The balance sheet of KriBank starts with an allowance for loan losses of $2.66 million. During the y
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The balance sheet of KriBank starts with an allowance for loan losses of $2.66 million. During the year, KriBank writes-off worthless loans amounting to $1.68 million, recovers $0.44 million on loans previously written off, and charges current income for $2.96 million provisions for loan losses. Calculate the end of year allowance for loan losses.
The balance sheet of KriBank starts with an allowance for loan losses of $2.66 million. During the year, KriBank writes-off worthless loans amounting to $1.68 million, recovers $0.44 million on loans previously written off, and charges current income for $2.96 million provisions for loan losses.
a. Calculate the end-of-year allowance for loan losses.
b. X-Bank reported an ROE of 15% and a ROA of 1%. How well capitalized in this bank?
answers
| Computation of end of year allowance for loan losses | ||
| a | $ in Milion | |
| Opening allowance for loan losses | 2.66 | |
| Less : Wortless Loan Writen off | 1.68 | |
| Add : Recovery of Loans written of Previously | 0.44 | |
| Add : Current year's provisions for Losses | 2.96 | |
| Year end allowance for Loan Losses | 4.38 | |
| b | ROE=ROA×EM | |
| 0.15=0.01×EM | ||
| EM=15=assets/equity | ||
| So Equity/Assets=6.66% | ||
| The Bank is well capitalised |
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