1

IACPM India

Regional Meeting

February 2, 2017

Credit Risk & Portfolio Management:

Evolving Frameworks

Som-lok Leung

Executive Director, IACPM

About the IACPM

2

3

The IACPM’s Mission

Further the management of credit exposures by providing a forum for member institutions to exchange ideas

Foster research on credit portfolio management

Represent members before regulators and rulemaking bodies (e.g., IASB)

Develop and promote standard practices

98 Member Institutions

4

ABN AMRO Bank NV

ABSA Capital

African Development Bank Group

African Export-Import Bank

AIG, Inc.

Allianz

Allied Irish Banks

Al Rajhi Bank

Assenagon Asset Management

Asian Development Bank

ATB Financial

Atradius

Australia & New Zealand Banking Group

AXA Investment Managers

BB&T

Banco Itau

Banco Santander

Bank of America

Bank of Montreal

Bank of the West

Bank of Tokyo-Mitsubishi UFJ

Barclays Capital

BBVA

BLADEX

BNP Paribas

Capital One

China Huarong

Chorus Capital

CIBC World Markets

Citigroup

Citizens Financial Group

Commonwealth Bank of Australia

Credit Agricole CIB

Credit Suisse

DBS Bank Ltd.

Danske Bank

Deutsche Bank

Development Bank of Japan

Elanus Capital Management

European Bank for Reconstruction &

Development

European Investment Fund

Export Development Canada

Export-Import Bank

Fifth Third

First Horizon

FirstRand Bank

Funding Asia Group

GE Capital

Goldman Sachs

Huntington National Bank

HSBC

Inter-American Development Bank

IKB Deutsche Industriebank

ING Group

International Finance Corporation,

Intesa Sanpaolo

JPMorgan Chase

Jyske Bank

KeyCorp

KfW Ipex

Lloyds Banking Group

M&T Bank

Mizuho Bank, Limited

Morgan Stanley

Munich Reinsurance

National Australia Bank

National Bank Financial

Nationwide Insurance

Natixis

Nomura International

Nordea

NordLB

OCBC Bank

Orchard Global Asset Management

PGGM Investments

PNC Financial Services

Prudential

Rabobank

Regions Bank

RBC Capital Markets

Royal Bank of Scotland

Société Générale

Standard Chartered Bank

State Street Bank

Sumitomo-Mitsui Banking Corp

Sumitomo Mitsui Trust & Banking

Sun Life Financial

SVB Financial Group

Swiss Re

TCF Financial

TD Bank

UBS

UniCredit Group S.p.A.

UniCredit Corporate & Investment Banking

United Overseas Bank

UK Export Finance

Westpac

XL Catlin

IACPM Members Around the Globe

5

United States

29

Canada

8

Africa

4

South

America

1

Asia

12 Europe

38

Australia

4

Central

America

1

Middle East

1

IACPM Board of Directors

6

IACPM Officers/Executive Committee

Sean Kavanagh, Citigroup (Chair) Tim Hartzell, Barclays (Vice Chair)

Cam DesBrisay, RBC Capital Markets (Treasurer)

Sarah Cheriton-Jones, Lloyds (Secretary)

Directors

Thomas Alamalhoda, BNP Paribas Som-lok Leung, IACPM

Cheryl Boucher, Bank of America Anthony O’Flynn, Commonwealth Bank of Australia

Chris Camisa, Bank of Tokyo-Mitsubishi UFJ, Ltd. Juan Manuel Prado, BBVA

Anne-Christine Champion, Natixis Derek Saunders, HSBC

Davide Crippa, Standard Chartered Bank Mitchell Smith, JP Morgan Chase

Dell Futch, Regions Bank Seiya Ueno, Mizuho Bank, Limited

Brian Hurdal, Credit Suisse Jeffery J. Weaver, KeyCorp*

IACPM Advisory Council

Andreas Bohn, Managing Partner, SwanCap

Craig Broderick, CRO, Goldman Sachs

Jin-Chuan Duan, Professor of Finance, Natl. Univ. of Singapore

Betsy Gile, Board Member, KeyCorp

Mark Hughes, CRO, RBC Capital

Stuart Lewis, CRO, Deutsche Bank

Mark Midkiff, CRO, GE Capital

Elbert Pattijn, CRO, DBS

Francois Riahi, Global Co-head CIB, Natixis

Sid Sankaran, CFO, AIG

Sir Hector Sants, Vice Chairman, Oliver Wyman & former FSA

Bob Scanlon, former group CCO, Standard Chartered

Nick Silitch, CRO, Prudential Financial

Mark Smith, CRO Standard Chartered

7

What We Do

IACPM Sponsored Meetings

- Conferences

- Regional/Interest Group Meetings & Roundtables

- Educational Seminars

Research projects & surveys

Advocacy

Committees and working groups

Development of market practice

Weekly news briefing via email

8

Why Credit Portfolio Management?

9

Credit risk is different

10

There’s more than one business in credit

“Origination”

Specialization

Expertise

Relationships

Volume

“Portfolio”

Diversification across industry

Diversification across geography

Limited concentrations

11

Getting Started with CPM

12

Develop

business plan

for credit

portfolio

management

Recognition by senior

management of need for

change

(Originate & hold vs. CPM)

Improve measurement and

management of credit risk

(Use of models and market

data)

Educate the organization,

change culture

Agreement on mandates

and objectives for CPM

Core & Related

CPM Support

Functions

Back end

control levers

Front end

control levers

Control Levers

Front end control

Policy, limits

Deal/credit committee input

Pricing tools (RAROC, etc.)

Syndications

Back end control

Loan sales, distribution

Insurance products

Single name hedges

Securitizations (cash, synthetic)

Macro hedges (tranches, baskets, etc.)

13

Credit Portfolio Management

The State of the Practice

14

Firms Apply CPM to Different Asset Mixes

15

Source: IACPM 2015 Principles & Practices in CPM Survey

16

Firms Build Unique CPM Organizations

Source: IACPM 2015 Principles & Practices in CPM Survey

Not involved

Advisory role

Co- responsibility

Full and sole responsibility

Does not apply

Origination

Function

Transfer pricing of assets

from origination function to

portfolio function

Transaction origination and

vetting (e.g., pricing, hold

amount, approval)

Market

Tools

Portfolio CDS hedging

strategy and/or execution

CPM research (dedicated sector/name

research within CPM)

Portfolio secondary sales

Portfolio securitization

Investing via a "long book"

for diversification and/or to

fund hedging/sales

Portfolio

Reporting/

Modeling

Portfolio reporting and data

analysis

Quantitative modeling and

analytics (e.g., development,

validation, stress testing,

economic capital, risk/

return, PD, LGD)

Problem loan management

CPM Mandate Can Vary By Firm

17

Source: IACPM 2015 Principles & Practices in CPM Survey

Selected CPM Mandates by Region

18

Source: IACPM 2015 Principles & Practices in CPM

External Drivers of Current CPM Mandates

19

Focus on B/S and

sustainability of

business model

Focus on execution

and implementation

of CPM model

Changed customer behavior 22%

Additional regulatory pressure 85%

Existing balance sheet

constraints 86%

Cost/margin pressure 59%

Increased market volatility 41%

Changed instrument set/

illiquidity in secondary markets 32%

SOURCE: IACPM/McKinsey survey 2015 on "The evolving role of Credit Portfolio Management within the enterprise"

CPM Control Levers

20

Back End Control Levers Front End Control Levers

Credit insurance 37%

Financial guarantees 46%

Linkages with insurance

companies/asset managers 39%

32% Single-name CDS

37% Securitizations

17% Index tranches, baskets,

options

71% Loan sales/purchases

Pricing analytics 59%

Credit analysis 78%

Economic capital

measurement tools 68%

Transfer pricing 29%

Portfolio capital

allocation or planning 66%

Portfolio perspective in

deal decision of

institution 73%

Concentration limits 88% Regulatory capital

measurement tools 88%

SOURCE: IACPM/McKinsey survey 2015 on "The evolving role of Credit Portfolio Management within the enterprise"

CPM Continues to Increase in Importance

21

Source: IACPM 2015 Principles & Practices in CPM

Resources

IACPM website: www.iacpm.org

- Principles & Practices in CPM 2015 (repeating soon)

- “The Evolving Role of Credit Portfolio Management

Within the Enterprise” – research with McKinsey

- Sound Practices in Credit Portfolio Management

IACPM Weekly Smartbrief: www.smartbrief.com/iacpm

22