a Bank Risk Assessment and Recommendations for Bank X

Coursework Project: Preparing a Bank Risk Assessment and Recommendations

All work is to be submitted via email. Project submission is in the form of two files, one text document called Report (a Word *.doc file), plus one supporting file called Modelling that documents your modelling work (a spreadsheet *.xls file). All MS Office docs need to be submitted in 2003 compatibility format. The file name should be RM-ID-report.doc and RM-ID-modelling.xls, where instead of ID you list your student ID.

Topic: You are a risk analyst in a large bank and must write a 3-5 page report on a real bank whose numbers you were given.

The report should consist of:

An introductory paragraph assessing the bank s overall financial and risk profile, along with your recommendations for improvement (10%).

Beneath that you should include a table of headline numbers and ratios (10%),

Followed by greater amplification on the assessment of:

Asset quality and adequacy of loan loss reserves (10%),

Cost position and dividend recommendation (10%),

Pricing of loans and deposits (10%),

Quality of earnings (10%),

Capital adequacy (10%),

Liquidity and funding (10%),

Market risk and sensitivity thereto (10%), and lastly,

Operational risk (10%).

Each section, consisting of a paragraph, should also include recommendations where appropriate.

Report: Your report should have 1000 to 2000 words, excluding tables and graphs. You should give a reasoned and persuasive rationale for your recommendations, using financial measures to back up your analysis. As outlined above, there should be a table of summary financial ratios. There could also be a table comparing your bank s performance indicators with comparable banks, to help justify your recommendations.

Modelling: You also need to supply a file that documents your calculation work, for the major ratios. This should be a representative spreadsheet file.

The project
Imagine you are the Chief Risk officer of a newly-formed bank, with a focus on corporate lending in Slovakia. The bank is largely funded by local deposits. The CEO (and so does the regulator) wants to know if sufficient capital has been allocated against assets, and what provisioning policy should be. He would also like your views on pricing of loans and deposits, so that the bank can make a decent profit while making competitive headway without excessive risk. The bank takes small positions in trading local government bonds. The CEO would also like you to assess the bank s VAR, as well as liquidity; to be sure no undue risks are being taken.

Following is the financial position of the bank after the first year of operations:

Assets (Euro millions)
Cash 24
Due from banks 93
Securities 210
Gross loans 460
Loan Loss reserves (LLRs) -9
Fixed Assets 35
Other Assets 47
Total Assets 860

Liabilities & Equity
Deposits 646
Due to banks 58
Market funds 42
Other liabilities 48
Equity 66
Total Liabilities & Equity 860

Income Statement
Int income 44
Int exp -14
= Net int income 30
Trading income 2
Net fee & comm. Income 11
= Operating Income 43
Personal exp -9
Other operating income -14
D&A -3
= Pre-prov Income) 17
Loan Loss provisions (LLPs) -4
= P-t income 13
Tax -3
= Net Income 10

In addition to the above requests from the CEO, he would also like your input on measures to reduce the operational risk, and what dividend policy should be.

The bank s 460 million Euros gross loan book is rated as follows:

200 million Euros of BBB rated loans,
200 million Euros of BB rated loans,
50 million Euros of B rated loans
10 million of CCC rated loans. There are no collateralised loans or off-b/s items.

Securities of 200 million Euros are all invested in A-rated government bonds.

VAR = 2168 million

Loans are evenly divided between 1, 2 and 3 years maturity.

Deposits are 50% demand (due at any time), 25% in 9 months, and 25% in over 1 year.

Market debt is of 2 years maturity.

Please formulate your recommendations to the CEO. Thank you.

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