CESIM BANK SIMULATION Introduction. Simulation for banking and financial services

Transcription

1 CESIM BANK SIMULATION Introduction Simulation for banking and financial services

2 What is Cesim Bank Simulation? The goal of the Cesim Bank Simulation is to facilitate understanding of the front and back office operations of a bank, and their interaction in a competitive environment, and to help cultivate holistic and fact-based management culture, develop analytical skills, and create awareness about the current banking operating environment. The task for the participating teams is to manage a bank with several front and back office operations in a single geographical market. In the role of a bank manager, the teams will be responsible for retail and SME clients, lending and borrowing, front office and back office, and customers with deposits, mortgages and investments. They ll have personnel to manage, IT systems to develop, regulators to report to and capital markets to raise financing from, provided that they are pleased with the way the bank is managed. 2

3 Learning Goals Key learning goals include: a. Balancing risks and the growth of the balance sheet. b. The division of sources of bank funding into core deposits and managed liabilities. c. Understanding the bank income statement and balance sheet. d. The function of the central bank as the lender-of-last-resort. e. Bank specific solvency and liquidity measures and regulation according to Basel III. f. Bank specific terminology and results presentation including many unique financial ratios. g. Uniqueness of money as the bank s core product. h. Profitability of different customer segments. i. Understanding basic banking products and services and their interconnectedness. 3

4 Learning Process Concrete experience Decision making Applying new ideas Analysis & planning Observations & reflections Results & teamwork Generalizing from the experience Lectures & discussion 4

5 Targeted at Educational sector Financial services industry a. Introduce banking to participants in a new, much more engaging way b. Allow the participants to learning complex banking issues by making them in charge of their own bank and compete against their peers c. Content configuration options allow for targeting optimal learning outcomes a. Illustrate core banking topics b. Demonstrate the interaction of different banking functions in a competitive environment or key initiatives in a simulated, yet familiar setting c. Broad range of customization possibilities out of the box d. Great platform for custom development 5

6 Web Based Solution The simulation is completely web based. There is no need to install any separate applications and the simulation can be accessed from any computer that has an internet connection. The simulation platform allows team members to work virtually if they wish. Each team member has her/his own account that enables them to make decisions and scenarios on their own and later combine the outcomes with the other team members on the [decision checklist] -page. The platform also includes a communications forum that can be used to communicate within teams and between all teams in one market. 6

7 Simulation Platform Structure The simulation platform includes the following pages: [Home] - Overview page with deadlines [Decisions] - All decisions are made under Decisions [Results] - Results become available in this area after each deadline [Schedule] - Simulation schedule is available on this page [Teams] - Teams and team members in your market can be viewed here [Readings] - Access to the decision making instructions and case description [Forums] - Access to the discussion forums for team and market 7

8 Simulation Organization Each simulation market consists of 2-12 teams, with 1-8 members in each. The number of parallel simulation markets is not limited, making it possible to utilize the simulation for any number of students in the class. All teams are starting from exactly the same position, with similar market shares and profits. Equally, teams will face the same market conditions during the simulation. Note that the teams compete against other teams in their own market, not against a computer. The decisions of each team influences the other teams results and the market development overall. 8

9 Course Options I As an instructor you have significant discretion over the basic structure of the simulation market. By default, all Cesim Bank Simulation courses are set to include a limited set of functionality that can nonetheless be complemented through [Case management] If you want to make changes to your course, you need to go to [Case management] page and click tab Your parameter sets. Then follow these steps: 1. Click Create new simulation parameters and name it. The parameters now appear under Your parameter sets 2. Click Parameters and click the box Modules 3. Activate desired feature set 4. Go back to [Case management], choose tab Apply parameters to groups] and click Assign Note that you can also change all the other parameters with the same steps as presented above. 9

10 Course Options II The course options available through Case Management include: a. Private customer segment b. Institutions customer segment c. SME banking d. Number of SME credit rating classes e. Corporate banking f. Investment services and products g. Brokerage services h. Portfolio management services i. Ability to create new investment fund products j. Third party investment funds k. Structured products l. Systems & Processes operations Furthermore, the following options are available: a. Naming of SME credit rating classes, partnership asset managers and investment fund classes b. Domestic and foreign currencies 10

11 Student Registration Process 1. Go to and choose Register on the top right. 2. Fill in your and other details and select the language and the time zone. click <next> 3. Enter the course code that is given by your instructor. click <next> 4. Enter license code if required. (Note that if the license code is required you must enter a valid code. Otherwise the registration will not continue.) click <next> 5. Choose your Group and Team. Group equals one world where a maximum of 12 teams operate. click <next> 6. Click Finish and your registration is almost done. 7. Check your and click the activation link. 8. Login with your and password at 11

12 Flow of Operations Introduction Practice Round Strategy and Objectives Decision making (x 5 12) Conclusion and Analysis After the introduction, the teams familiarize themselves with the decision making process via a practice round. The results of the practice round will not have any influence on the actual game results. Analysis and planning Decision making with the web interface The instructor decides the number of actual decision making rounds (5-12) and decision making follows the cycle on the right. Results from the previous round and market info for the new round available System calculates the results automatically at the given deadline Note that it is not possible to modify the decisions after the round deadline. If the team has not saved its decisions for a round, the system will automatically use the results of the previous round. 12

13 Main Objective & Winning Criteria The main objective for the teams is to deliver sustainable, profitable growth. Typically this is measured by a ratio called cumulative total return to the shareholders, which combines share price development and dividends paid to show the total return to the shareholders. The instructor may, at his/her discretion, choose to use other criteria to measure the performance of the teams. For example, market shares, net interest income, and total income growth can be used if so decided. We recommend cumulative total return to shareholders due to its comprehensive nature. The teams may try to manipulate their profits, revenues, and market share in the short run, but share price will punish any short sighted decisions sooner rather than later. 13

14 Decision Making Fundamentals I Decision making is round based. One decision making round equals one financial year. In the beginning of the game, so called initial round results are available for analysis. These can be used as a starting point for the practice round decisions. After the practice round, the situation is reset back to the initial state, and decisions will be made for the first round. Decision making guide and case description should be read before the practice round. Market outlooks should be read before each round of decision-making. A new market outlook containing information about the market development becomes available as soon as the previous round deadline has passed. 14

15 Decision Making Fundamentals II Decisions are entered in the white cells. These will be used in the actual results calculation. Estimations are entered in the blue cells. These will not affect results directly, but they are important because together with the decisions they form the basis for the budgeted results. Drop-down menus are used in certain decisions where there are some specific options to choose from. Remember to copy the decisions as team decisions before the deadline. 15

16 Business Case I New challenges The bank s operations have expanded from the early days to many new exciting fields of finance. Retail and small business customers are served on many fronts and investment services and products have lately been in focus. The bank has considered other opportunities and ventures as well, and robust back office operations have been established to support efficient client processes. The bank today is not anymore about taking in deposits and lending money to creditworthy customers but about being a reliable financial adviser and partner to all customers in all of their financial needs. 16

17 Business Case II As a response to economic turbulence, new regulations are in process of being enforced in the banking sector, and this development is expected to continue some time. Other challenges can be seen in introduction of new investment services and products and following the key trends to capture the most value to shareholders, as well as in technology and increasingly complicated HR affairs. Furthermore, given the recent history of troublesome lending decisions, the Board is stressing that the bank should carefully assess growth ambitions against appropriate risk policies. Your task The Board has made it clear that misconduct of the past kind is not acceptable and that the profitability of the bank at the present stage is barely satisfactory. You are expected to enhance the shareholder value as measured by the cumulative total shareholder value more than the competing bank s in the industry. 17

18 Cesim Bank Overview Customers Retail Private Institutions SME Corporate Front office Banking and investment services and products Banking and investment services and products Investment services and products SME banking services and products Corporate advisory services Treasury (Credit and equity markets, investments, central bank) Back office Risk management (Controls, reporting) Personnel management (Resources, management, engagement) Systems & Processes (Technology infrastructure support) 18

19 Summary of Service Offering Service Retail Private* Institutions* SME* Corporate* Mortgage loans x x Other loans x x x Demand deposits x x x Fixed term deposits x x Other bank products x x x In-house funds* x x x 3 rd party funds* x x x Securities brokerage* x x x Structured products* x x x Portfolio management* x x Advisory* x x *At course instructor s discretion through case management 19

20 Introduction to banking I Banking and multitude of financial services include several elements that are unlike those found in other commercial activity and as such rudimentary understanding of these functions is paramount to understanding Cesim Bank Simulation as these core relationships have been built into the simulation model. Credit creation When banks create new loans to customers, most of the money returns to the same banks as new deposits, which can then be used to create more customer loans with only fraction of the amount being held in compliance with minimum reserve requirements. Liquidity risk Bank balance sheet s typically include significant amounts of long term assets and short term liabilities resulting in what is known as asset-liability maturity mismatch. This creates a unique liquidity risk amongst banks that is generally alleviated with the help of deposit insurance arrangements. 20

21 Introduction to banking II Solvency risk Banks typically have very high financial leverage as measured by commonplace indicators like equity ratio. Bank solvency is measured by taking into account both the type of capital protecting against losses and the quality of the assets. Basel III decrees that banks must hold at least 4.5 per cent of common equity tier 1 capital against risk-weighted assets where CET1 capital refers to common equity and RWA to assets weighted by risk factors. For example, cash and gold would be assigned a risk factor of 0. Bank funding Unlike with most business, with banks, the core customer services, deposits and loans, form a significant part of the bank s own funding structure. Central banking Commerical banks, unlike other businesses, interface with central banks in several ways. Bank cash is held as reserves at the central bank, central bank s require certain level of minimum reserves and they act as the lender of last resort to commercial banks if capital markets funding is unavailable. 21

22 Front office operations Customer facing front office operations include Retail, SME and Corporate banking as well as Investment services and products offered to Retail, Private and Institutional customers. Front office operations consist of: a. Retail Banking: loans and deposits b. SME Banking: banking services to SME customers c. Corporate Banking: corporate advisory transactions d. Investment Services: brokerage, portfolio management, advisory a. Investment Products: investment funds, structured products 22

23 Retail Banking I Retail Banking is responsible for the bank s consumer level customers and their traditional banking service needs Consumer banking products: a. Mortgage loans b. Consumer loans c. Demand deposits d. Fixed term deposits e. Other banking products and services Loan products (lending) Teams are able to offer mortgage and consumer loans to both retail and private customers. Mortgage loans always carry collateral whereas consumer loans are mixed. Mortgage loans are offered with 1 and 3 year interest repricing periods with maturities ranging from 15 years to 50 years whereas consumer loans consist of a mixture of 3 and 5 year loans. 23

24 Retail Banking II Lending decisions a. Consumer loan average margin retail / private b. Mortgage loan average margin retail / private, 12 months / 3 years c. Maximum maturity 10/15/20/25/30/50 years d. Expense to income ratio (typically circa 30 per cent) e. Loan to value ratio (typically circa 65 per cent) f. Other risk factors (from negligible to paramount) Loan demand formation The simulated market has a certain basic demand for loans for each competing bank. The average interest charges direct customer demand amongst the competing banks resulting in some level of loan application demand for each of them. Teams must decide on a set of lending terms criteria for mortgage loans which is then used to screen the incoming application flow resulting in a fraction of the original customer demand turning into granted mortgage loans. 24

25 Retail Banking III Deposit products (borrowing) a. Demand deposits retail / private b. Fixed term deposits 12 months / 2 years Teams must decide on interest paid on the average balance of demand and fixed term deposits. Demand deposit rates can be set separately for retail and private customers. Fixed term deposits are offered for 12 months and 2 years, and the interest remains the same until maturity. The higher the interest differential in favor of fixed term deposits, the more customer shift funds into those products. Other banking products Retail and private customers are assumed to use a variety of banking services and products in addition to loans and deposits. These services are covered with a single pricing decision that ranges from no fees to heavy fee structure. At every pricing tier the upfront costs are less for the private segment clients. 25

26 SME Banking (optional) SME Banking consists of banking relationship with all business customers except for the largest enterprises that are considered in Corporate Banking advisory services Services and products include deposits, loans and other banking products. Teams make decisions on deposit interest rate and interest premiums on loans separately for each credit rating class. SME customers are classified into separate credit rating classes indicating their overall creditworthiness ranging from AAA to C, 7 in total, at the broadest setting. Teams are free to exclude some customers altogether if they so choose. In addition to the interest rate, other lending terms can be adjusted as well. These are covered by a single lending terms decision that includes factors such as personal guarantees, collateral and covenants. The stricter the terms, the less loans there are but of higher quality. Competitive factors include pricing, lending terms, depth of service offering and bank image. 26

27 SME Banking II (optional) Real estate lending Real estate sector has been separate from the SME customer mass since it is typically very sensitive to changes in the business cycle. Teams are able to set lending standards separate for all real estate related lending (excluding personal mortgage lending). Competitive positioning Teams are able to adjust their strategy and competitive position in two ways: through service offering and sector targeting. Teams may specialize in service domestic or export sector which leads to increased competence and credit exposure. Furthermore teams can choose the aggregate level of their product offering; seeking to serve the needs of all customers requires broad portfolio but brings with it greatly increased operating costs. Case management options: a. Inclusion of the SME module b. Number of credit rating classes c. Naming scheme for credit rating classes 27

28 Corporate Banking I (optional) Corporate and investment banking business consists of advisory transactions and general advisory on hourly basis. There are 3 types of transactions: a. Mergers & Aqcuisitions b. Equity Capital Markets c. Debt Capital Markets The service capacity is based on Corporate personnel and the remaining resources are allocated to serving customers on hourly basis on smaller assignments. Teams have the option of assigning different priorities to the aforementioned transactions types in order to gain competitive edge through product competence and experience. Product prioritization makes the bank allocate more time for attracting and serving those client needs while reducing the resources available for other customers. Single prioritization has the largest effect while prioritizing all products carries no effect. 28

29 Corporate Banking II (optional) Factors affecting demand: a. Pricing (percentage based fee on total transaction value and hourly charge for general advisory) b. Bank image (bank image is an important factor in relationship driven business) c. Product competence (formed overtime based on experience and specialty prioritization) d. Product experience (completed transaction backlog, visibility as a leading bank) e. Marketing expenditure f. Employee retention and compensation Case management options include: a. Inclusion of the Corporate business line 29

30 Investment Services I (optional) Investment services consists of managing and marketing investment services to the available customer segments, and acting as a distribution channel for in-house and third party investment products. Customer segments include: a. Retail b. Private c. Institutions Investment services include: a. Portfolio management (only Private and Institutional clients) b. Financial advisory (only Private clients) c. Securities brokerage d. Sales channel for in-house and third party investment products The servicing capacity is based on investments personnel where insufficiency is reflected as poor customer satisfaction and vice versa. 30

31 Investment Services II Portfolio management Portfolio management consists of offering tailored full service wealth management to private and institutional clients. The teams are not able to offer this service to their retail customer base. For both private and institutional clients, the teams should choose finer segmentation based on the aggregate wealth of the target market s clients. Teams may offer their service to the broadest market possible or specialize to serving the needs to the top-tier clients. The wealthiest clients tend to prefer more exclusive service providers, although that significantly reduces the addressable market. Teams must also choose the portfolio management fee for both segments. Financial advisory Financial advisory services can be offered to the bank s private clients in conjunction with portfolio management service. Teams have to decide the hourly charge for the service, and it is recommended to consider the targeted segment when pricing the service. 31

32 Investment Services III Securities brokerage Securities brokerage consists of offering trading services in cash and derivative instruments in equities and fixed income. These services are offered to the bank s entire customer base from retail customers to largest institutional customers. Pricing is based on monthly base fee, transaction fee and premium services fee. Private clients do not pay monthly fees, and institutional customers get even the premium services for free. The wealthier the client, the more price sensitive they usually are. However, investment services need to be considered together with the bank s total offering. Case management options: a. Inclusion of the entire business line b. Private segment c. Institutions segment d. Portfolio management e. Brokerage services 32

33 Investment Products I (optional) Investment products consists of managing and developing investment products for marketing to the bank s customer base. The products include: a. In-house investment funds b. Third party investment funds c. Structured products In-house investment funds I In house investment funds consits of three common funds across all competing banks and the ability to launch up to five (5) new funds as specified by the teams. For all funds, teams must decide the asset management fee charged on NAV or net asset value and whether to outsource the management or not. In the former case, asset management fee is split between the team s bank and the outside manager. Outsourcing option is the most beneficial for exotic funds. 33

34 Investment Products II In-house investment funds II For new funds, teams must specify the desired fund class, sub class and geographical target market. Options include equity and fixed income funds with several sub-classes for both, as well as several target markets with all possible combinations thereof being available. It is most beneficial to launch funds that have no direct competitors in the market and on the other hand have strong customer interest indicated. Third party investment funds Third party funds consist of up to five (5) possible partner managers, whose selection of funds can be offered to the bank s customer base. These partnerships involve startup costs, and success based fees paid back to the bank depending on how much capital is attracted to aforementioned funds. Offering third party funds might weaken demand for the banks own selection of funds. 34

35 Investment Products III Structured products The wealth of options available for investors consists of far more than simple investment funds and this is reflected in the team s ability to decide on the breath of structured product selection ranging from abstaining from the market completely to broad and innovative offering. Broader offering incurs more management costs but attracts more customer capital. Importantly, some of these products put the bank s own capital at risk and as such more robust risk management controls are recommended. Case management options: a. Inclusion of investment products b. Ability to launch new investment funds c. Third party investment funds d. Structured products 35

36 Back Office Operations In addition to client facing front office operations, the Cesim Bank Simulation covers a range of supporting back office operations. Back office operations consist of: a. Personnel Management: sufficiency of personnel b. Systems & Processes: investment into infrastructure c. Risk Management: risk management a. Treasury: credit and equity markets, treasury investments, central bank 36

37 Personnel Management I The personnel management function consists of managing the sufficiency of sales and support personnel in all the bank s departments including retail, sme, corporate, investments and back office (including management) and determining appropriate personnel policies related to compensation, training and engagement. Hiring / Layoffs Teams need to hire employees to each of the bank s department according to customer service needs and marketing intentions. Teams choose the number of people they will have in each department for each round. Any additional hiring or redundancies take place immediately and the desired number of employees is always available. Certain fraction of people, indicated by the turnover percentage, leave the bank each period without any associated redundancy costs whereas hiring and layoffs do incur additional personnel costs. 37

38 Personnel Management II Sales & Support resources Immediate customer service and support needs require certain level of minimum resources. In addition to this time is consumed in various miscellaneous activities such as personnel engagement, training etc. Importantly, the resources in excess of aforementioned requirements are spent in various value adding activities such as customer prospecting, relationship management and internal development, depending on the department. Personnel policies: Personnel policies include compensation, training and HR development. Compensation includes decisions for basic compensation as well as incentive pay in either pre-set profitability based or freely set profit share based. Training is administered by choosing the level of funds and priority areas, which can be used to target problem spots or key concerns. HR development policies allow the teams to decide how important personnel management is to their bank s goal. While it requires more time and money in the short term, it yields lasting benefits over the long term. 38

39 Systems & Processes Investment options include: a. Internet banking services b. Banking product development c. Customer service processes and experience The more you invest the higher quality results you will achieve. However, decreasing marginal benefits apply. Higher levels of competence lead to higher demand across the bank s services and products. Systems development Systems development deals with the bank s basic IT infrastructure and systems. The development decision is made for the pace of adoption of new technology. Tech bellwethers are fastest at adopting the latest technology innovations but have to pay the highest cost for them. Laggards concentrate on observing others and only adopt proven solutions that yield the most benefits once the costs have come down. Higher levels of competence and technology leadership bring down operating costs and reduce operational risks. 39

40 Risk Management I The risk management function deals with risk identification, quantification and prioritization and insituting proper controls, policies and reporting of the aforementioned issues within the bank. Risk management policies Teams must make policy decisions regarding internal risk management controls and external risk reporting. Internal risk management policy deals with recognizing, quantifying, prioritizing and communicating risks within the bank. More rigorous processes increase costs but reduce the likelihood of mishaps in most bank operations. External risk reporting policies deal with communicating the bank s risk status to outside interest parties such as regulators, debt and equity investors and the general public. Transparent and extensive reporting promotes good bank image and yields a multitude of subtle benefits across the organization. 40

41 Risk Management II Interest rate risk management A core risk management issue in banking is the interest rate risk that emanates from asset-liability mismatch in interest rate sensitive assets and liabilities. For example, if a bank has twice as many assets with a one year repricing period as it has liabilities, a decrease in interest rate has a negative impact on the bank s cash flows, and vice versa. This risk can be hedged by derivative instruments, and the decision is made by choosing the degree of hedging. Core risk factors in banking a. Credit risk b. Interest rate risk c. Liquidity risk d. Solvency risk e. FX risk f. Market risk g. Operational risk 41

42 Bank Regulatory Issues Bank regulatory issues typically fall under structure, solvency and liquidity. In Cesim Bank Simulation we have included: a. Central bank minimum reserve requirements b. BASEL III based solvency requirements The central bank in the simulation requires the competing banks to deposit a certain fraction of their short term liabilities with the central bank at the end of each period to adhere to minimum requirements. According to Basel III solvency requirements, banks must hold certain fractions of their risk weighted assets as Common Equity Tier 1 capital, Tier 1 capital and Total capital. Furthermore, profit distribution is limited by an additional conservation margin. These concepts have been built into the Cesim Bank Simulation. 42

43 Bank Treasury I Bank balance sheet and funding In banking the customer-facing product and sales decisions, borrowing and lending, form a core part of the funding of the enterprise and management of the balance sheet. 90 Bank funding is divided into core deposits (demand and fixed term) and managed liabilities (interbank, capital markets, central bank). Equity typically covers a very small fraction of funding needs. Assets tend to be very longterm (mortgages) while liabilities (demand deposit) are short term giving rise to significant liquidity risk Assets Cash and reserves Investment assets Business loans Consumer loans Mortgage loans Tangible assets Intangible assets Assets Liabilities Liabilities Central bank Demand deposits Fixed term deposits Bonds Subordinated debt Equity 43

44 Bank Treasury II The goal of the financing decisions is to minimize the cost of funding to the bank and to return capital to the equity holders. Decisions that are available include: a. New senior and subordinate bond issue b. Share issue and repurchase c. Dividend payment d. Treasury investments Credit markets Banks can raise long term debt financing from capital markets by issuing either a) new senior bonds or b) new subordinate bonds. Both debt instruments have a five year maturity and a fixed interest rate. The interest rate is based on the bank s public credit rating. Senior bonds rank higher in the bank s capital structure, but subordinate bonds can be counted against regulatory requirements on total capital, because they are included in Tier 2 capital. 44

45 Bank Treasury III Equity Markets Financing New shares can be issued to raise equity financing. Solvency regulations decree a certain level of regulatory capital to be sustained at all times. The issue price is based on market valuation at the beginning of the round, and the number of shares issued affects the issue price linearly. Profit distribution Dividend payments and share repurchase can be used to return earnings to the shareholders, assuming the company has retained its earnings and conforms to solvency regulations including the capital conservation buffer. The repurchase price is based on market valuation at the beginning of the round, and the size of the repurchase affects the issue price linearly. 45

46 Bank Treasury IV Treasury investments The teams can manage the bank s balance sheet by investing certain fraction of the bank s assets into domestic or foreign treasury bonds. These carry higher risk and return expectations than deposits with the central bank. In addition, foreign bonds incur FX risk. Central bank operations The lender of the last resort in the Cesim Bank simulation is a central bank. This means that all emerging funding gaps are covered by automatically taking short term loans from the central bank. The central bank funding is twotiered; there is a limited amount of funding available through the credit facility, but needs in excess of this are covered from the emergency funding program that carries a higher interest rate. The central bank also required certain amount of minimum reserves to be deposited with it at all times. In addition excess cash funds are held with the central bank as excess reserves in the deposit facility. 46

47 Projections Projections can be launched from the bottom of the page and they consist of income statement, balance sheet, segment based income statement and loan book. In addition, projections include key parameters for current and previous periods. Current round figures update continuously as decisions are made. Actualized figures for the previous round are shown on the right. 47

48 Bank Specific Financial Ratios I Net interest margin, % = Net interest income / Interest income Indicates the bank s ability to generate value from its core operations, borrowing and lending. Calculated as interest income less interest cost divided by interest income. All balance sheet items that generate interest income or costs are taken into account. Cost / Income ratio = Total non-interest costs / Total income Indicates the bank ability to cover it operational costs with the income from its operations. Calculated as total non-interest costs divided by total income. Common Equity Tier 1 ratio, % = CET1 capital / Total risk weighted assets Indicates the bank s financial leverage and solvency risk by taking into consideration amount and type of capital as well as riskiness of assets on balance sheet as required by regulatory standards. CET1 includes Tier 1 ratio, % = CET1 + Other Tier 1 capital / Total risk weighted assets Indicates the bank s financial leverage and solvency risk by taking into consideration amount and type of capital as well as riskiness of assets on balance sheet as required by regulatory standards. 48

49 Bank Specific Financial Ratios II Total Capital ratio, % = Tier 1 + Tier 2 Capital (subordinated debt) / Total risk weighted assets Indicates the bank s financial leverage and solvency risk by taking into consideration amount and type of capital as well as riskiness of assets on balance sheet as required by regulatory standards. Risk weighted assets = All assets on balance sheet weighted with individual risk factors Risk weighted assets calculation standardizes the risk inherent in the different balance sheet items on the bank s balance sheet. This is required to better understand the amount of capital that should be held against bank s total assets, because the risk associated with for example central bank reservers, gold, long-term customer loans, treasury bonds and real estate is very different. Rate sensitive assets and liabilities Rate sensitive assets and liabilities refer to balance sheet items that are based on adjustable interest rates and whose cash flows can change over time. 49

50 Key Financial Ratios I Profit before taxes, % = Profit before taxes / Total income Indicates the bank s ability to generate profits from its operations. Profit before taxes is calculated after customer credit impairments. Net margin, % = Profit for the period / Total income Indicates the bank s ability to generate profits for the shareholders from its operations. Calculated as profit for the period divided by total income. Return on equity, ROE % = Profit for the period / Average shareholders equity Indicates the return that the bank earns to its shareholders. Return on assets (ROA) % = Earning before interest and taxes / Average Total assets Indicates the bank s ability to generate returns with all of its assets. Equity ratio = Total Shareholder s equity / Total assets Indicates the bank s financial leverage, i.e., what proportion of assets are financed with common equity. 50

51 Key Financial Ratios II EPS (Earnings per share) = Profit for the period / Number of shares outstanding Dividend yield-% = Dividend per share / Share price Indicates the annual percentage of return that the current level of dividend provides to the investor, as compared to the current share price P/E = Market value per share / EPS P/E indicates how many years it takes with the current level of earnings to pay the price of one share. High P/E ratio usually implies high growth expectations and vice versa. P/B = Market capitalization / Shareholders equity Indicates the financial markets perception of the true value of the bank s equity compared to its book value. Cumulative total shareholder return, % (winning criteria) 1 this period current share price cumulative dividends per share 100% 1 initial period share price The concept of total shareholder return is explained on the next slide 51

52 Cumulative Total Shareholder Return % p.a. Cumulative Total Shareholder Return is the average annualized percentage return that a company delivers to its shareholders during the whole simulation. It takes into account the changes in the company s share price and cumulative dividend payments. Example: 1. No dividends. Let s say that the share price in the beginning of the game is 10EUR, and after one round (=year) the share price is 12EUR. This gives 20% return to shareholders for that given year. 2. With dividends. In addition to the above, the company pays a 1EUR dividend per share during the round. Total return is (12+1)/10 = 30% In the previous we assumed that the change happened over one round. The same principle applies for multiple rounds. In that case we add cumulative dividends to the share price and annualize the return. For example, 30% cumulative return over three years would be 9% annualized return on average. 52

53 Decision Checklist On the decision checklist page all team members decisions can be seen side by side. By pressing copy a team member s decisions are moved to the team decision column. At the deadline, the system reads the decisions from the team decision column and calculates results for the round. Team decisions can be accessed and consequently edited directly by pressing go in the team column. Note that previous round decisions will be used if there are no saved decisions for the round. Also historical decisions for any team member can be accessed by choosing the respective round from the dropdown menu. 53

54 Results I After each round the system generates reports that depict the results of each team in a particular market. Results consist of: a. Summary report with a set of charts b. Business line reports for Retail, SME and Corporate banking, and Financial services and products c. Back office reports for Personnel, Systems and Risk management d. Financial statements; including an income statement with a separate statement of comprehensive income and a balance sheet e. Financial ratios; including share price info and key financial indicators f. Banking sector report portraying the development of the industry Results provide useful information about a team s own sales, operations, and finances. In addition, results can be used to benchmark performance with the competing teams in the same market. 54

55 Results II Analyzers Some results reports include additional information only available in the Instructor Results view. We call these analyzers, and they typically offer more insight into the formation of results by for example detailing result item subcomponents etc. 55

56 More Information Cesim Arkadiankatu 21 A Helsinki, Finland Tel contact@cesim.com Technical Support support@cesim.com 56