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:
- 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 |