Liquidity & Capital Management

Transcription

1 Liquidity & Capital Management David Hart SunTrust Bank May 5, 2016

2 Unprecedented Times Current Events : A difficult period marked by bank failures and challenging economic conditions : Bank financial performance metrics show improvement Profitability, Capital Adequacy, Liquidity, and Asset Quality Significant regulatory and legislative changes are in progress, particularly with regards to Capital Adequacy of banks. Key legislation includes Dodd-Frank, Volcker Rule, Basel III and others 2015/2016: Top line revenue growth/expense management is a major focus/challenge Oil price volatility direct and indirect impact of energy industry Real estate markets rebounding Technology Mobile capabilities (bricks and mortar vs on-line), information protection, non-traditional competition (FinTech players, etc.) 2

3 Liquidity and Capital Management Impact on Stakeholders Shareholders Regulators Depositors Borrowers Employees Community 3

4 Liquidity and Capital Management A Complex Continuum Credit Risk Earnings Risk Strategic Planning ALCO Planning Interest Rate Risk Regulatory Risk Concentration Risk 4

5 Liquidity Management Key Issues Understand the impact of changes in the balance sheet over time. Identify behavior patterns and volatility of key accounts. Forecast sources and uses of funds. In essence, an exercise in cash budgeting. 5

6 Sources and Uses of Funds An Accounting Perspective Assets = Liabilities + NW Double entry bookkeeping prescribes keeping the equation in balance. How do changes in these accounts impact liquidity? 6

7 Sources and Uses of Funds Relationship to the Balance Sheet SOURCES USES Assets Assets Liabilities Net Worth Liabilities Net Worth 7

8 Sources and Uses of Funds Key Areas to Emphasize SOURCES FF Purchased Repos Loan Payoffs Sell Securities Deposit Increase Profits Issue Debt Issue Equity USES FF Sold Reverse Repos Loan Proceeds Purchase Securities Deposit Runoff Losses Repay Debt Dividends Stock Buyback 8

9 Refer to SunTrust Banks, Inc. Annual Report Balance Sheet 9

10 The Key to Sustained High Performance A Balancing of the Risks Credit Risk Interest Rate Risk Liquidity Risk Define your risk management profile! 10

11 Liquidity Planning Managing the Liquidity Gap Short-term horizon Maintain required reserves over a two week maintenance period Invest or borrow for surplus/shortfall Long-term horizon Forecast liquidity surplus/shortfall on a monthly basis for the upcoming year How will you manage liquidity needs? 11

12 Liquidity Planning Overview of Reserve Requirements Regulation D Implemented by the Federal Reserve to maintain liquidity and confidence in the banking industry Reserve requirements are the amount of funds that a depository institution must hold in reserve against specific deposit liabilities Current Reserve Requirements Tranche Exempt Low Reserve Normal Reserve Deposit Levels Up to $15.2MM >$15.2MM<$110.2MM Over $110.2MM Reserve Requirement 0% 3% 10% 12

13 Liquidity Planning Liquidity Gap Management Deficit/Surplus Forecasting Sources Total Uses Total 0-30 Days Days Over 90 Days Surplus/Shortfall 13

14 Liquidity Management Liquidity through Borrowing Whether short-term or long-term, access to various financing vehicles is dependent on maintaining solid financial performance. Key areas of emphasis include: Liquidity Capital Adequacy Asset Quality Profitability 14

15 Liquidity through Borrowing Key Measurements of Liquidity The ability to meet short-term obligations Pledged Securities Total Securities 100+ Time Deposits Total Deposits Loan Deposit MV of Securities BV of Securities Typical Range < 50% < 20% 60% - 90% 95% - 105% Back-up Lines of Credit As needed 15

16 Liquidity through Borrowing Key Measurements of Capital Adequacy To provide a sufficient buffer against loss to ensure soundness Tier I Capital Average Assets Tier I Capital Risk-Based Assets Total Capital Risk-Based Assets Adequate 4% 4% 8% Well 5% 6% 10% Note: Capital adequacy guidelines are under regulatory review.. 16

17 Liquidity through Borrowing Key Measurements of Asset Quality To manage the balance between risk and return Typical Range NPL + OREO Loans + OREO.75% % LLR NPL LLR Total Loans 100% - 200% 1.25% % Net COs Avg Loans 90 + Day Del. Total Loans.25% %.25% -.75% 17

18 Liquidity through Borrowing Key Measurements of Profitability To maintain solvency and continue as a viable, on-going entity. Typical Range ROE ROA NIM Non-interest Income Non-interest Expense 12.0% %.75% % 3.00% % Various Various 18

19 Capital Planning Key Issues What compromises bank capital and why is it important? What is the magic number or optimal capital position for a bank? How does a bank manage its capital position over time? 19

20 Bank Capital Definitions A Balance Sheet figure Similarities to traditional Net Worth Total capital equals Tier 1 + Tier 2 Tier 1 (Core) Capital Common stock Some preferred Paid-in Capital Retained Earnings Other Tier 2 (Supplemental) Capital ALLL Hybrid Capital Other Tangible Common Equity (TCE) = Total equity intangible assets goodwill preferred stock 20

21 Bank Capital Primary Functions Buffer against losses Liquidity enhancement Impacts growth and risk-taking Internal, sustainable growth Risk-based concepts 21

22 Bank Capital Impact of Size Lending constraints Legal limits and house limits Participations Returns to shareholders Impact on asset growth 22

23 BANK BALANCE SHEET Assets Cash Securities Loans PP&E Liabilities Deposits Other Obligations Net Worth (5-10%) MANUFACTURER BALANCE SHEET Assets Cash A/R Inventory PP&E Liabilities Accounts Payable Other Debt Long-term Debt Net Worth (30-50%) 22

24 Return on Equity How does Leverage Fit In? ROE = ROA x EM = (Profitability) Net Income Assets x (Leverage) Assets Equity ROA = PM x AU = (Profitability) Net Income Total Rev. x (Efficiency) Total Rev. Assets (Profitability) (Efficiency) (Leverage) Net Income ROE = PM x AU x EM = x Total Rev. x Total Rev. Assets Assets Equity 24

25 (000 s) Total Assets Net Income Interest Income Non-interest Income Total Revenues Net Worth (Equity) ROE = PM x AU x EM BANK A $100,000 $1,000 $8,000 $1,000 $9,000 $7,000 BANK B $100,000 $715 $7,000 $1,000 $8,000 $5,000 Bank A s ROE = Bank B s ROE = (Profitability) (Efficiency) (Leverage) PM x AU x EM = ROE 24

26 Bank Capital Risk-Based Concepts To require more capital for greater risk $100MM in T-Bills vs $100MM in CRE To capture off-balance sheet risk To limit the impact of quasi capital relative to total capital 26

27 Bank Capital Risk-Based Requirements On-balance sheet activities 4 Buckets of Risk Step 1: Categorize Asset Category 1: 0% Category 2: 20% Category 3: 50% Category 4: 100% Step 2: Asset x Risk% x Required Capital % Off-balance sheet activities Step 1: Convert the face amount of the off-balance sheet item to an on-balance sheet credit equivalent amount (CEA) Step 2: Categorize the resulting CEA into its proper risk category as discussed above Step 3: Converted Asset x Risk % x Required Capital % 27

28 Bank Capital Key Concepts Banks with greater risk assets are now differentiated with risk-based guidelines Off-balance sheet items are captured Limitations Total Tier 2 is limited to 100% of Tier 1 ALLL in Tier 2 is limited to 1.25% of total risk assets Must maintain a leverage ratio Certain intangibles which are allowed are limited to 25% of Tier 1 28

29 Bank Asset Risk Weights Loans: Installment Loans 100% C&I 100% Residential Loans 50% Investments: U.S.Treasuries 0% U.S.Agencies 20% Agency CMO 20% G.O. Municipals 20% Revenue Municipals 50% Money Mkt Securities 20% Other Assets: Cash and Due From 0% Fed Funds Sold 20% Premises and Equipment 100% 29

30 Refer to Hard Copy Risk Adjusted Exercise 30

31 Refer to Hard Copy Risk Adjusted Exercise 31

32 Prime Rate, Present Yield (%) PRIME Index 12.00% 3.50% as of % 8.00% 6.00% 4.00% 2.00% 0.00% PRIME Index(3.25%) Average(6.47%) 32

33 1 Month Libor, Present Yield (%) 1-Month LIBOR Last 20 Years 7.00% 6.00% 0.44% as of % 4.00% 3.00% 2.00% 1.00% 0.00% M LIBOR (0.20%) 10-Year Average (1.98%) 33

34 Liquidity & Capital Planning Consequences of Poor Management Regulatory Implications Forced to submit plans Disallow Acquisitions/branches Insurance premium issues Financial Implications Higher interest expense Volatility of earnings Lower stock price Less expensive target Potential failure Other implications Employees Community 34

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