Transcript BALANCE SHEET ANALYSIS

ASSET & LIABILITY
MANAGEMENT IN
COMMERCIAL BANKS
Instructor……Bülent Şenver
bsenver@superonline.com
ALM
bsenver@superonline.com
1
ALM
Assett
Liability
Asset
Management
Liability
Management
ALM
bsenver@superonline.com
2
ASSET & LIABILITY
MANAGEMENT (ALM)
• DEFINITION
• ALM is continuously arranging and
rearranging the assets and liabilities of the
bank without infringing the liquidity and
safety of the bank and with the purpose of
maximizing the bank’s profits.
ALM
bsenver@superonline.com
3
LIQUIDITY
• The ability of a bank to fulfill its
obligations, and after doing so having
enough cash left to do its normal daily
banking business.
ALM
bsenver@superonline.com
4
SAFETY
• The ability of a bank’s “Share Holder’s
Equity” (SHI) to absorb the future possible
losses that may arise and after doing so
having enough SHI left to run the bank and
to comply with the minimum “Capital
Requirements”.
ALM
bsenver@superonline.com
5
Capital protects your bank
in rainy days!..
ALM
bsenver@superonline.com
6
ALM DEVELPOMENT
1950’s
1960’s
ASSET
MNG.
LIABILITY
MNG.
LOAN
PRODUCTS
DEPOSIT
PRODUCTS
ALM
bsenver@superonline.com
1970’s
ASSET &
LIABILITY
MNG.
LOAN &
DEPOSIT
BOTH
7
Internet
Personal Training
Office Automation
Computerization
Management
Reorganization
GAAP
SC of Accounts
Deregulations
ALM
bsenver@superonline.com
8
Yesterday
Tomorrow
Arena
Services
Organizatio
n
&
Reporting
Data
ALM
bsenver@superonline.com
9
NEW DEVOPLEPMENTS
• 1. Deregulation of Interest Rates
• 2. Deregulation of Foreign Exchange
Operations
• 3. Changes in Laws and Regulations
• 4. Increase in Deposit Interest Rates
ALM
bsenver@superonline.com
10
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
ALM
bsenver@superonline.com
11
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 Capital
Requirements
ALM
bsenver@superonline.com
12
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
ALM
bsenver@superonline.com
13
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
ALM
bsenver@superonline.com
14
1950
1970
1980
2000
RELATIONSHIP
MANAGEMENT
SALES FORCE
SPACE
SHARING
IN-STORE
BRANCH
BRANCH
DATABASE
MARKETING
DIRECT
MAIL
MAIL
CREDIT
CARD
FRANCHISE
BRANCHES
REMOTE
RELATIONSHIP
MANAGEMENT
CALL CENTER
OUTBOUND
CALL CENTER
INBOUND
DEBİT
CARD
ATM
SMART CARD
INTERNET
ATM
KIOSK
TELEPHONE
BANKING
Kaynak: A.T.Kearney
1990
VIDEO
KIOSK
SCREEN
PHONES
PC
INTERNET
ALM
BANKING
BANKING
bsenver@superonline.com
INTERACTIVE
15TV
FINANCIAL STATEMENTS
• 1. BALANCE SHEET
• 2. STATEMENT OF INCOME
• 3. STATEMENT OF
SHAREHOLDER’S EQUITY
• 4. SOURCES & USES OF FUNDS
STATEMENT
ALM
bsenver@superonline.com
16
Balance Sheet
Liabilities
Assets
Earning
Assests
Interest Income
Deposits
Loans
Interest
Income Statement
Interest
Bearing
Treasury Bills Liabiliti
es
Interest Expences
Debt
Net Interest Income
NonInterest
Bearing
Liabiliti
Share Holders’
es
Equity
NonInterest
Earning
Assests
Total Assets
=
Total Liabilities
ALM
bsenver@superonline.com
17
Balance Sheet
Deposits
100
120
Interest
Bearing
Liabiliti
es
Treasury
Bills
80
Debt
60
Non35
Total Assets
Interest
Rate
Assets
=
%20
NonInterest
Earnin
g
Assests
Interest Income
Liabilities
Assets
Loans
Interest
Earning
Assests
Income Statement
Interest
Bearing
Liabiliti
Share Holders’
Equity
es
=
30
35
Interest
Rate
Liabiliti
es
=
Total Liabilities
36
Interest Expence
9
Net Interest Income
27
%5
ALM
bsenver@superonline.com
18
BALANCE SHEET
SHOWS
• The Financial Position
of a Bank
• As at a specific date.
• As of Dec. 31,1998
ALM
bsenver@superonline.com
19
BALANCE SHEET
EQUATION
•
• ASSETS
•
100
=
=
Equals
• = 100
• LIABILITIES
•
+ Plus
• SHAREHOLDER’S
EQUITY
ALM
bsenver@superonline.com
20
ASSET CLASSIFICATION
TOTAL
ASSETS
NON INTEREST EARNING
ASSETS
INTEREST EARNING
ASSETS
ALM
bsenver@superonline.com
21
LIABILITY
CLASSIFICATION
TOTAL
LIABILITIES
INTEREST BEARING
LIABILITIES
NON INTEREST BEARING
LIABILITIES
ALM
bsenver@superonline.com
22
BALANCE SHEET Assets
•
•
•
•
•
•
•
•
Liquid Assets
Loans
Marketable Securities
Investment Securities
Fixed Assets
Accrued Interest
Other Assets
Total Assets
ALM
bsenver@superonline.com
150
400
200
50
100
70
80
1050
23
BALANCE SHEET Liabilities
•
•
•
•
•
•
•
Deposits
Bank Borrowings
Accrued Expenses
Other Liabilities
Bonds Issued
Shareholder’s Equity
Total Liabilities & S/HE
ALM
bsenver@superonline.com
400
150
100
80
70
250
1050
24
SHAREHOLDER’S EQUITY
•
•
•
•
•
•
•
Share Capital
Legal Reserves
Retained Earnings
Revaluation Surplus
Share Premiums
Net Income
Total S/H Equity
ALM
bsenver@superonline.com
100
30
50
20
10
40
250
25
BALANCE SHEET
DOES NOT SHOW
•
•
•
•
Interest Rates
Interest Sensitivity
Due Dates
Foreign Currency
breakdown
• Collateral
ALM
bsenver@superonline.com
26
STATEMENT OF INCOME
SHOWS
• The results of
operations of a bank.
• For the period
between two dates.
• For the year ended
Dec. 31 , 1998
ALM
bsenver@superonline.com
27
NET PROFIT
NET PROFIT
TOTAL
INCOME
TOTAL
EXPENSE
ALM
bsenver@superonline.com
28
TOTAL INCOME
TOTAL
INCOME
NET
INTEREST
INCOME
NET
NON-INTEREST
INCOME
ALM
bsenver@superonline.com
29
NET INTEREST INCOME
NET
INTEREST
INCOME
INTEREST INTEREST
INCOME EXPENSE
(+)
(-)
ALM
bsenver@superonline.com
30
$
interest
income
+
net interest
income
net interest
income
interest
expense
ALM
bsenver@superonline.com
-
time
31
NET INTEREST INCOME
NET
INTEREST
INCOME
INTEREST
INCOME
P/L
INTEREST
EXPENSE
P/L
INTEREST
EARNING
ASSETS
B/S
INTEREST
BEARING
LIABILITIES
B/S
ALM
bsenver@superonline.com
32
NET NON-INTEREST
INCOME
NET
NON-INTEREST
INCOME
NON
NON
INTEREST INTEREST
INCOME EXPENCE
(+)
(-)
ALM
bsenver@superonline.com
33
STATEMENT OF INCOME
•
•
•
•
•
•
•
•
Interest Income
Interest Expense
Net I.Income
Non Interest Income
Operating Expenses
Pre-Tax Profit
Tax Provision
Net Income
ALM
bsenver@superonline.com
1000
(700)
300
220
(450)
70
(30)
40
34
ANALYSIS OF PROFIT
NET
PROFIT
(NP)
PROFIT FROM
BANKING OPERATIONS
(NET OPERATING INCOME)
(NOI)
PROFIT FROM
EXTRAORDINARY
TRANSACTIONS
(PEXT)
ALM
bsenver@superonline.com
PROFIT FROM
SECURITY
TRANNSACTIONS
(PST)
35
BANKING
RISKS
ALM
bsenver@superonline.com
36
BANKING RISKS
•C AMEL
•
•
•
•
A
M
E
L
ALM
bsenver@superonline.com
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CAMEL
• Capital
Adequacy
ALM
bsenver@superonline.com
38
C
AMEL
• Asset
Quality
ALM
bsenver@superonline.com
39
CA
MEL
• Management
Quality
ALM
bsenver@superonline.com
40
EL
CAM
• Earnings
Efficiency
ALM
bsenver@superonline.com
41
L
CAME
• Liquidity
Risk
ALM
bsenver@superonline.com
42
CAMEL RISKS
• Capital
Adequacy
• Asset Quality
• Management
• Earnings
• Liquidity
ALM
bsenver@superonline.com
43
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
ALM
bsenver@superonline.com
44
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
ALM
bsenver@superonline.com
45
BANKING RISKS
•
•
•
•
•
•
•
18. Theft Risk
19. Fraud & Defalcations Risk
20. Natural Disasters
21. Strategic Risk
22. Fiduciary Risk
23. Transaction Risk
24. Regulatory/Compliance
ALM
bsenver@superonline.com
46
BANKING RISKS
• 25. Reputation Risk
• 26. Large Loans/Deposits Risk
• 27. Concentration Risk
ALM
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47
RATIO ANALYSIS
Numerator
______________________
Denominator
ALM
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48
RATIO ANALYSIS
• Balance Sheet
__________________
Balance Sheet
• Income Statement
________________
Balance Sheet
ALM
bsenver@superonline.com
49
RATIO ANALYSIS
• What is the
• What is the
• LEVEL ?
• TREND ?
ALM
bsenver@superonline.com
50
RATIO ANALYSIS
•
•
•
•
•
1. Capital Adequacy
2. Asset Quality
3. Management
4. Earnings & Efficiency
5. Liquidity
ALM
bsenver@superonline.com
51
RATIO ANALISIS
CAPITAL ADEQUACY
• “The Capital of a
Bank protects the
Bank against
unexpected future
losses.”
ALM
bsenver@superonline.com
52
RATIO ANALYSIS
CAPITAL ADEQUACY
• 1.
•
•
Shareholders’ Equity
-----------------------------------Total Assets
• The ability of the present Capital to support
the further growth of Assets
ALM
bsenver@superonline.com
53
RATIO ANALYSIS
CAPITAL ADEQUACY
• 2.
•
•
Shareholders’ Equity
-----------------------------------Risk Weighted Assets
ALM
bsenver@superonline.com
54
RATIO ANALYSIS
CAPITAL ADEQUACY
• 3.
•
•
Shareholders’ Equity
-----------------------------------Risk Weighted Assets
+
RW Contingent Liabilities
ALM
bsenver@superonline.com
55
RATIO ANALYSIS
CAPITAL ADEQUACY
• 4.
•
•
Total Debt
-----------------------------------Shareholder’s Equity
• The ability to raise additional Debt Capital
ALM
bsenver@superonline.com
56
RATIO ANALYSIS
CAPITAL ADEQUACY
• 5. Financial Leverage :
•
•
Total Assets
-----------------------------------Shareholder’s Equity
ALM
bsenver@superonline.com
57
RATIO ANALYSIS
CAPITAL ADEQUACY
• 6. Capital Formation Rate :
•
Retained Net Income (RNI)
-------------------------------------------------•
Average Shareholder’s Equity
• RNI = Net Income - Dividends to be paid
• The internal growth of Equity Capital
ALM
bsenver@superonline.com
58
RATIO ANALISIS
ASSET QUALITY
• 1.
•
•
Loans
-------------------------------Total Assets
ALM
bsenver@superonline.com
59
RATIO ANALISIS
ASSET 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.
•
ALM
bsenver@superonline.com
60
RATIO ANALISIS
ASSET QUALITY
• 3.
•
Non Performing Loans
------------------------------------Total Loans
• Indicates how much of the loan portfolio is
non performing.
ALM
bsenver@superonline.com
61
RATIO ANALISIS
ASSET QUALITY
• 4. Reserves for Non Performing Loans
---------------------------------------------•
Non Performing Loans
• Indicates the ability of the loan loss reserve
to absorb potential losses from currently
non performing loans.
ALM
bsenver@superonline.com
62
RATIO ANALISIS
ASSET QUALITY
• 5.
•
Loan Loss Provision
------------------------------------Average Loans
• Shows current income reduction in
anticipation of loan losses.
ALM
bsenver@superonline.com
63
RATIO ANALISIS
ASSET QUALITY
• 6.
•
Net Charge - Offs
------------------------------------Average Loans
• Shows current income reduction in
anticipation of loan losses.
ALM
bsenver@superonline.com
64
RATIO ANALISIS
ASSET QUALITY
• 7.
•
•
Interest Earning Assets
------------------------------------------------Total Assets
ALM
bsenver@superonline.com
65
RATIO ANALISIS
ASSET QUALITY
• 8.
•
•
Non Interest Earning Assets
------------------------------------------------Total Assets
ALM
bsenver@superonline.com
66
RATIO ANALISIS
EARNINGS & EFFICIENCY
• “A Bank with no
profit is like a human
body with no blood.”
ALM
bsenver@superonline.com
67
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
ALM
bsenver@superonline.com
68
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 1. Return on Assets ( ROA )
•
•
Net Income
-------------------------------------------Total Average Assets
ALM
bsenver@superonline.com
69
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 2. Return on Equity ( ROE )
•
•
Net Income
-------------------------------------------Average Shareholder’s Equity
ALM
bsenver@superonline.com
70
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 3. Return on Equity ( ROE )
• ROE =
ROA
* Equity Multiplier
• ROE = ( NI / AST ) * ( AST / SHEQ )
ALM
bsenver@superonline.com
71
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 4.
•
•
Interest Income
-------------------------------------------Average Interest Earning Assets
ALM
bsenver@superonline.com
72
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 5.
•
•
Net Interest Income
-------------------------------------------Average Total Assets
ALM
bsenver@superonline.com
73
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 6.
•
•
Interest Income on Loans
-------------------------------------------Average Total Loans
ALM
bsenver@superonline.com
74
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 7.
•
Total Operating Expense
------------------------------------------------•
Total Operating Income
ALM
bsenver@superonline.com
75
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 8. Efficiency Ratio
•
Non Interest Expense
---------------------------------------------------• Net Interest Income + Fees Commissions
ALM
bsenver@superonline.com
76
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 9. Break Even Ratio
• Total Expenses - Non Interest Income
---------------------------------------------------• Total Average Interest Earning Assets
ALM
bsenver@superonline.com
77
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 10. Net Free Funds Ratio
• Non Paying Liabilities - Non Earning
Assets
-------------------------------------------------•
Interest Earning Assets
ALM
bsenver@superonline.com
78
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 11. Interest Rate Sensitivity Gap :
•
Interest Rate Sensitive Assets
( minus )
•
Interest Rate Sensitive Liabilities
• Shows the net amount to be effected by the
future change of interest rates in the market
ALM
bsenver@superonline.com
79
RATIO ANALISIS
EARNINGS & EFFICIENCY
• 12. Interest Rate Sensitivity Gap Ratio :
•
•
Interest Rate Sensitive Assets
------------------------------------------------Interest Rate Sensitive Liabilities
ALM
bsenver@superonline.com
80
RATIO ANALYSIS
LIQUIDITY
• “Inadequate
Liquidity of a Bank
may cause an
accident similar to an
airplane crash !”
ALM
bsenver@superonline.com
81
RATIO ANALISIS
LIQUIDITY
• 1.
•
•
Loans
------------------------Deposits
ALM
bsenver@superonline.com
82
RATIO ANALISIS
LIQUIDITY
• 2.
•
•
Liquid Assets
------------------------Deposits
ALM
bsenver@superonline.com
83
RATIO ANALISIS
LIQUIDITY
• 3.
•
•
Liquid Assets
-------------------------------Deposits + Borrowings
ALM
bsenver@superonline.com
84
RATIO ANALISIS
LIQUIDITY
• 4.
•
•
Assets Due for the Period
----------------------------------------Liabilities Due for the Period
ALM
bsenver@superonline.com
85
RATIO ANALISIS
LIQUIDITY
• 5.
Net Large Liabilities
----------------------------------------•
Net Earning Assets
• Both numerator & denominator are net of
short-term assets.
• Measures the extent to which net earning
assets would be effected by the loss of a
bank’s large liabilities.
ALM
bsenver@superonline.com
86
RATIO ANALISIS
LIQUIDITY
• 6.
•
Liquid Assets
----------------------------------------Large Liabilities
• Measures the assets readily available to
cover a loss of large liabilities.
ALM
bsenver@superonline.com
87
RATIO ANALISIS
LIQUIDITY
• 7.
•
Core Deposits
----------------------------------------Earning Assets
• Indicates the extend to which earning assets
are funded by those deposits considered
stable and not subject to interest rate
disintermediation.
ALM
bsenver@superonline.com
88
RATIO ANALISIS
LIQUIDITY
• 8.
•
Brokered Deposits
----------------------------------------Earning Assets
• Measures the extent to which a bank is
funding assets with high-priced and volatile
brokered deposits.
ALM
bsenver@superonline.com
89
MATURITY ANALISIS
Days
Cash
Loans
0-10
100
200
300
Deposit 400
Borrow 150
550
10-30
200
500
700
300
200
500
30-60
300
200
500
800
200
1000
ALM
bsenver@superonline.com
60-90
50
100
150
20
30
50
90
MATURITY ANALYSIS
Days
0-10
10-30
30-60
60-90
Asset
Liab
100
300
500
200
1000
1500
2000
700
Short - -200
Long +
-500
+300
ALM
bsenver@superonline.com
1300
91
OFF - BALANCE SHEET
RISK
• 1.
•
Loan Commitments
----------------------------------------Average Assets
• Shows the extent of a bank’s obligation to
make loans.
ALM
bsenver@superonline.com
92
OFF - BALANCE SHEET
RISK
• 2.Contingent Liabilities & Commitments
---------------------------------------------------•
Average Assets
• Shows the extent of a bank’s commitments
& contingent liabilities.
ALM
bsenver@superonline.com
93
I manage
Assets!
% rates,
due dates...
RISKS
I manage
Liabilities
% rates,
due dates...
ALM
bsenver@superonline.com
94
ASSET & LIABILITY MATCH
ALM
bsenver@superonline.com
95
A & L Match
•
•
•
•
•
•
Amounts
Currency
Due Dates
Interest Rates
Interest Sensitivity
Volatility
ALM
bsenver@superonline.com
96
Foreign Exchange Position
• USA $ Short Position
• $Liabilities>$Assets
• USA $ Long Position
• $Assets>$Liabilities
ALM
bsenver@superonline.com
97
F/X Position Strategy
Increasing
F/X Rates
Decreasing
F/X Rates
Long Position
YES
NO
NO
YES
Short Position
ALM
bsenver@superonline.com
98
Interest Rate Sensitivity
• Interest Rate Sensitive Assets/Liabilities
• IRSA/L are such assets and Liabilities
whose interest rates will change before their
due dates when there is a change in market
interest rates.
ALM
bsenver@superonline.com
99
Interest Rate Sensitivity
Interest Rate Sensitive
Assets & Liabilities
Interest Rate
Non-Sensitive
Assets & Liabilities
VARIABLE RATES
ALM
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FIXED RATES
100
Interest Rate Sensitivity Gap
• Positive Gap
• IRSA>IRSL
• IRS GAP =
• (IRSA – IRSL)
• Negative Gap
• IRSL>IRSA
ALM
bsenver@superonline.com
101
Interest Rate Sensitivity Strategy
Interest Rates
Will Increase
Interest Rates
Will Decrease
Positive
IRS GAP
YES
NO
Negative
IRS GAP
NO
YES
ALM
bsenver@superonline.com
102
INTEREST MARGIN
INCREASING THE
INTEREST MARGIN
%
ALM
bsenver@superonline.com
103
INCREASING INTEREST
MARGIN
• Interest Income…………..200
• Interest Expense…………( 50 )
---------• INTEREST MARGIN….. 150
----------
ALM
bsenver@superonline.com
104
$
interest
income
+
net interest
income
net interest
income
ALM
bsenver@superonline.com
interest
expense
-
time
105
INCREASING THE
INTEREST MARGIN
BANK STRATEGY TO
INCREASE THE
INTEREST MARGIN
INCREASE
SIZE
CHANGE
INTEREST
SPREAD
ALM
bsenver@superonline.com
ALTER
ASSET/LIABILITY
MIX
106
INCREASING THE
INTEREST MARGIN
• BANK STRATEGY
• ACTION
• Increase Size
• 1.Expand Assets
• 2.Reduce Fixed Assets
• 3.Increase Equity Base
ALM
bsenver@superonline.com
107
INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
• ACTION
• Change
Interest Spread
• 1.Re-Price
Asset Portfolio
• 2.Re-Price
Liability Portfolio
ALM
bsenver@superonline.com
108
INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
• Alter
Asset / Liability
Mix
•
•
•
•
ACTION
1.Plan Taxes
2.Reduce Liquidity
3.Increase
Aggressiveness
• 4.Change Asset Yield
Sensitivity
• 5.Change Liability
Cost Sensitivity
ALM
bsenver@superonline.com
109
INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
Increase Size
• ACTION
Expand Assets
• IMPLEMENTATION
• 1.Offer new Products
and Services
• 2.New Loans/Deposits
• 2.Open new Branches
• 3.Expand Promotion
Budget
• 4.Reduce Interest
Spread
ALM
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EXPAND ASSETS
• 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 Interest
Spread
ALM
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INCREASE THE
INTEREST MARGIN
• BANK STRATEGY
Increase Size
• ACTION
Increase
Equity Base
• IMPLEMENTATION
• 1.Reduce Dividend
pay out
• 2.Offer Dividend
reinvestment
• 3.Sell Stock
• 4.Establish Employee
Stock Ownership PL
ALM
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INCREASE EQUITY BASE
• REPERCUSSIONS
• 1.Hurt shareholders
• 2.Double taxation S/H
3.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
ALM
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INCREASE INTEREST
MARGIN
• BANK STRATEGY
Change Interest
Spread
• ACTION
Re-price Portfolio
• IMPLEMENTATION
• 1.Increase rates on
Loans
• 2.Compound return
more frequently
• 3.Reduce rates on
Deposits
• 4.Compound cost less
frequently
ALM
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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
ALM
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INCREASE INTEREST
MARGIN
• IMPLEMENTATION
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Reduce Liquidity
• 1.Minimize cash
• 2.Minimize due from
• 3.Sell Securities &
Bonds
• 4.Increase short term
Deposits
ALM
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REDUCE LIQUIDITY
• REPERCUSSION
• IMPLEMENTATION
• 1.Liquidity Risk
• 2.Lose correspondent
• 3.Incur book losses
• 1.Minimize cash
• 2.Minimize due from
• 3.Sell Securities &
Bonds
• 4.Increase short term
Deposits
• 4.Increase volatility of
deposits
ALM
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INCREASE INTEREST
MARGIN
• 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
ALM
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INCREASE
AGGRESSIVENESS
• REPERCUSSION
• 1.Increase need for
capital
• 2.Increase loan losses
• 3.Increase security
losses
• IMPLEMENTATION
• 1.Increase loan/deposit
ratio
• 2.Increase highest
yielding loans
• 3.Increase highest
yielding securities
ALM
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INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
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
ALM
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CHANGE ASSET YIELD
SENSITIVITY
• REPERCUSSION
• 1.Wrong estimate of
interest movement,
thereby reducing
interest spread
• IMPLEMENTATION
• 1.Increase S/T &
variable rate assets if
rates will increase
• 2.Decrease S/T &
variable rate assets if
rates will decrease
ALM
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INCREASE INTEREST
MARGIN
• BANK STRATEGY
• Alter Asset/Liability
Mix
• ACTION
• Change Liability
Cost Sensitivity
• IMPLEMENTATION
• 1.Decrease S/T &
variable rate liabilities
if rates will increase
• 2.Increase S/T &
variable rate liabilities
if rates will decrease
ALM
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CHANGE LIABILITY COST
SENSITIVITY
• REPERCUSSION
• 1.Wrong estimate of
interest movement,
thereby reducing
interest spread
• IMPLEMENTATION
• 1.Decrease S/T &
variable rate liabilities
if rates will increase
• 2.Increase S/T &
variable rate liabilities
if rates will decrease
ALM
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