Given the difficulty of constructing an integrated indicator that equally reflects the level of the bank's financial condition and the actual difference in the accounting approaches of banking institutions, we propose to asses the composition of the bank's activities (base indicator Net Cash Flow (NCF)). NCF is an indicator that directly affects the quality of financial management of the bank. Accordingly, the condition of cash flow can be used to analyze the quality of bank management (quality of financial management).
Thus, given the complexity of the concept of financial condition, the complexity of determining the benchmarks of the bank that influence direct to it degree of helth, we propose for objectivity in determining the financial condition of the bank with the ability to quantify the probability of bank default - segmentation of banks on the basis of NCF.
NCF composition characteristics: It should be noted that the quality of bank management can be characterized as good (excellent) if the results of the reporting period net cash flow from operating activities is positive, and the amount of these funds significantly exceeds the results of investment and financial activities, which can be negative (as a last resort). This means that as a result of operating activities (from the sale of services) the bank receives enough money to invest in fixed assets, new financial instruments and pay for the use of loans obtained on the interbank market to maintain liquidity from its own funds.
The positive value of net cash flow as a result of all activities of the bank indicates that management skillfully performs its functions.
If the cash flow as a result of operating and financial activities is positive, and as a result of investment - negative, it indicates the normal quality of bank management. The essence of this cash structure is explained by the fact that the bank directs cash from operating activities to loans and additional investments of owners from financial activities to acquire non-current assets to restore fixed assets, invest in intangible assets and make long-term investments.
Financing the costs of investment activities from the proceeds of financial activities is not always a negative phenomenon. Each bank wants to attract investment to implement scientific and technological progress and upgrade fixed assets.
A negative value of cash flow from investing activities and a positive cash flow from financing activities may mean that the bank has received additional financing and invested the received funds on more favorable terms. This situation is favorable for mark quality of bank management like normal financial stability, but management should pay attention to this fact to improve the results of investment activities.
The situation in the bank is alarming if the movement of funds as a result of investment and financial activities is positive, and operating - negative. In this case, the state of the bank can be described as a crisis, and the quality of management in this situation as low.
The essence of this capital structure is that the bank finances operating expenses from income from investment and financial activities. These are, first of all, attraction of refinancing loans, interbank credit funds, additional issue of shares. This structure of cash flows could be only for the newly created bank, which has not started working at full capacity, but is gradually implementing its strategy to enter the market.
Therefore, the quality of bank management will be favorable for bank health only if there is a positive result from the movement of funds (income greater than costs) in connection with operating activities, which will significantly exceed the result from investment and financial activities.
This means that the bank receives timely payment for services provided by customers, a fairly low percentage of NPL loans (bad debts). In this situation, the costs of implementing and providing banking services are much lower than the income received, and the bank receives income from operating activities.
It is recommended to use the following table to determine the quality of financial management of the bank (Table 1):