David Dougherty Senior Vice President, Market Risk Group Risk Management RBC Financial Group

Transcription

1 David Dougherty Senior Vice President, Market Risk Group Risk Management RBC Financial Group

2 Caution regarding forward-looking statements From time to time, we make written and oral forward-looking statements, included in this presentation, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission, in reports to shareholders and in other communications, which are made pursuant to the safe harbor provisions of the United States Private Securities Litigation Reform Act of These forward-looking statements include, among others, statements with respect to our objectives for 2004, and the medium and long terms, and strategies to achieve those objectives, as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates and intentions. The words may, could, should, would, suspect, outlook, believe, anticipate, estimate, expect, intend, plan, and words and expressions of similar import are intended to identify forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the strength of the United States economy and the economies of other nations in which we conduct significant operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada and the Board of Governors of the Federal Reserve System in the United States; changes in trade policy; the effects of competition in the markets in which we operate; inflation; capital market and currency market fluctuations; the timely development and introduction of new products and services in receptive markets; the impact of changes in the laws and regulations regulating financial services (including banking, insurance and securities); changes in tax laws; technological changes; our ability to complete strategic acquisitions and to integrate acquisitions; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and saving habits; the possible impact on our businesses of international conflicts and other developments including those relating to the war on terrorism; and our anticipation of and success in managing the risks implicated by the foregoing. We caution that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on our behalf.

3 OBJECTIVE The use and limitations of performance measures based on publicly reported financial data for Canadian banks trading portfolios. Revenue/VaR Ratio Revenue As % of Risk Adjusted Trading Assets

4 BACKGROUND Trading revenues have become Trading Revenues (Six Major Canadian Banks) an increasingly significant 7 10% income source for most banks. 6 9% 8% 5 7% 14% annual growth rate in the last 6 years. CAD Billions 4 3 6% 5% 4% 2 3% 9.1% of major banks revenues 1 2% 1% in 2003 versus 6.5% in % Trading Revenues Trading Revenues as % of Total Revenues

5 BACKGROUND Trading is also increasingly significant user of banks balance sheets. 450 Trading Assets (Six Major Canadian Banks) 30% 18% annual growth rate in the last 6 years. 26% of total assets in 2003 compared to 17% in On/Off balance sheet items show volume of activity but overstate risk. Limited use in performance measures. CAD Billions % 20% 15% 10% 5% 0% Trading Assets Trading Assets as % of Total Assets

6 VALUE AT RISK (VAR) BASED PERFORMANCE MEASURES b VaR reporting for most banks implemented in VaR provides one measure of risk that can be used as the denominator in performance measures based on revenue/risk ratios. VaR is a models based estimate of maximum one day trading loss at a 99% confidence level. VaR has two components: General market risk due to adverse changes in general level of market rates and prices. Specific risk due to adverse price changes in an individual security due to factors related to the security issuer.

7 VALUE AT RISK (VAR) BASED PERFORMANCE MEASURES Higher levels of reported VaR are generally associated with higher levels of trading revenues. Average Daily Trading Revenue Fiscal 2002 for US Banks Fiscal 2003 for Canadian Banks PNC RBC CIBC BNS NBC Mellon BNY KeyCorp TD Daily Trading Revenue vs VaR (North American Banks) Bank One BMO Wachovia (USD Millions) Bank of America Average Daily Value-at-Risk (1-Day 99%CI) Citigroup JP M organ Chase Fleet

8 VALUE AT RISK (VAR) BASED PERFORMANCE MEASURES Revenue/VaR ratio measure efficiency in terms of trading revenue generated per unit of market risk. Ratio of Daily Trading Revenue to VaR (Selected North American Banks) RBC PNC NBC Citigroup BNS CIBC Bank of America TD Bank of New JP M organ Chase Mellon KeyBank Fleet BM O Bank One Wachovia Canadian Banks - Fiscal 2003 US Banks - Fiscal 2002

9 VALUE AT RISK (VAR) BASED PERFORMANCE MEASURES Composition of trading revenues can significantly impact relative performance as measured by revenue/var ratios. Revenue Type Client flow trading and commission revenue VaR incurred Per Dollar of Revenue Very Low Structured Product Trades Low Arbitrage trading Low to Moderate Proprietary trading involving directional views on market rates and prices High

10 VALUE AT RISK (VAR) BASED PERFORMANCE MEASURES Reported VaR is not always indicative of actual differences in risk levels among banks. Methodology differences also impact relative VaR levels, particularly with respect to diversification benefits recognized when aggregating risks. Risks captured in VaR Models varies considerably among banks, particularly with regard to the inclusion of specific risk across different product types.

11 Risk Adjusted Trading Assets Performance Measures Risk adjusted trading assets provides an alternative to VaR as the denominator in revenue/risk ratios. R is k A d ju s t e d A s s e t s - T r a d in g (CAD billions) RBC TD CIBC BMO BNS NBC Y1998 Y1999 Y2000 Y2001 Y2002 Y2003 CAD(Billions)

12 Risk Adjusted Trading Assets Performance Measures Risk adjusted trading assets include. Risk Adjusted Assets - Market Risk (CAD billions) RBC TD CIBC BMO BNS NBC Risk asset equivalent for market risk Grossed up VaR produces a risk adjusted asset equivalent CAD (Billions) Plus Market risk not in VaR models calculated using standardized regulatory weights Y1998 Y1999 Y2000 Risk Adjusted Assets Counte rparty Cre dit Risk (De riv ativ e s) (CAD billions) Y2001 Y2002 Y2003 Risk adjusted assets for netted derivative counterparty credit calculated using regulatory risk weights CAD (Billions) Y1998 Y1999 Y2000 Y2001 Y2002 Y2003 RBC TD CIBC BMO BNS NBC

13 Risk Adjusted Trading Assets Performance Measures Trading Revenue as a % of Risk Adjusted Trading Assets RBC TD CIBC BMO BNS NBC 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Yr 1998 Yr 1999 Yr 2000 Yr 2001 Yr 2002 Yr 2003

14 Risk Adjusted Trading Assets Performance Measures Performance measures using Risk Adjusted Trading Assets have both advantages and limitations. Risk adjusted trading assets is more comprehensive than VaR in terms of coverage of trading products and risk. Clearly superior to nominal on-balance sheet and off-balance sheet amounts that are not risk adjusted. Risk Adjusted Assets combine models and non-models risk measures. Non-models component tend to significantly overestimate risk relative to models based component. Non-models component does not include effects such as basis risk or correlation in a rigorous manner and therefore difficult to compare risk between products.

15 Concluding Observations No single best measure of performance of trading portfolios. Relative performance can be assessed from currently available information that produces directional indications but not absolute measures of performance. Interpretation of performance measures must be tempered by qualitative assessments and interpretations of data. CONSISTENT REPORTING STANDARDS AND ENHANCED QUALITATIVE DISCLOSUES WOULD SIGNIFICANTLY ENHANCE COMPARISON OF TRADING RESULTS.

16 VALUE AT RISK (VAR) BASED PERFORMANCE MEASURES Revenue/VaR ratio measure efficiency in terms of trading revenue generated per unit of market risk Daily Trading Revenue vs. VaR RBC TD CIBC BMO NBC BNS RBC TD CIBC BMO NBC BNS Ratio of Daily Trading Revenue to VaR (Canadian banks) Average Daily Trading Revenue (CAD Millions) Average Daily Value at Risk (CAD Millions) RBC NBC BNS CIBC TD BMO