The Board of Directors of the 1^st National Bank of Sydney Elizabeth has approved the following target ratios:
(1) A Target ROE after taxes of 16%; and (2) A Target equity to assets ratio of 8.33% (i.e. and EM of 12) . The bank has total assets of $850 million, a Burden of $11.5 million, a Provision for Loan Losses of $1 million, and a marginal tax rate of 35%.
What target ROA after taxes and target NIM before taxes does the bank need to reach its target ROE?

Question

Quizplus · Accepted Answer

Target ROA = ROE / EM = 16%/12 = 1.33% 
Target ROA before taxes = ROA / (1 - t) = 1.33% / (1 - .35) = 2.046% 
Solving for the Target NIM = ROA before taxes + Burden% + PLL% 
Burden % = Burden /Assets = 11.5/850 = .01353 or 1.353% 
PLL% = PLL / Assets = 1/850 = .00118 or 0.118% 
Target NIM = 2.046% + 1.353% + 0.118% = about 3.52%

The Board of Directors of the 1st National Bank of Sydney

The Board of Directors of the 1^st National Bank of Sydney