b. Discuss whether a high Return on Equity ratio is good for a bank. (7 marks)


Section A
Table 1:Income statement and Balance sheet Llyods Bank PLC, 2017.
Source: Orbis Bank Focus
Values are in ‘000s of £s.
Income statement
Net interest revenue 16,705,625
Interest Income 21,419,789
Interest Expense 4,714,164
Other operating
income
5,001,959
Net gains (losses) on
trading and
derivatives
737,728
Net gains (losses) on
assets at FV through
income statement
306,711
Net fees and
commissions
2,380,727
Remaining operating
income
1,576,793
Overheads 14,112,767
Loan loss provisions 932,294
Other 140,520
Profit before tax 6,803,043
Tax 2,164,543
Net income 5,714,016
Operating income 21,707,584
Common and
Preferred dividends
declared
3,580,549
Assets
Loans 629,034,877
Gross loans 632,000,652
Less: Reserves for
impaired loans /
NPLs
2,965,775
Other earning assets 170,781,371
Loans and advances
to banks
15,165,313
of which Reverse
Repos, Securities
Borrowed and Cash
Collaterals
127,008
Derivatives 32,632,987
Other securities 122,915,513
Remaining earning
assets
67,558
Total earning assets 799,816,248
Fixed assets 12,176,568
Non-earning assets 300,044,590
Cash& Balances at
Central Bank
79,070,679
Goodwill 640,445
Other Intangible
Assets
3,602,167
Total assets 1,112,037,406
Liabilities & equity
Deposits & short
term funding
726,340,683
Total customer
deposits
561,384,122
Deposits from banks 130,681,926
of which Reverse
Repos, Securities
Borrowed and Cash
Collaterals
90,785,154
Other deposits and
short-term
borrowings
34,274,635
Other interest
bearing liabilities
101,979,436
Derivatives 33,372,067
Trading liabilities 12,830,525
Long term funding 55,776,844
Other (non-interest
bearing)
206,993,556
Reserves 7,552,931
Equity 69,170,799
Total liabilities &
equity
1,112,037,406
Module Title: The Financial Environment
Module Code: BUSI22820


Page 5 / 6
Section A
Answer ALL questions.

  1. The balance sheet for Bank of Santander SA is given in Table 1.
    a. Using the information provided calculate the following ratios:
    i. Return on assets (ROA) (3 marks)
    ii. Return on equity (ROE) (3 marks)
    iii. Net interest margin (NIM) (3 marks)
    b. Discuss whether a high Return on Equity ratio is good for a bank.
    (7 marks)
    c. Using examples explain why the retail banking sector is important for the functioning of the Economy. (9 marks)
  2. As an employee of Lemon Brothers Bank you are asked to create term loans that
    might appeal to potential customers. You are working on different structures for
    a 3 years loan of £20,000 at an interest rate of 7%. The Bullet loan structure
    consist of zero payments at the end of the first and second year and a final
    payment of £24,500.86 at the end of the third year.
    a. Calculate the payments for a loan structure that includes interest only paid at
    the end of each year and a final repayment at the end of the third year.
    (5 Marks)

b. Show one example of a Balloon-style repayment structure for the loan
mentioned above. (10 Marks)
c. Calculate the payments for a mortgage style repayment loan. (10 marks)

Module Title: The Financial Environment
Module Code: BUSI22820


Page 6 / 6
Section B
Answer TW0 questions
3.
a. Discuss whether the time value of money is negative and could be subjective
based on each individuals preferences. (15 marks)
b. What is meant by “money is a medium of exchange and has a store of value”?
Discuss whether these two concepts are related to each other. (10 marks)
4.
a. Why are investment banks achieving high level of profits and why does this
spark controversy? Explain. (8 marks)
b. Discuss why investment banks are willing to pay large bonuses to their
employees. (5 marks)
c. Why may investment banks experience conflicts of interest. (12 marks)
5.
a. Explain how a central bank can engage in contractionary monetary policy.
(15 marks)
b. Analyse how “quantitative easing” differs from traditional monetary policy.
(10 marks)
6.
a. Describe and explain the following instruments:
i. Collateralised debt obligations (CDOs) (5 marks)
ii. Structured investment vehicles (SIVs) (5 marks)
iii. Credit default swaps (CDSs) (5 marks)
b. Explain the different approaches taken to regulation in response to Financial
Crisis of 2008 in the UK and US by comparing “ring-fencing” to the “Volcker
rule”. (10 marks)
END OF EXAMINATION QUESTIONS



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