Question

A bank has total assets of $620 million and $68.2 million in equity. The managers of the bank realize that $18.6 million of its $372 million loan portfolio will not be repaid. After the bank charges off these unexpected bad loans the bank's equity to asset ratio will be _________.

Answer 1

Equity to assets ratio = 11.3%

Step-by-step explanation:

The equity to asset ratio is used to determine what proportion of the total assets is financed and owned by the shareholders.

Included in a bank assets is risk assets. these represent loans and advances contracted to loan customers. And unexpected bad loans are portion of the loans that might be lost by the bank to default risk and non-repayment. Such amount will reduce the value of the assets.

To work out the bank equity to asset ratio, we use the formula:

The equity to assets ratio = Total equity/ Total assets

= (68.2/620-18.6) × 100

= 11.3%

Equity to assets ratio = 11.3%