Portfolio Management

A Bank of America Perspective

Executive Summary

Concept of Portfolio Management – an emerging strategy for excellence

Portfolio Management – reporting / monitoring function OR profit center

Origination versus ownership of risk Key transfer pricing challenges Maximizing shareholder value

Traditional Model

Philosophy of holding assets till maturity (or default) Relationships have been perceived by the extent of

paper / risk that is held by banks Performance metrics have been driven by revenues &

net income versus economic capital and ROE Emphasis on primary distribution with no markets /

products for secondary sales Use the drawing toolbar to draw the auto shapes

Buy Hold

Strategic Rationale for Change

Emergence of a secondary market. Flight to quality led to a smaller domain of issuers.

The new paradigm for return on capital

Net IncomeRevenue

RevenueCapital

= Return on Capital

X

Margin Velocity

Concept of Portfolio Management

Advocate of shareholder value Scope is not just limited to credit risk

management, but more… Owners of risk and capital Investor driven approach. Hold positions

benchmarked to market standards.

Portfolio Management discipline - isthis an emerging strategy forexcellence ? YES

The New Structure

Borrowers

Client Management

Origination

PortfolioManager

Credit decision Risk Rating

Pricing ReturnPortfolio Decision

Syndication

Loan Trading

Hedging & Securitization

Secondar yMkt

Servicing

New Approach to Portfolio Management

Originate to distribute Portfolio Management acts as buyer, seller and manager

of risk Support OR profit center ?

– Support in a cross sell environment

– ‘Hold’ to be at least SVA neutral Fundamental shift in viewing exposures from ‘Approved

commitments’ to ‘Economic capital usage’

Buy Sell, Hedge

Portfolio Management Philosophy

Improve credit / risk and productdelivery processes to transform thetraditional lending business into anissuer and investor-driven, mark-to market-based, “Originate to Distribute”business.

Portfolio Management : Role

Strategy

DCM Derivatives Other products

OriginationProcess

DistributionProcess

Portfolio Management Process

ISSUER ISSUER

Structuring Process

Market Clearing Process

Key Attributes

Strategic Risk Capital Allocation

•Risk capital to be BID for by GlobalIndustry and Key Product groups

•Robust return measurement metricswill drive on-going capital allocationS

trat

egy

Pro

cess

• Creation of a common platform whereall product partners will project their

business and expected ROE. Riskcapital will be allocated on this basis

Maximizing Shareholder Value - SVA

SVA Drivers

Capital usage Pricing discipline Volume / pricing management Mix of revenue Credit quality

Maximizing Shareholder Value

The economic capital framework creates a common currency for measuring risks and returns Different forms of risk: Credit, Market, Country and Business risks are quantified on a uniform scale Performance is expressed as an after-tax return on economic capital The framework creates incentives to deploy capital toward activities with better risk adjusted returns

Measuring return relative to risk

References

1. www.wikipedia.org

2. www.google.com