Emerging Market Bank Analysis
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The overall goal of this workshop is to give a structured approach to the credit analysis of banks in emerging markets.
Key Learning Outcomes:
- Participants will be enabled to apply a structured analytic approach incorporating the operating environment (sovereign and systemic risk), financial fundamentals, management and support
- Identify banking systems with high systemic risk and evaluate the potential impact on the banking system
- Evaluate the financial statements to identify strong and weak performers and recognize the key areas of vulnerability in emerging market bank financial statements
- Use both international and local financial, qualitative and market indicators to distinguish early warning signals of credit deterioration
- Recognise the impact of the sovereign, systemic and regulatory change on bank performance and strategy and identify the need for and likelihood of support for different types of creditors in a crisis
Section aims: structured approach to the credit analysis of emerging market banks with perspectives of regulators, rating agencies and debt and equity investors.
- Frameworks and tools of analysis: sovereign, operating environment, management and franchise, financial fundamentals (CAMELS) and support
- Differing approaches: banks, rating agencies, regulators, equity and bond investors
- Sovereign and bank debt ratings: issuer default, national, viability and support
- Market indicators of risk: equity, bond, CDS and deposit rates
- Exercise: identifying relative creditworthiness, likelihood of default and failure from different types of ratings
- Purpose payback model: structured approach to analysis.
- Case study: Using the 4 step model to evaluate appropriate bank exposure strategies
Section aims: systemic risk driven by either sovereign or banking system weakness and evaluation of the impact of macro economic, competitive and regulatory change on bank financial health and performance.
- Key macro-economic indicators: GDP, interest, inflation and FX rates, current and capital account, savings and investment, unemployment etc.
- Key structural issues- Latin America, Eastern Europe, Asia and Africa
- Sustainable debt levels: public and private sector, domestic and external debt and liquidity
- Exercise: identifying strong and weak performers across different emerging market regions
- Social and political factors: political stability, labour force, legal system, trade and political links, corruption
- Macro prudential indicators of systemic risk: credit growth, asset price inflation etc.
- Credit crises: causes and effects
- Competitive environment: role of key players, banking penetration, product diversification
- Legal system: bankruptcy laws, recovery rates; judicial process
Regulation and supervision
- Prudential supervision and conflicts of interest
- Key regulations: international vs. local benchmarks, implementation
- Exercise: assessing bank regulations in different emerging markets
- Capital adequacy: Basel I vs. Basel II, implications of Basel III; liquidity and core capital.
Section aims: define, measure and evaluate bank performance through balance sheet, income statement and key financial ratio analysis. Appreciate the limitations of the figures given and the challenges of different accounting regimes.
- Banking business models and balance sheet configuration
- IFRS vs. local GAAP: key differences
- Limited disclosure: looking behind the numbers
- Exercise: emerging market bank balance sheet recognition indicators
- Loan quality: growth, concentrations, impaired loans (definitions and accounting)
- Reserve adequacy: provisioning, write-offs and recoveries, capital and profit distortions
- Off balance sheet exposures: trade finance, derivatives and other contingencies
- Trading and investment assets: liquidity pool or black hole
- Related parties: contagion and other risks.
- Risk / return profile: quality and diversity of income
- Control of expenses: high inflation and IAS 29
- Earnings accrual and asset impairment
- Exercise: in-depth performance risk assessment of an emerging market bank
Financial risk - liquidity
- Stability and variety of funding: stability of insured and uninsured deposit base, dependence on inter-bank, access to money and capital markets
- Liquidity: liquidity of assets and liabilities, contingency funding plans
- Basel III liquidity provisions: net stable funding ratio and liquidity coverage
- Gap management: FX, interest rate and maturity exposures
- Securitization: impact on earnings, assets and capital
- Exercise: identification of liquidity and FX vulnerability in various banks in an emerging market experiencing systematic collapse
Financial risk - capital adequacy
- Capital adequacy: size, quality and adequacy, economic and free capital
- Impact of Basel II and III capital adequacy changes on banks
- Capital distortions: under-provisioning, revaluation, deferred tax, risk weightings etc.
- Exercise: stress testing capital ratios after for deficient accounting systems or inappropriate risk weighting.
Early warning signals
- Financial and non-financial indicators of distress in emerging markets
- Exercise: emerging market banks' failure predictive ratios.
Management, Franchise and Ownership
Section aims: risk of differing management and shareholder structures prevalent in emerging markets and benchmarks of appropriate risk management and corporate governance behaviour.
- Management - structured approach: strategy, systems, skills and structure
- Risk management – credit assessment and recovery; liquidity preservation, trading controls and operational risk
- Exercise: risk assessment in banks ,implications of failure ,minimum safeguards and due diligence questions
- Franchise and competitive advantage
- Shareholder risks: contagion, corporate governance, related party, transparency, succession.
Section aims: lessons learned from banking crises to anticipate the availability of support for the creditors of a failing bank from either Government or shareholders.
- Solvency and liquidity problems: potential solutions
- Lender of last resort: safety net from shareholders and/or government
- Bank rescues: comparing supervisory and other intervention in a variety of problem situations
- Exercise: assessing the likelihood of support from shareholders or governments in the event of bank failure across different types of banks and emerging markets.
Final Case Study
- Preparation and presentation of a comprehensive credit analysis of an emerging market bank, covering operating environment, business risk, performance risk, financial risks and the quality of management
- Participants will evaluate the overall risk of failure or default, assign ratings and make appropriate recommendations on exposure levels.
Who should attend
A basic knowledge of Bank Analysis is required for this course. Financial Institution Analysts, Relationship Managers, Investment Fund Managers, Development Bank and Export Credit Agency Staff who do business with, or have credit exposure to Emerging Market and Frontier Market Banks should attend this course.