Banking Terms Used In Financial Statements
Advances to deposit ratio The ratio of total loans and advances to customers relative to total customer deposits. A low advances to deposits ratio demonstrates that customer deposits exceed customer loans resulting from emphasis placed on generating a high level of stable funding from customers.
Asset Backed Securities (ABS) Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools of residential or commercial mortgages and in the case of Collateralised Obligation (CDOs), the reference pool may be ABS.
Alt-A Loans regarded as lower risk than sub-prime, but they share higher risk characteristics than lending under normal criteria.
Attributable profit to ordinary shareholders : Profit for the year after minority interests and the declaration of dividends on preference shares classified as equity.
Collateralised Debt Obligations (CDOs): Securities issued by a third party which reference ABSs and/or certain other related assets purchased by the issuer. CDOs may feature exposure to sub-prime mortgage assets through the underlying assets.
Collateralised Loan Obligation (CLO)A security backed by the repayments from a pool of commercial loans. The payments may be made to different classes of owners (in tranches).
Commercial Mortgage Backed Securities (CMBS)
Commercial Mortgage Backed Securities are securities that represent interests in a pool of
commercial mortgages. Investors in these securities have the right to cash received from future
mortgage payments (interest and/or principal).
Commercial Real Estate Commercial real estate includes office buildings, industrial property, medical centres, hotels, malls,retail stores, shopping centres, farm land, multifamily housing buildings, warehouses, garages, and industrial properties. Commercial real estate loans are those backed by a package of commercial real estate assets.
Contractual maturities Contractual maturity refers to the final payment date of a loan or other financial instrument, at which point all the remaining outstanding principal will be repaid and interest is due to be paid.
Cost-income ratio Represents the proportion of total costs to total income.
Cover ratio Represents the extent to which non-performing loans are covered by impairment allowances.
Commercial paper (CP) An unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date.
Core Tier 1 Capital comprises called-up ordinary share capital and eligible reserves plus minority interests, less goodwill and other intangible assets and deductions relating to excess expected losses over eligible provisions and securitisation positions as specified by the FSA (Financial Services Authority).
Core Tier 1 Capital ratio Core Tier 1 capital as a percentage of risk weighted assets.
Credit Default Swaps (CDSs) A credit derivative is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection. A credit default swap is a contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
Credit risk spread The credit spread is the yield spread between securities with the same coupon rate and maturity structure but with different associated credit risks, with the yield spread rising as the credit rating worsens. It is the premium over the benchmark or risk-free rate required by the market to take on a lower credit quality.
Customer deposits Money deposited by all individuals and companies which are not credit institutions. Such funds are recorded as liabilities in the Group’s balance sheet under Customer accounts.
Debt restructuring This is when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. It can involve altering the repayment schedule as well as debt or interest charge reduction.
Debt securities Debt securities are assets on the Group’s balance sheet and represent certificates of indebtedness of credit institutions, public bodies or other undertakings excluding those issued by Central Banks.
Debt securities in issue Debt securities in issue are transferrable certificates of indebtedness of the Group to the bearer of the certificate. These are liabilities of the Group and include certificates of deposits.
Delinquency A debt or other financial obligation is considered to be in a state of delinquency when payments are overdue. Loans are considered to be delinquent when consecutive payments are missed.
Dividend per share Represents the entitlement of each shareholder in the share of the profits of the company. Calculated in the lowest unit of currency in which the shares are quoted.
Exposures Credit exposures represent the amount lent to a customer, together with an undrawn commitments
First/Second Lien First lien: debt that places its holder first in line to collect compensation from the sale of the underlying collateral in the event of a default on the loan.
Second lien: debt that is issued against the same collateral as higher lien debt but that is subordinate to it. In the case of default, compensation for this debt will only be received after the first lien has been repaid and thus represents a riskier investment than the first lien.
Funded/unfunded exposures Exposures where the notional amount of the transaction is funded. Represents exposures where there is a commitment to provide future funding is made but funds are not released.
Guaranteed mortgages Mortgages for which there is a guarantor to provide the lender a certain level of financial security in the event of default of the borrower.
Home Loan A loan to purchase a residential property which is then used as collateral to guarantee repayment of the loan. The borrower gives the lender a lien against the property, and the lender can foreclose on the property if the borrower does not repay the loan per the agreed terms. Also known as a residential mortgage.
Impaired loans ‘Impaired loans’ comprise loans where individual identified impairment allowance has been raised and also include loans which are collateralised or where indebtedness has already been written down to the expected realisable value. The impaired loan category may include loans, which, while impaired, are still performing.
Impairment allowances Impairment allowances are a provision held on the balance sheet as a result of the raising of a charge against profit for the incurred loss. An impairment allowance may either be identified or unidentified and individual or collective.
Individually/Collectively Assessed Impairment is measured individually for assets that are individually significant, and collectively where a portfolio comprises homogenous assets and where appropriate statistical techniques are available.
Typically assets within the Wholesale Banking business of the Group are assessed individually
whereas assets within the Consumer Banking business are assessed on a portfolio basis.
Internal Ratings Based (IRB) approach
The IRB approach is used to calculate risk weighted assets in accordance with the Basel Capital
Accord where capital requirements are based on a firm’s own estimates of certain parameters.
Leveraged Finance Loans or other financing agreements provided to companies whose overall level of debt is high in relation to their cash flow (net debt : EBITDA) typically arising from private equity sponsor led acquisitions of the businesses concerned.
Liquidity and Credit enhancements Credit enhancement facilities are used to enhance the creditworthiness of financial obligations and cover losses due to asset default. Two general types of credit enhancement are third-party loan guarantees and self-enhancement through over-collateralisation. Liquidity enhancement makes funds available if required, for other reasons than asset default, e.g. to ensure timely repayment of maturing commercial paper.
Loans and advances : This represents lending made under bilateral agreements with customers entered into in the normal course of business and is based on the legal form of the instrument. An example of a loan product is a Home loan Loan-to-value ratio
The loan-to-value ratio is used in determining the appropriate level of risk for the loan and therefore the correct price of the loan to the borrower.The loan-to-value ratio is a mathematical calculation which expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property.
Loans past due Loans on which payments have been due for up to a maximum of 90 days including those on which partial payments are being made.
Mezzanine capital Financing that combines debt and equity characteristics. For example, a loan that also confers some profit participation to the lender.
Mortgage Backed Securities (MBS) Securities that represent interests in a group of mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal).
Mortgage related assets Assets which are referenced to underlying mortgages.
Medium Term Notes (MTN) Corporate notes continuously offered by a company to investors through a dealer. Investors can choose from differing maturities, ranging from nine months to 30 years.
Net asset value per share Ratio of net assets (total assets less total liabilities) to number of shares outstanding.
Net interest income The difference between interest received on assets and interest paid on liabilities. Group net interest income includes the impact of structural hedges which function to reduce the impact of the volatility of short term interest rate movements on equity and customer balances that do not re-price with market rates.
Net interest margin The margin is expressed as net interest income divided by average interest earning assets.
Net interest yield Interest income divided by average interest earning assets less interest expense divided by average interest bearing liabilities.
Net principal exposure Net principal exposure is the gross principal amount of assets that are not protected by CDSs. It includes assets that benefit from monoline protection, except where this protection is purchased with a CDS.
Normalised earnings Profit attributable to ordinary shareholders adjusted for profits or losses of a capital nature; amounts consequent to investment transactions driven by strategic intent; and other infrequent and/or exceptional transactions that are significant or material in the context of the Group’s normal business earnings for the period
Prime Prime mortgages have a higher credit quality and would be expected to satisfy the criteria for inclusion into Government programs
Private equity investments Equity securities in operating companies generally not quoted on a public exchange. Investment in private equity often involves the investment of capital in private companies. Capital for private equity investment is raised by retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
Profit attributable to ordinary shareholders’
Profit for the year after minority interests and dividends declared in respect of preference shares classified as equity.
Renegotiated loans Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a concessionary rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will be individually impaired where the renegotiated payments of interest and principal will not recover the original carrying amount of the asset. In other
cases, renegotiation will lead to a new agreement, which is treated as a new loan.
Repo/Reverse repo A repurchase agreement or repo, is a short term funding agreements which allow a borrower to sell a financial asset, such as ABS or Government bonds as collateral for cash. As part of the agreement the borrower agrees to repurchase the security at some later date, usually less than 30 days, repaying the proceeds of the loan. For the party on the other end of the transaction (buying
the security and agreeing to sell in the future) it is a reverse repurchase agreement or reverse repo.
Retail Loans Money loaned to individuals rather than institutions. The loans may be for car or home purchases,medical care, home repair, holidays, and other consumer uses.
Return on equity Represents the ratio of the current year’s profit available for distribution to the weighted average shareholders equity over the period under review.
Risk weighted assets A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel Capital Accord as implemented by the FSA.
Residential Mortgaes Backed Securities (RMBS)
Securities that represent interests in a group of residential mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal).
Securitisation Securitisation is a process by which debt instruments are aggregated into a pool, which is used to back new securities. A company sells assets to an SPE (special purpose entity) who then issues
securities backed by the assets based on their value. This allows the credit quality of the assets to be separated from the credit rating of the original company and transfers risk to external investors.
Special Purpose Entities (SPEs) SPEs are entities that are created to accomplish a narrow and well defined objective. There are often specific restrictions or limits around their ongoing activities.
Transactions with SPEs take a number of forms, including:
– The provision of financing to fund asset purchases, or commitments to provide finance for future
purchases.
– Derivative transactions to provide investors in the SPE with a specified exposure.
– The provision of liquidity or backstop facilities which may be drawn upon if the SPE experiences
future funding difficulties.
– Direct investment in the notes issued by SPEs.
Structured finance /note A Structured note is an investment tool which pays a return linked to the value or level of a specified asset or index and sometimes offers capital protection if the value declines. Structured notes can be linked to equities, interest rates, funds, commodities and foreign currency.
Student loan related assets Assets which are referenced to underlying student loans.
Subordinated liabilities Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claimsof depositors and other creditors of the issuer.
Sub-Prime Sub-prime is defined as loans to borrowers typically having weakened credit histories that include payment delinquencies and potentially more severe problems such as court judgements and
bankruptcies. They may also display reduced repayment capacity as measured by credit scores,
high debt-to-income ratios, or other criteria indicating heightened risk of default.
Tier 1 capital Tier 1 capital comprises Core Tier 1 capital plus innovative Tier 1 securities and preference shares and tax on excess expected losses less material holdings in credit or financial institutions
Tier 1 capital ratio Tier 1 capital as a percentage of risk weighted assets
Tier 2 capital Tier 2 capital comprises qualifying subordinated liabilities, allowable portfolio impairment provisionand unrealised gains in the eligible revaluation reserves arising from the fair valuation of equity
instruments held as available-for-sale.
VaR Value at Risk is an estimate of the potential loss which might arise from market movements undernormal market conditions, if the current positions were to be held unchanged for one business day,measured to a confidence level of 97.5 per cent.
Write Downs The depreciation or lowering of the value of an asset in the books to reflect a decline in their value, or expected cash flows