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
3
Highlights of Sparkasse bank ABS bank before and Sparkasse bank today
ALM management
Significant loans and deposits growth, even in the period of financial crisis
4
Highlights of Sparkasse bank ABS bank before and Sparkasse bank today
ALM management
Equally importance of retail sector and legal entities within the bank but main focus should be retail sector
in the near future
5
Highlights of Sparkasse bank ABS bank before and Sparkasse bank today
ALM management
Totally 373 mil. KM of granted loans to individuals and legal entities
6
Highlights of Sparkasse bank ABS bank before and Sparkasse bank today
ALM management
Share of NPLs in total portfolio stood at 7,18%, comparing with banking sector average almost 14%
7
Highlights of Sparkasse bank ABS bank before and Sparkasse bank today
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
8
Highlights of Sparkasse bank ABS bank before and Sparkasse bank today
ALM management
From the one side increase of profitability, but from the other side decrease of cost/income ratio
9
Asset 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 ALMfunction 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. ALMis 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 fromtime 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 VA N A SA PL ASM AN I MA D R U GI M B AN K AM A 15 0, 1 66
N ov ana sr ed st va i ra un i de poz it a k od de poz i tn ih i nst i t ucij a 13 0, 7 09
Go t ov no va c i n e ka ma t on 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
St an je s re d st a v a na ino ra un u 4 4 ,3 1 5
Pl a sma ni dru gi m ban ka ma 1 9 ,4 5 7
O bv ez ni c e 2 0 ,8 0 6
K re di t i i dos pj el a pot ra i v aj a 76 0, 7 53
Kre di ti 71 3, 1 01
D os p jela po tr a iv a nja 4 7 ,6 5 2
Po sl ov ni pros t or i o st al a f i ks na ak ti va 3 8 ,0 2 9
I n ves t ic i ja u ne ko nso l id ova na pre duz e a 8 44
O st a la ak ti va 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 . Ak 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 PNA AK TI VA 91 2, 2 62
A K T I V A
D e poz i ti 78 7, 0 08
A VIS TA 16 7, 5 16
O RO ENI 35 8, 3 89
D EPOZ IT I F IN A NSI J SK IH I NST IT UC I J A 26 1, 1 03
O ba ve z e po u ze ti m k re di ti ma 2 83
s a p re os t ali m ro k om d os p ije a do jed ne go d ine
s a p re os t ali m ro k om d os p ije a pr ek o jed ne go di ne 2 83
O s t ale ob av ez e 1 7 ,4 7 7
U K U PNE O BA VEZE 80 4, 7 68
O bi n e d ion ic e 8 6 ,4 7 3
Em is i ona a i j a 3 , 00 0
na tr a jne pr ior it et n e di on ic e
na ob i ne dio ni ce 3 , 00 0
N e ra s po dije lje na do bit i re z er ve k ap it ala 8 , 08 3
O s t ali k ap it al 9 , 14 9
R e ze rv e za kr ed it ne gu b itk e fo rm ira n e iz d o bit i 7 89
U K U PAN KA PI TA L 10 7, 4 94
U K U PNE O BA VEZE I KA PI TA L 91 2, 2 62
P A S I V 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 ALMis 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
De 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
TOTAL 7 3 5, 6 8 5
CBBH ra te - s h or t te r m 1 0%
CBBH ra te - l on g te rm 7 %
Re se r ve re q u ir eme n t
S h or t te r m 1 8 ,9 7 9
L o ng te rm 3 8 ,2 1 3
TOTAL 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) includeat least 85%of funds sources with thematuritydateupto 30days in placements with the
maturitydateupto30days;
b) includeat least 80%of funds sources with thematuritydateupto 90days in placements with the
maturitydateupto90days;
c) includeat least 75%of fundssourceswiththematurityupto180daysinfull amount inplacements
withthematuritydateupto180days
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 the
overall position of the bank
corporate sector is obliged to announce all high volume outflows and inflows to ALM minimum
2 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 FBAregulation 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 FBAprescribed - 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 themALM 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 also
attacks 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 policy
of 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 the
purchase of real estate (mortgage loans)
The offer was so great that people without permanent employment, income and collateral may finally
realize the dream of buying a property with cheap loan
Idea was buy now and pay later
22
Global financial crisis
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 fromSEC:
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
Global financial crisis
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
Global financial crisis
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
Global financial crisis Sparkasse bank measures
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
Global financial crisis Sparkasse bank measures
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. Ahigher volume of collected sight deposits required creating products on the assets side which
would enable greater profitability
5. Better planning of all ALMpositions
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 ALMis 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.