ALM Presentation 02-12-2013

ALM management

Sarajevo 02.12.2013.

ALM management 2

Content:

Highlights of Sparkasse bank ABS bank before and Sparkasse bank today

Asset and liability management

1. Organization of Treasury division

2. Responsibilities and key roles of ALM within the bank

4. ALCO committee

ALM management on daily basis

1. Liquidity risk

2. Currency risk

3. Interest rate risk

Global financial market crisis

Global financial crisis Sparkasse bank measures

3Highlights of Sparkasse bank ABS bank before and Sparkasse bank today

ALM management

Significant loans and deposits growth, even in the period of financial crisis


ALM management

Equally importance of retail sector and legal entities within the bank but main focus should be retail sector

in the near future


ALM management

Totally 373 mil. KM of granted loans to individuals and legal entities


ALM management

Share of NPLs in total portfolio stood at 7,18%, comparing with banking sector average almost 14%


ALM management

Increase of clients deposits for 81% comparing with 2009 and target segment is retail due to diversification

of funds and maturity requirements structure


ALM management

From the one side increase of profitability, but from the other side decrease of cost/income ratio

9Asset and liability management - Organization of Treasury divison

ALM management

Treasury division

ALM department

Investment banking

department

Trading department

Central vault department

Most banks have a similar organization within the Treasury division

In some banks, the organizational structure may vary due to the size of banks and development operations

within these departments

In some countries regulator is prescribed that ALM must be directly under control of Management board of

the banks

10

Asset and liability management - Responsibilities and key roles of ALM

ALM management

The traditional ALM programs focus on interest rate risk, foreign exchange risk and liquidity risk

because they represent the most prominent risks affecting the organization balance-sheet (as they require

coordination between assets and liabilities)

The scope of the ALM function to a larger extent covers the hereafter processes:

1. Liquidity risk: the current and prospective risk arising when the bank has the inability to

meet its obligation as they come due without adversely affecting the bank's financial conditions. In ALM

perspective, the focus is on the funding liquidity risk of the bank meaning its ability to meet its current

and future cash-flow obligations and collateral needs, both expected and unexpected.

2. Interest rate risk: The risk of losses resulting from movements in interest rates and their

impact on future cash-flows. Generally because a bank may have a disproportionate amount of fixed or

variable rates instruments on either side of the balance-sheet. One of the primary causes are mismatches

in terms of a bank deposits and loans.

3. Currency risk management: The risk of losses resulting from movements in exchanges

rates. To the extent that cash-flows assets and liabilities are denominated in different currencies.

4. Funding and capital management: It is a dynamic and ongoing process considering both

short-and longer term capital needs and is coordinated with a bank's overall strategy and planning cycles

(usually a prospective time-horizon of 2 years)

5. Profit planning and growth

6. ALM is dealing with aspects related to credit risk as this function is also to manage the

impact of the entire credit portfolio (including cash, investments and loans) on the balance sheet.

11

Asset and liability management ALCO committee

ALM management

ALCO should be established by the Board of Directors to assist the Board of Directors by assessing the

adequacy and monitoring the implementation of ALM Policy

The ALCO will consist of at least four (4) members minimum two board of direktors. The members of

the ALCO will be appointed annually by the Board of Directors. The Board of Directors will designate a

chair of the Committee - CEO or CRO of the bank

The ALCO will meet at the call of the Chair, and the Committee shall convene at least one meeting each

month/quarter and more frequently as needed. The actions of the Committee require a quorum. A

presence of a majority of the Committee members shall constitute a quorum.

The ALCO should oversee the implementation of an effective process for managing the Banks interest

rate, liquidity, and similar market risks relating to the Banks balance sheet and associated

activities, including the adoption from time to time of policies, risk limits and capital levels

In fulfilling its responsibilities, the Committee should ensure the development of an appropriate ALM

Policy for the Bank. The ALM Policy should, among other things, set fort the Banks asset and liability

management general policy relating to liquidity, interest rate risk management, capital management,

investments, hedging and the use of derivatives (investgment strategy)

In fulfilling its responsibilities, the ALCO should review and approve, at least annually, the bank's

policies and procedures relates to ALM which shall be prepared and implemented by the management

12

Asset and liability management on daily basis

ALM management

ALM department is responsible for management of all asset and liability positions (important from ALM

perspective to the Bank - cash funds and loans/deposits and funds from financial institutions)

Structure of balance sheet according to FBA (Federal Banking Agency) is as follows:

N O V A N A S A P L AS M AN IM A D R U G IM B AN K AM A 15 0,1 66

N o v an a sr ed stva i ra u n i d e p o z ita k o d d e p o z i tn ih i n st i tu cij a 13 0,7 09

G o tov no va c i n e ka m a ton os n i ra un i de po z ita 3 7 ,2 0 5

C en tr a lna ba nk a 4 9 ,1 8 9

S tan je s re d sta v a na ino ra un u 4 4 ,3 1 5

P la sm a n i d ru g im b an ka m a 1 9 ,4 5 7

O b v ez n ic e 2 0 ,8 0 6

K re d it i i d o s p jela p o t ra iv aja 76 0,7 53

K re di ti 71 3,1 01

D os p je la po tr a iv a nja 4 7 ,6 5 2

P o slo v n i p ro s t o r i o st ala f iks n a ak tiva 3 8 ,0 2 9

In ves t ic i ja u n e ko n so lid o va n a p re d u z e a 8 44

O st a la ak tiva 8 ,81 8

R e z erv e 6 7 ,1 5 4

R ez er v e na s ta v k e po z ic ije 4 . A k t iv a 6 2 ,4 5 5

R ez er v e na po z ic iji a k t ive os im p o zic ije 4. 4 ,69 9

U K U P NA AK T IV A 91 2,2 62

A K T IV AD e p o z iti 78 7,0 08

A V IS T A 16 7,5 16

O RO E NI 35 8,3 89

D E P O Z IT I F IN A NS IJ S K IH INS T IT UC IJ A 26 1,1 03

O b a ve z e p o u ze tim k re d itim a 2 83

s a p re os ta li m ro k om d os p ije a do jed ne go d ine

s a p re os ta li m ro k om d os p ije a pr ek o jed ne go di ne 2 83

O s ta le ob av ez e 1 7 ,4 7 7

U K U P NE O BA V E Z E 80 4,7 68

O bi n e d ion ic e 8 6 ,4 7 3

E m is io n a a i ja 3 ,00 0

na tr a jne pr ior ite tn e d i on ic e

na ob i ne d io n i ce 3 ,00 0

N e ra s po dije lje na do bit i re z er ve k ap ita la 8 ,08 3

O s ta li k ap ita l 9 ,14 9

R e ze rv e za kr ed itne gu b itk e fo rm ira n e iz d o bit i 7 89

U K U P AN KA P IT A L 10 7,4 94

U K U P NE O BA V E Z E I KA P IT A L 91 2,2 62

P A S IV A

13

Asset and liability management on daily basis reserve requirement

ALM management

Liquidity risk is the main risk with which ALM is facing on daily basis. All momenents in structure of

balance sheet are affecting liquidity risk in positive or negative way

On daily basis ALM is responsibile for:

- Mandatory reserve/Reserve requirement ???

The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not

all, of the world's central banks, that sets the minimum fraction of customer deposits that each

commercial bank must hold as reserves (rather than lend out). These required reserves are normally in

the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank

D e po s it ba s e

S h or t te r m d e p os it s* 1 8 9,7 8 8

L o ng te rm d e po s it s* * 5 4 5,8 9 7

T O T A L 7 3 5,6 8 5

C B B H ra te - s h or t te r m 1 0%

C B B H ra te - l on g te rm 7 %

R e se r ve re q u ir em e n t

S h or t te r m 1 8 ,9 7 9

L o ng te rm 3 8 ,2 1 3

T O T A L 5 7 ,1 9 2

According to CBBH regulation every bank must

maintain minimum reserve requirement as 10 day

average in prescribed level of required reserve

Banks are obliged to send to CBBH report with deposit

base in local and foreign currencies two working days

after every 10 days

Based on these values CBBH is calcualting new reserve

requirement for every bank

CBBH is paying interest rate on reserve requirement as

well as on funds above

14

Asset and liability management on daily basis maturity adjustment

ALM management

Maturity GAP:

The objective is to measure the direction and extent of asset-liability mismatch through the funding or

maturity gap. This aspect of ALM stresses the importance of balancing maturities as well as cash-flows

or interest rates for a particular set time horizon

Maturity adjustments of assets and liabilities, where the bank has to:

a) include at least 85% of funds sources with the maturity date up to 30 days in placements with the

maturity date up to 30 days;

b) include at least 80% of funds sources with the maturity date up to 90 days in placements with the

maturity date up to 90 days;

c) include at least 75% of funds sources with the maturity up to 180 days in full amount in placements

with the maturity date up to 180 days

It is not possible to have a full hedge of all time buckets but every bank should strive to achieve maturity

adjustment in time beckets less than 5 years (attachment)

ALM department is responsible for daily management and monitoring of maturity structure of asset and

liability and should react in form of strategy or one off measures if position is not or will be in breach

Measures could be: increase of deposits, granting of loans (decrease of cash funds) etc.

Accounting department must deliver report to FBA not more than 5 working days after end of previous

month

15

Asset and liability management on daily basis daily liquidity limits

ALM management

LEvery bank should develop internal liquidity ratios which should be approved by Management or

Supervisory board. Ratios should reflect the following:

1. Risk appetite of the bank

2. Market position of the bank

3. Liability structure of the bank

The most common ratios used in managing the liquidity position of the bank on a daily basis are:

1. Liquid asset/total asset

This ratio is important to steer and manage the balance-sheet of the bank, because only greater position

of liquid assets in the total assets of the bank can influence the structure of bank's balance sheet. The

main disadvantage of this ratio is the impact on the profit/loss account in case of higher amount of liquid

assets in total assets of the bank.

2. Liquid asset/total liabilities capital

This ratio gives the information about the possibility to operate the external financing (including banks).

3. Liquid assets / Clients sight deposits

This ratio gives information about the possibility and dependence of financing based on short-term client

sight deposits (without banks).

4. Ratio Total loans / Total clients deposits (without banks)

This ratio gives information about the amount of a bank's loans divided by the amount of its deposits at

any given time. The higher the ratio, the more the bank is relying on borrowed funds, which are generally

more costly than most types of deposits. If the ratio is too high, it means that banks might not have

enough liquidity to cover any unforeseen fund requirements, if the ratio is too low, banks may not be

earning as much as they could be - attachment

16

Asset and liability management on daily basis excess liquidity

ALM management

ALM is responsible for management of cash funds within the bank as well as for loans, deposits, capital

etc.

All these positions, any movements of them, can seriously and quickly effect the banks overoll position

What does it mean in practice

- if corporate or retail sector collect more deposits than the bank is really need (in accordance with

guidance of ALM) this could crate an excess liquidity on cash funds and the bank can have negative

effect on profit and loss (in situation when there is no enough demand for loans on market)

- interest rate on EUR deposit for maturity of 2 years 3%

- interest rate on funds term with foreign banks in EUR currency, O/N rate 0.1%

- negative effect in this case is 2.9% p.a.

The main role of ALM is managing of liquidity on a daily basis with clear and precise guidelines for

sales staff

17

Asset and liability management on daily basis liquidity planning

ALM management

Liquidity planning is one of the daily activity in ALM department. The main focus should be>

identify all potential outflows and inflows in balance and off balance sheet include all of them in daily report block some high volume transactions (loans or deposits) if these transactions will jeopardize theoverall position of the bank

corporate sector is obliged to announce all high volume outflows and inflows to ALM minimum2 days before

The main goal is to have complete control over the all positions of assets, liabilities and off-balance sheet

and reduce possible unannounced outflows in the balance and off balance sheet to a minimum

In this way, ALM may, in a period of monitoring and reporting, identify key risks and try to mitigate

them with appropriate measures

18

Asset and liability management on daily basis liquidity committee

ALM management

On weekly basis ALM is responsible for preparing materials for OLC (Operating Liquidity Committee)

and present them to other board members (retail risk and corporate)

Each bank with its own liquidity management process should set up a local OLC. The respective

structure shall be similar to the bank profile and shall account for local conditions of every bank.

The OLC shall also be organized for the status ordinary course of business and for times of a crisis.

The main reports which ALM is preparing includes:

1. Structure of liquid funds

1. Reserve required

2. Funds above reserve required

3. EUR funds vs. funds in local currency

4. Amount of loans newly disburse loans

5. Amount of deposits newly term deposits

6. Currency position of the bank

7. Maturity adjustment of asset and liability

8. Liquidity planning for upcoming week

19

Asset and liability management on daily basis currency risk

ALM management

Management of currency risk on daily basis is duty of ALM department but only for EUR currency due

to the fact that for other currencies trading department is responsible for management

One of the reasons for this is currency board arrangement in BiH and fact that ALM is managing only

with EUR position according to FBA regulation not with profit and loss effect

According to the FBA Decision on Minimum Standards for Banks Foreign Exchange Risk Management

the Bank is obliged to perform foreign currency operations only within the restrictions, calculated

according to the banks core capital.

Restrictions in FC activities related to the core capital, according to this article, are:

1. for individual foreign currency over-night position maximum up to 20%;

2. FC position of the bank maximum up to 30%

Internal limits should be more lower than FBA prescribed - attachment

20

Asset and liability management on daily basis interest rate risk

ALM management

By contracting loans and deposits with its clients, the Bank may offer three types of interest rates and for

all of them ALM is responsible to manage:

1. Fixed interest rate,

2. Variable interest rate

3. Administrative interest rate (or so called until further notice interest rate),

- Fixed interest rate - This interest rate is agreed to remain the same for the whole time being of either

loan or deposit. In the loan/deposit contract there is no clause that will allow change of the interest rate.

That is, interest rate could not be changed till the end of contracted loan/deposit.

-Variable interest rate -This type of interest rate is linked to other basic/benchmark interest rate

(EURIBOR, LIBOR etc), in our case Bank relies on EURIBOR. Interest rate is composed of basic

(EURIBOR) and additional banks margin.

-Administrative interest rate or Until Further Notice (UFN) This type of interest rate is contracted

with client and it is expressed in an absolute amount and it is not linked to any other interest rate. The

contract contains that the Bank has a discretionary right to change interest rate as well as the conditions

and manner of informing clients on these changes.

IRR strategy should be defined attachment

21

Global financial crisis

ALM management

What really happened and why there was large shocks on the global markets?

The answer to this question can be found in the events of the past few years...

Main facts:

2001 the U.S. economy has suffered a milder recession caused by the dotcom crisis, but alsoattacks 09/11 and the accounting scandals had the huge impact on recession

Taking into account all these facts the FED, to reduce impact of the recession, executing a policyof low interest rates and lowering them by 6% (05/2000) to 1.75% (12/2001)

Result - Bank came to cheap money that could be granted to legal and individuals

06/2003 FED FUND TARGET RATE = 1% (lowest interest rate in the last 45 years)

And what happened next?

Significant amount of "cheap money" leads to large amounts of loans with a focus on loans for thepurchase of real estate (mortgage loans)

The offer was so great that people without permanent employment, income and collateral may finallyrealize the dream of buying a property with cheap loan

Idea was buy now and pay later

22


ALM management

Due to the extremely high demand for these loans as well as the rise in prices, loans are repackaged in

CDO (collateral debt obligation) and further sold on the market

A Collateralized Debt Obligation, or CDO, is a synthetic investment created by bundling a pool of

similar loans into a single investment that can be bought or sold. An investor that buys a CDO owns a

right to a part of this pool's interest income and principal.

For example, a bank might pool together 5,000 different mortgages into a CDO. An investor who

purchases the CDO would be paid the interest owed by the 5,000 borrowers whose mortgages made up

the CDO, but runs the risk that some borrowers don't pay back their loans. The interest rate is a function

of the expected likelihood that the borrowers whose loans make up the CDO will default on their

payments - determined by the credit rating of the borrowers and the seniority of their loans.

CDOs are created and sold by most major investment banks, due to the reduction of capital

requirements for the issuance and distribution of subprime loans from SEC:

1. Goldman Sachs

2. Merill Lynch

3. Lehman Brothers

4. Bear Stearns

5. Morgan Stanley

CDOs played a prominent role in the U.S. subprime crisis, where critics say CDOs hid the underlying

risk in mortgage investments because the ratings on CDO debt were based on misleading or incorrect

information about the creditworthiness of the borrowers.

23


ALM management

Using leverage the initial investment has been increased by 30-40 times

Cheap money on the market, a large amount of subprime loans and ultimately, lower regulatory

requirements for the largest investment banks have led to an increase in the volume of CDO

Peak 2006/ volume

520bln. USD

24


ALM management

To summarize >>>

Mortgage loans packaged into CDOs and further

sold on the market:

The initial investment increased by 30-40 times

30/06/2004 interest rates begin to rise from 1% to 1.25%

The peak was 29.06.2006 (5.25%). It was the beginning

of the end

In meanwhile Q4/2005 property prices under

pressure of high supply, begin to fall

Clients with subprime loans were no longer able to pay

installments with higher interest rates

During 2007, every month one financial

institution is bankrupt

RE

ZU

LT

AT

The volume of securities with CDOs as underlying instruments was USD 1.5 trillion globally

Consequences of CDOs suffering all of us even today and nobody can predict how long this is going to

take

25


ALM management

During the crisis, even today, Sparkasse bank is striving to achieve the best possible structure of asset

and liability, avoid potential risks, increase profitability and shareholders value

During 2009 ALM department proposed and Management board adopted several measures, on asset and

liability side, to achieve above mentioned targets:

1. Prompt reaction on deposits outflows during 2009:

a. Sparkasse bank introduced new product on local market deposits covered by Parent bank

guarantee in full amount regardless of the tenor (maturity), currency and segment (retail, SME,

corporate)

b. The aim was to build trust in Sparkasse bank asa new brand on local market and encourage

clients to term new deposits

2. Full control of all, newly, term deposits within the bank

a. ALM is supposed to give its approval to any corporate term deposits within the bank ( in

accordance with defined deposit strategy)

b. The goal was to completely control the interest expense and not allow the creation of excess

liquidity

3. Management of liquid funds with aim of increase profitability:

a. Sparkasse bank decreased liquid funds of the bank and invests them in loans growth without

creating additional cost on liability side due to the fact that the Bank was over liquid

attachment

26


ALM management

4. Creation of new product on asset side:

a. Due to volatility on the market, banks increased interest rates and decreased maturity of

deposits (especially for corporate) and Many banks have put the focus on a vista deposits

b. A higher volume of collected sight deposits required creating products on the assets side which

would enable greater profitability

5. Better planning of all ALM positions

a. Together with corporate and retail sector, ALM is responsible for optimal structure of risk

taking and yields (profitability)

b. Aim is to find the best possible structure of cash funds, loans (short and long) and also deposit

structure (short and long) as well as position funds from financial institutions and capital

6. Defining strategies for all types of risk for which ALM is mainly responsible

a. Liquidity risk strategy

b. Interest rate risk strategy

c. Currency risk strategy

d. Strategy for optimization of liability side

27

Izjava o odricanju odgovornosti

ALM management

Sparkasse banka nema namjeru savjetovati Vas u primjeni miljenja baziranih na ovim informacijama.

Svako miljenje i procjena reflektuje stava autora i ne predstavlja nuno miljenje Sparkasse banke ili

bilo koje od njenih podrunica ili povezanih lica.

Izvjetaj je baziran na javno dostupnim informacijama ili na informacijama koje ne moraju nuno

predstavljati finansijske podatke Sparkasse banke. Dodatne informacije su dostupne na upit

injenice i pogledi u ovoj prezentaciji nisu bili revidirani i mogue je da iste nisu poznate

profesionalcima u drugom podruju djelovanja Sparkasse banke.

Ova prezentacija ne predstavlja strateki savjet. Niti Sparkasse banka ni njene podrunice/povezane

osobe ne prihvataju odgovornost za bilo kakav direktan ili indirektan gubitak koji bi mogao nastati iz

koritenja informacija u ovoj prezentaciji.

ALM Presentation 02-12-2013

Documents

Transcript of ALM Presentation 02-12-2013