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
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 |