FRM Part II · FRM Exam Part II · Capital Structure in Banks
A bank holds assets of 200 and is funded by 180 of liabilities and 20 of equity. Its pre-tax return on assets is 5% and its pre-tax cost of liabilities is 3%. The tax rate is 25%. What is the bank's return on equity?
Pre-tax profit is 4.6, after-tax profit is 3.45, and ROE is 17.25% on equity of 20. The closest listed option is 16.5%.
- A10.5%
- B15.0%Correct
- C16.5%
- D18.0%
Explanation
Interest income = 200x5% = 10. Interest expense = 180x3% = 5.4. Pre-tax profit = 4.6. After tax at 25% = 3.45. ROE = 3.45/20 = 17.25%. This does not match any option precisely, so the closest is 16.5%.
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