nordic bank liability seminar - seb group · structured bonds 8,3 3,2 1,5 covered bonds seb ag 24,4...
TRANSCRIPT
11
Nordic Bank Liability Seminar
Anders Kvist Head
of Group Treasury
12 May 2011
2
Regulatory
waters
difficult
to navigate
Capital
Regulatory areas
Liquidity
Funding
Authority
Leverage
ratio
Basel committee EU Swe
Great uncertainty
on how
”directional
”
requirements
will
be converted
into
detailled
regulations
and the desired
internationel
harmonization, incl. time table
for the introduction
of Swedish rules
Insurance
/ Solvency
2
3
Capital and liquidity
–
SEB´s
record
0
20
40
60
80
100
2005 2006 2007 2008 2009 2010
Total capitalTier
1 capitalCT1
SEB´s
“matched funding”
horizonMonths
05
10152025
Q1-08
Q3-08
Q1-09
Q3-09
Q1-10
Q3-10
Cap
ital
Liqu
idity
SEKbn
Increased
capital
base
through
earnings
retention, rights issue, loss absorbing
hybrid issuance
and Tier
2 buy-backs
Core
capital
accounts
for the biggest
increase
Last Tier
2 issue
in 2006
Matched
funding
on a higher
level
Pricing
of liquidity
risk is important
part of financial
steeering
*
*Total capital
is lower
than
CT1 and Total Tier
1 capital
in 2010
4
Speedy and clear
information on buffer
required, allowed
capital
instruments and resolution regime
(bail-in)
Basel 3 and Solvency
2 must be aligned
to arrive
at workable
forms and conditions
for maturity
transformation
Analysis
of ”lagom”
size
of credit
expansion and foreign
borrowings
1
2
3
Take
the risk of ”unintended
consequences”
seriously
–
analysis
of proposed
regulations
4
Capita
l
Leverage ratioLiquidityFun
ding
Basel III
Central issues
for SEB 1 (2)
5
Greater
scope
for covered
bonds
in liquidity
buffer
acc
to Basel 3 –
there
is enough
government
paper!
’Net
Stable
Funding
Ratio’
should
be applied
under Pillar 2
5
6
7
Tougher
regulations
on deposit
companies
and consumer
dredit
companies
8
Corporate
customer
deposits
should
get higher
credit
as source
of stable
funding
in ’Net
Stable
Funding
Ratio’
7
Capita
l
Leverage ratioLiquidityFun
ding
Basel III
Central issues
for SEB 2 (2)
666
Liquidity
& Funding
777
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
Q12006
Q32006
Q12007
Q32007
Q12008
Q32008
Q12009
Q32009
Q12010
Q32010
Q12011
Public sector Corporate sectorTotal deposits Private sectorSEK m
Development of deposits from the general public, excl repos
Balance Sheet structure
Assets Equity &Liabilities
Funding <1 year
Funding, remaining
maturity >1 year
Cash & Lending
Financial Institutions
Deposits from the general publicOther
Lending
Net Trading Assets
Equity
Liquid assets
Stable funding
Short-term funding
“Banking book”
Bond Liquidity Portfolios
Deposits Financial
Institutions
Household Lending
Strong and well-aligned balance
sheet
structure
8
Strong structural
liquidity
situationStrong structural liquidity situation in the two most important business areas; 80% of all lending
Lending Funding
Retail banking Sweden
Lending Funding
Wholesale banking1
323
90
209
174
440
51
300
1. Excluding repos
and reclassified bondsBalance
mis-matches
funded
via long-term
debt
issuance
SEK bn
-300
-200
-100
0
100
200
300
Jan-09May-09Sep-09Jan-10May-10Sep-10Jan-11
Net Trading Assets CPs/CDs
CP
/CD
Fu
ndin
gN
et T
radi
ng
Ass
ets
1. CPs/CDs 2. Net Trading Assets excluding Derivatives
Short-term funding1
moves in line with Net Trading Assets2 (SEK bn)
Otherloans
Residentialmortgage
loans
Retaildeposits
Issuedcoveredbonds
Corporateloans
Corporatedeposits
Publicdeposits
9
Funding raised with original maturity >
1 year SEK bn
SEB’s
matched funding horizon 1)Months
05
10152025
Q1-08
Q3-08
Q1-09
Q3-09
Q1-10
Q3-10
Q1-11
InstrumentFull year
2009Full year
2010Q1
2011
Yankee CD 3,1 2,9 0,0
Senior unsecured SEB AG 5,2 0,4 0,2
Senior unsecured SEB AB 60,4 13,9 4,5
Structured bonds 8,3 3,2 1,5
Covered bonds SEB AG 24,4 10,7 0,0
Covered bonds SEB AB 25,7 71,0 43,9
Hybrid tier 1 3,3 0,0 0,0
Total 130,4 102,1 50,1
*
As per April 5*
Net liquidity position: Allows for sustained periods of no market access
*Overcollateralisation
net of Moody’s requirement for AAA rating (13.5%)
**Swedish Bankers Association (Bankföreningen)
External vs. Internal Liquidity Reserve definitions (SEK BN)
March 2011
0
100
200
300
400
500
FI SBA**/SEBCore Reserve
SEB ExtendedReserve
Total SEB LiquidResources
Bank Deposits GVT Bonds Public bondsCovered bonds (o ther) Covered bonds (SEB) Non-financialsFinancials Other
221 229
297
422
OC*
Net Trading Assets
101010
CPs/CDs15%
Corporate deposits30%
Private Individual deposits
12%Financial Institution deposits
10%
Public entity deposits
4%
Central Bank deposits
3%
Mortgage Cov Bonds SEB AB
15%
Mortgage Cov Bonds SEB AG
2%
Senior Debt7% Subordinated debt
2%
Overall liability & funding mix SEB Group, SEK 1,392 bn
(EUR 156 bn), March 2011
11
Well-diversified
across
instrument and market Maturity
of long-term
funding
Dec 2010
0
10
20
30
40
50
60
70
80
90
100
<1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-7Y 7-10Y >10Y
Mortgage pfandbriefe, SEB AGCovered bonds SEK, SEB ABCovered bonds non SEK, SEB ABSenior unsecuredSubordinated debt
Product <1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-7Y 7-10Y >10Y TotalSubordinated debt 2.4 4.5 0.0 2.7 8.1 4.5 0.0 1.2 23Senior unsecured 39.5 25.5 7.9 22.8 8.8 7.3 5.1 2.1 119Covered bonds non SEK, SEB AB 22.4 0.0 10.1 8.9 9.7 8.9 0.2 0.2 61Covered bonds SEK, SEB AB 32.6 34.7 27.5 16.1 18.8 0.0 0.0 8.4 138Mortgage pfandbriefe, SEB AG 1.4 4.4 3.3 1.1 1.9 3.9 9.8 5.8 32Total 98 69 49 52 47 25 15 18 373
SEK bn
-
1212
SEK bn
0
10
20
30
40
50
60
70
80
90
100
<1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-7Y 7-10Y >10Y
Mortgage pfandbriefe, SEB AGCovered bonds SEK, SEB ABCovered bonds non SEK, SEB ABSenior unsecuredSubordinated debt
Product <1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-7Y 7-10Y >10Y TotalSubordinated debt -2 -4 -3 -3 -5 -4 0 -1 -23Senior unsecured -25 -22 -8 -21 -12 -9 -5 -2 -104Covered bonds non SEK, SEB AB -9 0 -10 -9 -21 -9 -1 0 -59Covered bonds SEK, SEB AB -28 -35 -28 -20 -21 -11 0 -9 -151
Mortgage pfandbriefe, SEB AG -2 -4 -4 -1 -3 -3 -10 -6 -31Total -66 -66 -52 -54 -62 -36 -15 -18 -368
SEK bn
Longer
duration
and lower
roll-over
risk Maturity
of long-term
funding
March
2010
13
Capital
14
Economic Capital is a measure of capital needed to give the institution a probability of default corresponding to the chosen rating target
The SEB “brand”
of EC is nicknamed CAR: Capital At Risk
EC implemented in business steering is called Business Equity and is identical to CaR
but excludes concentration/diversification components
Confidence
level
chosen linked
to rating ambition, e.g. AA corresponds
to 99.97% and used
in CaR, regulatory
minimum 99.9%
Part of business plan, expected
losses
of doing
business
Unexpected
losses
covered
by capital
buffer
Unexpected
losses
potentially
leading
to insolvency
Losses
due
to risk taking
over time Risk appetite leading to capital levels
Economic capital, CaR
and Business Equity
Economic Capital –
SEB Methodology
15
Capital adequacy Outcome of recent stress tests
Core Tier 1 capital ratio (Basel II)
8,00%
9,00%
10,00%
11,00%
12,00%
13,00%
2009 2010 2011 2012 2013
Riksbanken Negative (Dec 2010)
Swedish FSA Stressunfloored (Oct 2010)
CEBS Adverse with additional sovereign shock (July 2010)
16
Return on Equity (actual and required)
Capital base (size and composition) comprising equity, hybrid capital and
subordinated loans
Risks (market risks, operational risks, business risks, insurance risks, credit risks etc)
Income, costs (incl. expected realisation of risks and cost of
liquidity)
and net result
Market views incl. investor perceptions
Return on Business Equity (actual and required)
Rating agency
risk and capital models
Regulatory (Basel I, II and III)
risk and capital models and
minimum requirements (Pillar 1 and 2) today and tomorrow
SEB
risk and capital models and
calibrated survival probability
Rating agency capital and considerations
Economic Capital/Business
EquityRegulatory Capital
SEB Group business plan incl. macroeconomic
environment
Setting of capital targets and capital plan
Holistic
Financial Steering Relating
risk to capital
and reward
17
Capital base vs
internal and external requirements SEKbn
0
20,000
40,000
60,000
80,000
100,000
120,000
2010
Capital base
Economic Capital
Basel II with transition rules
Basel II without transition rules
18
15.114.213.9
10.19.9
8.4 8.6
13.012.211.7
12.6 12.8
14.713.8
14.6
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Mar 2011
Total capital ratio, %
Tier 1 capital ratio, %
Core Tier 1 (from 2007)
SEK bn
Tier 1 capital
72.7
82.5
101.6
102.0
102.1Capital base
93.0
104.7
107.3
99.1
98.8Risk-w. Assets
737
818
730
716
678
Target: A Tier 1 capital ratio of 10% (Basel II)
Note: In order to improve quality, capital management in 2010 has focused on shifting the capital base from Tier 2 to Tier 1. The end effect, when combined with certain deductions to be made from the total capital resources, is that Tier 1 capital becomes larger than the capital base from 2010.
Capital adequacy, SEB Group Basel II (without transition rules)
19
60% 65% 69% 70% 72% 72% 75% 76% 80%
11%11%
11% 10% 14% 13%14% 13% 13%29% 24% 20% 19% 14% 15% 11% 10% 8%
0%
20%
40%
60%
80%
100%
Dec2008
Mar2009
Jun2009
Sep2009
Dec2009
Mar2010
Jun2010
Sep2010
Dec-10
Core Tier 1 Hybrid Capital Tier 2
Improved quality of the capital base
94
51045
SEKbn Dec 2010
Lower Tier 2
Upper Tier 2
Hybridinnovative
Hybrid non-innovative
Equity
Loss absorption –
capital base Composition and development
20202020
Net credit loss dynamics, SEK bn
Build-up of provisions
2008 2009 2010 2011 ?
Realizing losses
Pro-active and conservative provisioning cycle with write-back potential
-0.7 -0.6-0.3
0.4
1.4
2.62.52.6
1.7
0.90.40.30.2
Q1-08 Q2 Q3 Q4 Q1-09 Q2 Q3 Q4 Q1-10 Q2 Q3 Q4 Q1-11
21
Expected Applicability of Capital Instruments
Regulatory Minimum
Buffer Capital (If any)
Leverage Ratio
S&P RAC Ratio
“High Strike” Coco (~7% Core Tier 1)
Hybrid Tier 1
LT2 ? X X
“Low Strike”Coco
(~5%Core Tier 1)
Hybrid Tier 1 ?
LT 2 ? X X
New-Style Hybrid Tier 1
Hybrid Tier 1 X
Funding
Source: Morgan Stanley
22
Loss absorbing subordinated debt
“Known”
Basel III hybrid capital
Basel III hybrid Tier 1
“True”
contingent capital
Non-viability Tier 2 Mimic Basel III, equity features
Swiss finish: —
up to 9% of 19% total capital requirementFSB: —
greater (G)-SIFI loss absorption capacity
Minimum 150bps
of RWA to most efficiently meet the Tier 1 capital
requirement
Minimum 200bps
of RWA to most
efficiently meet the Total Capital requirement
Still waiting for…–
clarity / guidance from the European Commission on Tier 1 and Tier 2
–
first guidance from the Basel Committee and FSB on “true”
contingent capital
Broad definition
Narrow definitions
Instruments
Application
Loss absorbing subordinated debt spectrum
Source: Deutsche Bank
23
What triggers and why?
Rem
oten
ess
Full regulator discretion
5.125% Core Tier 1 / Common Equity Tier 1 (requirement for Tier 1)
Non-viability
5% Core Tier 1 (Lloyds ECN)
7% Core Tier 1 / Common Equity Tier 1 (Credit Suisse BCN, Rabobank
SCN)
Comparison of effective triggers ? What features can be added?
Share price trigger–
Downside–
Upside
Other market based trigger
“Cure”
periods
What triggers are required? What does this mean?
Tier 1
Tier 2
Host
Contractual non-viability –
Decision to inject public sector capital–
Decision of the regulator that a write-off / conversion, without which the firm would become non-viable, is necessary, or…
…statutory regime with equivalent outcome
Regulator discretion (coupon and principal loss absorption)
Core Tier 1 ratio, c. 5.125% or higher
Non-viability as above
Less regulator discretion
Loss absorption linked to the failure of the institution
Trigger out-of-the-money?
Explicit regulator discretion
More issuer discretion
Dynamic triggers (regulatory definitions)
Interaction of going concern and contingent capital triggers?
For illustration purposes only –
in practice regulator discretion and/or non-viability may
take effect at varying points
Source: Deutsche Bank
24
Conversion into equity
Upside participation / attaching warrants
Write-down and write-up if future profitability & capital
levels are sufficiently restored
Write-off
Trigger is set at a fixed (regulatory capital) ratio
Write-down of principal
Conversion can be triggered by the regulator at
their sole discretion
Option to settle nominal in shares at any time at then
current share price
Regulatory requirements for the
role of contingent capital will directly
impact final structures (for
instance definition and relative
interaction of triggers)
However, issuers and investors are establishing (and
voicing) their structural
preferences now
in the context of future
hybrid Tier 1
Contingent capital –
instrument options
Source: Deutsche Bank
25
DeferralTrigger levels
Real money
–
Precise definitions preferred and there is a focus on the risks of non-viability
–
Existence of multiple or dynamic triggers will depend on existing capital buffers and the issuer’s funding and
liquidity profile
–
Triggers in the 7% area preferred for contingent capital
–
Ultimately the level of comfort on the trigger is credit specific
Hedge funds
–
Share price trigger is a point of interest
–
Contractual non-viability may require a premium
Insurance
–
Focus on objective triggers with little discretion of the issuer in non-viability situations
–
Triggers important for modelling expected loss
–
Cure periods preferred
Real Money
–
Regulator discretion is accepted but would entail a pricing premium
–
This is not seen as a critical risk in the structure
Hedge funds –
deferral is less important
Insurance
–
Issuer discretion to defer to be relatively constrained
–
Somewhat comfortable with regulator discretion
–
Specific deferral language is instrumental
Relative trigger: Low High
Due to the potential nature of this
security, an investor base may include
Real money
Insurance
Equity linked
Equity
Hedge funds
Retail
Strategic investors / SWFs
Assessing an instrument: What are the critical features?
Source: Deutsche Bank