This course will provide participants with an opportunity to enhance their knowledge of risk and return issues for both individual corporate credit exposures as well as a corporate credit portfolio, and also some of the techniques of active credit portfolio management. The emphasis of the course is on risk and return issues for large corporate exposures, although there will be some coverage of Structured Debt Finance.
Whilst the course will include some quantitative elements, the focus of the course is not on building credit risk models and best practice in financial modeling, or the interpretation of the model, but a financial model will be used to illustrate risk and return issues as a basis for evaluating and managing a corporate credit portfolio.
The course will be in 3 parts
Part 1 will look at 2 or 3 examples of large corporates credit exposures where participants will develop a proposal for building the relationship and assessing the returns from the relationship. The results will then be discussed with a view to assessing how returns from the relationship might be improved
Part 2 will build on Part 1 by looking at developments in the Bank Capital Adequacy Rules and typical methods for measuring bank performance and then discussing the key features of RAROC and corporate credit risk measurement
Part 3 will look at techniques for managing the credit portfolio to enhance returns.
There will be a mixture of presentations and exercises to illustrate risk and return issues on credit portfolio management, and to discuss potential implications of proposed changes in the Basle Capital Adequacy Rules.
Risk and return for a single corporate banking relationship
Introduction: Developing a corporate credit portfolio – key elements
- How much risk are you prepared to assume?
- What rate of return do you expect?
- What options are there for enhancing risk vs return?
- Exercise: assessing risk and return in 3 examples of credit portfolios
Developing a strategy to develop a banking relationship for a large corporate
During this session participants will develop their objectives for developing a relationship with a large corporate that will meet, from a bank’s perspective, an acceptable balance between risk and return whilst meeting the needs of the company. In developing the strategy participants should consider the following issues
- Understanding a company and its strategic goals – what are the financing implications?
- What are the core activities of the company; where does it trade?
- What is its market position?
- Organic growth vs acquisitions vs divestments
- Competitive position and dynamics of the industry sector
- What are the key financial risks facing the company – how might this impact on banking requirements?
- What are the key costs in the business – can they be managed?
- How companies and financial investors measure performance and financial objectives – how will this influence the company?
- Accounting based measures: ROE, ROCE
- Other measures: CFROI and EVA
- How these measures link with Cost of Capital
- IRR objectives for financial sponsors in projects and how this is intended to be achieved
- What is the company’s financial risk profile?
- What is the structure of the debt – maturity structure; currency composition
- Is the company using a range of debt financing instruments – loans vs bonds; use of Structured Finance
- What are some of the potential benefits / limitations of various debt products?
- Other financial risk exposures – off balance sheet financings, liabilities and commitments
- Rating objectives
- Debt vs equity decisions – principles of corporate valuation
- What is the anticipated development of the company’s financing needs
Presentation by the participants of their strategy and group discussion
Risk and return and Basle Capital Adequacy rules as they relate to corporate credit risk
Measuring risk in a corporate credit portfolio
- Traditional accounting based methods of bank performance measurement and potential limitations
- Exercise : Comparison of returns on selected corporate credit portfolios
- Relating the traditional methods of bank performance measurement with equity performance measures
- Looking at net earnings in terms of earnings per share
- Assessing returns on a corporate credit
- Exercise : evaluation of returns on a corporate credit portfolio
- Risk adjusted returns –the Basle Capital Adequacy rules for corporate credit exposures
- Development of the Basle Capital Adequacy Rules for corporate credit exposures
- Standardised approach vs internal rating based models
- Corporate credit vs retail finance
- Unsecured vs secured transactions- impact of collateral
- Exercise: Evaluating how changes in underlying assumptions in a credit portfolio model impacts risk and return – stress testing a corporate credit portfolio model
Managing the portfolio
Managing a corporate credit portfolio – how a bank views portfolio management and how this compares with techniques used by fund managers
- Traditional measures – portfolio diversification, how this might relate to assessment of bank credit portfolios in terms of risks in the portfolio
- Review of a corporate loan securitisation to illustrate issues relating to portfolio composition
- How investment managers view portfolio management and how some of the practices might be adopted in loan portfolio management
- Different investment management styles
- Use of benchmarks for measuring returns
- How investors assess the performance of fund managers
Active corporate credit portfolio management
- Options for more active corporate credit portfolio management in a bank
- Changing the risk profile of the portfolio
- Boosting ancillary income from the relationship
- Reducing the amount of capital needed to support the portfolio – book value of capital vs regulatory capital vs economic capital
- Use of securitisation and how it works ; Securitisation and Basle Capital Adequacy
- Exercise : participants review and sensitise a sample portfolio to assess how portfolio returns can be maximised