asset liability management. generic income statement of fin. inst. financial institutions interest...

ASSET LIABILITY MANAGEMENT

Generic Income Statement Of Fin. Inst.FINANCIAL INSTITUTIONs

INTEREST REVENUE (IR)

-INTEREST EXPENCE (IE)

SPREAD = (IR – IE)

Non interest Expenses

-Non interest Revenues (fee based revenues)

NIE (Net non interest expenses)

EBT = Spread – NIE

TAX

NI

DIVIDENDS TO PREFERRED SHARE

INCOME AVAILABLE TO COMMON SHARES

EPS = INCOME TO COMMON SHARE /SHARES

DPS = d * EPS

• IR= r * TA•  • IE= c * TL•  • r = weighted average interest rate (yield) earned on assets•  • c = weighted average interest rate (yield) paid on liabilities. Cost of funds.•  • r =[{( Asset1/TA) x r1}+ {( Asset2/ TA ) x r2}+……….+ {(Assetn /TA) x rn}]•  • c =[{( Liab.1 / TL) xc1} + {(Liab 2 / TL) x c2} +…………..+{(Liab n / TL) x

cn}]•  • IR=( Asset1 x r1 ) + (Asset2 x r2) +……………(.Asset n x rn)•  • IE = ( Liability1 x c1) + ( Liability2 x c2 )+……………+(Liability n x c n)•  • NIE is (Net non interest Expenses) = Non Interest expenses - Non Interest

Revenues

Non Interest Expenses:

• Rents, Salaries, utilities, Mkt’g Expenses/Advertising. , Stationary, entertainment.

• Depreciation, Insurance of premises and insurance of Deposits, Security guards etc.

• Legal expenses, Bad debts called provisioning for bad loans/ or loan loss provisions. It is similar to bad debt expense in non financial cos.

• Capital losses on Securities, computing, etc

Non Interest Revenues:• Lockers fee• L/C fees• L/G fees . Letters of guarantee issued by a bank on behalf of a client• Account Maintenance fee• DD/ TT fee• ATM fees• Credit Card fee• Trust Service fee• Commitment fee• Bank guarantee fee• Traveler’s checks making and cashing fees• Underwriting fees for underwriting security issue of a client

• NIE (Net Non Interest Expense) = Non interest expenses – Non interest income

• NIM = Spread /TA= (IR – IE)/TA= { (r*TA) - (c*TL) }/ TA = r- (c* TL/TA)

EXERCISE: BALANCE SHEET Of FI (Millions of Rs) ASSETS Y* LIAB Y*Cash 6.9 0% Demand Deposits 30

5%Short term Securities 15 7% S. Term Saving Deposits 30 6%Long term Invest 15 10% L. T Saving Deposits 30 7%S.T. Loans 20 9% TFCs issued 3 7%Medium Term Loans 20 11% TL 93 Long Term Loans 20 12% Share Capital 3Premesis (i.e. FA) 3.1 0% RE 4TA 100 Total OE (NW) 7

TL & OE 100

Non interest revenues are forecasted as 10, and non interest expense as 5 for the next year. The co has “d” of 40%, Tax rate is 30%, and it has 5 shares.

• Required:• r• c• EPS• DPS• RE increase in next yr.• RE balance at the end of next yr.• OE at the end of yr.• Financial Leverage = TA / NW (Beginning Of Period)• Capital Adequacy ratio = NW/ TA• Does it have Adequate Capital ? Int’l standard for the capital adequacy ratio is 4%• RONW = NI / NW• ROA = NI / TA• Double check RONW = TA / NW *ROA (i.e financial leverage * Return on

assets)• NIM = Spread /TA• NIM = (IR-IE) /TA• NIM = {(r*TA) ( c*TL) } / TA• NIM = r- {c*TL/TA }• Please Complete the forecasted Income Statement