Case:
In any economy, commercial banks play very important role at both national and international
level. At national level, commercial banks play key role in the economic development. They help
various consumers, both individuals and businesses. Commercial banks make funds available for
the individuals and businesses that can make more productive use of the capital/ funds. If the
banking system of any country expands, it will make capital available for everyone, it will create
investment opportunities which results in the expansion of trade and industry that will create
more employment opportunities, consequently it results in the increase of per capita income and
rise in the overall national income. In the end economy flourishes and lead to economic
development. At international level commercial bank helps in transferring money from country
to country that eliminates the need to travel with the money. Beside this, the profit and success
of banking system directly affect the economic growth of a country. While bank performs its
activities and operation, it is always exposed to several kinds of risks; on the other hand bank
has to maintain its profitability because whatever the risk, it may hurts the profitability of a bank.
So, banks have to take pro-active measures to cope up with any kind of risk. The balance sheet
of banks shows its financial position, success and profitability.
“Shams Bank Ltd. “is a fast growing and emerging commercial bank, its financial figures and
data is given below:
Data Regarding the year 2012 Rs.
net profit after tax 5283200
Share capital Reserves 3043838
investment in securities 1846626
Inappropriate profit 656162
Liabilities against assets subject to finance lease 3091
Lendings to financial institutions 876870
Bills payable 840000
Borrowings from financial institutions 2122783
Balances with other banks 2672099
Cash and balances with treasury banks 5804405
Deposits and other accounts 4534126
Data Regarding Previous Years 2010 2011
Profit before tax 2065110 5433718
Total assets 9400000 10200000
Total liabilities 2875000 3550000
Bank capital 6525000 6650000
tax rate is 25%
Question 1: (15 marks)
a. From the above table and given data prepare the balance sheet of Shams Bank LTD. (7 marks)
b. If a bank has no excess reserves, how a bank will manage liquidity risk if a customer demands Rs 1.5
million cash withdrawals from the bank? What changes will occur in the Balance Sheet if the bank
decides to manage the liquidity risk through:
1. Adjusting assets by:
Paying 40% of the amount from loans and 60% of the amount from securities. (4 marks)
2. Adjusting liabilities by:
Attracting deposits with the same amount (4 marks)
(Note: Prepare balance sheet for each case)
Question 2: ( 15 marks)
a. As the bank is new, so its management keeps an eye on its profit on yearly basis, management needs
to compare its profitability with the past years. Using the figures of question 1 (part a), you are
required to compare the efficiency of bank in the utilization of its assets and equity in year 2012 as
compared to year 2011. (8 marks)
b. 30% of the assets are sensitive to change in interest rate while 70% are non- sensitive; interest rate on
assets is 7% (it yields Rs. 7 for every Rs. 100). 70% of the liabilities are sensitive to change in
interest rate while 30% are non-sensitive; interest rate on liabilities is 3%. How a decrease in interest
rate by 2% in year 2012 will affect the profit of the bank (per Rs. 100 in assets). (7 marks)
(Note: Show complete working, where necessary)
Solution:
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Case:In any economy, commercial banks play very important role at both national and international
level. At national level, commercial banks play key role in the economic development. They help
various consumers, both individuals and businesses. Commercial banks make funds available for
the individuals and businesses that can make more productive use of the capital/ funds. If the
banking system of any country expands, it will make capital available for everyone, it will create
investment opportunities which results in the expansion of trade and industry that will create
more employment opportunities, consequently it results in the increase of per capita income and
rise in the overall national income. In the end economy flourishes and lead to economic
development. At international level commercial bank helps in transferring money from country
to country that eliminates the need to travel with the money. Beside this, the profit and success
of banking system directly affect the economic growth of a country. While bank performs its
activities and operation, it is always exposed to several kinds of risks; on the other hand bank
has to maintain its profitability because whatever the risk, it may hurts the profitability of a bank.
So, banks have to take pro-active measures to cope up with any kind of risk. The balance sheet
of banks shows its financial position, success and profitability.
“Shams Bank Ltd. “is a fast growing and emerging commercial bank, its financial figures and
data is given below:
Data Regarding the year 2012 Rs.
net profit after tax 5283200
Share capital Reserves 3043838
investment in securities 1846626
Inappropriate profit 656162
Liabilities against assets subject to finance lease 3091
Lendings to financial institutions 876870
Bills payable 840000
Borrowings from financial institutions 2122783
Balances with other banks 2672099
Cash and balances with treasury banks 5804405
Deposits and other accounts 4534126
Data Regarding Previous Years 2010 2011
Profit before tax 2065110 5433718
Total assets 9400000 10200000
Total liabilities 2875000 3550000
Bank capital 6525000 6650000
tax rate is 25%
Question 1: (15 marks)
a. From the above table and given data prepare the balance sheet of Shams Bank LTD. (7 marks)
b. If a bank has no excess reserves, how a bank will manage liquidity risk if a customer demands Rs 1.5
million cash withdrawals from the bank? What changes will occur in the Balance Sheet if the bank
decides to manage the liquidity risk through:
1. Adjusting assets by:
Paying 40% of the amount from loans and 60% of the amount from securities. (4 marks)
2. Adjusting liabilities by:
Attracting deposits with the same amount (4 marks)
(Note: Prepare balance sheet for each case)
Question 2: ( 15 marks)
a. As the bank is new, so its management keeps an eye on its profit on yearly basis, management needs
to compare its profitability with the past years. Using the figures of question 1 (part a), you are
required to compare the efficiency of bank in the utilization of its assets and equity in year 2012 as
compared to year 2011. (8 marks)
b. 30% of the assets are sensitive to change in interest rate while 70% are non- sensitive; interest rate on
assets is 7% (it yields Rs. 7 for every Rs. 100). 70% of the liabilities are sensitive to change in
interest rate while 30% are non-sensitive; interest rate on liabilities is 3%. How a decrease in interest
rate by 2% in year 2012 will affect the profit of the bank (per Rs. 100 in assets). (7 marks)
(Note: Show complete working, where necessary)
Solution:
| Balance sheet of Sham Banl Ltd. | |||
| Assests | |||
| Investment in securties | 1,846,626 | ||
| Lending to financial institutions | 876,870 | ||
| Balance with other banks | 2,672,099 | ||
| Cash and Balance with treasury banks | 5,804,405 | ||
| Liabilities against assest subject to financial lease | 3,091 | ||
| Net profit after tax | 5,283,200 | ||
| 16,486,291 | |||
| Liability | |||
| Bills payable | 840,000 | ||
| Borrowing from financial institution | 2,122,783 | ||
| Deposits and other accounts | 4,534,126 | ||
| 7,496,909 | |||
| Net Assest | 8,989,382 | ||
| Inapporiate profit | 6,556,162 | ||
| share captial reserve | 3,043,838 | ||
| 9,600,000 | |||
| (610,618) |
In any economy, commercial banks play very important role at both national and international
level. At national level, commercial banks play key role in the economic development. They help
various consumers, both individuals and businesses. Commercial banks make funds available for
the individuals and businesses that can make more productive use of the capital/ funds. If the
banking system of any country expands, it will make capital available for everyone, it will create
investment opportunities which results in the expansion of trade and industry that will create
more employment opportunities, consequently it results in the increase of per capita income and
rise in the overall national income. In the end economy flourishes and lead to economic
development. At international level commercial bank helps in transferring money from country
to country that eliminates the need to travel with the money. Beside this, the profit and success
of banking system directly affect the economic growth of a country. While bank performs its
activities and operation, it is always exposed to several kinds of risks; on the other hand bank
has to maintain its profitability because whatever the risk, it may hurts the profitability of a bank.
So, banks have to take pro-active measures to cope up with any kind of risk. The balance sheet
of banks shows its financial position, success and profitability.
“Shams Bank Ltd. “is a fast growing and emerging commercial bank, its financial figures and
data is given below:
Data Regarding the year 2012 Rs.
net profit after tax 5283200
Share capital Reserves 3043838
investment in securities 1846626
Inappropriate profit 656162
Liabilities against assets subject to finance lease 3091
Lendings to financial institutions 876870
Bills payable 840000
Borrowings from financial institutions 2122783
Balances with other banks 2672099
Cash and balances with treasury banks 5804405
Deposits and other accounts 4534126
Data Regarding Previous Years 2010 2011
Profit before tax 2065110 5433718
Total assets 9400000 10200000
Total liabilities 2875000 3550000
Bank capital 6525000 6650000
tax rate is 25%
Question 1: (15 marks)
a. From the above table and given data prepare the balance sheet of Shams Bank LTD. (7 marks)
b. If a bank has no excess reserves, how a bank will manage liquidity risk if a customer demands Rs 1.5
million cash withdrawals from the bank? What changes will occur in the Balance Sheet if the bank
decides to manage the liquidity risk through:
1. Adjusting assets by:
Paying 40% of the amount from loans and 60% of the amount from securities. (4 marks)
2. Adjusting liabilities by:
Attracting deposits with the same amount (4 marks)
(Note: Prepare balance sheet for each case)
Question 2: ( 15 marks)
a. As the bank is new, so its management keeps an eye on its profit on yearly basis, management needs
to compare its profitability with the past years. Using the figures of question 1 (part a), you are
required to compare the efficiency of bank in the utilization of its assets and equity in year 2012 as
compared to year 2011. (8 marks)
b. 30% of the assets are sensitive to change in interest rate while 70% are non- sensitive; interest rate on
assets is 7% (it yields Rs. 7 for every Rs. 100). 70% of the liabilities are sensitive to change in
interest rate while 30% are non-sensitive; interest rate on liabilities is 3%. How a decrease in interest
rate by 2% in year 2012 will affect the profit of the bank (per Rs. 100 in assets). (7 marks)
(Note: Show complete working, where necessary)
Solution:
| Balance sheet of Sham Banl Ltd. | |||
| Assests | |||
| Investment in securties | 1,846,626 | ||
| Lending to financial institutions | 876,870 | ||
| Balance with other banks | 2,672,099 | ||
| Cash and Balance with treasury banks | 5,804,405 | ||
| Liabilities against assest subject to financial lease | 3,091 | ||
| Net profit after tax | 5,283,200 | ||
| 16,486,291 | |||
| Liability | |||
| Bills payable | 840,000 | ||
| Borrowing from financial institution | 2,122,783 | ||
| Deposits and other accounts | 4,534,126 | ||
| 7,496,909 | |||
| Net Assest | 8,989,382 | ||
| Inapporiate profit | 6,556,162 | ||
| share captial reserve | 3,043,838 | ||
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