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FINANCE AND STRATEGY PRACTICE

BANK RAROC DIAGNOSTIC Bank Relationship Benchmarking

Sample Customized Report

© 2009 The Corporate Executive Board Company. All Rights Reserved. 2

MethodRisk-Reward

Analysis(Page 3)

Tear Sheets

RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD

TABLE OF CONTENTS


EXECUTIVE SUMMARY


A strong and statistically significant correlation exists between banks’

credit facility exposure and total banking fees.

The Bank RAROC Diagnostic is designed to:

• Analyze your banking relationships like banks would

• Illustrate your bank’s position in the banking “risk-reward comfort zone”

• Provide credit received versus bank fees paid data points

• Equip you with quantifiable data to strengthen your bank credit negotiations

Bank RAROC Diagnostic outputs:

• Risk – Reward Sensitivity Plots:

Are you receiving the credit you should based on bank fees you are paying? Is your bank relationship at risk?

• Tear sheets

Where does your relationship fits with your specific banks?


Banks fall into one of five segments:

• Investment banks receive the most fee business relative to their levels of credit participation. Key differentiators are the materiality of their credit participation and the degree of variance in fee capture across the “bulge bracket” players.

• US commercial banks bifurcate into two segments:

(i) The large “global stakeholders” with high levels of both credit participation and fee business

(ii) Regional banks that resemble the investment banks with comparatively low credit participation and relatively high marginal fee business

• European and Canadian banks provide more credit at close-to-average fee allocation levels

• Asian banks participate in credit facilities with relatively low levels of ancillary fee business.

J.P. Morgan

Citigroup

Morgan Stanley

Bank of America

ABN AMRODeutsche Bank

UBS

Bank of NY

Bank of Tokyo Scotiabank

Merrill Lynch

BNP Paribas

Credit Suisse Group

US Bank

Barclay'sHSBC

Societe Generale

Goldman Schs & Co.

Wells Fargo

Royal Bank of ScotlandMizuho Bank

Lehman Brths.

Fifth Third Bank

Sumitomo

RBC

Wachovia Securities

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

$180,000,000

$200,000,000

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000

Total Bank Fees

Cre

dit E

xpos

ure

Low Boundary of Risk-Reward "Comfort Zone" High Boundary of Risk-Reward "Comfort Zone"

AVERAGE FEES TO AVERAGE EXPOSURE


RISK-REWARD SENSITIVITY PLOT

*Illustration from ’04 data set


Fees Exposure Fees Exposure Fees ExposureWachovia Securities $0.2 MM $30 MM Bank of New York $0.41 MM $10 MM Goldman Schs & Co. $0.02 MM $5 MM

J.P. Morgan $0.5 MM $28 MM Royal Bank of Canada $0.98 MM $10 MM Deutsche Bank $0.06 MM $3 MM

Bank of America $0.24 MM $25 MM KBC Bank $0.03 MM $15 MM

Key Bank $0.13 MM $25 MM Bank of Tokyo $0.03 MM $15 MM

US Bank $0.57 MM $25 MM AG Edwards $0.04 MM $8 MM

Wells Fargo $0.47 MM $25 MM Credit Suisse Group $0.01 MM $5 MM please type here $0 MM

Union Bank of California $0.05 MM $18 MM Morgan Stanley $0.2 MM $5 MM

Banking Fees and Credit Exposure Positions on the Plot:

Wachovia Securities J.P. MorganKey Bank

Bank of America Wells Fargo

Bank of New York

Royal Bank of CanadaKBC BankBank of Tokyo

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000Fees

Exposure

RISK-REWARD RELATIONSHIP PLOT

Analysis of your banks’ risk-reward relationship suggests that relationship with Bank of Tokyo may be potentially under stress. At the same time, RBC may be receiving a disproportionate amount of banking fees relative to their credit facility participation.


BANK RELATIONSHIP ANALYSIS

High Boundary

“Risk-Reward Comfort Zone”

Low Boundary

*Illustration from ’04 data set


NEMO Credit Exposure Gross Margin Expected LossInterest on

CapitalRequired Capital RAROC**

Median RAROC for BBB

GAP

Wachovia Securities $30,000,000 $122,910 26,976$ 49,977$ 951,948$ 15.33% 12.29% 3.03%

J.P. Morgan $27,500,000 $292,394 24,728$ 45,812$ 872,619$ 35.92% 21.72% 14.21%

Bank of America $25,000,000 $136,712 22,480$ 41,648$ 793,290$ 19.65% 14.68% 4.97%

Key Bank $25,000,000 $65,994 22,480$ 41,648$ 793,290$ 10.74% 6.64% 4.09%

US Bank $25,000,000 $189,271 22,480$ 41,648$ 793,290$ 26.28% 10.47% 15.81%

Wells Fargo $25,000,000 $136,644 22,480$ 41,648$ 793,290$ 19.64% 11.21% 8.43%

Union Bank of California $17,500,000 $14,503 15,736$ 29,153$ 555,303$ 5.03% 9.00% -3.97%

Bank of New York $10,000,000 $333,636 8,992$ 16,659$ 317,316$ 107.56% 12.58% 94.98%

Royal Bank of Canada $10,000,000 $767,759 8,992$ 16,659$ 317,316$ 244.37% 15.30% 229.07%

KBC Bank $15,000,000 $3,054 13,488$ 24,989$ 475,974$ 3.06% 3.26% -0.20%

Bank of Tokyo $15,000,000 $3,054 13,488$ 24,989$ 475,974$ 3.06% 4.12% -1.06%

AG Edwards $7,500,000 $20,526 6,744$ 12,494$ 237,987$ 11.04% 0.00% 11.04%

Credit Suisse Group $5,000,000 $4,458 4,496$ 8,330$ 158,658$ 5.23% 17.38% -12.15%

Morgan Stanley $5,000,000 $132,296 4,496$ 8,330$ 158,658$ 85.80% 15.15% 70.65%

Goldman Schs & Co. $5,000,000 $12,436 4,496$ 8,330$ 158,658$ 10.25% 36.93% -26.68%

Deutsche Bank $2,500,000 $49,425 2,248$ 4,165$ 79,329$ 64.72% 10.81% 53.91%

AssumptionsLoss Given Default 54%

Probabilty of Default 0.23%

Required Capital, as % of CF* 3.17%

Exposure at default, as % of CF 72.00%

Interest on Required Capital 5.25%

Credit Facility 10.0%

Cash Management 20.0%

FX-Related Services 10.0%

Other Capital Markets Services (CP, etc.)50.0%

Debt Issuance Services 80.0%

Equity Issuance Services 90.0%

Advisory (e.g., M&A) Services 80.0%

Other Services: 80.0%

Gross Profit Margin

*Based on Basel II Model for Capital Requirement

REQUIRED CAPITAL = [LGD * N [(1 - R)^-0.5 * G (PD) + (R / (1 - R))^0.5 * G (0.999)] -

- PD * LGD] * (1 - 1.5 * b(PD))^-1 * (1 + (M - 2.5) * b (PD)), Where R = 0.12 * (1 - EXP(-50 * PD))/(1-EXP(-50))

+ 0.24 * [1 - (1 - EXP(-50 * PD))/((1 - EXP(-50))]

b(PD) = (0.11852 - 0.05478 * LN(PD))^2

PD – Probability of default

LGD – Loss Given Default

R – Asset correlation (to be determined by asset class)

**RAROC = GROSS MARGIN - EXPECTED LOSS + INTEREST ON ECONOMIC CAPITAL / REQUIRED CAPITAL, Where


BANK RAROC ANALYSIS


MethodRisk-Reward

AnalysisTear Sheets

(Page 8)



Positions Total Fees Credit Exposure Bank Name RAROC Median RAROC GAP

Current J.P. Morgan $465,382 $27,500,000 J.P. Morgan 35.92% 21.72% 14.21%

Average J.P. Morgan $3,550,488 $133,498,402

Average bank in your facility $244,837 $15,625,000

Profitability of Bank RelationshipRisk-Reward Relationship

Credit Exposure Vs. Fees

Current J.P. Morgan

Fee change (directional)

Exposure change (directional)

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

- 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000

Total Fees

Cre

dit

Exp

osu

re

Current J.P. Morgan Average J.P. Morgan Average Company Facility

BANK RELATIONSHIP ANALYSIS: J.P. Morgan

NOTE: you will receive a tear sheet for each bank that you submit in the survey.


Positions Total Fees Credit Exposure Bank Name RAROC Median RAROC GAP

Current Wachovia Securities $240,174 $30,000,000 Wachovia Securities 15.33% 12.29% 3.03%

Average Wachovia Securities $1,872,694 $99,305,242

Average bank in your facility $244,837 $15,625,000

Profitability of Bank RelationshipRisk-Reward Relationship

Credit Exposure Vs. Fees

Current Wachovia Securities

Fee change (directional)

Exposure change (directional)

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

- 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000

Total Fees

Cre

dit

Exp

osu

re

Current Wachovia Securities Average Wachovia Securities Average bank in your facility

SAMPLE TEAR SHEET: WACHOVIA SECURITIES


NOTE: you will receive a tear sheet for each bank that you submit in the survey.


Method(Page 10)

Risk-Reward Analysis

Tear Sheets



Applying Basel II framework, the Roundtable derives a synthetic risk-adjusted return on required capital for the banks in your credit facility pool and compares it to the average RAROC realized by these banks in their relationships with other surveyed companies.

BANK RAROC TOOL

RISK-ADJUSTED RETURN ON CAPITAL (RAROC) CALCULATOR



Bank1

Bank3

Bank4

Bank16

y = 3E+07Ln(x) - 3E+08

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

- 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000

Total Fees Paid to the Banks by a Company

Ban

k's

Cre

dit

Exp

osu

re t

o a

Co

mp

any

The Roundtable’s analysis of bank relationship starts with the identification of potentially unhealthy bank relationships when compared to the lognormal relationship.

• In this example, relationships with Bank1, Bank4 and Bank3 may be potentially “stressed”, as these particular banks fall outside the risk-reward “comfort zone”. At the same time, Bank 16 appears to be receiving a disproportionate share of banking fees given its credit facility participation.

BANK RAROC METHODOLOGY

Comfort Zone

Grey lines delineate one

standard deviation above and below the risk-reward

relationship function

“Sleepers”: Potentially StressedRelationships

“Dealmakers”: Potentially Disproportionate Wallet Share

SAMPLE RISK/REWARD RELATIONSHIP PLOT

• Note:• A strong and statistically significant correlation exists between credit facility banks’ exposure and total banking fees. • This trend supports the assertion that banks’ participation in credit facilities is driven not only by credit facility fees and structure,

but also by total banking relationship wallet share. • The data suggests that as the amount of total fees received by a bank increases, their appetite for credit exposure increases

along with it, but at a decreasing rate. • This relationship appears to be best explained by a logarithmic function, suggesting that after bank exposure reaches a certain

threshold, the bank is less able to diversify company-specific or industry-specific risk within its portfolio.


CORPORATE EXECUTIVE BOARD

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Economic Analysis and Decision Support Group

The Economic Analysis and Decision Support Group has worked to ensure the accuracy of the information it provides to the Corporate Executive Board members. This project relies upon data obtained from many sources, however, and the Economic Analysis and Decision Support Group cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, the Economic Analysis and Decision Support Group is not engaged in rendering legal, accounting, or other professional services. Its projects should not be construed as professional advice on any particular set of facts or circumstances. Members requiring such services are advised to consult an appropriate professional. Neither Corporate Executive Board nor its programs are responsible for any claims or losses that may arise from any errors or omissions in their reports, whether caused by Corporate Executive Board or its sources.

Professional Services Note

Thomas Roberts – DirectorDennis Gannon – Senior DirectorOleg Polishchuk – Senior DirectorMichael Griffin – Managing DirectorAnil Prahlad – Managing DirectorScott Bohannon – General Manager

Please contact the team with any questions or comments at (571) 303-6257

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