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Case Study
Q1

FIN925

2005
Loans
NII
%NIM

Week 3 tutorial

2004

2003

2002

2001

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

5,966
2.74%

5,410
2.86%

5,026
3.13%

4,710
3.20%

4,474
3.29%

Case Study

Case Study

Q1

Q2

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%

Interest income
Interest expense
Loans
Deposits
income/loans
expense/deposits
spread

2005
16,194
10,228
217,516
168,029
7.44%
6.09%
1.36%

2004
13,287
7,877
189,391
163,177
7.02%
4.83%
2.19%

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Case Study

Case Study

Q2

Q3

Interest income
Interest expense
Average earning assets
Average int. bearing liabilities
income/earning assets
expense/i.b. liabilities
spread

2005
16,194
10,228
243,948
225,592
6.64%
4.53%
2.10%

2004
13,287
7,877
214,187
197,532
6.20%
3.99%
2.22%

Operating income
Net profit
Profit margin

2005
2004
2003
2002
2001
11,354 10,491
9,399
9,068
8,824
3,991
2,572
2,012
2,655
2,398
35.15% 24.52% 21.41% 29.28% 27.18%

Case Study

Case Study

Q4

Operating income
Total Assets
Asset use

Q5
2005
2004
2003
2002
2001
11,354 10,491
9,399
9,068
8,824
329,035 305,995 265,110 249,648 230,411
3.45% 3.43% 3.55% 3.63% 3.83%

Total Assets
Equity
Multiplier

2005
2004
2003
2002
2001
329,035 305,995 265,110 249,648 230,411
24,271 22,405 20,024 19,030 18,393
13.56 13.66 13.24 13.12 12.53

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Case Study

Extra Question #1

Q6
High
Low
Weighted averages shares
High MC
Low MC
Equity
High P/B
Low P/B

2005
38.52
28.79
1273
49,036
36,650
24,271
2.0
1.5

2004
33.54
27.00
1256
42,126
33,912
22,405
1.9
1.5

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)
14.7

Extra Question #1

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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%

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

Extra Question #1

e) Asset Use
= Operating revenue / Total Assets
= 94 / 850 = 11.06%

g) % Net Interest Margin (NIM)

= NII / Earning Assets
= 18 / 600 = 3%

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

= interest revenue interest expense
= 82 64 = 18
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Extra Question #1

Extra Question #2

h) Interest Rate Spread

= interest revenue / earnings assets
- interest expense / interest bearing liabilities
= 82/600 64/540
= 13.67% - 11.85% = 1.81%
(difference due to rounding)

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

Extra Question #2

b) RAROC
= (loan revenue loan 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)
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b) RAROC
= (loan revenue loan 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)

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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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