A bank had the following balance sheet during 2017. Also shown are the interest
ID: 2656502 • Letter: A
Question
A bank had the following balance sheet during 2017. Also shown are the interest rates:
Assets amount ($mm) rate, %
Business Loans 50 6
Corporate Bonds 25 5
Government Bonds 18 2.5
Cash 6
Real assets 2
Liabilities
Demand Deposits 36 0
Time Deposits 45 1.1
Inter-Bank Borrowing 15 1.25
Equity 5
Calculate Net Interest Margin for the year.
The bank also received $200,000 in non-interest (fee) income during the year, and paid $1.5mm in labor compensation and other expenses for the year. What was its ROE?
The bank is considering issuing enough equity to replace all its time deposits. If nothing else changes, what is the new NIM and the new ROE?
Explanation / Answer
Interest Income Amount Rate of interest Buiness loans 50 6% 3 Corporate Bonds 25 5% 1.25 Government Bonds 18 2.50% 0.45 Total Income 4.7 Interest Expenses Demand Deposit 36 0% 0 Time Deposit 45 1.10% 0.495 Inter Bank Borrowing 15 1.25% 0.1875 Total Expense 0.6825 Net Interest Margin 4.0175 Net Interest Income 4.0175 Non Interest Income 0.2 Total Income 4.2175 Less:- Expenses 1.5 Net Return 2.7175 ROE 2.7175/5 = 54.35% If tIme Deposits changed to equity then Interest Income Amount Rate of interest Buiness loans 50 6% 3 Corporate Bonds 25 5% 1.25 Government Bonds 18 2.50% 0.45 Total Income 4.7 Interest Expenses Demand Deposit 36 0% 0 Inter Bank Borrowing 15 1.25% 0.1875 Total Expense 0.1875 Net Interest Margin 4.5125 Net Interest Income 4.5125 Non Interest Income 0.2 Total Income 4.7125 Less:- Expenses 1.5 Net Return 3.2125 Now New Equity 5+45 50 ROE 3.2125/50 = 6.43%
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