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interest rate risk. More specifically, since the bank is leaning toward
short-term retail deposits which is short duration and lending to
long-term customers, institution which is long duration. As a result,
the bank has negative repricing gap in the short-term period and
positive duration. By having a negative short term repricing gap
exposes the bank to an interest increase which would decreases net
interest income due to refinancing risks. In addition, having a
positive duration expose the bank to decrease in interest rate where
the market value of equity would decrease.
Secondly, the bank is facing liquidity risk which is the risk that the
bank can not meet its payment as it falls due such as customer
deposit or wholesale maturity. The risk comes from various sources
such as off-balance sheet activities, inherent from bank operation,
negative externality and inability to refinance due to credit rating
and market conditions. Specifically, off-balance sheet activities such
as undrawn facilities or financial guarantee can be drawn down if
contingent events happen such as defaults of accountable party
leading to the banks obligation to pay the guarantee letter thus
expose the bank to liquidity risk. BY the nature of the bank
operation, the bank would desire to lend all their available cash in
order to achieve the best return thus exposing to liquidity risk where
there are sudden demand of withdrawal. This is enhanced by the
negative externality when the default of another financial institution
has the negative impact on all the financial market.
Next, credit is another crucial risk that impacts the performance of
the bank. Credit risk is the risk that customers or counter party of
the bank fail to perform the term of the loan contract. The risk arises
from the nature of lending business and is enhanced by the
concentration of credit risk where numerous customers expose to a
homogenous factor thus subjecting to same risk of default.
Therefore, if there are unfavorable economic conditions such as
natural disaster could result in the inability to fulfill customer
obligation to the bank and lead to credit risk. In addition, with
customers in tourism, agriculture industry, there is a currency risk
that could lead them to default and thus increasing credit risk.
Lastly, the most important factor that can lead to credit risk is the
insufficient assessment of customer credit approval thus lending to
customers that are unable to pay thus the bank needs to carefully
consider the credit of customer before making the transactions.
6,338
6.51
#
1
2
3
4
5
6
7
8
9
10
11
12
years
20069
An example of calculating duration of 2 years term is set as follow
and since the overdraft with less than 1 year term the principle is
paid with interest thus their duration is their maturity and is
assumed to be 0.5 thus duration of overdraft and credit card is :
(7261*0.5+4235*1.89+3436*2.71+2295*3.46+2842*5.44)/
(20069)=2.21
The payment is discount at WACC calculated as follow with
assumption that market value of deb is equal the book value, cost of
equity is calculated using CAPM model with risk premium is 7.5%,
beta is 1.33 obtained from Yahoo! Finance and risk free is according
to treasury 10 years at 2.53%. In addition, cost of debt equal
interest expense divided by total debt value and tax rate is 29.86%.
Market
value($m
Attribute
WACC
)
Cost
to WACC
Equity
85,235
0.1251
0.0155
Debt
603,782
0.0260
0.0160
WACC=
0.0315
Next in net loan and advance is term loan- housing with the terms
various from 1 year to 10 years with different rates according to
their website charge. It is assumed that those payments will be fixed
interest rate and monthly payment thus the duration of term is
calculated as follow:
Terms
Amount
Duration
1 Year 113,785
0.98
2 Years
75,670
1.91
3 Years
55,618
2.80
4 Years
48,566
3.64
5 Years
34,678
4.49
7 Years
63,954
5.65
10 Years
92,441
7.52
Their average duration is thus : 3.72 years. Since hire purchase,
lease receivable and commercial bill have similar stream of payment
thus they would be group together and assume payment are semi
annual and fixed rate payment with 7.63% interest p.a and the
terms between 1 and 5 years have 3 year maturity on average:
Terms
Amount Duration
1 Year
3,939
0.98
1 to 5
years
15,231
2.76
Their duration is : 2.39 years. The rest of assets are not impacted by
the interest rate so their durations are 0. Next, on the liability side,
regarding deposit and other borrowing, the duration is calculated
with the assumption that fixed interest payment are made semiannual for deposit more than 6 months term with interest rate of
1.92% according to ANZ website. The amount within the time bucket
is following note 31,33 of the bank financial statement with most of
the amounts are less than 3 months maturity and those are
assumed to have average maturity of 1.5 months and since they are
less than 6 months, their duration is equal their maturity since
interest are paid with principle. In addition, the deposits with in 3
months to 12 months are assumed to have maturity of 0.75 year
and 1 to 5 years is 3 years maturity assumption:
Amount
($m)
Terms
Duration
Less than 3
months
419,903
0.125
3 to 12
months
68,959
0.748
1 to 5 years
21,217
2.93
Average duration : D = 0.33 years
Similar to deposit, long-term including subordinated debt and debt
issuances are grouped together and the terms according to note 31
with the interest rate of Bank bill rake + margin = 2.6%+3.4% = 6%
as in 30 September 2014 and the payment is half-yearly:
Terms
Amount Duration
Less than 3
months
4630
0.125
3->12months
12469
0.743
1 to 5 years
61917
2.8
After 5 years
20118
5.93
No specific day
17.66666
(perpetual)
1097
667
Perpetual duration is equal 1+0.06/0.06=17.66 years thus their
average duration is 3.21 years. Next is derivative instrument, since
the value showed on the balance sheet are their fair value
recognized at the current interest rate, the true amount exposing to
risk is actually the notional amount of the derivative contract. It is
assumed that $1,700,111m of the notional amount is derivative
asset (decrease equity value when interest increases or long
position) and the rest are derivative liability( decrease equity value
when interest decreases or short position). In addition, since their
the fact that the net margin of the bank has been decreasing since
2010 (from 2.47% to 2.13%) showing that funding cost increases
relatively to lending rate.
Lastly, run-off cash flow is also another factor that impact not only
duration gap but also repricing gap. Run-off cash flow is the problem
that the payments are not always as planned such as repaid of
deposit or withdrawal of fund before maturity. Similar to this is the
rescheduling of payment or default on the counter party which
would lead to increase or decrease of duration.