This workout gets us to look at two loans. The thing is they're not really two loans, it's two sets of assumptions. They're scenarios.

The biggest difference between the scenarios you can see is the tier one capital ratio. You can see everything else about the loans is the same. Scenario one has a certain loan, has some income, has some expenses, then it has tax, and then it has the tier one capital ratio of 8%. And loan two or scenario two has the exact same thing. But the bank has to stump up a lot more equity to get this going. And what this workout will start to look at is the relationship between the equity that needs to go into a loan situation and the return that can be expected from it. The first thing we'll do is we'll apportion the loan and it's tempting to go and fetch the loan like this and press enter, but we are not really handing over 100 million and that's because that will be reduced by the arrangement fee. So you can imagine the bank handing over a hundred million and then being handed back 1 million immediately. And so you can think about the loan as 99 million there. Now that means that 99 million of cash is going to be leaving the bank and that's gonna need to be backed by funding. And that funding is where we apportion the loan asset now into deposits and equity according to the tier one capital ratio. So if the 99 is majority deposits, i.e., the other part of that ape set percent 92%, then you can see that the majority of the deposits will make up that loan asset. And then we can do the same thing and we can say, well, the loan asset will need to be backed by equity. And you can see those two add up back to the 99 nicely. Next we're going to start modeling the interest income. And we'll just do it for scenario one and then we'll drag it over to the right. So the interest income, if we take a look at it, you can say the interest on the loan is 5% and the borrower is gonna be paying that on the full loan. Okay? That wouldn't be on the 99 it beyond a hundred.

The fee monetization is a little more complicated here. The first thing to figure out is what the fee actually is. And we've kind of done it by implication in the loan asset. It's the difference between a 99 and a hundred. You can see that the arrangement fee is 1% of the loan, but that fee will not be hitting the income statement immediately. We'd like to spread it out over the period of time that feels most appropriate. And we're actually given that period of time here, you can see that the amortization basis is five years. And so that 1% i.e.1 million will be spread out Over five years and that's why we end up with a 0.2 there.

Next, the interest expense, and it's important to note who this is for and kind of where it is now. So this is the expense to the bank and what's gonna happen is for the deposit backed part, which we figured out earlier, the 91.1, that will have a cost to the bank and that cost will be the interest that needs to be handed over to the depositors. And you can see that we've got a rate. I just went past it. It was 2% and that's what we'll use Now, we'll say interest expense, it's gonna be 2% of the deposits. Okay? If we wanted to, we could make that negative or we could stick with positive presentation. Let's make it negative, it's a cost to the bank. Now, once we figure that out, we can net that all out and we get our net interest income to run the bank though we'll need to pay our staff. And so we've got another relationship up here. It says whatever income we make, we will immediately lose half of it to the workings of the bank staff bonuses, that kind of thing. And so we will lose half of that and we'll be left with the other half as income before tax. Then we'll need to pay the tax person. And we've got a tax rate of 20% and we've got our net income there and we've got net income of 1.4. The equity capital we've actually already found earlier. So we can just copy that down or link it should I say again? I went straight past it. So here's the equity down here, the 7.9, and then we can find our return on equity by dividing those numbers through each other. And you can see we've got a nice return on equity of 17.1% for scenario one. Now what I'll do is I'll highlight the whole of scenario one and then I'll push it to the right and press control R to copy it and let's take a look.

Okay? If I drop the formulate in again, you'll see that the exact same formulate just pushed on column to the right. Now pretty much everything is the same. Okay? The problem we get is we, we start seeing things look quite different where, especially down here, and that's because we're having to put a lot more equity in at this stage. And the reason behind that is because of the higher tier one capital ratio. So you know, regulation has pushed those up. And one thing that's nice about this workout is it starts to reinforce the idea that traditional syndicated loans have become less competitive. And so we're seeing a lot more participation by non-bank players in the syndication process in project finance.