Lahore University of Management Sciences

Graduate School of Business Administration

6023 COMMERCIAL BANKING
Quarter V, Autumn 2004-05

Dr. Bashir Ahmad Khan

Associate Professor

COURSE OBJECTIVES
This course focuses on the financial management of commercial banks. It is not a finance course,
but a management one: many concepts in related fields like marketing, accounting, organizational
behavior, human resource management, management information systems and statistics will also
come into play. Commercial banks are major players in both the money and capital markets, and
the sector has seen major changes during the last ten years in terms of new intermediaries, the
globalization of services, and new prudential regulations governing bank operations. This course
examines how decision-making within banks has been affected by such trends, and the tools and
techniques used by bankers to operate in a changing environment. Topics include bank
performance evaluation, cost control, strategic planning, asset-liability management, capital
maintenance, risk assessment and ratings, treasury operations, reserves and liquidity management,
etc.

COURSE CONTENT
1 Introduction to Bank Financial Management
Sessions 1-5
2 Basic Asset, Liability and Capital Decisions
Sessions 6-11
3 Bank Operations
Sessions 12-18
4 Integrative Bank Financial Management Decisions
Sessions 20-25

GRADING
Class Participation & Quizzes 45%
Group Project 25%
Final Examination 30%

RESOURCES
The course textbook is George H. and Donald G. Simonson (H&S) (1999), Bank Management:
Text and Cases, Fifth Edition, John Wiley & Sons. It is supplemented by Peter S. Rose (2002),
Commercial Bank Management, International Edition, New York: McGraw-Hill, and Joseph F.
Sinkey, Jr. (1998), Commercial Bank Financial Management, 5th Edition. I would also
recommend The Banker (UK), Pakistan and Gulf Economist, and the Banking Statistics of the
State Bank of Pakistan, as well as various websites in the Europe and the USA, for additional
information.

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MODULE 1 INTRODUCTION TO BANK FINANCIAL MANAGEMENT
This module introduces bank financial statements and evaluation of bank performance, both
profitability and risk position, in the context of decisions taken by the bank. Session 1, the
Introduction, reviews both the course and the main events in commercial banking both in
Pakistan and globally in recent times. It provides the theme for the remainder of the course.
Session 2, First National Bank of Park Cities, looks at the issue of bank organization in the
context of whether or not a new bank should be opened. Session 3, Lincoln National Bank and
Session 4, Quaker National Bank, focus on the issue of bank profitability and exposure to
different risks. The last, Session 5, Peralta National Bank integrates the material of Module 1 by
introducing performance in the context of asset liability management.

Session 1 Introduction
Read Rose, Chapter 1-2.
Assignment Be prepared to discuss the reading in class

Session 2 First National Bank of Park Cities

Read H&S, Chapter 1; Rose, Chapter 3.
Assignment Do the questions in the case.

Session 3 Lincoln National Bank

Read H&S, Chapter 2; Rose, Chapter 4.
Assignment 1. Analyze and compare Lincoln’s profitability and risk ratios and performance
with its peers. Summarize the key features.
2. Review the purpose and structure of ALCO, and assess the degree of
compliance of performance with ALCO’s parameters.

Session 4 Quaker National Bank

Read H&S, Chapter 3; Rose, Chapter 5.
Assignment 1. Compare the relative earnings performance of Quaker National Bank with its
peers and also evaluate the financial risks that the bank has absorbed.
2. Analyze the interest sensitivity report and comment on Quaker’s interest rate
risk position.
3. Can you assess Quaker’s liquidity needs in the beginning of 1998?
4. Make any specific recommendations in the light of your analysis.

Session 5 Peralta National Bank

Read: Rose, Chapter 6.
Assignment 1. Analyze Peralta’s performance, including the trends over the last three years.
Discuss how you would rate its risk-return profile. What are the unique features of
the banks vis a vis the peer group.
2. Review and critique the positions adopted by the different members of ALCO.
3. Assess the interest rate risk and the measures of this risk. Specifically, examine
the information of the “gap” report.

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MODULE 2 ASSET AND LIABILITY MANAGEMENT (ALM)
This module permits students to understand the fundamentals of ALM. Students are exposed to
the critical principal that banks operate on spreads and spreads are affected by changes on either
or both sides of the balance sheet. The first case (Session 6), Norwest Corporation, introduces
critical tools for ALM, including gaps, simulations, and duration. Session 7, Shawnee National
Bank, addresses the issue of estimating a bank’s reserve position. Sessions 8-9 examine capital
adequacy following the introduction of international uniform standards on capital in the cases
Hillside Bancorp (A) and (B). Session 10, Lobo Mill Products, looks at bank lending, by
focusing on financial analysis for a small company. The “Five C’s” of credit analysis, are used to
evaluate commercial lending in the case Bergner Construction (Session 11).

Session 6 Norwest Corporation

Read H&S, Chapter 5; Rose, Chapter 7.
Assignment Discuss limitations in the reliability of the gap report. How could you sue Exhibit 3
to examine the impact of a one percent across-the-board rise in interest rates. What
are some of the difficulties in earnings simulation modeling?

Session 7 Shawnee National Bank

Read H&S, Chapter 7; Rose, Chapter 12.
Assignment 1. Why is it necessary for the bank’s senior officers to determine first the deposit,
loan and investment objectives before Mr. Bradley can decide the strategy he
should employ in managing the bank’s reserve position.
2. Should Mr. Bradley have sold the $8.0 million net Federal Funds on Friday,
December 18, thus deliberately creating a reserve deficit?

Session 8 Hillside Bancorp (A)

Read H&S, Chapter 9; Rose, 16.
Assignment 1. Determine the implicit amount actually charged off by Marcy State Bank during
1996. Using the same methodology, determine Forbes’ projected charge-offs for
1997 and 1998.
2. Determine the expected risk-based capital ratios and tier 1 leverage ratios for
Marcy State Bank in 1997 and 1998. Discuss the banks regulatory capital position.
How will this impact on the price paid by Hillside for Marcy State?

Session 9 Hillside Bancorp (B)

Read As above.
Assignment Compare actual and projected financial statements. Calculate the apparent actual
writeoffs in 1997. Develop revised pro formas for 1998. How much additional
capital is required? Will Marcy State Bank meet the risk-based capital and leverage
requirements?

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Session 10 Lobo Mill Products
Read H&S, Chapter 10; Rose, Chapter 17.
Assignment What questions would you like to ask the borrower to evaluate the amount of
funds needed? What options are open to the bank? What is likely to happen to the
company if the loan is not made?

Session 11 Bergner Construction Company

Read H&S, Chapter 11; Rose, Chapter 18.
Assignment Evaluate the borrower characteristics that a loan officer must consider while
assessing an application, and review the various factors that affect the bank
officer’s lending decision. Should the loan be granted?

MODULE 3 BANKING OPERATIONS

This module focuses on various aspects of banking operations, ranging from customer
profitability to foreign exchange dealing rooms. In Session 12, the issue of cost of funds and
marginal profitability analysis for banking relationships is examined in Premier National Bank.
Sessions 13 deals with the critical area of Trade Documentation, and Session 14, Global
Machinery & Metals Co, is a case on financing an L/C facility. Session 15, Muslim
Commercial Bank, shows how the bank has successfully integrated technology in its operations.
Session 16, Madison County National Bank, focuses on strategic planning requirements and the
introduction of new products. Sessions 17-18 are devoted to Treasury Operations, with special
reference to foreign exchange operations, investment strategies and internal issues of pricing.

Session 12 Premier National Bank

Read: Rose, Chapter 13.
Assignment: 1. Assess PNB’s attempts to introduce MPA into the evaluation system for
relationships.
2. Try and work out some of the problems posed by Ali Ahmed in his draft for
ALCO. Which is the most suitable methodology to adopt? Why do banks’ face so
many problems in allocating costs?

Session 13 Banking Operations Trade and Letters of Credit

Read 1. The Letter of Credit and the Draft.
2. Uniform Rules for Collections (No. 522).
3. Export Documentation.
Assignment Guest Speaker.

Session 14 Global Machinery and Metals Company

Read H&S, Chapter 16; Rose, Chapter 10, pp.277-294.
Assignment 1. Outline the mechanics of the L/C arrangement, and examine the bank’s exposure
to risk when it accepts time drafts. Assess the additional collateral that can be used
to reduce this risk.
2. Carry out credit analysis to determine whether there should be increases in the
credit line and L/C funding for GMM.
Session 15 Information Technology at Muslim Commercial Bank
Read Rose, Chapter 22; Note on the Impact of Technology on Banking in Pakistan.
Assignment 1. What are key factors in MCB’s introduction of technology compared to other
Pakistani banks?

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 2. What are the issues of concern, from the point of view of risk of the increased
electronic innovations in banking? What is the impact on bank performance of
technology in general?

Session 16 Madison County National Bank

Read 1. Rose, Chapter 14; Bryan, Breaking up the Bank.
Assignment 1. Do you consider Peterson’s expectations (as given in Appendix A) to be
reasonable? What changes would you suggest?
2. How are Peterson’s estimates (Appendix B) affected if alternative (your)
assumptions are used instead. Be prepared to elaborate upon your assumptions in
class.
3. Would you recommend that Madison start a personal financial planning service
to generate additional income?

Session 17/18Treasury Operations: Foreign Exchange Transactions

Read H&S, Chapter 16; Rose, Chapter 11, 24
Assignment Guest Speaker.

MODULE 4 INTEGRATIVE BANK FINANCIAL MANAGEMENT DECISIONS

This module focuses on inter-related aspects of the management and decision-making of
commercial banks. Tate City Bank (Session 20) looks at a competitive market research study
trying to evaluate bank performance. Session 21, Askari Commercial Bank, deals with liability
management in the changing economic conditions affecting the Pakistani banking sector. Session
22, United Bank Limited looks at the issue of bank. Session 23 looks at acquisitions in United
Bancshares, and the next session, BCCI (Session 24), looks at issues of international regulation
of a private bank. The final case, Grantland National Bank (Session 25) is an integrative case,
bringing together all the issues discussed in previous modules.

Session 19 Free Session

Please work on the group projects.

Session 20 Tate City Bank

Read Rose, Chapter 14.
Assignment 1. What strengths and weaknesses do you see at Tate as a result of this marketing
survey? How would you rank Tate City Bank among the sample of banks in the
survey?
2. How can a bank (in general) significantly differentiate itself from its competitors
to gain an advantage in the customers’ minds? What are the implications for bank
profitability implied in the survey?

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Session 21 Askari Commercial Bank
Read 1. Khan, Note on Commercial Banking in Pakistan.
2. Meenai, Chapter 9, 11.
Assignment 1. What is the implication of the AWT deposits for Askari’s liability management?
How well has Askari coped with the pressure on spreads?
2. What is the future direction for banks like Askari?

Session 22 United Bank Limited

Read 1. Klein, Commercial Banking in Pakistan.
Assignment What are the lessons for regulators, policy-makers, and bankers to be derived from
the experience of UBL?

Session 23 United Bank Limited: Privatization

Read Rose, Chapter 23; Sinkey, Chapter 19.
Assignment 1. Do a SWOT of the proposed sale? What is your view of the value placed on the
target bank?

Session 24 Bank of Credit & Commerce International

Read Sinkey, Chapter 17.
Assignment 1. What are the problems associated with running an international private bank?
2. Identify the key strengths and weaknesses of BCCI? Is it possible to extend the
notion of “banking relationships” too far?

Session 25 Grantland National Bank

Read None
Assignment 1. Consider the two-year period, 1988-89, and explain how GNB achieved its
superior earnings performance. Compare GNB’s risk exposure with that of the
average peer group bank, and evaluate the different risks. What are the strengths
and weaknesses of the bank?
2. Evaluate the risk exposure of GNB at the end of 1990 and again examine the
critical strengths and weaknesses.

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Session Topic Case/Note Reading
1 Introduction Rose, Chapter 1, 2.
2 Bank Organization First National Bank of Park Cities H&S, Chapter 1.
3 Bank Performance Lincoln National Bank H&S, Chapter 2.
4 Risk-Return Profiles Quaker National Bank H&S, Chapter 3.
5 ALM Peralta National Bank Rose, Chapter 6.
6 Gap Reports Norwest Corporation H&S, Chapter 5.
7 Reserves & Liquidity Shawnee National Bank H&S, Chapter 7.
8 Capital Adequacy Hillside Bancorp (A) H&S, Chapter 9.
9 Capital Adequacy Hillside Bancorp (B)
10 Lending Principles Lobo Mill Products H&S, Chapter 10.
11 Commercial Lending Bergner Construction Co H&S, Chapter 11.
12 Customer Profitability Premier National Bank (Pakistan) Rose, Chapter 13.
13 Trade Operations Trade and Letters of Credit (Pakistan) 1. The Letter of Credit and the Draft.
2. Uniform Rules for Collections (No. 522).
3. Export Documentation.
14 Trade Financing Global Machinery & Metals Company H&S, Chapter 16.
15 IT in Bank Operations Muslim Commercial Bank-Information Technology 1. Rose, Chapter 22.
(Pakistan) 2. Other Readings to be distributed in class.
16 Product Development Madison County National Bank 1. Rose, Chapter 14.
2. Bryan, Breaking up the Bank.
17/18 Treasury Operations Role of Treasury; FX Transactions. H&S, Chapter 16.
19 Free Session: Project Work
20 Marketing Analysis Tate City Bank Rose, Chapter 14.
21 Planning Askari Commercial Bank (Pakistan) Khan, Note on Commercial Banking in Pakistan
22 Bank Reorganization United Bank Limited (Pakistan) Klein, Commercial Banking in Pakistan
23 Mergers and United Bancshares 1. Rose, Chapter 23.
Acquisitions
24 Regulation BCCI (Pakistan) Rose, Chapter 17.
25 Overview Grantland National Bank

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