Unisa risk analysis

Risk Analysis and Bank Financial Statements Hennie van Greuning World Bank Treasury FirstRand Board of Directors

Outline – key messages ,[object Object],[object Object],[object Object],[object Object]

1. Credit Crises – Common Causes ,[object Object],[object Object]

1. Financial / Banking Sector Crises – Common Causes ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

1. Financial Crises – Common Causes ,[object Object],CA balances Financial

1. Financial Crises – Common Causes ,[object Object],US Private Sector Debt to GDP Source: US Federal Reserve *Nouriel Roubini (2001) Debt Sustainability: How to Assess Whether a Country is Insolvent, Stern School of Business, NYU 0% 50% 100% 150% 200% 250% 300% 350% 400% 1916 1926 1936 1946 1956 1966 1976 1986 1996 2006

1. Financial Crises – Common Causes ,[object Object],[object Object]

1. Financial Crises – Common Causes Unrestrained asset (derivative) growth – CDS market growth Source: ISDA, The World Bank, US Bureau of Economic Analysis and US Treasury

1. Financial Crises – Common Causes ,[object Object],Current account balance Household debt to disposable income House prices Inflation

1. Financial Crises – Common Causes ,[object Object],Global financial sector crisis Global macroeconomic crisis Bank share prices Global growth

Financial Crises – Common Causes ,[object Object],Source: http://investingcontrarian.com/global/us-1800-bank-failures-tsunami-on-horizon/ 2010 began with a whimper for Bank Failures as the first week almost gave us the illusion that maybe and just maybe, the problem might just have solved itself as zero failures were reported. It was never going to be that easy, was it? As the graph, shows, a few weeks into 2010, the number of failures curve has already picked up steam and we see the red curve blasting away. May 20 Failures – 72 so far this year Problems - 775 institutions with aggregate assets of $431 billion 8,384 FDIC insured banks

Key Lessons Learned ,[object Object],[object Object],[object Object],[object Object],[object Object]

Key Lessons Learned ,[object Object],[object Object],[object Object],[object Object],[object Object],“ The last time anybody made a list of the top hundred character attributes of New Yorkers, “common sense” snuck in at number 79.” Douglas Adams “ Nothing travels faster than the speed of light with the possible exception of bad news, which obeys its own special laws.” Douglas Adams, "The Hitchhiker's Guide to the Galaxy"

Financial Failure - Nothing New ? Themes Lehman Brothers Kidder, Peabody & Co Barings Bank Orange County Societe Generale Dick Fuld Joseph Jett Nick Leesam Bob Citron Jerome Kerviel Board failure Management failure Failure in Internal controls Weak risk management Accounting failure Corporate Governance failure Regulatory failure IT Compensation

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3. Regulatory Reform ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

4. Key stakeholders - Accountability Key stakeholders Accountability A. Regulators Set regulatory framework, including risk exposures limits and other risk management parameters, which will optimize risk management in the banking sector A. Supervisors Monitor financial viability and effectiveness of risk management. Check compliance with regulations. B. Shareholders Appoint “fit and proper” boards, management, and auditors C. Board of directors Set risk management and other bank policies. Ultimate responsibility for the entity D. Executive management Create systems to implement board policies, including risk management, in day-to-day operations E. Risk Committee and ERM Monitoring of risk management practices F. Audit Committee and Internal Audit Test compliance with board policies and provide assurance regarding corporate governance, control systems, and risk management processes G. External Audit Express opinion and evaluate risk management policies ,[object Object],Insist on transparency and full disclosure

4. Risk information not directly reflected in AFS ,[object Object],Financial risks Operational risks Business risks Event risks Balance sheet structure Internal fraud Macro policy Political Income statement structure External fraud Financial infrastructure Contagion Capital adequacy Employment practices Legal infrastructure Banking crisis Credit Clients, products and business Legal liability Other exogenous Liquidity Damage to physical assets Regulatory compliance Market Business disruption and system failures Reputational and fiduciary Interest rate Execution, delivery and process Country risk Currency Strategic issues

4. Risk information not directly reflected in AFS ,[object Object],Assets Liabilities Credit risk +Interest Rate in the banking book +Liquidity Market risk + Banking book hedges Investment risk + Liquidity risk + Market risk Liquidity risk Liquidity & Funding risk + Interest rate in the banking book Market risk + Banking book hedges Market risk Capital risk Funding risk High level allocation to key risk types Note: figures are provisional

Financial Analysis – Principles ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Financial Analysis – Principles ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Financial Analysis – Tools and techniques Tools Techniques ,[object Object],[object Object],[object Object],Manipulate the data to facilitate analysis ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Balance Sheet Overview 4. Regulatory Returns Analytical Value

4. Regulatory Returns Analytical Value Composition of Assets : Structural Change & Growth

4. Regulatory Returns Analytical Value Asset Growth Over Time SARB -2008 Annual Bank Supervision Report

Financial Analysis – Tools and techniques ,[object Object],Source: 2009 ABACUS

6. Financial Analysis – Tools and techniques ,[object Object],SARB – 2008 Annual Bank Supervision Report

Financial Analysis – Tools and techniques ,[object Object],Period 1 (%) Period 2 (%) Revenue source: Service A 30 45 Revenue source: Service B 23 20 Revenue source: Service C 30 30 Revenue source: Service D 17 5 Total Revenue: 100 100 Operating expenses (excluding depreciation) Salaries and employee benefits 15 25 Administrative expenses 22 20 Rent expense 10 10 Earnings before interest, tax, depreciation (EBITDA) 53 45 Depreciation and amortization 4 4 Earnings before interest and tax (EBIT) 49 41 Interest paid 7 7 Earnings before tax (EBT) 42 34 Income tax provision 15 8 Net Income 27 26

Assets Vs Income: Energy Applied Vs Income Earned Regulatory Returns Analytical Value Income Assets

Cost-to-Income Ratios of Individual banks Categorized by Asset Value of Each Bank SARB – 2008 Annual Bank Supervision Report 4. Regulatory Returns Analytical Value

Composition of Income Statement - Multi Year Trend SARB – 2006 Annual Bank Supervision Report Regulatory Returns Analytical Value

Financial Analysis – Tools and techniques ,[object Object],0% 50% 100% 150% 200% 250% Period 1 Period 2 Period 3 Period 4 Current Period Customer loans as % of customer deposits Interbank loans as % of interbank deposits Readily marketable assets as % of total assets Volatile liabilities as % of total liabilities Volatility coverage (readily marketable assets as % of volatile liabilities) Bank run (readily marketable assets as % of all deposits type)

Financial Analysis – Tools and techniques ,[object Object],SARB – 2008 Annual Bank Supervision Report

Unisa risk analysis

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