Bank Capital Adequacy Model

The model's foundation is a set of assumptions covering balance sheet composition, interest rates, growth rates, asset quality, operating efficiency, and capital targets. For example, loan growth is tied to nominal GDP, while deposit growth typically lags.

• Net interest margin emerges from the spread between asset yields and funding costs, with loan yields often set as a spread over a base rate. Non-interest income is driven by account fees and transaction volumes, and operating expenses are managed to an efficiency ratio target.
• These drivers interact to shape profitability and capital generation, allowing users to assess sensitivity to changes in the operating environment.

The model follows a logical sequence, beginning with the balance sheet build from opening balances and growth assumptions. Interest income and expense are calculated on average balances, producing net interest income.

• Non-interest income and operating expenses are then combined to yield pre-provision operating profit. Provisions for credit losses are derived from the loan book and asset quality assumptions.
• The income statement integrates these elements to produce net income, which feeds into the capital adequacy calculations. Risk-weighted assets are computed by applying regulatory risk weights to each asset class, and CET1 capital is accumulated from share capital and retained earnings.

Dividend capacity is constrained by the need to maintain the target CET1 ratio, and actual dividends are set as the minimum of dividend capacity and the payout ratio.

The model outputs a full set of financial statements, key ratios, and capital metrics. The balance sheet, income statement, and capital adequacy schedule are interconnected, with validation checks ensuring internal consistency.

• Key outputs include CET1 ratio, risk-weighted assets, efficiency ratio, net interest margin, and return on average equity. Checks verify that the balance sheet balances, the CET1 ratio meets or exceeds the target, and that ratios like NIM and efficiency fall within expected ranges.
• These checks help identify implausible results, such as an excessively high loan-to-deposit ratio or dividends exceeding capacity. The model also includes a dividend discount valuation, providing an implied equity value based on projected dividends and terminal growth.

This template is designed for evaluating a commercial bank's capital adequacy under Basel III, making it useful for investment, acquisition, or capital injection decisions. It helps users understand how loan growth, margin pressure, and credit losses affect regulatory capital ratios and dividend sustainability.

• The model addresses common pitfalls, such as the circularity between average balances and retained earnings, by using opening balances for interest calculations. It also enforces that dividends are limited by capital requirements.
• While the public download is a values-only preview, the underlying model captures the complex interplay between balance sheet management, profitability, and regulatory compliance, providing a robust framework for bank analysis.