered until the midterm, and the final exam covers the entire course.
• The instructions at the top of the login screen will tell you how many parts the exam has and their weights.
• Please report any problems such as wrong deadlines or missing parts of the exam to me immediately.
• Log in to Almaris right before your exam. Refresh your screen to see active links for the exam.
• Your final score on each part of the exam will be max(score1, score2 - 7, score3 - 14, score4 - 21, score5 - 28).
• You must answer all questions without help from another student or anyone else. Any such communication will be construed as cheating. If the exam is online, email your questions to the TA AND me. Whichever one of us reads the message first will respond. If the exam is held in class, you can ask the proctor.
• If the exam is online, please keep your email open during the exam and check it periodically. Any updates/corrections will be sent via email.
• Manage your time. Extra time will NOT be allowed.
• If you want us to grade your incomplete or incorrect spreadsheet manually, submit it within FIVE MINUTES of the end of the exam. Do not email it; look for Assignment on NYU Brightspace. If you submit the spreadsheet for manual grading, you will be considered to have used up your five attempts. Therefore, your maximum score on that spreadsheet can only be 72/100 due to the penalty for multiple attempts.

Important computer tips for the final

• DO NOT WORK ON A SPREADSHEET WITHIN A BROWSER. Save the spreadsheet to your computer, work on it, and save it periodically. If you navigate away from the spreadsheet in a browser, ALL YOUR WORK WILL BE LOST.
• Organize your computer files and designate a directory to save your exam files.
• Restart your computer before the exam to minimize problems.
• Bring an external mouse with a scroll wheel to speed up test-taking. Do not waste time using the trackpad or the internal mouse.
• Maximize screen space by hiding the Excel ribbon and browser menus. The more the screen you see, the faster and more accurate you are.
• Bring a computer with as big a screen as possible.
• Do not use an unfamiliar computer.

NYU Stern Policies

Please read the NYU Stern Policies for this course.

Administrative and System Requirements

Videotaping

Classes are normally not videotaped, except for EMBA classes. If the class is videotaped, the link is posted to Brightspace by NYU Stern IT within a day.

Registered Students Only

Only registered students can attend classes. I cannot override this NYU Stern rule. We do not allow unregistered students to "audit" a class.

Albert and NYU Brightspace

You must be in Albert and NYU Brightspace before starting the first class. If you register late, there might be a delay of a day before you appear in these systems. If you cannot access these systems after a day, please contact the relevant REGISTRAR. I cannot add you to these systems regardless of what someone in IT tells you.

Computer Requirements

You need to bring a computer to every class. If you have any technical questions, please contact Stern IT at (212-998-0180) or servicedesk@stern.nyu.edu, or NYU IT at +1 (212) 998-3333 or askit@nyu.edu. I cannot help you with your computer issues.

NYU.EDU versus STERN.NYU.EDU

Almost all NYU systems (Brightspace, Class emails, Zoom, Excel download, Excel Bootcamp, Gemini, important messages from Wasserman Career Center, and Moses Center) require you to sign up using your NYU.EDU profile. The STERN.NYU.EDU profile will fail.

Even if you forward your NYU.EDU email to STERN.NYU.EDU, the spam will not be forwarded, and some important messages might be in your NYU.EDU spam.

Therefore, I strongly recommend creating a separate browser profile for NYU.EDU and dragging the browser shortcut to your desktop. This way, when you log in, you will use the NYU.EDU profile, not the STERN.NYU.EDU profile. If you are not sure how to do this, ask AI or contact NYU/Stern IT.

Excel 365 Desktop Version Required

The desktop version of Excel 365 is required. Excel Online and Google Sheets are NOT OK. Read this page regarding Excel 365 Desktop access for NYU students.

Help and Office

• Instructors
  • Dan Gode: dgode@stern.nyu.edu, 212-998-0021, Office: KMC 10-86.
  • Stephen Ryan: sr1@stern.nyu.edu, 212-998-0020, Office: KMC 10-73
• Teaching assistant: Please check NYU Brightspace

Topics

Topic 1: An introduction to banks

Core functions of a bank

• Financial intermediation between depositors and borrowers: How banks use leverage to boost ROE
• Transaction services

Unique aspects of a bank's business model

• Why the metrics used for non-financial businesses do not apply
• A balance-sheet-based financial institution business versus an income-statement-based industrial business

Topic 2: Simple transactions for a bank

• Raise equity from shareholders
• Borrow money from financial markets by issuing bonds
• Attract deposits from retail and corporate customers
• Lend money to borrowers
• Earn interest income on loans to borrowers
• Charge fees to borrowers
• Incur interest expense on deposits
• Charge fees to depositors
• Earn interest income on cash
• Incur interest expense on borrowings from financial markets
• Incur operating costs
• Collect part of the money lent to borrowers
• Depositors withdraw cash
• Repay part of the amount borrowed from financial markets
• Buy back shares
• Pay dividends

Topic 3: Building simple models for a bank and valuation metrics

Unconstrained equity models

• Deposit drivers and deposit-constrained models
• Loan drivers and loan-constrained models

Constrained equity models

• Why are banks required to have equity
• How leverage and the interest rate difference between deposits and loans boost ROE and risk
• How liquidity lowers ROE and risk

Topic 4: Key valuation metrics

• Dividend discount model
• Dividend yield
• Price-to-book ratio
• Price-to-earnings ratio

Topic 5: Interest-bearing assets and liabilities

Amortization tables

• Cash flows versus accruals
• Building amortization tables efficiently
• Par, premium, and discount bonds

Amortized costs versus fair values

• Amortized costs
• Fair values
• Mark-to-market accounting

Topic 6: Interest rate and exchange rate risks

Interest rate risk

• Duration
• Convexity
• Forward rates
• Leverage-adjusted duration gap

Inflation and exchange rates

• Interest rate parity

Topic 7: Credit risk

Balance sheet classification

• Contra-assets: Allowances for loan losses
• Liabilities: Allowance for unfunded lending commitments and loan guarantees

Credit loss measurements

• Incurred losses versus current expected credit loss (CECL) models
• Undiscounted versus discounted CECL models

Topic 8: Debt securities

Debt securities

• Trading securities
• Available-for-sale securities
• Held-to-maturity securities

Topic 9: Balance sheets of Wells Fargo and Silicon Valley Bank

Key assets

• Assets held for liquidity
• Trading account assets
• Interest-earning assets: Available for sale securities, Held-to-maturity securities, Whole loans
• Loan loss reserves
• Deferred tax assets
• Intangible assets and goodwill

Key liabilities

• Deposits
• Debt
• Guarantees
• Employee liabilities
• Deferred tax liabilities

Key equity accounts

• Paid-in capital
• Retained earnings
• Accumulated other comprehensive income

Topic 10: Flow statements of Wells Fargo and Silicon Valley Bank

Income statements

• Interest income
• Fee income and trading gains (losses)
• Interest expense
• Operating expenses
• Bad debt expense
• Tax expense

Other comprehensive income

• Unrealized gains and losses on available-for-sale securities
• Unrealized gains and losses on cash flow hedges securities
• Cumulative translation adjustments
• Pension and OPEB items

Cash flow statements

• Ambiguity of cash flow classifications
• Operating items
• Investing items
• Financing items

Topic 11: Key metrics for Wells Fargo and Silicon Valley Bank

Balance sheet metrics

• Capital adequacy: Tier I, II, and III capital ratio
• Liquidity
• Adequacy of loan loss reserves
• Matching of asset and liability durations

Income statement metrics

• Interest yield rate
• Interest expense rate
• Net interest margin
• Provision for bad debts expense ratio
• Efficiency ratio (aka expense ratio)

ROI and valuation metrics

• ROA and ROE
• Payout ratios
• Price-to-book ratio
• Price-to-forward earnings ratio

Topic 12: Structured transactions and off-balance-sheet financing

Special purpose entities

• Voting interest entities versus variable interest entities
• Separation from the parent

Securitization

• Off-balance-sheet financing and capital adequacy
• Bankruptcy remoteness
• Conditions for sale accounting

Derivatives

• Fair value hedges versus cash flow hedges
• Interest rate swaps, forwards and futures, credit default swaps