Asset Liability Management for CBA - Essay Example

Report on Asset liability management for CBA Executive Summary Asset liability management is an approach that bank employ in coordinating the control of asset and liabilities to realize sufficient return from investment. The management will earn net income by influencing the bank’s asset and liabilities, which might translate into improved stock prices. The process therefore ensure an effective planning, organizing and controlling the asset and liability as well maturities and rates so as to reduce interest rate risk and upheld an satisfactory profitability level. Effective liquidity planning would lead to efficient working capital management that would lead to better management of the bank operation. This can only be achieved where the bank has executed an ideal asset liability management (ALM) in order to ensure that there is balanced between the asset and liability of the bank. The bank therefore should ensure that it has an investment diversification portfolio to minimize business risk. Asset management plays a key role in merging together the dissimilarity business lines in a financial institution. Controlling the liquidity as well as the statement of financial position is critical to the existence of a financial institution and its operation (Atsuo, 2001). It as well critical for endless expansion of the statement of financial position in a profitable manner. Recently, it was observed that even big investment banks faced serious liquidity problem and consequently the real significance of asset liability management has been undervalued. This therefore has to the Commercial bank of Australia (CBA) to adopt effective asset liability management in order to rescue the business from liquidity risk that might affect the business going concern. Understanding the liquidity position and historic trend for bank Liquidity risk The measure the banks need for meeting customers need as and when they fall due. It measures the needs for complying with cash outflow and loan increase as well as its real or probable source of liquidity from disposing the asset or incurring extra liabilities. The liquidity risk for the bank can be appraised using the total asset or liquid asset to total deposit ratio. Liquidity risk encompasses both the funding liquidity and market liquidity. Funding liquidity risk is the threat that the bank will not be in a position to meets efficiency both anticipated and unanticipated present and prospect cash flows. Market liquidity is the threat that the bank might rarely offset or get rid of the position devoid of considerably impacting the market price due to inadequacy of market in debt or market disturbance .Within the market liquidity risks, the bank must frequently appraise its effect to ascertain and preserve link with liability holders, to uphold the diversification of liabilities s well as focus on the capacity to dispose the assets. Workings Coverage short term liabilities by liquid assets={Liquid assets/Short term liabilities} Coverage of loans by deposits ={ Deposit/loan} Maturity Gap={Total Inflows in time bucket-Total outflow in particular time bucket} Year 2013 ={459429-556648)=-97219, 2012 {437655-525682)=-88027 Current ratio={Current Asset/current Liability}= 753876/708384=1.06, year 2013 = {718859/677287)=1.06 Quick ratio={Cash+ Account receivable + Marketable securities)/Total Current liabilities} year 2013= {7744+45340)/708384}=0.08, Year 2012 (10886+39567)/677287}=0.07 2014 2013 2012 Quick ratio 0.1 0.08 0.07 Current ratio 1.09 1.06 1.06 CRR Bank 4.67 4.5 4.49 Maturity Gap 99045 -97219 -88027 Coverage short term liabilities by liquid assets 0.86 0.84 0.83 Coverage of loans by deposits 0.16 0.15 0.16 The above table depicts trend analysis for the bank liquidity position. It can be observed that the bank depicts an increasing trend in current ratio. This therefore implies that the company has more short-term asset to return its liability (Chittenden, 2000). The ideal value of current ratio reported by bank is due to placing significant importance on the operational financing as well as the state of the debt. The rising value of the current ratio implies that the Bank is a good financial situation capable of financing its working capital. The quick ratio and CRR for the bank depict no change implying that the bank ability to meets short-term obligation as, when they fall due is clearly met by the bank, and consequently, the bank’s liquidity position is ideal. In this regards, the bank’s liquidity risk is not at risk and consequently depict a going concern. The bank as therefore adopts an ideal liquidity risk management by ensuring that the debt of its client can fully be met as and when they fall due. Moreover, the working capital of the bank is effective as depicted by the current ratio implying that the working capital is effective in meeting the daily operation such as financing the loan capital as well as meeting short term and long-term obligation of the bank. Bank Security portfolio The bank portfolio combines of liquid asset, this type of asset are short term and matures within one of business operation. This type of asset are highly risk since, they depend on the working capital of the bank hence, there must exist an effective working capital management as depicted by the current ratio and quick asset (Giardini, 2002). Another nature of security portfolio t is the bank loan. This are amount loaned to customers by the bank are susceptible to business risk such as loan default risk. In this regards, the bank place more emphasis on appraising the loan worth of a client in order to minimize default risk by the customer, which might jeopardize the business going concern. Securities are another class of portfolio that bank poses. this are marketable securities invested by the bank in the security market and are susceptible to market risk and consequently bank place more concern on the performance of the securities in the stock market in order to ensure that there positive returns from investment in securities. 2014 % 2013 % 2012 % Liquid Asset 20634 3.3 19666 3.4 18030 3.2 Securities 45340 7.2 39567 6.8 45203 8 Loan 556648 89.4 525682 89.8 502349 88.8 622622 100 584915 100 565582 100 Interpreting the performance of the security portfolio for the bank From the above table analysis, it can be depicted that there is an increasing trend in value of liquid asset as well as the value of securities. This therefore implies that the bank has enhanced its statement of financial position and thus there is an effective working capita management as depicted by increasing trend in value of the asset. The threat if that as the company capital base increase, the ;level of loan capital increases and thus the higher the amount of loan to customers the higher the business risky way of loan default and business risk such as the effect of inflation that might affect the banks business performance. In this regards, the bank should mitigate default risk by having a comprehensive underwriting process, which will scrutinize the broad aspect of the customer’s credit worthiness in order to ensure that only viable customer with a value of collateral with good reputation on business operation and ideal credit worthiness, are only allowed to aces loan. From the above graph analysis. It can be concluded that the bank asset portfolio is increasing with liquid asset being the most invested asset. This in regards implies that investment in liquid asset will lead to effective working capital management, thus the bank can be able to meet its obligation such as the customers’ deposits as, and when they fall due. Morever, the bank effective working capital implies that the daily business operation will be ideal which guarantees that the bank going concern assumption is reliable. As a result, the bank must ensure that the amount of loan to customer is kept with the bank capacity to assume business risk by virtue of loan default. This is possible ensuring that every loan given to customer must have collateral for loan, which will mitigate for any loan default risk. This act therefore help the customers since it will as well as help them mitigate for loan risk. The bank must increase the level of marketable securities in order to increase the level of capital base to the bank (Hungarian Financial Supervisory Authority , 2000). The benefit of effective capital structure is that the bank effectiveness of working capital will be enhanced implying that the bank’s obligation will effectively be met as and when they fall due for obligation. An ideal asset management will consequently guarantee the bank is financial statement performance hence the going concern assumption of the bank will be guaranteed. Effective asset management provides an assurance that customers deposit is safe with the bank and thus the customer’s confidence on the bank will be improved. Bank’s Liability (Deposit and Borrowing) and deposit 2014 % 2013 % 2012 % Deposit 459429 0.69 437655 0.67 425276 0.7 Borrowing 158730 0.26 146838 0.24 140457 0.23 Equity capital 45492 0.07 44572 0.07 40984 0.07 663651 1 626065 1 610717 1 The table above depicted that there is increasing trend in value of equity capital and borrowing and customer’s deposit. An increase in value of borrowing is risky to the bank since; the bank will be susceptible to business risk since, the bank will be faced with hard times in repaying the amount borrowed with interest and also the effect of inflation might jeopardize the bank performance which might further pout the bank at a higher risk of repaying the increasing trend in amount borrowed. As a result, the bank might consider reducing the amount of borrowed capital and improve on increasing on the other source of capital such as investment in marketable securities since; they are less susceptible to risk and have low interest rate risk. In this regards, holding portfolio of asset to the bank will improve on the financial statement by ensuring that there is manageable liabilities with improved asset to the bank (Michael Crouchy, 2001).While the deposit increases the capital, base and availability of funds to customers as loan. The bank equity capital is as well increasing which is a good indication that the capital structure of the business is efficient and thus the bank going concern assumption is not compromised. Interpreting the bank liability and deposit. The bank is having a huge vale of liabilities has depicted by the value of deposit and borrowing. This increasing amount is risky to the bank since, the more the amount liabilities I crease the higher the business risk and consequently it might affect business performance. The bank will therefore be susceptible to business risk such as the difficulty in repaying the borrowed amount as well as meeting the customer’s obligation as and when they need their deposit. In order to ensure that the bank has an effective working capital, the bank should consider reducing the value of borrowed capital and increase the level of customers deposit by crating customer’s confidence on the bank performance. The bank should therefore consider holding diversified portfolio in order to ensure that the business is secured in case of business risk that might affect the bank’s performance in case of risk. The capital structure of the bank is way below as compared to the value of the liabilities. This depicts a future threat to the bank if the trend continues. An n ideal balance sheet should ensure that the equity capital for the bank is strong enough to guarantee the business performance and the going concern (Jean Dermine, 2003). The capital structure for the bank should therefore be improved by investing marketable securities such as the bonds since they are less volatile and are not easily susceptible to risk as well as holding diversified portfolio in order to increase the capital base of the bank. Efficient capital structure consequently implies that the bank risk is minimal. Asset liability management therefore tries to bring the balance between the asset and liability in the bank’s financial position in order to ensure that an effective asset and liability management exist. This management is effecient since it ensures that business is not faced with risk of liquidation but ensure the going concern assumption is ideal. Conclusion The financial performance of the bank depicts an ideal management of asset and liability for the bank and thus it is apparent that the bank is going to meet its obligation as and when they fall due. This depicted by the effective of the working capital for the last fours. The growth in capital base for the bank implies an increase in size of the bank, which in turn would, to an increase with the size of loan to customers. Increasing the loan capital as well as the amount of borrowing might lead to business risk since, the bank will be opened to more risky venture that required m ore consideration such as undertaking a comprehensive underwriting process in order get a clear understanding of the customer’s credit worthiness in order to minimize lending risk such as loan default as well management the asset and liability of the bank in order to ensure that the bank has more asset at their disposal as compared to the amount of liability. This will act as a security in case the bank faces liquidity problem. Effective liquidity planning would lead to efficient working capital management that would lead to better management of the bank operation. This can only be achieved where the bank has executed an ideal asset liability management (ALM) in order to ensure that there is balanced between the asset and liability of the bank. The bank therefore should ensure that it has an investment diversification portfolio to minimize business risk. Asset management plays a key role in merging the dissimilarity business lines in a financial institution. Controlling the liquidity as well as the statement of financial position is critical to the existence of a financial institution and its operation (Konish, 1996). The analysis therefore concluders that the financial performance of the bank depict a going concern and thus strong asset liability management must be executed and updated in the bank so as to put the business at safer position every business day. References Adam, A., n.d. Handbook of Asset/liability management from models to Optimal return Strategies. New York: ohnWiley and Sons Ltd. Atsuo, F.J.F.a., 2001. The Handbook of Asset/Liability Management. London: Irwin McGraw-Hil. Chittenden, J., 2000. A bank’s focal point for market risk; The transfer pricing mismatch unit. Journal of Bank Cost & Management Accounting. Giardini, V., 2002. Internal Transfer Pricing of Bank Funds Institute. Bank Administration. Hungarian Financial Supervisory Authority , 2000. Proposal for Asset/liability Managment. Jean Dermine, I.F., 2003. Handbook of Asset/Liability Management. Konish, F.J.F.a.A., 1996. The Handbook of Asset/Liability management. London: McGraw-Hill. Michael Crouchy, D.G.R.M., 2001. Risk Management. London: McGaw-Hill. Murat, A., n.d. Adjustments to the base FTP rate index curve. Bank Cost & Managment Accounting. Read More