Asset Liability Management explained using Yes Bank example

A lot of people want to understand what the cause of woes of Indian bank is. Here is my attempt at demystifying the asset liability mismanagement 

1.     What does “asset liability” in the term asset liability management imply?

Asset for a bank in this case refers to assets that generate interest and liabilities are those on which we pay interest. Hence, assets would primarily include loans and advances given by bank and interest generating investments. On the other hand, liability would include deposits and loans and advances taken by bank  to finance their investment.

2.     So what does asset liability management imply?

Here the assets are primarily funded by liabilities. Example, the loan that the bank grants you for your house may be funded by the deposit that people make in their accounts or the loan that the bank takes to fund the assets.

Asset Liability Management refers to the process of balancing tenure of assets with the tenure of liability. Tenure refers to the period for which the money is lent and borrowed. Ideally, a short term asset should be financed with a short term liability.

3.     Why do we need to match the tenure for assets and liabilities?

We need to match the tenure of the loans because the rate of short term and middle term assets and liabilities (1-5 years) change at a faster rate compared to change in the rate of interest of loans which are long term assets. For example, if the base rates change the banks are forced to increase deposit rates on short term and medium term deposits. However, interest rates on loans which are of longer tenure do not increase in hurry on the other hand.

4.     So how does it impact the income?

It impacts the net interest income negatively, whenever interest rates go up. The interest income remains constant, while interest expense increases as re-pricing of bank assets take longer than pricing of bank liabilities. (Re-pricing is

technical term for adjustment of interest rates.)

5.     What are the interest rate expectations in the future?

Banks fear that the interest rate might go up as the inflation rate is at all-time high. RBI ideally uses interest rates as a tool to control liquidity. According to a recent survey done by Reuters unexpectedly high inflationary pressure has led to analysts expecting higher interest rates.

6.     What are asset liability buckets?

Asset Liability bucket refers to the process of dividing assets and liabilities based on their tenures. Following is the asset liability maturity bucket of Yes Bank Ltd.

	Assets			Liabilities
Maturity Buckets	Loans & Adv	Investment	Total Assets	Deposits and Securities	Borrowings	Total Liabilities	Net Assets
1 day	2,211,941	-	2,211,941	5,968,491	-	5,968,491	(3,756,550)
2-7 days	6,687,905	-	6,687,905	45,289,832	62,347,081	107,636,913	(100,949,008)
8-14 days	6,245,494	368,400	6,613,894	35,097,867	2,671,425	37,769,292	(31,155,398)
15-28 days	10,089,421	-	10,089,421	34,129,892	12,926,268	47,056,160	(36,966,739)
29-3 months	43,069,022	43,168,616	86,237,638	128,802,454	15,102,693	143,905,147	(57,667,509)
3-6 months	37,436,803	19,475,685	56,912,488	98,147,190	24,550,604	122,697,794	(65,785,306)
6-12 months	51,190,708	31,694,415	82,885,123	192,640,064	10,020,585	202,660,649	(119,775,526)
1-3 years	193,093,925	56,155,228	249,249,153	35,536,058	14,750,088	50,286,146	198,963,007
3 -5 years	61,576,756	85,004,308	146,581,064	89,478,067	2,463,321	91,941,388	54,639,676
>5	58,393,688	193,893,769	252,287,457	4,465,937	64,389,407	68,855,344	183,432,113
	469,995,663	429,760,421	899,756,084	669,555,852	209,221,472	878,777,324	20,978,760

Source: Annual Report Yes Bank 2013

Comparing the tenure of Assets and Liability

The table below compares the tenure of assets and liabilities of Yes bank. The mismatch between the Assets and Liabilities tenure is there for all to see. Hence interest income which depends on assets will be repriced after the interest expenses which depends on the liabilities. Thus, banks such as Yes Bank might see negative Net Interest from income if banks continue to increase interest rate. In other words, these banks will earn losses from NII. Interest Income is approximately 87% of the total income for Yes Bank. This  shows the dependence of the bank on  Interest Income. Hence, if net interest becomes negative the bank is in deep problem.   

ALM Bucket	Assets in the category to total assets	Liability in the category to toal liabilities
1 day	0.25%	1%
2-7 days	0.74%	12.2%
8-14 days	0.74%	4.3%
15-28 days	1.12%	5.4%
29-3 months	9.58%	16.4%
3-6 months	6.33%	14.0%
6-12 months	9.21%	23.1%
1-3 years	27.70%	5.7%
3 -5 years	16.29%	10.5%
>5	28.04%	7.8%
	100.00%	100.0%

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +