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ASSET LIABILITY MANAGEMENT

Presented by
Manika Tuli
Asset liability Management
MEANING

► The technique of managing assets and liabilities


together became known as ASSET LAIBILITY
MANAGEMNT (ALM).
► Asset Liability Management focuses on the net
interest income of the institution.
► Net interest income = Interest income – Interest
expenses
OBJECTIVES
► TO INCREASE THE MKT VALUE OR NET
WORTH
► TO INCREASE THE NII
► TO MITIGATE RISK UNDER ALM
CLASSIFICATION OF RISK UNDER
ALM
► Interest Rate risk- is the risk that, the
value of its assets and liabilities and also its
net interest income may get adversely affected
on account of movements in interest rates.
►Liquidity risk-. It involves a likelihood of
demand for funds from customers exceeding
supply of funds forcing banks to sell or collect
assets at a loss or borrow at a high cost.
INTEREST RATE RISK
EFFECTS OF INTEREST RATE RISK
Changes in interest rates can have adverse effects both on a banks earnings
and its economic value:-

► Earnings perspective: In the earnings perspective, the focus of


analysis is the impact of changes in interest rates on accrual or reported
earnings.
► Economic value perspective: The economic value of an instrument
represents an assessment of the present value of its expected net cash
flows, discounted to reflect market rates.
Tools To Measure Interest Rate risk

TOOLS

GAP ANALYSIS DURATION ANALYSIS VALUE AT RISK STRESS TESTING


GAP ANALYSIS
Maturity 1-28 days 29days- 3 3months- 6months- 1-3yr 3-5yr Over 5yrs Non
Bucket months 6months 1yr sensitive

Rate 219767968 94949527 98105181 66455339 99533891 431733797 112308241 13958866


Sensitive
Assets
(TOTAL)

Rate 144156792 131713546 403088476 47065780 60065771 427493124 5419314 332831067


Sensitive
Liabilitie
s
(TOTAL)

Sensitivit 75611216 -36764019 -304983295 19389559 -501123823 404240673 106888927


y Gap
(RSA-
RSL)

GAP 1.52 0.72 0.24 1.41 0.17 15.70 20.72


RATIO
Gap Interest rate changes Impact on NII

Positive Increase increase

Positive Decrease decrease

Negative Increase decrease

Negative Decrease increase


DURATION ANALYSIS
► Itis for long term and explains the effects
on market value of its assets and liability.

► Insimple terms ,it is the time in which


cash flows on assets are recd & cash flows
on liability are paid.

► Duration is generally calculated on rate


sensitive assets and liabilities.
METHODS of MITIGATING
Interest Rate Risk
►On-Balance Sheet adjustments

►Off-Balance Sheet items

►Securitization
LIQUIDITY RISK

►Liquidity risk is the potential inability to


meet the bank’s liabilities as they become
due.
►By assuring a bank’s ability to meet its
liabilities as they become due, liquidity
management can reduce the probability of
an adverse situation developing in a bank.
TYPES OF LIQUIDITY RISK
► ASEET SIDE LIQUIDITY RISK

► LIABILITY SIDE LIQUIDITY RISK


MEASUREMENTS OF MANAGING
LIQUIDITY RISK
► CASH APPROACH (Net liquidity position)- It
measures sources and uses of liquidity. The average
time to maturity of all assets and liabilities are depicted
from the statement of structural liquidity.

• If GAP POSITIVE- More assets are maturing -> no


liquidity problem.
• If GAP NEGATIVE- More liabilities are maturing->
liquidity problem will arise.
Another method is Stock
Approach
Liquidity Ratios of PNB

Ratios Particulars 2006 2005

       

1) Current Ratio Current Assets / Current Liabilities 0.909324 1.08701

       

2) Debt Equity Ratio Total Liabilities / Total Shareholders' Equity 15.46828 20.4181

       

Investments+ Fixed Assets + Other Assets/ Cash


and balance with RBI + Balance with Banks and
3) Core Assets to Non Core Assets Money at Short and Call Notice + Advances 0.765568 0.8.58772

       

4) Purchased Funds to Total Asset Borrowed Funds + Deposits / Total Asset 0.838752 0.87173

       

5) Liquid Asset to Total Asset Liquid Assets / Total Assets 0.08784 0.0862

       

6) Core Assets to Total Asset Tier 1 capital / Total (Risk-adjusted) Assets 0.064648 0.04897

       

       
DU PONT
ANALYSIS OF PNB
RETURN ON EQUITY
=NET INCOME/AVG
EQUITY

RETURN ON ASSETS EQUITY MULTIPLIER


=NET INCOME/AVG. =AV. ASSETS/AVG.
ASSETS EQUITY

PROFIT MARGIN ASSET UTILIZATION


=NET INCOME / =REVENUE/ AVG.
REVENUE ASSETS

NET INCOME / AVG.


EQUITY
= ROE
DU PONT RATIOS OF PUNJAB NATIONAL BANK
     

Ratios 2006 2005


     
Net Income 87254092 85378845
Total Assets 1262412809 1023317419
Total Revenue 101355293 96465749
Equity 81612992 50118070
     

Profit Margin (net income/total revenue) 0.86 0.88


     
Asset Utilization (total revenue/total
assets) 0.08 0.09
     

Return on Asset (net income/total assets) 0.069 0.079


     

Equity Multiplier (total assets/equity) 15.47 20.42


     

Return on Equity (net income/equity) 1.069 1.613


MITIGATING Liquidity Risk
For achieving a desirable liquidity
position: This can be done
► By making sufficient cash available
► By having stable earnings
► By having more maturing assets
Observations and Findings
► Risks under Asset Liability Management i.e. interest rate risk
and liquidity risk are viewed by the ALM cell of PNB.

► Statement of GAP analysis depicts mostly the negative gap

► Duration GAP is mostly negative for PNB

► The statement of structural liquidity shows the various assets


and liabilities according to their average time to maturity.

► All the liquidity ratios are showing satisfactory results


RECOMMENDATIONS
Recommendations for PNB to
tackle Interest Rate Risk
► To reduce asset sensitivity

► To increase asset sensitivity

► To reduce liability sensitive

► To increase liability sensitivity


RECOMMENDATIONS TO PNB TO TACKLE

LIQUIDITY RISK

► Utilize liquidity monitoring tools


► Illiquidity is experienced when the bank’s cash
outflows exceed its cash inflows, this can be
remedied through borrowing, or through
selling assets.
► Banks can “securitize” assets (loans) by selling
them in a secondary market.
► The bank sells assets (loans) to a trustee who
issues securities collateralized by them.
Thank you

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