BFF5280 Institutional Asset And Liability Management Essay.

For the purpose of the assignment, you are the most senior risk officer at National Australia Bank Ltd and has responsibility for risk assessment and evaluation.

 

In an advisory capacity, you have been requested by the Board to submit a comparative risk assessment report. The report should cover the strategic risk, interest rate risk, market risk, credit risk, credit portfolio risk, liquidity risk and foreign exchange risk. The sample includes ANZ, NAB, Commonwealth Bank and Westpac Bank. The sample period depends on data availability in Orbis Bank Focus database available. 

Risk assessment is the term which is used by the company to determine the overall process and the methods. The process is undertaken to identify the hazards and the risky factors that the company is going to affect the organisation. Analyse and evaluate the risk associated with the risk analysis and the risk evaluation. The report below is the analysis of the ratios of the 4 banks which are National Australian Bank and the same is compared with the ANZ bank, Commonwealth bank and the Westpac bank (Cohen & Scatigna, 2016).

The strategic risk has been defined as the central risk of the business. The key aim of the strategic risk management is to strengthen the earnings of the banks through the resilience and the same has been protected with the assistance of the undue earnings volatility to gauge the overall risk targets. For the purpose of determining the strategic risk of any bank the leverage ratios and the CET 1 ratios are calculated (Behn, Haselmann & Vig, 2016).

Capital Adequacy ratio is also known as the Capital to Risk Weighted Asset ratio in relation to the bank’s capital and the risk. The capital ratios are divided among the three major categories such as the Tier 1 ratios, the equity to total assets ratio and the capital funds by liabilities. This ratio basically determines the capital structure of the banks and from the table below it can be analysed that the NAB’s Tier 1 ratio is has been 12.41 which are the third highest in terms of the other comparing banks. The tier 1 ratio of the NAB increased from 6.67 in the year 2007 to 12.41 in the year 2017 and the ANZ bank increased from 7.30 and just reached double the amount at 14.10 being the highest performer in terms of the tier 1 ratio. The CBA and the Westpac are again on the same motion at 12.3 and the 12.66 respectively. The tier 1 ratio determines the ability of the company to absorb the losses therefore higher the ratio, higher the company is able to absorb it. From the above results it can be analysed that ANZ bank is highly capable and after that the Westpac bank in comparison to the NBA bank for the financial year 2017 as well as the past 4 years (Estrella, Park & Peristiani, 2012). 

The equity to total assets of the company is the measure of the equity and the total assets held by the banks for the period of the 12 years. This basically determines the ratio which determines that how much assets are in the range of the shareholders having the residual claim. The figures are taken from the balance sheet. Except the ANZ bank the NBA, CBA and the Westpac bank have increased the ratio from the 4.86% to 6.39% in the year 2017, 5.34% to 6.91% and 5.37% to 7.20% respectively. The increase in the ratio is basically by the fluctuations in the earnings of the banks and therefore the balance of the shareholders equity has also been changed over the years. The higher the ratio the more the number of the assets is in the hands of the shareholder. From the results as given in the table it can be concluded that the thought the highest ratio is of the ANZ bank yet this bank is prone to the maximum amount of the fluctuations. In terms of the consistency the NBA bank has been increasing consistently and so is the Westpac bank, henceforth, the NBA bank is performing better (Shrieves & Dahl, 2012).

Equity/Total Assets		6.39%	6.48%	5.71%	5.20%	5.46%	5.40%	5.26%	5.30%	5.39%	4.64%	4.86%	5.36%
Capital funds/Liabilities		1.08	1.08	1.07	1.06	1.06	1.06	1.06	1.06	1.07	1.06	1.06	1.07
Equity/Total Assets		8.11%	7.72%	8.24%	8.91%	9.26%	8.99%	8.91%	8.97%	8.56%	7.98%	8.07%	9%
Capital funds/Liabilities		1.09	1.09	1.09	1.10	1.11	1.10	1.10	1.10	1.09	1.09	1.09	1.09
Equity/Total Assets		6.91%	6.47%	6.44%	5.90%	6.05%	5.85%	5.58%	5.37%	5.36%	4.92%	5.17%	5.34%
Capital funds/Liabilities		109%	108%	108%	107%	107%	107%	107%	107%	107%	106%	107%	107%
Equity/Total Assets		7.20%	6.93%	6.55%	6.30%	6.67%	6.57%	6.25%	6.49%	6.20%	4.43%	4.72%	5.37%
Capital funds/Liabilities		1.09	1.08	1.08	1.07	1.08	1.08	1.07	1.07	1.07	1.05	1.05	1.06

Interest Rate risk exposure arises when the change in the interest rates has the potential to affect the numerical value of the assets and the liabilities, the operational ratios are calculated. The following table determine the data of the National Bank of Australia for the period of 12 years. The operational ratios basically are divided into the four categories which are Net interest margin, return on assets, return on equity and cost to income ratio (Drechsler, Savov & Schnabl, 2018).

Net interest Margin		0.6%	0.6%	0.6%	0.6%	0.7%	0.7%	0.7%	0.7%	0.7%	0.7%	0.7%	1.3%
return on assets		0.7%	0.0%	0.7%	0.6%	0.7%	0.5%	0.7%	0.6%	0.4%	0.5%	1.0%	1.1%
Return on Equity		10.5%	0.7%	11.7%	11.5%	12.1%	9.9%	13.2%	11.6%	7.3%	10.2%	20.0%	19.8%
Cost to income ratio		2.69	41.17	2.49	3.21	3.34	5.22	4.07	4.16	7.35	9.10	3.81	3.28

The net interest margin ratio is the measure of the difference between the interest income generated either by the banks or the financial institutions and the amount of the interest paid out to the lenders in relation to their interest earning asset. The net interest margin helps in improving the assets of the banks and the structure and assessing the stability and the efficiency of their operations. Besides this the interest margin of the ANZ Company was 1.4% in the year 2006 and the 0.7% in the year 2017. The ratio was consistent for the period of the 7 years as can be observed form the table. Analysing the situation of the Westpac bank and the Commonwealth Bank of Australia, the net margins were almost similar at 0.6% in comparison to each other. Therefore it can be interpreted that in terms of the Net interest margin the NBA is performing better than among all the three banks (Hevert, 2014).

The return on assets of the National Bank of Australia was highest in the year 2006 at 1.3% and thereafter the ratio decreased to the range of the 0.5% to 0.7%. The return on assets basically determines the ability of the company to use the assets and generate the revenue for the company. The higher the return on assets the more efficient the company is working. The ANZ bank on the other hand has improved its performance as it can be reflected from the hike in the ratio of the 1.1% to 1.2% from the year 2006 to 2015. Thereafter the bank reached back to square 1, on the same ratio on which it was in the year 2006. The CBA bank and the Westpac bank are on the same platform in terms of the return on the assets and over the period of the 12 years the ratio remained in the range of the 0.9% to 1.1% (Liang, et al 2016).

The return on equity is the ratio which determines the amount of equity that has been invested in the organisation and the return on the equity received by the shareholder. In case of the National Bank of Australia the return on equity was highest in the year 2007 at 19.97% and thereafter it decreased to 13.18% in the year 2011 and further it almost touched the figure of 10.50% in the year 2017. The return on equity has been decreasing as can be seen from the table and the major reason is that the bank has sold the shares and converted into the liquid form. The return on equity of the ANZ bank has increased from 13% to 14.1% over the period of the 12 years and is performing better than NBA. In case of the CBA and the Westpac Bank the return on equity of the Westpac Bnak is better than the NBA; however the ANZ bank is the most consistent. The CBA on the other hand has lost the position which it was having in the year 2013 at 18.1% and thereafter it decreased and reached to 13.9% in the year 2017 (Moreira, 2016). The same is explained by the graph also.

Net interest Margin		0.7%	0.7%	0.7%	0.7%	0.7%	0.8%	0.7%	0.7%	0.7%	0.6%	0.7%	1.4%
return on assets		1.1%	1.0%	1.2%	1.3%	1.1%	1.1%	0.9%	0.7%	0.3%	0.9%	1.1%	1.1%
Return on Equity		14.1%	12.4%	14.7%	14.9%	12.3%	12.1%	10.2%	7.9%	3.0%	11.9%	13.4%	13.0%
Cost to income ratio		1.79	2.23	2.27	2.06	2.44	2.52	3.29	4.18	16.42	6.51	5.19	4.74

 

Net interest Margin		0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%
return on assets		1.0%	1.0%	1.0%	1.0%	1.1%	1.0%	1.0%	1.0%	0.9%	0.8%	1.0%	1.0%
Return on Equity		13.9%	15.8%	15.4%	17.6%	18.1%	17.3%	17.7%	17.9%	16.4%	15.6%	19.1%	19.1%
Cost to income ratio		1.73	1.58	1.83	2.02	2.14	2.73	3.54	3.88	3.57	4.46	4.42	3.74

(Source: By Author)

The above graph also explains the net interest margin, return on assets and return on equity and cost to income ratio.

WESTPAC	2017	2016	2015	2014	2013	2012	2011	2010	2009	2008	2007	2006
Net interest Margin	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.6%	0.7%	0.6%	0.6%	1.2%
return on assets	0.9%	0.9%	1.0%	1.0%	1.0%	0.9%	1.1%	1.0%	0.6%	0.9%	0.9%	1.0%
Return on Equity	13.0%	12.8%	15.2%	15.7%	14.6%	13.6%	16.8%	16.0%	9.6%	20.2%	19.7%	19.4%
Cost to income ratio	1.97	2.24	2.23	2.45	2.96	4.04	3.70	3.48	5.35	5.56	4.48	3.98

Market risk is the risk of the losses and it determines the position of the bank in terms of the market risk arising due to the fluctuations. The risk is further segregated into the Equity risk, net loans risk and for the purpose of the ascertainment of this risk the liquidity ratios are calculated.

Market Risk refers to the losses in the books of the banks due to the changes in the equity prices the rate of interest and the commodity prices and other indicators having the current value in the public market. The interest rate of the banks is 3.6% of the NAB, 2.30% of the CBA, 4.85% of the ANZ and lastly in case of the Westpac the rate of interest came to 2.51%. In terms of the equity prices the price of the Westpac is at $27.49 the NAB is $27.21 and that of the CBA and the ANZ is $69.9 and 27.72 (Drechsler, Savov & Schnabl, 2018). The highest range is of the CBA in terms of the equity price and in terms of the interest rate again the CBA is having the highest bracket. Therefore it can be interpreted for the above information that CBA is good in terms of the interest rate yet if the investor wishes to purchase the stock is costly than the other three banks.

The liquidity ratios of the bank generally determine the ability of the banks the short term loans are made or not. The short term financial obligation is of greater concern to the creditors. Therefore it is an important ratio in terms of the banks financial position. In case of the banks the liquidity ratios are categorised into the interbank ratio, net loans to total asset ratio (Heider, Hoerova & Holthausen, 2015).

The interbank ratio is the ratio which determines how much amount the bank has to pay and how much bank needs to receive from the other banks. This ratio simply indicates the ability of the bank and the portion of the expenditure as well as the revenue of the bank. The higher the ratio that means the bank is able to define the expenses and keeping the balance as revenue (Cohen & Scatigna, 2016). The NBA has the ratio of the 12.88% and which is low in comparison to its previous years as it can also be observed that the highest ratio was 36.88% in the year 2008. In case of the CBA the interbank ratio ranged from 13.27% to 19.91% as well and the Westpac scored a ratio of 72.58% in the year 2008 and the 5.03% in the year 2016 which created a huge impact on the business. Lastly the ANZ bank ranged from 6.645 in the current year to 36.52% in the year 2007. Therefore it can be interpreted that in the earlier years the ratio was the higher and it reduced in case of all the banks. The expenses shall be met yet not in such a manner that the ratio exceeds the limits set by the banking regulations act (Al?Hadi, Hasan & Habib, 2016).

The net loans to the total asset ratio is again the bifurcation of how much amount of the loan can be availed by the customers from the use of the existing assets and the higher the ratio the more the is the income of the bank in the form of the deposits from the customers. The range of the ratio is from 67.24% to 80.40% in all the cases. Therefore the results cannot be interpreted only on the basis of the net loans to asset ratio as all the bank are equally performing and the other criteria needs to be decided in order to figure out the best bank (Moldovan & Mutu, 2015).

Particulars		2017	2016	2015	2014	2013	2012	2011	2010	2009	2008	2007	2006
Liquidity Ratios
NBA
Interbank ratio%		12.88%	15.98%	17.57%	16.51%	26.35%	32.39%	31.30%	34.33%	32.26%	36.88%	32.49%	36.26%
Net loans / Tot assets%		71.23%	69.80%	60.71%	61.26%	63.79%	64.83%	63.13%	64.32%	65.64%	65.80%	67.24%	70.60%
Net loans / Dep & ST funding%		995.02%	915.84%	719.61%	908.04%	1006.41%	1101.60%	760.06%	734.18%	628.98%	452.38%	395.74%	403.39%
ANZ
Interbank ratio%		6.64%	11.54%	9.94%	4.59%	7.04%	10.28%	25.20%	23.48%	25.01%	30.94%	36.52%	56.28%
Net loans / Tot assets%		76.39%	71.27%	72.09%	74.70%	75.42%	71.31%	68.85%	73.77%	74.86%	79.47%	81.53%	81.57%
Net loans / Dep & ST funding%		2714.05%	1945.07%	1587.89%	1359.58%	1687.48%	1287.36%	1283.94%	965.75%	1019.75%	657.06%	795.49%	926.78%
CBA
Interbank ratio%		13.27%	16.46%	14.18%	17.32%	16.33%	16.11%	19.91%	17.23%	10.94%	21.89%	11.82%	8.47%
Net loans / Tot assets%		76.27%	75.00%	74.69%	73.41%	76.16%	74.64%	74.48%	76.48%	78.14%	77.59%	77.85%	75.92%
Net loans / Dep & ST funding%		915.29%	846.16%	736.13%	655.01%	723.79%	649.01%	653.18%	654.06%	968.54%	931.26%	728.13%	721.15%
WESTPAC
Interbank ratio%		5.03%	6.63%	7.09%	6.16%	9.93%	8.67%	7.03%	10.86%	10.41%	36.76%	72.58%	50.92%
Net loans / Tot assets%		80.40%	78.88%	76.75%	75.29%	76.48%	76.22%	74.10%	77.26%	78.61%	71.31%	72.92%	78.27%
Net loans / Dep & ST funding%		464.89%	421.26%	435.43%	455.72%	457.75%	425.40%	383.83%	401.15%	476.58%	525.70%	676.77%	910.94%

Credit risk of banks are basically the risk that are associated while making transaction like when borrower may fail to make the payment that is necessary.. Credit risk is the gamble of loss due to a borrower's default on a loan that may be classified in danger of default (Acharya, Drechsler & Schnabl, 2014).

Particulars		2017	2016	2015	2014	2013	2012	2011	2010	2009	2008	2007	2006
Asset Ratios
NBA
Loan loss res / Gross loans%		0.57%	0.57%	0.60%	0.57%	0.77%	0.85%	0.83%	0.96%	1.01%	0.68%	0.54%	0.59%
Loan loss prov / Net int rev%		24.46%	24.08%	28.25%	23.24%	30.10%	31.88%	30.54%	34.87%	36.47%	26.70%	21.62%	23.27%
Impaired loans / Gross loans%		0.15%	0.15%	0.13%	0.16%	0.35%	0.51%	0.36%	0.63%	0.88%	0.62%	0.20%	0.18%
ANZ
Loan loss res / Gross loans%		0.49%	0.54%	0.57%	0.69%	0.90%	1.20%	1.36%	1.60%	1.42%	0.68%	0.53%	0.59%
Loan loss prov / Net int rev%		19.06%	20.72%	21.25%	24.28%	31.61%	39.30%	45.17%	57.79%	51.85%	29.10%	20.71%	21.61%
Impaired loans / Gross loans%		0.05%	0.13%	0.07%	-0.02%	0.07%	0.22%	0.21%	0.50%	0.98%	0.31%	0.08%	0.02%
CBA
Loan loss res / Gross loans%		0.48%	0.50%	0.53%	0.56%	0.64%	0.79%	0.89%	1.00%	1.06%	1.01%	0.45%	0.37%
Loan loss prov / Net int rev%		19.66%	21.05%	21.95%	22.87%	25.60%	31.97%	36.79%	40.87%	45.53%	47.80%	21.66%	17.52%
Impaired loans / Gross loans%		0.14%	0.15%	0.18%	0.15%	0.15%	0.20%	0.20%	0.25%	0.47%	0.55%	0.24%	0.13%
WESTPAC
Loan loss res / Gross loans%		0.42%	0.50%	0.48%	0.54%	0.67%	0.74%	0.81%	0.98%	0.94%	0.62%	0.49%	0.51%
Loan loss prov / Net int rev%		18.47%	21.98%	21.22%	23.43%	28.41%	30.67%	33.72%	39.78%	37.64%	26.93%	21.69%	21.27%
Impaired loans / Gross loans%		0.12%	0.17%	0.12%	0.11%	0.16%	0.23%	0.20%	0.30%	0.69%	0.30%	0.17%	0.16%

The assets ratio of the bank can also be termed as the loan loss rate is the ratio which measures the loan impairment charge for the year in terms of the percentage of the loans and the advances to the customers and the clients. The banks chosen for the purpose of the NBA, CBA, Westpac and the ANZ bank and in case of the ANZ Bank the ratio is too low to protect itself from the future losses. Earlier the ratio was 1.36% in the year 2011; however the ratio reduced to 0.49% in the current year. In case of the NBA the ratio is still low at 0.57% and it only touched the figure greater than 1 in the year 2010. The CBA however is even lower in comparison to the NBA and ANZ and the Westpac is the lowest. Therefore from the results it can be concluded that the ANZ bank is better than the other banks (Valencia, 2016).

From the above graph it can also be seen that the loans quality ratio also known as the reserves for the impaired loans divided by the gross loans is generally evaluated to analyse the creditworthiness of the bank. From the table above it can be seen that the impaired loans ratio is also same in case of all the banks. The NBA has the ratio of the 0.15% and that of the CBA is 0.14%, Westpac being 0.12% and lastly the ANZ bank at the most lowest 0.05%. The ratio is lower and it shall be as it determines the expenses incurred annually in respect to the total assets available. If the ratio is higher the expenses are going to be higher and the amount of the assets is suitable enough to pay back the same (Acharya & Steffen, 2014).

Foreign exchange risks also known as the financial risk which comes into existence when the financial transactions are denominated in the currency despite of its base currency. In particular there are no such ratios; however, the bans can detect the foreign exchange risk of the banks by creating the own Foreign exchange management risk program, hedging them, calculating the exposures to the FX risk and analysing the operating cycle to clearly identify the risks (Borio, Gambacort & Hofmann, 2017).

From the above report it can be concluded that there are different types of risk and for which different categories of ratios are calculated and on the basis of these ratios and the performance of the bank is evaluated on the basis of the above ratios. The NBA bank being the core bank has been compared with the other three similar banks namely CBA, ANZ and Westpac and according to the final results the NBA has ANZ as the biggest competitor. Therefore it is recommended that the banks shall not only focus on the liquidity position of the company but the other factors as well.

Acharya, V., & Steffen, S. (2014). Benchmarking the European Central Bank's Asset Quality Review and Stress Test–A Tale of Two Leverage Ratios. NYU Stern School of Business, 2.

Acharya, V., Drechsler, I., & Schnabl, P. (2014). A pyrrhic victory? Bank bailouts and sovereign credit risk. The Journal of Finance, 69(6), 2689-2739.

Al?Hadi, A., Hasan, M. M., & Habib, A. (2016). Risk committee, firm life cycle, and market risk disclosures. Corporate Governance: An International Review, 24(2), 145-170.

Behn, M., Haselmann, R. F., & Vig, V. (2016). The limits of model-based regulation. New York: Springer

Borio, C., Gambacorta, L., & Hofmann, B. (2017). The influence of monetary policy on bank profitability. International Finance, 20(1), 48-63.

Cohen, B. H., & Scatigna, M. (2016). Banks and capital requirements: channels of adjustment. Journal of Banking & Finance, 69, S56-S69.

Drechsler, I., Savov, A., & Schnabl, P. (2018). Banking on deposits: Maturity transformation without interest rate risk (No. w24582). National Bureau of Economic Research.

Estrella, A., Park, S., & Peristiani, S. (2012). Capital ratios and credit ratings as predictors of bank failures. Federal Reserve Bank of New York: Economic Policy Review, 33-52.

Heider, F., Hoerova, M., & Holthausen, C. (2015). Liquidity hoarding and interbank market rates: The role of counterparty risk. Journal of Financial Economics, 118(2), 336-354.

Hevert, S. R. B. (2014). Return on Equity. United States: John Wiley & Sons

Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), 561-572.

Moldovan, D., & Mutu, S. (2015, June). A Cluster Analysis on the Default Determinants in the European Banking Sector. In International Conference on Business Information Systems (pp. 64-74). Springer, Cham.

Moreira, M. (2016). Return on assets in the Tobacco Industry analysis of the four main Tobacco Manufacturers (Doctoral dissertation).

Shrieves, R. E., & Dahl, D. (2012). The relationship between risk and capital in commercial banks. Journal of Banking & Finance, 16(2), 439-457.

Valencia, F. (2016). Bank capital and uncertainty. Journal of Banking & Finance, 69, S1-S9