Question

a. Detail and give examples of two (2) financial ratios often used to provide a direct measure of a commercial bank’s credit risk exposure. Guide: 200 words, 4 marks.

b. Find annual (yearly) data to calculate and graph the two ratios discussed in part (a) for the top four Australian banks over 2014-2019. Conduct trend and peer analyses based on your graphs, and comment on these banks’ credit risk management approaches.

Guide: 400 words, 9 marks. You must provide two (2) graphs, one for each ratio. Your graphs must be presented in the main text of the essay together with the discussion, while your data and calculated ratios must be shown in the appendix. Note: Appendices are not included in the word limit.

c. Evaluate how and why Australian banks’ credit risk exposure may be affected by the current COVID-19 pandemic in the foreseeable future. Comment on whether you believe Australian banks have the resilience to weather this challenging episode and why or why not. Your answers should be relevant to banks’ credit risk. Guide: 400 words, 7 marks.

Answer 1

Ans a) The financial ratio that provide a direct measure of a commercial bank's credit risk exposure are:

1) Leverage ratio - (Debt vs Equity ratio) - When the company uses debt financing its financial leverage increases. Debt Equity ratio measure the ratio of Debt and Equity of the company

2) Debt to income ratio - This is calculated by monthly recurring debts divided by gross monthly income of the company

Ans b) --> Information about 4 Austrailian bank is not available