Knowee
Questions
Features
Study Tools

Suppose a banker tells you that his bank in the year just completed had total interest expenses on all borrowings of $12 million and noninterest expenses of $5 million, while interest income from earning assets totaled $16 million and noninterest revenues totaled $2 million. Suppose further that assets amounted to $480 million, of which earning assets represented 85 percent of that total while total interest-bearing liabilities amounted to 75 percent of total assets. See if you can determine this bank's net interest and noninterest margins and its earnings base and earnings spread for the most recent year.

Question

Suppose a banker tells you that his bank in the year just completed had total interest expenses on all borrowings of 12millionandnoninterestexpensesof12 million and noninterest expenses of 5 million, while interest income from earning assets totaled 16millionandnoninterestrevenuestotaled16 million and noninterest revenues totaled 2 million. Suppose further that assets amounted to $480 million, of which earning assets represented 85 percent of that total while total interest-bearing liabilities amounted to 75 percent of total assets. See if you can determine this bank's net interest and noninterest margins and its earnings base and earnings spread for the most recent year.

...expand
🧐 Not the exact question you are looking for?Go ask a question

Solution

Step 1: Calculate Net Interest Margin

Net Interest Margin (NIM) is calculated as the difference between the interest income and the interest expense, divided by the average earning assets.

Interest Income = 16millionInterestExpense=16 million Interest Expense = 12 million Earning Assets = 85% of Total Assets = 85% of 480million=480 million = 408 million

NIM = (Interest Income - Interest Expense) / Earning Assets NIM = (16million−16 million - 12 million) / 408millionNIM=408 million NIM = 4 million / $408 million = 0.0098 or 0.98%

Step 2: Calculate Noninterest Margin

Noninterest Margin is calculated as the difference between noninterest revenue and noninterest expense, divided by the average total assets.

Noninterest Revenue = 2millionNoninterestExpense=2 million Noninterest Expense = 5 million Total Assets = $480 million

Noninterest Margin = (Noninterest Revenue - Noninterest Expense) / Total Assets Noninterest Margin = (2million−2 million - 5 million) / 480millionNoninterestMargin=−480 million Noninterest Margin = -3 million / $480 million = -0.00625 or -0.625%

Step 3: Calculate Earnings Base

Earnings Base is the proportion of total assets that are earning assets.

Earnings Base = Earning Assets / Total Assets Earnings Base = 408million/408 million / 480 million = 0.85 or 85%

Step 4: Calculate Earnings Spread

Earnings Spread is the difference between the return on earning assets (interest income / earning assets) and the cost of carrying liabilities (interest expense / interest-bearing liabilities).

Interest-bearing Liabilities = 75% of Total Assets = 75% of 480million=480 million = 360 million

Earnings Spread = (Interest Income / Earning Assets) - (Interest Expense / Interest-bearing Liabilities) Earnings Spread = (16million/16 million / 408 million) - (12million/12 million / 360 million) Earnings Spread = 0.0392 - 0.0333 = 0.0059 or 0.59%

This problem has been solved

Similar Questions

This measures the amount of interest and non-interest income generated per dollar of total assets.

First National Bank of Bannerville has posted interest revenues of $63 million and interest costs from all of its borrowings of $42 million. If this bank possesses $700 million in total earning assets, what is First National's net interest margin? Suppose the bank's interest revenues and interest costs double, while its earning assets increase by 50 percent. What will happen to its net interest margin?

Me Bank has 300 million in interest earning assets upon which it earns an average of 5%. Credit or obligations sum to 200 million which on average costs 4%. The bank has total assets of 400 million. What is the interest rate margin of the bank?

If margin = 5 percent, net income = $100,000, and turnover = 4.0, then Blank______.Multiple choice question.ROI = 20%, average total assets = $500,000, and sales = $2,000,000ROI = 20%, average total assets = $1,000,000, and sales = $4,000,000ROI = 10%, average total assets = $500,000, and sales = $4,000,000ROI = 15%, average total assets = $500,000, and sales = $5,000,000

Suppose that a bank has interest yield on interest sensitive assets currently average 11% while interest sensitive liabilities have an average cost of 9%. In contrast fixed asset yield 13% and fixed liability cost 11%. If the bank has total asset of $6100 million and interest sensitive asset and liabilities are $3800 and $3500 respectively. Calculate the net interest income and net interest margin.If the market interest rate on rate-sensitive assets reduces to 9% and the interest rate on rate-sensitive liabilities reduces to 7%, what would be the impact of net interestincome and net interest margin?

1/3

Upgrade your grade with Knowee

Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.