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ASSET LIABILITY MANAGEMENT

ASSET LIABILITY MANAGEMENT. Generic Income Statement Of Fin. Inst. IR= r * TA IE= c * TL r = weighted average interest rate (yield) earned on assets c = weighted average interest rate (yield) paid on liabilities. Cost of funds.

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ASSET LIABILITY MANAGEMENT

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  1. ASSET LIABILITY MANAGEMENT

  2. Generic Income Statement Of Fin. Inst.

  3. IR= r * TA • IE= c * TL • r = weighted average interest rate (yield) earned on assets • c = weighted average interest rate (yield) paid on liabilities. Cost of funds. • r =[{( Asset1/TA) x r1}+ {( Asset2/ TA ) x r2}+……….+ {(Assetn /TA) x rn}] • c =[{( Liab.1 / TL) xc1} + {(Liab2 / TL) x c2} +…………..+{(Liabn / TL) x cn}] • IR=( Asset1 x r1 ) + (Asset2 x r2) +……………(.Assetn x rn) • IE = ( Liability1 x c1) + ( Liability2 x c2 )+……………+(Liability n x c n) • NIE is (Net non interestExpenses) = Non Interestexpenses - Non Interest Revenues

  4. Non InterestExpenses: • Rents, Salaries, utilities, Mkt’g Expenses/Advertising. , Stationary, entertainment. • Depreciation, Insurance of premises and insurance of Deposits, Security guards etc. • Legal expenses, Bad debts called provisioning for bad loans/ or loan loss provisions. It is similar to bad debt expense in non financial cos. • Capital losses on Securities, computing, etc

  5. Non Interest Revenues: • Lockers fee • L/C fees • L/G fees . Letters of guarantee issued by a bank on behalf of a client • Account Maintenance fee • DD/ TT fee • ATM fees • Credit Card fee • Trust Service fee • Commitment fee • Bank guarantee fee • Traveler’s checks making and cashing fees • Underwriting fees for underwriting security issue of a client

  6. NIE (Net Non Interest Expense) = Non interest expenses – Non interest income • NIM = Spread /TA= (IR – IE)/TA= { (r*TA) - (c*TL) }/ TA = r- (c* TL/TA)

  7. EXERCISE: BALANCE SHEET Of FI (Millions of Rs) ASSETSY*LIABY* Cash 6.9 0% Demand Deposits 30 5% Short term Securities 15 7% S. Term Saving Deposits 30 6% Long term Invest 15 10% L. T Saving Deposits 30 7% S.T. Loans 20 9% TFCs issued 3 7% Medium Term Loans 20 11% TL 93 Long Term Loans 20 12% Share Capital 3 Premesis (i.e. FA) 3.1 0% RE 4 TA 100 Total OE (NW) 7 TL & OE 100 Non interest revenues are forecasted as 10, and non interest expense as 5 for the next year. The co has “d” of 40%, Tax rate is 30%, and it has 5 shares.

  8. Required: • r • c • EPS • DPS • RE increase in next yr. • RE balance at the end of next yr. • OE at the end of yr. • Financial Leverage = TA / NW (Beginning Of Period) • Capital Adequacy ratio = NW/ TA • Does it have Adequate Capital ? Int’l standard for the capital adequacy ratio is 4% • RONW = NI / NW • ROA = NI / TA • Double check RONW = TA / NW *ROA (i.e financial leverage * Return on assets) • NIM = Spread /TA • NIM = (IR-IE) /TA • NIM = {(r*TA) ( c*TL) } / TA • NIM = r- {c*TL/TA } • Please Complete the forecasted Income Statement

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