COMMERCIAL BANKING AND FINANCE ASSIGNMENT-
Part One: Briefing to the Bank CEO
The Accounts Department of a major bank forecasts an increase in interest rates (?R) of xxx bps and the Senior Management of the bank is concerned about the impact of this possible interest rate increase on the performances of the bank. Your group has been appointed as a risk management team and are requested to provide a risk analysis of your bank. To this effect, submit a report to the CEO of the bank on assessment of the risk that the bank would face as a result of the change in interest rate.
The Accounts Department has provided you with the following balance sheet information. Please use this information in your analysis.
|
Assets
|
($million)
|
Market yields
%
|
Duration
|
|
Cash
Interbank lending 3-month T-notes 2-year T-bonds
5-year T-bonds 10-year T-bonds Consumer loans Business loans
Fixed-rate mortgages Variable-rate mortgages Premises & equipment
|
160
550
450
400
600
900
800
450
1,300
700
190
|
- 5.05
4.50
5.00
6.00
7.00
6.00
5.80
7.85
6.30
-
|
- 0.02
0.25
2.00
*
* 2.50
6.58
19.50
0.50
-
|
|
Total assets
|
6,500
|
|
|
|
Liability & Equity
|
|
|
|
|
Demand deposits Savings accounts 3-month CDs
6-month CDs 1-year CDs
5-year CDs Interbank borrowings Commercial paper
Subordinated debt: fixed rate
|
400
450
275
300
590
1,700
885
600
500
|
- 4.50
4.00
4.30
4.50
6.00
5.00
5.05
7.25
|
- 0.50
0.25
0.50
*
* 0.02
0.45
6.65
|
|
Total liabilities
|
5,700
|
|
|
|
Equity
|
800
|
|
|
|
Total liabilities and equity
|
6,500
|
|
|
Notes: Please use the following notes in conjunction with the balance sheet data.
1. The coupon rate paid on 5-year T-bonds is 5.00% (per annum). The coupon payment is received bi-annually.
2. The coupon rate paid on 10-year T-bonds is 6.00% (per annum) and the coupon payment is received annually.
3. Variable rate mortgages are repriced at every six months.
4. 1-year CDs have been issued with a coupon rate of 4.00% (per annum, bi- annual payments)
5. 5 year CDs has been issued with a coupon rate of 5.00% (per annum, annual payments).
6. The current price on IRFs is $98.50 per $100 FV with a contract size of $500,000.The duration of the deliverable security is xxx yrs. The sensitivity of the futures and spot rates (b ratio) is assumed to be expressed in the regression ?Sp = -2.5 + 1.05?Fp.
7. We further note that the 12-month cumulative Lgap is forecast to rise and that our loan base is expanding at a rate faster than our deposits.
8. xxx denotes missing data that will be provided in tute classes.
In your written report analysing the risk of the bank, you are expected include the following:
(i) A discussion (no more than one page) that outlines various sources/types of risks a bank would face in general;
(ii) Given that the Accounts Department has forecast an increase in rates, analyse the extent to which our bank is exposed to interest rate risk/s, if any. In this case, using your understanding about the interest rate risk as discussed during the semester, you are required to measure interest rate risk using major models introduced in this unit. Hint: you may analyse the impact of rate change on net worth and net interest income over 30 days and one year horizons;
(iii) Following the analysis in part II above, formulate a strategy to cover any decline in net worth using futures, if applicable and;
(iv) Provide a brief assessment as to whether the bank is facing any other risks in its current operations and if so, outline an strategy with recommendations to address/manage such risks. In this strategy you may include recommendations that can be implemented in the medium to long run in managing the risk as well as improving the bank's profitability.
Part Two: Measuring Bank Performances
Data for Ratio Analysis.xlsx file contains the following information of a major bank operating in Australia.
1. Financial summary 2008-2010
2. Income statement 2008-2010
3. Balance sheet 2008-2010
Using the data contained in these reports conduct a ratio analysis to measure the performances of this bank for the period 2008-2010. You are required to:
i. Calculate bank performance ratios (Part IV Core reading includes a discussion on Bank Performance ratios)
ii. Provide an analysis based on ratios calculated for the period 2008-2010.
iii. Highlight any specific aspects arising from analysis in terms of the risk this bank is facing.
Attachment:- Data for Ratio Analysis.rar