North South University

                                             School of Business & Economics
FIN 464
Bank Management

Mid Assignment
The goal of this assignment is to assess your quantitative, qualitative and overall
understanding of the topics that has been discussed during the semester. Please finish and
submit the assignment on time. Under any circumstances, do not engage in any unethical
conducts that can result in F grade and further repercussion. Wish you all the best.

Part 1:

Answer all the following questions (20 points)

You must have to show all the steps to receive full credit.

1. 

Balance Sheet 2018 2019 2020

Cash 150 140 165
Marketable securities 500 450 500
Equipment and buildings 600 600 600
Net Loan 1200 1300 1250
Total Assets 2450 2490 2515
Deposit 1000 900 1000
Non-deposit  300 200 300
Equity 1150 1390 1215
Total Liabilities and 2450 2490 2515
equity
Income Statement 2018 2019 2020
Interest revenue 500 450 500
Interest expense 100 150 150
Non interest revenue 100 150 150
Operating expense 50 50 60
Provision for loan loss 30 30 30
Pre tax net operating income 420 370 410
Securities gains/loss 30 40 40
Tax 80 70 80
Net Income 370 340 370
From above data, as an analyst of the company, calculate the ROE for all 3 years. Now break

down the ROE in different components to understand the following factors.

I. Efficiency

II. Control of expenses

III. Asset and fund management

Now write a brief report of competitive analysis on above factors and what can be done

in coming years to improve them

(8 points)
 2. United Bank issued a 3 years 7% fixed rate loan to a borrower. After 1 year of the issuance
government decreased the yield on T-bond by 50 basis point. Will it adversely affect the
borrower? If yes, why? (4 points)

ANSWER:
Indeed, it will unfavorably influence the purchaser, since this is a long term fixed rate credit to
the borrower and if the yields on the depository bills will expand, it implies that the security
would have been gained at a less expensive rate by the purchasers so if the yields have been
diminished by 50 premise focuses, It will imply that the purchaser would have obtained this
advance inexpensively following one year and the pace of profit from his speculation would have
been higher not really good or bad he ought to be antagonistically influenced as he will be
paying greater expense just as he is additionally getting a lower pace of return. it will likewise be
recalled that the security yields and security costs are conversely related so when the bone yields
will go down, the security costs will go high and it is additionally to be considered that
depository bills would have been a superior speculation.

 3. If Citi Bank stock is expected to pay a dividend of $30 per year for unlimited years and
investors requires a 15% annual return, what is the value of Citi Bank stock after 15% tax
rebate? 
 (3 points)

4. Royal Bank capital structure consist of 20% debt, 30% PR Stock, and 50% equity. In
Bangladesh, bank is subject to 32% tax rate. YTM on outstanding bond is 8%. PR Stock pays
dividend of $10 and selling at $95. Common share dividend is $0 for next year. Current market
price of common stock is $40. With beta of 1.3, expected return 14% and risk free 6%. What is
the Bank’s WACC? Now revise the capital structure to reduce the WACC by at least 1%. Show
the revised WACC. (5 points)
answer:
Part 2:
Answer all the following questions (4 X 5) = 20 points
 1. Since Bangladesh is a developing nation, the banking needs for our citizens are different
from the citizens of developed nation. Conventional financial products and services does
not fit the demand for mass people who lives in rural areas and purchasing power is very
low. We have banks like Grameen Bank, Shilpa Bank, Karmasangsthan Bank, Basic
Bank, Krishi Bank and others with different objectives and goals. You need to precisely
explain where these banks source their fund from and how these banks manage their
investment, risk and profitability.  

Answer: We have different banks and have different goals. Banks get their fund from normal
people mostly but they have other sources . Bangladesh bank is the source of their funding .
Deposit is the source of funds. From different financial institutions they get funds . supplier
credit is also a fund. Government also gives funds. By selling bonds, banks get funds. Sometime
bank borrowing
money from other banks for their fund. capital , reserve ,surplus is source of funding .
Commercial bank deposits are their main source of funding, and those deposits are current
account deposits , saving deposit and term deposit , Short Notice deposit, schemes accounts,
FDR .
The central bank is the last resort for funding. they give loans to commercial banks.

Banks invest their funds in varieties sourced through Small and medium enterprise, consumer
items, Garments sector, ceramic sector, pharmaceutical sector, varieties industry through
different types of loan like term loan, continuous loan, short term agricultural & micro credit
loan .

Banks give loans to their customers. Sometimes they didn’t get their money fully bank, this is the
risk for the bank. Banks invest money in different sides, sometimes for many reasons they can
lose it. always have some risk ,but banks maintain all rules and strategy to avoid it . Banks are
very much exposed to so many different types of risk. Due to both external and internal factors
they face risk. the reason behind it ,bad loans poor business model and misguided strategic
business model,

There are some risks like off balance sheet risk, legal and complaints risk ,strategic risk, capital
risk, by proper strategy and taking necessary steps the bank can avoid these risks .

To manage profitability banks have to consider several factors, they have to use their financial
leverage and operating leverage carefully . they have to be careful in controlling operations so
that more sales revenue can earn in net income ,cautious administration of the resource portfolio
to address liquidity issues while looking for the best yield from any resource gained and of
course it should be maintained that losses can overwhelm income and equity capital .
2,During the semester, we learnt that banks are one of the most regulated institution in the
world. There is a set limit of how much they can be exposed in off-balance sheet
activities and capital market. Many experts argue that limiting the banks from doing these
businesses are unfair and it hampers the growth. You should argue both for and against
the regulations that limit the banks from risky undertaking.

Answer: Bank is one of the most regulated institution they have to maintain many rules for their
activity. in our country Bangladesh bank observe everything what are they doing , and
Bangladesh bank give many circular that all bank have to maintain . their financial activity can
be seen in their balance sheet. Their liabilities asset are all in their balance sheet. Off balance
sheet items are those liabilities and assets that aren't shown in the balance sheet . and its activity
includes letter of credit, loan commitment, revolving underwriting facilities . And it has limit
that how much they can exposed in off-balance sheet. Many expert argue that limiting this credit
can harm banking business. If bank have that ability to give permission for high amount of letter
of credit that don’t they do it . it will create more customer and make good terms with their
customer. and bank can earn more profit. But sometimes some LCs get default. due to different
reasons like un-fixability, economic changes of dollar rate as it’s an international transaction for
changing dollar rate banks have to pay more and face loss. some buyer import such product that
bring loss and they can’t return banks money for that reason bank face great loss

1. Bank is exposed to many different types of risks such as credit, liquidity, market,
business, interest, forex, regulation etc. As a bank policymaker, how will you manage these risks
in Bangladesh? You have to precisely explicate the types of tools and strategies that will be
implemented for risk mitigation. Your prescribed tools and policies must be feasible from the
context of this country.  
ANSWER
Banks are exposed to many different types of risk .
Credit risk: When borrowers default on the bank advance, it is known as credit risk. The
estimation of the advance given by the bank goes down is likewise known as credit risk. Banks
offer cash to individuals, who aren't equipped for the credit, which leads to every single risky
advance. For this bank can't repay depositor money . To avoid credit risk, banks have to be more
serious to whom they are giving money. And they have to give loans against strong security ,
that’s how they can recover their money.
Liquidity risk : Bank usually faces two types of liquidity risk, short term of liquidity risk and
long term of liquidity risk. When banks face short term liquidity risk, banks can solve this crisis
borrowing money from others. But when banks face long term liquidity risk, it is really
problematic. Banks don't have enough liquidity to provide loans or depositors can’t withdraw
money; it is known as a long term liquidity crisis. Banks can solve this crisis by selling assets,
adding liabilities, and securitization. Securitization can sell its illiquid loans to the investment
bank and investment banks packaged them as asset backed securities. One of the most popular
assets backed securities MBS (mortgage-backed securities).
Market Risk: Comes from price and interest rate movement. Price risk is when the value of the
bank’s assets goes down. Banks have Interest rate sensitive assets and liabilities, which can
affect their profitability. By balancing the assets and liabilities, banks hedge the risk associated
with assets and liabilities. Banks always calculate sensitive assets and liabilities.
Forex risk: Bangladeshi banks don’t have foreign exchange risk because they aren’t allowed to
provide loans internationally.

Interest risk: some time Bangladesh banks decrease the interest rate that happened last year. and
the fixed interest rate and deposit rate for this many banks couldn’t make profit.

Business risk: many businesses have huge risk , before investing it banks have to be careful and
find out proper information. otherwise banks have to bear all this.

Regulation risk :Bangladesh bank regulates all other banks, if any bank doesn't maintain it, they
have to face penalty . for this all bank should manage overthink properly .

4.The overall banking industry is facing the following challenges in Bangladesh.

● Interest rate volatility and government intervention

● Huge government borrowing

● Money laundering under the guise of international trade
● Deliberate default by few clients
● Board of director’s undue influence on loan approval
● Small market with too many competitors like NBFI & MFI
● Stringent branching regulation
● Stringent branching regulation

● Lack of policy regarding merger and acquisition

● Poor bond market and lack of secondary trade
● High cost of doing business
● Negative image 
I discussed these challenges of local banks throughout the semester. Now, I want you to
write an editorial on how to overcome these challenges in a meaningful way. It is
important for you to understand and consider that some of the challenges are out of your
 control. Still, you should write about the remedies that might someday will influence the
policymakers. (Maximum 400 words)

ANSWER

The overall banking industry is facing different challenges in Bangladesh.

Interest rate volatility and government intervention : For sudden change in interest rate bank face
problem, In different situation government change and fixed rate , for this sudden decision bank
had to bear losses, for example , if a bank take a deposit in certain fixed return rate in agreement
and after that government increase interest rate and decrease deposit rate , bank must pay their
customer in that rate which they agreement in earlier, for this bank pay pore deposit rate that
definitely a loss because they get lower interest rate so their profit margin get lower. And this
situation is completely dependent on Bangladesh bank. They have to make decisions in a way
that helps general people and banks.

Money laundering under the guise of international trade: Bangladesh is one of the top nations
confronting exchange based money laundering, which is a huge danger to development and
reasonable turn of events. As per the review, directed by the Bangladesh Institute of Bank
Management, this has become a significant worry for the banking business of Bangladesh in
light of fast development of unfamiliar exchange. Bank management needs to more stick on
it .Bangladesh needs to be completely dedicated to stay at the bleeding edge of worldwide
endeavors to battle exchange based money laundering and also settle proper enforcement and
implementation against this money laundering .

Deliberate default by few clients: Before giving loan bank must have to take strong security
against it .That’s how they can collect their investment.

Board of director’s undue influence on loan approval: Some time board of director pressure or
influence for giving approval for loan. but as giving the decision of loan is only dependent on
bank management that’s why it should not be acceptable, regulation should be maintained in the
right way. Management has to be more strict about their policy .

Small market with too many competitors like NBFI & MFI: There are a huge number of non
banking financial institutions and microfinance institutions , it's really hard to manage and
maintain all of that. Many institutions doing fraud to maintain their government have to set
regulations for them.

Stringent branching regulation: For opening sometimes it is tough to regulate all branches in the
same way. Bank management should regulate more hardly to maintain that.
Lack of policy regarding merger and acquisition: for lack of policy regarding merger and
acquisition , many companies overrule other one. Both sides must be aware of every regulation
and use it and maintain it.

Poor bond market and lack of secondary trade; Government has to take necessary steps to solve
this issue.

High cost of doing business: In this economy the cost of business is very high for this people fear
doing business, it should be reduced so that people that easily do business.

Negative image: some banks make their image negative for not giving liquid in time. For this
everyone fears to use that bank like pharmas bank , that now name in Padma bank, but for their
past history people still fear to deposit money in there.