pricing highly volatile cre loans › publications › 030513webinar.pdf · §loan portfolio: $150m...
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PRICING HIGHLY VOLATILE CRE LOANSUNDER BASEL III GUIDELINES
Proposed regulatory standards.... increased capital requirements…..revised risk
weights….…lower returns….….product profitability recalibrated…….Risk Adjusted Return On Capital
(RAROC)
§ Implements a new capital measure – CommonEquity Tier I Capital (CET1)
§Raises the Minimum Standards for all other Capital Measures to be considered Well Capitalized
§Allows for Accumulated Other Comprehensive Income (AOCI) to be considered as Capital
§Causes substantial reductions to “Excess Capital” at most institutions currently considered well capitalized
PROPSEDREGULATIONBasel III NPR – Summary of Major Provisions
§Defines Highly Volatile Commercial Real Estate Loans (HVCRE) – All Acquisition, Construction & Development Loans (ACD) – and CRE Loans with LTV ratio above supervisory guidelines
§For 1-4 Family Residential Mortgage Loans –creates Category 1 & 2 risk categories – with generally higher risk weightings based on LTV ratios (35%, 50%, 75%, 100%, 150%, 200%)
§Establishes higher risk weights for past due loans (generally 150%)
PROPSEDREGULATIONBasel III NPR – Summary of Major Provisions
EXAMPLE IMPACTS TO EXCESS CAPITALA $600 M ASSET COMMERCIAL BANK - $70 M of Capital
Before (Minimum) After (CCB*)
Leverage Ratio 8.36% (5.0%) 8.65% (5.0%)
Tier I Capital Ratio 10.89% (6.0%) 9.88% (8.5%)
Total Capital Ratio 12.14% (10%) 11.13% (10.5%)
NEWCommon Equity Tier 1 Ratio N/A 9.88% (7.0%)
* Capital Conservation Buffer
EXAMPLE IMPACTS TO EXCESS CAPITALA $600 M ASSET COMMERCIAL BANK - $70 M of Capital
Assumptions:
Ø Percentage of Commercial Loans determined to be HVCRE - 15%Ø Percentage of Mortgage Loans determined to be Category 2 - 10%
q Category 1 Loans by LTV %§ LTV% < 60% 40%§ LTV 60 – 80% 15%§ LTV 80 – 90% 10%§ LTV > 90% 35%
q Category 2 Loans by LTV %
§ LTV < 80% 45%§ LTV 80 – 90% 10%§ LTV > 90% 45%
EXAMPLE IMPACTS TO EXCESS CAPITALA $600 M ASSET COMMERCIAL BANK - $70 M of Capital
Before (Minimum) After (CCB*)
Calculation of “Excess Capital” Tier I Capital % Tier I Capital %
Actual @ 10.89% / 9.88% $51.2 M $53.1 M
Minimum @ 6.0% / 8.5% $28.2 M $45.7 M
Excess Capital $23.0 M $ 7.4 M
Decrease $15.6 M
* Capital Conservation Buffer
EXAMPLE IMPACTS TO EXCESS CAPITALA $600 M ASSET COMMERCIAL BANK - $70 M of Capital
Where did the Capital Go?
Increase in Minimum Standard from 6% - 8.5% $11.8 M
Increase in Risk Weighting of Assets $ 4.0 M
Increase in Capital Due to Addition of AOCI ($ 0.2) M
Total Decrease in Capital Due to Basel III $15.6 M
CASESTUDYBASEL III IMPACT ON LOAN PRICING
Commercial Real Estate Loan§ Loan Amount: $500,000
§ Loan Rate: 4.00%
§ Loan Term: 60 months
§ Credit Quality: Average
§ Capital Allocation: 9.00% (100% Risk Weighted)
CASESTUDYBASEL III IMPACT ON LOAN PRICING
Annual Profit
CASESTUDYBASEL III IMPACT ON LOAN PRICING
CASESTUDYBASEL III IMPACT ON LOAN PRICING
Highly Volatile CRE Loan§ Loan Amount: $500,000
§ Loan Rate: 4.00%
§ Loan Term: 60 months
§ Credit Quality: Average
§ Capital Allocation: 13.50% (150% Risk Weighted)
CASESTUDYBASEL III IMPACT ON LOAN PRICING
Annual Profit
CASESTUDYBASEL III IMPACT ON LOAN PRICING
CASESTUDYBASEL III IMPACT ON LOAN PRICING
Alternative Risk Adjustment Factors§ Loan to Value ratio
§ Debt Service Coverage ratio
§ Collateral types
CASESTUDYBASEL III IMPACT ON CAPITAL PLANNING AND STRESS TESTING
Example Institution§ Asset Size: $215M
§ Loan Portfolio: $150M
§ 1-4 Family RE: $50M (50% Risk Weighted)
§ Commercial RE: $75M (100% Risk Weighted)
§Other Loans: $25M (100% Risk Weighted)
§ Total Risk Weighted Loans: $125M
CASESTUDYBASEL III IMPACT ON CAPITAL PLANNING AND STRESS TESTING
Example 3 Year Plan§Modest Loan Growth: 3%
§ Bank maintains comfortable capital cushion over their established targets
CASESTUDYBASEL III IMPACT ON CAPITAL PLANNING AND STRESS TESTING
Proposed Guidelines
CASESTUDYBASEL III IMPACT ON CAPITAL PLANNING AND STRESS TESTING
Example Institution§ Asset Size: $215M
§ Loan Portfolio: $150M
§ 1-4 Family RE: $50M (various Risk Weightings)
§ Commercial RE: $75M (various Risk Weightings)
§Other Loans: $25M (100% Risk Weighted)
§ Total Risk Weighted Loans: $166.5M
CASESTUDYBASEL III IMPACT ON CAPITAL PLANNING AND STRESS TESTING
Example 3 Year Plan§Modest Loan Growth: 3%
§ New risk weightings applied
§ Bank falls below its established targets
STRATEGIES / NEXTSTEPS
• Adjust product design / offerings as needed
• Adjust pricing policies necessary to move balances / adjust returns
• Determine additional capital requirements
• Analyze degree of product mix change necessary / possible / desired
• Forecast financial implications of product mix changes expected
• Identify current levels of HVCRE and Mortgage Loans with Risk Weights above 50% (current level)
• Recalibrate Capital Allocation Model
• Calculate impact on product profitability in ROE terms
PREPARE
EXECUTE
PLAN
HOW CAN WE HELP?Austin Associates, LLC
Support / Services§ Formal Independent Third Party Review of
In-house Systems (Profitability, Loan Pricing, ALCO)§ Informal Review / Recommendations of In-
house Systems (Profitability, Loan Pricing)§Operating Cost / Efficiency Reviews and
Recommendations§ Branch Network Analysis
Software§ Capital Planning System (CAPS Model)§ Loan Pricing System (LPS)§ Deposit Pricing Module (DPM)§ Customer Profitability Reporting System
(CPRS)
ADDITIONALRESOURCES
For more information please visit our website:
www.austinassociates.com
THANK YOUFOR ATTENDING
CONTACTUSYOUR PRESENTERS
419.841.8521
Jeffrey L. MorrisManaging Director & PrincipalFinancial Management Division
Andy E. MorganManaging Director & PrincipalFinancial Management Division