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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

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:

  1. Complete the Income Statement
  2. 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

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