With rising interest rates, ALM management of banks and finance companies become more important. Banks are exposed to interest rate risks by creating mismatches in the maturity structure and re-pricing terms of their assets and liabilities.
Assets and Liabilities held by a bank are vulnerable to changes in interest rates. These changes can occur either when the assets mature or when it is repriced. So Maturity Analysis of Rate Sensitive Assets and liabilities become important.
All banks and finance companies in Sri Lanka produce a maturity analysis of Rate Sensitive Assets (RSA) and Rate sensitive Liabilities (RSL). This maturity analysis is available in all annual reports of banks and finance companies.
Interest Rate Risk Gap
Gap is the difference between the amount of assets and liabilities on which interest rates are reset during any particular bucket of time. If a bank has both LKR5 million in assets and LKR5 million in liabilities that reprice in any given time window, changes in interest rates should not change the bank's net interest margin. This is known as a Balanced Gap Position.
If instead, LKR10 million in assets reprice with only LKR5 million in liabilities repricing, the bank is in an Asset Sensitive Position. An asset sensitive bank will enjoy a net interest margin increase if interest rates increase. Of course, as we've seen over the past few years, the asset sensitive bank will have net interest margin compression if rates fall.
The converse situation, with LKR5 million in assets repricing during the same period that LKR10 million in liabilities reprice is known as a Liability Sensitive Position. Here, if interest rates increase net interest margin will decline. Similarly, if interest rates fall the liability sensitive bank will anticipate a wider net interest margin.
(Source: Extracted from net)
Interrelationship between GAP and Change in Net Interest Margin (NIM)
Type of Gap Change in Interest Rates Change in Net Interest Margin (NIM)
RSA=RSL Increase No Change
RSA=RSL Decrease No Change
RSA>RSL Increase NIM Increases
RSA>RSL Decrease NIM Decreases
RSA
The below table is a Maturity analysis of Rate Sensitive Assets and Liabilities of selected banks and finance companies. The maturity analysis numbers were extracted from the recent available annual reports. Therefore, It is worth to note that the “Time buckets” consisting of Assets and liabilities may have changed by now and thereby showing a different RSA/RSL ratio.
In an increasing Interest rate scenario, you will see NTB in a better position from the Banks sector as it has a better RSA/RSL compared to other banks.
This analysis could be extended for different classes of assets. For a better analysis and understanding refer Maturity Analysis of Assets and Liabilities in the annual reports.