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?

Answer 1

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%