Transcript Management of Financial Institutions

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
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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}]
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• IR=( Asset1 x r1 ) + (Asset2 x r2) +……………(.Asset n x rn)
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• IE = ( Liability1 x c1) + ( Liability2 x c2 )+……………+(Liability n x c n)
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• 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:
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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*
Y*
Cash
6.9 0%
Short term Securities 15
7%
Long term Invest
15
10%
S.T. Loans
20
9%
Medium Term Loans 20 11%
Long Term Loans
20
12%
Premesis (i.e. FA)
3.1
0%
TA
100
LIAB
Demand Deposits
30
S. Term Saving Deposits 30
L. T Saving Deposits 30
TFCs issued
3
TL
93
Share Capital 3
RE
4
Total OE (NW) 7
TL & OE
100
5%
6%
7%
7%
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