BFW3841 – CREDIT ANALYSIS AND LENDING MANAGEMENT MOCK EXAM QUESTIONS – S1 2022
QUESTION 1 [20 marks]
Consider Bank ABC with the following assets:
Cash and cash equivalents
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to OECD country (A) Deposits at local banks (A-)
Deposits at foreign banks (A-) Corporate loans (B-)
Value (in RM million)
20 50 65 60 115
a. Calculate the Tier 1 capital requirements of this bank using the regime.
b. Calculate I Tier I capital minimum requirements using the conversion table provided below. Conclude whether I is beneficial to this bank.
SUGGESTED ANSWERS:
a. RWA = (20 × 0) + (50 × 0) + (65 × 0.2) + (60 × 0.2) + (115 × 1) = RM 140m Tier 1 capital required = 4% × 140 = RM 5.6m (2 marks)
b. RWA = (20 × 0) + (50 × 0.2) + (65 × 0.5) + (60 × 0.5) + (115 × 1) = RM 187.5m Tier 1 capital required = 4% × 187.5 = RM 7.5m
arbitrarily assign risk weights to different types of assets based on the nature of issuers
I is more risk-sensitive and assigns risk weights based on the borrowers’ external credit ratings under a standardized approach or internal ratings under the IRB approach. Therefore, it can differentiate among the degrees of risk in a bank’s asset portfolio and requires more capital to preserve against a higher value of RWA. These requirements help the bank better withstand unprecedented credit losses or liquidity crises.
QUESTION 2 [14 marks]
Aristocrat Leisure Ltd. is an Australian leading gaming provider and games publisher. Aristocrat supplies various products and services, including electronic gaming machines, casino management systems, and digital social games. The Company’s land- based products are approved for use in more than 300 licensed jurisdictions and are available in over 80 countries.
In 2020, the COVID-19 containment measures significantly reduced the Company’s land-based revenue and EBITDA generation by about 34%, compromising its ability to maintain a low debt-to-EBITDA ratio. As such, S&P Ratings placed the Company on the CreditWatch list with a negative outlook as of April 2020.
Assume you are a credit analyst of S&P Ratings as of March 2021. Your most recent assignment is to revisit Aristocrat’s financial and non-financial performance and revise its credit outlook. To complete your task, you have collected the following information:
• There was a reopening of casinos in the U.S., the largest market of Aristocrat, during the second half of 2020.
• Thanks to stay-at-home orders, the Company has experienced consistent growth in the digital gaming segment, accounting for around 57% of its revenue.
• Aristocrat currently has no large debt-funded acquisitions or significant shareholder return commitments.
• The Company has an available cash balance of around A$1.95 billion, a A$2.34 billion term loan outstanding due in late 2024, undrawn revolving credit facilities of about A$286 million, and no near-term debt maturity of 30 September 2020.
• No record of breaching debt covenants has been documented thus far. Required
Based solely on the information provided, critically evaluate the credit outlook of Aristocrat. Please clearly articulate the company’s potential upside or downside risks in your evaluation. Would you recommend updating the view to “stable” or keep it unchanged as “negative”?
SUGGESTED ANSWERS:
Upside potential:
• Aristocrat’s strong market presence and distribution across a diversified geographical footprint and its track record of developing products that continue to attract consumers are good characteristics for this borrower.
• Earlier-than-anticipated casinos reopening during the second half of 2020 enabled cash flow to recover faster. We can expect a much-improved land- based operating performance, supported by consistent growth in digital, to underpin Aristocrat’s earnings recovery in the fiscal years 2021 and 2022.
• The recovering conditions, combined with an absence of significant debt- funded acquisitions or sizable shareholder capital returns, enable Aristocrat to lower its debt to EBITDA.
• Aristocrat’s long-dated debt profile, undrawn facilities, and available cash of around A$1.7 billion as of 30 September 2020 underpin its strong liquidity position. Therefore, the Company has enough liquidity to weather further pandemic-related disruptions and obtain some flexibility to undertake capital management or corporate activity over the next 12 months.
• No breaching of debt covenants suggests that Aristocrat has shown good compliance to the requirements of its creditors
Downside risk:
• Despite the earlier-than-anticipated casino reopenings across the U.S., land- based earnings can hardly return to pre-pandemic levels until fiscal 2022 due to some level of capacity restrictions until widespread vaccination is achieved.
• Digital segment revenue growth will largely depend on how Aristocrat remains continually innovative to retain newly acquired digital users.
• The Company cannot permanently maintain its high cash balance should market conditions normalize. Any corporate activity decision or capital management decision that increases leverage would undermine the assessment of the Company’s future financial policy commitments.
• Uncertainties associated with the economic environments across different markets or a severely weakened Aristocrat’s market position across its portfolio could affect the Company’s ability to meet future debt obligations.
QUESTION 3 [16 marks]
On 1 January 20X2, purchased a $10 million six-year senior unsecured bond issued by UNAB Corporation. Six months later (1 July 20X2), concerned about the portfolio’s credit exposure to UNAB, , the chief investment officer at
, purchases a $10 million CDS with a standardized coupon rate of 5%. The reference obligation of the CDS is the UNAB bond owned by .
On 1 January 20X3, Morrison asks you, a derivatives analyst, to assess the current credit quality of UNAB bonds and the value of ‘s CDS on UNAB debt. Watt gathers the following information on UNAB’s debt issues currently trading in the market:
• Bond 1: A two-year senior unsecured bond trading at 40% of par
• Bond 2: A six-year senior unsecured bond trading at 50% of part
• Bond 3: A six-year subordinated unsecured bond trading at 20% of par
Concerning the credit quality of UNAB, Watt makes the following statement:
“There is severe near-term stress in the financial markets, and UNAB’s credit quality reflects the difficult environment.”
On 1 July 20X3, Morrison asks you to explain under what conditions that UNAB experiences a credit event, and if the event happens, to recommend a settlement preference.
Recommend a settlement preference if UNAB experienced a credit event on 1 July 20X3.
SUGGESTED ANSWERS:
would prefer a cash settlement.
owns Bond 2 (trading at 50% of par), worth more than the cheapest- to-deliver obligation (Bond 1 trading at 40%)
’ proceeds from cash settlement is $11m, consisting of two components: one is from its CDS contracts [= (1 – 40%) × 100 = $6m], and another is from selling Bond 2 for $5m.
If were to settle the contract physically, only $10m would be received, the bond’s face amount, and they would deliver bond 2.
QUESTION 4 [20 marks]
Public Bank receives a loan application of RM 250 million from XYZ Inc. XYZ pledges to deposit RM 10 million in Public Bank. The average interest rate on loans is 10%, while the average interest rate on deposit balances is 3%. The bank will impose a commitment fee of 1.5%. However, the bank has to bear 2% monitoring and 3% loan processing costs, calculated based on the loanable amount. Bank Negara Malaysia maintains a statutory reserve requirement (SRR) of 5%. The loan committee hopes to
estimate the following revenues and expenses and project the net return using the amount of the loan requested as a base for the calculations:
a. Calculate the expected rate of return of the loan, excluding its servicing costs, given the estimated probability of default of 5%.
b. Assume the bank’s internal lending policy requires a minimum 5% annual before- tax rate of return over all the costs. Estimate the net rate of return when lending to XYZ and evaluate whether the loan can be approved. Justify with workings.
SUGGESTED ANSWER
a. The contractually promised return for each $1 of loan is:
k = f +(BR+m) = 0.015+0.10 =0.119711.97% 1−b(1−RR) 1−0.04(1−0.02)
The expected return of the loan is:
E(r)= p(1+k)−1=(1−0.05)(1+0.1197)−1=6.37% b.
Estimated revenues:
Interest income from loan Loan commitment fee Total revenues
Estimated expenses:
Interest on deposit Monitoring costs
Costs of processing the loan Total expenses
The average amount of credit committed to the borrower
Less: Average customer deposit balances SRR 5% x 10 million
The net amount of loanable reserves supplied to the borrower
The net rate of return of the loan is:
28.75 −12.8 = 6.63% > 5% 240.5
250 million × 10% = 250 million × 1.5% =
10 million × 3% = 250 million × 2% = 250 million × 3% =
25 million 3.75 million RM 28.75m
0.3 million 5 million 7.5 million RM 12.8m
250 million
10 million 0.5 million 240.5 million
Yes, the bank should approve the loan because the bank’s net rate of return of 6.63 % is higher than the minimum required 5% rate of return.
QUESTION 5 [30 marks]
Based on the financial results of PPB Group as of 31 December 2020 provided below to answer the following questions:
Gross profit
Other operating income Distribution costs Administrative expenses Other operating expenses Finance costs
Finance income
Profit before tax
Tax expense
Profit for the year
ASSETS Non-current assets Current assets
2020 RM ‘000 4,190,690 3,760,894 429,796 80,753 189,972 199,881 17,786 28,683 1,346,706 1,420,933 57,511 1,363,422
2020 RM ‘000
2019 RM ‘000 4,683,776 4,053,680 630,096 62,232 208,147 205,332 8,061 33,814 1,034,654 1,271,628 72,366 1,199,262
2019 RM ‘000
20,428,833 3,150,924 802,513 752,164 1,500,909 95,338 23,579,757
4,096 227,976 102,191 29,340 1,085,363 647,363 357,075 80,925 1,448,966
22,130,791
2,825,928 17,180,017
21,889,296 2,994,362 Inventories 658,626
Trade and other receivables Cash and cash equivalents Other current assets
TOTAL ASSETS
LIABILITIES Non-current liabilities
Borrowings
Lease obligations
Deferred tax liabilities Provision for restoration cost
Current liablities
Trade and other payables Borrowings
Other obligations
TOTAL LIABILITIES TOTAL EQUITY
Share capital
Other non-distributable reserves Retained earnings
768,361 1,420,341 147,034 24,883,658
25,461 239,307 110,139
367,732 455,798 110,156
1,337,213 23,546,445
3,377,002 18,012,433
Share price as of 31 December 2020 18.52 Number of shares outstanding (‘000) 1,422,599
Appraise PPB Group’s efficiency, liquidity, and leverage position by completing the table below using its financial information and interpret the calculated ratios
Efficiency ratios
Accounts Receivable Turnover Days ARO
Inventory Turnover
Accounts Payable Turnover Days APO
Cash conversion cycle
Liquidity ratios
Current ratio Cash ratio
Leverage ratios
Debt-to-capital EBIT-to-interest expense
SUGGESTED ANSWERS
Efficiency ratios
Accounts Receivable Turnover Days ARO
Inventory Turnover
Accounts Payable Turnover Days APO
Cash conversion cycle
Liquidity ratios
Current ratio Cash ratio
Leverage ratios
Debt-to-capital EBIT-to-interest expense
FY2020 Formula
5.51 =Revenue/Average(AR 20, 19) 66.22 =365/AR Turnover
5.15 =COGS/Average(Inventories 20, 19) 70.90 =365/IO Turnover
7.41 =COGS/Average(AP 20, 19)
49.26 =365/AP Turnover
87.86 =Days ARO + Days IO – Days APO
3.04 =Average(CA)/Average(CL) 1.45 =Average(Cash)/Average(CL)
=Average(Total debt)/Average(Total 1.81% capital)
3.588 =EBIT/Finance cost
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