Question

Based on the following information about Banks A and B, compute for each the return on assets (ROA), return on equity (ROE), and leverage ratio.
a. Bank A has net profit after taxes of $1.8 million and the following balance sheet:

Bank Balance Sheet
(in millions)
Assets Liabilities
Reserves $5 Deposits $100
Loans $70 Borrowing $10
Securities $45 Bank Capital $10
Instructions: Enter your responses rounded to two decimal places.

The return on assets (ROA) for Bank A: ______ percent

The return on equity (ROE) for Bank A: ______ percent

The leverage ratio for Bank A: _______

b. Bank B has net profit after taxes of $2 million and the following balance sheet:

Bank Balance Sheet
(in millions)
Assets Liabilities
Reserves $10 Deposits $55
Loans $45 Borrowing $10
Securities $35 Bank Capital $25
Instructions: Enter your responses rounded to two decimal places.

The return on assets (ROA) for Bank B: ________ percent

The return on equity (ROE) for Bank B: _______ percent

The leverage ratio for Bank B: _______

Answer 1

Answer:

BANK A

ROA  1.50%

ROE 18.00%

LEVERAGE: 8.33%

BANK B

ROA 2.22%

ROE 8.00%

LEVERAGE: 27.78%

Explanation:

BANK A

ROA: profit / assets

assets: reserves, loans, securities:  5 + 70 + 45 = 120

1.8 millions / 120 assets = 0.015 = 1.5%

ROE: profit / equity

equity = bank capital = 10

1.8 / 10 = 0.18 = 18%

LEVEGARE: 10/120 = 0.083333 = 8.33%

BANK A

ROA: profit / assets

assets: reserves, loans, securities:  10 + 45 + 35 = 90

2 millions / 90 assets = 0.02222 = 2.22%

ROE: profit / equity

equity = bank capital = 25

2 / 25  = 0.08 = 8%

LEVEGARE: 25/90 = 0.277777 = 27.78%