asset liability management. generic income statement of fin. inst. financial institutions interest...
DESCRIPTION
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 =[{( Asset 1 /TA) x r 1 }+ {( Asset 2 / TA ) x r 2 }+……….+ {(Asset n /TA) x r n }] c =[{( Liab. 1 / TL) xc 1 } + {(Liab 2 / TL) x c 2 } +…………..+{(Liab n / TL) x c n }] IR=( Asset 1 x r 1 ) + (Asset 2 x r 2 ) +……………(.Asset n x r n ) IE = ( Liability 1 x c 1 ) + ( Liability 2 x c 2 )+……………+(Liability n x c n ) NIE is (Net non interest Expenses) = Non Interest expenses - Non Interest RevenuesTRANSCRIPT
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ASSET LIABILITY MANAGEMENT
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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
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• 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
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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
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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
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• 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)
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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.
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• 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