UNIVERSITY OF PROFESSIONAL STUDIES, ACCRA L S"#$e%t& Date& LEVEL 400 Mid-Semester Exami ati!

P''F 40( ) 'a *i + , I -estme t A a./sis N!-em#er 01, 20034 Time a..!5ed& ONE 607 8!"r 30 Mi "tes

I str"%ti! & ATTEMP ALL 9UESTIONS& Cir%.e ! ./ t:e %!rre%t a s5er 1. One of the following forms may not result in credit risk a) In the case of direct lending, principal and / or interest amount may not be repaid b) In case of guarantee or letters of credit, funds may not be forthcoming from the parties upon crystallization of the liability c) In the case of securities trading, funds and securities settlement may not be effected d) None of the abo e. !. Operational risk is the risk of loss arising from arious types of a) "uman error b) #ailed systems and procedures in the bank c) $reakdown in internal controls d) Only %b) and %c) e) &ll of the abo e '. (redit risk to the bank is high from a) all customers b) )ebit holders only c) (redit holders only d) $oth %b) and %c) *. Net Interest income is a) Interest earned on ad ances b) Interest earned on in estments c) +otal interest earned on ad ances and in estment d) )ifference between interest earned and interest paid ,. & bank suffers loss due to ad erse market mo ement of a security. +he security was howe er held beyond the defeasance period. -hat is the type of the risk that the bank has suffered. a) /arket 0isk b) Operational 0isk c) /arket 1i2uidation 0isk d) (redit 0isk 3. & bank holds a security that is rated &4. +he rating of the security migrates to &. -hat is the risk that the bank has faced. a) /arket risk b) Operational risk c) /arket li2uidation risk d) (redit risk 5. Operational risk arises from which of the following. i. Inade2uate or failed internal processes ii. 6eople and systems iii. 78ternal 7 ents i . )efaults 1

a) &ll of them b) None of them c) i , ii and iii d) i , ii and i 9. Ob:ecti e of li2uidity management is to; a) 7nsure profitability b) 7nsure li2uidity c) 7ither of two d) $oth <. $anks need li2uidity to; a) /eet deposit withdrawal b) #und loan demands c) $oth of them d) None of them 1=. &de2uacy of bank>s li2uidity position depends upon a) ?ources of funds b) &nticipated future funding needs c) 6resent and future earnings capacity d) &ll of the abo e 11. &sset 1iability management is only management of maturity mismatch and has no bearing on profit augmentation. a) +rue b) #alse c) ?ometimes true and sometimes false d) )ifficult to say 1!. Net Interest /argin is also known as @?pread> a) +rue b) #alse c) Ancertain d) )ifficult to say 1'. +he risk that arises due to worsening of credit 2uality is a) Intrinsic 0isk b) (redit spread 0isk c) 6ortfolio risk d) (ounterparty risk 1*. +he bank>s liabilities are its sources of funds, which include; a) 0eser es b) $orrowings from other banks c) )eposits at other banks. d) ?ecurities and loans e) both %b) and %c)

ESSAY TYPE 9UESTION

N&$ B C&D E (o, a pri ate listed bank in Fhana. +he bank was formed si8teen years ago by Cames and 7mmanuel, who as directors retain sole ownership. +he bank has returned a profit in each year of operations as shown by the following financial statements.

NA' - ;AY INCOME STATEMENT FOR T8E FINANCIAL YEAR 2000 , 2000

2002

2000

'

Interest Income Interest 78penses NET INCOME #ees and (ommissions Income #ees and (ommissions 78penses NET Fees a d C!mmissi! s Net +rading Income Other Operating Income

<8= i Mi..i! s '9,=,< %!1,5=5) 0>,3(2 3,,31 %'5,) >,0@> <,<!< 5,5 00,>@> 33,224 %!,193) 30,03@ %11,=,,) %9,=3*) %1,,9') 620,1027 00,33> B '3 1=,'5! %!,'<3) 1,?1>

<8= i Mi..i! s !*,'31 %1!,'53) 00,?@( *,1!1 %!*9) 3,@13 ,,3!! <33 >,(@@ 22,44> %1,3*3) 20,@00 %3,!,=) %3,55,) %1,1,3) 604,0@07 >,>0? B 15 3,3'3 %1,9<1) 4,14(

OAerati + I %!me Impairment Net OAerati + I %!me ?taff (osts &dministration and Feneral 78penses )epreciation and &mortization T!ta. OAerati + ExAe ses OAerati + Pr!Bit ?hare of 6ostBta8 6rofit of &ssociated (ompany 6rofit #rom )isposal of NonB(urrent &ssets Pr!Bit 'eB!re I %!me Tax Income +a8 78pense Pr!Bit ABter Tax Attri#"ta#.e t! EC"it/ 8!.ders !B t:e #a *

NA' - ;AY STATEMENT OF FINANCIAL POSITION AS AT 30 ;ANUARY 2000

2002
<8= i Mi..i! s ASSETS (ash and balances with $oF In estment in Fo ernment ?ecurities )ue from $anks and Other #inancial Institution 1oans and &d ances to (ustomers In estment in Other ?ecurities In estment in &ssociated (ompany In estment in ?ubsidiaries Other &ssets (urrent +a8 &ssets 6roperty and 72uipment '',!=< *',**9 *,,**= 1<=,<'9 '5= *=5 5!9 ,,,91 <'' 1*,'',

2000
<8= i Mi..i! s !=,5!9 '*,=!9 *5,1=, 11,,=3! 1,5,3 *=5 51' !,9!< 1< 11,3<9 *

Intangible &ssets T!ta. Assets LIA'ILITIES (ustomer )eposit )ue to $anks and other #inancial Institutions $orrowing &ccruals and Other 1iabilities (redit 0isk 0eser e T!ta. Lia#i.ities S8ARE8OLDERSD E9UITY ?tated (apital ?tatutory 0eser e #und (apital ?urplus Income ?urplus Other 0eser es T!ta. S:are:!.dersD EC"it/ T!ta. Lia#i.ities a d S:are:!.dersD EC"it/

!3= 33(,>4?

1!5 234,412

131,'31 1*,!'! 11,,,<! ,,<'' ',1!' 300,240

1!=,=5< ',<'5 35,'=3 1=,,1* !,!9= 204,00>

9,!5! <,*'5 *,',5 1=,,,< !,59' ',,*=9 33(,>4?

9,==9 5,**! *,''9 9,11' !,*,, '=,',3 234,412

Additional Information 1. (ash and balances with $oF should be treated as a nonBinterest earning asset interest. !. In estments in other securities are all interest earning assets. '. (onsider gross loans to include )ue to other banks and financial institutions, borrowings and customer deposits *. &ssume Net loans be all loans and ad ances to customers Note: ?tate all assumptions made and show all workings ReC"ired& (ompute and briefly comment on the following bank financial ratios a) 0eturn on &ssets g) 1oansBtoB&ssets 0atio b) 0eturn on 72uity h) 6ro ision for 1oan 1osses c) Interest 78pense i) 1oans 1oss 0eser esBtoBFross 1oans d) Interest (o er :) 1oans 1oss 0eser esBtoBNet 1oans e) Net Interest /argin k) 72uityBtoB&ssets f) Net 1oansBtoB+otal )eposit l) +otal )epositsBtoBNet 1oans One (1) marks each. Total of twenty four (12) marks are available for this question.

End of Paper.

Good Luck

MAREIN< SC8EME
A s5ers t! m".tiA.e C"esti! s 1. ) !. 7 '. ( *. ) ,. $ 3. ) ,

5. ( 9. ) <. (

1=. ) 11. $ 1!. &

1'. $ 1*. $

S"++ested A s5ers
5!r*i +s
w1) Total Interest Earnings Assets B In estment in Fo Gt ?ecurities B )ue from banks and other #I B 1oans and &d ances to (ustomers B In estment in other securities w2) Profit before Interest and ta !P"IT) B 6rofit before +a8 B Interest e8pense 1=,'5! !1,5=5 32,01? 3,3'3 1!,'53 0?,002 2012 *',**9 *,,**= 1<=,<'9 '5= 2@0,0?> 2011 '*,=!9 *5,1=, 11,,=3! 1,5,3 0?1,?(0

w#) Net $oans % &ross loan ' A(t)al $oans Ad*an(ed Fross loans B )ue to banks E other #I 1*,!'! B $orrowings 11,,,<! B (ustomer deposits 131,'31 +otal Fross 1oans 2?0,0@( 1ess 1oans E &d ances %1<=,<'9) Net loans 100+2,w,) Total deposits B (ustomer deposit 131,'31 B )ue to banks 1*,!'! B $orrowings 11,,,<! 12/+101

',<'5 35,'=3 1!=,=5< 0?0,322 %11,,=3!) -.+2.0 1!=,=5< ',<'5 35,'=3 1/1+#22

9"esti! 0
T/Ae Rati!
Return Assets

!B F!rm".a
on = et O!eratin" #ncome$ Total Assets % 1&&'

2000
'1,='9I 1==H '',,3*< G ?42(H I 1==H

2000

Remar*s FC!mme t

+he bank was able to !=,9==I 1==H generate re enue 9.95H in !'*,*5! !=1= and this increased by G @4@1H =.'9H in !=11.

I 1==H I 1==H

Return (quity #nterest (*!ense #nterest +overa"e Ratio

on = et #ncome$ sharehol)er (quity %

1&&'

= Total #nterest (*!ense $ Total #nterest (arnin" Assets % 1&&' = ,-#T or (-#T $ #nterest e*!ense . 1 = et #nterest income$ Total #nterest (arnin" Assets % 1&&' = et 0oans $ Total 1e!osits in times = 0oans to the bank $ Total Assets) % 1&&'

5,<53 ',,*=9 G 22H !1,5=5 I 1==H !9=,1<3 J 141(H '!,=<5 !1,5=5 J 044@& 0 13,',! I 1==H !9=, 1<3 J (4@4H 1==,!*5 15,,,<' J 04(1 times 1<=,<'9 I 1==H '',,3*< J (>4@@H ',1!'I 1==H 1<=,<'9 J 04>4H I 1==H ',1!' !<1,19, J 0401H ',1!' I 1==H 1==,!*5 J 3402H ',,*=9 I 1==H '',,3*< J 004((H 15,,,<'& 0 1==,!*5 J 041( & 0

*,5*, '=,',3 J0(4>3H 1!,'53 1<5,<,1 J >42(H 1<,=1! 1!,'53 J 04(4 &0 11,<9, I 1==H 1<5<,1 J >40(H 53,!3= 1!*,=13 J 04>0 times 11,,=3! I 1==H !'*,*5! J 4?401H !,!9=I 1==H 11,,=3! J 04?@H !,!9=I 1==H 1<1,'!! J 040?H !,!9=I 1==H 53,!3= J 24??H '=,',3 I 1==H !'*,*5! J 024?(H 1!*,=13& 0 53,!3= J 04>3 & 0

+his ratio indicates the return to owners of the bank. Increase by 3.'5H. +he interest e8pense increase by 1.,H. +his could be due to increase in acti ities. +he company is doing fairly well as it is able to pay its interest e8pense abo e the a erage. +his ratio indicates that interest e8pense is less than interest income. +his is a wise in estment management. +his ration indicates that the bank is not relying much on borrowed funds. +his ratio indicates the bank is assuming more risk as it may be prone to higher defaults, and its assets can pay off deposits. +his is the amt thought to be ade2uate for estimated loan losses. +he bank is keeping less of this meaning assets portfolio is 2uality. +his ratio determines how 2uality assets are. +he low ratios supposes less problems of the loans defaults. +his ratio is linked to the former ratio. 7 en though it has slightly increased, it is still generally low. +his ratio indicates the degree of e2uity le erage. Fenerally, banks are highly geared by nature of it sources of funding
+his ratios determines the deposit drains. +his ratio indicates abo e a erage funding base. ?ol ency is good

et #nterest /ar"in Net loans BtoB total deposits 0oans2to2 Assets

,rovision = 0oan loss Reserve $ for 0oan Total loans) % 1&&' 0osses 1oan loss = 0oan 0oss Reserves $ reser es BtoB 3ross 0oans avera"e % 1&&' gross loans 1oan loss reser es BtoB = 0oan loss reserves $ Net loans net loans avera"e % 1&&' (quity Assets to = 4harehol)ers (quity $ Total Assets% 1&&'

+otal )eposits BtoB = Total 1e!osits $ et Net 1oans 0oans : 1