Question $2$

The management of ABC Bank Limited is worried about falling interest rates over the next $1$

year and its impact on the bank's Net Interest Income, returns on loans and capital. During

ALCO last month, the treasurer of ABC Bank Ltd was tasked to quantify the risks the bank is

exposed to over the next $1$ year. The Treasurer has gathered an extract of the bank's balance

sheet as at ${30}^{th}$ June $2023$ as shown below:

In addition to the balance sheet, the Treasurer has determined that the weighted average

duration of the bank's assets is $5$ years whilst that of its deposits is $3$ years. The current $1$ year

interest rates is $16\%$ and is forecasted to decline to $14\mathrm{.}50\%$ in a year's time. Also, $100\%$ of the

short term loans re$-$price every $3$ months, whilst $60\%$ of the Long Term consumer loans re$-$price

every $6$ months. The Long Term Commercial loan is $100\%$ fixed whilst the mortgage re$-$price

every month.

On the deposit side, $25\%$ of both the demand and the savings account re$-$price every month. As

a new recruits in the Treasury department, the Treasurer has tasked you to help determine the

following:

a$)$ The impact on bank's Net Interest Income over the next lyr if the decline in rates as

forecasted tends to be true.

b$)$ The impact on bank's Capital $($Net worth$)$