The management of ABC Bank Limited is worried about falling

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 30th September 2021 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 3years. The current 1-year interest rates is 16% and is forecasted to decline to 14.50% in a year’s time. The bank price its loans using the Ghana Reference Rate as required by Bank of Ghana and demands 10% compensating balance on all its loans. The bank charges 0.75% origination fees and 3% risk premium on all its loans. Also, 100% of the short-term loans re-price every 3months, whilst 60% of the Long Term consumer loans re-price every 6 months. The LongTerm 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:

1. The impact on bank’s Net Interest Income over the next 1yr if the decline in rates as forecasted tends to be true.
2. The impact on bank’s Capital (Net worth)
3. The expected return on the bank’s loan book if ABC’s loan loss ratio is 5%.

The current 91-day Treasury Bill is 12.47%, Monetary Policy Rate is 13.50% and Interbank Overnight Rate is 12.61%. Cash Reserve Requirement is 8% whilst Cash-In-Vault is 2%.