When beginning to think about analyzing bank financial statements, there is one fundamental difference between banks and non-financial companies, which is vital to understand.

Non-financial companies typically will have a range of assets, such as cash, marketable securities, accounts receivable, inventory, and PP&E, which produce economic value for the company. They are physical or financial resources that are used to run the business.

On the other side of the balance sheet, we have liabilities and equity. Liabilities represent future cash outflows, essentially what the company owes, including operating liabilities such as payables and accrued expenses, as well as debt financing.

And then there's also shareholders' equity.

The debt financing and shareholders' equity together provide the financing needed for the business.

What's important here is that there is a fundamental split on the liability side between liabilities created in the operational activities of the business and the liabilities which represent debt financing, borrowed money, which must be repaid at some point in the future.

Management of the company have two sets of decisions to make in running the business.

How to run the business day-to-day, that is the operational decisions, and separately, how to finance those operations, deciding between how much debt and equity financing to use. This financing decision is independent of the operational activities of the business.

For banks, however, the split between operational and financing decisions is not so clear.

The key to this is a commercial bank's fundamental operating activity of taking in financing in the form of deposits, loans, notes, or other forms of debt to enable it to issue loans.

These loans earn the bank interest income, while to attract the deposits or other forms of debt, banks offer to pay interest, which is an expense for the bank.

This means that a bank's debt financing is core to its operations, and so it is not possible to split operational decisions from financing decisions, as is the case for non-financial companies.

In other words, financing is fundamental to the operations of the bank. Another issue to note is that while all liabilities for a non-financial company will have a date when they become payable, a bank's deposit financing only represents what the bank potentially has to pay to customers should they wish to withdraw funds from their accounts. So what does this mean for the analysis of bank financial statements? Firstly, when looking at the income statement, traditional profit margin calculations, such as gross and operating profit margin, aren't applicable, since banks don't earn revenue in the same way as non-financial companies, but rather as interest income from loans, with interest also being a key operational expense.

Also, when analyzing non-financial companies, the analysis can be split between the operations of the business and its financing. Another way of saying this is that analysis can be done at the enterprise or operational level, as well as at the equity level.

We can calculate operating profit, which would be at the enterprise level, the profit from operations earned for all providers of finance, and also net income, which would be at the equity level, the profits earned only for the company's shareholders.

For banks, this split can't be made, since the operations and financing of a bank are so fundamentally connected.

As a result, most financial analysis is done at the equity level.

Despite this, enterprise-level analysis, i.e.

analysis of capital structure and total assets, remains important, but largely from a regulatory and capital adequacy perspective.