Portfolio mgmt.ppt

8/8/2019 Portfolio mgmt.ppt

1/20

Portfolio Management -anemerging strategy for

excellence

A Bank’s Perspective


2/20

Executive Summary

Concept of Portfolio Management – anConcept of Portfolio Management – anemerging strategy for excellenceemerging strategy for excellence

Portfolio Management – reporting /Portfolio Management – reporting /

monitoring function ! profit center monitoring function ! profit center

rigination versus o"ners#ip of riskrigination versus o"ners#ip of risk

$ey transfer pricing c#allenges$ey transfer pricing c#allenges

Maximi%ing s#are#ol&er valueMaximi%ing s#are#ol&er value

$ey c#allenges$ey c#allenges


3/20

'ra&itional Mo&el

BuyBuy (ol&(ol&

P#ilosop#y of #ol&ing assets till maturity )orP#ilosop#y of #ol&ing assets till maturity )or

&efault*&efault*

!elations#ips #ave +een perceive& +y t#e!elations#ips #ave +een perceive& +y t#e

extent of paper / risk t#at is #el& +y +anksextent of paper / risk t#at is #el& +y +anks

Performance metrics #ave +een &riven +yPerformance metrics #ave +een &riven +y

revenues , net income versus economic capitalrevenues , net income versus economic capital

an& !Ean& !E

Emp#asis on primary &istri+ution "it# noEmp#asis on primary &istri+ution "it# no

markets / pro&ucts for secon&ary salesmarkets / pro&ucts for secon&ary sales


4/20

Strategic !ationale for C#ange

'#e take an& #ol& proprietary portfolio #as +een a'#e take an& #ol& proprietary portfolio #as +een a&umping groun& for pro&uct groups resulting in&umping groun& for pro&uct groups resulting in

assets t#at #ave +een lo" yiel&ing illi.ui& su+ parassets t#at #ave +een lo" yiel&ing illi.ui& su+ par

an& large users of capitalan& large users of capital

Portfolio &iversity 0ack of a 1Portfolio’ approac#Portfolio &iversity 0ack of a 1Portfolio’ approac#

resulte& in im+alances t#at #ave +een &ifficult toresulte& in im+alances t#at #ave +een &ifficult to

manage ie in cyclical in&ustries "eaker countriesmanage ie in cyclical in&ustries "eaker countries

etcetc

0ack of accounta+ility - t#e +alance s#eet0ack of accounta+ility - t#e +alance s#eet

su+si&i%e& all +usinessessu+si&i%e& all +usinesses

0o" !C for Cre&it Business &riving t#e nee& for0o" !C for Cre&it Business &riving t#e nee& for

creating 23elocity4creating 23elocity4


5/20

Strategic !ationale for C#ange

Emergence of a secon&ary market 5lig#t to .ualityEmergence of a secon&ary market 5lig#t to .uality

le& to a smaller &omain of issuersle& to a smaller &omain of issuers

6ro"ing s#ift in portfolio metrics to !E an& S3A6ro"ing s#ift in portfolio metrics to !E an& S3A

7sage of economic capital an& specific return on7sage of economic capital an& specific return on

resi&ual assets gaining importanceresi&ual assets gaining importance

'#e ne" para&igm for return on capital'#e ne" para&igm for return on capital

8et 9ncome8et 9ncome !evenue!evenue:: ;;!evenue!evenue CapitalCapital

!eturn on!eturn on

CapitalCapital

MarginMargin 3elocity


6/20

Concept of Portfolio Management

Portfolio Management &iscipline – is t#isPortfolio Management &iscipline – is t#isan emerging strategy for excellence < =ESan emerging strategy for excellence < =ES

A&vocate of s#are#ol&er valueA&vocate of s#are#ol&er value

Scope is not >ust limite& to cre&it riskScope is not >ust limite& to cre&it risk

management +ut more?management +ut more?"ners of risk an& capital"ners of risk an& capital

5un& managers "it# &iscretion over t#e proprietary risk portfolio5un& managers "it# &iscretion over t#e proprietary risk portfolio

9nvestor &riven approac# (ol& positions +enc#marke& to market9nvestor &riven approac# (ol& positions +enc#marke& to marketstan&ar&sstan&ar&s

ortfolio Management is vie"e& as an integral

ortfolio Management is vie"e& as an integral

link +et"een 9ssuers an& 9nvestors to ensure t#at

ink +et"een 9ssuers an& 9nvestors to ensure t#at

t#e +ank is not stuffe& "it# su+stan&ar& assets

#e +ank is not stuffe& "it# su+stan&ar& assets


7/20

'#e 8e" Structure

B

o

r r

o

"

e

r

s

S

e

c

on

&

a

r

y

M

k

t

Client

Manage

ment

rigination

PortfolioPortfolio

Manager Manager Cre&it &ecision

!isk !ating

Pricing/!eturn

Portfolio @ecision

Syn&ication

0oan

'ra&ing

(e&ging ,

Securiti%ati

on

Servicing


8/20

8e" Approac# to Portfolio Managemente" Approac# to Portfolio Management

BuyBuy Sell (e&geSell (e&ge

riginate to &istri+uteriginate to &istri+ute

Portfolio Management acts as +uyer seller an&Portfolio Management acts as +uyer seller an&manager of riskmanager of risk

Support ! profit center


9/20

rigination versus "ners#ip of risk

Portfolio managers are o"ners of risk an&Portfolio managers are o"ners of risk an& CA 9'A0A 9'A06iven scarcity of capital an& unattractive loan6iven scarcity of capital an& unattractive loanpro&ucts in most markets pure origination of loanpro&ucts in most markets pure origination of loanpro&ucts "it# no cross sell makes little economicpro&ucts "it# no cross sell makes little economicsensesense

Close linkages #o"ever exist )especially in loanClose linkages #o"ever exist )especially in loanpro&ucts* "#ere a resi&ual piece sits in t#e portfoliopro&ucts* "#ere a resi&ual piece sits in t#e portfoliouality of origination #inges on t#e risk appetite ofuality of origination #inges on t#e risk appetite oft#e Portfolio Manager t#e Portfolio Manager

rigination "oul& +e limite& to Portfolio +alancing torigination "oul& +e limite& to Portfolio +alancing toensure appropriate "eig#t age – ac#ieve& t#roug#ensure appropriate "eig#t age – ac#ieve& t#roug#cre&it s"aps C@s secon&ary markets etccre&it s"aps C@s secon&ary markets etc

Most C9B platforms to&ay are evolving , &o not #aveMost C9B platforms to&ay are evolving , &o not #ave89! as an in&epen&ent financial target?/89! as an in&epen&ent financial target?/


10/20

Portfolio Management P#ilosop#y

9mprove cre&it / risk an& pro&uct

&elivery processes to transform t#e

tra&itional len&ing +usiness into an

issuer an& investor-&riven mark-to-market-+ase& 2riginate to @istri+ute4

+usiness


11/20

Portfolio Management !ole

ISSUERISSUER INVESTORINVESTOR

Portfolio Management ProcessPortfolio Management Process

DistributionDistributionProcessProcess

OriginationOriginationProcessProcess

Market Clearing ProcessMarket Clearing Process

StrategyStrategy

Structuring ProcessStructuring Process

DCMDCM DerivativesDerivatives Other productsOther products


12/20

'#e 8e" Structure - A&vantages

0ea&s to increase& transparency an& re&uces0ea&s to increase& transparency an& re&ucescross su+si&i%ationcross su+si&i%ation

Balances issuers an& investors – t#e universal &e+tBalances issuers an& investors – t#e universal &e+t

mo&el #as tra&itionally +een +ase& on "#atmo&el #as tra&itionally +een +ase& on "#at

9ssuers nee& )an& not "#at 9nvestors "ant?*9ssuers nee& )an& not "#at 9nvestors "ant?* 0ea&s to s#arper risk-return &iscipline "#ile0ea&s to s#arper risk-return &iscipline "#ile

putting t#e +/s on lineputting t#e +/s on line

Benc#marks t#e portfolio to market – especially forBenc#marks t#e portfolio to market – especially for

loan pro&uctsloan pro&ucts

5ocuse& on @istri+ution t#at "ill re&uce Cre&it5ocuse& on @istri+ution t#at "ill re&uce Cre&it

Capital an& #ence increases !ECapital an& #ence increases !E


13/20

$ey Attri+utes

Strategic !isk Capital AllocationStrategic !isk Capital Allocation

• Risk capital to be BID for b !lobal

I"dustr a"d #e $roduct %roups

• Creatio" of a co&&o" platfor& 'here

all product part"ers 'ill pro(ect theirbusi"ess a"d e)pected ROE* Risk

capital 'ill be allocated o" this basis

• +ll clie"ts 'ill be assi%"ed peak risk

capital a"d ROE tar%ets

• $ortfolio Risk Ma"a%e&e"t 'ill be a

ke part of this process to set riskappetite

• Robust retur" &easure&e"t &etrics

'ill drive o",%oi"% capital allocatio"

S t r a t e %

$ r o c e s s


14/20

$ey Attri+utes

Active Portfolio !isk ManagementActive Portfolio !isk Management

• Credit 'ill be a parallel process- "o lo"%er a se.ue"tial

process

• $ortfolios 'ill be ru" o" a !/OB+/ basis i" li"e 'ith thetpe of e)posure

• The ori%i"ate to distribute process 'ill lead to %reater

discussio" o" the ulti&ate hold levels

• Risk capital usa%e 'ill be activel &a"a%ed b $ortfolio

Ma"a%e&e"t- 'hich 'ill be (ud%ed b retur" o"

eco"o&ic capital deploed

• Credit risk decisio"s 0bui"%- selli"% a"d hed%i"%1 'ill

be &ade 'ithi" $ortfolio Risk Ma"a%e&e"t*

$ortfolio Risk Ma"a%e&e"t $rocess


15/20

$ey 'ransfer pricing c#allenges

Portfolio Management is t#e 1a&vocate’ ofPortfolio Management is t#e 1a&vocate’ ofs#are#ol&er value Approval / rene"al of alls#are#ol&er value Approval / rene"al of all

exposure is contingent on t#e return irrespectiveexposure is contingent on t#e return irrespective

of "#ere revenues are +ooke& or recogni%e&of "#ere revenues are +ooke& or recogni%e&

$ey c#allenge is to +e a+le price loan pro&ucts$ey c#allenge is to +e a+le price loan pro&ucts2appropriately4 "#ile ensuring an accepta+le2appropriately4 "#ile ensuring an accepta+le

return on t#e entire cre&it exposurereturn on t#e entire cre&it exposure

0oans s#oul& +e price& to +e at least 2S3A or0oans s#oul& +e price& to +e at least 2S3A or

Economic profit4 neutralEconomic profit4 neutral

0oan structure an& pricing s#oul& +e reflective of0oan structure an& pricing s#oul& +e reflective of

t#e prevailing investor market to provi&e li.ui&ityt#e prevailing investor market to provi&e li.ui&ity

to t#e loan portfoliosto t#e loan portfolios


16/20

Maximi%ing S#are#ol&er 3alue - S3A

#y a ne" metric


17/20

Maximi%ing S#are#ol&er 3alue - S3A

S3A @rivers

3A @rivers

Capital usageCapital usage

Pricing &isciplinePricing &iscipline

3olume / pricing management3olume / pricing management

Mix of revenueMix of revenue

Cre&it .ualityCre&it .uality


18/20

Maximi%ing S#are#ol&er 3alue

'#e economic capital'#e economic capitalframe"ork creates aframe"ork creates a

common currency forcommon currency for

measuring risks an& returnsmeasuring risks an& returns

@ifferent forms of risk@ifferent forms of risk

Cre&it Market Country an&Cre&it Market Country an&

Business risks are .uantifie&Business risks are .uantifie&

on a uniform scaleon a uniform scale

Performance is expresse& asPerformance is expresse& as

an after-tax return onan after-tax return on

economic capitaleconomic capital

'#e frame"ork creates'#e frame"ork creates

incentives to &eploy capitalincentives to &eploy capital

to"ar& activities "it# +etterto"ar& activities "it# +etter

risk a&>uste& returnsrisk a&>uste& returns

I"vestors2 Re.uired Retur"

Return

Expected

Cashflo

!roth of

"n#estment

$ase

Risk

%irm &alue

Measuring return relative to

risk


19/20

$ey C#allenges to implement t#isApproac# in our Markets

0ack of li.ui&ity )+ot# &ept# an& +reat#* in0ack of li.ui&ity )+ot# &ept# an& +reat#* int#e secon&ary loan tra&ing marketst#e secon&ary loan tra&ing markets

Most profita+ility mo&els are glo+al an&Most profita+ility mo&els are glo+al an&

nee& to +e customi%e& for regional /nee& to +e customi%e& for regional /emerging marketsemerging markets

8ot enoug# volume to sustain an active8ot enoug# volume to sustain an active

mo&el in t#e current environment –mo&el in t#e current environment –

ten&ency is to #ang onto goo& .ualityten&ency is to #ang onto goo& .ualityassetsassets


20/20

$ey C#allenges to implement t#isApproac# in our Markets

Potential negative impact on clientPotential negative impact on clientrelations#ips 8ee& to align all pro&uctrelations#ips 8ee& to align all pro&uct

specialists to a common goal vis a visspecialists to a common goal vis a vis

clients to avoi& &ifferent agen&asclients to avoi& &ifferent agen&as

'eam"ork is critical for success Creates'eam"ork is critical for success Createsanot#er silo in an alrea&y over matrixanot#er silo in an alrea&y over matrix

environmentenvironment

Severe compression in sprea&s "#ic# makesSevere compression in sprea&s "#ic# makes

t#e ultimate 1#ol&’ position uneconomicalt#e ultimate 1#ol&’ position uneconomical

an& t#e portfolio manager luke"arm to t#ean& t#e portfolio manager luke"arm to t#e

transactiontransaction

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Portfolio mgmt.ppt