Guide to Analysing Companies

Part of a company’s accounts that lists its assets and its lia-
bilities. Fundamental to all such accounts is the idea that
assets and liabilities are equal – that they are in balance. The dif-
ference between them is called shareholders’ funds; so share-
holders’ funds amount to whatever is needed to put the assets
and liabilities in balance. Shifting assets (that is, loans) off a
bank’s balance sheet, thus giving it more breathing space to
meet regulators’ requirements over capital adequacy, has
provided a spur for securitisation. For example, a bank
may sell mortgages on its books to a special purpose
vehicle (in which it will have a minority stake). The entity will
then issue new securities backed by the loans. Result: the
bank raises cash from the mortgages and reduces the number of
loans on its balance sheet.
Balloon
A loan whose repayments are spread unevenly over its life.
As the loan nears maturity, the normal number of payments
balloon into one or two large ones that finally pay off the debt.
Such loans or mortgages are popular with borrowers who
expect extra cash flow towards the end of a loan’s life or
where a refinancing is due. In the United States, balloons are
sometimes also called partially amortised loans.
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Bancassurance
The phenomenon whereby a financial institution combines the
selling of banking products with insurance products through
the same distribution channel or network; it is also called all-
finanz in Germany. Popular during the early 1990s, especially
in Europe, bancassurance rested on the premise that it is easy to
cross-sell banking and insurance services because customers
feel confident about buying insurance from the same institution
where they keep their savings. The idea has worked best where
borrowers require insurance to help protect them from possible
default on their mortgage. But bancassurance by itself
cannot replace a powerful brand that customers trust. Increas-
ingly, this applies to brands built up outside the world of
finance (for example, the UK’s Virgin Group) as well those from
within it. The result is greater competition for suppliers but
more choice for consumers.
Bank
An institution that deals in money and, significantly, makes
some or all of its profits by making loans that do not have to
be repaid until some future date. Because of this function, gov-
ernments have always kept a close eye on banks. There are
many types of banks (see central bank, clearing bank,
consortium bank, investment bank, merchant bank,
money-centre bank, mutual savings bank, private
bank, savings bank, universal bank). The main differ-
ence between them is the amount of emphasis that they place
on various fundamental banking services. These services
include the following.