Assignment Task
1. Bank Performance
You are a Research Analyst for Griffith Global Capital Partners and you have been asked to analyse Gold Coast Bank. You are required to:
Complete the Income Statement
Calculate the specified ratio
Income Statement Items
£ million
Interest on reverse REPOs
10.00
Interest – federal funds purchased
14.00
Interest on mortgage loans
135.00
Overhead expenses
4.00
Fee for securitization of mortgage assets
12.00
Fee for liquidity enhancement of securitized assets
5.00
Employee wages, salaries, and benefits
35.00
Interest – clients with time and savings deposits
90.00
a. Insert the following items into the Income Statement and calculate the missing numbers:
b. Given your calculation in part a) and the information below, calculate the following ratios for the bank:
Balance Sheet (averages over last two years)
£ million
Cash
73.00
Investment securities
77.00
Reverse repurchase agreements
53.00
Commercial & industrial loans
38.00
Consumer & instalment loans
30.00
Mortgage loans
628.00
Plant and equipment
44.00
Goodwill and other intangibles
57.00
Total assets
1000.00
Demand deposits
0.00
Time and savings deposits
512.00
Federal funds purchased
80.00
Repurchase agreements
55.00
Other borrowed funds
95.00
Subordinated debt
123.00
Limited life preferred stock
90.00
Total liabilities
955.00
Common stock
15.00
Surplus
18.00
Retained earnings
8.00
Perpetual preferred stock
4.00
Total Capital
45.00
Total Liabilities and Capital
1000.00
2. Repricing Gap
Assets, in M$
Liabilities and Equity, in M$
T-notes (3 months) $90
Interest-paying demand deposits $50
Short-term Loans (9 months) $30
Bank accepted bills (8 months) $100
Bonds (2 years) $80
Equity: $50
Total assets: $200
Total liabilities and equity: $200
1. Calculate repricing gap.
2. Calculate incremental and cumulative gap for 6-12 months maturity bucket.
3. Calculate the impact on net interest income of 100 b.p. increase in interest rates for (i) incremental gap in 0-6 months maturity bucket; (ii) incremental gap in 6-12 months maturity bucket.
4. What is the interest rate exposure for cumulative gaps in 0-3 month’s maturity bucket and 3-12 months maturity bucket?
3. Credit Risk Management
3.1. You are analysing a loan application from your client. Base lending rate in the bank is 6%, credit risk premium is 2%, loan origination fee is 20b.p., compensating balance is equal to 10% and reserve requirement with a central bank is 8%.
Calculate contractually promised return on this spot loan.
Calculate contractually return on the loan commitment if the back-end fee is 35 b.p. and drawdown rate is 70%.
3.2. New loan application from the bank’s customer. Its financial ratios are EBIT/Total assets = 3%, MV of equity /BV of debt = 0.5, working capital to total assets =12%, sales to total assets = 1.5, earnings to total assets = 1%. Using Altman’s discriminant model:
Calculate Z-score?
Decide whether to approve or reject the application. Briefly explain.
3.3. Assume the loan application. Loan probability of default equals to 5%, recovery rate if defaulted is 60%, risk-free rate is 4.5%.
Estimate required (expected) return on loan;
Calculate risk premium
4. Liquidity management
1. Assume unexpected deposit withdrawal of $10M. Show the impact on the bank balance sheet if the following liquidity solution is used: (a) stored liquidity; (b) purchased liquidity.
Assets, in M$
Liabilities and Equity, in M$
Cash $10
Deposits $70
Securities $10
Borrowed funds $10
Other assets $80
Equity: $20
Total assets: $100
Total L+E: $100
2. Deposit earned 5% interest, securities yielded 4% p.a, mortgage loans earn 10%. Assuming scenario 1a, calculate the impact on bank’s NII and its size.
3. Assume loan commitment of $10 M is drawn upon. Show the impact on the bank balance sheet if the following liquidity solution is used: (a) stored liquidity; (b) purchased liquidity.
Assets, in M$
Liabilities and Equity,
in M$
Cash $10
Deposits $70
Securities $10
Borrowed funds $10
Other assets $80
Equity: $20
Total assets: $100
Total L+E: $100
5. Capital management
Assets, in M$
Liabilities and Equity,
in M$
Cash $10
Deposits $215
Securities (AA rated, 20% weight) $30
Loan capital $7
Corporate loans (BBB rated 100%) $150
Non-cumulative perpetual shares $3
Corporate loans (B rated 150%) $50
Equity: $15
Total assets: $240
Total L+E: $240
