Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Appendix: ROE breakdown

Denoting:

A = total assets

D = total debt

E = equity

EOA = earnings on assets

COD = cost of debt

OE = operating expenses

t = corporate tax rate

Exercise: Stage Three

Q1: The balance sheet and income statement of your bank are as follows: Balance sheet (end of the year, $ million) Assets 110 Debt (including deposits) 105     Equity 5         Total 110 Total 110   Income statement ($ million)   Interest income 8.2 – Interest expenses – 5.25   Net interest margin 2.95   Non-interest income 0.8   Gross revenue 3.75 – Provisions for bad debts – 1.3 – Operating expenses ...