mcf 304 bank management n.
Skip this Video
Download Presentation
MCF 304: Bank Management

Loading in 2 Seconds...

play fullscreen
1 / 23

MCF 304: Bank Management - PowerPoint PPT Presentation

  • Uploaded on

MCF 304: Bank Management. Lecture 2.2 Asset Management. Asset Management. How to distribute bank funds among different categories of assets so as to maximize profits Different assets have different level of liquidity and profitability

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'MCF 304: Bank Management' - wenda

Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
mcf 304 bank management
MCF 304: Bank Management

Lecture 2.2

Asset Management

asset management
Asset Management

How to distribute bank funds among different categories of assets so as to maximize profits

Different assets have different level of liquidity and profitability

The LP dilemma: If bank emphasize on liquidity, profitability will be sacrifice

bank financial statements balance sheet
Bank Financial Statements:Balance Sheet

Fixed Assets

Current Assets

- Cash and short term funds

- Securities purchased under resale agreement (REPO)

- Deposits and placements with banks and other financial institutions

Securities held for trading

Investment securities

Loans, advances and financing

Other assets

Investment in subsidiary companies

Investment in associate companies

bank financial statements income statement
Bank Financial Statements:Income Statement

Interest Income

(-) Interest Expense

(=)Net Interest Income

(-) Allowance for losses on loans, advances and financing

(+)Non-Interest Income

(=)Net Income

Net Income

(-) Overhead Expenses

(=) Profit Before Tax

(-) Tax

(=) Net Profit After Tax

(-) Transfer to Statutory Reserves

(=) Net Profit After Transfer to Statutory Reserves

bank financial statements income statement1
Bank Financial Statements:Income Statement

Net Profit After Transfer to Statutory Reserves

(+) Retained Profit Brought Forward

(+) Distributable Profit

(-) Proposed Dividend

(=) Retained Profit Carried Forward

Earnings Per Share

asset management1
Asset Management

How the bank invest its assets / funds to maximize its shareholders wealth

As the liquidity and profitability differ from one assets to another, banks must take into consideration the liquidity-profitability (LP) Dilemma

lp dilemma
LP Dilemma

Exist because the degrees of liquidity and profitability are different across different assets

Attributed by conflicting goals among depositors, shareholders and controlling party

Shareholders expect high return, depositors desire maximum liquidity

lp dilemma1
LP Dilemma

LP Dilemma = to find a method that can strike a balance between risk & return, liquidity & profitability

Three methods;

Fund pool method

Assets allocation method

Management science method

fund pool method
Fund Pool Method

Fund from all sources are pooled together to create a single source of funds

The funds are distributed to the various predetermined categories of assets based of their degree of importance

fund pool method1
Fund Pool Method


Current deposits 200

Savings deposits 100

Fixed deposits 100


NCD’s 50

Debentures 100

Total 600

Reserve based 20%

Statutory reserves 10%

Secondary reserves 20%

Loan portfolio 30%

Allocation by sectors;

Agriculture 10%

Manufacturing 50%

Real estate 20%

Service 20%

disadvantaged of fund pool method
Disadvantaged of Fund Pool Method

Over emphasize on liquidity at the expense of profitability

Does not provide any specific basis for purpose of estimating liquidity standards

does not take into consideration the volatility of deposits accounts

Does not recognized source of liquidity

assets allocation method
Assets Allocation Method

Banks are forced to utilize deposits more efficiently and effectively as a result of competition from non-bank financial institutions in terms of deposits acquisitions and use funds in a more profitable way

Assets allocation method treats each source of fund individually in view of the different degrees of volatility among them. Each source of funds is treated as a profit centre

Short (long) term assets should be financed by short (long) term financing

disadvantages of assets allocation method
Disadvantages of Assets Allocation Method

May overestimate the liquidity of deposits accounts

Does not recognized loan portfolio as a source of liquidity

Asset & liability management decisions are made separately

does not provide specific guidelines on the allocation of funds among different categories of bank assets

management science method
Management Science Method

a.k.a Linear programming method

A mathematical procedure to choose variable values for purpose of maximizing (minimizing) an objective, subject to certain restrictions

Helps to determine the required balance sheet quantity set in order to maximize bank profitability subjects to restrictions in trems of liquidity and other fixed rules

management science method1
Management Science Method


Bank A has funds totaling RM25 million which can be invested in loan assets (X1) and secondary reserves (X2). The funds made up of current deposits and fixed deposits. The rate of return is estimated at 12% while short term securities 8%. Let’s assume that the bank income is net income after deducting the cost of deposits. The management bank of bank A has stipulated the bank’s liquidity standard of RM2 in short term securities for every RM10 investment in fixed assets

bank liquidity
Bank Liquidity

5 factors why banks must have adequate liquidity;



Force sale

Risk premium

Last chance

bank liquidity theory
Bank Liquidity Theory

Commercial Financing

A bank is considered liquid if its loan portfolio consist of short term financing only

Maturity dates of financing coincides with maturity dates of deposits


Bank invest part of their funds in loan portfolio & secondary markets

This theory prolongs the average maturity period of loans portfolios

bank liquidity theory1
Bank Liquidity Theory

Expected Income

Bank liquidity can be acquired through loan repayments

Loan repayment should be match with loan income

Acknowledges that loan portfolio is a source of liquidity

Liability Management

Banks can fulfill liquidity requirements by borrowing from the money and capital markets

Borrowed funds acquired for the purpose of bank liquidity are sometimes called purchased funds

liquidity measurement
Liquidity Measurement

No one single specific measurement standards

However loan to deposit ratio is used widely to measure liquidity

As the ratio increases, bank liquidity decreases

Loan interest increase in tandem with the increase in loan to deposit ratio since the demand for credit exceeds supply

disadvantages of loan to deposits ratio
Disadvantages of Loan to Deposits Ratio

Does not show the maturity or quality of loan portfolio

Does not provide any truth about bank liquidity needs. Banks that provides more for speculative loans are more likely to face liquidity problems

Does not provide any information on other assets of a bank other than its loan portfolio

other liquidity measurement
Other Liquidity Measurement

1. Cash Assets / Total Assets

2. (Cash Assets – Statutory Reserve + Marketable Government Securities of Less than One year Maturity) / Total Deposits

3. (Cash Assets – Reserve + Government Securities) / Total Deposits

4. (Cash Assets + Government Securities) / Total Deposits

estimating credit requirement
Estimating Credit Requirement

Please refer to worksheet

thank you

Thank You!

Izdihar Baharin @ Md Daud

Post Graduate Centre

HP: 006019-5170817