Sample Bank

Balance Sheet

Year ended 31/12/2021

Assets Liabilities & Equity

$ (000) $ (000)

Cash 100,000 Savings deposits 350,000

Investments 150,000 Fixed deposits 500,000

Loans 1,050,000 Long term bonds 200,000

Other 50,000 Equity 300,000

Total Liab.

Total Assets 1,350,000 & Equity 1,350,000

The Sample Bank (SB) has been in operations for many years. Due to the global health crisis, the growth of the bank has been very low. The income on the loan portfolio is 8%. The ratio of fixed/floating rate loans is 60/40. The investments are a mixture of equities (50%) and bonds (50%). The income on the equities average 10%. The bonds are fixed at 7% and duration of 5. They are non-callable with an average maturity of 10 years. The fixed deposits are all one year maturities with an average interest at 3%. The savings account pays 1%. You have recently joined the bank and your supervisor is preparing his report for the asset liability management committee and is seeking your help in answering the following questions:

A. What was the net interest income in 2021. (4 marks)

B. Due to high inflation, interest rates are expected to increase. Outline the impact of rising interest rates on the performance and position of the bank? (No calculations required). (4 marks)

C. What is the effect on the banks net interest income and investments should interest rates rise by 100 bps. Recommend two strategies to mitigate this risk. (7 marks)