A.

Profit Ratios:
Net Income
1. Return on equity (ROE) =
Total Equity Capital
2. ROE = ROAXEM
Net Income Total Assets
3. ROE = X
Total Assets Total Equity
Total Assets
4. Equity Multiplier (EM) =
Total Equity Capital

Equity of the bank capital is the sum of preferred stock, common stock, reserve and surplus, paid in
capital, share premium and other equity capital.

Net Income
5. Return on Assets (ROA) =
Total assets
6. ROA = Profit Margin X Assets Utilization Ratio
Net income
7. Profit Margin (PM) =
Total operating income
Total operating income
8. Assets Utilization Ratio (AU) =
Total Assets .

AU shows how the bank is mobilizing its resources to generate profit.

Net Income Total operating income

9. ROA = X
Total Operatingincome Total assets .
Interest expenses
10. Interest Expenses Ratio =
Total Operating Income
11. Impairment Charge ratio: Loans and advances are the major assets of the banks. Amount of
impairment charges for loan loss and other losses depends on the quality of loans and advances.
Such amount is charged to income of a bank. So, it affects the profitability of a bank. The higher
impairment charge adversely affects the profitability of a bank and vice versa.
Impairment charge for loan loss
Impairment charge ratio =
Total Operating Income
Non interest expenses
Non -interest expenses Ratio:
Total Operating Income
12. Tax ratio: Tax environment and corporate tax rate applicable to banks also affect the net
income available to shareholders. Higher tax rate applicable to the banks affects the income
available to shareholders adversely.
Income Tax
Tax Ratio:
Total Operating Income
Interest Income
13. Interest Income Ratio =
Total Assets
Non−Interest Income
14. Non-Interest Income Ratio =
Total assets
B. Other Ratios
Net Interest Income
15. Net interest Margin =
Earning assets
Net Income−Interest expenses
16. Net interest margin =
Investment securities+ Net loans∧Lease
Interest Income Interest Expenses
17. Spread Ratio = − (Spread is the difference
Earning Assets Interest Bearing liabilities
between income and interest expenses)
Non−Interest Income
18. Overhead efficiency ratio: (It measures the bank's ability to
Non−Interest expenses
generate non-interest income to cover the non interest expenses)
NOn− performing loans∧advances
19. Non Performing assets ratio=
Total loans∧advances .
Temporary Investment
20. Temporary investment ratio=
Total assets .
Total Volatile liabilities−Temporary Investment
21. Volatile liability Dependency ratio=
Net loans∧long term securities
Interest rate sensitive assets−Interest rate sensitive liabilities
22. GAP Ratio (%) =
Total assets .
23. Capital charge =
% of equity capital allocated ¿ loan Xopportunity cost of equity capitsl ¿
1−Tax rate
Numerical Problems
1. Total assets of XYZ bank ltd. Is Rs 150,000 million and return on assets is 2 percent. The
outstanding number of shares of this bank is 1,500 Million. Suppose the size of the assets
declines by 5 percent and return on assets remains the same.
a. What is the net profit after tax before decrease in the size of this bank?
b. What is earning per share before decrease in the size of this bank?
c. What is the net profit after tax after declining the size of the bank by 5 percent?
d. What is the effect of decline in the size of EPS?
e. What conclusion do you draw from your calculation in a, b, c and d ?
(Ans: a. Rs 3,000 Million, b.Rs2, c. Rs 2,850 Million, d. Rs 1.90)
2. The following are the information extracted from P/L account and Balance sheet of Bank
A and Bank B for the fiscal year 2019/20:

Particulars Bank A Bank B

Interest Income (In Million) 3,109.27 2,351.51
Interest Expenses (In Million) 1,735.35 1,261.07
Loans, advances and bill purchased 34,261.30 25,330.82
Investments 4,479.14 5,754.94
Calculate net interest margin ratio of Bank A and Bank B for the fiscal year 2019/20.
(Ans: 3.5% and 3.51% )
3. Calculate the required loan rate from the information given below

Elements of cost Cost (In%)

Cost of funds 5.0
Provision for loan losses 1.5
Direct expenses 0.5
Indirect expenses 0.3
Overhead 0.2
Opportunity cost of equity capital 15.0
The tax rate applicable to the bank is 30 percent and equity capital allocation to loan is 21
percent.

a. What is the capital charge?

b. What is total required loan rate?
c. When does bank earn target return on equity?
d. Show the return on equity on Rs 1,000 Million loan.
(Ans: a. 4.5%, b. 12% d. 15%)

4. Following are the projected financial information relevant to the business of loan
applicant:

Particulars Amount
Sales 500 Million
Total assets 600 Million
Total equity capital 200 Million
5% Long term loan 200 Million
Short term loan (To be borrowed from bank) 100 Million
Other interest free loan and liabilities 100 Million
Income tax 20 Million
Net profit 60 Million
Suppose that the application is for short term loan (For one year) of Rs 100 Million and interest
rate on it is 7 percent. Bank is very strict in evaluating the loan application. It does not grant the
loan if applicant does not meet any of the following financial criteria.

ROA 5 percent
ROE 20 percent
Debt service ratio 4 times
Profit margin Ratio 10 percent
Should the bank grant the loan of Rs. 100 Million? (Ans: 10%, 30%,5.71 times and 12%)

5. The Following are the information extracted from balance sheet and profit and loss
account of HBL and BOK for the year 2019/20 (Rs in Million)

Particulars HBL BOK

Total assets 30,000 42,000
Non Interest income 350 650
Interest Income 4,000 4,500
Interest expenses 2,100 2,900
Loans, advance and Bill purchased 21,000 27,000
Investments 5,000 8,000
 Interest bearing deposits 25,000 30,000
Debenture and bond 500 600

a. Calculate non -interest income ratio of both banks

b. Calculate net interest margin ratio of both banks
c. Calculate spread ratio of both banks
d. How do you evaluate the both bank's performance on the basis of above
calculation.
(Ans: a.1.17%,1.55%, b. 7.31%,4.57%, c.7.14%,3.38%)
6. A bank offers at an annual interest rate of 10 percent and pays 7 percent on its deposits.
The amount of each assets and liability are Rs.9, 000 and Rs.6, 000 respectively and the
bank's only interest earning and interest paying accounts. What is the bank's net interest
income? What is the bank's interest spread. (Ans: Rs 480 and 3%)

7. NICA disclose the following information on its annual report of fiscal year 2019/20

Particulars Amount
Total interest revenue Rs. 4,402 Million
Total interest expenses Rs.2,444 Million
Provision for loan losses Rs.190 Million
Total non -interest revenue Rs. 656 Million
Total non -interest expenses Rs.1,053 Million
Income tax rate 30%
Total assets Rs. 80,457 Million
a. What is the bank's net interest income?
b. What is its net profit?
c. What is its return on assets?
d. What is its assets utilization ratio?
e. What is its profit margin ratio?
(Ans: a. Rs 1958, b.Rs 959.70, c. 1.19%, d. Rs 6.29% and e. 18.97%)