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Excel For Banking

This document provides information on using Excel functions for banking applications. It discusses the Future Value, Present Value, If, Payment, Net Present Value, Correlation, and Sensitivity Analysis functions. Specific examples are given for how each function can be used, such as calculating loan payments, comparing profitability of loan products, and analyzing a bank's financial ratios and performance.

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Jaya Dewani
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67 views19 pages

Excel For Banking

This document provides information on using Excel functions for banking applications. It discusses the Future Value, Present Value, If, Payment, Net Present Value, Correlation, and Sensitivity Analysis functions. Specific examples are given for how each function can be used, such as calculating loan payments, comparing profitability of loan products, and analyzing a bank's financial ratios and performance.

Uploaded by

Jaya Dewani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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EXCEL FOR BANKING

-----JAYA DEWANI
EXCEL FUNCTIONS

• Future Value(FV)

FV (Rate, Nper, [Pmt], PV, [Type])


• Rate = It is the interest rate/period
• Nper = Number of periods
• [Pmt] = Payment/period
• PV = Present Value
• [Type] = When the payment is made (if nothing is mentioned,
it’s assumed that the payment has been made at the end of the
period)
2. PV = (Rate, Nper, [Pmt], FV, [Type])
• Rate = It is the interest rate/period
• Nper = Number of periods
• [Pmt] = Payment/period
• FV = Future Value
• [Type] = When the payment is made (if nothing is mentioned,
it’s assumed that the payment has been made at the end of the
period)
EXCEL FUNCTIONS(CONT)

• If Function: =IF( condition, [value_if_true], [value_if_false] )

Banks need to data mine their existing loan portfolio to prevent loan
prepayments and protect existing loans from being poached by competitors.
This conditional function helps us determine if borrowers are top relationship
for our bank, and then we determine if they meet criteria that makes the
borrower more likely to refinance with a competitor.  We use this function to
establish if the fixed rate loan has less than 2-years to a pricing reset, if the
borrower is paying above market rate, and if the loan has no prepayment
protection.  If loans meet any of these criteria we contact the borrower to
present new loan commitment options.  We want to be the first to present the
borrower a proposal because being preemptive allows us the opportunity to
refinance our own loan before a competitor does.
• Payment Function: =PMT(rate, nper, pv, [fv], [type])

Borrowers care more about their monthly payment rather than the
interest rate on the loan.  This function calculates how much a
borrower will pay in principal and interest every payment period. 
Because the yield curve is so flat, this function shows that the monthly
payment on a Rs1million loan is only Rs192 more per month at a 20-
year fixed rate versus a 5-year fixed rate.  This function is a powerful
way for a banker to show borrowers various potential loan scenarios
and the effect and cost of eliminating the borrower’s refinancing risk. 
Furthermore, it also highlights how the 5-year fixed rate loan repricing
creates a credit risk for the bank.
• Net Present Value Function: = NPV(rate,value1,[value2],...)

This function is great to calculate the lifetime value of a loan or other


banking products.  We were amazed when we started using this function
to compare the amount of money our bank earns on short-term loan
products (like bridge financing, mini-perms or construction loans) versus
long-term stable loans (like permanent finance and real estate term
facilities).  Given that commercial underwriting expensive and origination
costs are high, this function gives bankers the ability to compare profit
streams for various relationship timelines.  We find that longer-term
relationships are much more profitable for commercial banking.
 
CORRELATION FUNCTION: =
CORREL(ARRAY1, ARRAY2)
This function allows us to determine the statistical relationship between two
properties. For example, we track our cost of funding to various indices and
market developments.  We have found that our cost of funding is more closely
correlated to LIBOR than to the Prime rate even though we price very few
deposits directly to LIBOR.  This phenomenon is true for almost all banks in
the country.
RECONCILATION:BANK STATEMENT
CASH STATEMENT
SENSITIVITY ANALYSIS :TWO VARIABLE

• Consider the following data:


• Loan Amount:3000000
• Interest p.a:8%
• Loan period(Months):180
Calculate EMI and show the sensitivity of the value by changing
loan amount and interest rates.
ANALYZING BANK’S FINANCIAL RATIOS

• Financial ratios are widely used to analyze a bank's


performance, specifically to gauge and benchmark the bank's
level of solvency and liquidity. A financial ratio is a relative
magnitude of two financial variables taken from a business's
financial statements, such as sales, assets, investments and
share price. Bank financial ratios can be used by the bank's
clients, partners, investors, regulators or other interested
parties
• Calculate solvency ratios. Solvency ratios are ratios that tell us
whether the bank is a healthy long-term business or not. A
good ratio here is the Loans to Assets ratio. It is calculated by
dividing the amount of loans by the amount of assets
(deposits) at a bank.
• The higher the loan/assets ratio, the more risky the bank. The
Loans to Assets ratio should be as close to 1 as possible, but
anything bigger than 1.1 can mean that the bank gives more
loans than it has in deposits, borrowing from other banks to
cover the shortfall. That is considered risky behavior
• Another ratio to be considered here is the Non-Performing
Loans to All Loans Ratio, or, more simply put, the Bad Loans
ratio. The Bad Loans Ratio indicates the percentage of
nonperforming loans a bank has on its books.
• This ratio should be about 1 to 3 percent, but a figure of more
than 10 percent indicates the bank has serious problems
collecting its debts. A nonperforming loan is a loan the bank
says will not recover. Banks use a pretty sophisticated
methodology to calculate the number of those loans.
• Calculate and analyze liquidity ratios. Liquidity ratios are
ratios that reveal whether a bank is able to honor its short-term
obligations and is viable in the short-term future.
• The primary ratio here is the Current Ratio. The Current Ratio
indicates whether the bank has enough cash and cash-
equivalents to cover its short-term liabilities.
• Current Ratio = Total Current Assets / Total Current Liabilities
• The current ratio of a good bank should always be greater than
1. A ratio of less than 1 poses a concern about the bank's
ability to cover its short-term liabilities.
• Calculate and analyze the Return to Shareholders Ratio and
the Price to Earning Ratio.
• To calculate the Return to Shareholders Ratio, divide the
dividends and capital gains of a stock by the price of the stock
at the start of the period being analyzed, usually a calendar
year.
• For example, if the stock on Jan. 1, 2010, cost 10, dividends
per share were 1, and on Jan. 1, 2011, the stock cost 11, then
the Return to Shareholders Ratio will be as follows: [(11-
10)+1] / 10 = 0.2 or 20 percent.
• The return to shareholders should be at least the interest rate
paid on a bank term deposit. Otherwise shareholders would be
better off having their money in a safe bank deposit,
guaranteed by the government.
• The Price to Earning Ratio is calculated by dividing the bank's
share price by the earning per share: P/E = price of one share /
earnings per share. The P/E ratio typically varies in the 10 to
20 range.
SENSITIVITY ANANLYSIS USING ONE
VARIABLE
EXAMPLE

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