Banking CIA 2

8/8/2019 Banking CIA 2

1/47

ASSET LIABILITYMANAGEMENT OF ICICI BANK

Presented By:

PaulCarolinePoornima

SonalAnvin


2/47

WHAT IS ALM?

An attempt to match:

Assets and Liabilities

In terms of:

Maturities and Interest Rates Sensitivities

To minimize:Interest Rate Risk andLiquidity Risk


3/47

Asset Liability Management

AssetManagement LiabilityManagement

How Liquid are theassets of the Bank

How easily canthe Bank generateloans from market


4/47

Liabilities Assets

Capital Cash and Balances at RBI

Reserves and Surplus

Deposits

Borrowings Investments

Other Liabilities and Provisions AdvancesContingent Liabilities Fixed Assets

Other Assets

Balance with banks and money

at call and short notice

Balance Sheet of a Bank


5/47


6/47


7/47


8/47

Asset Liability Management

ALM can be termed as a risk management

technique designed to earn an adequate return

while maintaining a comfortable surplus of assets

beyond liabilities.

It takes into consideration interest rates, earning

power, and degree of willingness to take on debt

and hence is also known as Surplus Management


9/47

Illustration

If 50% of the liabilities are maturing within 1 year

but only 10% of the assets are maturing within the

same period.Though the financial institution has

enough assets,it may become temporarily insolventdue to a severe liquidity crisis.

Thus,ALM is required to match assets & liabilities

and minimise liquidity as well as market risk.


10/47

ALM and NIM

ALM is all about efficient management of balancesheet dynamics with regard to its size, constituentsand quality.

It is the process of managing the Net InterestMargin (NIM) within the overall risk bearing abilityof a bank

ALM process depends on the understanding of the

balance sheet; the availability, accuracy, adequacyand expediency of the data and the MIS system


11/47

Definitionof ALM

ALM is defined as, the process of decision making to control risks of existence, stability andgrowth of a system through the dynamic balancesof its assets and liabilities.

The text book definition of ALM is a riskmanagement technique designed to earn anadequate return while maintaining a comfortablesurplus of assets beyond liabilities. It takes into

consideration interest rates, earning power anddegree of willingness to take on debt. It is alsocalled surplus- management.


12/47

Purposeandobjectivesof ALM

Review the interest rate structure and compare the

same to the interest/product pricing of both assets

and liabilities.

Examine the loan and investment portfolios in the

light of the foreign exchange risk and liquidity risk

that might arise.

Examine the credit risk and contingency risk thatmay originate either due to rate fluctuations or

otherwise and assess the quality of assets


13/47

Review , the actual performance against theprojections made and analyse the reasons for anyeffect on spreads.

Aim is to stabilise the short-term profits,long-termearnings and long-term substance of the bank.Theparameters that are selected for the purpose ofstabilising asset liability management of banks are:

-Net Interest Income(NII)-Net Interest Margin(NIM)

-Economic Equity Ratio


14/47

Net Interest Income-

Interest Income-Interest Expenses.

Net Interest Margin-

Net InterestIncome/Average Total Assets

Economic Equity Ratio-

The ratio of the shareholders funds to the total

assets measures the shifts in the ratio of owned

funds to total funds. The fact assesses the

sustenance capacity of the bank.


15/47

Risks

Various Risks

Interest Rate Risk

Foreign Exchange Risk

Liquidity Risk

Credit Risk

Contingency Risk


16/47

Interest Rate Risk: It is the risk of having a negativeimpact on a banks future earnings and on themarket value of its equity due to changes in interest

rates. Liquidity Risk: It is the risk of having insufficient

liquid assets to meet the liabilities at a given time.

Forex Risk: It is the risk of having losses in foreign

exchange assets and liabilities due to changes inexchange rates among multi-currencies underconsideration.


17/47

Managementof

Liquidity Risk

Stock Approach

Stock Approach is based on the level of assets and

liabilities as well as off balance sheet exposures on

a particular date.

liquid assets to short term liabilities ratio

loan to deposits ratio


18/47

Managementof

Liquidity Risk

Flow Approach

-Measuring and managing net funding requirements.

-Managing Market Access-Contingency Planning


19/47

Liquidity Risk Profile of a Bank(Rs in crores)


20/47

Managementof

Interest Rate Risk

Interest rate risk is the volatility in net interest

income(NII) or in variations in net interest

margin(NIM).

Techniques:

1. Gap Analysis

2. Duration Gap Analysis

3. Simulation

4. Value at Risk


21/47

GAP Analysis

One way to measure the direction and extent of

asset-liability mismatch is by using gap analysis. The

analysis derives its name from the gap which is

the difference between the amounts of RateSensitive Asset (RSA) and Rate Sensitive Liabilities

(RSL).


22/47

GAP Analysis

Repricing gaps are calculated for assets and

liabilities of differing maturities.

Positive gap indicates that assets get repriced

before liabilities, whereas, a

Negative gap indicates that liabilities get repriced

before assets.


23/47

GAP Analysis

The general formula that is used is as follows:

NIIi =R i (GAPi)

NII

is the net interest incomeR refers to the interest rates impacting assets

and liabilities in the relevant maturity bucket

GAP refers to the differences between the book value

of the rate sensitive assets and the rate sensitive

liabilities.


24/47

Duration Model

Duration is an important measure of the interest

rate sensitivity of assets and liabilities as it takes

into account the time of arrival of cash flows and

the maturity of assets and liabilities.

It is the weighted average time to maturity of all

the preset values of cash flows. Duration basically

refers to the average life of the asset or the

liability.


25/47

Simulation

Simulation models help to introduce a dynamic

element in the analysis of interest rate risk.

Basically simulation models utilize computer power

to provide what ifscenarios, for example: What if:

The. absolute level of interest rates shift

Margins achieved in the past are not

sustained/improved


26/47

Value at Risk

It enables the calculation of market risk of a

portfolio for which no historical data exists.

It enables one to calculate the net worth of the

organization at any particular point of time so that

it is possible to focus on long-term risk implications

of decisions that have already been taken or that

are going to be taken.

It is used extensively for measuring the market risk

of a portfolio of assets and/or liabilities.


27/47

SUCCESS OF ALM PROCESS

The ALM process rests on ThreePillars:

1. ALM Information Systems

2. ALM Organisation

3. ALM Process


28/47

1. ALM INFORMATION SYSTEM

Decision Support and Reporting Tool

Comparison between different Branches

Product Analysis

Duration Gap Analysis

Risk Planning and Management

Flexible Design

Strategic Planning of the Asset-Liability Mix Simulation Analysis

Transfer- Pricing Mechanism


29/47

2. ALM ORGANISATION

Strong Commitment of Senior Management

ALCO should comprise the Senior Management

( including the CEO)

A Support Group of Operational Staff


30/47

Finance Planning Department

Asset Liability Committee (ALCO)

Board of Directors

Management Committee

Asset Liability Management Cell

Credit Analysis

Department

Credit Risk Management

DepartmentTreasury

Investment and Loan Departments


31/47


32/47


33/47

3. ALM PROCESS

The scope of ALM function can be described as

follows:

Liquidity Risk Management

Management of Market Risks

Trading Risk Management

Funding and Capital Planning

Profit Planning and Growth Projection


34/47

1.

StrategicFramework

2.

Organizational

Framework

3.

Operational

Framework

4.

AnalyticalFramework

5.

Technology

Framework

6.

Information

Reporting

Framework

7.

Performance

Measurement

Framework

8.

Regulatory

Compliance

Framework

9.

ControlFramework

ASSET ANDLIABILITY

MANAGEMENT


35/47

ASSET LIABILITY MANAGEMENT AT

ICICI BANK

The Special Asset Management Group (SAMG) isa group of people with specialized skills inmanaging the "stressed" assets of ICICI Bank.

The group was created with a view to enablerestructuring and recoveries through various initiativeslike innovative work-outs, merger & acquisitionstrategies, asset stripping, security enhancements and

structured sell-downs The group has also been working with / advising

various governmental and regulatory bodies in


36/47

evolving a framework for implementing international

best practices like asset reconstruction companies in

the country.

SAMG is a relatively smaller sized group; thereby theasset size per employee is among the highest in ICICI

Bank


37/47

RISK MANAGEMENT

Banks face several risks such as the liquidity risk,

interest rate risk, credit risk and operational risk.

Asset Liability management (ALM) is a strategic

management tool to manage interest rate risk andliquidity risk faced by banks, other financial services

companies and corporations.


38/47

ENTERPRISE RISK MANAGEMENT

ICICI has four dedicated groups, the Global Risk

Management Group (GRMG), the Compliance

Group, Internal Audit Group and the Financial

Crime Prevention and Reputation Risk ManagementGroup (FCPRRMG) which are responsible for

assessing, managing, and mitigating risk.


39/47

CREDITRISK

ICICI's loan book is well diversified, and has a higher

proportion of retail assets. Within retail, the bank has

the highest exposure to housing (54%), followed by

vehicle loans (29%). Unsecured retail loans form 16%of the total retail loans.

NPAs have started rising with the economic slowdown

and seasoning of loans. The loan book grew rapidly

between 2002 and 2009 with a CAGR (compoundannual growth rate) of 33.6%.The bank's rapid loan

growth and high exposure to unsecured retail assets

has increased the credit risk.


40/47

The gross NPAs as a proportion of gross customer

assets rose to 3.3 % as at March 31, 2009, from

1.7% as at March 31, 2006.

The absolute gross NPL increased by 27% in fiscal2009. The retail segment constituted about 73% of

NPL, which increased significantly in 2008 and

2009 due to increase in non-collateralized loan

exposure, seasoning of loans, and evolving legalinfrastructure pertaining to recovery of retail assets.


41/47

Unsecured loans will be the most vulnerable to creditrisk. Though ICICI bank is reducing its exposure to theseloans, they still constitute about 8% of total loans. Thecorporate portfolio has seen some stress in a fewsegments severely affected by the economic slowdown.However, these do not form a large proportion of thebank's portfolio.

The stress on ICICI Bank's asset quality is being

contained in fiscal 2010 in the most likely scenario ofreal economic growth of 5.8% to 6.3% in the currentfiscal year .


42/47

Given its strong capitalization, the bank should be

able to absorb credit costs relating to its NPA. ICICI

Bank's investments have averaged slightly over

31% of its total assets over the past three years.


43/47

MARKETRISK

ICICI Bank's Global Market and Operational Risk

Management Group exercises independent control

over market risk management and recommends

changes in the processes and methodologies formeasuring market risk. The TMOG(treasurymiddle

officegroup)monitorstheasset-liabilityposition

underthesupervisionofthe Asset-Liability

ManagementCommittee.


44/47

OPERATIONAL RISK

Operational risk is governed by an operational risk

management policy. The bank's definition of

operational risk includes all types of risks, except

credit and market risks; it excludes strategic andreputational risks. The control function is a mix of

financial control, technology-enabled processes and

efforts to instill risk culture.


45/47

LIQUIDITYRISK

The funding profile of ICICI Bank is satisfactory, thoughweaker than its domestic peers. The bank's ratio of loansto customer deposits for domestic operations is acceptableat 86%. However ICICI Bank Ltd's stand-alone (including

overseas branch operations, but excluding internationalsubsidiaries) loans to customer deposits ratio is higher at110%. The high ratio reflects the regulatory constraint onthe bank's capacity to raise retail deposits in itsinternational branches.

The management of liquidity risk is pretty muchsatisfactory.


46/47


47/47

THANK YOU

Documents

Banking CIA 2