Intensive Bank Analysis
The overall goal of this interactive three day workshop is to provide participants with structured approach to analysing the credit risk of banks and the skills to make an independent assessment of the strengths and weaknesses of a bank.
Key Learning Outcomes:
- Use a structured approach to the analysis of banks, incorporating the CAMELS framework within the wider context of the operating environment and support
- Identify strong and weak performers using a detailed analysis of financial statements within the context of local and international accounting and business norms
- Identify financial, qualitative and market early warning signals of credit migration
- Stress test bank capital and ability to withstand credit, market and liquidity risk
- Evaluate strategy and risk management capabilities within the context of the current and future economic climate and changing competitive, political and regulatory conditions, including Basel III capital and liquidity requirements.
This section provides a structured framework of analysis including the use of market indicators.
Overview of the framework and tools of bank analysis: operating environment, financial fundamentals, management, support
- Purpose and payback model: a structured approach to credit analysis
- Key issues in exposures to banks: exposure profile, seniority, safeguards, pricing
- Rating agency approaches: issuer ratings, individual / financial strength and support ratings
- CAMELS (capital, assets, management, earnings, liquidity, sensitivity to market risk)
- Market perspective on credit: equity indicators, credit default swap and bond market indicators
- Exercise: understanding and applying the purpose payback model and demonstrate the typical borrowing needs and repayment capacity of a commercial bank.
This section focuses on the impact of external factors on the banking systems, including the economic environment, competitive environment and regulatory and supervisory pressures.
Macro - economic and systemic issues
- Impact of macro - economic variables on performance
- Bank systemic risk: macro prudential indicators
- Sub-prime and other drivers of credit crunch
- Macro prudential indicators of risk; credit growth, equity and property prices and FX
- Competitive and structural issues of the banking system.
Regulation and supervision
- Changing roles of the regulator and supervisor
- Key regulations: purpose and implementation
- Liquidity: quantitative and qualitative measures, Basel III liquidity guidelines
- Capital: size, quality and adequacy of capital base under Basel I, II and III
- Types of capital; core (common equity) vs. hybrid
- Standardised and advanced approaches for credit, market and operational risk
- Economic capital and internal capital adequacy assessment process (ICAAP)
- Considering the impact on bank profitability of the operating environment in various countries
- Consider and quantify the impact on bank capital adequacy ratios of the implementation of Basel III.
This section covers how to measure and evaluate bank performance, distinguish strong and weak performance and appreciate the limitations of the figures.
- Relating business mix to financial statements
- Accounting policies and disclosure: IFRS and local GAAP; fair valuation - securities, derivatives, own debt
- Exercise: understanding how the business model of a financial institution impacts its financial statements.
- Loan portfolio analysis: uncovering the risk profile ; key differences between types of bank
- Loan quality: impaired loans and reserve adequacy
- Off balance sheet exposures: lending commitments, SIVs, conduits and other special purpose vehicles
- Trading risk: assessing securities and derivatives portfolios, use of value at risk (VaR) models and stress testing
- Investment risk: valuation and accounting policies, hidden reserve or black hole
- The capital base and profitability of a bank may be influenced by their provisioning policies
- Identify the risks prevalent in the trading operations of a commercial or investment bank.
Illustration case study:
Assessing business risk, incorporating loan portfolio quality, trading portfolio and other credit and market risks.
Performance risk - earnings
- Balancing the risk/return profile: strategy and risk appetite
- Income stability and diversity: earnings at risk
- Control of expenses: targets and peer comparisons
Illustration case study:
Assessing performance of a bank, incorporating overall returns, income diversity and stability and cost control.
Financial risk - liquidity
- Funding risk: stability and variety of funding sources, contingency funding
- Liquidity of assets: identifying truly liquid assets, stable funding of illiquid assets
- Liquidity of liabilities: stability of deposit base, dependence on short - term wholesale funding, inter - bank market, key challenges of repo and CP funding
- Basel III liquidity standards
- Cash capital, stress testing and other tools to control liquidity risk
- Gap management: using the tenor and interest rate mismatch tables to better understand refinancing risk
- Securitisation vehicles: accounting and credit implications
- Exercise: demonstrate how a bank's funding structure can impact its liquidity position and interest rate exposure.
Financial risk - solvency
- Leverage ratios: benchmarks and challenges
- Capital adequacy: measuring size, quality and adequacy of capital base; regulatory capital ratios and assessing regulatory capital for non-deposit takers
- Stress-testing capital for market and credit write-downs
Illustration case study:
Assessing financial risk including solvency, funding strategy and liquidity in the light of the risk profile of the business model.
Early warning signals
- Financial and non-financial indicators of distress
- Market indicators: equity, CDS and bond indicators
- Lessons learned from failed banks
- Exercise: distinguishing strong and weak players.
Management, Franchise and Ownership
This section focuses on the key risk areas of strategy, franchise and risk management.
- Management: strategy, systems, skills, structure
- Risk management
- Franchise - strength of banking business model.
This section considers which institutions may receive government or shareholder support and in what form that support may be received.
- Reliance on support: rating floors, which creditors are supported, loss absorbing capability of hybrid capital
- Solvency vs. liquidity problems
- Regulatory responses to banking crisis: recapitalisation, guarantees, bad banks, insurance
- Exercise: recognise the main approaches to support employed by governments and their pros and cons.
Group Case study
The goal of this closing case study is for participants to apply the analytic framework to identify the strengths and weaknesses in a developed market commercial bank.
Who should attend
This is an intermediate level course for credit risk management, fixed income, origination and regulatory professionals. The two-day Fundamentals of Bank Financial Statement Analysis is designed as a preparation for those with limited accounting and banking experience.