Bank A has net profit after taxes of $1.8 million and the balance sheet on the l

Question

Bank A has net profit after taxes of $1.8 million and the balance sheet on the left. Bank B has net profit after taxes of $2 million and the balance sheet on the right.

Bank A

(in millions)

Bank B

(in millions)

Instruction: Round your responses to 2 decimal places.

a. Based on the information provided above about Bank A, the return on assets (ROA) for Bank A is  percent ? , the return on equity (ROE) for Bank A is  percent ? , and the leverage ratio for Bank A is ?.

b. Based on the information provided above about Bank B, the return on assets (ROA) for Bank B is ? percent, the return on equity (ROE) for Bank B is ? percent, and the leverage ratio for Bank B is ?.

What would happen if all interest rates were to rise by 1 percent?

If the interest rate rises 1 percent, the bank's profit in the second year falls to $?.

Bank A

(in millions)

Bank B

(in millions)

Assets Liabilities Assets Liabilities Reserves $5 Deposits $100 Reserves $8 Deposits $65 Loans $70 Borrowing $10 Loans $52 Borrowing $10 Securities $45 Bank Capital $10 Securities $30 Bank Capital $15

Explanation / Answer

a. ROA = $1,800,000 / $120,000,000 * 100%

= 1.50%

ROE = $1,800,000 / $10,000,000 * 100%

= 18.00%

Leverage ratio = $10,000,000 / $120,000,000

= 0.0833

b. ROA = $2,000,000 / $90,000,000 * 100%

= 2.22%

ROE = $2,000,000 / $15,000,000 * 100%

= 13.33%

Leverage ratio = $15,000,000 / $90,000,000

= 0.1667

Drop in profit for bank A = ($100,000,000 + $10,000,000) * 1%

= $1,100,000

Drop in profit for bank B = ($65,000,000 + $10,000,000) * 1%

= $750,000

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