slides used in week 3 tutorials.pdf

7/26/2019 slides used in week 3 tutorials.pdf

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FIN925

Week 3 tutorial

1

Case Study

Q1

2005 2004 2003 2002 2001

Loans 217,516 189,391 160,347 147,074 136,059

NII 5,966 5,410 5,026 4,710 4,474

%NIM 2.74% 2.86% 3.13% 3.20% 3.29%

2

Case Study

Q1

2005 2004 2003 2002 2001

Avg earning assets 243,948 214,187 188,270 170,634 160,607

NII 5,966 5,410 5,026 4,710 4,474

%NIM 2.45% 2.53% 2.67% 2.76% 2.79%

3

Case Study

Q2 2005 2004Interest income 16,194 13,287

Interest expense 10,228 7,877

Loans 217,516 189,391

Deposits 168,029 163,177

income/loans 7.44% 7.02%

expense/deposits 6.09% 4.83%spread 1.36% 2.19%

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Case Study

Q2

2005 2004

Interest income 16,194 13,287

Interest expense 10,228 7,877

Average earning assets 243,948 214,187

Average int. bearing liabilities 225,592 197,532

income/earning assets 6.64% 6.20%

expense/i.b. liabilities 4.53% 3.99%

spread 2.10% 2.22%

5

Case Study

Q3

2005 2004 2003 2002 2001

Operating income 11,354 10,491 9,399 9,068 8,824

Net profit 3,991 2,572 2,012 2,655 2,398

Profit margin 35.15% 24.52% 21.41% 29.28% 27.18%

6

Q4

Case Study

2005 2004 2003 2002 2001

Operating income 11,354 10,491 9,399 9,068 8,824

Total Assets 329,035 305,995 265,110 249,648 230,411

Asset use 3.45% 3.43% 3.55% 3.63% 3.83%

7

Case Study

Q5

2005 2004 2003 2002 2001

Total Assets 329,035 305,995 265,110 249,648 230,411

Equity 24,271 22,405 20,024 19,030 18,393

Multiplier 13.56 13.66 13.24 13.12 12.53

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Case Study

Q6

2005 2004

High 38.52 33.54

Low 28.79 27.00

Weighted averages shares 1273 1256

High MC 49,036 42,126

Low MC 36,650 33,912

Equity 24,271 22,405

High P/B 2.0 1.9

Low P/B 1.5 1.5

9

Extra Question #1

a) Net Profit After Tax (NPAT)

Net profit before tax ($ millions)

= interest revenue 82

- interest expense (64)

+ non-interest revenue 12

- non-interest expense (9)

Total: 21

NPAT = 21*(1-0.3) 14.710

Extra Question #1

b) Return on Equity (ROE)

ROE = ROA * Equity multiplier

Work out c) ROA first

ROA = NPAT / Total Assets

= 14.7 / 850 = 1.73% ROE = 1.73% * 15 = 25.94%

11

Extra Question #1

d) Profit Margin

Operating revenue ($ millions)

= Interest revenue + non-interest revenue

= 82 + 12 = 94

Profit Margin = NPAT / operating revenue= 14.7 / 94 = 15.64%

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Extra Question #1

e) Asset Use

= Operating revenue / Total Assets

= 94 / 850 = 11.06%

f) Net Interest Income (NII) ($ millions)

= interest revenueinterest expense

= 8264 = 18

13

Extra Question #1

g) % Net Interest Margin (NIM)

= NII / Earning Assets

= 18 / 600 = 3%

14

Extra Question #1

h) Interest Rate Spread

= interest revenue / earnings assets

- interest expense / interest bearing liabilities

= 82/60064/540

= 13.67% - 11.85% = 1.81%(difference due to rounding)

15

Extra Question #2

a) Capital required to support each loan

11% * risk weighted assets

Risk weighted Assets ($ millions):

Credit cards: $100 * 1.0 = $100

Mortgages: $260 * 0.5 = $130

Capital to support credit cards: $100*11% =$11

Capital to support mortgages: $130*11% =$14.3

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Extra Question #2

b) RAROC

= (loan revenueloan costs) / capital

Credit Cards:

Loan revenue = $13m

Loan costs = (3% + 2.2%)*100m + 2.8m = $8m

RAROC = (13-8)/11 = 45.45% (before tax)

45.45%*(1-0.3) = 31.82% (after tax)

17

Extra Question #2

b) RAROC

= (loan revenueloan costs) / capital

Residential Mortgages:

Loan revenue = $19m

Loan costs = (4% + 0.8%)*260m + 4m = $16.48m

RAROC = (19-16.48)/14.3 = 17.62% (before tax)

17.62%*(1-0.3) = 12.34% (after tax)

18

Extra Question #3

RAROC > ROE

Let the loan rate be x

RAROC = (x-0.09) *(1-0.3) /0.12

(x-0.09)*(1-0.3)/0.12 > 0.15

x-0.09 > 0.0257 x> 0.1157

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Documents

slides used in week 3 tutorials.pdf