Assets |
Amount |
Interest rate of return |
Liab. & Equity |
Amount |
Interest Cost |
|||||||||||||||
Securities |
$ |
475 |
4.5 |
% |
Liabilities |
$ |
1,175 |
3.0 |
% |
|||||||||||
Loans |
725 |
7.5 |
% |
Equity |
125 |
|||||||||||||||
Non-earning |
100 |
0.0 |
% |
Total |
$ |
1,300 |
||||||||||||||
Total |
$ |
1,300 |
||||||||||||||||||
First National Bank |
||||
ROE |
12 |
% |
||
Tax rate |
34 |
% |
||
Noninterest Expense |
$ |
30 |
||
PLL |
$ |
3 |
Industry Average |
|||
NIM |
3.54 |
% |
|
Overhead Efficiency |
0.85 |
||
Average Loan Rate (ALR) |
7.5 |
% |
What is the bank's NIM? Is the bank performing better or worse than average? In what area is the bank performing better or worse than average? How could the bank improve if necessary?
NIM = (Interest revenue − Interest expense)/(Securities + Loans)
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Answer:
Bank's Net interest margin can be calculated as
=> (Interest revenues - Interest expense)/(Total securities + loans)
= 475*0.045 + 725*0.075 - 1175*0.03 / 475 + 725
= 3.375%
The bank is performing worser than the average bank in generating a large enough spread between interest income and interest expense. The bank may need to increase loan rates, shift to more profitable loans or seek lower cost deposits
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