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Homework answers / question archive / The T-account below shows the balance sheet of Santander
The T-account below shows the balance sheet of Santander.
Assets:
Reserves 10 million
Loans 400 million
Securities 200 million
Liabilities:
Deposits 500 million
Borrow from other banks 20 million
Borrow from FED 50 MILLION
Bank Capital 40 million
A) Loans, securities, borrowing from other banks, and borrowings from the Fed are rate-sensitive. The other items are fixed-rate.
Based on the balance sheet above, if interest rate increases by 5.6%, how much would the profit of Santander change (in millions of $)? Round your answer to at least 2 decimal places. Enter an increase as a positive number and a decrease as a negative number. (E.g. a decrease of $12,345,678 in profit should be entered as -12.35)
B) The assets of Santander have an average duration of 8 years. The liabilities of Santander have an average duration of 3 years.
Based on the balance sheet above, if interest rate decreases by 3.8%, what is the change in net worth (in millions of $) of the bank? Round your answer to at least 2 decimal places. An increase in net worth should be entered as a positive number and a decrease in net worth should be entered as a negative number. (E.g. A decrease of $12,345,678 in net worth should be entered as -12.35)
Answer to Part A)
If interest rate increases by 5.6%, then following will the effect on profit of Satender:
| Particulars | Amount (in millions $) |
| Interest receivable on Loans | 22.40 |
| Interest receivable on Securities | 11.20 |
| Interest on borrowings from other banks | -1.12 |
| Interest on borrowings from FED | -2.80 |
| Net Increase/(Decrease) in profits | 29.68 |
Answer to Part B)
Assuming the existing Market Interest rate = 10%
% change in Market Value of Security = - Average Duration of Security*(change in interest rate/1+interest rate)
In case of assets, average duration is 8 years, then the change in value of assets is calculated as follows:
% change in Market Value of Security = - 8 + (-0.038/1 + 10%)
% change in Market Value of Security = - 8 - 0.034 = -8.03%
Hence, the Market Value of Total assets currently standing at $610 million reduces by 8.03% as a result of 3.8% decrease in Market Interest Rate i.e. by $48.98 million.
In case of liabilities, average duration is 3 years, then the change in amount of liabilities is calculated as follows:
% change in Market Value of Security = - 3 + (-0.038/1 + 10%)
% change in Market Value of Security = - 3 - 0.034 = -3.03%
Hence, the Market Value of Total Liabilities currently standing at $570 million reduces by 3.03% as a result of 3.8% decrease in Market Interest Rate i.e. by $17.27 million.
| Particulars | Amount (in millions $) |
| Decrease in value of assets | -48.98 |
| Increase in value of liabilities | 17.27 |
| Net decline in Net Worth | -31.71 |
