Fund

Transfer
Pricing
F T P

KPMG d.o.o. Beograd

Financial Services Team
2016
Would you like to see more and
further than others in terms of
your profitability?

Contents
Introduction to IFRS 9 3
The Journey 4
Why now? 5
Case study 6
Why KPMG? 7
Our approach 9
KPMG gCLAS 10

© 2016 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 2
Contents
Page

Introduction to Fund Transfer Pricing (FTP) [4]

• What is FTP? [4]

• Internal transfer and ALM risks centralization [5]

Main targets of FTP [6]

Potential consequences of not having FTP  [7]

Exemplary scope of work, timeline and modules [9]

Appendices

Why KPMG? [11]

© 2016 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 3
Introduction to Fund Transfer Pricing (FTP)
Banks have realized the need for an effective transfer pricing
system in order to manage funding, the balance sheet structure
(financial or ALM risks), and risk adjusted profitability.

Net Banking Income of Serbian Q3

Taking into account banking sector 2015
decreasing market Net interest income 73%
rates environment Net fee and commission income 19%
and the fact that Net income from fin. transactions 5%
majority of Banks
Other income 3%
NBI comes from Net
Total 100%
interest income, the
FTP system is crucial. Source: National Bank of Serbia.
Note: Annualized data.

What is FTP?
-F
 und Transfer Pricing (FTP) is a well known
practice in finance. It is a part of the overall
management information, accounting and
control system which includes: pricing, bud-
geting and profit planning, ex-post profitabil-
ity measurement (profit ability controlling)
and ALM.

- It is a widely used and comprehensive tool in
overall financial management. Some would
say it’s crucial for effective and efficient not
only financial but banking business manage-
ment.
- FTP system serves as main tool for expost
profitability measurement, i.e. profitabili-
ty follow-up and controling per various axis
(business units, products, branches, relation-
ship managers etc.).

- The FTP system groups together the financial risks generated by commercial transactions with in
a Central Finance Unit (CFU). CFU is generally managed by the ALM/Treasury department, which
has the necessary expertise and resources to assess and hedge the financial risks.

- This centralization of risks is done thanks to a system of internal transfers between the commercial
(business) lines and the CFU. These internal transfers are made via the theoretical “purchase” of
customer deposits from deposit centers and the theoretical “sale” of funds to loan centers. The
pricing terms of such transfers constitute FTPs.

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member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 4
Introduction to Fund Transfer Pricing (FTP)
Internal (theoretical) fund transfer and ALM risk centralization
could be presented as follows
Process of commercial products
internal pricing

Funding Deposits
Commercial Commercial
loans deposits

Notional Notional
funding / Cost investments /
FTP of funds for Replacement FTP
loans yield for
deposits

Commercial margin on loans Commercial margin on deposits

calculated on the basis of FTPs calculated on the basis of FTPs
cost of funds ALM center replacement rates

Figure 1 – Theoretical internal transfers

Management Board

ALCO
ALM
Reference rate
Liquidity portfolio
Liquidity premium
income
Market
Assets

Other
FTP rate
Liquidity mismatch
Risk
Interest rate
mismatch

Funding cost
Reference rate
Liquidity premium
Liabilities

Market

Other
FTP rate
Interest Liquidity FX
rate gap gap gap Risk
€ £
¥ $

Figure 2 – ALM risks cantralization

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member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 5
What are main targets of FTP?
Strategic Integration of FTP Regulatory
goals of FTP into general Bank’s requreiments and
management system best practice

• To define funding cost for • FTP should align risk-taking • Regulations on liquidity:
the assets and to calculate initiatives of BUs with ü Minimum liquidity
NIM for asset items liquidity and interest rate requirements from local
• To define reinvestment risk exposure they create for regulator or from Basel III
yield for the liabilities and the whole Bank in form of NSFR and LCR
to calculate NIM for liability • BUs take risk they can requirement
items control and manage ü Recommendations on
• To stabilize NIM for all • BUs are responsible for Organizing Effective
commercial deals by clients pricing Liquidity Management
transferring (isolating) • Fair assessment of • BCBS requirements
interest rate, liquidity and economic performance of • FSA requirements
FX risk from BUs to CFU every BU, i.e. commercial
• Best practices
• To define pricing benchmark margin then becomes the
for clients’ deals (pricing sole result of negotiations
tool) and thus ex-ante by BU with customers
profitability measurement • Business people shall
• To establish efficient ex-post understand how the
profitability measurement profitability is measured
per various axis and thus and shall be motivated by
to link budgeting and profitability indicators
controlling activities • FTP requires reliable IT
• To impact BUs sales system and support
strategy through concept • FTP requires comprehensive
of incentives (subsidies) via FTP Policy and Methodology
Management FTP
• To signalize a real, existing
market conditions in terms
of market prices of sources
and alternative placements,
and thus influence
commercial lines to “fine
tune”the prices of their
products

FTP changes the overall commercial mindset of the Bank

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member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 6
What are potential consequences of not following/having FTP?
Loosing money on products mispricing. Without FTP top management is not able
Without FTP framework, based on actual to distinguish profitable BUs, segments,
maturity, some BUs are charged less than products, branches, front officers etc.
required rate to cover funding cost from non-profitable ones

BUs are unclear on real

Volatile result of BUs due to margin of their products. Non-
not transferred and not hedged market based FTP overstates
liquidity and IR risk performance of some BUs and
Consequences understates that of others and
Performance of ALM Unit of not having leads to “unfair” and inefficient
cannot be measured and volatile performance-rewards decision
financial results of ALM-unit FTP system
(realized liquidity risks or Overstated profitability of
improper liquidity management) non-funded products creates
allocated back to BUs and distort wrong incentives for BUs to
their performance disproportionally grow portfolio

Total level of liquidity and IR risk cannot be measured and managed.

Bank bears hidden risk of maturity and IR transformation

How we can help

What we offer: We have developed the robust and comprehensive
FTP framework in line with Maturity and Cash-
flow Weighted Rate Approach (MCWR).

Market rate based transfer procong method

Rate
[%] Loan
We offer more than just FTP as is: Price
Asset
ü Comprehensive gap analysis concerning margin
Bank’s current profitability management
approach Treasure
margin for
ü Benchmark analysis vs. best practice levarage
Market curve
ü Recommendations for improvement of management
Bank’s profitability system
ü Journey beyond just FTP –OPEX Liability
allocation and Cost of Risk incorporation margin
into products pricing
ü Completely new profitability approach in
order to reach targeted ROE and EVA Liability
ü PMO in terms of selection and Price Term
implementation of new FTP tool (engine)

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member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 7
Our approach to FTP is flexible and
customized, driven by the specific
needs, culture and strategic goals
of our clients.

© 2016 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 8
Exemplary scope of work F T P

Basic module Optimal module Advanced module

Phase 1: Review of Bank’s Basic module Optimal module

current FTP model and gap
analysis

Review and gap analysis will

be conducted in the following
areas of the FTP model: Phase 4: Development of PMO in order to help Bank
• Objectives and principles of detailed concept of new FTP to select and implement new
FTP system with taking into model FTP tool (engine)
consideration requirements
regarding Bank’s business and Development of detailed PMO by KPMG shall help Bank
funding strategy performance concept of target to select a comprehensive FTP
• Scope of FTP model applica- funds transfer pricing model. tool (IT solution), which shall
tion Developed solutions will be used as FTP engine in order
• Components of FTP rates and encompass such aspects as: to calculate and store FTP rates,
methods for their determination • Objectives and principles of compute margins and produce
• Operational processes in new FTP system various profitability reports.
scope of FTP system • Components of FTP rates
and methods for their Such tailor made FTP tool shall
Phase 2: Benchmark analysis determination meet “state-of-the art” financial
• Methodology of assigning best practice.
FTP rates to particular
• Benchmark analysis of fund products groups The FTP tool is to be developed
transfer pricing models • Scheme of FTP system either as in-house solution or
used by leading financial and division of task and external solution provided by
institutions. competences. vendors the KPMG cooperated
• During the benchmark with.
analysis KPMG will review
best practice solutions for Phase 5: Preparation
selected aspects of FTP of written Policy and
models applied by the leading Procedures for new FTP
financial institutions. model

Phase 3: Recommendations Development of formal

documentation for FTP model
based on the concept prepared
Preparation of conclusions and by KPMG and accepted by
recommendations based on Bank, including the following:
as-is and benchmark analyses. • Policy –describing new
The recommendations shall be FTP model methodology,
divided into two groups: objectives and principles
• Key changes designed to for new FTP model,
ensure security and consisten- organizational units involved
cy of the FTP model in its key in FTP process with division
functioning aspects. of task and competences.
• Potential improvements with • Procedure –description of
aim to add new features methods and rules of tasks
and to adapt the model to execution by particular unites
application for wider range of involved in the process.
products. • Training of staff.

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member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 9
 Indicative timeline

FTP Project
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8

Phase 1:
Review and gap analysis

Phase 2:
Benchmark analysis

Phase 3:
Exemplary scope of work

Recommendations

Phase 4:
Development of detailed concept
of new FTP model

Phase 5:
Preparation of Policy and
Procedure for new FTP model

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© 2016 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent
Advanced PMO: Selection and implementation of new FTP engine (tool)
F
T

Kick-off! End of Basic End of Moderate End of

P

Your comments Module Your comments Module Advanced PMO

10
services
Why KPMG?

KPMG d.o.o. Beograd is the leading consultant of financial institutions in Serbia.

Currently, we perform audit and consulting for more than 2/3 of the banking
market in Serbia.

The practice in Serbia has rich experience in providing advisory services to the
entire spectrum of financial institutions: banks, leasing companies, government
bodies, foreign investors, insurance companies and other financial institutions,
agencies and other companies that operate in Serbia. Our team also covers
Montenegrin financial sector market.

KPMG d.o.o. Beograd currently has about 210 employees, including 9 partners.
Our FS Team, responsible for clients in the financial sector, currently has about
30 employees, including one partner, two senior managers and three managers.

© 2016 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 11
Contact us:
Dušan Tomi , Partner
E: dtomic@kpmg.com
T: +381 11 20 50 521

Sanja Ko ovi , Departmental Senior Manager

E: skocovic@kpmg.com
T: +381 11 20 50 518

Ivan Cirkovi , Manager

E: icirkovic@kpmg.com
T: +381 11 20 50 649

© 2016 KPMG d.o.o. Beograd, a Serbian limited

liability company and a member firm of the KPMG
network of independent member firms affiliated
with KPMG International Cooperative (‘KPMG
International’), a Swiss entity. All rights reserved.
Printed in Serbia.
The KPMG name and logo are registered
trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a
thorough examination of the particular situation.

© 2016 KPMG d.o.o. Beograd, a Serbian limited liability company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved 12