fin t ÚSPEŠNOSŤ ORGANIZÁCIE

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1 fin t october 2011 e independent update for banks and financial institutions 2011/2 TALENTY A ÚSPEŠNOSŤ ORGANIZÁCIE Also in this issue Quo vadis zlato? BAnk internal Audit... third line of defence or first line of AttAck? reassessing And updating credit AnAlysis And Models ibv -prehľad podujatí októberdecember 2011 IBV NBS, n.o..all rights reserved.available by subscription only not for sale or resale

2 index page Dear FiN t Subscriber e global banking industry is going through a period of unprecedented challenge and change. e impact of global indebtedness, financial uncertainty and changing regulation has put the spotlight on the banking sector. e ability of banks to deal with the existing level of stress is under constant scrutiny. in dealing with such combined challenges banks need to enhance their understanding of their business and their customers while recognising that behaviours may change as a result of changing circumstances. ey will also have to upgrade the skills of their team and the control systems they employ. talenty A ÚspeŠnosŤ organizácie 3 Quo vadis zlato? 5 BAnk internal Audit... third line 6 of defence or first line of AttAck? reassessing And updating 8 credit AnAlysis And Models ibv -prehľad podujatí októberdecember in this new edition of fin t we cover the issues of talent management, recent trends on the gold market, bank internal audit, and credit analysis and models. e ibv together with risk reward limited uk have formed an intellectual partnership with the intention to provide training services to the slovak banking and financial services sector. e aim of this collaboration is to make the delivery of the highest quality training services available locally to financial institutions in slovakia in order to enable them to meet the challenges they are facing. risk reward limited is delighted at the prospect of cooperating with the ibe nbs, n.o. and providing its guidance and support in what are likely to remain rapidly changing and challenging times. dennis cox ceo, risk reward Vážený čitateľ FiN t-u, peter szovics director, ibv nbs, n.o. svetové bankovníctvo prechádza obdobím náročných, dosiaľ nevídaných úloh a bezprecedentných zmien. následkom globálnej zadlženosti, finančnej neistoty a meniacej sa regulácie sa pozornosť sústreďuje na bankový sektor. schopnosť bánk vysporiadať sa s existujúcou úrovňou stresu je neustále pod kritickým drobnohľadom. pri riešení takýchto zložitých a náročných úloh je potrebné, aby banky zdokonalili svoje poznatky o vlastnej činnosti, lepšie pochopili svojich klientov a zároveň uznali, že meniace sa okolnosti môžu ovplyvňovať spôsoby správania. takisto bude potrebné, aby banky zlepšili kvalitu zručností svojich zamestnancov rovnako, ako i zavedené kontrolné systémy. v novom čísle fin t-u sa zaoberáme otázkami talent manažmentu, aktuálnym vývojom na trhu so zlatom, bankovým interným auditom a úverovou analýzou a modelmi. ibv nbs, n.o., spolu s risk reward limited uk vytvorili intelektuálne partnerstvo so zámerom zabezpečiť pre slovenský bankový a finančný sektor služby v oblasti vzdelávania. cieľom tejto spolupráce je realizácia vzdelávacích služieb, ktoré budú na najvyššej kvalitatívnej úrovni, regionálne dostupné pre slovenské finančné inštitúcie a umožnia im vyrovnať sa o zložitými úlohami, pred ktorými stoja. PLEASE CIRCuLATE TO: chief financial officer head of risk Management head of internal Audit head of operations head of AlM head of treasury head of h.r. TO ThE EDITOR do you have risk issues in your organisation or region you would like to share? your thoughts to the editor at peter.szovics@nbs.sk fin t, a regular journal covering insights and global risk issues of interest to the banking, insurance and financial sectors in developed and emerging markets. Available by subscription via the website to unsubscribe at any time simply the editor at peter.szovics@nbs.sk and enter unsubscribe in the subject field. risk reward limited uk sa s potešením ujíma príležitosti spolupracovať s ibv nbs, n.o. a poskytnúť svoje poradenstvo a podporu v časoch, ktoré s veľkou pravdepodobnosťou budú i naďalej prinášať rýchle zmeny a náročné výzvy. peter szovics riaditeľ ibv nbs, n.o. dennis cox výkonný riaditeľ risk reward ibv nbs, n.o. serving the banking and financial services sectors with risk consultancy and risk training in developed and emerging markets. ibv nbs, n.o All rights reserved. By subscription only - not for sale or resale

3 talenty A ÚspeŠnosŤ organizácie Múdre rozhodovanie o talentoch je rozhodujúce pre dosiahnutie úspešnosti organizácií v budúcnosti: je to všetko o hľadaní a opracovávaní diamantov. VYuŽÍVAJME SPRÁVNY ASSESSMENT PRÍSTuP keď sa rozhodujeme, nedajme sa zaskočiť. ľahšie sa to povie ako urobí. je na škodu, že veľa hr profesionálov a líniových manažérov musí robiť rýchle rozhodnutia v najnevhodnejšom čase. Manažéri často robia náročné rozhodnutia o talentoch v oblastiach selekcie, promotion, downsizing, identifikácie talentov s vysokým potenciálom, manažmentu nástupníctva, odmeňovania, ocenenia a rozvoja. tieto rozhodnutia sú ťažké aj v situáciách, keď nie sme pod tlakom. v náročných situáciách riziko rastie a nesprávne rozhodnutie môže mať veľký vplyv na biznis. niektorí manažéri si mýlia výkon s potenciálom, povyšujú ľudí do vyššej manažérskej úrovne na základe ich úspechu v súčasnej pozícii. je nesporné, že výkon v minulosti je základom pre výkon v budúcnosti, a pri nedostatku iných údajov, to môže byť dôležitý zdroj informácií. na základe výkonu v minulosti sa dá s väčšou p r a v d e p o d o b n o s ť o u predpovedať výkon v budúcnosti, v tom prípade, keď je práca podobná, ale čo sa stane, keď je práca podstatne iná? podobne ako keď ide o posun z jednej líderskej pozície do inej. príliš často sa dostávame do situácií, kedy sa snažíme hodnotiť talent bez jasnej objektivity pri rozmýšľaní a rozhodovaní o tom. pomôže nám spraviť krok späť a spýtať sa seba samých: Čo sa snažím pochopiť o tomto konkrétnom človeku? skôr ako ideme hodnotiť talent, potrebujeme vedieť, prečo ho ideme hodnotiť. ŠTYRI ZÁKLADNÉ PILIERE pri výbere správneho hodnotiaceho prístupu je potrebné začať s poznaním štyroch základných pilierov, ktoré sú podstatné pri rozhodovaní v talent manažmente: výkon, pripravenosť, potenciál a vhodnosť pre danú prácu / kultúru. každý z týchto pilierov pomôže pýtať sa a nachádzať odpovede na rôzne otázky o talentoch. proces na zhromaždenie týchto informácií bude variabilný a môže byť riešený pomocou množstva nástrojov a prístupov. prvý krok je poznať, čo každý z nich poskytuje. Dôležité: umiestnenie správnych ľudí na správne miesta v správnom čase, čo je ťažké, ale kľúčové. hodnotiť zamestnancov správnym spôsobom, s cieľom určiť ich budúci potenciál. Minulý a súčasný výkon nemusí predikovať efektivitu výkonu v budúcnosti. výkon sa vzťahuje na individuálne dosahovanie priebežných výsledkov (biznis výsledky, splnenie cieľov, kpi s) aj na spôsoby použité na uskutočnenie týchto výsledkov (kompetencie a správania) v ich súčasnej pozícii. pre organizácie je typické hodnotiť pracovníkov na základe dosahovaných výsledkov, pričom sa často zameriavajú iba na prvú dimenziu výkonu Čo a 3

4 talenty A ÚspeŠnosŤ organizácie nie aj na druhú dimenziu Ako. organizácie zbierajú a uchovávajú tieto informácie počas kariérnej histórie zamestnanca. obidve dimenzie výkonu sú všeobecne využívané v performance Management systémoch a je typické previazanie na odmeňovacie a bonusové schémy. pripravenosť je schopnosť jednotlivcov riešiť požiadavky a výzvy so širšou komplexitou v blízkej budúcnosti zvyčajne v rámci nasledujúcich 12 mesiacov. zameranie je na PDI Ninth house je globálna konzultačná spoločnosť, ktorá poskytuje komplexné riešenia v oblasti liderstva pre organizácie. Pomáha organizáciám maximalizovať ich úspech zvyšovaním kvality a efektivity ich lídrov. PDI Ninth house sa stará o tisíce klientov na šiestich kontinentoch: 80% FORTuNE 100 v usa 75% FORBES GLOBAL % BuSINESS WEEK S TOP 100 GLOBAL PDI Ninth house spolupracuje s klientmi v regióne strednej Európy od roku kompetencie a skúsenosti, ktoré sú relevantné pre budúcu rolu (nie pre súčasnú rolu), a často sú v kontexte s plánovaním nástupníctva. v súlade so spomenutým príkladom, môže byť pre vás zaujímavé vedieť, či niekto z vašej skupiny regionálnych riaditeľov pre predaj je pripravený prevziať pozíciu country manager na budúci rok. Častú chybu robia organizácie ak sa rozhodujú iba na základe výkonu v súčasnej pozícii. kým minulý a súčasný výkon môže byť zaujímavým predikujúcim faktorom pre výkon v budúcnosti, nie vždy sa to dá aplikovať predovšetkým, ak nová rola predstavuje veľkú zmenu a vyžaduje si nový súbor zručností. rozhodovanie o pripravenosti by malo určite obsahovať prehľad záznamov dosiahnutej výkonnosti a funkčnej expertízy, ale najefektívnejšie merania sú tie, ktoré hodnotia aktuálne schopnosti jednotlivca zvládať nové výzvy a zodpovednosti. potenciál sa vzťahuje na pravdepodobný dlhodobý rast a prechod jednotlivca do vyšších líderských úrovní. kým pre pripravenosť je typické zameranie na časový rozsah v horizonte 1-2 rokov, pri potenciáli sa pozeráme na kapacitu jednotlivca v priebehu niekoľkých rokov. zameranie nie je na špecifické zručnosti vo vzťahu ku konkrétnej pozícii alebo funkčnej zodpovednosti, ale na atribúty ako intelektuálna schopnosť, osobnostné c h a r a k t e r i s t i k y, ambicióznosť, motivácia, emocionálna zrelosť, schopnosť učiť sa, relevantné sú aj špecifické pracovné skúsenosti. hodnotenie potenciálu mladých talentov by mohlo byť užitočné na začiatku ich kariéry. to umožňuje organizáciám zamerať sa na tých, ktorí sa pravdepodobne dostanú do vyšších manažérskych pozícií, ak budú mať príležitosť získavať správne rozvojové skúsenosti. vhodnosť pre danú prácu/kultúru sa vzťahuje na stupeň zhody alebo zosúladenie medzi charakteristikou jednotlivca a špecifickou pozíciou. napríklad mnohí ľudia môžu byť pripravení na pozíciu country manager, avšak treba vziať do úvahy skutočnosť, že country manager v rozvíjajúcej sa trhovej ekonomike a v rozvinutej je odlišný. náš regionálny riaditeľ pre predaj môže byť pripravený na rolu country manager, ale otázka je, či bude vhodnejší pre nemecko, kde bude riadiť biznis v objeme 200 mil. eur alebo pre Malajziu, kde bude riadiť biznis v objeme 0 mil. eur. Aspekty ako špecifické zručnosti jednotlivca, štýl líderstva, pracovné skúsenosti a schopnosť pracovať skôr na nových začínajúcich trhoch ako na stabilných, sú mimoriadne dôležité pri nachádzaní zhody. z tohto sa môžeme poučiť, že jasné rozhodovanie pri výbere relevantných údajov pomôže minimalizovať straty vo výnosoch a pri nesprávnych rozhodnutiach. Darina Vrbová Senior Consultant, PDI Ninth House Darina Vrbová - senior consultant pdi ninth house Darina Vrbová má skúsenosti v oblasti vzdelávania a rozvoja, práce s talentami. V PDI NH sa podieľa na rozvoji jednotlivcov, tímov a organizácií v rôznych oblastiach biznisu.

5 Quo vadis zlato? svet ovládla nová zlatá horúčka. cena zlata za posledné mesiace láme rekord za rekordom, preto aj mnohí finanční analytici zdvihli varovný prst a nazvali cenu zlata bublinou. Milovníci tejto teórie začali hovoriť o bubline už v roku 2008, pri cene zlata 1000 usd/oz, neskôr pritvrdili pri 1200, 1300 usd/oz a pokračujú dodnes. pritom sa za toto obdobie žiadny z ekonomických fundamentov zdôvodňujúci nákupný apetít výrazne nezmenil, dokonca môžeme tvrdiť, že dôvody sa posilnili. v posledných dňoch sme registrovali v mnohých médiách aj články o tom, že zlatá bublina spľasla. pokiaľ títo odborníci mali na mysli korekciu, ktorá nastala po rekordnom náraste v auguste (z 1606 usd/oz na 1911 usd/oz mimochodom najväčším za posledných 20 rokov), tak by mali siahnuť po učebniciach základov investovania. je na škodu, že ľudia, ktorí pracujú v bankách a v správcovských spoločnostiach, ako aj trhoví komentátori, nevidia rozdiel medzi korekciou a začiatkom dlhodobého medvedieho trendu, najmä ak príčiny predchádzajúceho nárastu sú viac než evidentné (pokiaľ sa nebudem vracať k x - krát pretriasanému strachu z ochladenia globálnej ekonomiky, tak uvediem napríklad intervencie centrálnej banky voči švajčiarskemu franku, ktoré viedli k presunu špekulatívneho kapitálu, alebo začiatok sviatočnej sezóny v indii). v každom prípade sú takéto úvahy správne aj keby išlo o prognózu podloženú neotrasiteľným fundamentom. najobľúbenejšou kartou v rukách odporcov investovania do zlata ostáva zdanlivo historická paralela s vývojom iných aktív, ktorých cena sa stala bublinou. v prvom rade je potrebné logicky odfiltrovať hodnoverné fundamenty, ktoré viedli k nárastu ceny zlata. okrem presunu špekulatívneho kapitálu podstatnejším faktorom, ktorý sa skrýva za nárastom ceny zlata, sú náklady ťažobných spoločností, ktoré sa od roku 2001 takmer strojnásobili (viac ako 9% nárast ročne) a samozrejme zvýšený záujem o investičné zlato (jeho pomer oproti šperkárskemu sa výrazne zvýšil). okrem toho na zlato, ako na každú inú komoditu, vplýva rast inflácie, dokonca pri zlate to platí dvojnásobne, vzhľadom k tomu, že ide o komoditu, ktorá je v investičných (a nie špekulatívnych) kruhoch s obľubou využívaná ako protiinflačný nástroj. Ak by sme za posledných 30 rokov počítali so % infláciou (vo vyspelých ekonomikách) a aplikovali tento ročný nárast na cenu zlata v roku 1980, dnes by sa reálna cena mala pohybovať okolo 2800 dolárov za trojskú uncu. Ak mám byť úprimný, cenu zlata v roku 1980 považujem za bublinu. je však na prvý pohľad jasné, že jeho vývoj v roku 1980 má veľmi ďaleko od dnešného vývoja ceny zlata. v prvom rade za nárastom cien zlata v rokoch hľadajme ropnú krízu a následnú paniku z cválajúcej inflácie v usa (na úrovni približne 15%), o čom v dnešnej dobe nemôže byť ani reč. v roku 1980 takmer 3% g l o b á l n e h o fi n a n č n é h o majetku bolo v zlate, dnes je to približne len 0,5%, tzn. že priestor na kvantitatívny nárast tejto veličiny je stále vysoký (pre tých, ktorí tvrdia, že dopyt po zlate je saturovaný). e r u d o v a n í a n a l y t i c i nepre javu jú žiadne prehnané očakávania, napríklad podľa agentúry reuters priemerné očakávania analytikov pre rok 2011 boli na úrovni 150 usd/oz (cena, ktorú zlato prekonalo už v apríli). Ak porovnáme cenu zlata s ropou (obľúbená metóda georga sorosa), ktorej dlhodobá priemerná cena sa pohybuje okolo 0,07 barelov za trojskú uncu zlata, jej dnešný pomer okolo 0,06 naznačuje, že zlato je stále lacné v porovnaní s ropou. pri porovnaní ceny zlata s väčšinou svetových indexov sa cena zlata príliš neodchyľuje od dlhodobého mediánu, ale to ani nie je také podstatné, vzhľadom na biednu koreláciu zlata s akciovými a dlhopisovými trhmi (preto je zlato ideálnym doplnkom každého rozumne zostaveného portfólia). najpodstatnejším znakom bubliny je však zvýšená volatilita v poslednej fáze akcelerácie nárastu. Akcelerácia tempa nárastu zlata od roku 2007 však nevykazuje príznaky zvýšenej volatility, dokonca tá je nižšia ako pri väčšine akciových indexov. odchýlka zlata od 200 dňového kĺzavého priemeru vykazuje stabilný býčí trh. divergencia od priemernej odchýlky po augustovom skoku je však po miernej korekcií zmazaná, čo indikuje zdravé pokračovanie dlhodobého býčieho trendu. toľko k technickej a fundamentálnej analýze. všetko ostatné sú len šumy. Ing.Christian Florio Finančný analytik protected Financial Services 5

6 BAnk internal Audit... third line of defence or first line of AttAck? peter hughes fca is director of internal Audit and risk at risk reward ltd and a visiting research fellow at the york Management school, university of york. he was formerly a bank chief Auditor and head of risk Management. in this article peter examines the three lines of defence concept that is widely accepted as risk governance best practice and assesses its implications for internal audit. 6 e three lines of defence concept has become the widely accepted standard for best practice risk management governance. Banks internal capital adequacy assessment processes (icaaps) invariably feature it as the means of achieving a strong risk culture in their particular organisations. What are these three lines of defence? here is not an untypical representation developed specifically for banks: First Line of Defence Top Management and Front Office promote a strong risk culture and sustainable risk-return thinking portfolio optimization on the macro and micro level promote a strong culture of adhering to limits and managing risk exposure ongoing monitoring of positions and inherent risks Second Line of Defence Risk Management Function combination of watchdog and trusted advisor; police limits with teeth understand how the business makes money and actively challenge initiatives if appropriate top talent with business experience engaging with front office as equals risk management separate from risk control overarching risk oversight unit across all risk types intraday availability for data and positions; comprehensive report at t+1 / 6 a.m. ird Line of Defence Audit good understanding of capital markets, the business type, and risk management top talent within audit to challenge the front office and risk management function independent oversight function with enforcement ability (e.g., immediate fulfilment of findings) Ability to link business and risk with process and it know-how Source: Booz & Co is three lines of defence concept is about to be set in stone. in a consultative document recently issued by the Basel committee on Banking supervision entitled sound practices for the Management and supervision of operational risk reference is made to reliance on three lines of defence as common industry practice for sound operational risk governance. ese are: 1. Business line management 2. An independent corporate operational risk management function 3. An independent review and challenge Whereas the paper does not explicitly assign the third level of defence to internal audit this would be the expected configuration in the majority of cases. e use of the word defence with such prominence when applied to risk governance implies that there is exposure to threats that is both ongoing and unpredictable. in other words, the nature of systemic and related risks exposes banks to unexpected losses that can occur at any time and to any degree. evidence that this is the case can be found in the financial crisis. Many banks of all sizes had accumulated unidentified and unquantified risks on an unprecedented scale which ultimately triggered losses causing the failure, bailout and nationalisation of banks around the globe that in turn wreaked

7 havoc on national and global economies. in examining the causes of the financial crisis, in written testimony prepared for the us house of representatives financial services committee in october 2009, professor Andrew lo commented; Before we can hope to reduce the risks of financial crises, we must be able to define and measure those risks explicitly. erefore, a pre-requisite for effective financial regulatory reform is to develop dedicated infrastructure for defining, measuring, monitoring, and investigating systemic risk on a standardized, ongoing, and regular basis. with teeth and challengers of initiatives whereas such attributes are more likely to be associated with audit. in these unusual times functional boundaries between risk management and internal audit can easily become confused with one function gaining management are examined, evaluated and unequivocally reaffirmed. in this regard a healthier view of internal audit in relation to ineffective risk governance, and one that is more likely to ensure the audit function s effectiveness and optimisation, is first line of attack rather than third line of if an industry and the organisations that comprise it have not yet been able to neutralise threats by resolving the underlying causes then there is little alternative but to construct lines of defence to cushion and contain the actual and potential effects. e increased minimum capital requirements mandated in Basel iii in the absence of any risk management based theory or rationale is just one example of effects being addressed rather than their causes. in the case of risk governance, as indicated by professor lo above, the neutralisation of systemic and related risks requires the development of dedicated infrastructure for defining, measuring, monitoring, and investigating (them) on a standardized, ongoing, and regular basis ; a capability that is lacking across the financial services industry. in such periods of ongoing and unresolved threat it is not unusual for functions that possess relevant expertise to assume roles and responsibilities beyond their normal attributes in order to ensure as robust a defence as possible. But such exceptional arrangements only need prevail for as long as the related threats prevail. if threats to risk governance are resolved through the design and implementation of an effective risk identification and measurement framework then the role of risk management, in all probability, will devolve to the maintenance and operation of the framework. enterprise-wide risk management then becomes the natural response to such a common risk measurement framework provided it has credibility. in the absence of such a framework risk managers are more likely to act as watchdogs, trusted advisors, police profile to the detriment of the other. consequently, chief Auditors, Audit committees and chief executive officers must remain sensitive to this eventuality and ensure that the role of audit does not lose profile or suffer impairment. After all, whatever the functional boundaries are in practice the accountabilities audit has vis-à-vis the board of directors and various external stakeholders is nonnegotiable. ere are real grounds for concern here given that the label third line of defence applied to audit implies subordination to risk management s second line of defence. indeed, such labels may be inappropriate if the view is taken that the lines of defence concept is transient and only meaningful for as long as there are ongoing and unresolved threats. After all, the three lines of defence concept is not used in conjunction with the relationship between internal audit and the more established and mature functions such as finance management. chief Auditors, Audit committees and chief executive officers should ensure that the roles of internal audit and risk defence. in this scenario, the primary role of the relatively new discipline of risk management is to complete the creation of the framework that enables the proactive definition, measurement, monitoring and investigation of risks. e primary role of internal audit is to evaluate and challenge emerging solutions and, through its ongoing audit activities, identify and inform senior management and the board of shortfalls between the actual incidence of risk and the framework applied in its identification, measurement and management. it goes without saying that if internal audit is to be positioned as the first line of attack on inadequate risk governance then it must have the necessary top talent within its ranks and operate state-of-the-art risk-based approaches to auditing. PJH@riskrewardlimited.com 7

8 reassessing And updating credit AnAlysis And Models After a financial crisis, there is always room for improvement in corporate credit-risk analysis. tracy e. Williams, former managing director at jpmorgan, makes recommendations for model updates and shows how analysis can be forward-looking and anticipate unforeseen risks. the final article of three parts examines how to look for signals of insolvency, excessive debt levels and trouble lurking off-balance-sheet. 8 Solvency: Looking for Weak Signals All discussions of liquidity, cash reserves and working capital lead to an examination of solvency. emerging from a crisis, analysts will ask why they didn t see the signals of companies that defaulted or went bankrupt. ere have been times when a company is deemed insolvent, despite satisfactory earnings, cash on hand, and a balance sheet without much of a debt burden. insolvency sends signals, although they are sometimes difficult to detect. Analysts should suspect a degree of insolvency if there is a combination of any of the following: 1. e company has no ability to refinance short-term debt, 2. A swift, significant short-fall in cash reserves occurs, 3. Most of its short-term lenders demand immediate paydown with little notice. financial assets collapse in values, 5. interest rates increase sharply with little evidence the company has hedged against the risk, 6. ird parties emerge from nowhere to stake their claims, or 7. e company has unusual, sudden obligations arising in unconsolidated subsidiaries. like liquidity, there is no one way to measure insolvency. Abundant factors contribute to it. post-crisis, analysts should address it and hunt for weak signals. An important first signal? if liquidity, measured by cash, marketable securities and immediately available funding sources, is substantially less than the sum of short-term liabilities, current interest expenses, other demand payouts, or other unanticipated liabilities, then the analyst should raise a flag. Capital Structure: Fine-Tuning the Mix for many, capital structure is about the debt-equity ratio and perhaps an assessment of whether the balance sheet is overburdened with leverage. companies have been able to survive downturns or withstand unanticipated risks if they have sturdy balance sheets anchored by the right capital structure. post-crisis, risk managers must examine whether the structure is appropriate for good times and bad. What is the right capital structure? A high debt load doesn t imply a faulty capital structure. e appropriate mix of current and long-term debt and equity contributes to the right structure. But the evaluation goes beyond the right mix and should incorporate the following: 1. industry-related structure: is capital structure appropriate for the company s industry (e.g., financing institutions, industrial companies or service companies)? 2. tenor matching: Are assets and liabilities matched properly? Are fixed assets funded by long-term debt and/or capital? 3. currency matching: Are assets and liabilities by currencies matched properly (or hedged sufficiently) to minimize foreign-exchange risks?. interest payments: is debt structured such that interest expenses (floating and fixed) are matched properly with cash flows from operations or from interest earned on certain assets? 5. debt maturities: is debt structured such that principal payments are matched properly with cash flows? 6. debt burdens: Based on current operations or in a downturn scenario, at what point does the debt-equity ratio become too much of a burden, when the company struggles to meet principal and interest payments and/or when short-term lenders begin to pressure for paydowns?

9 7. debt content: if the amount of debt is appropriate, is the makeup of debt optimal? Debt: e Good and the Bad risk managers might conclude that the amount of debt on the company s balance sheet is manageable and is rationalized. sometimes, however, they neglect to dissect the make-up and details of complex debt structures. A torrent of risks may exist beneath a single line of liabilities on the balance sheet. debt structures today have numerous features, many not always be understood until a crisis event, or until it s too late (for both the lender and the borrower). in one period, debt may appear as a fixed-rate senior, secured liability. in a subsequent downturn, the same debt might convert into a floating rate obligation with principal payments due that same quarter. While evaluating capital structure and debt-equity ratios, analysts should seek to understand debt nuances and understand the impact of a downturn. 1. fixed rate, floating rate structures, 2. senior secured, senior unsecured, subordinated, and convertible structures, and 3. prepayment options, call options, financial covenants A downturn will decrease earnings and cash flows. yet it will also cause anxiety among lenders and debt-holders who all seek an advantage to ensure payback or a comfortable position going forward. Analysts must ask whether the company has a capital structure that can endure such scenarios and the posture-changes by lenders and other creditors. Capital as Cushion: Surviving Stress Besides providing a return to investors and helping to fund long-term assets, investments and expansion, capital provides a balance-sheet cushion. When a company confronts stress (arising from, for example, a recession, financial-market collapse, or customer defaults), ample amounts of capital help relieve companies from debt burdens, sudden losses, market wipeouts, or cash shortfalls. capital as cushion doesn t mean a company must manage a balance sheet supported all by capital and no debt. All capital implies the company is not exploiting the advantages of debt to generate improved returns on equity or to lower the overall cost of capital. (And investors will argue there is such a thing as too much equity capital.) e objective, of course, is to determine optimal levels of debt-equity partly to avoid excess debt burdens and partly to ensure there is a sufficient capital cushion during downturns. Analysts should, therefore, determine whether the capital structure is close to an optimal mix, one that also ensures a capital cushion exists for worst cases. to measure capitalcushion adequacy, analysts should perform some form of a balance-sheet stress test, using extreme-risk scenarios and measuring and deducing how the company will fare. e exercise is crude, but can tell much about whether the company can endure these scenarios or is prepared for them. stressing the balance sheet is an attempt to quantify the maximum amount of loss all categories of the balance sheet will suffer within a defined period (one week, one month, six months, etc.). losses might be due to collapse in asset values, business declines, surges in interest expense, volatile currencies, and customer defaults. After such losses (risks) are quantified (based on history, statistical probabilities, or worst-case assumptions), is there still enough capital (or better, liquid capital) to absorb losses and provide a cushion to keep the company afloat? Cash flow: Is It Still King? for the most part, balance sheets help companies ward off risks, but cash flow is still king, because earnings are why companies exist and cash flow permits payouts to debt-holders and investors. sustainable, high-probability cash flow is a goal that emanates from sustainable profitability. Analysts must ask themselves whether the company s operations can generate predictable, stable cash flows, even during downturns or when unanticipated risks arise. risk managers learned from past events that financial analysis must look for cash traps or stumbling blocks or any weaknesses or factors that might threaten cash-flow stability. in some cases, the company might report earnings, but cash generated from operations can t get to where it needs to be (to parent companies or other operating subsidiaries). at might result from: 1. limited access to cash from unconsolidated or foreign subsidiaries, 2. limited access to cash from regulated subsidiaries, 3. cash sent from one affiliate to support activities or deficits in another,. cash subject to unexpected tax treatments or other penalties, and 5. cash necessary for unplanned capital expenditures. just as the balance sheet should be stressed and tested for worst-case scenarios, so should an analysis of cash flows, from the past and projected going forward: how are cash flows affected by extreme risks? e exercise should not be perfunctory. Analysts 9

10 reassessing And updating credit AnAlysis And Models must sensitize cash flows from operations for many realistic scenarios: 1. no-growth business case, 2. conservative, declining business case, 3. unexpected escalation of certain costs (raw materials, interest rates, etc.), and. unexpected payouts for emergencies, disasters, contingencies, or legal action sometimes there is a tendency to dismiss sensitivity analyses as unreal, unlikely cases. recent crisis events show they can and do happen. Analysts, therefore, should determine the impact on cash flow in these cases or assess what the company is doing to minimize their impact on operations. Off-Balance-Sheet Risks: Trouble Lurking Beneath Analysts often forget to assess adequately off-balance-sheet risks, because the risks (a) are sometimes cryptically described in detailed footnotes, (b) are sometimes reported in an inconsistent way and at the discretion of the company, (c) are hard to measure, quantify or understand, or (d) have probabilities of occurring that are mere guesses. in worst cases, however, many of those same risks all of a sudden appear on the balance sheet as real liabilities. Analysts should never shrug them off. instead they should strive to understand what they are or request the company to explain them as thoroughly as possible. off-balance-sheet risks can range from financial risks to legal risks. ey include pending legal action, unexpected environment costs, forward financial transactions, pension obligations, uncertain contractual commitments, or thirdparty guarantees. recognizing the risks are real, analysts should: 1. identify and prioritize the most significant of these risks, based on probability or immediacy of impact, 2. request from companies more disclosures if the reporting is inadequate or difficult to interpret, 3. determine how the same risks would appear on the balance sheet when the risks are realized,. Quantify as best as possible what the risks are or what the potential loss would be, and 5. Measure the impact of the same risks and potential losses on income statements, cash flows and balance sheets (capital cushion) Borrowings: Getting Paid Back for risk managers, analysis ultimately comes down to the company s ability to meet obligations: pay interest or amortize debt; meet obligations arising from other bank-related activity (trading, funds transfer, securities processing, etc.). here is where the analyst starts to aggregate other parts of the analysis. from lessons of the past, the analyst should ask: 1. can the company fulfill obligations from primary sources: cash flow from operations, cash reserves, or other liquid assets? 2. can the company avoid relying on secondary sources: sales of fixed assets, refinancing, new capital, etc.? 3. What are the significant threats and risks to both primary and secondary sources? how would they affect the paydown of debt in the short- and long-term? What is the company doing to avoid such scenarios?. Will new debt be necessary for the company to achieve planned growth? Will cash from primary sources be sufficient to manage the new debt? or must it rely, too, on new sources? Market-Based Indicators: how Meaningful? in risk analysis, there is nothing wrong with using market-based models and indicators. ey include, for example, a company s stock quotes or prices in credit-default swaps. ey are reactive, up-to-the-minute measurements of a company s creditworthiness. ey also include models based on bond-market prices and credit spreads and models based on translating a company s equity value into an assessment of its ability to meet debt payments. At their best, they send warning signals or reminders that a company or companies in an industry group require attention. ey tap you on the shoulder to alert you that something might be wrong. And they suggest that more than a few people in the marketplace might have cause for some degree of concern. At their worst, they garner too much attention, as herds of risk managers respond to the indicator instead of the company or the situation. And overwhelming response spawns panic or creates an avalanche of reactive behavior. in the summer, 2008, market participants and risk managers watched credit-default-swaps market activity and pricing trends for financial institutions hourly, observed signals of weakness, but couldn t necessarily pinpoint the triggers of weakness. Market models and indicators are useful, if they: 1. Are understood and use variables, factors or influences that are readily measured and explained, 2. Are intended to be signals for possible decline and tools to suggest reasonable, courses of action might be necessary (updated company review, riskrating review, exposure reviews, or discussions with the company), and 3. Are not substitutes for rational decision-making and in-depth analytical scrutiny post-crisis, for risk managers and financial analysts, a revised approach to credit models and financial analysis is to acknowledge extreme risks, worst cases, and prolonged downturns. ey can and do occur, and companies and counterparties should show they are financially and operationally prepared. forward-looking financial analysts should take initiatives to update their approaches, techniques, ratios and models. More than ever, the models, like sleuths, should look for hidden risks, anticipate worst cases, and assess carefully whether those companies are prepared to withstand what most will say might not ever occur. 10

11 ibv -prehľad podujatí október-december 2011 OKTÓBER 2011 NOVINKA Zákon o platobných službách Právny systém Slovenskej republiky NOVINKA Solvency II Insurance, Reinsurance, Bancassurance - ANJ Trhové riziko v rámci Basel II NOVINKA Vyšetrovacie zručnosti Základné deriváty FT oceňovanie a účtovanie NOVEMBER 2011 Finančná matematika stupeň (KE) NOVINKA Motivačný systém a riadenie výkonnosti zamestnancov ako zlepšiť úroveň plnenia stanovených cieľov Školenie APS STATuS_DFT pre používateľov stupeň (Michalovce) Vybavovanie reklamácií a sťažností Školenie pre správcov a administrátorov IS EuRO SIPS Odborná skúška vyšší stupeň (BA) Nové výzvy v riadení útvaru IA Peňažné a kapitálové trhy I Osobitné finančné vzdelávanie (sektor PaZ) Predajné zručnosti Peňažné a kapitálové trhy II stupeň (NT) stupeň (NZ) Retail deriváty NOVINKA Prevencia zamestnaneckých podvodov lekcie z podnikovej sféry Školenie pre používateľov IS EuRO SIPS Komunikácia so zahraničným partnerom partnerom v AJ RBuZ prístup cez server LN Osobitné finančné vzdelávanie (sektor Úvery) Stratégia riad. aktív a pasív I Forenzná analýza prakticky Osobité finančné vzdelávanie (sektor PaZ) Nákladový kontroling metódou ABC v banke kalkulácia nákladov na produkty, zákazníkov, predajné kanály, kalkulácia ziskovosti Základy teórie portfólia Stratégia riadenia aktív a pasív II Školenie ICM TARGET stupeň (ZA) stupeň (BB) NOVINKA Workshop Manažérstve riziká v bankovníctve Zabezpečovanie pohľadávok v obchodných vzťahoch Osobitné finančné vzdelávanie (sektor Úvery) stupeň (BA) Effective Meeting Skills (3 dni v novembri, termín zatiaľ neurčený) stupeň (Lučenec) Finančná analýza firmy Oceňovanie a využitie vybraných exotických opcií DECEMBER 2011 stupeň (BA) Skúška aktuára Kontroling v bankovníctve moderné trendy Školenie pre správcov a administrátorov IS EuRO SIPS Školenie pre používateľov IS EuRO SIPS stupeň (Ba) SEPA Kreditné riziko v rámci Basel II Riadenie rizika podvodov Zhodnotenie kvality interného auditu

12 inštitút bankového vzdelávania nbs, n.o. tomášikova 28/a, p.o. Box Bratislava 29 slovenská republika telefón: + 21 (0) (0) fax: + 21 (0) (0) ibv@nbs.sk