Question

                  Balance Sheet of Star Bank Ltd.

	Assets $	yield	Liabilities $	yield
Rate sensitive	1500	12%	1800	9%
Fixed rate	1050	15%	860	8%
Other earnings	450	6%	540	4%
Non-earnings	800
			Equity=600
Total	3800		3800

1. Calculate the net interest income, net interest margin and the funding GAP
2. If the size of the bank increases by 60% and at the same time short term rate increases by 1%, how would this affect net interest income, net interest margin and the funding GAP

Answer 1

Interest Income from Asset = ( Rate sensitive Asset * yield ) + ( Fixed rate Asset * yield)

= ( 1500 * 12%) + ( 1050 * 15%) = 337.50

Interest Income from Liabilities = ( Rate sensitive Liabilities * yield ) + ( Fixed rate Liabilities * yield)

= ( 1080 * 9%) + ( 860* 8%) = 230.80

NII = Interest Income from Asset - Interest Income from Liabilities

= 337.50 - 230.80 = 106.70

net interest margin = NII / (Interest Income Assets) =  NII / (Rate sensitive Asset + Fixed rate Asset)

= 106.70 / ( 1500 + 1050) = 4.184%

funding GAP = Rate sensitive Asset -   Rate sensitive Liabilities = 1500 - 1800 = - 300

Ans a)

Net Interest Income = 106.70

net interest margin = 4.184%

funding GAP = -300

Ans b)

With 60% Increase in Bank Book Each Portion will Increase by 60% proportionaly.

With Increase in Rate of 01%

Yield of Rate sensitive assets and liabilities will  increase by 01%

Interest Income from Asset = ( Rate sensitive Asset * yield ) + ( Fixed rate Asset * yield)

= ( 2400 * 13%) + ( 1680* 15%) = 564.0

Interest Income from Liabilities = ( Rate sensitive Liabilities * yield ) + ( Fixed rate Liabilities * yield)

= ( 2880* 10%) + ( 1376* 8%) = 398.08

NII = Interest Income from Asset - Interest Income from Liabilities

= 564.00 - 398.08 = 165.92

net interest margin = NII / (Interest Income Assets) =  NII / (Rate sensitive Asset + Fixed rate Asset)

= 165.92 / ( 2400 + 1680) = 4.067%

funding GAP = Rate sensitive Asset - Rate sensitive Liabilities = 2400 - 2880 = - 480

Ans b)

Net Interest Income = 165.92

net interest margin = 4.067%

funding GAP = -480