sberbank asset & liability management contest

8/13/2019 Sberbank Asset & Liability Management Contest

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Banc One Strategy 1993 1994

Segah Meer (MAE 12)

S********@nes.ru

+7(963)*********

Aleksandr Sh**** (MIF 12)

A**********@nes.ru

+7(985)*******

1 Banc One 2010
mailto:[email protected]:[email protected]:[email protected]:[email protected]


2/15

Meeting Agenda

Address growing concerns over our derivative portfolio

analysts accuse us of overstating ROA and Profit Margins notional amount disclosures incorrectly suggest one-way

exposure

Discuss recent and expected market conditions

our risk exposure relative to the industry existing risk management strategy new derivative instruments MBS, AIRS immediate plans for the derivatives portfolio

Our long-term strategy

M&A and implications for overall interest rate exposure modest liability sensitivity in stable economic conditions focus on longer-term (2 year) periods for continuous change

in rates

Q&A

2 Banc One 2010

NetIncome

ROE

ROA

1.53%

$1.14billion

17.89%


3/15

Interest Rate Exposure: Negligible!

Asset Sensitive Growth Strategy

Addition of $9 billion to assets from Non-dilutivepending M&A activity

Asset sensitive Basic Portfolio Rising magnitude of GAP from acquisitions

incorrectly suggests increases in swap portfolios NIM (the relevant metric) stays the same

Negative GAP is normal at times of low

interest rates (when the demand for short-term loans is low) - hence the need forderivatives as hedging instruments

3 Banc One2010

Derivatives & Risk Management

Net payments are free from the risk of default Ability to drop Earnings Sensitiv ity t o -0.2%by

the end of 1994 should the interest rates rise

Short-term liquidity Disclosed Notional Amount exceeds One-Way

Potential Exposure

ROA & ROE are wrong metrics - earnings

sensitivity and net income are the correct metrics Greater Earnings imply greater volume of swap

contracts

Short-Term Assets Short-Term Liabilities

M&A

BasicPortfolio

GAP

Liquidity

Two-wayExposure

NoDefault

Risk


4/15

Fluctuating Interest Rates are Driving Equity Valuations of Banks

4 Banc One 2010

Since 1989 the market has seen sharp decline in interest rates

rates continued to decline unprecedentedly for 4 straight years In 1991, some analysts incorrectly concluded that typical long-term asset

sensitivity of Banks would lead to the decline of their earnings

a drop in rates implied a rise in demand for refinancing

Bank One, among others, was downgraded in its credit rating to AA-

?


5/15

Interest Rate Derivatives

Do interest rate

derivatives affect theprice?

7 Banc One 2010


6/15

Value creation for shareholders

8 Banc One 2010

Does derivative usage for hedginginterest rate risk add value toshareholders? We certainly think so

VS

But we understand your concern:using derivatives just to avoid capitalconstrains results in lower value andsuggests weak assets


7/15

Hedging Strategy

Banc one'snatural balancesheet position

is assetsensitive

interest rateson our assets

react morequickly

Banc Onesearnings riseand fall withinterest rates

To minimize

this interestrate exposurewe use

derivatives(instead of U.S.Treasures, etc.)

The result is areduction inoverall asset

sensitivity

9 Banc One 2010


8/15

Derivatives vs U.S. Treasuries

MBS

Provided lower after-tax return

Prepayment risk (when low interest rates)

CMO

Pools divided into tranches with different risk of prepayment Still, the prepayment risk exists. CMOs remain subject to capital adequacy requirements

Swaps

Capital is preserved Liquidity is increased Enable faster response to changes in market conditions Customized contracts (e.g. duration) Off-balance sheet (Boost ROE, ROA)

AIRS

High yields in exchange for taking on prepayment risk Reduction of capital adequacy requirement More liquid than CMO BUTIncrease in earnings volatility

10 Banc One 2010


9/15

Look at AIRS!

Hedging

Speculative

11 Banc One 2010

Increased volatility inearnings:

1% increase in rates 1% earnings drop2 % increase in rates

3%, 4% drop (NOT 2%)


10/15

M&A Strategy

13 Banc One 2010

in case of $9 bl. M&A

M&A of asset liabilityfirm could boostasset sensitivity


11/15

Continuing Growth with Prudent Risk Management

14 Banc One 2010

d

Strategic Acquisitions

Acquisition of asset sensitive firms

No dilutive acquisitions

Centralization of operations

Asset & Liabi lity Simulat ions

On-line balance sheet measuring

responses to interest rate shifts Monthly download of over 3 million

loans and deposits

ALCOs A&L Management policies

Commitment to Maximizing

Shareholder Value

Faze-out a share of swap contractswith the use of offsetting contracts

Initiate a Buyback stock at


12/15

Strategy to Maximize Shareholder Value

15 Banc One 2010

Settle M&Adeals

($9 billion)

Supportstock price:Dividends,Buy Backs

Act onexpectationsof a rise ininterestrates

Continue to useSwaps in HedgingRisks

Maximize

shareholder value


13/15

Banc One

16 Banc One 2010

THANK YOU!


14/1517 Banc One 2010

Appendix


15/1518 Banc One 2010

sberbank asset & liability management contest

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