2021

Liquidity indicators and

liquidity ratios in CIB

MADE BY:
DINA AHMED FAWZY ALFAWAL
Under supervision of:
Professor: Menan Etab

[COMPANY NAME] | [Company address]

Liquidity indicator approach:

1. Cash position indicator: The cash position ratio refers to the amount of cash that the
bank has on its books at a certain point of time. The cash position ratio is calculated
by dividing the cash and the cash equivalents on a bank’s balance sheet by the value
of its total assets (both the fixed assets and the earning assets). A high cash position
ratio is a good sign of financial strength and liquidity. The cash equivalents include
highly liquid assets such as certificates of deposits, short-term government debt and
other cash equivalents. Despite the fact that the cash position provides a liquidity
reserve and acts as a shield against losses, too much cash holdings can be an
opportunity cost as this amount of cash is idle rather than investing this money in the
market. The formula for the cash position ratio is as follows:

Cash position ratio= cash and cash equivalents (deposits with

other banns) / total assets.
2. Liquid securities indicator: The liquidity securities indicator compares the most
marketable securities an institution can hold with the overall size of its asset portfolio.
The liquidity securities are calculated by dividing the total government securities that
a bank holds by the total assets of the bank. Therefore, the higher the proportion of
government securities, the more liquid the bank’s position tends to be.

Liquid securities indicator = government securities / total assets.

3. Net federal funds position: This ratio measures the comparative importance of
overnight
Loans relative to overnight borrowings of reserves. The higher this ratio is the more liquid the
bank becomes.

Net federal funds position = federal funds sold – federal funds

purchased/ total asset

4. Capacity ratio: The capacity ratio is a negative liquidity indicator because loans and
leases are often among the most illiquid assets a bank can hold. The higher the
capacity ratio is the less liquid the bank becomes.

Capacity ratio = net loans & leases / total assets.

 5. Pledged securities ratio: a negative liquidity indicator because the greater the
proportion of securities pledged to back government deposits, the fewer securities are
available to sell when liquidity needs arise.

Pledged securities ratio = pledged securities / total securities

holdings.

6. Hot money ratio: This ratio reflects whether the bank has balanced its borrowings in
the money market with increases in its money market assets that could be sold quickly
to cover those money market liabilities.

Hot money ratio = money market assets / money market

liabilities.
The money market assets include the cash, short term government securities, federal
funds loans, reverse repurchase agreements. On the other hand, the money market liabilities
include the large CDs, euro currency deposits, federal funds borrowed and repurchase
agreements.

7. Deposit brokerage index: the deposit brokerage index is calculated by dividing the
brokered deposits by the total deposits, where the brokered deposits consist of
packages of funds placed by securities brokers for their customers with banks paying
the highest yields. Brokered deposits are highly interest sensitive and may be quickly
withdrawn; the more the bank holds, the greater the chance of a liquidity crisis. A
brokered deposit is a deposit made to a bank by a third-party deposit broker. A
brokered deposit is a type of investment that attracts individual investors because the
deposits typically offer higher interest rates. The brokered deposits are usually large-
denomination and are often sold by a bank to a deposit broker, who then divides the
deposit into smaller pieces for sale to their customers. Banks that accept brokered
deposits often do so as a way to increase their liquidity.

Deposit brokerage index= brokered deposits/ total deposits

 8. Core deposit ratio: This ratio estimates the range that assets are backed by the part of
constant deposit. Higher the ratio indicates sound liquidity position of banks. The core
deposits refer to deposits that for, a stable source of funds to the bank. The Core
deposits are made in a bank's natural demographic market and offer numerous
advantages to financial institutions, including predictable costs, and reliable gauges of
customer loyalty. Those core deposits include mall-time savings accounts, payment
accounts, and checking accounts.

Core deposit ratio= core deposits/ total assets.

9. Deposit composition ratio: this ratio is used to measure the stability of the bank’s
funding base as it is calculated by dividing the demand deposits by the time deposits.
The lower this ratio is the better the deposits stability and the lesser need for liquidity.
This is mainly because the demand deposits are more subject to be withdrawn
immediately via check writing. Whereas, time deposits carry fixed maturities with
penalties for early withdrawals which means that it is a more stable source of funding.

Deposit composition ratio= demand deposits/ time deposits.

10. Loan commitments ratio: measures the volume of promises a lender has made to its
borrowers to provide credit up to a pre-specified amount for a specified period.

Loan commitments ratio= unused loan commitments/ total assets.

Liquidity ratios:

Year Current ratio Quick ratio Cash ratio

2018 1.000265987 0.313638394 0.132171918

2019 1.012382831 0.288675024 0.191496369

2020 0.939037852 0.519237462 0.236935436

Moving on to the liquidity ratios, they are ratios that measure the ability of the bank to meet
its short-term debt obligations. These ratios serve as an indicator of the bank’s ability to pay
off its short-term liabilities when their maturities come to an end (Liquidity Ratio - Overview,
Types, Importance, Example, 2021).

In order to calculate most of the liquidity ratios, we must divide the cash and other most
liquid assets by the short-term borrowings and current liabilities of the bank. They mainly
show the number of times the short-term debt obligations are covered by the cash and liquid
assets. If the value is greater than one, this means that the short-term obligations are fully
covered (Liquidity ratios: сash ratio, current ratio., 2021).

Logically, the higher the liquidity ratios, the higher the margin of safety that the bank has to
meet its current liabilities. Liquidity ratios that are greater than one, shows that the bank is in
good financial health and less likely to fall in financial difficulties.

The most commonly used liquidity ratios are the current ratio, quick ratio, and cash ratio. In
order to calculate each ratio, the current liabilities amount is placed in the denominator of the
equation and the liquid assets amount is placed in the numerator of the ratio.
Current ratio:
Starting with the first ratio, which is the current ratio, it is simply calculated by dividing the
value of current assets by the value of current liabilities. In the case of CIB, the current assets
consist of the liquid financial assets such as the cash and cash equivalents and balances with
the central bank, due from banks, treasury bills and other governmental notes and trading
financial assets with maturities less than one year, in addition to the gross loans that are going
to be repaid within one year and derivatives and other financial investments having maturities
less than 12 months. All these current assets are divided by the short-term liabilities. The
short-term liabilities include, the due to banks and customers, derivative financial instruments
and other loans with maturities less than 12 months.
Current ratio= current assets/ current liabilities.
In the year 2018, the current ratio registered a value of 1.000265987 which resulted from
dividing the value of current assets that registered EGP258,784,044 by the value of current
liabilities that registered EGP258,715,229. Apparently, the current ratio in 2018 is more than
one due to the fact that the value of current assets is more than the value of current liability
but with a small difference, which means that there are enough liquid assets to pay off the
short-term obligations, therefore, the CIB has a favorable liquidity positions as all the short-
term obligation are covered with the liquid assets

On the other hand, in the year 2019, the current ratio increased to reach a value of
1.012382831 which is the result of dividing the value of current assets in 2019 which
registered a value of EGP295,568,652 by the value of current liabilities which is
EGP291,953,442. The ratio is greater than one as the current assets is greater that than the
value of current liabilities, which means that the CIB had enough cash and liquid assets to
pay-off its short term obligation in 2019 , which means that CIB has a favorable liquidity
position even better than that of 2018 as the value of liquid assets increased from
EGP258,784,044 in 2018 to reach EGP295,568,652, however the value of current liabilities
also increased from EGP258,715,229 in 2018 to EGP291,953,442 in 2019 but apparently
the current assets increased with a rate higher than that of the current liabilities which
resulted in a higher current ratio.

Finally, in the year 2020, the current ratio decreased to reach a value of 0.939037852 which
is less than one due to the fact that the current assets which registered a value of
EGP289,466,197 are apparently less than the value of current liabilities which is equal to
EGP308,258,284. This means that there are not enough liquid assets to cover the short-term
obligations which means that the CIB has to borrow or sell some of its assets to be able to
meet its short-term obligations. The decrease in the current ratio in 2020 is mainly due to the
fact that the current assets decreased from EGP295,568,652 in 2019 to reach
EGP289,466,197 in 2020, on the other hand, the current liabilities increased from
EGP291,953,442 in 2019 to reach EGP308,258,284 in 2020 which is the main reason the
current ratio decreased and made the CIB in an unfavorable liquidity situation.
Quick ratio:
The second ratio is called the quick ratio, which is a stricter test of liquidity than the current
ratio, it is somehow similar to the current ratio as both of them is calculated by dividing the
current assets in the numerator by the current liabilities in the denominator. However, it is
stricter as some liquid assets are excluded only the cash and due from the central bank, the
due from banks (receivables) and the marketable securities which are the treasury bills and
the government notes and trading account assets. Therefore, in this ratio we assume that the
bank depends on limited liquid assets to finance its short-term obligations which will serve as
true test of a company’s ability to cover its short-term obligations.

Quick ratio= (cash + receivables (due from banks) + marketable securities) /

current liabilities.

Regarding the figures of the quick ratio for the commercial international bank, in 2018 the
quick ratio registered a value of 0.313638394 which means that the liquid assets (cash,
receivables, marketable securities) with a value of EGP81,143,029 are less than the current
liabilities with a value of EGP258,715,229 this means that the liquid assets are not enough to
reimburse the bank’s short-term obligations, therefore, the bank has to either sell some of its
assets or borrow money from other banks to fill the liquidity gap.

However, the situation got worse in 2019 as the quick ratio decreased to register a value of
0.288675024, this was mainly due to the fact that the short-term liabilities increased from
EGP258,715,229 in 2018 to reach a value of EGP291,953,442 in 2019, however the value of
liquid assets (cash+ receivables + marketable securities) slightly increased from
EGP81,143,029 in 2018 to reach a value of EGP84,279,667 in 2019. Therefore, the quick
ratio decreased signaling that the bank’s liquidity position is getting worse and that the
liquidity manager should react accordingly to adjust both the sources and the uses of funds so
that they are close to each other to avoid losses and maintain the profitability of the bank and
its reputation.

In 2020, apparently the liquidity situation was better as the quick ratio increased to
0.519237462 which means that the liquid assets (cash+ receivables + marketable securities)
are enough to pay off about half of the short-term obligations which signals a threatening
situation to the liquidity of CIB. The quick ratio increases in 2020 due to the fact that the
liquid assets (cash+ receivables + marketable securities) increase from EGP84,279,667 in
2019 to EGP160,059,249 in 2020, whereas the short-term liabilities also increased from
EGP291,953,442 in 2019 to EGP308,258,284 in 2020, but apparently the rate by which the
liquid assets increase is higher than the rate by which the short-term liabilities increase which
resulted in an increase in the quick ratio.
Cash ratio:
Moving on to the cash ratio, which takes the test of liquidity even further and stricter as it
excludes most of the current assets and uses only the cash and the marketable securities to
pay off the short-term obligations. It only takes into consideration these types of assets as
they are the most readily available to the bank to pay its short-term obligations. To conclude,
the cash ratio is considered the strictest liquidity ratio. Therefore, it is expected to register the
lowest ratios, less than the current and quick ratios.

Cash ratio= (cash+ marketable securities) / current liabilities.

Regarding the trend of the cash ratio in CIB, it started with 0.132171918 and began to
slightly increase signaling an improvement of the CIB liquidity position as it reached a value
of 0.191496369 in 2019 then finally increased to reach a value of 0.236935436 in 2020. In
2018, the low cash ratio is justified by the fact that the value of cash and marketable
securities which is equal to EGP34,194,888 is very low relative to the value of short term
liabilities which is equal to EGP258,715,229.

This means that the CIB doesn’t have enough cash to pay-off its obligation and it certainly
has to address this problem in order to enhance its liquidity position. However, there was a
slight improvement in 2019 as the cash ratio increased to reach a value of 0.191496369 this
was mainly due to the fact that cash and marketable securities increased from EGP34,194,888
in 2018 to EGP55,908,024 in 2019, this apparently lead to the slight increase in the value of
cash ratio.

Finally, there was a further improvement in the liquidity position as the cash ratio reached a
value of 0.236935436 this can be justified by the increase of the value of cash and marketable
securities from EGP55,908,024 in 2019 to EGP73,037,311 in 2020.

To conclude, according to the cash ratio values, we can say that the liquidity position of CIB
is improving due to the availability of more cash and marketable securities to reimburse the
short-term obligations.
References:
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