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Banc One Strategy 1993 1994
Segah Meer (MAE 12)
S********@nes.ru
+7(963)*********
Aleksandr Sh**** (MIF 12)
A**********@nes.ru
+7(985)*******
1 Banc One 2010
mailto:[email protected]:[email protected]:[email protected]:[email protected]8/13/2019 Sberbank Asset & Liability Management Contest
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Meeting Agenda
Address growing concerns over our derivative portfolio
analysts accuse us of overstating ROA and Profit Margins notional amount disclosures incorrectly suggest one-way
exposure
Discuss recent and expected market conditions
our risk exposure relative to the industry existing risk management strategy new derivative instruments MBS, AIRS immediate plans for the derivatives portfolio
Our long-term strategy
M&A and implications for overall interest rate exposure modest liability sensitivity in stable economic conditions focus on longer-term (2 year) periods for continuous change
in rates
Q&A
2 Banc One 2010
NetIncome
ROE
ROA
1.53%
$1.14billion
17.89%
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Interest Rate Exposure: Negligible!
Asset Sensitive Growth Strategy
Addition of $9 billion to assets from Non-dilutivepending M&A activity
Asset sensitive Basic Portfolio Rising magnitude of GAP from acquisitions
incorrectly suggests increases in swap portfolios NIM (the relevant metric) stays the same
Negative GAP is normal at times of low
interest rates (when the demand for short-term loans is low) - hence the need forderivatives as hedging instruments
3 Banc One2010
Derivatives & Risk Management
Net payments are free from the risk of default Ability to drop Earnings Sensitiv ity t o -0.2%by
the end of 1994 should the interest rates rise
Short-term liquidity Disclosed Notional Amount exceeds One-Way
Potential Exposure
ROA & ROE are wrong metrics - earnings
sensitivity and net income are the correct metrics Greater Earnings imply greater volume of swap
contracts
Short-Term Assets Short-Term Liabilities
M&A
BasicPortfolio
GAP
Liquidity
Two-wayExposure
NoDefault
Risk
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Fluctuating Interest Rates are Driving Equity Valuations of Banks
4 Banc One 2010
Since 1989 the market has seen sharp decline in interest rates
rates continued to decline unprecedentedly for 4 straight years In 1991, some analysts incorrectly concluded that typical long-term asset
sensitivity of Banks would lead to the decline of their earnings
a drop in rates implied a rise in demand for refinancing
Bank One, among others, was downgraded in its credit rating to AA-
?
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Interest Rate Derivatives
Do interest rate
derivatives affect theprice?
7 Banc One 2010
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Value creation for shareholders
8 Banc One 2010
Does derivative usage for hedginginterest rate risk add value toshareholders? We certainly think so
VS
But we understand your concern:using derivatives just to avoid capitalconstrains results in lower value andsuggests weak assets
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Hedging Strategy
Banc one'snatural balancesheet position
is assetsensitive
interest rateson our assets
react morequickly
Banc Onesearnings riseand fall withinterest rates
To minimize
this interestrate exposurewe use
derivatives(instead of U.S.Treasures, etc.)
The result is areduction inoverall asset
sensitivity
9 Banc One 2010
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Derivatives vs U.S. Treasuries
MBS
Provided lower after-tax return
Prepayment risk (when low interest rates)
CMO
Pools divided into tranches with different risk of prepayment Still, the prepayment risk exists. CMOs remain subject to capital adequacy requirements
Swaps
Capital is preserved Liquidity is increased Enable faster response to changes in market conditions Customized contracts (e.g. duration) Off-balance sheet (Boost ROE, ROA)
AIRS
High yields in exchange for taking on prepayment risk Reduction of capital adequacy requirement More liquid than CMO BUTIncrease in earnings volatility
10 Banc One 2010
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Look at AIRS!
Hedging
Speculative
11 Banc One 2010
Increased volatility inearnings:
1% increase in rates 1% earnings drop2 % increase in rates
3%, 4% drop (NOT 2%)
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M&A Strategy
13 Banc One 2010
in case of $9 bl. M&A
M&A of asset liabilityfirm could boostasset sensitivity
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Continuing Growth with Prudent Risk Management
14 Banc One 2010
d
Strategic Acquisitions
Acquisition of asset sensitive firms
No dilutive acquisitions
Centralization of operations
Asset & Liabi lity Simulat ions
On-line balance sheet measuring
responses to interest rate shifts Monthly download of over 3 million
loans and deposits
ALCOs A&L Management policies
Commitment to Maximizing
Shareholder Value
Faze-out a share of swap contractswith the use of offsetting contracts
Initiate a Buyback stock at
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Strategy to Maximize Shareholder Value
15 Banc One 2010
Settle M&Adeals
($9 billion)
Supportstock price:Dividends,Buy Backs
Act onexpectationsof a rise ininterestrates
Continue to useSwaps in HedgingRisks
Maximize
shareholder value
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Banc One
16 Banc One 2010
THANK YOU!
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Appendix
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