Question

Yip Bank & Trust expects interest revenue of $50 million, interest expenses of $20 million, non-interest expenses of $30 million, non-interest revenues of $15 million, provision for loan losses of $5 million and a tax rate of 30%. Total assets are $700 million and total equity is $70 million. What is the bank’s a) net interest income, b) burden, c) net income, d) ROA, e) Equity Multiplier, and f) ROE? In addition, what is the bank’s g) net interest margin today and h) what would it have to be to provide an ROE of 15%?

Answer 1

a) net interest income = interest revenue - interest expenses = $50 million - $20 million = $30 million

b) burden =  non-interest expenses - non-interest revenues = $30 million - $15 million = $15 million

c) net income = (interest revenue - interest expenses - non-interest expenses + non-interest revenues - provision for loan losses)*(1-tax rate)

net income = ($50 million - $20 million - $30 million + $15 million - $5 million)*(1-0.30) = $10 million*0.70 = $7 million

d) ROA = net income/Total assets = $7 million/$700 million = 0.01 or 1%

e) Equity Multiplier = Total assets/Total equity = $700 million/$70 million = 10

f) ROE = net income/Total equity = $7 million/$70 million = 0.1 or 10%