ASSET LIABILITY MANAGEMENT

Generic Income Statement Of Fin. Inst. FINANCIAL INSTITUTIONs INTEREST REVENUE (IR) -INTEREST EXPENCE (IE) SPREAD = (IR – IE) Non interest Expenses -Non interest Revenues (fee based revenues) NIE (Net non interest expenses) EBT = Spread – NIE TAX NI DIVIDENDS TO PREFERRED SHARE INCOME AVAILABLE TO COMMON SHARES EPS = INCOME TO COMMON SHARE /SHARES DPS = d * EPS

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 =[{( Asset 1 /TA) x r 1 }+ {( Asset 2 / TA ) x r 2 }+……….+ {(Asset n /TA) x r n }] c =[{( Liab. 1 / TL) xc 1 } + {(Liab 2 / TL) x c 2 } +…………..+{(Liab n / TL) x c n }] IR=( Asset 1 x r 1 ) + (Asset 2 x r 2 ) +……………(.Asset n x r n ) IE = ( Liability 1 x c 1 ) + ( Liability 2 x c 2 )+……………+(Liability n x c n ) NIE is (Net non interest Expenses) = Non Interest expenses - Non Interest Revenues

Non Interest Expenses: 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

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

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)

EXERCISE : BALANCE SHEET Of FI (Millions of Rs) ASSETS Y* LIAB Y* 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.

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