2014 Risk & Investment Management-print

8/12/2019 2014 Risk & Investment Management-print

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EDS - MARCH 2014

Risk &Investment


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get a detailed overview of the various risks inthe management of a corporation

understand the role of environmental and

strategic factors that could impact the business

or organizational profile

work through hands on workshops to complete

scoring models for credit risk, sensitize cash

flow projections and use other tools of risk

management

discuss and consider what further informationand verification is required to strengthen the

analysis


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Understanding Your business

Please state :

1. Your Name and Position in your organization

2. What are the key identified risks3. What Enterprise Risk Management or other tools you

already use

4. Your expectations


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PROGRAM TOPICS

THE INVESTMENT SIDE

Cash Flow projections

Sensitivity Analysis

Defining Risk & Risk Attitudes

Types of Risk impacting Corporations e.g. Financing risk Credit risk Interest rate risk Global risk

Modelling the environmental risk impacting our financial institution:

Where weve been recently The Global Recession

Using the Inverted Triangle Analysis to score market risk factors on

our loan portfolio and other financing products.


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A broad approach to risk management in Financial Services (overview session)

COSO Framework

ATEM Rule

Basel II

Capital Adequacy

CAMELS

MEASURING RISK

Portfolio Risk for Investment Banking

5Cs Credit RiskIndividuals 5Cs Credit RiskBusiness borrowers

ON GOING MEASURES OF RISK IN BUSINESS INVESTMENT

Sensitizing key business factors

Leverage Analysis

RECOGNIZING RED FLAGS


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RISK

&

INVESTMENT


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Investment is Risky

Investment requires sacrifice of current consumption for

potential future gain.

SACRIFICE is current

RETURNS are:

In the FUTURE

Therefore UNCERTAIN (Risky)


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About RISK in Investment

The fact that people are full of greed, fear, or

folly is predictable. The sequence is not

predictable.

Warren Buffett The major difference between a thing that

might go wrong and a thing that cannot possibly

go wrong is that when a thing that cannot

possibly go wrong goes wrong it usually turns

out to be impossible to get at or repair

Douglas Adams


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Current scenarios

Changing course on the

economy would plunge the UK "back into theabyss", David Cameron has said.

Mr Cameron said: "There are some people whothink we don't have to take all these tough decisionsto deal with our debts. They say that our focus ondeficit reduction is damaging growth, and what we

need to do is to spend more and borrow more. "It's as if they think there's some magic money tree.

Well, let me tell you a plain truth: there isn't."


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It is subject to


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TIME VALUE OF MONEY

1. Currency Fluctuations

2. Investment Opportunities

3. Increasing uncertainty with longer time and

planning horizons

4. Liquidity Preference

5. Time cost of money = INTEREST RATES

Everything that can be counted does not necessarily count;

everything that counts cannot necessarily be counted.

Albert Einstein


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TIME VALUE OF MONEY

measured using Discount

Rates COMPUNDING = Value of a cash flow at a specific point of

time in the future

DISCOUNTING = Value today, of a cash flow arising in the

future


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TEMPLATE FOR INVESTMENT

APPRAISALINVESTMENT APPRAISAL PROCESS

IDENTIFICATION OF INVESTMENT NEED OR

OPPORTUNITY

ENVIRONMENTAL ANALYSIS ( SWOT & PESTEL )

ASSESSMENT OF STRATEGIC FIT ( BCG MATRIX )

PREPARATION OF PROJECTED CASH FLOWS

ANALYSIS OF PROJECTED CASH FLOWS

FINANCING CONSIDERATIONS

RISK CONSIDERATIONS

DECISION MAKING


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Seven Principles of Behavioral Economics

that apply to RISK MANAGEMENT

1. Other peoples behavior matters

People do many things by observing others and copying; people are

encouraged to continue to do things when they feel other people

approve of their behavior.

2. Habits are important

People do many things without consciously thinking about them.

These habits are hard to change even though people might want to

change their behaviour, it is not easy for them.


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3. People are motivated to do the right thing

There are cases where money is de-motivating as it undermines peoples

intrinsic motivation, for example, you would quickly stop inviting friends to

dinner if they insisted on paying you.

4. Peoples self-expectations influence how they behave

They want their actions to be in line with their values and their

commitments.


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5. People are more afraid of incurring losses than making profits

They hang on to what they consider theirs.

6. People are bad at computation

when making decisions: they put undue weight on recent events and too

little on far-off ones; they cannot calculate probabilities well and worry too

much about unlikely events; and they are strongly influenced by how the

problem/information is presented to them.


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that apply to CREDIT RISK MANAGEMENT

7. People need to feel involved and effective to make a change

Just giving people the incentives and information is not necessarily enough.


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Summary

Economics is not wrong science and is also a study of human

behavior but certain assumptions are generalized and not seemempirical or practical which may bring ambiguity at times. Behavioral

Economics teaches us:

To avoid making serious mistakes down the road. Clarify what is rational and irrational decision making.

Lead to a better understanding of opportunity costs, time

discounting, and other economic concepts.

Provide a richer, more realistic understanding of decision making inpractice.


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WORKSHOP

How would you define risk for the business of a selected

business ?

Is Risk all bad news ?

Can Risk be Managed ?


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RISK QUADRANT FOR

CONSTRUCTION SECTOR

8/1/2014

DrHarwindarSing

h


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RISK

MODELS


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TOOLBOX OF CUSTOMER

CREDIT RISK ASSESSMENT CREDIT PROFILING

FINANCIAL ANALYSIS

LEVERAGE ANLYSIS

SENSITIVITY ANALYSIS

COLLATERAL ANALYSIS

FORWARD ANALYSIS


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CREDIT PROFILING

Use of Harvey Gill 5 Cs Risk Rating

Business borrower

Business controlled by individual / individual borrower

Identify category of borrower

(A to D) Other scoring models


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BEVERAGE COMPANIES


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FINANCIAL ANALYSIS to

evaluate

REPAYMENT CAPACITY RISK Cash Ratio

Working Capital Ratio

Interest Cover Income Generation

Operating Profitability

Net Profitability

RISK ANALYSIS IS BASED ON :

Significant Changes in trends

Value of key ratios within acceptable limits


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LEVERAGE ANALYSIS

SENSITIVITY ANALYSISFor discussion on Day 2

Data Required:

Analysis of business costs as fixed and variable

Business VOLUME Contribution Rate

Tax Implications

ANALYSIS :

Sensitivity of bottom line to business volume

Breakeven or tolerance level


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COLLATERAL ANALYSIS

Valuation bases for:

Landed Property

Financial Assets

Cash Assets

must be clearly established so that margin of financing can bedetermined without hurting the risk profile of the overall loan

portfolio


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INVESTMENTISSUES


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INVESTMENT TYPES

APPLICATION & RELATED TENURE

FIXED ASSETS

WORKING CAPITAL

MONETARY ASSETS

AMOUNT / SIZE / MIX

EXPECTED RETURNS

ACCEPTABLE RISK

OTHER FACTORS


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INVESTMENT ANALYSIS

MARKET INVESTMENT

FUNDAMENTAL ANALYSIS

TECHNICAL ANALYSIS

HOLDING PERIOD RETURN (HPR / TWRR)

CORPORATE INVESTMENT RETURN ON INVESTMENT (ROI)

NET PRESENT VALUE (NPV)

INTERNAL RATE OF RETURN (IRR)

PAYBACK PERIOD


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A BROAD

APPROACH TORISK

ASSESSMENT


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ProcessLevel

Activity

Level

Entity Level

Risk

Monitoring

Identification

Measurement

Prioritization

Risk

Assessment

Source: Business Risk Assessment. 1998The Institute of Internal Auditors

RISK STRATEGIES


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ENTERPRISE RISK MANAGEMENT

Risk is defined as Uncertainty that can be estimated, tracked

and managed to some extent. (Dr. Harvey Gill)

There are FOUR approaches to uncertainty :

A - AVOID IT

T - TRANSFER IT

E - ELIMINATE IT

M - MANAGE IT : This is the scope of

CRM


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PROJECT RISK PROCESS


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THE COSO FRAMEWORK


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Establish ERM

Determine a risk philosophy

Survey risk culture

Consider organizational integrity

and ethical values

Decide roles and responsibilities


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WORKSHOP SESSION

Developing Investment Strategies Based on Risk Factors Eg.

1 POLITICAL

2 ECONOMIC

3 SOCIAL4 TECHNOLOGY factors

ESTABLISH THE SPECIFICEVENTS & DRIVERS

STATE PROBABILITYOF OCCURRENCE ON A SCALE OF 1 -10

WHERE 10 IS CERTAIN TO HAPPEN

PROVIDE SCORE FOR IMPACTFROM -10 TO +10

KEY IN THE DATA IN THE HARVEY GILL TEMPLATE

TIME TARGET : 30 MIN.


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Financial Models for monitoring

and managing risk


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CAPTURING TRENDS

REVENUE

OPERATING PROFIT

NET INCOME

NEW ASSET INVESTMENT

TOTAL BORROWING

CASH & CASH EQUIVALENTS

ANALYSIS OF THE STD


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ANALYSIS OF THE STD

DEVIATION UPTREND ANALYSIS

DOWN TREND ANALYSIS

FLUCTUATING MARKET CONDITIONS

IMPORTANT !!!

DEVELOP ACTION PLANS FROM ANALYSIS


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MOODYS DEBT RATING SYSTEM

FOR OVERALL RISK ASSESSMENT


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LATEST ON DEFAULT RATES


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LATEST ON DEFAULT RATES


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Rating Debt S&P Moodys & Z Score

US Equivalent Rating Average Z Score Sample SizeAAA 8.15 8

AA+ 7.6 -

AA 7.3 18

AA- 7 15

A+ 6.85 24

A 6.65 42

A- 6.4 38BBB+ 6.25 38

BBB 5.85 59

BBB- 5.65 52

BB+ 5.25 34

BB 4.95 25

BB- 4.75 65

B+ 4.5 78B 4.15 115

B- 3.75 95

CCC+ 3.2 23

CCC 2.5 10

CCC- 1.75 6

D 0 14


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LEVERAGE ANALYSIS

DOL = EBIT + FOH / EBIT

DFL = EBIT / (EBITFFC)

DTL = DOL * DFL


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T H A N K Y O U ! ! !

WE HOPE THIS PROGRAM HAS

ADDED VALUE TO YOU LIFE !

[email protected]

Documents

2014 Risk & Investment Management-print