Optimal Bank Net Interest Margin By Government Bonds: A Modern Portfolio Approach

Abstract

The business model of bank is based on borrowing and lending on the balance sheet. The bank makes a profit by way of borrowing at a lower rate and lending at a higher rate. A crucial task in each bank’s operation is to maximize its net interest margin with the assumption is that minimizing risk as much as possible. A bank has to take financial regulation such as Net Stable Funding Ratio (NSFR) into account in order to optimize the net interest margin. The purpose of this research is to examine how the Black-Litterman model can be used for optimizing Vietcombank’s net interest margin. Historical data of Vietnam government bonds is used to modified this model. There are two approaches that applying in the returns. The first approach is that the bonds are held to maturity. Another approach is that the bonds are held for trading. After showing the final results, it can be seen definitely that the assumption of the first approach is violated compared to the fundamental assumption on the Black-Litterman model. Because of the bonds are held to maturity are not a normal distribution. As a result, the study concludes that the bank’s balance sheet is a portfolio of bonds where only the bonds are held for trading can optimize the bank’s net interest margin with the Black-Litterman model. In addition, Net Stable Funding Ratio (NSFR) is incorporate into the model as a constraint in order to ensure the requirements of the NSFR are met.