REAL NUMBERS FOR REAL BANKS Continuing Case Assignment for Chapter 7 ANALYSIS OF INTEREST RATE SENSITIVITY In Chapter 7, the focus is interest rate risk management. Reg. ulatory agencies began to collect relevant information in the 1980s when large numbers of thrift institutions failed due to their interest rate risk exposure at a time when market rates were increasing both in level and volatility. You will find Inter- est Rate Risk Analysis or Interest Sensitivity Reports included in both the UBPR and the Bank Holding Company Performance Report (BHCPR) as described in the appendix to Chapter 6. Both reports are available at www.ffiec.gov. This is one area where measurement within banks and BHCs is more sophis- ticated than the measures used by regulatory agencies. For instance, to date none of the regulatory agencies require their financial institutions to submit measures of duration gaps. Part One: NIM: A Comparison to Peers A. Open your Excel Workbook and access the spread- sheet with Comparisons with Peer Group. On line 36, you find net interest income (NII) as a percentage of total assets (TA). This is one calculation of NIM. You may have noticed from a footnote in Chapter 6 that sometimes NIM is calculated using total assets as the denominator, and sometimes total earning assets (TEA) is used as the denominator as illustrated in Equation (7-5). To transform the first measure of NIM(NII/TAA) to the second measure using TEA, we need to col- lect one more item from the FDIC's website. Using the directions in Chapter 5's assignment, go to the FDIC's Statistics for Depository Institutions, www2.fdic .gov/sdi/, and collect from the Memoranda section of Assets and Liabilities the earning assets as a percent- age of total assets for your BHC and its peer group for the two periods. We will add this information to this spreadsheet to calculate NIM (NII/TEA) as follows: N Clipboard Font BEST Alignment Number Styles Colls Editing A54 Tx Interest Sensitivity Analysis B D E FE H J K L M 54 Pinterest Sensitivity Analysis BB&T Peer Group BBRT Peer Group 33 Date 12/31/2010 12/31/2010 12/31/2009 12/31/2009 56. Total Carring Assets TEA) 82 87% 85 18% 83.769 84.32% 57 NIN USING TEA as denominator 0.7070 0.09% -0.0773 58 59 HNL Basic Information Year.to.Yaar Comoarisons Comparisons with Poor Group Ready 100% Note: The above spreadsheet has been filled-in with the information for BB&T for 2009 and 2010 for illustrative purposes as directed below: B. Use your formula functions to generate the percentages in row 57. For instance, cell B57 = B36/B56. C. Once you have collected the data on NIM, write one para- graph discussing interest rate sensitivity for your bank rel- ative to the peer group across the two time periods based on the NIM. Discuss what is revealed by the variation of NIM across time. See the following illustrative paragraph for BB&T using 2009 and 2010 Information. BB&T in comparison to 96 basis points for the peer group. The percentage change in NIMs was 6.5 percent for BB&T in comparison to 1353.88 percent for the peer group. The smaller difference/percentage change for BB&T relative to the peer group's average for 2010 could have occurred for a number of reasons; however, it is indicative that BB&T was less exposed to interest rate changes than the average institution over this period. Part Two: Interest-Sensitive Gaps and Ratios While the FDIC's website is powerful in providing basic data concerning assets, liabilities, equity, income, and expenses for individual banks and the banking component of BHCs, it does not provide any reports on interest sensitivity. For indi- vidual banks such information is available in the UBPR, and for BHCs information is available in the BHCPR. (Note that these data are for the entire BHC and not an aggregation of (Continued) Interest Sensitivity Analysis: Ex-Post Comparison with Peers. The variation of NIM for an institution across time is affected by the interest rate risk exposure of the institu- tion. BB&T's NIM increased from 0.66 percent in 2009 to 0.70 percent in 2010 while the average for their peer group increased from -0.07 percent in 2009 to 0.89 percent in 2010. The difference in NIMs across years was 3 basis points for the chartered bank and thrifts that we have used to this point.) We will access the BHC reports at www.ffiec.gov and create a report for the most recent year-end. You will use information from this report to calculate one-year interest-sensitive GAPs (Equation (7-7) and one-year Relative IS GAP ratios Equation (7-11) for the two most recent years. A. Using the BHCPR created for your BHC fill in rows 73 and 74. You will find net assets repriceable in one year-to-total assets in the Liquidity and Funding section and the dollar amount of average assets on page 1 of the report. Add your information to the spreadsheet as follows: WM- Real Numbers for Real Banks Chapter 7 - Microsoft Excel - 2 AutoSum " YA FI Clear - Sort & Find & Fiter Select Editing x Home Insert Page Layout Fornuis Data Review View * Cut Arial - 10 A CA == Wrap Text General Paste BIURA Format Painter Merge & Center $ - % Cell : Con Citional Format Insert Dalete Format Formatting as Table Styles - Clipboard Font CH Alignment Number Styles Cell B87 fo A B D E F G . J 71 Interest-sens tivity data from UBHCPR--Liquidit and Funding BBBT BEST 12 Date 12:31 2010 12/31/2009 73 14.7296 9.92% 74 Average 093cts (found top of Page 1 DHCPR $150 660,581 $156,460 535 15 Interest-sensitive gap S23503 362 S15,421586 76 77 HNL Basic Information Year-to-Year Comparisons - Comparisons with Peer Group Ready K L M @ 100% The above spreadsheet has been filled in with the information for BB&T for 2009 and 2010 for illustrative purposes as directed below: B. Having acquired the above information, you have the 14.72 percent in 2010 while its interest-sensitivity gap was Relative IS gap in row 73 and you will calculate the $ $15.5 billion for 2009 and over $23.5 billion for 2010. This interest-sensitive gap by multiplying the Relative IS gap indicates that BB&T is asset sensitive and its exposure to by average assets. interest rate changes increased during 2010. Using a one- C. Write one paragraph discussing the interest rate risk year time frame, we may explore the effects on net inter- exposure for your BHC. Is it asset or liability sensitive at est income from changes in market interest rates using the the conclusion of each year? What are the implications one-year Interest Sensitive Gap for 2010 and the following of the changes occurring across the years? Using Equa- equation: tion (713), discuss the effects on net interest income if market interest rates increase or decrease by one full Change in NII = (Change in interest rate) * ($ gap) percentage point. See the following illustrative paragraph If market interest rates increase by one full percentage point, for BB&T using 2009 and 2010 information. the increase in net interest income is forecast as close to Interest Sensitivity AnalysisImplications from Interest- $235 million. If market interest rates decrease by one full per- Sensitive GAPs and Relative IS GAP Ratios. Bank hold- centage point, the decrease in net interest income is forecast ing companies' profits are affected by the interest rate risk as nearly $235 million. BB&T will benefit most from increasing exposures of their balance sheets. The relative interest- interest rates. sensitivity gap ratio for BB&T was 9.92 percent in 2009 and REAL NUMBERS FOR REAL BANKS Continuing Case Assignment for Chapter 7 ANALYSIS OF INTEREST RATE SENSITIVITY In Chapter 7, the focus is interest rate risk management. Reg. ulatory agencies began to collect relevant information in the 1980s when large numbers of thrift institutions failed due to their interest rate risk exposure at a time when market rates were increasing both in level and volatility. You will find Inter- est Rate Risk Analysis or Interest Sensitivity Reports included in both the UBPR and the Bank Holding Company Performance Report (BHCPR) as described in the appendix to Chapter 6. Both reports are available at www.ffiec.gov. This is one area where measurement within banks and BHCs is more sophis- ticated than the measures used by regulatory agencies. For instance, to date none of the regulatory agencies require their financial institutions to submit measures of duration gaps. Part One: NIM: A Comparison to Peers A. Open your Excel Workbook and access the spread- sheet with Comparisons with Peer Group. On line 36, you find net interest income (NII) as a percentage of total assets (TA). This is one calculation of NIM. You may have noticed from a footnote in Chapter 6 that sometimes NIM is calculated using total assets as the denominator, and sometimes total earning assets (TEA) is used as the denominator as illustrated in Equation (7-5). To transform the first measure of NIM(NII/TAA) to the second measure using TEA, we need to col- lect one more item from the FDIC's website. Using the directions in Chapter 5's assignment, go to the FDIC's Statistics for Depository Institutions, www2.fdic .gov/sdi/, and collect from the Memoranda section of Assets and Liabilities the earning assets as a percent- age of total assets for your BHC and its peer group for the two periods. We will add this information to this spreadsheet to calculate NIM (NII/TEA) as follows: N Clipboard Font BEST Alignment Number Styles Colls Editing A54 Tx Interest Sensitivity Analysis B D E FE H J K L M 54 Pinterest Sensitivity Analysis BB&T Peer Group BBRT Peer Group 33 Date 12/31/2010 12/31/2010 12/31/2009 12/31/2009 56. Total Carring Assets TEA) 82 87% 85 18% 83.769 84.32% 57 NIN USING TEA as denominator 0.7070 0.09% -0.0773 58 59 HNL Basic Information Year.to.Yaar Comoarisons Comparisons with Poor Group Ready 100% Note: The above spreadsheet has been filled-in with the information for BB&T for 2009 and 2010 for illustrative purposes as directed below: B. Use your formula functions to generate the percentages in row 57. For instance, cell B57 = B36/B56. C. Once you have collected the data on NIM, write one para- graph discussing interest rate sensitivity for your bank rel- ative to the peer group across the two time periods based on the NIM. Discuss what is revealed by the variation of NIM across time. See the following illustrative paragraph for BB&T using 2009 and 2010 Information. BB&T in comparison to 96 basis points for the peer group. The percentage change in NIMs was 6.5 percent for BB&T in comparison to 1353.88 percent for the peer group. The smaller difference/percentage change for BB&T relative to the peer group's average for 2010 could have occurred for a number of reasons; however, it is indicative that BB&T was less exposed to interest rate changes than the average institution over this period. Part Two: Interest-Sensitive Gaps and Ratios While the FDIC's website is powerful in providing basic data concerning assets, liabilities, equity, income, and expenses for individual banks and the banking component of BHCs, it does not provide any reports on interest sensitivity. For indi- vidual banks such information is available in the UBPR, and for BHCs information is available in the BHCPR. (Note that these data are for the entire BHC and not an aggregation of (Continued) Interest Sensitivity Analysis: Ex-Post Comparison with Peers. The variation of NIM for an institution across time is affected by the interest rate risk exposure of the institu- tion. BB&T's NIM increased from 0.66 percent in 2009 to 0.70 percent in 2010 while the average for their peer group increased from -0.07 percent in 2009 to 0.89 percent in 2010. The difference in NIMs across years was 3 basis points for the chartered bank and thrifts that we have used to this point.) We will access the BHC reports at www.ffiec.gov and create a report for the most recent year-end. You will use information from this report to calculate one-year interest-sensitive GAPs (Equation (7-7) and one-year Relative IS GAP ratios Equation (7-11) for the two most recent years. A. Using the BHCPR created for your BHC fill in rows 73 and 74. You will find net assets repriceable in one year-to-total assets in the Liquidity and Funding section and the dollar amount of average assets on page 1 of the report. Add your information to the spreadsheet as follows: WM- Real Numbers for Real Banks Chapter 7 - Microsoft Excel - 2 AutoSum " YA FI Clear - Sort & Find & Fiter Select Editing x Home Insert Page Layout Fornuis Data Review View * Cut Arial - 10 A CA == Wrap Text General Paste BIURA Format Painter Merge & Center $ - % Cell : Con Citional Format Insert Dalete Format Formatting as Table Styles - Clipboard Font CH Alignment Number Styles Cell B87 fo A B D E F G . J 71 Interest-sens tivity data from UBHCPR--Liquidit and Funding BBBT BEST 12 Date 12:31 2010 12/31/2009 73 14.7296 9.92% 74 Average 093cts (found top of Page 1 DHCPR $150 660,581 $156,460 535 15 Interest-sensitive gap S23503 362 S15,421586 76 77 HNL Basic Information Year-to-Year Comparisons - Comparisons with Peer Group Ready K L M @ 100% The above spreadsheet has been filled in with the information for BB&T for 2009 and 2010 for illustrative purposes as directed below: B. Having acquired the above information, you have the 14.72 percent in 2010 while its interest-sensitivity gap was Relative IS gap in row 73 and you will calculate the $ $15.5 billion for 2009 and over $23.5 billion for 2010. This interest-sensitive gap by multiplying the Relative IS gap indicates that BB&T is asset sensitive and its exposure to by average assets. interest rate changes increased during 2010. Using a one- C. Write one paragraph discussing the interest rate risk year time frame, we may explore the effects on net inter- exposure for your BHC. Is it asset or liability sensitive at est income from changes in market interest rates using the the conclusion of each year? What are the implications one-year Interest Sensitive Gap for 2010 and the following of the changes occurring across the years? Using Equa- equation: tion (713), discuss the effects on net interest income if market interest rates increase or decrease by one full Change in NII = (Change in interest rate) * ($ gap) percentage point. See the following illustrative paragraph If market interest rates increase by one full percentage point, for BB&T using 2009 and 2010 information. the increase in net interest income is forecast as close to Interest Sensitivity AnalysisImplications from Interest- $235 million. If market interest rates decrease by one full per- Sensitive GAPs and Relative IS GAP Ratios. Bank hold- centage point, the decrease in net interest income is forecast ing companies' profits are affected by the interest rate risk as nearly $235 million. BB&T will benefit most from increasing exposures of their balance sheets. The relative interest- interest rates. sensitivity gap ratio for BB&T was 9.92 percent in 2009 and