Commercal banking

7/26/2019 Commercal banking

1/23

AFW 2401 Mohammed Shaiban 1

Office Use Only

Monash University

Faculty of Business and Economics

Department of Accounting and Finance

EXAM CODES:

TITLE OF PAPER: COMMERCIAL BANKING AND FINANCE

EXAM DURATION: 3 hours

READING TIME: 10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable)

Berwick Clayton Peninsula Distance Education Other (specify)

Caulfield Gippsland Sunway Open Learning

During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case,mobile phone or any other material/item which has not been authorised for the exam or specificallypermitted as noted below. Any material or item on your desk, chair or person will be deemed to be inyour possession. You are reminded that possession of unauthorised materials in an exam is adisciplinable offence under Monash Statute 4.1.

AUTHORISED MATERIALS

CALCULATORS YES NO

(If YES, only calculators with an 'approved for use' Faculty label are permitted)

OPEN BOOK YES NO

SPECIFICALLY PERMITTED ITEMS YES NO

if yes, items permitted are:

This paper consists of seven (7)questionsand one (1) formula sheetprinted on a total of twenty three (23)pages.

Students must attempt to answerALLquestions.

Paper adds to 70 marks

STUDENT ID: ... DESK NUMBER: .

PLEASE CHECK THE PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER. THIS EXAMINATION

PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE COMPLETION OF THE PAPER. NO

EXAMINATION PAPERS SHOULD BE REMOVED FROM THE EXAMINATION ROOM


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Answer all questions.

Answer Question 1 in the script book provided.

Answer all other questions in the spaces provided on the question paper.

Question One Lending and Credit risk

Effective management of credit risk is fundamental to successful bank management.

(a) Define credit risk and its five components.(b)Outline the six Cs of credit which should be investigated by a loan officer when he is

using the judgemental approach to assess a loan application. For each of these factorscomment on what information he would collect and what would encourage him torecommend approval of the loan.

( 5 + 12 = 17 Marks)


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Question Two Bank performance

(a) Monash banks financial statements for 2012 and 2013 are provided below:

Balance Sheet

Assets 2012 2013 Liabilities 2012 2013Cash/liquidity 16,800,000 21,600,000 Current debt 148,800,000 153,600,000

Loans etc 264,000,000 289,200,000Long termdebt 112,800,000 136,800,000

Premises etc 2,400,000 2,400,000 Equity 21,600,000 22,800,000Total 283,200,000 313,200,000 Total 283,200,000 313,200,000

Income Statement2012 2013

Interest revenue 12,000,000 12,480,000Interest expense -3,600,000 -4,032,000

Net interestincome 8,400,000 8,448,000

Non-interestincome 2,160,000 2,400,000Non-interestexpense -3,600,000 -3,600,000Net non-interest

cost

-

1,440,000

-

1,200,000

Net operating

income 6,960,000 7,248,000

Tax (30%) -2,088,000 -2,174,400

Net income 4,872,000 5,073,600

Using the data provided above, compute the 5 ratios in the Du Pont Model for 2012 and2013. You may tabulate the ratios.

(b)Given the ratios you have calculated in Question Two (a), comment on theperformance of Monash Bank.

(c) What further information would help you make a more complete assessment?

(d)Distinguish between return on equity (ROE) and shareholder's rate of return.

(2.5 + 2.5 + 3 + 3 = 11 marks)


4/23


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Question Three Banking Book

The core banking activities of a bank are deposits and loans.

(a)Contrast current deposits and fixed deposits in terms of maturity, minimum balance,withdrawal and interest rates.

(b)

Distinguish between the credit card outstandings and fully drawn term businessloans in relation to their purpose, maturity, repayment requirement, interest rates,fees and collateral.

(2 + 3 = 5 Marks)

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Question Four Capital Management

(a) In December 2013 XYZ Bank announced a decline in profit by 15% compared to itsprevious years performance. At the same time, XYZ Bank also declared that it wouldmaintain its dividend payments like previous year. Suggest why XYZ Bank still maintainsits dividend payment despite a decline of 15% in its performance.

(b) Use the data below(i) Calculate the internal capital generation rate for Bank XYZ.

(ii) Project Bank XYZ's simple capital ratio in one year's time.

Capital at start of year $3,780 millionAssets at start of year $54,100 millionAsset growth rate 15% per annumReturn on assets 1.2% per annumDividend payout ratio 55%Target capital ratio 7%;

(c) Explain the meaning of the two numbers calculated in Question 4(b).

(d) Based on the calculation in Question 4 (b), should the bank increase or decrease externalcapital and by how much?

(4+ 3+ 2+ 2 = 11 marks)

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Question Five Derivatives and Off balance Sheet Business

(a) Explain three reasons why banks may become involved in market related derivativetransactions activities.

(b) Monash Bank has provided a letter of credit in support of an issue of mortgage backedsecurities, but, due to a liquidity crisis in financial markets, the issuer finds it cannot sell

the securities. How will this affect Monash Bank?

(c) What payment (in dollars) would be made, and by whom, to settle an FRA (Forward-rate agreement) with the following conditions?

Nominal value $2,000,000 Term 90 days FRA rate 8% per annum Reference rate on the settlement date = 7% per annum

(3 + 2 + 2 = 7 marks)

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Question Two: Shareholders Wealth

Shareholders Wealth maximization refers to the maximization of the present value of

future cash flows accruing to the common shareholders.

(a) In relation to this statement, explain with a mathematical model, why shareholderswealth is said to depend on the value of expected future cash flow, the timing ofthose cash flows and the perceived riskiness of the firm.

(b)

Assume a bank with 10 million outstanding shares pays perpetual annual dividendsof $2/share. If investors require 8% rate of return, what is the total shareholdersvalue of this bank.

(7 + 2 = 9 marks)

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Question Seven


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AnswerALLquestions (10 x 1 = 10 marks). For each question, select the BESTanswer ofthe choices provided. All answers must be written on the space provided on page 22.

7.1 A bank with a positive interest-sensitive gap will have a decrease in net interestincome when interest rates in the market:

a. riseb. fallc. stay the same

d. a bank with a positive interest-sensitive gap will never have a decrease in netinterest income

7.2 Which of the following factor(s) can affect banks' debt-equity mix decision from theviewpoint of shareholders?

a. dividend policyb. ownership controlc. financial riskd. all of the above

7.3 Which of the following is a source of funds?

a. increases in loans and decreases in depositsb. decreases in loans and increases in depositsc. increases in loans and increases in depositsd. decreases in loans and decreases in deposits

7.4 From the viewpoint of bank shareholders, what is (are) the advantage(s) of using debtto finance assets?

a. using debt reduces bank financial risk

b. interest on debt is tax deductiblec. using debt prevents the dilution of ownershipd. a and be. b and c

7.5 An agreement where two parties agree to exchange different currencies is knownas:

a. An interest rate swapb. A currency swapc. A swaption

d. A quality swape. None of the above

7.6 A bank is asset sensitive if its:


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a. loans and securities are affected by changes in interest rates.b. interest-sensitive assets exceed its interest-sensitive liabilities.c. interest-sensitive liabilities exceed its interest-sensitive assets.d. deposits and borrowings are affected by changes in interest rates.

7.7 If a trader buys a put option, he (she) will make a profit if the price of the underlyingasset:

a.

increasesb. decreasesc. increases and then decreasesd. decreases and then increases

7.8 An option buyer can:

a. Exercise the option.b. Sell the option to another buyer.c. Allow the option to expire.d. All of the above.

e. A and B only.

7.9 Monash Bank is forecasting that interest rates are likely to be raised by the centralbank. How the bank could play the yield curve (use the cyclical approach) to coverits position in its security investment.

a. sell long term and buy short term securityb. buy long term and sell short term securityc. sell long term security onlyd. buy short term security only

7.10 Forward contractsdiffer from futures contracts in which of the following ways:

a. less standardized than futures contractsb. traded over-the-counter (OTC) between large dealer banks (rather than on an

organized exchange)c. not marked-to-market daily as are futures contractsd. all of the above


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Question Seven Answers:

Question No. Answers

7.17.27.3

7.47.5

7.6

7.77.8

7.97.10

(Total = 10 marks)


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AFW 2401 M h d Sh ib 23

Formulae

Compound Interest Effective Interest

PV S i n

1 S FV em

ij

m

1 1

FV A n

i 1 A PV

Bill Price

Price

36500

36500

FaceValue

IR days

Annualised return

R Sale Purchase

Purchase days held

Price Price

Price

36500

Ordinary Annuity

PV R i i n

1 1

FV R i i n

1 1

Perpetual Annuity

p Dividends/ R

Bond Price

P PV coupons PV face value

Asset Growth Model

AGRADROAAGRAC

CR

1

111

Internal capital generation rate

ICGR = [1/capital ratio] x ROA x (1-D)

Customer Profitability Analysis

Re turn on allocated capital net income before tax

allocated capital

Interest rate risk

Gap$ = RSA - RSL iGapNII $

END OF EXAMINATION

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