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MENTORING - Fundamentals - Company fundamentals - Analysing financials -…
MENTORING - Fundamentals - Company fundamentals - Analysing financials
The financials industry is a linchpin for an economy, because the industry deals with the money that flows through an economy. This part entails one side of an entire GDP.
The industry stands on one side of the economy, while all other non-financial industries stand on the other side of the economy.
In non-financial industries, money is transacted with respect to products or services.
In a financial industry, money is transacted with respect to money. This is what doubles up its power within an economy.
What are the financial industries? Banks, insurers, asset management companies (mutual fund owners), non-banking financial companies (NBFCs), gold loan companies, factoring companies.
Financials are the companies that match the supply and demand in an economy with respect to money. The money supply in an economy flows through these companies.
The financials industry brings together savers and investors in an economy. They take money from those who have it and give it to those who do not have it. But both come at a cost.
A financial institution bridges the gap between savers and investors in an economy.
Financials build a network to pass on the benefit of access to money in an economy.
Individual savers and investors cannot meet together on their own to exchange money requirement because of lack of "trust".
Let us discuss banks. What do they do? They take money from savers who want to safeguard their money. They also take money from savers who want to get a return on their savings. The also take money from a market where investors want to fund banks. These people form the supply side of money for a bank.
There is a cost for a bank to acquire these funds. That is called interest expense.
Now the bank has the demand side too. The demand side comprises broadly investors, who borrow money from banks for a charge. These people are key for a bank to make money. Else the bank will be left with flush funds that it cannot lend. So a bank needs both supply and demand sides to survive. The banks give money to borrowers in the form of loans.
There is a cost for borrowers who take money from banks. That is called interest. That is an income for a bank. It is interest income.
A banking P&L is very simple. It has interest income, interest expense and a few other things.
We are not worried about other stuff, such as employee costs, operating costs, provisions and other items.
A bank takes money from depositors, term deposit investors and the market. It has to return this money along with interest. Hence these are liabilities. So the supply side comprises liabilities.
A bank has to make money on these liabilities. So it creates assets by giving loans to investors (they are called borrowers). These form the assets for a bank. These are different in producing income. Unlike bank buildings and computers, which are also assets, these assets are income producing assets. Hence these are very important for a bank to manage.
So for a bank, the assets side comprises loans given to investors (borrowers).