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Co-taught with Professor Stephen Ryan
Fall 2022, Half Semester Starting Wednesday 6-9 PM, September 22, 2022. We will teach this course in person, but we will also turn on Zoom and record the class. You are encouraged to attend in person unless of you have special circumstances.
MBA ACCT-GB-3120 (1.5 credits) specialization: Accounting
Undergrad ACCT-UB-20 (2 credits) concentration: Accounting
This course analyzes financial statements of financial institutions from the perspective of investors, bankers, and consultants. It provides a framework to identify, understand, and analyze key performance metrics of banks.
- 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
Core course in Financial Accounting
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
Attendance and penalty for missing classes
Requiring attendance is necessary for several reasons. First, you incorrectly assume that 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 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.
The policy below will be in effect only after the add/drop period.
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 I approve. 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.
For sections meeting in 150-190 minute sessions, you would 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 would lose two grades, and so on.
For sections meeting in 75-80 minute sessions, you would 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 would lose two grades, and so on.
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.
After entering the class, please mark yourself present in the first 20 minutes on the OneDrive sheet (link posted on Brightspace). You will be marked absent if you are more than 20 minutes late unless it is because of factors beyond your control (traffic, subway, 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.
Exams and Grading
There are no in-class quizzes or midterms. There is take-home final exam.
- Please read about the penalty for missing classes above.
- Assignments: 50%. Will be due at the beginning of each class except the first class.
- Take-home final exam: 50%
- You need to be in the following systems before the start of the first class:
- If you are blocked from accessing these systems, please ask the administration to expedite matters. Given the complexity of these systems, we cannot manually add you to any system.
- Per Stern rule, only registered students can attend. We cannot override this rule.
- You will need a computer in every class. Either MAC or Windows is OK.
Help and Office
- Teaching assistant: Please check NYU Brightspace
- Machine-graded spreadsheet-based Almaris assignments: Link is on Brightspace
- Assignments to be turned in on paper: Brightspace
Topic 1: An introduction to modeling and analyzing a bank
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
- Identifying the key drivers while modeling a bank
- Modeling sequence
- Analyzing historical statements to project model inputs
- Key asset classifications:
- 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 liability classifications:
- Employee liabilities
- Deferred tax liabilities
- Key equity classifications
- Paid-in capital
- Retained earnings
- Accumulated other comprehensive income
- Interest income
- Fee income and trading gains (losses)
- Interest expense
- Operating expenses
- Bad debt expense
- Tax expense
Topic 2: Transactions and Basic Valuation Metrics for a Bank
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
Balance sheet metrics
- Capital adequacy: Tier I, II, and III capital ratio
- 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 3: Technical concepts
Loan and Bond Amortization
- Building amortization tables efficiently
- Par, premium, and discount bonds
- Current expected credit loss model [CECL]
- Trading securities
- Available-for-sale securities
- Held-to-maturity securities
Interest rate risk
- Forward rates
Inflation and exchange rates
Topic 4: Analyzing real financial statements (Wells Fargo 2020 report)
- Net interest income
- Interest rate risk
- Realized gains and losses
- Fair values of financial instruments
Topic 5: Analyzing real financial statements (Wells Fargo 2020 report)
Topic 6: Structured transactions and off-balance-sheet financing
Special purpose entities
- Voting interest entities versus variable interest entities
- Separation from the parent
- Off-balance-sheet financing and capital adequacy
- Bankruptcy remoteness
- Conditions for sale accounting
- Fair value hedges versus cash flow hedges
- Interest rate swaps, forwards and futures, credit default swaps