Transcript BALANCE SHEET ANALYSIS

ASSET & LIABILITY
MANAGEMENT IN
COMMERCIAL BANKS
Instructor……Bülent Şenver
[email protected]
ALM
[email protected]
1
ALM
Assett
Liability
Asset
Management
Liability
Management
ALM
[email protected]
2
ASSET & LIABILITY
MANAGEMENT (ALM)
• DEFINITION
• ALM is continuously arranging and
rearranging the assets and liabilities of the
bank without infringing the liquidity and
safety of the bank and with the purpose of
maximizing the bank’s profits.
ALM
[email protected]
3
LIQUIDITY
• The ability of a bank to fulfill its
obligations, and after doing so having
enough cash left to do its normal daily
banking business.
ALM
[email protected]
4
SAFETY
• The ability of a bank’s “Share Holder’s
Equity” (SHI) to absorb the future possible
losses that may arise and after doing so
having enough SHI left to run the bank and
to comply with the minimum “Capital
Requirements”.
ALM
[email protected]
5
Capital protects your bank
in rainy days!..
ALM
[email protected]
6
ALM DEVELPOMENT
1950’s
1960’s
ASSET
MNG.
LIABILITY
MNG.
LOAN
PRODUCTS
DEPOSIT
PRODUCTS
ALM
[email protected]
1970’s
ASSET &
LIABILITY
MNG.
LOAN &
DEPOSIT
BOTH
7
Internet
Personal Training
Office Automation
Computerization
Management
Reorganization
GAAP
SC of Accounts
Deregulations
ALM
[email protected]
8
Yesterday
Tomorrow
Arena
Services
Organizatio
n
&
Reporting
Data
ALM
[email protected]
9
NEW DEVOPLEPMENTS
• 1. Deregulation of Interest Rates
• 2. Deregulation of Foreign Exchange
Operations
• 3. Changes in Laws and Regulations
• 4. Increase in Deposit Interest Rates
ALM
[email protected]
10
NEW DEVELOPMENTS
• 5. Increase in Deposit Interest Rates
• 6. Change in Deposit Characteristics
•
Increase in Term-Deposits
•
Decrease in Demand-Deposits
•
Increase in Short Terms
ALM
[email protected]
11
NEW DEVELOPMENTS
•
•
•
•
•
7. Increase in Personnel Expenses
8. Increase in Operating Expenses
9. Increase in Technology Investments
10. Frequent Changes in Interest Rates
11. Increase in Share Capital
Requirements
ALM
[email protected]
12
NEW DEVELOPMENTS
• 12. Change in Asset Structure
•
Increase in Government Bonds
•
Increase in Treasury Bills
•
Increase in Foreign Exch. Loans
•
Increase in Short Term Loans
•
Increase in Non-Performing Loans
•
Increase in Consumer Loans
ALM
[email protected]
13
NEW DEVELOPMENTS
•
•
•
•
•
•
•
13. Decrease in S/H Equity Growth
14. Increase in Customer Expectations
15. New Service Points
Small Branches
ATM and POS
Telephone and Internet Banking
16. 24 Hours 365 Days Banking
ALM
[email protected]
14
1950
1970
1980
2000
RELATIONSHIP
MANAGEMENT
SALES FORCE
SPACE
SHARING
IN-STORE
BRANCH
BRANCH
DATABASE
MARKETING
DIRECT
MAIL
MAIL
CREDIT
CARD
FRANCHISE
BRANCHES
REMOTE
RELATIONSHIP
MANAGEMENT
CALL CENTER
OUTBOUND
CALL CENTER
INBOUND
DEBİT
CARD
ATM
SMART CARD
INTERNET
ATM
KIOSK
TELEPHONE
BANKING
Kaynak: A.T.Kearney
1990
VIDEO
KIOSK
SCREEN
PHONES
PC
INTERNET
ALM
BANKING
BANKING
[email protected]
INTERACTIVE
15TV
FINANCIAL STATEMENTS
• 1. BALANCE SHEET
• 2. STATEMENT OF INCOME
• 3. STATEMENT OF
SHAREHOLDER’S EQUITY
• 4. SOURCES & USES OF FUNDS
STATEMENT
ALM
[email protected]
16
Balance Sheet
Liabilities
Assets
Earning
Assests
Interest Income
Deposits
Loans
Interest
Income Statement
Interest
Bearing
Treasury Bills Liabiliti
es
Interest Expences
Debt
Net Interest Income
NonInterest
Bearing
Liabiliti
Share Holders’
es
Equity
NonInterest
Earning
Assests
Total Assets
=
Total Liabilities
ALM
[email protected]
17
Balance Sheet
Deposits
100
120
Interest
Bearing
Liabiliti
es
Treasury
Bills
80
Debt
60
Non35
Total Assets
Interest
Rate
Assets
=
%20
NonInterest
Earnin
g
Assests
Interest Income
Liabilities
Assets
Loans
Interest
Earning
Assests
Income Statement
Interest
Bearing
Liabiliti
Share Holders’
Equity
es
=
30
35
Interest
Rate
Liabiliti
es
=
Total Liabilities
36
Interest Expence
9
Net Interest Income
27
%5
ALM
[email protected]
18
BALANCE SHEET
SHOWS
• The Financial Position
of a Bank
• As at a specific date.
• As of Dec. 31,1998
ALM
[email protected]
19
BALANCE SHEET
EQUATION
•
• ASSETS
•
100
=
=
Equals
• = 100
• LIABILITIES
•
+ Plus
• SHAREHOLDER’S
EQUITY
ALM
[email protected]
20
ASSET CLASSIFICATION
TOTAL
ASSETS
NON INTEREST EARNING
ASSETS
INTEREST EARNING
ASSETS
ALM
[email protected]
21
LIABILITY
CLASSIFICATION
TOTAL
LIABILITIES
INTEREST BEARING
LIABILITIES
NON INTEREST BEARING
LIABILITIES
ALM
[email protected]
22
BALANCE SHEET Assets
•
•
•
•
•
•
•
•
Liquid Assets
Loans
Marketable Securities
Investment Securities
Fixed Assets
Accrued Interest
Other Assets
Total Assets
ALM
[email protected]
150
400
200
50
100
70
80
1050
23
BALANCE SHEET Liabilities
•
•
•
•
•
•
•
Deposits
Bank Borrowings
Accrued Expenses
Other Liabilities
Bonds Issued
Shareholder’s Equity
Total Liabilities & S/HE
ALM
[email protected]
400
150
100
80
70
250
1050
24
SHAREHOLDER’S EQUITY
•
•
•
•
•
•
•
Share Capital
Legal Reserves
Retained Earnings
Revaluation Surplus
Share Premiums
Net Income
Total S/H Equity
ALM
[email protected]
100
30
50
20
10
40
250
25
BALANCE SHEET
DOES NOT SHOW
•
•
•
•
Interest Rates
Interest Sensitivity
Due Dates
Foreign Currency
breakdown
• Collateral
ALM
[email protected]
26
STATEMENT OF INCOME
SHOWS
• The results of
operations of a bank.
• For the period
between two dates.
• For the year ended
Dec. 31 , 1998
ALM
[email protected]
27
NET PROFIT
NET PROFIT
TOTAL
INCOME
TOTAL
EXPENSE
ALM
[email protected]
28
TOTAL INCOME
TOTAL
INCOME
NET
INTEREST
INCOME
NET
NON-INTEREST
INCOME
ALM
[email protected]
29
NET INTEREST INCOME
NET
INTEREST
INCOME
INTEREST INTEREST
INCOME EXPENSE
(+)
(-)
ALM
[email protected]
30
$
interest
income
+
net interest
income
net interest
income
interest
expense
ALM
[email protected]
-
time
31
NET INTEREST INCOME
NET
INTEREST
INCOME
INTEREST
INCOME
P/L
INTEREST
EXPENSE
P/L
INTEREST
EARNING
ASSETS
B/S
INTEREST
BEARING
LIABILITIES
B/S
ALM
[email protected]
32
NET NON-INTEREST
INCOME
NET
NON-INTEREST
INCOME
NON
NON
INTEREST INTEREST
INCOME EXPENCE
(+)
(-)
ALM
[email protected]
33
STATEMENT OF INCOME
•
•
•
•
•
•
•
•
Interest Income
Interest Expense
Net I.Income
Non Interest Income
Operating Expenses
Pre-Tax Profit
Tax Provision
Net Income
ALM
[email protected]
1000
(700)
300
220
(450)
70
(30)
40
34
ANALYSIS OF PROFIT
NET
PROFIT
(NP)
PROFIT FROM
BANKING OPERATIONS
(NET OPERATING INCOME)
(NOI)
PROFIT FROM
EXTRAORDINARY
TRANSACTIONS
(PEXT)
ALM
[email protected]
PROFIT FROM
SECURITY
TRANNSACTIONS
(PST)
35
BANKING
RISKS
ALM
[email protected]
36
BANKING RISKS
•C AMEL
•
•
•
•
A
M
E
L
ALM
[email protected]
37
CAMEL
• Capital
Adequacy
ALM
[email protected]
38
C
AMEL
• Asset
Quality
ALM
[email protected]
39
CA
MEL
• Management
Quality
ALM
[email protected]
40
EL
CAM
• Earnings
Efficiency
ALM
[email protected]
41
L
CAME
• Liquidity
Risk
ALM
[email protected]
42
CAMEL RISKS
• Capital
Adequacy
• Asset Quality
• Management
• Earnings
• Liquidity
ALM
[email protected]
43
BANKING RISKS
•
•
•
•
•
•
1.2.3.4.5.CAMEL
6. Credit Risk
7. Interest Rate Risk
8. Interest Rate Sensitivity Risk
9. Foreign Exchange Availability Risk
10. F/X Position Risk
ALM
[email protected]
44
BANKING RISKS
•
•
•
•
•
•
•
11. Accounting & Reporting Risk
12. Computer Risk
13. Capital Market Operations Risk
14. Money Market Operations Risk
15. Country (Sovereign) Risk
16. Pricing Risk
17. Market Risk
ALM
[email protected]
45
BANKING RISKS
•
•
•
•
•
•
•
18. Theft Risk
19. Fraud & Defalcations Risk
20. Natural Disasters
21. Strategic Risk
22. Fiduciary Risk
23. Transaction Risk
24. Regulatory/Compliance
ALM
[email protected]
46
BANKING RISKS
• 25. Reputation Risk
• 26. Large Loans/Deposits Risk
• 27. Concentration Risk
ALM
[email protected]
47
RATIO ANALYSIS
Numerator
______________________
Denominator
ALM
[email protected]
48
RATIO ANALYSIS
• Balance Sheet
__________________
Balance Sheet
• Income Statement
________________
Balance Sheet
ALM
[email protected]
49
RATIO ANALYSIS
• What is the
• What is the
• LEVEL ?
• TREND ?
ALM
[email protected]
50
RATIO ANALYSIS
•
•
•
•
•
1. Capital Adequacy
2. Asset Quality
3. Management
4. Earnings & Efficiency
5. Liquidity
ALM
[email protected]
51
RATIO ANALISIS
CAPITAL ADEQUACY
• “The Capital of a
Bank protects the
Bank against
unexpected future
losses.”
ALM
[email protected]
52
RATIO ANALYSIS
CAPITAL ADEQUACY
• 1.
•
•
Shareholders’ Equity
-----------------------------------Total Assets
• The ability of the present Capital to support
the further growth of Assets
ALM
[email protected]
53
RATIO ANALYSIS
CAPITAL ADEQUACY
• 2.
•
•
Shareholders’ Equity
-----------------------------------Risk Weighted Assets
ALM
[email protected]
54
RATIO ANALYSIS
CAPITAL ADEQUACY
• 3.
•
•
Shareholders’ Equity
-----------------------------------Risk Weighted Assets
+
RW Contingent Liabilities
ALM
[email protected]
55
RATIO ANALYSIS
CAPITAL ADEQUACY
• 4.
•
•
Total Debt
-----------------------------------Shareholder’s Equity
• The ability to raise additional Debt Capital
ALM
[email protected]
56
RATIO ANALYSIS
CAPITAL ADEQUACY
• 5. Financial Leverage :
•
•
Total Assets
-----------------------------------Shareholder’s Equity
ALM
[email protected]
57
RATIO ANALYSIS
CAPITAL ADEQUACY
• 6. Capital Formation Rate :
•
Retained Net Income (RNI)
-------------------------------------------------•
Average Shareholder’s Equity
• RNI = Net Income - Dividends to be paid
• The internal growth of Equity Capital
ALM
[email protected]
58
RATIO ANALISIS
ASSET QUALITY
• 1.
•
•
Loans
-------------------------------Total Assets
ALM
[email protected]
59
RATIO ANALISIS
ASSET QUALITY
• 2. Non Performing Loans =
•
a) Loans past due more than 90 days
•
b) Loans not accruing interest
•
c) Loans with low interest rates
•
d) Loans on which repayment terms
have been renegotiated.
•
ALM
[email protected]
60
RATIO ANALISIS
ASSET QUALITY
• 3.
•
Non Performing Loans
------------------------------------Total Loans
• Indicates how much of the loan portfolio is
non performing.
ALM
[email protected]
61
RATIO ANALISIS
ASSET QUALITY
• 4. Reserves for Non Performing Loans
---------------------------------------------•
Non Performing Loans
• Indicates the ability of the loan loss reserve
to absorb potential losses from currently
non performing loans.
ALM
[email protected]
62
RATIO ANALISIS
ASSET QUALITY
• 5.
•
Loan Loss Provision
------------------------------------Average Loans
• Shows current income reduction in
anticipation of loan losses.
ALM
[email protected]
63
RATIO ANALISIS
ASSET QUALITY
• 6.
•
Net Charge - Offs
------------------------------------Average Loans
• Shows current income reduction in
anticipation of loan losses.
ALM
[email protected]
64
RATIO ANALISIS
ASSET QUALITY
• 7.
•
•
Interest Earning Assets
------------------------------------------------Total Assets
ALM
[email protected]
65
RATIO ANALISIS
ASSET QUALITY
• 8.
•
•
Non Interest Earning Assets
------------------------------------------------Total Assets
ALM
[email protected]
66
RATIO ANALISIS
EARNINGS & EFFICIENCY
• “A Bank with no
profit is like a human
body with no blood.”
ALM
[email protected]
67
THE PRIMACY OF
EARNINGS
• A bank can not sustain itself long without a
positive cash flow.
• Earnings are essential to :
• 1.Absorb loan losses
• 2.Finance internal growth of capital
• 3.Attract investors to supply capital
ALM
[email protected]
68
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 1. Return on Assets ( ROA )
•
•
Net Income
-------------------------------------------Total Average Assets
ALM
[email protected]
69
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 2. Return on Equity ( ROE )
•
•
Net Income
-------------------------------------------Average Shareholder’s Equity
ALM
[email protected]
70
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 3. Return on Equity ( ROE )
• ROE =
ROA
* Equity Multiplier
• ROE = ( NI / AST ) * ( AST / SHEQ )
ALM
[email protected]
71
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 4.
•
•
Interest Income
-------------------------------------------Average Interest Earning Assets
ALM
[email protected]
72
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 5.
•
•
Net Interest Income
-------------------------------------------Average Total Assets
ALM
[email protected]
73
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 6.
•
•
Interest Income on Loans
-------------------------------------------Average Total Loans
ALM
[email protected]
74
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 7.
•
Total Operating Expense
------------------------------------------------•
Total Operating Income
ALM
[email protected]
75
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 8. Efficiency Ratio
•
Non Interest Expense
---------------------------------------------------• Net Interest Income + Fees Commissions
ALM
[email protected]
76
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 9. Break Even Ratio
• Total Expenses - Non Interest Income
---------------------------------------------------• Total Average Interest Earning Assets
ALM
[email protected]
77
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 10. Net Free Funds Ratio
• Non Paying Liabilities - Non Earning
Assets
-------------------------------------------------•
Interest Earning Assets
ALM
[email protected]
78
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 11. Interest Rate Sensitivity Gap :
•
Interest Rate Sensitive Assets
( minus )
•
Interest Rate Sensitive Liabilities
• Shows the net amount to be effected by the
future change of interest rates in the market
ALM
[email protected]
79
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 12. Interest Rate Sensitivity Gap Ratio :
•
•
Interest Rate Sensitive Assets
------------------------------------------------Interest Rate Sensitive Liabilities
ALM
[email protected]
80
RATIO ANALYSIS
LIQUIDITY
• “Inadequate
Liquidity of a Bank
may cause an
accident similar to an
airplane crash !”
ALM
[email protected]
81
RATIO ANALISIS
LIQUIDITY
• 1.
•
•
Loans
------------------------Deposits
ALM
[email protected]
82
RATIO ANALISIS
LIQUIDITY
• 2.
•
•
Liquid Assets
------------------------Deposits
ALM
[email protected]
83
RATIO ANALISIS
LIQUIDITY
• 3.
•
•
Liquid Assets
-------------------------------Deposits + Borrowings
ALM
[email protected]
84
RATIO ANALISIS
LIQUIDITY
• 4.
•
•
Assets Due for the Period
----------------------------------------Liabilities Due for the Period
ALM
[email protected]
85
RATIO ANALISIS
LIQUIDITY
• 5.
Net Large Liabilities
----------------------------------------•
Net Earning Assets
• Both numerator & denominator are net of
short-term assets.
• Measures the extent to which net earning
assets would be effected by the loss of a
bank’s large liabilities.
ALM
[email protected]
86
RATIO ANALISIS
LIQUIDITY
• 6.
•
Liquid Assets
----------------------------------------Large Liabilities
• Measures the assets readily available to
cover a loss of large liabilities.
ALM
[email protected]
87
RATIO ANALISIS
LIQUIDITY
• 7.
•
Core Deposits
----------------------------------------Earning Assets
• Indicates the extend to which earning assets
are funded by those deposits considered
stable and not subject to interest rate
disintermediation.
ALM
[email protected]
88
RATIO ANALISIS
LIQUIDITY
• 8.
•
Brokered Deposits
----------------------------------------Earning Assets
• Measures the extent to which a bank is
funding assets with high-priced and volatile
brokered deposits.
ALM
[email protected]
89
MATURITY ANALISIS
Days
Cash
Loans
0-10
100
200
300
Deposit 400
Borrow 150
550
10-30
200
500
700
300
200
500
30-60
300
200
500
800
200
1000
ALM
[email protected]
60-90
50
100
150
20
30
50
90
MATURITY ANALYSIS
Days
0-10
10-30
30-60
60-90
Asset
Liab
100
300
500
200
1000
1500
2000
700
Short - -200
Long +
-500
+300
ALM
[email protected]
1300
91
OFF - BALANCE SHEET
RISK
• 1.
•
Loan Commitments
----------------------------------------Average Assets
• Shows the extent of a bank’s obligation to
make loans.
ALM
[email protected]
92
OFF - BALANCE SHEET
RISK
• 2.Contingent Liabilities & Commitments
---------------------------------------------------•
Average Assets
• Shows the extent of a bank’s commitments
& contingent liabilities.
ALM
[email protected]
93
I manage
Assets!
% rates,
due dates...
RISKS
I manage
Liabilities
% rates,
due dates...
ALM
[email protected]
94
ASSET & LIABILITY MATCH
ALM
[email protected]
95
A & L Match
•
•
•
•
•
•
Amounts
Currency
Due Dates
Interest Rates
Interest Sensitivity
Volatility
ALM
[email protected]
96
Foreign Exchange Position
• USA $ Short Position
• $Liabilities>$Assets
• USA $ Long Position
• $Assets>$Liabilities
ALM
[email protected]
97
F/X Position Strategy
Increasing
F/X Rates
Decreasing
F/X Rates
Long Position
YES
NO
NO
YES
Short Position
ALM
[email protected]
98
Interest Rate Sensitivity
• Interest Rate Sensitive Assets/Liabilities
• IRSA/L are such assets and Liabilities
whose interest rates will change before their
due dates when there is a change in market
interest rates.
ALM
[email protected]
99
Interest Rate Sensitivity
Interest Rate Sensitive
Assets & Liabilities
Interest Rate
Non-Sensitive
Assets & Liabilities
VARIABLE RATES
ALM
[email protected]
FIXED RATES
100
Interest Rate Sensitivity Gap
• Positive Gap
• IRSA>IRSL
• IRS GAP =
• (IRSA – IRSL)
• Negative Gap
• IRSL>IRSA
ALM
[email protected]
101
Interest Rate Sensitivity Strategy
Interest Rates
Will Increase
Interest Rates
Will Decrease
Positive
IRS GAP
YES
NO
Negative
IRS GAP
NO
YES
ALM
[email protected]
102
INTEREST MARGIN
INCREASING THE
INTEREST MARGIN
%
ALM
[email protected]
103
INCREASING INTEREST
MARGIN
• Interest Income…………..200
• Interest Expense…………( 50 )
---------• INTEREST MARGIN….. 150
----------
ALM
[email protected]
104
$
interest
income
+
net interest
income
net interest
income
ALM
[email protected]
interest
expense
-
time
105
INCREASING THE
INTEREST MARGIN
BANK STRATEGY TO
INCREASE THE
INTEREST MARGIN
INCREASE
SIZE
CHANGE
INTEREST
SPREAD
ALM
[email protected]
ALTER
ASSET/LIABILITY
MIX
106
INCREASING THE
INTEREST MARGIN
• BANK STRATEGY
• ACTION
• Increase Size
• 1.Expand Assets
• 2.Reduce Fixed Assets
• 3.Increase Equity Base
ALM
[email protected]
107
INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
• ACTION
• Change
Interest Spread
• 1.Re-Price
Asset Portfolio
• 2.Re-Price
Liability Portfolio
ALM
[email protected]
108
INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
• Alter
Asset / Liability
Mix
•
•
•
•
ACTION
1.Plan Taxes
2.Reduce Liquidity
3.Increase
Aggressiveness
• 4.Change Asset Yield
Sensitivity
• 5.Change Liability
Cost Sensitivity
ALM
[email protected]
109
INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
Increase Size
• ACTION
Expand Assets
• IMPLEMENTATION
• 1.Offer new Products
and Services
• 2.New Loans/Deposits
• 2.Open new Branches
• 3.Expand Promotion
Budget
• 4.Reduce Interest
Spread
ALM
[email protected]
110
EXPAND ASSETS
• REPERCUSSION
• 1.Increase operating
Expenses
• 2.Need for Capital
• 3.F/A Regulations
• 4.Decrease Capital
Ratio
• 5.Reduce ROA
• IMPLEMENTATION
• 1.Offer new Products
and Services
• 2.New Loans/Deposits
• 3.Open new Branches
• 4.Expand Promotion
Budget
• 5.Reduce Interest
Spread
ALM
[email protected]
111
INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
Increase Size
• ACTION
Increase
Equity Base
• IMPLEMENTATION
• 1.Reduce Dividend
pay out
• 2.Offer Dividend
reinvestment
• 3.Sell Stock
• 4.Establish Employee
Stock Ownership PL
ALM
[email protected]
112
INCREASE EQUITY BASE
• REPERCUSSIONS
• 1.Hurt shareholders
• 2.Double taxation S/H
3.Reduce ability to
leverage ROA,
dilution of earnings
• 4.Continued Employee
Expectations
• IMPLEMENTATION
• 1.Reduce Dividend
pay out
• 2.Offer Dividend
reinvestment
• 3.Sell Stock
• 4.Establish Employee
Stock Ownership PL
ALM
[email protected]
113
INCREASE INTEREST
MARGIN
• BANK STRATEGY
Change Interest
Spread
• ACTION
Re-price Portfolio
• IMPLEMENTATION
• 1.Increase rates on
Loans
• 2.Compound return
more frequently
• 3.Reduce rates on
Deposits
• 4.Compound cost less
frequently
ALM
[email protected]
114
REPRICE PORTFOLIO
• REPERCUSSIONS
• 1.Lose business
Loan quality decrease
• 2.Increase operations
Client dissatisfaction
• 3.Lose business
Liquidity problem
• 4.Increase operations
Client dissatisfaction
• IMPLEMENTATION
• 1.Increase rates on
Loans
• 2.Compound return
more frequently
• 3.Reduce rates on
Deposits
• 4.Compound cost less
frequently
ALM
[email protected]
115
INCREASE INTEREST
MARGIN
• IMPLEMENTATION
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Reduce Liquidity
• 1.Minimize cash
• 2.Minimize due from
• 3.Sell Securities &
Bonds
• 4.Increase short term
Deposits
ALM
[email protected]
116
REDUCE LIQUIDITY
• REPERCUSSION
• IMPLEMENTATION
• 1.Liquidity Risk
• 2.Lose correspondent
• 3.Incur book losses
• 1.Minimize cash
• 2.Minimize due from
• 3.Sell Securities &
Bonds
• 4.Increase short term
Deposits
• 4.Increase volatility of
deposits
ALM
[email protected]
117
INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Increase
Aggressiveness
• IMPLEMENTATION
• 1.Increase loan/deposit
ratio
• 2.Increase highest
yielding loans
• 3.Increase highest
yielding securities
ALM
[email protected]
118
INCREASE
AGGRESSIVENESS
• REPERCUSSION
• 1.Increase need for
capital
• 2.Increase loan losses
• 3.Increase security
losses
• IMPLEMENTATION
• 1.Increase loan/deposit
ratio
• 2.Increase highest
yielding loans
• 3.Increase highest
yielding securities
ALM
[email protected]
119
INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Change Asset Yield
Sensitivity
• IMPLEMENTATION
• 1.Increase S/T &
variable rate assets if
rates will increase
• 2.Decrease S/T &
variable rate assets if
rates will decrease
ALM
[email protected]
120
CHANGE ASSET YIELD
SENSITIVITY
• REPERCUSSION
• 1.Wrong estimate of
interest movement,
thereby reducing
interest spread
• IMPLEMENTATION
• 1.Increase S/T &
variable rate assets if
rates will increase
• 2.Decrease S/T &
variable rate assets if
rates will decrease
ALM
[email protected]
121
INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Change Liability
Cost Sensitivity
• IMPLEMENTATION
• 1.Decrease S/T &
variable rate liabilities
if rates will increase
• 2.Increase S/T &
variable rate liabilities
if rates will decrease
ALM
[email protected]
122
CHANGE LIABILITY COST
SENSITIVITY
• REPERCUSSION
• 1.Wrong estimate of
interest movement,
thereby reducing
interest spread
• IMPLEMENTATION
• 1.Decrease S/T &
variable rate liabilities
if rates will increase
• 2.Increase S/T &
variable rate liabilities
if rates will decrease
ALM
[email protected]
123