KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

THIRD SEMESTER
2020/2021

BBBE2013 MONEY AND BANKING

Tutorial 3: The Banking Firm and Bank Management

1. Suppose a banker at CNC tells you that the bank in the just completed financial year
had total interest expenses on all borrowings of RM20 million and non-interest
expense of RM13 million, while interest earning from assets totalled RM24 million
and non-interest revenues is RM15 million with current provision for loan losses of
RM0.3 million.

Suppose that assets amounted to RM488 millions of which earning assets represented
85 percent of total assets, while total interest-bearing liabilities amounted to 75
percent of the bank’s total assets.

Based on the scenario above, determine CNC bank’s:

(a) Net interest margin;
(b) Net non-interest margin; and,
(c) Earnings spread.

2. Identify the THREE (3) principal components of Return of Equity (ROE). What does
each of these components measure?

3. The latest report of condition and income for REC Bank is shown in the table below:

Item Amount (RM’000)

Interest income RM 2,250
Interest expenses RM 1,500
Total assets RM 45,000
Security losses or gains RM 21
Earning assets RM 40,000
Total liabilities RM 38,000
Taxes paid RM 16
Non-interest income RM 800
Non-interest expense RM 900
Provision for loan losses RM 250

Shares of common stock outstanding 5,000 units

Suppose REC Bank’s interest income and expenses as well as its non-interest income
and expenses each decreases by 3 percent while all other revenue and expenses items
shown in the preceding table remain unchanged.

(i) Estimate REC Bank’s return on equity (ROE), return on assets (ROA), and
earnings per share (EPS), respectively.

(ii) Explain why ROE and ROA might be useful to the managers of financial firms.

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4. “China will step up oversight in the banking sector this year to reduce financial risks,
the country’s banking regulator said, stressing that long-term efforts would be needed
to control banking sector chaos.” [The Star,
2018]

Based on the above statement, discuss the financial risks that might be facing by the
banking sector in China.

5. An investor holds the stock of Last-But-Not-Least Financials and expects to receive a

dividend of RM4.75 per share at the end of the year. Stock analysts recently predicted
that the bank’ dividend will grow at approximately 3 percent a year indefinitely into
the future. If this is true, and if the appropriate risk-adjusted cost of capital (discount
rate) for the bank is 14 percent, what should be the current price per share of Last-
But-Not-Least Financials’ stock?

6. Suppose that stockbrokers have projected that Jamestown Savings will pay a dividend
of RM2.50 per share on its common stock at the end of the year; a dividend of
RM3.25 per share is expected for the next year, and RM4.00 per share in the
following two years. The risk-adjusted cost of capital (discount rate) for banks in
Jamestown’s risk class is 15%. If an investor holding Jamestown’s stock plans to hold
that stock for only four years and hopes to sell it at the price of RM50 per share, what
should the value of the bank’s stock be in today’s market?