asset and liability management bs1

7/31/2019 Asset and Liability Management BS1

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ASSET & LIABILITYMANAGEMENT IN

COMMERCIAL BANKS


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AssetManagement

LiabilityManagement

ALMAsset t

Liability


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ASSET & LIABILITY

MANAGEMENT (ALM) DEFINITION

ALM is continuously arranging andrearranging the assets and liabilities of thebank without infringing the liquidity andsafety of the bank and with the purpose of maximizing the banks profits.


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LIQUIDITY

The ability of a bank to fulfill itsobligations, and after doing so havingenough cash left to do its normal dailybanking business.


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SAFETY

The ability of a banks Share HoldersEquity (SHI) to absorb the future possiblelosses that may arise and after doing sohaving enough SHI left to run the bank and

to comply with the minimum CapitalRequirements.


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Capital protects your bank in rainy days!..


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ALM DEVELPOMENT

1950s 1960s 1970s

ASSETMNG.

LIABILITYMNG.

ASSET &LIABILITY

MNG.LOANPRODUCTS

DEPOSITPRODUCTS

LOAN &DEPOSITBOTH


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8DeregulationsSC of Accounts

GAAP

Reorganization

Management

Computerization

Office Automation

Personal Training

Internet


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Yesterday Tomorrow

Arena

Services

Organization&

Reporting

Data


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NEW DEVOPLEPMENTS

1. Deregulation of Interest Rates

2. Deregulation of Foreign ExchangeOperations 3. Changes in Laws and Regulations

4. Increase in Deposit Interest Rates


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NEW DEVELOPMENTS

5. Increase in Deposit Interest Rates 6. Change in Deposit Characteristics Increase in Term-Deposits Decrease in Demand-Deposits

Increase in Short Terms


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NEW DEVELOPMENTS

7. Increase in Personnel Expenses 8. Increase in Operating Expenses 9. Increase in Technology Investments 10. Frequent Changes in Interest Rates

11. Increase in Share CapitalRequirements


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NEW DEVELOPMENTS

12. Change in Asset Structure Increase in Government Bonds Increase in Treasury Bills Increase in Foreign Exch. Loans

Increase in Short Term Loans Increase in Non-Performing Loans Increase in Consumer Loans


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NEW DEVELOPMENTS

13. Decrease in S/H Equity Growth 14. Increase in Customer Expectations

15. New Service Points Small Branches ATM and POS

Telephone and Internet Banking 16. 24 Hours 365 Days Banking


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1950 1970 1980 1990 2000SALES FORCE

BRANCH

CALL CENTER

INBOUND

MAIL

CREDIT

CARD

ATM

TELEPHONE

BANKING

PC

BANKING

DIRECTMAIL

CALL CENTER

OUTBOUND

DEBT CARD

RELATIONSHIP

MANAGEMENT

IN-STOREBRANCH

DATABASEMARKETING

SMART CARD

KIOSK

INTERNET

BANKING

SCREEN

PHONES

INTERNETATM

VIDEOKIOSK

INTERACTIVE

TV

SPACE

SHARINGFRANCHISEBRANCHES

REMOTE

RELATIONSHIP

MANAGEMENT

Kaynak: A.T.Kearney


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FINANCIAL STATEMENTS

1. BALANCE SHEET 2. STATEMENT OF INCOME 3. STATEMENT OF

SHAREHOLDERS EQUITY

4. SOURCES & USES OF FUNDSSTATEMENT


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Balance Sheet Income StatementAssets Liabilities

Loans

Treasury Bills

Interest Income

Interest Expences

Net Interest Income

Deposits

DebtInterestEarningAssests

InterestBearingLiabiliti

es

Non-

InterestEarningAssests

Non-


esShare Holders

Equity

Total Assets Total Liabilities=


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Balance Sheet Income StatemenAssets Liabilities

Loans

Treasury

Bills

Interest Income

Interest Expence

Net Interest Income

Deposit s

DebtInterestEarningAssests


es

Non -Interest

Earning

Assests

Non -InterestBearingLiabiliti

esShare Holders

Equity

Total Assets Total Liabilities=

100

80

InterestRate

Assets=

%20

36

InterestRate

Liabilities=

%5

120

60 9

27353035


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BALANCE SHEET

SHOWS

The Financial Positionof a Bank

As at a specific date.

As of Dec. 31,1998


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BALANCE SHEET

EQUATION 100 =

ASSETS = Equals

= 100

LIABILITIES + Plus

SHAREHOLDERS EQUITY


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ASSET CLASSIFICATION

NON INTEREST EARNING

ASSETS

INTEREST EARNING

ASSETS

TOTALASSETS


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LIABILITY

CLASSIFICATION

INTEREST BEARING

LIABILITIES

NON INTEREST BEARING

LIABILITIES

TOTALLIABILITIES


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BALANCE SHEET Assets

Liquid Assets 150 Loans 400 Marketable Securities 200

Investment Securities 50 Fixed Assets 100 Accrued Interest 70

Other Assets 80 Total Assets 1050


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BALANCE SHEET Liabilities

Deposits 400 Bank Borrowings 150 Accrued Expenses 100 Other Liabilities 80 Bonds Issued 70 Shareholders Equity 250 Total Liabilities & S/HE 1050


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SHAREHOLDERS EQUITY

Share Capital 100 Legal Reserves 30 Retained Earnings 50 Revaluation Surplus 20 Share Premiums 10 Net Income 40 Total S/H Equity 250


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BALANCE SHEET

DOES NOT SHOW Interest Rates

Interest Sensitivity Due Dates Foreign Currency

breakdown Collateral


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STATEMENT OF INCOME

SHOWS

The results of operations of a bank.

For the periodbetween two dates.

For the year endedDec. 31 , 1998


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NET PROFIT

TOTALINCOME

TOTALEXPENSE

NET PROFIT


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TOTAL INCOME

NETINTERESTINCOME

NETNON-INTEREST

INCOME

TOTAL

INCOME


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NET INTEREST INCOME

INTERESTINCOME(+)

INTERESTEXPENSE(-)

NETINTERESTINCOME


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31time

$interestincome

interest expense

net interestincome

net interestincome

+

-


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NET INTEREST INCOME

INTERESTEARNING ASSETS

B/S

INTERESTINCOME

P/L

INTERESTBEARINGLIABILITIES

B/S

INTERESTEXPENSE

P/L

NETINTERESTINCOME


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NET NON-INTEREST

INCOME

NON

INTERESTINCOME

(+)

NON

INTERESTEXPENCE

(-)

NETNON-INTEREST

INCOME


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STATEMENT OF INCOME Interest Income 1000 Interest Expense (700) Net I.Income 300 Non Interest Income 220 Operating Expenses (450) Pre-Tax Profit 70

Tax Provision (30) Net Income 40


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ANALYSIS OF PROFIT

PROFIT FROMBANKING OPERATIONS

(NET OPERATING INCOME)

(NOI)

PROFIT FROMEXTRAORDINARYTRANSACTIONS

(PEXT)

PROFIT FROMSECURITY

TRANNSACTIONS

(PST)

NETPROFIT

(NP)


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BANKINGRISKS


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BANKING RISKS

C AMEL A M E L


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CAMEL

Capital

Adequacy


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C

AMEL

Asset Quality


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CA

MEL

Management

Quality


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CAM

EL

Earnings

Efficiency


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CAME

L Liquidity Risk


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CAMEL RISKS

CapitalAdequacy

Asset Quality Management

Earnings Liquidity


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BANKING RISKS

1.2.3.4.5.CAMEL 6. Credit Risk 7. Interest Rate Risk 8. Interest Rate Sensitivity Risk 9. Foreign Exchange Availability Risk 10. F/X Position Risk


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BANKING RISKS

11. Accounting & Reporting Risk 12. Computer Risk 13. Capital Market Operations Risk 14. Money Market Operations Risk 15. Country (Sovereign) Risk 16. Pricing Risk 17. Market Risk


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BANKING RISKS

18. Theft Risk 19. Fraud & Defalcations Risk 20. Natural Disasters 21. Strategic Risk 22. Fiduciary Risk 23. Transaction Risk 24. Regulatory/Compliance


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BANKING RISKS

25. Reputation Risk 26. Large Loans/Deposits Risk 27. Concentration Risk


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RATIO ANALYSIS

Numerator

______________________Denominator


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RATIO ANALYSIS

Balance Sheet__________________Balance Sheet

Income Statement________________Balance Sheet


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RATIO ANALYSIS

What is the

LEVEL ?

What is the

TREND ?


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RATIO ANALYSIS

1. Capital Adequacy 2. Asset Quality 3. Management 4. Earnings & Efficiency 5. Liquidity


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RATIO ANALISIS

CAPITAL ADEQUACY

The Capital of aBank protects theBank againstunexpected futurelosses.


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RATIO ANALYSIS

CAPITAL ADEQUACY 1. Shareholders Equity

------------------------------------ Total Assets

The ability of the present Capital to supportthe further growth of Assets


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RATIO ANALYSIS

CAPITAL ADEQUACY 2.

Shareholders Equity ------------------------------------

Risk Weighted Assets


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RATIO ANALYSIS

CAPITAL ADEQUACY 3.

Shareholders Equity ------------------------------------

Risk Weighted Assets

+RW Contingent Liabilities


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RATIO ANALYSIS

CAPITAL ADEQUACY 4.

Total Debt------------------------------------

Shareholders Equity

The ability to raise additional Debt Capital


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RATIO ANALYSIS

CAPITAL ADEQUACY 5. Financial Leverage :

Total Assets------------------------------------

Shareholders Equity

RATIO ANALYSIS


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RATIO ANALYSIS CAPITAL ADEQUACY

6. Capital Formation Rate :

Retained Net Income (RNI)--------------------------------------------------

Average Shareholders Equity

RNI = Net Income - Dividends to be paid The internal growth of Equity Capital


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RATIO ANALISIS

ASSET QUALITY 1.

Loans--------------------------------

Total Assets


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RATIO ANALISISASSET QUALITY

2. Non Performing Loans = a) Loans past due more than 90 days

b) Loans not accruing interest c) Loans with low interest rates d) Loans on which repayment terms

have been renegotiated.


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3. Non Performing Loans-------------------------------------

Total Loans

Indicates how much of the loan portfolio isnon performing.

RATIO ANALISIS


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4. Reserves for Non Performing Loans----------------------------------------------

Non Performing Loans

Indicates the ability of the loan loss reserveto absorb potential losses from currentlynon performing loans.


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5. Loan Loss Provision-------------------------------------

Average Loans

Shows current income reduction inanticipation of loan losses.


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6. Net Charge - Offs-------------------------------------

Average Loans

Shows current income reduction inanticipation of loan losses.


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RATIO ANALISIS

ASSET QUALITY 7.

Interest Earning Assets-------------------------------------------------

Total Assets


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RATIO ANALISIS

ASSET QUALITY 8.

Non Interest Earning Assets-------------------------------------------------

Total Assets


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RATIO ANALISIS

EARNINGS & EFFICIENCY

A Bank with noprofit is like a humanbody with no blood.


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THE PRIMACY OF

EARNINGS A bank can not sustain itself long without a

positive cash flow.

Earnings are essential to : 1.Absorb loan losses 2.Finance internal growth of capital 3.Attract investors to supply capital


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RATIO ANALISIS

EARNINGS & EFFICIENCY 1. Return on Assets ( ROA )

Net Income--------------------------------------------

Total Average Assets


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RATIO ANALISIS

EARNINGS & EFFICIENCY 2. Return on Equity ( ROE )

Net Income--------------------------------------------

Average Shareholders Equity


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RATIO ANALISIS

EARNINGS & EFFICIENCY 3. Return on Equity ( ROE )

ROE = ROA * Equity Multiplier

ROE = ( NI / AST ) * ( AST / SHEQ )


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RATIO ANALISIS

EARNINGS & EFFICIENCY 4.

Interest Income--------------------------------------------

Average Interest Earning Assets


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RATIO ANALISIS


Net Interest Income--------------------------------------------

Average Total Assets


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RATIO ANALISIS


Interest Income on Loans--------------------------------------------

Average Total Loans


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RATIO ANALISIS


Total Operating Expense-------------------------------------------------

Total Operating Income


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RATIO ANALISIS

EARNINGS & EFFICIENCY 8. Efficiency Ratio

Non Interest Expense----------------------------------------------------

Net Interest Income + Fees Commissions


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RATIO ANALISIS

EARNINGS & EFFICIENCY 9. Break Even Ratio

Total Expenses - Non Interest Income----------------------------------------------------

Total Average Interest Earning Assets


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RATIO ANALISIS

EARNINGS & EFFICIENCY 10. Net Free Funds Ratio

Non Paying Liabilities - Non EarningAssets

--------------------------------------------------

Interest Earning Assets

RATIO ANALISIS


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RATIO ANALISISEARNINGS & EFFICIENCY

11. Interest Rate Sensitivity Gap : Interest Rate Sensitive Assets

( minus ) Interest Rate Sensitive Liabilities

Shows the net amount to be effected by thefuture change of interest rates in the market

RATIO ANALISIS


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RATIO ANALISISEARNINGS & EFFICIENCY

12. Interest Rate Sensitivity Gap Ratio :

Interest Rate Sensitive Assets-------------------------------------------------

Interest Rate Sensitive Liabilities


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RATIO ANALYSIS

LIQUIDITY

InadequateLiquidity of a Bankmay cause anaccident similar to an

airplane crash !


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RATIO ANALISIS

LIQUIDITY 1.

Loans-------------------------

Deposits


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RATIO ANALISIS

LIQUIDITY 2.

Liquid Assets-------------------------

Deposits


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RATIO ANALISIS

LIQUIDITY 3.

Liquid Assets--------------------------------

Deposits + Borrowings


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RATIO ANALISIS

LIQUIDITY 4.

Assets Due for the Period-----------------------------------------

Liabilities Due for the Period

RATIO ANALISIS


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RATIO ANALISISLIQUIDITY

5. Net Large Liabilities-----------------------------------------

Net Earning Assets Both numerator & denominator are net of

short-term assets.

Measures the extent to which net earningassets would be effected by the loss of a

banks large liabilities.

RATIO ANALISIS


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6. Liquid Assets-----------------------------------------

Large Liabilities

Measures the assets readily available to

cover a loss of large liabilities.

RATIO ANALISIS


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7. Core Deposits-----------------------------------------

Earning Assets

Indicates the extend to which earning assets

are funded by those deposits consideredstable and not subject to interest ratedisintermediation.

RATIO ANALISIS


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8. Brokered Deposits-----------------------------------------

Earning Assets

Measures the extent to which a bank is

funding assets with high-priced and volatilebrokered deposits.


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MATURITY ANALISIS

Days 0-10 10-30 30-60 60-90Cash 100 200 300 50

Loans 200 500 200 100300 700 500 150

Deposit 400 300 800 20

Borrow 150 200 200 30550 500 1000 50


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MATURITY ANALYSIS

Days 0-10 10-30 30-60 60-90

Asset 100 500 1000 2000Liab 300 200 1500 700

Short - -200 -500Long + +300 1300

OFF BALANCE SHEET


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OFF - BALANCE SHEET

RISK 1. Loan Commitments

----------------------------------------- Average Assets

Shows the extent of a banks obligation tomake loans.

OFF BALANCE SHEET


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OFF - BALANCE SHEET

RISK 2.Contingent Liabilities & Commitments

---------------------------------------------------- Average Assets

Shows the extent of a banks commitments& contingent liabilities.


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RISKS

I manage Assets!% rates,

due dates...

I manage Liabilities

% rates,

due dates...


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ASSET & LIABILITY MATCH


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A & L Match

Amounts

Currency Due Dates Interest Rates

Interest Sensitivity Volatility


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Foreign Exchange Position

USA $ Short Position $Liabilities>$Assets

USA $ Long Position $Assets>$Liabilities


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F/X Position Strategy

IncreasingF/X Rates

DecreasingF/X Rates

Long PositionYES NO

Short PositionNO YES


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Interest Rate Sensitivity

Interest Rate Sensitive Assets/Liabilities

IRSA/L are such assets and Liabilitieswhose interest rates will change before theirdue dates when there is a change in market

interest rates.


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Interest Rate Sensitivity

Interest Rate SensitiveAssets & Liabilities

Interest RateNon-Sensitive

Assets & Liabilities

VARIABLE RATES FIXED RATES


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Interest Rate Sensitivity Gap

IRS GAP =

(IRSA IRSL)

Positive Gap IRSA>IRSL

Negative Gap IRSL>IRSA


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Interest Rate Sensitivity Strategy

Interest RatesWill Increase

Interest RatesWill Decrease

PositiveIRS GAP YES NO

NegativeIRS GAP NO YES


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INTEREST MARGIN

INCREASING THE

INTEREST MARGIN%

INCREASING INTEREST


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INCREASING INTEREST

MARGIN Interest Income..200

Interest Expense( 50 ) ----------

INTEREST MARGIN.. 150

----------

$


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105time

interestincome

interestexpense

net interestincome

net interest

income

+

-

INCREASING THE


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INCREASING THE

INTEREST MARGIN BANK STRATEGY TO

INCREASESIZE

CHANGEINTERESTSPREAD

ALTER ASSET/LIABILITY

MIX

INCREASE THEINTEREST MARGIN

INCREASING THE


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INCREASING THE

INTEREST MARGIN BANK STRATEGY

Increase Size

ACTION

1.Expand Assets 2.Reduce Fixed Assets 3.Increase Equity Base

INCREASE THE


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INCREASE THE

INTEREST MARGIN BANK STRATEGY

ChangeInterest Spread

ACTION

1.Re-PriceAsset Portfolio 2.Re-Price

Liability Portfolio

INCREASE THE


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INTEREST MARGIN

BANK STRATEGY

AlterAsset / Liability

Mix

ACTION 1.Plan Taxes 2.Reduce Liquidity 3.Increase

Aggressiveness 4.Change Asset Yield

Sensitivity 5.Change Liability

Cost Sensitivity

INCREASE THEINTEREST MARGIN


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INTEREST MARGIN

BANK STRATEGYIncrease Size

ACTIONExpand Assets

IMPLEMENTATION 1.Offer new Products

and Services 2.New Loans/Deposits 2.Open new Branches 3.Expand Promotion

Budget

4.Reduce InterestSpread

EXPAND ASSETS


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REPERCUSSION 1.Increase operating

Expenses

2.Need for Capital 3.F/A Regulations 4.Decrease Capital

Ratio 5.Reduce ROA

IMPLEMENTATION 1.Offer new Products

and Services 2.New Loans/Deposits 3.Open new Branches 4.Expand Promotion

Budget

5.Reduce InterestSpread

INCREASE THE


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INTEREST MARGIN

BANK STRATEGYIncrease Size

ACTIONIncrease

Equity Base

IMPLEMENTATION 1.Reduce Dividend

pay out 2.Offer Dividend

reinvestment 3.Sell Stock 4.Establish Employee

Stock Ownership PL

INCREASE EQUITY BASE


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INCREASE EQUITY BASE

REPERCUSSIONS 1.Hurt shareholders

2.Double taxation S/H3.Reduce ability to

leverage ROA,

dilution of earnings 4.Continued Employee

Expectations

IMPLEMENTATION 1.Reduce Dividend

pay out 2.Offer Dividend

reinvestment 3.Sell Stock 4.Establish Employee

Stock Ownership PL

INCREASE INTEREST


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INCREASE INTEREST

MARGIN BANK STRATEGY

Change Interest Spread

ACTIONRe -price Portfolio

IMPLEMENTATION 1.Increase rates on

Loans 2.Compound return

more frequently 3.Reduce rates on

Deposits 4.Compound cost less

frequently


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REPRICE PORTFOLIO

REPERCUSSIONS 1.Lose business

Loan quality decrease 2.Increase operations

Client dissatisfaction 3.Lose business

Liquidity problem 4.Increase operations

Client dissatisfaction

IMPLEMENTATION 1.Increase rates on

Loans 2.Compound return

more frequently 3.Reduce rates on

Deposits 4.Compound cost less

frequently

INCREASE INTEREST


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INCREASE INTEREST

MARGIN BANK STRATEGY

Alter Asset/LiabilityMix

ACTION Reduce Liquidity

IMPLEMENTATION

1.Minimize cash 2.Minimize due from 3.Sell Securities &

Bonds 4.Increase short term

Deposits


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REDUCE LIQUIDITY

REPERCUSSION

1.Liquidity Risk 2.Lose correspondent 3.Incur book losses

4.Increase volatility of deposits

IMPLEMENTATION

1.Minimize cash 2.Minimize due from 3.Sell Securities &

Bonds 4.Increase short term

Deposits

INCREASE INTEREST


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INCREASE INTERESTMARGIN

BANK STRATEGY Alter Asset/Liability

Mix

ACTION Increase

Aggressiveness

IMPLEMENTATION 1.Increase loan/deposit

ratio 2.Increase highest

yielding loans 3.Increase highest

yielding securities

INCREASE


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INCREASEAGGRESSIVENESS

REPERCUSSION 1.Increase need for

capital 2.Increase loan losses

3.Increase securitylosses

IMPLEMENTATION 1.Increase loan/deposit

ratio 2.Increase highest

yielding loans 3.Increase highest

yielding securities

INCREASE INTEREST


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Mix

ACTION Change Asset Yield

Sensitivity

IMPLEMENTATION 1.Increase S/T &

variable rate assets if rates will increase

2.Decrease S/T &variable rate assets if

rates will decrease

CHANGE ASSET YIELD


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CHANGE ASSET YIELDSENSITIVITY

REPERCUSSION 1.Wrong estimate of

interest movement,thereby reducinginterest spread

IMPLEMENTATION 1.Increase S/T &

variable rate assets if rates will increase

2.Decrease S/T &variable rate assets if

rates will decrease

INCREASE INTEREST


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Mix

ACTION Change Liability

Cost Sensitivity

IMPLEMENTATION 1.Decrease S/T &

variable rate liabilitiesif rates will increase

2.Increase S/T &variable rate liabilities

if rates will decrease

CHANGE LIABILITY COST


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CHANGE LIABILITY COSTSENSITIVITY

REPERCUSSION 1.Wrong estimate of

interest movement,thereby reducinginterest spread

IMPLEMENTATION 1.Decrease S/T &

variable rate liabilitiesif rates will increase

2.Increase S/T &variable rate liabilities

if rates will decrease

asset and liability management bs1

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