ALM Maturity Profile

7/22/2019 ALM Maturity Profile

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Asset - Liability Management in Banks

Prepared by-

Sk. Nazibul Islam

Faculty member, BIBM


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ALM: Conceptual Discussion

Today banks are highly complex organizations- offeringmultiple services.

Different groups of individuals inside the bank usually make

the decisions on- What customers are to receive loans

- What securities the bank should add to its investment

portfolio

- What terms should be quoted to the public on deposits

and other services the bank offers- What sources of capital the bank should draw upon


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In a well- managed bank all of these management

decisions must be coordinated across the whole bank.

It must be ensured that they do not clash with each

other, leading to inconsistent actions that damage the

banks earnings and value.

Today bankers have learned to look at their asset and

liability portfolios as an integrated whole, considering how

the banks total portfolio contributes to its broad goals of

adequate profitability and acceptable risk.

This type of coordinated and integrated bank decision

making is known as asset-liability management.


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ALM represents management of the structure of abank balance sheet in such a way that interest

related earnings are maximized with in the overall

risk preferences of a banks manager.

ALM-

Basically balance sheet management

Sources and Uses of Funds management

Cost and Revenue implication


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Objectives of ALM

- Maximize profitability

- Maintain adequate liquidity

- Manage B/S Risk

ALM- Primary Responsibility of Treasury

Department.

Treasury analyzes B/S and places Results &

Recommendations to ALCO (Asset liabilitycommittee)


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ALCO Composition

Chairman: CEO/MD+ Head of treasury

+ Head of Finance

+ Head of Corporate banking

+ Head of Consumer Banking+ Head of Credit

+ Head of Operation

ALCO meets once in every month to set and

review ALM strategies.


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ALCO Paper- Coverage

- Commentary on the last month status

- Interest Rate Trend- Balance Sheet/Trend in A&L

- Key Management Indicators

Wholesale borrowing guidelines

Commitments to customersLoan Deposit Ratio

Medium Term Funding Ratio

Maximum cumulative Outflow

- Maturity Profile Mismatch

- Interest Rate Profile

- Local Regulatory Compliance etc.


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A Bank Manager has three primary concerns:

Liqu id i ty Management:To keep enough cash on hand, to acquire

sufficiently liquid assets to pay the depositors when there are DepositOutflows.

Asset Management: To minimize risks by acquiring assets that have a

low rate of default risk by diversifying asset holdings.

Strategies Involved:

- Search borrowers to pay high interest rates / yet unlikely to default.

- Purchasing securities with high returns and low risk.

RiskReturn Trade off.

- Minimizing Risk by Diversifying both holdings of Loans and Securities.

Not putting all eggs in one basket.

- Managing the Liquidity of its assets so that it can satisfy its reserve

requirements without bearing huge costs.


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Liabi l i ty Management: The main goal of Liability

Management is to acquire Funds at low cost.

Earlier, a bank used to take its liability as fixed and spent

their time trying to achieve an optimal mix of assets. But the

things have changed now-a-days. A bank now can agreeaggressively set target for asset growth and try to acquire

funds as it needs.

The higher interest cost of liabilities today has significantlyaffected banks profitability and their interest rate risk.


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Composition of asset and liability of a bank

Balance Sheet

Asset Liability

Cash & Liquid Reserve

(Non-Earning Asset)

Loans/Advances/Invest-

ment

(Earning Asset)

Deposit Borrowing

(Outside liability)

Capital (Inside liability)


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Different Aspects of Fund Management of a Bank

Aspects Objectives1.Outside Liability Minimization of Cost & Stability offund.

2.Inside liability Regulatory Requirement: 10% of

RWA or Tk. 400 crore

whichever is higher.

3.Non-Earning Asset Regulatory Requirement: 19% of

TDTL, 6% CRR and 13% SLR

4.Earning Asset Maximization of Return and

Minimization of Risk

5.Matching Strategy Matching between Asset &

Liability: Interest Risk Matchingand Maturity Matching

6.Pricing of Earning Asset Based on Liability Cost: Cost of fund,

risk premium

7.Profitability Management Based on above all.


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Maturity Profile Mismatch

A key issue that banks need to focus on is the

maturity of its assets and liabilities in different

tenors.

A typical strategy of a bank to generaterevenue is to run mismatch.

Banks make profits through the process ofasset transformation: They borrow short term

and lend longer term.


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Mismatch is accompanied by liquidity risk andexcessive longer tenor lending against shorter-

term borrowing would put a banks balance sheet

in a very critical and risky position.

To address this risk and to make sure a bank does

not expose itself in excessive mismatch, a bucket

wise maturity profile of the assets and liabilities is

prepared to understand mismatch in every bucket.


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Bucket- wise means

Next day

27 days7 days1 month

13 months

36 months

6 months1 year12 year

23 years

34 years

45 years

Over 5 year


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Banks prepare Forecasted Balance Sheet where the

assets and liabilities of the nature of current, overdraft etc.

are divided into Core and Non-Core balances.

Core Non-Core

Stable and will stay withthe bank

Less stable

Can be put into over 1

year bucket

Can be put in 27 days

or 3 months bucket.


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Documents

ALM Maturity Profile