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1
Commonwealth Bank of Australia ACN 123 123 124
David CraigCHIEF FINANCIAL OFFICER
Managing interest rate risk
9 September 2009
Determined to offer strength in uncertain times.
Alden ToevsCHIEF RISK OFFICER
Lyn CobleyGROUP TREASURER
2
Disclaimer
The material that follows is a presentation of general background information
about the Bank’s activities current at the date of the presentation, 9
September 2009. It is information given in summary form and does not
purport to be complete. It is not intended to be relied upon as advice to
investors or potential investors and does not take into account the
investment objectives, financial situation or needs of any particular investor.
These should be considered, with or without professional advice when
deciding if an investment is appropriate.
3
Agenda
Introduction David Craig
Replicating Portfolios Lyn Cobley
Balance Sheet Lean and Alden Toevs
Duration of Equity
Questions & Answers Panel
4
Group NIM FY09
* Includes ASB and other offshore
Jun 08 Assets Deposits Mix & Liquids Treasury Other* Jun 09
Replicating
Portfolio
Capital
DOE & Balance
Sheet positioning
Personal Lending
Business Lending
Home Loans
Transactions
Savings
Investment
Domestic Pricing
+13 -24
+24
202 210
+4
-6
-7
+16
+2+3
-9 +4
+6-9
+4
bpts
Management of interest rate
risk contributed 24 bpts to the
Group’s FY09 NIM movement
5
CBA Balance Sheet - Overview
6%1%
4%7%
4%
18%
33%14%
49%55%
4% 5%
Other Assets
Other Lending
(2.5 yrs)
Home Loans
(4 yrs)
Trading Securities
Cash Capital
Deposits
Commercial (2 yrs)
Household (4 yrs)
Long Term
(3.6 yrs)
Short Term
Other LiabilitiesTrading Liabilities
CBA balance sheet as at 30 June 2009
Balance sheet does not include derivative assets and liabilities
(21%
household
deposits)
Assets Liab + Equity
Other Fair Value assets
Balance sheet has a
high level of natural
hedging
Interest rate risk
arises from re-pricing
characteristics
6
Managing interest rate risk
Assets Liabilities plus capital
Rate
insensitive
deposits
Portfolio of
fixed rate
assets
Portfolio of
fixed rate
assets
Duration of
Equity
Equity and
retained
earnings
Assets Liabilities
Balance
Sheet Lean
(if any)
Replicating
Portfolios
Liabilities
plus capital
Assets
Illustrative only. Not drawn to scale.
To smooth the impact
of interest rate
volatility on the
Group’s NIM and
earnings through a
combination of passive
(RP, Duration of
Equity) and active
(Balance Sheet Lean)
management
strategies
1
3
2
7
Agenda
Introduction David Craig
Replicating Portfolios Lyn Cobley
Balance Sheet Lean and Alden Toevs
Duration of Equity
Questions & Answers Panel
8
Replicating Portfolios
Assets Liabilities plus capital
Rate
insensitive
deposits
Portfolio of
fixed rate
assets
Portfolio of
fixed rate
assets
Duration of
Equity
Equity and
retained
earnings
Assets Liabilities
Balance
Sheet Lean
Replicating
Portfolios
Liabilities
plus capital
Assets
Illustrative only. Not drawn to scale.
1A selected portfolio of
fixed rate assets with
repricing
characteristics that
mirror that subset of
the Group’s retail
deposit base which is
less than 100% rate
sensitive
9
Replicating Portfolios
In place for over 15 years – a consistent strategy
Represents approximately $70bn of retail deposit balances
Includes 15 different deposit products
All products individually assessed
Formal annual review, ongoing monitoring, APRA oversight
No executive discretion – predetermined, modelled approach
Smooths NIM/earnings volatility through the cycle
10
Replicating Portfolio over time
1%
2%
3%
4%
5%
6%
7%
8%
1996 Current
Replicating
Portfolio Yield
Official Cash
Rate
2001 2005
11
Rising Rate Scenario #1
1%
2%
3%
4%
5%
6%
7%
8%
Scenario #1:
Rising Rate Period
1996 2001 2005 Current 2015
Replicating Portfolio Yield
Official Cash Rate
12
Rising Rate Scenario #2
1%
2%
3%
4%
5%
6%
7%
8%
1996 2001 2006 2011
Scenario #2:
Rising Rate Period
1996 2001 2005 Current 2015
Replicating Portfolio Yield
Official Cash Rate
13
Agenda
Introduction David Craig
Replicating Portfolios Lyn Cobley
Balance Sheet Lean and Alden Toevs
Duration of Equity
Questions & Answers Panel
14
Balance Sheet Lean
Assets Liabilities plus capital
Rate
insensitive
deposits
Portfolio of
fixed rate
assets
Portfolio of
fixed rate
assets
Duration of
Equity
Equity and
retained
earnings
Assets Liabilities
Balance
Sheet Lean
(if any)
Replicating
Portfolios
Liabilities
plus capital
Assets
Illustrative only. Not drawn to scale.
2
Active management of
the Group’s asset and
liability “mis-match”
within a carefully
managed risk and
regulatory framework
15
Duration of Equity
Assets Liabilities plus capital
Rate
insensitive
deposits
Portfolio of
fixed rate
assets
Portfolio of
fixed rate
assets
Duration of
Equity
Equity and
retained
earnings
Assets Liabilities
Balance
Sheet Lean
Replicating
Portfolios
Liabilities
plus capitalAssets
Illustrative only. Not drawn to scale.
3
Managing the earnings
impact of free
capital, primarily with
regard to term invested
(Investment Term of
Capital or ITOC)
16
Duration of Equity
0%
2%
4%
6%
8%
10%
12%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Official Cash RatePortfolio of 1 year fixed
rate instruments
(APRA preference in APS117)
Portfolio of 5 year fixed
rate instruments
(CBA preference)
Scenario:
Rising Rate Period
17
Duration of Equity
Potential Offset to Credit Cycle Losses(US industry perspective 1963-2003)
Source: Historical interest rates from Federal Reserve data. Net charge-offs data from FDIC
(weighted average for all FDIC-insured commercial banks)
LIE (bpts)Realised Gains Coupon Income 10 Year UST Yield
18
Interest rates vs credit spreads
0%
1%
2%
3%
4%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2002 2003 2004 2005 2006 2007 2008 2009
3 year swap rate (LHS)
BBB spread (RHS)
19
Jun 08 Dec 08
Optionality (retail)
Basis Risk
Repricing and
Yield Curve Risk
Embedded Loss
Jun 09
$1,286m
-$70m
(ie zero)
$716m
Embedded Gain
(offset to capital)
Repricing and
Yield Curve Risk
Basis Risk
Optionality
(retail)
Fixed rate asset portfolios serve to offset NIM
compression in falling and low rate environment -
less APS117 capital needs to be held
Capital Impacts - APS117
20
Commonwealth Bank of Australia ACN 123 123 124
Questions &
Answers
9 September 2009
Determined to offer strength in uncertain times.