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Glossary of keybanking terminology.

The Balance Sheet is a financial statement approved by an external auditor showing a bank's assets, liabilities, equity and annual income on given date.

Balance Sheet Mismatch implies that the maturities of the liabilities differ (are typically shorter) from those of the assets and/or that some liabilities are denominated in a foreign currency whilst the assets are not.

Asset/Liability Management (ALM) refers to prudent management of assets to ensure that liabilities are sufficiently covered by productive assets at all time.

Total Assets Deployed refers to cash and short-term funds, demand balances with other banks (i.e. inter-bank deposits), loans/advances (business/personal lending, project finance), short-term investments (Treasury bills), equity holdings (including stakes in non-banking ventures), debt stock and fixed assets.

Deposits include the customers' deposits and certificates of deposits. There are two types of savings account--non interest-bearing current account and time deposit. The latter is usually referred to as a checking or deposit account that pays a fixed-term interest. Time deposit represents a negotiated order of withdrawal.

Time draft is a demand for payment on a specified future date--comprising banker's acceptance, bill and sight draft.

Time bill represents a banker's acceptance or bill of exchange that is not payable until some specific future time. This contrasts with a banker's draft or sight bill, which is good for immediate payment at sight.

Intermediation is the process of transferring funds from the ultimate source to the ultimate (final) user. A bank intermediates credit when it obtains money from depositors and re-lends it to borrower.

Foreign Bank Claim on domestic counterparts including deposits and balances, loans to non-banks and holdings of domestic debt securities.

Capital Definition is core capital and supplementary capital. The former or 'Tier 1' capital comprises (1) common shareholders' equity and retained profits or net earnings; (2) qualifying non-cumulative preferred stock (up to a maximum 25% of core capital); and (3) minority interests in equity accounts of consolidated subsidiaries. The 1988 Basel Capital Convergence Accord--operated by national regulatory authorities in over 100 countries--requires banks to hold total capital equivalent to at least 8% of their risk-adjusted assets, with half of this cushion in the form of Tier 1 capital. While the latter or 'Tier 2' capital is formed, within certain limits, from (1) undisclosed and revaluation reserves; (2) general provisions or general loan loss reserves; (3) perpetual preferred stock not qualified to include into Tier 1; (4) hybrid debt instruments and subordinated debt items; and (4) preferred stock with medium-term remaining current maturity.

Banking Soundness refers to the financial health of a country's banking system. Profitability is calculated before corporate taxes (i.e. pre-tax profit) and minority interest payments for end-reporting period. Key measurements of earnings are the annual Returns on Equity (ROE) and Returns on Assets (ROA).

Profit Margin is the difference between the price received by a company for its products/services and total production cost (including labour).

Net Interest Margin is interest income earned on assets, less interest expense paid on liabilities and capital. This is the gross margin for financial institutions.

EBITDA refers to earnings before interest, taxes, depreciation and amortisation. It measures the underlying performance of a company.

Leverage is the proportion of debt to capital often measured as the ratio of on- and off-balance sheet exposures to capital. Leverage can be built up by borrowing (on-balance sheet leverage, usually measured by debt-to-equity ratios) or by using off-balance sheet transactions.

Leveraged Loans are 'sub-prime' loans rated below investment grade (BB+ and lower by Standard & Poor's and Bal and lower by Moody's Investors Services) to firms with a higher debt-to-EBITDA ratio, or trade at wide spreads over London Inter-bank Offered Rate (e.g. above 150 basis points).

Leveraged Buyout (LBO) refers to acquisition of a company heavily funded by loans or bond issues to meet the cost of take-over. Usually, the assets of the acquired company are used as collateral for bank loans.

Syndicated Loans are large loans made jointly by a consortium of banks to one borrower (sovereign or corporate). Usually, one lead bank partitions (i.e. syndicates) the rest to other banks. According to the International Monetary Fund, four sub-Saharan countries--South Africa, Angola, Ghana and Nigeria--account for 85% of syndicated bank loans.

Non-performing loans (NPLs) are bad debts that are in default or close to being in default (i.e. typically in interest arrears for 90 days or more). Banks are required to cover these credit losses, commonly referred to as 'Expected Losses' (EL) on an ongoing basis by provisions and write-offs.

Value-at-risk (VaR) estimates the loss, over a given horizon, which is statistically unlikely to be exceeded at a given probability level.

Probability-of-default (PD) gives the average percentage of obligors in a particular rating grade that default in the course of one year.

Exposure-at-default (EAD) provides a general estimate of the amount outstanding in case the borrower defaults on repayments.

Loss-given-default (LGD) gives the percentage of exposure the bank could lose in the case of a borrower defaulting. These losses are shown as a percentage of EAD, and depend on the type and amount of collateral, as well as credit rating of borrower and the expected proceeds from the sale of the assets.

Credit Tiering refers to differentiation of borrowers by their credit quality, thus resulting in higher cost and/or reduced flows to low credit worthy clients.

Investment-grade Obligations where bank loans or bonds are considered safe if they receive favourable debt ratings. Standard & Poor's classifies investment-grade obligations as BBB- or higher, whilst Moody's Investors Services classifies investment-grade bonds as Baa3 or higher.

Credit Risk is the potential for losses on fixed-income assets and derivative contracts, caused by issue and counter-party defaults, and market value losses related to credit quality deterioration. Internationally active banks are heavily exposed to derivatives whose value derives from underlying securities prices, etc.

Double Gearing describes situations where two institutions use shared capital to protect against risk occurring in separate entities. For example, an insurance company may acquire a sizeable equity in a bank as a reciprocal arrangement for loans. Hence, both institutions are leveraging their exposure to risk.
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Title Annotation:AFRICA'S TOP 100 BANKS
Comment:Glossary of keybanking terminology.(AFRICA'S TOP 100 BANKS)
Publication:African Business
Article Type:Glossary
Geographic Code:60AFR
Date:Oct 1, 2007
Words:1014
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