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Homework Assignment #4,
Economics 333
Money and Banking
Assigned: November 25, 2008
Due: December 2, 2008
1. Peer Analysis
One of the ways that we might analyze banks is by making a comparison with some
peers. Use the internet to get financial information from year 2007 for Bank of East
Asia and U.S. Commercial Banks with assets larger than US$10billion.
Get the data:
A. Bank of East Asia. The annual report for 2007 is available at BEA Annual and
Interim Reports and the information you will need is in Financial Highlights on p.
3.
B. Large U.S. Commercial Banks. Comparable information is available for the U.S.
Commercial banks from the Federal Deposit Insurance Corporation. Statistics on
Depositary Institutions SDI Enter the SDI and change the Select Number of
2
Columns Box to Select the number of Columns:
View He2, Choose to get
reports on Standard Peer Groups. Choose as your Peer Groups All Commercial
Banks and Commercial Banks with Assets greater than 10 Billion. Set the date to
December 31, 2007.
Duplicate >>>
<<< Duplicate
Standard Peer Group
Standard Peer Group
Assets more than $10B
All Commercial Banks
National
National
Report Date:
Report Date:
December 31, 2007
December 31, 2007
Hit Next. Then select Performance and Conditions Ratios Reports
Report Selection:
View
Performance and Condition Ratios
Download
Dollars
Assets
Column 1:
Column 2:
Hit Next.
All Commercial Banks - Assets more than $10B - National
All Commercial Banks - National
Percent of
Compare Bank of East Asia with its peers in the United States along the following
lines 1) Capital Adequacy; 2) Asset Quality; 3) Earnings 4) Liquidity
BofEA
Assets
Equity
Earnings
393979 EM
30446 ROA
4144 ROE
12.94025
0.010518
0.13611
USA
EM
ROA
ROE
9.978022
0.0091
0.0908
1) Capital Adequancy. What is the CAR for the Bank of East Asia and for US
Commerical Banks with assets above US$10 Billion? What is the Equity
Multiplier for each? Which has better capital adequacy?
CAR for Bank of East Asia is 12.6% The equity multiplier is assets to equity is
12.940. The CAR for US Commercial Banks with assets greater than 10Billion is
11.85%. . The equity multiplier is 9.98
BEA has a stronger capital adequacy ratio but also a larger equity multiplier. It is
ambiguous which is better capitalized.
2) Asset Quality. Compare Bank of East Asia’s Impaired Loan Ratio with the Large
US Bank’s Non-current Loan Ratio. Which has better asset quality.
BEA impaired Loan ratio is .6%; USA Non-current loans is 1.3%. Quality of assets is
better in Hong Kong.
3) Earnings. Calculate ROA and ROE for BEA and US peers. Which is more
profitable?
ROA for Bank of East Asia is 1.05% and ROE is 13.611%. Return on Assets is .91%
and Return on Equity is 9.08%. This indicates better earnings at BEA.
4) Liquidity. Calculate the Loan to Deposit Ratio for BEA and US peers. Which is
more liquid?
Loan to deposit ratio for BofEA is 73.6%; Loan to deposit ratio for US banks is 89%.
As a higher fraction of deposits are in illiquid loans in the US, BEA has better
liquidity.
So arguably, in terms of CAMEL rating, Bank of East Asian is doing better than
similar US banks.
2. Interest Rate Risk
You are calculating the balance sheet risk faced by an individual bank. This bank has
two types of assets: loans and government securities. The government securities have
a face value of $50,000 and a maturity of T = 1 year. The bank has only constant
payment loans with a remaining maturity of one, two, three and four years. The
quantity that was lent and the interest rate at which these loans were made is available
in the following table
Banks Loan Book
Remaining
Maturity
Quantity
Lent
1
2
3
4
Interest
Rate
$100,000
$150,000
$250,000
$500,000
Annual
Payment
10%
10%
10%
10%
a. Calculate the annual payments that the bank will receive on each of these loans
i
 LOAN Use this data to calculate the income
using the formula C 

1 
1  (1  i )T 


that the bank’s assets will generate in each of the next 4 years. Remember include
the face value of the bank securities in the income that the bank will receive in
year 1.
Payments Generated by Loans
in year:
1
with
1
Maturity
2
Date →
3
4
Total
2
0
3
0
0
4
0
0
0
Payments Generated by Loans
in year:
with
Maturity
Date →
1
2
3
4
Securities
duration
Total
PV
MV
w
w*t
Assets
L/Assets
Net Worth
1
2
3
$110,000.00
$0.00
$0.00
$86,428.57
$86,428.57
$0.00
$100,528.70
$100,528.70 $100,528.70
$157,735.40
$157,735.40 $157,735.40
$50,000.00
$504,692.67
$344,692.67 $258,264.10
$458,811.52
$284,869.98 $194,037.64
1048925.609
1048925.609 1048925.609
0.44
0.27
0.18
0.437410922
0.543165259 0.554961112
1.946378252
Liabilities
0.858020809
DGAP
148925.6092
EM
DGAP*EM*-Δi/(1+i)
-
0
.
0
6
9
6
8
7
3
8
4
$0.00
$0.00
$0.00
$157,735.40
$157,735.40 MV
$107,735.40 $1,045,454.53
1048925.609
0.10
0.410840958
1
1.088357443
7.043285669
5
b. Calculate the present value, PVj, of the income generated in year j = 1 - 4, using a
discount factor of 10%. Calculate the total market value of the banks assets.
Calculate the fraction of that present value that comes from each of year j = 1…4,
wj. Calculate the duration of the banks assets.
c. The bank finances the assets with $900,000 of 1 year time deposits, so the
duration of its liabilities is 1. Calculate the net worth of the bank as the difference
between the present value of the assets and the quantity of deposits. What is the
Equity Multiplier. What is the duration gap? Calculate the effect of an increase in
the interest rate from 10% to 11% on the value of the net worth of the bank.
An increase in the interest rate from 10% to 11% results in an approximately
7% decline in the Net Worth of the Bank.