Risk Assessment of The City Bank Limited

Submitted To: Farzana Lalarukh

Associate Professor
Department of Finance
Faculty of Business Studies

Submitted By: Asif Alam Chowdhury ID: 37045

Rafie Ahmed ID: 37043
Md. Ruhul Arefin ID: 34046
Faysal Hossain ID: 41072

Course Title: Management of Financial Institutions

Course Code: F-606
Date of submission: 31.12.2019
 Letter of Transmittal

31st December, 2019

Farzana Lalarukh
Associate Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Subject: Submission of report on Risk Assessment of The City Bank Limited.

Mam,
We, the undersigned, humbly express our great pleasure to present our report on “Risk
Assessment of The City Bank Limited”. This Assignment was assigned to us as
compulsory requirement of your course Management of Financial Institutions. This study
focused on Risk Assessment of The City Bank Limited. Working on this report has been really
interesting & informative experience for us. We learned many unidentified facts which we
believe will be supportive to our academic & professional career in the future. While doing
this report, we learned to integrate plenty of information into a concise volume. We have
enjoyed working on this report and hope that our report will meet the level of your
expectations. We would try our best and shall be obliged to provide you with any clarification
regarding the report.

Yours Sincerely,
Asif Alam Chowdhury ID: 37045
Rafie Ahmed ID: 37043
Md. Ruhul Arefin ID: 34046
Faysal Hossain ID: 41072

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 Acknowledgement

Firstly, we would like to thank the Almighty Allah for giving us the strength, the patience, and
the knowledge to do this report on “Risk Assessment of The City Bank Limited”. We would
also like to take this ultimate opportunity with pleasure to thank the course instructor, Farzana
Lalarukh, for giving us the opportunity to do the term report. He has been very helpful to us
throughout the entire process and has always been there to help us heartily even through his
hard times. She helped us whenever we got stuck with our paper without even a slight bit of
hesitation. She proved himself to be a successful mentor all through his deeds and
contributions for my preparation.

Moreover, we would also like to thank the wonderful coordination of the group members who
helped out in providing solution to every problem through discussion.

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Contents

Institutional Overview ......................................................................................................................................... 4

Measurement of Interest Rate Risk..................................................................................................................... 5

Impact on NII due to Repricing Gap ................................................................................................................ 5

Duration Model ............................................................................................................................................... 6

Duration Analysis of City Bank Limited............................................................................................................ 6

Duration Analysis of Assets of City Bank Limited ............................................................................................ 6

Calculation of Duration for Term Loan of City Bank Limited ........................................................................... 7

Credit Risk ............................................................................................................................................................ 8

Credit risk assessment ......................................................................................................................................... 8

Types of Credit Risk ......................................................................................................................................... 9

1) Credit Default Risk ................................................................................................................................... 9

2) Concentration Risk .................................................................................................................................. 9
3) Country Risk............................................................................................................................................. 9
Credit Default Risk: .......................................................................................................................................... 9

Linear Discriminant Model: ......................................................................................................................... 9

Foreign Exchange Risk: ...................................................................................................................................... 11

Capital Management ......................................................................................................................................... 12

Capital Management and Its Relationship with Risk Management .............................................................. 12

Framework of Capital Management.............................................................................................................. 12

Risk Management Reporting ............................................................................................................................. 13

Conclusion: ........................................................................................................................................................ 14

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Institutional Overview

Established in the year 1983, City Bank has transformed itself to remain relevant to
the times, with the result that today, the Bank has pioneered digital banking in Bangladesh,
representing a Paradigm Shift in the way customers engage with the Bank. Furthermore, the
Bank has also embraced a number of far-reaching initiatives in the realm of financial
inclusion. Continuing with achieving consistent growth in the Corporate and Commercial
Banking divisions, City Bank today is a versatile banking platform that focuses on extending
the frontiers of banking in Bangladesh.

City Bank is a next-generation private sector Bank in Bangladesh. The Bank has
rapidly transformed over the years to remain relevant to the country’s fast-evolving economy.
Today, the Bank provides a wide suite of deposit and loan products and solutions to cater to
the requirements of the widest socio-economic population cross-section. As a Bank with a
pioneering and award-winning Digital Banking app platform under Citytouch, City Bank is at
the forefront of transforming the way customers interact and engage with the Bank.

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 Measurement of Interest Rate Risk

Impact on NII due to Repricing Gap

Particulars/Maturity
Bucket Up to 1 month 1-3 months 3-12 months 1-5 years Above 5 years Total Taka

Rate-Sensitive
Assets (RSAs) 44,127,602,522 62,721,295,275 77,039,571,797 78,274,350,251 62,617,467,852 324,780,287,696
Rate-Sensitive
Liabilities (RSLs) 50,585,857,837 49,245,665,713 94,005,957,450 94,451,825,980 12,061,053,888 300,350,360,867

Maturity △NII for △R= △NII for △R= -

Bucket RSAs (A) RSLs (B) GAP (A-B) CGAP 1% 1%
Up to 1 44,127,602,52 50,585,857,83 (6,458,255,315 (6,458,255,315 (64,582,553.1
month 2 7 ) ) 5) 64,582,553.15
62,721,295,27 49,245,665,71 13,475,629,56 68,945,288.9 (68,945,288.95
1-3 months 5 3 3 6,894,528,895 5 )
3-12 77,039,571,79 94,005,957,45 (16,966,385,65 (10,071,856,75 100,718,567. (100,718,567.5
months 7 0 3) 8) 58 8)
78,274,350,25 94,451,825,98 (16,177,475,72 (26,249,332,48 (262,493,24.8
1-5 years 1 0 9) 7) 7) 260,493,24.87
Above 5 62,617,467,85 12,061,053,88 50,556,413,96 24,307,081,47 243,078,14.7
years 2 8 4 7 7 243,078,14.77
324,780,287,6 300,350,360,8 24,429,926,82
Total Taka 96 67 9

From the tables above, we see that all the maturity buckets are positive except the up to 1 month &
1-5 years bucket. So, if the interest rate decreases, City Bank will incur losses in the maturity buckets
1-3 months & 3-12 months bucket. If the interest rate increases, EBL will incur loss only in the 1
month & 1-5 years bucket.

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Duration Model
Duration is the weighted-average time to maturity on an investment. However, it is not the same
thing as maturity.

𝑇
PV (CFt)t
Duration = D = ∑
1 V

Other Duration estimation techniques include Modified Duration (MD) and Dollar Duration.

Duration Analysis of City Bank Limited

Duration Analysis of City Bank Limited will highlight the duration of its assets.

Duration Analysis of Assets of City Bank Limited

For conducting the duration analysis of assets of City Bank Limited, we are considering the Term Loan
portion in the Balance Sheet.
The Term Loan Amounts of City Bank for the past 5 years are given below:
Year Amount in BDT

2018 29,142,081,824

2017 6,864,158,264

2016 1,398,311,759

2015 5,082,020,004

2014 5,475,342,460

We will take an average from the amounts so that we can come up with a fixed amount for the ease
of our duration calculation. Average Term Loan for 5 years comes out to be BDT 95,923,882,862
We are assuming the lending rates of City Bank Limited for term loans to be 11.5%.

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Calculation of Duration for Term Loan of City Bank Limited
Time Cash Flow Present Value of Cash Flow Duration

1 1,918,476,572 1,918,476,572 1720606791

/1.115 /95,923,882,862x 1 =

0.0179

1720606791

2 1,918,476,572 1,918,476,572 1450643911

/1.115^2 /95,923,882,862x x 2 = 0.0322

1450643911

3 1,918,476,572 1918476572/1.115^3 1383986640/95,923,882,862 x 3 = 0.0433

= 1383986640

4 1,918,476,572 1918476572/1.115^4 1241243624/95,923,882,862xx 4 = 0.0518

= 1241243624

5 11,510,859,435 11510859435/1.115^5 6679337887/95,923,882,862 x 5 = 3.482

= 6679337887 ∴ Duration = 3.6272

BDT 95923882862

Duration = D = 3.6272 years.

3.6272
Modified Duration = MD = 1.115

= 3.2531 years
Dollar Duration = P x MD
= 95923882862 x 3.2531
= BDT 31204980689

= $3, 67,549,831.4 [$1= BDT 84.90]

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Credit Risk
The default risk on a debt that arises from a borrower who fails to make the required payments is
called Credit Risk. Any lender would include this as a first resort which includes principal and interest
along with disruption to cash flows and the collection cost. The loss may be partial or even complete
in many cases. Higher borrowing costs are always associated with higher credit risk levels in an
efficient market. Due to this reason, the cost of borrowing can be used to conclude credit risks based
on the assessment by the participants of the market.

Few cases in which losses can arise when a consumer fails to make the payment or when a company
is unable to repay an asset secured debt. They also arise when a consumer is unable to pay an invoice
when it is due or when a business does not pay salaries to its employees on time.

A credit check is performed by the lender to reduce this credit risk on the prospective borrower and
it may require the borrower to take insurance which guarantees from a third party of the payment
to the lender. In other cases, mortgage insurance or security over assets can be used for credit. In
general, the interest rate will depend on the risk, which means higher there is higher will be the
interest. Credit risk increases when the borrowers, willingly or unwillingly, are unable to pay.

Credit risk assessment

The risks are calculated on the borrower’s ability to repay the loan. To assess the risk credit risk the
lenders, look at the five C’s of the borrower. The five C’s are credit history, capacity to repay, capital,
the loans condition, and associated collateral. Some companies have a dedicated department only
for assessing the credit risk of its current and potential consumers.

Due to the help of technology businesses can now analyze the data quickly and assess customers risk
profile. If an investor is evaluating to buy a bond, he will review the credit rating of the bond before
the purchase is made. If the rating is low then the issuer is considered to have a high risk of default
and alternatively, if it has a high rating then it is considered to be a safe investment.

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Types of Credit Risk

1) Credit Default Risk

The risk of loss which arises from the debtor being unlikely to repay the amount in full or when the
debtor is more than 90 days past is the due date of credit payment, it gives rise to credit default risk.
The Credit default risk impacts all the sensitive transactions which are based on credit like loans,
derivatives or securities. Credit default risk is also checked by banks before approving any credit cards
or personal loan.

2) Concentration Risk
This is the type of credit risk which is associated with exposure of any single or group with the
potential to produce large losses to threaten the core operations of a bank. It may arise in the single
form of single name concentration even industry concentration.

3) Country Risk
The risk which arises from a sovereign state when it freezes the payments for foreign currency
overnight defaults or its obligation which is termed as sovereign risk. Country risk is exclusively
associated with the performance of macroeconomics of a country and is also closely related to the
political stability in the country. Sudden instability, which tends to happen during the elections,
results in high country risk.

Credit Default Risk:

Linear Discriminant Model:
Z=1.2 X1+ 1.4 X2+ 3.3 X3+ 0.6 X4+1.0 X5

Where,

X1=Working Capital/total Asset

X2=Retained Earning/Total Asset

X3=Earnings before income tax/Total Asset

X4=Market Value of earnings/Book Value of long term debt

X5=Sales/Total Asset

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We have assumed the values as the accurate data wasn’t available.

So,

X1= .80, X2=.1.23, X3=.89, X4=.66, X5=1.43

Now,

Z=7.445

We Know,

Critical Value of Z= 1.81

As per the calculation above, we can assume that City Bank’s credit risk has been lower.

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Foreign Exchange Risk:
Foreign exchange risk refers to the losses that an international financial transaction may incur due to
currency fluctuations. Also known as currency risk, FX risk and exchange-rate risk, it describes the
possibility that an investment’s value may decrease due to changes in the relative value of the
involved currencies.

To assess the foreign exchange risk of City Bank Limited, we could not find out the sufficient data in
the annual reports and in other sources. But we know that, on 31st December 2018, total liability and
total asset of the bank was Taka 326,940,438,782 (≈Tk 327 billion). We are assuming the following
scenario:

 The City Bank Limited is raising all of its BDT 327 billion liabilities in BDT (one-year CDs) but
investing 200 billion in BDT assets (one-year maturity loans) and 127 billion in U.K. pound
assets (one-year maturity loans). The City Bank Limited has matched the duration of its assets
and liabilities (DA =DL=1 year), but has mismatched the currency composition of its asset and
liability portfolios. The promised one-year BD CD rate is 8%, to be paid in BDT at the end of
the year, and that one-year, credit risk–free loans in Bangladesh are yielding only 9%.
However, that credit risk–free one-year loans are yielding 15% in the United Kingdom.
 To invest in the United Kingdom, The City Bank Limited decides to take BDT 127 billion and
make one-year maturity U.K. pound loans while keeping BDT 200 billion to make BDT loans.

Asset Liability
BDT 200 billion (BD loan, 1 year @9%) BDT 327 billion (BD CD, 1 year @8% )
BDT 127 billion (UK loan, 1 year @ 15%)
Total: BDT 327 billion Total: BDT 327 billion

 On 31st December 2018, exchange rate was, 1 GBP = 104.605 BDT.

 On 31st December 2019, exchange rate is, 1 GBP = 111.38 BDT.
Here,

 On 31st December 2018, The City Bank Limited gives loan to UK, BDT 127 billion= GBP 1.21
billion. (1 GBP = 104.605 BDT)
 On 31st December 2019, The City Bank Limited gets GBP (1.21*1.15) billion= GBP 1.4 billion.
That is equivalent to BDT 155.51 billion. (1 GBP = 111.38 BDT)
 Return from UK loan, 22.45%. [{(155.51/127)-1}*100].
 Weighted average return, 14.22% [{(200/327)*.09}+{(127/327)*.2245}]
 Cost of fund was 8%.
 Spread=6.22%. [14.22-8]
In this case, The City Bank Limited actually has a benefit or has a positive interest margin on its
balance sheet investments.

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Capital Management
Capital Management and Its Relationship with Risk Management
Capital management in a bank usually refers to implementing measures aimed at maintaining
adequate capital, assessing internal capital adequacy of the bank and calculating its capital adequacy
ratio. It is gaining increasing importance around the world, as reflected from taking several reform
initiatives and changes in the prudential requirements undertaken by banks in different countries in
line with the reform measures proposed by the Basel Committee on Banking Supervision.
Risk management is increasingly becoming difficult to separate from capital management. Most
banking risks can be quantified as numerical indicators, and this quantification naturally leads to the
principle that increased capital can be held to cover unexpected losses at a certain confidence level.
The followings indicate the relationship between risk management and capital requirement:
a) Capital management helps to ensure that the bank has sufficient capital to cover the risks
associated with its activities;
b) As part of the internal capital adequacy assessment process (ICAAP), management
identifies the risks that the bank is exposed to, and determines the means by which they will be
mitigated;
c) Capital is used to cover some of these risks, and the remainder of these risks is mitigated
by means of collateral or other credit enhancements, contingency planning, additional reserves and
valuation allowances, and other mechanisms.

The outcomes of capital management are:

i. A Capital Plan that meets the needs of the bank over a longer time horizon;
ii. An ICAAP that determines precise levels of required capital (the “solvency need”) according
to the measures of balance sheet capital and regulatory capital;
iii. A process to regularly compare available capital with current and projected solvency needs,
and address deficiencies in a timely manner.

Framework of Capital Management

Banks will devise and establish suitable capital management systems in order to calculate the capital
adequacy ratio and secure adequate capital to cover the risks they face, from the standpoint of
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ensuring soundness and appropriateness of the their businesses. In this regard, banks shall follow
the latest guidelines on Risk Based Capital Adequacy and related BB circulars/instructions to assess
its capital adequacy.

Risk Management Reporting

Risk Management Reporting
After proper analysis, risks are to be prioritized and reported to competent authorities (both internal
and external) by RMD on regular basis. Banks shall prepare Monthly Risk Management Report
(MRMR) and Comprehensive Risk Management Report (CRMR) according to the formats provided by
BB as a minimum requirement. They can also include additional information related to the concerned
risk areas depending on the nature, complexity and size of business. Banks shall arrange monthly
meeting of ERMC to discuss the risk issues based on the findings of the risk reports prepared by the
RMD and shall submit the CRMR and MRMR along with the minutes of ERMC meeting to DOS of BB
within stipulated time. Discussions & decisions of ERMC must be reflected in the meeting minutes.
Banks shall also submit the board approved Risk Appetite Statement (RAS) on yearly basis and BRMC
meeting minutes on regular basis. Besides they shall submit a soft copy of Stress Test report to DOS
of BB on half yearly basis along with risk reports. The risk reports and forwarding letter are to be
signed by the CRO.

In addition to the above reporting requirements, all banks must submit review report (board
resolution copy) of Risk Management Policies and effectiveness of risk management functions with
the approval of the board of directors to DOS of BB on yearly basis.

Penalty for Non-Compliance

If a bank’s employee willfully/knowingly furnishes false information in reporting to BB, such an
offence is punishable under section 109(2) of the Bank Company Act 1991. BB may impose penalty
as per section 109(7) of the said Act if a bank fails to submit the above mentioned reports within
stipulated time without any acceptable/satisfactory reason.

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Conclusion:
In this report, for risk assessments, we have taken some data from the annual reports available on
the internet of The City Bank Limited. Few components and scenario were assumed for the risk
assessment of The City Bank Limited.

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