Financial Accounting Advisory Services quantitative analysis to improve accuracy and reliability of your financial instrument valuations May 2013
Agenda About EY 3 5 Appendix 12 Contacts 13 Page 2
About EY Page 3
EMEIA Sub-areas Africa Angola, Botswana, Republic of Congo, Equatorial Guinea, Ethiopia, Gabon, Ghana, Guinea, Ivory Coast, Kenya, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Rwanda, Senegal, Seychelles, South Africa, Tanzania, Uganda, Zambia, Zimbabwe Belgium and Netherlands Germany, Switzerland and Austria Commonwealth of Independent States Azerbaijan, Belarus, Georgia, Kazakhstan, Russia, Ukraine, Uzbekistan Central and Southeast Europe Albania, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, FYR of Macedonia, Malta, Moldova, Poland, Romania, Serbia, Slovakia, Slovenia, Turkey France, Maghreb and Luxembourg France, Luxembourg, Algeria, Morocco, Tunisia Financial Services Organizations Belgium, Channel Islands, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Switzerland, UK India London Mediterranean Italy, Portugal, Spain Middle East and North Africa Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, Pakistan, Palestinian Authority, Qatar, Saudi Arabia, Syria, United Arab Emirates Nordics Denmark, Finland, Norway, Iceland, Sweden UK and Ireland UK, Isle of Man, Republic of Ireland Countries worldwide 140 EY Global Employees worldwide 167,000 US$ revenue (2011-12) 24.4b Page 4
Better portfolio evaluations Page 5
Quantitative analysis to improve accuracy and reliability of your financial instrument valuations. Companies are under pressure from regulators and new accounting standards to improve the way they value financial instruments. Pricing certainty, as well as greater consistency and comparability in financial reporting, is demanded. We can help you meet this challenge. Using our proprietary Visual Portfolio tool, we can analyze your securities portfolio, whatever its size, and: Independently review the prices used in your valuations Identify relevant risk factors Highlight significant deviations Classify your financial instruments according to IFRS 9 Show you the impact of IFRS 9 reclassifications and optimization potential The introduction of valuation adjustments such as credit valuation adjustment (CVA) and debt valuation adjustment (DVA) under IFRS 13 or US GAAP Accounting Standards Codification (ASC) 820 is increasing the need for companies to ensure that their use of quantitative and valuation techniques is appropriate and accurate. We can use the valuation knowledge, experience and tools gained from countless audit and advisory projects, together with our insights on the regulatory agenda, to help you deal with a wide range of valuation issues, such as multi-curve- and overnight index swap (OIS)-based derivative valuation. Page 6
140 Preisanbieter I 120 Preisanbieter II 100 80 60 40 40 Mio 20 0 0 20 40 60 80 100 120 140 Preis Bloomberg in Prozent Financials 20% 120 18% Anzahl Durchschnittspreis 100 16% 14% 80 12% 10% 60 8% 40 6% 4% 20 2% 0% 0 Financial Corporate Sovereign Mortgage Equity Valuation and benchmarking To evaluate your financial instruments in the new regulatory environment, you need support from experts who combine quantitative know-how with accounting expertise. Our team has the right tools and methodologies to make your valuation models and procedures more reliable. Valuation and benchmark analysis for financial instruments portfolios Our Visual Portfolio creates robust analytics of pricing and risk measures for security portfolios of any size. Using statistical analysis, we identify outliers within fair values. The visualization of the resulting valuation risk indicates which portfolio clusters and single assets require subsequent analysis and further action; for example, revaluation of individual securities. In addition, we monitor security portfolios over time in terms of performance, findings, cash flows and risk distribution. Analytics of Visual Portfolio Quality analysis of portfolio data, such as consistent pricing Portfolio analytics with respect to structure, liquidity and performance Fair value consistency, leveraging various external pricing sources Identification and quantification of systematic valuation risks, based on pricing ranges and statistical evaluation Analysis of model estimates for cash flows, expected loss, pull-to-par and fundamental value Fair value hierarchy, according to IFRS 13 Key output of Visual Portfolio Transparent and consistent reporting and documentation Granular visual and tabular formats Detailed presentation of qualitative and quantitative insight Risk factor attribution Input Client data Portfolio data Market data Check Vendor 1 of quality, consistency Vendor 2 and completeness Vendor n Visual portfolio database Data warehouse Client data Market data and analytics modules Consolidation, Data enrichment, processing and rules engines Expert review, charts, tables and graphs Output Ready-to-use analysis Preis C-Bank Workbook and database format Page 7
Analytics and identification of deviations Overall benchmark Visual Portfolio valuation and benchmarking tool Figures and diagrams on different levels of granularity Fair value deviations on different levels Highlighting of positions of special interest and specific views on demand Portfolio breakdown per asset class, rating, country, GIIPS exposure, market liquidity, concentration of asset-backed securities (ABS) vintages, etc. Market risk factor attribution This allows us to detect systematic pricing deviations originating from potential data or process issues at a client s site, and to benchmark our client s price and risk management processes, including the verification of risk models. Page 8 Fair value client 140 120 100 80 60 40 20 0 0 20 40 60 80 100 120 140 160 EY benchmark Sovereigns Financials Corporates ABS Distribution of ABS to the rating Fair value client in EUR (m) Our valuation and benchmarking analysis provides various flexible analytics, containing: Coverage nominal EUR50.9b 97% of total portfolio 160 400 Munis Price 100 90 80 70 60 50 40 30 20 10 0 300 200 100 0 Fair value client not covered in favor at expense Fair value client covered Total Nominal Model price Market price
Classification according to IFRS 9 Visual Portfolio classification tool Our Visual Portfolio tool is based on a translation of the principlebased IFRS 9 standard into a set of criteria, and into various decision trees that make use of market and client data. The tool has been expanded, so it now processes loans and asset-backed securities by applying sophisticated techniques, such as text data mining for the look-through test. Stage 1 Visual Portfolio IFRS 9 classification runs the set of rules on the portfolio, with three possible outcomes for each security: fair value (FV), not conclusive (NC) and no indication of fair value (NioFV). Stage 2 An expert review verifies the validity of the generated results. Debt instruments Characteristics of the financial asset test Pass Business model test Fail Hold to collect Both (a) to hold to 1 2 3 contractual cash collect contractual flows cash flows; and (b) to sell financial assets Neither (1) nor (2) Stage 1: automated result Stage 2: expert review NioFV FV NC NioFV 2389 2389 0 0 FV 116 0 116 0 NC 95 95 0 0 Stage 3: final result NioFV FV NC 2484 116 0 Stage 3 Results are consolidated into a final conversion report. Fair value option elected? No No Amortized cost Fair value through OCI Yes Fair value through profit or loss Page 9
Migration analysis Impact on balance sheet Visual Portfolio migration analysis For our migration analysis, we brought together valuation and benchmarking and classification according to IFRS 9 in order to analyze the effects of the change from IAS 39 to IFRS 9. Of particular interest are migrations of single financial instruments from IAS 39 fair value (FV) categories to the IFRS 9 amortized cost (AC) category, and vice versa. Our analysis includes: Deep insights into the portfolio IFRS 9 cash flow test and the client s business model Considerations concerning volatility risk and yield stability Information to optimize the resulting portfolio classification Our outputs show the results on an executive level to find the best trade-off between flexibility, performance and balance sheet stability. It also comprises summary tables and detailed overviews of the optimization achieved. Billions 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 15.396 b old covered balance Change in total covered balance Total Change of -107.7 m -33 m change Corporates +2 m change Financials -76 m change Sovereigns 15.288 b new covered balance Migration per asset class Corporates FV Corporates AC Financials FV Financials AC Sovereigns FV Sovereigns AC Corporates - no migration Corporates - FV2AC Financials - no migration Financials - FV2AC Sovereigns - no migration Sovereigns - FV2AC Client input Client balance strategy, business model and risk management Accounting policies and portfolio carve-out Client discussion Intermediate report Client data VP data warehouse Market data Classification Visual portfolio data processing Benchmarking Workbook format and database format Final report Market data vendors EY model pricing Page 10
IFRS 13 fair value measurement valuation adjustments and OIS CVA, DVA and OIS Changes arising from market practices, regulatory demands and IFRS 13 require financial institutions to reconsider how they value their financial assets and liabilities for regulatory and financial reporting. EY financial experts help you to model, calculate and document of CVA, DVA and OIS procedures. We analyze your business processes and investigate potential impacts on financial metrics, including regulatory capital. OIS modeling and pricing Risk management Collateral management Treasury Accounting Financial reporting Multiple-curve approach required for OIS discounting Increased computational and operational complexity Illiquid or non-availability of OIS quotes for longer terms or some currencies Cross-currency basis needs to be incorporated into curve construction Should consider adopting the front office pricing model changes to capture the risk exposure accurately Should consider updating risk models to reflect multi-curve sensitivities, basis risks and OIS discounting valuations Need to manage LIBOR- OIS spread risk and cross-currency basis risk Should assess the impact of additional risk factors due to OIS on VaR Need for front-office (FO) and collateral functions to collaborate Collateral management and optimization challenges due to multicurrency CSAs Incidence of collateral disputes, due to inconsistent implementation of OIS discounting across institutions Funding projection process needs to be reconsidered for OIS discounting Collateral optimization implications Funding challenges created by standardized CSA Fair value measurement considerations whether to include a CVA or DVA adjustment for a fully collateralized trade Impact on P&L Hedge accounting implications: Hedge relationship impact Measurement of hedge ineffectiveness Need to consider the impact of LIBOR to-ois transition on accounting policies or estimates Uncertainty over whether to consider OIS as level two or level three Implications and requirements for transferring from level two to level three Need to define the requirements for level three input (e.g., sensitivity analyses) Page 11
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Financial Accounting Advisory Services contacts EMEIA Karsten Füser Global and EMEIA Markets Financial Accounting Advisory Services karsten.fueser@de.ey.com + 49 711 9881 14497 Bernd Georgi EMEIA Financial Services bernd.georgi@de.ey.com + 49 6196 996 15957 Page 13
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