Asset Liability Management (ALM) of Commercial Banks & The HSBC Approach
C. Objective of the Study The objectives of the study are summarized below in two sub categories: C.1. Broad Objectives The broad objectives of the report are: To present an overview and brief introduction of HongKong and Shanghai Banking Corporation Ltd. Providing a clear idea about Asset Liability Management (ALM) of Commercial Banks and HSBC Approach. C.2. Specific Objectives The specific objectives are providing: • For Organization Part: • HSBC’s history in local and global markets • HSBC’s mission, vision, objectives, strategies and organization Structure • HSBC’s operations in Bangladesh • General idea of the products of HSBC for Bangladeshi customers • Overview of the functional departments • HSBC’s organogram , management. •
For Project Part: • • • • • • •
To define asset liability management Background of Asset liability management Techniques of Asset liability risk Asset liability Management approaches Procedure of examining ALM BB guideline on ALM HSBC Bangladesh ALM practices
D. Scope The scope of this report is limited to the overall description of the company, international network& brand, its product and services. The scope of the study is limited to organizational setup, functions, and performances Since HSBC is still in its growth stage in Bangladesh; it has still to go a long way to achieve its destination. To achieve the long-term goal it must take each step very carefully. The report will mainly focus on asset liability management of Commercial Bank and the HSBC approach. E. Methodology Both the primary as well as the secondary form of information was used to prepare the report. The details of these sources are highlighted below. Primary data Primary information are collected by interviewing managers, officers, by the process assigned by HSBC, observing various organizational procedures, structures. Primary data were mostly derived from the discussion with the managers, officers. FCD also provided me with their Financial Instruction Manual (FIM), Group intranet and Data Instruction BooK (DIB Secondary data Sources of secondary information can be defined as follows: •
Internal Sources • Bank's Annual Report • Group Business Principal manual • Group Instruction Manual & Business Instruction Manual • Prior research report • Local intranet Group manual. • Any information regarding the Banking sector
External Sources • Different books and periodicals related to the Asset Liability Management • Managing core Risks in Banking-Bangladesh Bank • Website Information
Organization part Part 1: Organization Synopsis: The HSBC A. An overview and Historical Background of the Organization A.1. the HSBC Group Who they are
The Hongkong and Shanghai Banking Corporation Limited popularly known as HSBC HSBC is one of the largest banking and financial services organizations in the world, with well-established businesses in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa.
HSBC Holdings plc is incorporated in England, with its head office in London.
HSBC’s strategic direction reflects its position as ‘the world’s local bank’ with its uniquely cosmopolitan customer base. Group strategy is aligned with the key trends shaping the global economy. HSBC recognizes that emerging markets are growing faster than developed economies, world trade is expanding at a greater rate than GDP, and life expectancy is increasing virtually everywhere. HSBC is, therefore, reshaping its business by investing primarily in the faster growing emerging markets and, in developed markets, focusing on businesses which have international connectivity.
US$2,354 billion (£1,172 billion HK$18,359 billion) at 31 December 2007.
Profit before tax
US$24,212 million (£12,106 million HK$188,878 million) for 2007.
Tier 1 capital ratio: 9.3%
Total capital ratio
13.6% at 31 December 2007
International reaches Around 10,000 offices in 83 countries and territories. Staff Customers
330,000 employees worldwide. About 128 million worldwide, with a total of 46 million customers registered for internet banking.
HSBC Holdings is listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges. The company’s US$0.50 ordinary shares are traded on the London, Hong Kong, and Paris and Bermuda stock exchanges and are traded in New York in the form of American Depositary Shares, each of which represents five ordinary shares. Shares in HSBC Holdings are held by more than 200,000 shareholders in over 100 countries and territories.
HSBC is a major user of advanced information technology, with an annual spending of US$5.9 billion. Its e-business channels include the internet, PC banking and telephone banking. HSBC maintains its own private telecommunications network – one of the worlds largest – to deliver IT services to customers and to staff around the world. HSBC web sites attracted 2.1 billion visits during 2007.
A.2. Historical Background Beginnings, 1865 The HSBC Group’s name is derived from The Hong Kong and Shanghai Banking Corporation Limited, the founding member of the modern Group. The bank owed its origins to the business communities of the China coast in the 1860s. At that time, the finance of trade in the region was not well developed and most transactions were still handled by the European trading houses, or hongs, rather than by professional banks. By the early 1860s, local businessmen needed larger and more sophisticated facilities. In Hong Kong, in particular, business leaders required specialist-banking services — preferably from a bank that was locally owned and managed. The founding of the bank in 1865 answered this need. The new company was the inspiration of Thomas Sutherland, then the Hong Kong Superintendent of the Peninsular and Oriental Steam Navigation Company, who produced a prospectus for a locally based bank operating on sound ‘Scottish banking principles’. The prospectus attracted the support of a broad spectrum of Hong Kong interests, including American and Indian trading houses as well as European firms, and the initial capital of HK$5 million was quickly taken up in Hong Kong, Shanghai and Calcutta. On this basis, the bank opened for business in Hong Kong on 3 March 1865. Then, as now, the bank’s headquarters were at 1 Queen’s Road. One month later, on 3 April 1865, the bank’s Shanghai office opened for business. Initial response from customers in the two cities was favorable, both from the foreign business community and from the compradors, the influential Chinese intermediaries in charge of local staff and business dealings in the Chinese community. Throughout the late nineteenth and the early twentieth centuries, the Bank established a network of agencies and branches based mainly in Chaina and South East Asia but also with representation in the Indian sub- continent, Japan, Europe, and North America. In many of its
branches the Bank was the pioneer of modern banking practices. From the outset, trade finance was a strong feature of the Bank’s business with bullion, exchange and merchant banking also playing an important part. Additionally, the Bank issued notes in many countries through the Far East. During the Second World War the bank was forced to close many branches and its head office was temporarily moved to London. However, after the war the Bank played a key role in the reconstruction of the Hong Kong economy and began to further diversify the geographical spread of the Bank. This brief history describes the origins and evolution of the companies that make up the HSBC Group. The history concludes with a summary of the far-reaching changes in recent years that have given HSBC its special place in today’s major financial markets. A.3. Growth of HSBC Group The HSBC Group evolved from The Hong Kong and Shanghai Banking Corporation Limited, which was founded in 1865 in Hong Kong with offices in Shanghai and London and an agency in San Francisco. The HSBC Group expanded primarily through offices established in the bank’s name until the mid-1950s when it began to create or acquire subsidiaries. Below are some key developments in the Group’s growth since 1959. 1959
1972 1978 1980
The Hong Kong and Shanghai Banking Corporation acquire The British Bank of the Middle East (formerly the Imperial Bank of Persia, now called HSBC Bank Middle East Limited). The Hong Kong and Shanghai Banking Corporation acquires a majority shareholding in Hang Seng Bank Limited, now the second-largest bank incorporated in Hong Kong. Midland Bank acquires a shareholding in UBAF Bank Limited (now British Arab Commercial Bank Limited). The Saudi British Bank is established under local control to take over The British Bank of the Middle East’s branches in Saudi Arabia. The Hongkong and Shanghai Banking Corporation acquires 51% of New York State’s Marine Midland Bank, N.A. (now called HSBC Bank USA, N.A.). Midland Bank acquires a controlling interest in leading German private bank Trinkaus & Burkhardt KGaA (now HSBC Trinkaus & Burkhardt AG). Hongkong Bank of Canada (now HSBC Bank Canada) is established in Vancouver. Egyptian British Bank S.A.E. is formed, with the Group holding a 40% interest. The Group now holds 94.5% in the renamed HSBC Bank Egypt S.A.E.
1983 1986 1987
1991 1992 1993 1994 1997
Marine Midland Bank acquires Carroll McEntee & McGinley (now HSBC Securities (USA) Inc.). HongkongBank of Australia Limited (now HSBC Bank Australia Limited) is established. The Hongkong and Shanghai Banking Corporation acquire the remaining shares of Marine Midland and a 14.9% equity interest in Midland Bank plc (now HSBC Bank plc). HSBC Holdings plc is established; its shares are traded on the London and Hong Kong stock exchanges. HSBC Holdings purchases the remaining equity in Midland Bank. The HSBC Group’s Head Office moves to London. Hongkong Bank Malaysia Berhad (now HSBC Bank Malaysia Berhad) is formed. In Brazil, the Group establishes Banco HSBC Bamerindus S.A. (now HSBC Bank Brasil S.A.-Banco Múltiplo), and acquires Roberts S.A. de Inversions in Argentina (now HSBC Argentina Holdings S.A.). Shares in HSBC Holdings begin trading on a third stock exchange, New York. HSBC acquires Republic New York Corporation (now integrated with HSBC USA Inc.) and its sister company Safra Republic Holdings S.A. (now HSBC Holdings (Luxembourg) S.A.). Midland Bank acquires a 70.03% interest in Mid-Med Bank p.l.c. (now HSBC Bank Malta p.l.c.), Malta’s largest commercial bank. HSBC acquires CCF (now HSBC France), one of France’s largest banks. Shares in HSBC Holdings are listed on a fourth stock exchange, in Paris. HSBC acquires Demirbank TAS, now HSBC Bank A.S., Turkey’s fifth largest private bank; and signs an agreement to purchase an 8% stake in Bank of Shanghai. Acquisitions include Grupo Financiero Bital, S.A. de C.V. (now Grupo Financiero HSBC, S.A. de C.V.), one of Mexico’s largest financial services groups. HSBC acquires Household International, Inc. (now HSBC Finance Corporation), a leading US consumer finance company; and Losango Promotora de Vendas Ltda in Brazil. Four French private banking subsidiaries combine to form HSBC Private Bank France. HSBC Insurance Brokers Limited forms a joint venture, Beijing HSBC Insurance Brokers Limited, in which it has a 24.9% stake. Hang Seng Bank acquires 15.98% of Industrial Bank Co Ltd, a mainland China commercial bank. HSBC acquires The Bank of Bermuda Limited and shares in HSBC Holdings are listed on a fifth stock exchange, in Bermuda. The Hongkong and Shanghai Banking Corporation acquires 19.9% of Bank of Communications Limited, China’s fifth largest bank, since reduced to 19%.
HSBC acquires 9.91% of Ping An Insurance (Group) Company of China, Ltd, subsequently increased to 16.8%. HSBC Finance Corporation acquires Metris Companies Inc. making HSBC the fifth largest issuer of MasterCard and Visa cards in the US. HSBC acquires the Panama-based Grupo Banistmo S.A., the leading banking group in Central America. In China, HSBC is one of the first foreign banks to incorporate locally under the name HSBC Bank (China) Company Limited, and HSBC Rural Bank opens for business in Hubei Province. In Vietnam,HSBC increases its stake in Techcombank to 14.4% and acquires 10% of Bao Viet, the countryâ€™s top insurer.In South Korea, HSBC agrees to acquire 51% of Korea Exchange Bank, subject to regulatory approval. In Taiwan, HSBC obtains agreement to acquire certain businesses and operations of The Chinese Bank Co., Ltd.
B. Banks under the HSBC Group and Customer Segments B. 1.Banks under the HSBC Group Many of the members have changed their name into HSBC, The Hongkong and Shanghai Banking Corporation Limited to introduce the whole group under one brand name. Midland Bank
Hang Seng Bank
HSBC Holdings acquired Midland Bank one of the principal UK clearing banks in 1992. Headquartered in London, the bank has a personal customer base of five and a half million, business customers of over half a million, and a network of almost 1,700 branches in the United Kingdom. Midland has offices in 28 countries and territories, principally in continental Europe, with a number of offices in Latin America. Hang Seng Bank, in which Hongkong Bank has a 62.1% equity interest, maintains a network of 146 branches in the Hongkong SAR, where it is the second largest locally incorporated bank after Hongkong Bank. Hang Seng Bank also has a branch in Singapore and two
branches and two representative offices in China. Midland Marine Midland Bank headquartered in Buffalo, New York, has 380 banking locations statewide. The bank serves over two million personal customers and 120,000 commercial and institutional customers in New York State and, in selected businesses, throughout the United States.
Bank Hongkong Bank of Canada is the largest foreign-owned bank in
Canada and the country’s seventh-largest bank. With headquarters in Vancouver, it has 116 branches across Canada and two branches in the western United States. HSBC Banco HSBC Bamerindus was established in Brazil in 1997. The bank
has network of some 1,900 branches and sub-branches, the second largest in Brazil.
Bank Hongkong Bank Malaysia is the largest foreign-owned bank in
Malaysia and the country’s fifth-largest bank, with 36 branches.
The British Bank The British Bank of the Middle East (British Bank) is the largest and of
Middle most widely represented international bank in the Middle East, with 31 (British branches throughout the United Arab Emirates, Oman, Bahrain, Qatar,
Jordan, Lebanon and the Palestinian Autonomous Area, including an offshore banking unit in Bahrain. The bank also has branches in Mumbai and Trivandrum, India, and Baku, Azerbaijan, as well as
HSBC Roberts Hongkong of Australia
private banking operations in London and Geneva. Banco HSBC Banco Roberts was acquired in 1997. Based in Buenos Aires, it is one of Argentina’s largest privately owned banks, with 60 branches throughout the country. Bank Hongkong Bank of Australia has 16 branches across Australia. It is the flagship of the HSBC Group’s businesses there, operating under the name HSBC Australia, and providing a complete range of financial
services. The Saudi British The Saudi British Bank, a 40%-owned member of the HSBC Group, Bank
has 63 branches throughout Saudi Arabia and a branch in London.
B. 2. Customer segment of HSBC Group Customer groups and global businesses Personal Financial Services (including Consumer Finance) HSBC provides its personal customers worldwide with a full range of personal financial services, including current and savings accounts, mortgages, insurance, credit cards, loans, pensions and investments. Consumer part of Personal Financial Services, facilitates point-ofsale credit to consumers, and lends money and provides related services to meet the financial needs of everyday people.
Pre-tax profit for 2007 was US$5.9 billion, a decrease of 38% on the previous year, due to higher impairment charges, particularly in the US. Excluding US consumer finance, pre-tax profit increased by18%, driven by exceptionally strong net operating income growth in Asia and Latin America. As Asian stock markets grew in value, HSBC delivered a wider array of products and services to meet demand. The HSBC Insurance brand was launched as part of a strategy to accelerate growth in the insurance business. Commercial Banking HSBC is a leading provider of financial services to small, medium-sized and middle-market enterprises. Pre-tax profit increased by 19% to US$7.1 billion, driven by strong results in Asia, Latin America and the Middle East. Customer numbers grew faster than in previous years, by 8%, to 2.8 million. HSBC continued to improve its capacity to meet customers’ cross-border business requirements. International banking centers covering a further 38 countries and territories were opened, increasing their coverage to 54 countries and nearly the entire customer base. Global Banking and Markets This global business provides tailored financial services to corporate, institutional and government clients and reported an increase of 5% in pre-tax profit to US$6.1 billion. Record revenues were reported in foreign exchange, equities, securities services, payments and cash management, and HSBC Global Asset Management. In 2007, the implementation of the ‘emerging markets-led and financing-focused’ strategy was Completed and Corporate, Investment Banking and Markets was renamed Global Banking and Markets. Private Banking HSBC is one of the world’s top private banking businesses, providing financial services to high net worth individuals and their families in 93 locations. Pre-tax profits increased by 24%, to US$1.5 billion, primarily due to an outstanding performance in Hong Kong, and strong growth in Switzerland and throughout the Americas. Client assets increased by 26% to US$421 billion, of which US$35.9 billion related to net new money, reflecting strong investment performance and increased marketing expenditure.
C. HSBC’s International Network & International Brand C.1. HSBC’s International Network
The HSBC Group now comprises a unique range of banks and financial service providers around the globe where it operates into 3 categories: the large, the major and the international. These classifications are a function of sustainable, attributable earnings, the number of retail clients, balance sheet and size of operation. The HSBC Groups international network comprises of over 10000 offices in 83 countries. A brief list is presented below:
Asia Pacific Malaysia Maldives New Zealand Pakistan Philippines Singapore Srilanka Taiwan Thailand Vietnam
Offices 48 1 10 9 28 26 15 19 1 4
Armenia Belgium Czech Republic
Offices 8 3 10
Manico Italy Luxembourg
Offices 2 4 4
Channel Islands Cyprus France Germany
35 2 833 13
Malta Netherland Poland Russia
48 1 17 5
Australia Bangladesh Brunei Darussalam Chaina Cook Islands Hong Kong India Indonesia Japan Korea Macau
Offices 35 9 12 103 1 345 70 14 7 4 7
Hungary Greece Ireland Isle of Man Turkey Turkey
11 27 12 8 242
Spain Sweenden Switzerland United Kingdom
2 3 18 1678
America Argentina Bahamas Bermuda Brazil British Virgin Canada Chile
Offices 248 8 16 1722 3 313 2
Colombia Costa Rica
Middle east and Africa Offices Algeria 1 Bahrain 6 Egypt 54 Ghana 4 Jordan 3 Kuwat 3 libya 2 lebanon 6
Cayman Islands Honduras Mexico Panama Peru Urguey United states of
Offices 15 84 1625 83 11 5 1651
Mauritius Mozambique Oman Autonomous Area Qatar Saudia Arabia South Africa United Arab
Offices 12 6 6 1 6 79 5 18
C.2.International Brand A key part of the Group’s business strategy, announced in 1998, is the creation of a global brand featuring the HSBC name and hexagon symbol. The symbol is now a familiar sight around the world. The Group has embarked on the next phase — making the HSBC brand universally synonymous with its core values of integrity, trust and excellent customer service. HSBC Brand & Corporate Identity The Hexagon logo of HSBC derives from HSBC’s traditionally flag, a white rectangle divided diagonally. Like many other Hong Kong company flags in the last century, the design of the flag was based on the cross of ST.Andrew, The Patron Saint of Scotland. HSBC brand & corporate identity represents what HSBC wants its brand to mean to its customer. It is derived from the group: Corporate Character HSBC is a prudent, cost conscious, ethically grounded, conservative, trustworthy international builder of long-term customer relationships. Basic Drives HSBC’s basic drives are Higher Productivity, Team Orientation, and Creative Organization & Customer Orientation. The essence of HSBC brand is integrity, trust and excellent customer service. It gives confidence to customers, value to investors & comfort to colleagues. Through the process of listening to individual needs and then acting in partnership to deliver the right solutions, HSBC is committed to help the clients make the most of their financial assets. HSBC operates on a global basis, but also work on a local level to ensure the cros border differences are identified and any related benefits exploited. HSBC teams of specialists ensure that if customer needs solutions across the world, regionally, or locally , they has the skills, expertise and resources to deliver them. They automate as many functions as possible, even as ensuring retains control. HSBC claims that they are the people to talk to if anyone wants the following
Global cash flow co-ordination
Enhanced risk management
Improved security and audit controls
Minimized costs and reduced operating expenses.
Maximized liquidity, returns and interest benefits.
D. Mission, Vision, Objectives and Strategies and Organization Structure of HSBC
D. 1.Mission – Vision HSBC’s mission statement“We aim to satisfy our customers with high quality service that reflects our global image as the premier international bank”. HSBC's mission statement is embodied in the Group's business principles and values. The HSBC Group is committed to five cores Business Principles: • • • • •
Outstanding customer service Effective and efficient operations Strong capital and liquidity Conservative lending policy Strict expense discipline.
HSBC also operates according to certain Key Business Values: • The highest personal standards of integrity at all levels • Commitment to truth and fair dealing • Hands-on management at all levels • Openly esteemed commitment to quality and competence • A minimum of bureaucracy • Fast decisions and implementation • Putting the Group's interests ahead of the individual's • The appropriate delegation of authority with accountability • Fair and objective employer • A merit approach to recruitment/selection/promotion • A commitment to complying with the spirit and letter of all laws and regulations wherever we conduct our business • The promotion of good environmental practice and sustainable development and commitment to the welfare and development of each local community
D.2. Objectives of HSBC HSBC’s objectives are to provide innovative products supported by quality delivery of systems and excellence customer services, to train and motivate staffs and to exercise social responsibility. By combining regional strengths with group network HSBC’s aim is to be the one of the leading banks in its principle markets. HSBC’s goal is to achieve sustained earnings growth and to continue to enhance shareholders value. D.3.Strategies
HSBC’s broad strategies can be brought into being here below. With products and imaging, the strategies are being categorized. A key part of the Group’s business strategy, announced in 1998, is the creation of a global brand featuring the HSBC name and hexagon symbol. The symbol is now a familiar sight around the world. The Group has embarked on the next phase — making the HSBC brand universally synonymous with its core values of integrity, trust and excellent customer service. Brand: The Hexagon logo of HSBC derives from HSBC’s traditionally flag, a white rectangle divided diagonally. Like many other Hong Kong company flags in the last century, the design of the flag was based on the cross of ST.Andrew, The Patron Saint of Scotland. Brand makes HSBC and its hexagon symbol one of the world’s leading brands for customer experience and corporate social responsibility; Personal Financial Services (‘PFS’): drive growth in key markets and through appropriate channels to make HSBC the strongest global player in PFS; Consumer Finance: extend HSBC’s new business to existing customers and penetrate new markets; Corporate, Investment Banking and Markets: accelerate growth through enhanced capital markets and advisory capabilities focused on the client; Commercial Banking: make the most of HSBC’s international customer base through effective customer relationship management and improved product offering in the entire Group’s markets; Private Banking: serve the Group’s highest value personal clients around the world, utilizing the investments already made; Attract, develop and motivate HSBC’s people, rewarding success and rejecting mediocrity; and TSR: Fulfill HSBC’s TSR target by achieving strong competitive performances in earnings per share growth and efficiency. D.4. Organization Structure Headed by the Chairman and Deputy Chairman, the HSBC Holdings Plc has 20 (twenty) members in its board of directors position with one Advisor to the Board and one Group Company Secretary. Their names are given in “Table 1: Names and Positions of the Members of Board of Directors of the HSBC” (Appendix 1: Tables): E. An overview, Functional Difference & Operations of HSBC Bangladesh E.1. HSBC Bangladesh
The HSBC Asia Pacific group represents HSBC in Bangladesh. HSBC opened its first branch in Dhaka in 17th December 1996 to provide personal banking services, trade and corporate services, and custody services. The Bank was awarded ISO9002 accreditation for its personal and business banking services, which cover trade services, securities and safe custody, corporate banking, Hexagon and all personal banking. This ISO9002 designation is the first of its kind for a bank in Bangladesh. The Hongkong and Shanghai Banking Corporation Bangladesh Ltd. primarily limited its operations to help garments industry and to commercial banking. Latter, it is extended to pharmaceuticals, jute and consumer products. Other services include cash management, treasury, securities, and custodial service. Realizing the huge potential and growth in person banking industry in Bangladesh, HSBC extended its operation to the personal banking sector in Bangladesh and within a very short span of time it was able to build up a huge client base. Extending its operation further, HSBC opened a branch at Chittagong, two branch offices at Dhaka (Gulshan and Motijheel) and an offshore banking unit on Novemberâ€™1998. Another branch has been opened at Dhanmondi on 1st March 2003. Recently they further expanded their banking services by opening up branches in Uttara and Sylhet. HSBC Bangladesh is under the strict of supervision of HSBC Asia Pacific Group, Hongkong. The Chief Executive Officer of HSBC Bangladesh manages the whole banking operation of HSBC in Bangladesh. Under the CEO, there are heads of departments, who manage specific banking functions e.g. Personal banking, corporate banking, etc. Currently HSBC Bangladesh is providing a wide range of services both two individual and corporate level customers. In 2000 the bank launched a wide array of personal banking products designed for all kinds of (middle and higher middle income) individual customers. Some such products were Personal loans, car loans, etc. The bank also possess different kinds of personal banking products â€“ Personal Secured Credit, Personal Secured loan & Automated Tele Banking (ATB) service, Credit Cards, ATM, Day& Night Banking Service and Easy Pay Machines. These products are designed to meet the diverse customer needs more completely. HSBC in Bangladesh also specializes in self-service banking through providing 24-hour ATM services. Name of Organization
the The Hong Kong Shanghai Banking Corporation Bangladesh LTD
Year of Establishment
Anchor Tower, 1/1-B Sonargaon Road Dhaka 1205, Bangladesh
Nature of organization
the Multinational company with subsidiary group in Bangladesh
HSBC group shareholders
Savings & deposit services Loan products Corporate and Institutional services Trade services & Hexagon Mr. Steve Banner Chief Executive Officer Mr. Mamoon Mahmood Shah Head of Personal Financial Services Mr. Adil Islam Head of Corporate Banking Mr. Syed Akhtar Hossain Uddin Human Resource Manager Mr. Munir Hussain Marketing Manager Mr. Wasim Adnan Wahed Chief Operating Officer 7 (Dhaka, Motijheel, Gulshan, Dhanmondi, Chittagong, Uttara and Sylhet)
Number of Offices Number of ATMâ€™s
Number of employees
Offers full online banking from branch to branch and from Dhaka to Chittagong.and now to Sylhet
Service Coverage Customers
& Serves individual and corporate customers within Dhaka , Chittagong and now to Sylhet.
Table 3: Brief Overview of HSBC in Bangladesh Location, address, contact to HSBC is given in Appendix 2 E.2. Functional Difference(s) Except one branch (Amanah) there is no functional difference between branches of HSBC in Bangladesh. HSBC Amanah is the global Islamic financial services division of the HSBC Group, responsible for the development of Islamic financial products for distribution to customers of the HSBC Group. It was established in 1998 and is now based in Dubai, UAE
with regional offices in the UK, the US, Saudi Arabia, Malaysia, Indonesia, Bangladesh, Singapore and Brunei. HSBC Bangladesh currently offers Amanah Current Account and Amanah Import finance. The Gulshan branch of HSBC Bangladesh is the Amanah branch. E.3. Operation of HSBC in Bangladesh As one of the largest international banks in Bangladesh, HSBC has a long-term commitment to its customers and provides a comprehensive range of financial services: personal, commercial and corporate banking; trade services; cash management; treasury; consumer & business finance; and securities, and custody services. The range of services offered by HSBC in Bangladesh is as follows: Personal Banking The Hongkong and Shanghai Banking Corporation Limited offers a full range of personal banking products and services designed to take care of its customers’ growing needs and requirements. HSBC in Bangladesh has launched a number of loan products during 2000. Personal Installment Loan is an unsecured loan that does not require any personal guarantee or cash security; Car Loan, also, does not require any down payment or personal guarantee. The Bank has already launched Phone banking, a state-of-the-art automated telephone banking service available 24 hours a day, 7 days a week, and 365 days a year, which allows customers to access their account from the comfort of the office or home. HSBC is the market leader in the local Auto pay service with which the company can initiate bulk Taka payments to, or Taka collections from, any HSBC current or savings accounts of counterparts for a specified sum at a specified date, regardless of the branch. HSBC also offers Power vantage, a unique all-in-one package of products and services designed to give total financial control to the customer; a unique savings account, which allows the customer to do any number of transactions without any charges being incurred or credit interest lost. To satisfy the growing needs of real estate HSBC Bangladesh recently launched Home Loan Scheme and a special type of deposit product named “Bangladesh International” for nonresident Bangladeshi. Corporate Banking Services The Hongkong and Shanghai Banking Corporation Limited offers a wide range of cash financing, working capital, short and medium-term loans and guarantee facilities from its
Head Office and Chittagong branch. The Offshore Banking Unit (OBU) provides US Dollar denominated working capital as well as short-term finance for capital imports to eligible businesses. Using high-speed communication links, HSBC connects customers to international payment systems. Trade Services: Trade finance and related services are a long-standing core business of HSBC based on the depth and spread of its corporate customer base and highly automated trade-processing network. As the leading provider of trade finance and related services to importers and exporters in Asia, HSBC in Bangladesh operates a highly automated trade-processing network and offer an Electronic Data Interchange (EDI) capability through Hexagon. The Bank also uses SWIFT, an efficient and secure mechanism for bank-to-bank global communications used for all trade related activities including fund transfers and issuance of DC’s (Documentary Credit). Financial Institutions HSBC provides global trade services and cash management services to local banks. HSBC’s worldwide network strength, with over 7000 offices in 81 countries and territories, coupled with a world class reputation in Trade Finance (“Best Trade Documentation Bank” – Euro money) and an unparalleled presence in Asia (“Best Bank in Asia” — Euro money), places HSBC in an ideal position to render unmatched correspondent banking services. HSBC’s commanding presence in the USA (5 th largest USD clearing bank globally), UK (largest GBP clearing bank globally), and the Euro land (largest Euro clearing bank in the UK) both in terms of network strength and clearing ability allows the Bank to provide first class cash management solutions in 3 major global currencies; US dollar, Pound sterling, and the Euro. Hexagon Hexagon, a proprietary computer-based software package, provides customer with an instant link into the HSBC Group’s international computer networks, allowing them to perform transactions and obtain a diverse range of up-to-date information 24 hours a day, 365 days a year. Payments and Cash Management (PCM) HSBC is the pioneer in introducing electronic cash management solutions in Bangladesh, by introducing its state-of-the-art proprietary software, Hexagon, back in 1997. This was initially made available to corporate clients only but has since been expanded to include banks and retail clients. With Hexagon, the Bank’s proprietary cash management system, corporate customers can access banking services from anywhere in the world to view account balances and statements,
make transfers and international payments, and to open documentary credits, by using only a PC, a modem, and a telephone line. Payment & cash Management services include: • •
Account opening for companies Countrywide receivables management solutions
Countrywide payables management solutions
ccCross border remittance services
Internet banking solution
Custody and Clearing: HSBC is a leader in custody and clearing in the Asia Pacific region and the Middle East. The network uses advanced securities clearing system, which was developed in-house and provides round-the-clock online real-time access to clients’ securities portfolios. Investment banking and markets This division together the advisory, financing, asset management, equity securities, private banking, trustee, private equity, and treasury and capital market activities of the HSBC Groups. Treasury and Capital Markets HSBC’s treasury and capital markets business ranks among the largest in the world and serves the requirements of supranational, central banks, international and local corporations, institutional investors, and financial institutions as well as other market participants. Amanah HSBC Amanah is the global Islamic financial services division of the HSBC Group, responsible for the development of Islamic financial products for distribution to customers of the HSBC Group. It was established in 1998 and is now based in Dubai, UAE with regional offices in UK, the US, Saudi Arabia, Malaysia, Indonesia, Bangladesh, Singapore and Brunei. HSBC Bangladesh currently offers Amanah Current Account and Amanah Import Finance. F. Products and Services at HSBC HSBC is always working with product developments. Products and services from HSBC are briefly shown below: Under Personal Financial Services ◊ ATM Service ◊ Hexagon
◊ Savings Account ◊ Phonebanking ◊ Current Account ◊ Time Deposit ◊ Car Loan ◊ Home Loan ◊ Credit Card ◊ Call Centre ◊ Personal Secured Credit ◊ Personal Secured Loan ◊ Personal Installment Loan ◊ Bangladesh International ◊ Day & Night Banking ◊ Power Vantage ◊ Traveler’s Cheques ◊ Investment Watch ◊ Corporate Employee Privilege Scheme (CEPS) ◊ Monthly Interest Bearing Time Deposit Under the name My Loan HSBC offers: ◊ Professional Loan, Lifestyle Loan, Furniture Loan, Wedding Loan ◊ Student Loan ◊ Travel Loan ◊ Motorbike Loan ◊ Car Loan ◊ Home Loan Corporate banking • Corporate Credit Overdraft, Import and Export Finance, Documents Against Acceptance (DA)/ Documents Against Payments (DP) purchase, Long-term Loans, Guarantees and Bonds, etc. • Payments and Cash Management Account Management Services, Countrywide Payments/Countrywide Collections, etc. • Electronic Banking: Cash Management Services, Trade Services, Salary Payments, Information Services, Hexagon Report Writer, Offline Hexagon operationos, Hexagon Cheque Writer, etc. • Trade Services include Export Services, Import Services, Trade Express, Document Tracker, Electronic DC Advising, etc. Treasury Service • Spot Foreign Exchange • Forward Foreign Exchange • Competitive Forex Rates for Remittances, Export and Import • Weekly Currency Newsletter • Market Outlook from our Global Desks Amanah – Shariah Compliant Solutions • Amanah Current Account • Amanah Import Finance • Amanah Day & Night Banking
G. An overview of Management and Major Functional Departments of HSBC Bangladesh G.1. Management of HSBC Bangladesh HSBC Bangladesh is such a company that has to overcome a lot of hurdles to reach the position it now holds. At present, Mr. Steve Banner is the CEO; Mr. Mahbubur Rahman is the chief of Corporate Banking; Mr. Arjun Surya is COO, Mr. Mamoon Mahmud Shah is the Chief of Personal Banking or as known in HSBC, Personal Financial Services (PFS) Head, and Mr. Mostofa Aolad is the financial controller of FCD ,Mr. Syed Akhtar Hossain is the Human Resource Manager at HSBC Bangladesh. These six men at the top carried out their management roles comprehensively and systematically. They equally contributed to HSBC’s superior leadership, by carrying out their unique roles. They worked well together, respecting each other’s abilities, & arguing openly, & without any resentment when they disagreed. To maintain a close touch with the organization each man works in separate area of HSBC’s complex. Their offices are indistinguishable from all other cubicles where HSBC’s junior executives & secretaries work in. There are no office walls in HSBC and all the staff starting from the CEO to the lower operating level employees shares the same premises under one roof. There are no specialized cabins for top management and executives and also no executive dining rooms. This has created a management team that is unified, cohesive, & energetic.
Each and every employee of HSBC takes pride of being an employee at HSBC and his or her pride comes from the freedom of direct communication with the top management. The management of HSBC is supportive in the sense that the top management deliberately supports the suggestions, values, ideas, innovation, and hard work of the employees and officers. Again high amount of employee participation is encouraged in the management AUTOCRATIC CUSTODIAL process. There are also systems for awards, incentives, and status for innovative ideas and Power Economic Resources hard works. Again the management style can also be termed as collegial as high amounts of Authority Money teamwork and participation top and bottom parts of HSBC. Management Obedience exists between the Security and benefits style at HSBC Dependence Bangladesh should falls somewhere between on Dependence on supportive and collegial. A Boss is shown below: organization graphical presentation Subsistence Security SUPPORTIVE COLLEGIAL Minimum Passive cooperation Leadership Support Job performance Participation Status and recognition Awakened drives
Participation Teamwork Responsible Behavior Self -discipline Self actualization Moderate HSBC enthusiasm
HSBC follows a 4 layers management philosophy in Bangladesh. These are Managers, Executives, Officers, and Assistant Officers. The CEO is the top most authority of all the levels. Managers are the departmental heads who are responsible for the activities of their departments. They are the heads of the department who formulate strategies for that department. e.g. Human Resources Manager. Executives have the authority next to managers. They are basically responsible for certain activities & organizational functions. e.g. Admin Executive. These two layers represent the management level of HSBC Bangladesh. Officers are the next persons to stand in the hierarchy list. They are the typical mid-level employees of HSBC organizational hierarchy. These officers are responsible for managing the operational activities and operating level employees. The operating level employees of HSBC who are ranked as Assistant Officer fill the last layer of this hierarchy. They perform the day-to-day operational activities of HSBC. An organizational hierarchy chart is shown below: Chief Executive Committee
The organizational structure of HSBC Bangladesh is designed according to the various service and functional departments. The Chief Executive Officer (CEO) heads the chief executive committee, which decides on all the strategic aspect of HSBC. The CEO is the person who supervises the heads of all the departments and also is the ultimate authority of HSBC Bangladesh. He is responsible for all the activities of HSBC Bangladesh and all its consequences. He administers all the functional departments and communicates with the department heads for smooth functioning of the organization. The HSBC Chief Executive Committee is formed with the heads of all departments along with the CEO. Besides the CEO the CEC is staffed with 6 more managers: Manager of Human Resources, Manager of Services, and Manager of Financial Control Department,
HSBC Functional Department HSBC activities are performed through functional departmentalization. So, the departments are separated according to the functions they perform (HR, Marketing, Personal Banking, etc.). There are 6 major functional departments at HSBC: Human Resources Department, Financial Control, Personal Banking, Corporate Banking and Marketing. Within these major departments there are some other subsidiary departments that allow smooth operation of their own major departmental function. A graphical presentation of all the departments (Major & minor) is shown below. Brief functional descriptions of these departments areChief Executive Officer (CEO)
Foreign Correspondenc e
Internal Control (IC)
Marketing Administratio n
Network Service Center (NSC)
Bond, ATM & ATB
Human Resource Department (HR) The Human Resource Manager currently heads this department. The major functions of this department are strategic planning and policy formulation for Compensation, Recruitment, Promotion, Training, and Developments, Personnel Services, and Security. The HR department is very much concerned with the discipline that is set up by the HSBC group.
HSBC group has got strict rules and regulations for each and every aspect of banking, even for non-banking purposes; i.e. the Dress Code. All these major personnel functions are integrated in the best possible way at HSBC, which results in its higher productivity. The Human resource officer monitors the employee staffing and administration activities. The Training officer supervises training, development, & rotation activities. The structure of the HR department is shown below: Human Resource Manager
Human Resource Officer
HSBC activities are performed through functional departmentalization. So, the departments are separated according to the functions they perform. Within the major departments there are some other subsidiary departments that allow smooth operation of their own major departmental functions. Personal Financial Services (PFS)
PFS is the most flourishing department ofHead HSBC Bangladesh. This department basically deals with the management of products and services offered to the individual consumers. Within a span of only five year HSBC PFS has grown tremendously and is still growing with Manager Manager Manager Manager Manager Manager itsBond innovative products and 2 booths & CCR and service offerings. ProductThe 3 branches Branches Sales of HSBC ATBbasically dealATM with the personal banking activities and provide various accounts services to individual customers. The departments under PFS are shown in the following diagram: Executive Bond & ATM
Executive Approval & Operations
Mobile Sales Officers
CSM DAK Branch
CSM Chittagong Branch
CSM Dhanmondi Branch
CSM Motijheel Booth
CSM Gulshan Booth
Branch Staff Team
Branch Staff Team
Branch Staff Team
Branch Staff Team
Branch Staff Team
Operations • • • • • • • • • • •
Manages daily operation PlaMns and directs sales and marketing Plans for service development Top-level authority for customers’ dealings and transaction Provides required service to the customers directly Maintains documentation and report flow vary rapidly Helps in planning in field level Assists PFS Head in decision-making process Assists PFS Head in different level of research Assists PFS Head day-to-day work Keeps track and inform PFS Head in present condition of the competition in the market
The Financial Control Department The COO (Chief Operating Officer) of HSBC directly controls the FCD (Financial Control Department). COO also supervises other departments of the bank like HSBC Universal Banking (HUB), Network Support Center (NSC), Administration, Information Technology (IT), and Management Internal Control (MIC). The FCD is
under taut security in the bank and it deals with all the sophisticated information (i.e. financial planning, payments, etc.) of the bank. FCD is especially controlled by dividing it into five sub departments that are shown below: COO COO
Treasury Back Office
Asset & Liability Committee
Figure 2: Partial Organogram of HSBC Depicting FCD The primary purpose of FCD is to maintain a rigorous financial control environment • • • • • • • • • • • • • • •
To ensure the maintenance of proper accounting records and the preparation of appropriate financial reports for GHQ, regulators and management To ensure compliance with tax and company law and regulations and Contribute to the effective planning and control of profitability and risk through the Asset and Liability Management Committee (ALCO) process. FCD has got some important responsibilities. These are: Financial accounting and reporting to the appropriate Head Office in accordance with prescribed reporting procedure Financial reporting as required by local regulations and law Asset and liability performance analysis Management accounting Use of management information system Co-ordination of planning Financial planning, including capital budgeting Cost control Setting tax, investment and administration policy Monitoring exchange rate and interest rate exposures and Tax compliance and planning
Brief descriptions of the above FCD sub departments have been endowed here: Chief Operating Officer
Executiv e, FC
Executiv e, Treasury
Officer, Financial Control
Officer, Fund Management
Executiv e, Payment s
Executive, Cash Management
Officer, Administrat ion
Officer, In-house PCM
Officer, Out-ward OCM
Treasury Back Office The treasury department of FCD is the treasury back office. It acts as a support function of treasury front office that is the Capital market dealing room. The treasury back office calculates the (CRR) Cash reserve Ratio and (SLR) Statutory Liquidity ratio and that is analyzed by the front office and treasury deals are done. The cash reserve ratio is in BDT amount. The bank has to maintain a minimum amount of 4% of demand and time liability. The customer deposits and demands liabilities are taken into account for calculation. Statutory Liquidity ratio is set as 16% as minimum to be maintained. The back office of FCD processes both the local currency and the foreign currency deals made by front office. The treasury back office of FCD also checks the deals and authenticates the dealing. Then the information is inputted in the HSBC Universal Banking (HUB). The treasury back office also makes conformations with local counterparts and sends swift messages to foreign counterparts for deals made by the front office. Return The Return section acts as an important support function of financial control department. The
department works to maintain proper Bangladesh Bank Regulatory policy. The department maintains proper financial reports and also looks after the bank compliance with tax and company laws. By this way the return section overviews the different sections of FCD which as a result give optimum level of performance Payments The payments section of Financial Control Department looks after the cost of operation aspects HSBC Bangladesh. The payments department deals with appropriate bills under their proper payments. The department allocates proper bills under the proper cost centers of the bank. The payment section also verifies the authenticity of the bill as per bank’s policy. Reconciliation The Reconciliation section of FCD deals with the Nostro and Vostro balances with other banks and entities. The section deals with HSBC’s accounts in other banks (Nostro) and other banks account in HSBC (Vostro). The section checks the transfer of fund with different accounts. This department settles payable and receivable balances in different accounts and informs treasury about different account positions. Asset & Liability Committee (ALCO) The word ALCO stands for Asset and Liability Committee. This section of Financial Control Department acts as a Management Information System of the bank. The department cosines all the data in a manageable form for the authority to look into. These data helps to make managerial decision for the top level of the bank. The asset and Liability management section segregates all the business lines of the bank. This helps the top level to understand the different business lines performance in specific terms. The ALCO also sets the targets to be met to the departments as per the Group Head office and Intermediate Head office. The department reports various information to group Head Office situated in England and Intermediate Head Office in Hongkong as per bank policy. The department also calculates various ratios related to bank’s performance. That is why the section maintains a high degree of secrecy, so that there is zero level of information drainage out side the section. The section uses software like HMI, Sarasen etc. for performing their job. Their responsibilities at a glance: • • • • • • •
Analysis of business performance Customer wise profitability through HMI Forward looking ALCO Balance sheet growth Analysis Annual operating plan(AOP) Strategic plan Liquidity Analysis
Review monthly analysis of the bank Total management information systems(MIS)
Credit Department The personal banking credit department deals with the consumer credit schemes such as the Personal loan, Car loan, Travel Loan, Personal Secured loan, etc. which are tailored to meet the demand of individual customers. The manager of PFS credit approves and administers all the activities of this department. He is staffed with five approval officers, four operations officers, and two MIS officers. The approval officers mainly reject or approve the credit requests. After being checked by the approval officer, the credit requests go to the operations for further processing of the application and disbursement. This department is a member of ALCO (Asset Liability Management Committee), which coordinates in preparation of lending analysis and data on concentration of risk and identifies possible lending risks. This department is also responsible for monitoring all necessary documents and securities related to loans. Administration Like any other organizations, the Admin department of HSBC makes sure that the organizations moves on with all its departments and staffs operating according to all the rules and regulations of the company. It also prevents any bottlenecks within the work process and ensures smooth functioning. The admin department has two divisions â€“ General Administration and Business Support Services.
General Administration The general administration division is pretty much similar to the admin departments of other companies that ensure discipline and regulatory concerns.
Business Support Services. Business support services provide supports to the departments during employee leaves and sudden terminations so that the department can function without problems.
Information Technology (IT) This department gives the software and hardware supports to different departments of the bank. As HSBC is engaged in online banking, the role of IT is very crucial for the bank. This department is the most active department of HSBC where employees always stand by to solve any problems in the system. The managers and executives of IT division work continuously to develop the total IT system of HSBC so that it can be operated with ease, accuracy, and speed. Internal Control HSBC has internal auditors who visit on regular basis and submit the report to the higher authority for audit purposes. This gives different departments the chance to know their mistakes and take necessary corrective actions. Again, the Bank annually administers a company wide audit program to evaluate the overall performance of the bank in Bangladesh. HSBC Universal Banking (HUB) The HSBC banking system is called HUB. HSBC does the online banking and it is HUB, which sets up the parameter for that. This HUB is linked with the HSBC group via satellite and each and every transaction made by HSBC within Bangladesh is being recorded at the HSBC Asia-pacific headquarters at Hong Kong via HUB. Thus the HUB is the most powerful and important equipment of HSBC Bangladesh that monitors and tracks any fraud and faults made with HSBC Bangladesh.
Network Services Center (NSC This department can be described as the ‘Power House’ of HSBC Bangladesh. NSC does the back office job for the bank. The main four jobs that are performed by NSC are •
Scanning of signature cards,
issuing checkbooks, and sending &
NSC looks after the clearing process of HSBC and makes necessary contact with the central bank for maintaining account flows. All the customer signatures are scanned in this department and are entered into the system. NSC also issues checkbooks for new and old accounts based on requisition from various branches. ‘Remittance’ is a banking term, which means ‘Transfer of funds through banks’. When a bank remits on behalf of its customers, it is termed as outward remittance. On the other hand, when the bank receives the remittance on behalf of the bank, it is inward remittance. The following methods that NSC uses to remit money for customers: Telegraphic Transfer (TT), Demand Draft (DD), & Cashier’s Order.
Marketing Department The sixth major department of HSBC is the marketing department. The marketing department of HSBC play a vital role in fostering the continuos growth HSBC in Bangladesh. A manager is assigned to this department who looks after the overall marketing operation of HSBC in Bangladesh. This department is basically concerned about marketing the companyâ€™s products, services, and building a strong corporate image. The marketing department of HSBC has three subdivisions: Direct Sales, Promotion, & Marketing Administration. Manager Marketing
Executive, Direct Sales
Officer, Sales Administration
HSBC Mobile Sales Team
Officer, Public Relations
Executive, Marketing Administration
Officer, Billing & Admin
ATM Center The ATM center ensures smooth operation of the ATM machines that are located at Dhaka and Chittagong. The ATM center is responsible for regular replenishment of the off-site ATMâ€™s and servicing of all the ATMs. Currently a total 10 ATMs are in operation. The ATM center also deals with issuance, termination and servicing of the ATM cards. On a whole, the ATM center is the department that is solely responsible for all the activities related to ATM and is the facilitating department that enables customers 24 hour banking support. Bond Department This department is under the same manager as the ATM center. They basically deal with all the buying and selling of government bonds and treasury bills as per customer instruction, i.e. BSP, PSP, and TSP etc. This department keeps under its control the transactions regarding USDB, USDIB and WEDB. ATB Center ATB refers to Automated Tele Banking. This department deals with the back office servicing of the HSBC phone banking services provided to customers. This department is basically responsible for the activation of ATB, ATB pin generation, and ATB security management, ATB blocking and troubleshooting of all ATB problems. This department is fairly new and was constructed on January 2001. Currently this department is staffed with one executive and one officer. Corporate Banking This division if HSBC provides financial services to organizational (corporate) clients. HSBC is a worldwide leader in banking and financial services whose success is based on its relationships with its corporate clients. Whether it is locally or around the world, HSBC offers a comprehensive range of services that can be tailored to the individual needs of the company. The Head of this department is the Chief of Corporate Banking. He is also the Vice-CEO of HSBC Bangladesh. The chief of Corporate Banking manages the activities of corporate banking of HSBC Bangladesh. Two offices of HSBC Bangladesh offer corporate banking services to corporate clients. These are the Dhaka Head Office and Chittagong office. Corporate Banking of HSBC Bangladesh includes Corporate Institutional Banking (CIB), Trade Service (HTV), and Hexagon. These sub-divisions are discussed briefly in the following sections along with a structure chart of Corporate Banking division of HSBC Bangladesh
Chief, Corporate Banking
Team of Relationship Managers
Officer, Sales & Marketing
Manager Trade Services
Executive Credit Admin
Officer, Officer, Officer, Export Services Import Services Foreign Exchange
Structure of Corporate Division
Corporate Institutional Banking (CIB) As their major customers operate internationally, HSBC services them internationally. Operating through the major centers and in close liaison with HSBC Investment Bank, Corporate and Institutional Banking provides the full range of the Group's capabilities at local and global levels, with a particular focus on payments and cash management, trade and securities custody. HSBC also offers local financial institutions and banks access to wide range of financial services available on an international basis. The services are tailored to suit the needs of the companies. CIB has two separate wings: Relationship management department and Hexagon. These are discussed below: Relationship Management Department The RM department consists of various relationship managers who are assigned to different corporate client to better satisfy their needs. These RM’s communicate with the clients and are solely responsible for the companies they deal in. Any information regarding a corporate client must be communicated through the respective RM assigned to that corporate client. A relationship manager may be assigned more than one company and this decision depends on the chief of Corporate Banking. Hexagon The Hexagon department deals with all aspects related to HSBC’s unique banking software product - Hexagon. It is the global Electronic Banking system of HSBC, which offers the customers more convenient and efficient banking than ever before. It is an innovative desktop banking system developed by the HSBC group, which operates via the group’s proprietary worldwide communications network. HSBC Trade Services (HTV)
Trade service is known by various names in other banks, e.g. Trade Finance Foreign Exchange, Foreign Trade etc. However, the functions are the same. As the name suggests, this department is involved in facilitating trade, both international & within Bangladesh. HSBC is the leading provider of trade finance and related services to importers and exporters in Asia. Trade is considered a core business of the group. The group’s presence in 81 countries of the world gives a good opportunity to control both ends of a trade transaction and keep the business within the Group. The various awards it has won from the leading publications of the world acknowledge HSBC’s excellence in trade. The trade service department has two separate subsidiaries: Credit Administration & Foreign Exchange Division.
Project part 1. Introduction It is generally accepted that risk is a fact of life and hence firms have to account for risk when making decisions on output levels or prices. This is particularly true for the banking industry. Since banks are traditionally in the business of issuing loans and taking deposits they are – in contrast to ”normal” firms – exposed to a number of very special risks. In this regard credit risk – i.e. the risk of borrower default –and the risk of changes of market prices for certain financial products and services maybe considered as the most important ones. Moreover, it is acknowledged that by issuing loans and taking deposits banks perform a number of very important functions in the economy – e.g. allocation of funds and provision of liquidity to name just a few. However, if the existence of risks induces banks to change decisions on deposits and loans compared to the riskless case one could expect risks to influence the performance of the functions stated above as well. It is thus very important to know in which way risks react banks’ optimal decisions on deposits and loans and hence banks’ assets and liabilities management. And this is the subject to be analyzed in this paper. What is Asset Liability Management? Asset-Liability Management (ALM) can be termed as a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. It takes into consideration interest rates, earning power, and degree of willingness to take on debt and hence is also known as Surplus Management. But in the last decade the meaning of ALM has evolved. It is now used in many different ways under different contexts. ALM, which was actually pioneered by financial institutions and banks, are now widely being used in industries too. The Society of Actuaries Task Force on ALM Principles,
Canada, offers the following definition for ALM: "Asset Liability Management is the ongoing process of formulating, implementing, monitoring, and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints." 2. Background of alm Traditionally, banks and insurance companies used accrual system of accounting for all their assets and liabilities. They would take on liabilities - such as deposits, life insurance policies or annuities. They would then invest the proceeds from these liabilities in assets such as loans, bonds or real estate. All these assets and liabilities were held at book value. Doing so disguised possible risks arising from how the assets and liabilities were structured. Consider a bank that borrows 1Crore (100Lakhs) at 6 % for a year and lends the same money at 8 % to a highly rated borrower for 5 years. The net transaction appears profitable-the bank is earning a 200 basis point spread - but it entails considerable risk. At the end of a year, the bank will have to find new financing for the loan, which will have 4 more years before it matures. If interest rates have risen, the bank may have to pay a higher rate of interest on the new financing than the fixed 7 % it is earning on its loan. Suppose, at the end of a year, an applicable 4-year interest rate is 9%. The bank is in serious trouble. It is going to earn 8 % on its loan but would have to pay 9 % on its financing. Accrual accounting does not recognize this problem. Based upon accrual accounting, the bank would earn Rs 200,000 in the first year although in the preceding years it is going to incur a loss. The problem in this example was caused by a mismatch between assets and liabilities. Prior to the 1970's, such mismatches tended not to be a significant problem. Interest rates in developed countries experienced only modest fluctuations, so losses due to asset-liability mismatches were small or trivial. Many firms intentionally mismatched their balance sheets and as yield curves were generally upward sloping, banks could earn a spread by borrowing short and lending long. Things started to change in the 1970s, which ushered in a period of volatile interest rates that continued till the early 1980s. US regulations which had capped the interest rates so that banks could pay depositors, were abandoned which led to a migration of dollar deposit
overseas. Managers of many firms, who were accustomed to thinking in terms of accrual accounting, were slow to recognize this emerging risk. Some firms suffered staggering losses. Because the firms used accrual accounting, it resulted in more of crippled balance sheets than bankruptcies. Firms had no options but to accrue the losses over a subsequent period of 5 to 10 years. One example, which drew attention, was that of US mutual life insurance company "The Equitable." During the early 1980s, as the USD yield curve was inverted with short-term interest rates sky rocketing, the company sold a number of long-term Guaranteed Interest Contracts (GICs) guaranteeing rates of around 16% for periods up to 10 years. Equitable then invested the assets short-term to earn the high interest rates guaranteed on the contracts. But short-term interest rates soon came down. When the Equitable had to reinvest, it couldn't get even close to the interest rates it was paying on the GICs. The firm was crippled. Eventually, it had to demutualization and was acquired by the Axa Group. Increasingly banks and asset management companies started to focus on Asset-Liability Risk. The problem was not that the value of assets might fall or that the value of liabilities might rise. It was that capital might be depleted by narrowing of the difference between assets and liabilities and that the values of assets and liabilities might fail to move in tandem. Assetliability risk is predominantly a leveraged form of risk. The capital of most financial institutions is small relative to the firm's assets or liabilities, and so small percentage changes in assets or liabilities can translate into large percentage changes in capital. Accrual accounting could disguise the problem by deferring losses into the future, but it could not solve the problem. Firms responded by forming asset-liability management (ALM) departments to assess these asset-liability risk. 3. Literature review There have been a number of papers which are also concerned with this critical issue of Asset Liability Management by a bank. Wahl and Broll (2000) and Wong (1997) show that the introduction of risk changes bank behavior fundamentally. In the model of Wahl and Broll (2000), the banking firm participates in an inter-bank market in which any amount of funds can be lent or borrowed in addition to standard lending and deposit taking. Risk in this setting appears in the way that the inter-bank market interest rate is uncertain when the bank makes
decisions. The main result of Wahl and Broll is that due to the risky inter-bank rate the optimal level of loans increases and the optimal level of deposits decreases as long as the bank is a net lender in the inter-bank market. The work of Wong (1997) extends the setting of Wahl and Broll (2000) in considering two sources of risk which need not be statistically independent. In particular Wong assumes that there exists credit risk as well as uncertainty regarding the deposit rate. The level of deposits is given exogenous and thus the bank only determines the profit maximizing amount of loans which is shown to decrease due to the introduction of risk. 4. Techniques for assessing Asset-liability risk Techniques for assessing asset-liability risk came to include Gap Analysis and Duration Analysis. These facilitated techniques of managing gaps and matching duration of assets and liabilities. Both approaches worked well if assets and liabilities comprised fixed cash flows. But in the cases, which includes options of prepayment and floating rates, posed problems that gap analysis could not address. Duration analysis could address these in theory, but implementing sufficiently sophisticated duration measures was problematic. Accordingly, banks and insurance companies started using Scenario Analysis. Under this technique assumptions were made on various conditions, for example: •
Several interest rate scenarios were specified for the next 5 or 10 years. These specified conditions like declining rates, rising rates, a gradual decrease in rates followed by a sudden rise, etc. Ten or twenty scenarios could be specified in all.
Assumptions were made about the performance of assets and liabilities under each scenario. They included prepayment rates on various products.
Assumptions were also made about the firm's performance-the rates at which new business would be acquired for various products, demand for the product etc.
Market conditions and economic factors like inflation rates and industrial cycles were also included.
Based upon these assumptions, the performance of the firm's balance sheet could be projected under each scenario. If projected performance was poor under specific scenarios, the ALM committee would adjust assets or liabilities to address the indicated exposure. Let us consider
the procedure for sanctioning a commercial loan. A borrower approaches to the bank for credit. Credit Risk Management (CRM) department of the bank has to appraise the borrower on various parameters like industry prospects, operational efficiency, financial efficiency, management qualities and other things, which would influence the working of the company. On the basis of this appraisal, the banks would then prepare a credit-grading sheet (ranging 1-6; as per Basel guideline) after covering all the aspects of the company and the business in which the company is in. Then the borrower would then be charged a certain rate of interest, which would cover the risk of lending. Practically the rate belongs to range of (+/-) 1% 1.5%. Lending risk is also adjusted through compensating balance, which rather more common. The main shortcoming of scenario analysis is that, it is highly dependent on the choice of scenarios. It also required that many assumptions are to be made about how specific assets or liabilities will perform under specific scenarios. Gradually the firms recognized a potential for different type of risks, which was overlooked in ALM analyses at once. Also the deregulation of the interest rates in US in mid 70s and subsequently in around the world, compelled the banks to undertake active planning for the structure of the balance sheet. The uncertainty of interest rate movements gives rise to Interest Rate Risk thereby causing banks to look for processes to manage this risk. In the wake of interest rate risk comes Liquidity Risk and Credit Risk, which became inherent components of risk for banks. The recognition of these risks brought Asset Liability Management to the centre-stage of financial intermediation. Today even Equity Risk, which until a few years ago was given only honorary mention in all but a few bank ALM reports, is now an indispensable part of ALM for most banks. Some companies have gone even further to include Counterparty Credit Risk, Sovereign Risk, as well as Product Design and Pricing Risk as part of their overall ALM. Now a day's a company have different reasons for doing ALM. While some companies view ALM as compliance and risk mitigation exercise, others have started using ALM as strategic framework to achieve the company's financial objectives. Some of the business reasons companies now state for implementing an effective ALM framework include gaining competitive advantage and increasing the value of the organization. 5. ALM approaches
ALM in its most apparent sense is based on funds management. Funds management represents the core of sound bank planning and financial management. Although funding practices, techniques, and norms have been revised substantially in recent years, it is not a new concept. Funds management is the process of managing the spread between interest earned and interest paid while ensuring adequate liquidity. Therefore, funds management has following three components, which have been discussed briefly. 5.1 Liquidity Management Liquidity represents the ability to accommodate decreases in liabilities and to fund increases in assets. The price of liquidity is a function of market conditions and market perception of the risks, both interest rate and credit risks, reflected in the balance sheet and off-balance sheet activities in the case of a bank. If liquidity needs are not met through liquid asset holdings, a bank may be forced to restructure or acquire additional liabilities under adverse market conditions. Liquidity exposure can stem from both internally (institution-specific) and externally generated factors. External liquidity risks can be geographic, systemic or instrument-specific. Internal liquidity risk relates largely to the perception of an institution in its various markets: local, regional, national or international. Determination of the adequacy of a bank's liquidity position depends upon an analysis of its: •
Historical funding requirements
Current liquidity position
Anticipated future funding needs
Sources of funds
Present and anticipated asset quality
Present and future earnings capacity
Present and planned capital position
As all banks are affected by changes in the economic climate, the monitoring of economic and money market trends is key to liquidity planning. Sound financial management can minimize the negative effects of these trends while accentuating the positive ones. Management must also have an effective contingency plan that identifies minimum and
maximum liquidity needs and weighs alternative courses of action designed to meet those needs. The amount of liquid assets a bank should hold depends on the stability of its deposit structure and the potential for rapid expansion of its loan portfolio. 5.2 Asset Management Many banks (primarily the smaller ones) tend to have little influence over the size of their total assets. Banks, which rely solely on asset management, concentrate on adjusting the price and availability of credit and the level of liquid assets. However, assets that are often assumed to be liquid are sometimes difficult to liquidate. For example, investment securities may be pledged against public deposits or repurchase agreements, or may be heavily depreciated because of interest rate changes. Furthermore, the holding of liquid assets for liquidity purposes is less attractive because of thin profit spreads. Asset liquidity, or how "salable" the bank's assets are in terms of both time and cost, is of primary importance in asset management. To maximize profitability, management must carefully weigh the full return on liquid assets (yield plus liquidity value) against the higher return associated with less liquid assets. Seasonal, cyclical, or other factors may cause aggregate outstanding loans and deposits to move in opposite directions and result in loan demand, which exceeds available deposit funds. A bank relying strictly on asset management would restrict loan growth to that which could be supported by available deposits. The decision whether or not to use liability sources should be based on a complete analysis of seasonal, cyclical, and other factors, and the costs involved. In addition to supplementing asset liquidity, liability sources of liquidity may serve as an alternative even when asset sources are available. 5.3 Liability Management Liquidity needs can be met through the discretionary acquisition of funds on the basis of interest rate competition. This does not preclude the option of selling assets to meet funding needs, and conceptually, the availability of asset and liability options should result in a lower liquidity maintenance cost. The alternative costs of available discretionary liabilities can be compared to the opportunity cost of selling various assets. The ability to obtain additional liabilities represents liquidity potential. The marginal cost of liquidity and the cost of incremental funds acquired are of paramount importance in evaluating liability sources of
liquidity. Consideration must be given to such factors as the frequency with which the banks must regularly refinance maturing purchased liabilities, as well as an evaluation of the bank's ongoing ability to obtain funds under normal market conditions. The obvious difficulty in estimating the latter is that, until the bank goes to the market to borrow, it cannot determine with complete certainty that funds will be available and/or at a price, which will maintain a positive yield spread. Changes in money market conditions may cause a rapid deterioration in a bank's capacity to borrow at a favorable rate. In this context, liquidity represents the ability to attract funds in the market when needed, at a reasonable cost vis-Ă -vis asset yield. The access to discretionary funding sources for a bank is always a function of its position and reputation in the money markets. Although the acquisition of funds at a competitive cost has enabled many banks to meet expanding customer loan demand, misuse or improper implementation of liability management can have severe consequences. Further, liability management is not riskless. This is because concentrations in funding sources increase liquidity risk. For example, a bank relying heavily on foreign interbank deposits will experience funding problems if overseas markets perceive instability in U.S. banks or the economy. Again over-reliance on liability management may cause a tendency to minimize holdings of short-term securities, relax asset liquidity standards, and result in a large concentration of short-term liabilities supporting assets of longer maturity. During times of tight money, this could cause an earnings squeeze and an illiquid condition. Also if rate competition develops in the money market, a bank may incur a high cost of funds and may elect to lower credit standards to book higher yielding loans and securities. If a bank is purchasing liabilities to support assets, which are already on its books, the higher cost of purchased funds may result in a negative yield spread. Preoccupation with obtaining funds at the lowest possible cost, without considering maturity distribution, greatly intensifies a bank's exposure to the risk of interest rate fluctuations. That is why banks that particularly rely on wholesale funding sources, management must constantly be aware of the composition, characteristics, and diversification of its funding sources. 6. Procedures for examin of ALM
In order to determine the efficacy of Asset Liability Management one has to follow a comprehensive procedure of reviewing different aspects of internal control, funds management and financial ratio analysis. Below a step-by-step approach of ALM examination in case of a bank has been outlined. Step 1 The bank’s financial statements and internal management reports should be reviewed to assess the asset/liability mix with particular emphasis on: •
Total liquidity position (Ratio of highly liquid assets to total assets).
Current liquidity position (Minimum ratio of highly liquid assets to demand liabilities/deposits).
Ratio of Non Performing Assets to Total Assets.
Ratio of loans to deposits.
Ratio of short-term demand deposits to total deposits.
Ratio of long-term loans to short term demand deposits.
Ratio of contingent liabilities for loans to total loans.
Ratio of pledged securities to total securities.
Step 2 It is to be determined that whether bank management adequately assesses and plans its liquidity needs and whether the bank has short-term sources of funds. This should include: •
Review of internal management reports on liquidity needs and sources of satisfying these needs.
Assessing the bank's ability to meet liquidity needs.
The bank’s future development and expansion plans, with focus on funding and liquidity management aspects has to be looked into. This entails: •
Determining whether bank management has effectively addressed the issue of need for liquid assets to funding sources on a long-term basis.
Reviewing the bank's budget projections for a certain period of time in the future.
Determining whether the bank really needs to expand its activities. What are the sources of funding for such expansion and whether there are projections of changes in the bank's asset and liability structure?
Assessing the bank's development plans and determining whether the bank will be able to attract planned funds and achieve the projected asset growth.
Determining whether the bank has included sensitivity to interest rate risk in the development of its long term funding strategy.
Step 4 Examining the bank's internal audit report in regards to quality and effectiveness in terms of liquidity management. Step 5 Reviewing the bank's plan of satisfying unanticipated liquidity needs by: •
Determining whether the bank's management assessed the potential expenses that the bank will have as a result of unanticipated financial or operational problems.
Determining the alternative sources of funding liquidity and/or assets subject to necessity.
Determining the impact of the bank's liquidity management on net earnings position.
Preparing an Asset/Liability Management Internal Control Questionnaire which should include the following: i.
Whether the board of directors has been consistent with its duties and responsibilities and included: a. A line of authority for liquidity management decisions. b. A mechanism to coordinate asset and liability management decisions. c. A method to identify liquidity needs and the means to meet those needs. d. Guidelines for the level of liquid assets and other sources of funds in relationship to needs.
Does the planning and budgeting function consider liquidity requirements?
Are the internal management reports for liquidity management adequate in terms of effective decision making and monitoring of decisions.
Are internal management reports concerning liquidity needs prepared regularly and reviewed as appropriate by senior management and the board of directors.
Whether the bank's policy of asset and liability management prohibits or defines certain restrictions for attracting borrowed means from bank related persons (organizations) in order to satisfy liquidity needs.
Does the bank's policy of asset and liability management provide for an adequate control over the position of contingent liabilities of the bank?
Is the foregoing information considered an adequate basis for evaluating internal control in that there are no significant deficiencies in areas not covered in this questionnaire that impair any controls?
7. Bangladesh bank gudelines on ALM Because of the severe importance of liquidity problems and integration of international Market, Bangladesh Bank (BB) has formulated a unified guidelines for the commercial banks. This instruction is a comprehensive one with guidance regarding formation of Asset
Liability Committee (ALCO), information flow, different check points ad tools. According to BB, treasury department of bank has the sole responsibility of managing Asset-Liability of the bank. Typical organization structure of the ALCO looks like;
Head of Consumer Banking
Head of Treasury
Head of Corporate Banking
Head of Finance
Head of Credit
Head of ALM Treasury: Responsible for ALM Money Market Dealers Source: Managing Core Risk in Banking; ALM â€“ Bangladesh Bank Information flow could be;
Head of Operation
Source: Managing Core Risk in Banking; ALM – Bangladesh Bank
7.1 Key Policy Indicators Along with these general issues, BB has advocated the bank’s ALCO should have policy statements and annual review of the following matters at least. •
Loan Deposit Ratio (LD): The AD ratio should be 80%-85%. However, the Loan Deposit ratio of the bank should go up to 110%. The LD ratio = Loan/(Deposit+Capital+Funded Reserve) The ratio will be fixed based on the bank’s capital, Bank’s reputation in the market and overall depth of the money market.
Wholesale Borrowing Guidelines (WBG): The guideline should be set in absolute amount depending on bank’s borrowing capacity, historic market liquidity. The limit should be capped at the bank’s highest level of past borrowings. However, this limit can be increased based on the match funding basis.
Commitments: The commitments limits should not exceed 200% of the unused wholesale borrowing capacity of the last twelve months. The limit can be increased if a bank has access to additional funds via realization of surplus statutory holdings.
Medium Term Funding Ratio (MTF): The MTF of a bank should not be less than 30%. The ideal scenario should be 45%. Given, the overall scenario of current market, it will be suitable to move towards the MTF limit of 45%.
Maximum Cumulative Outflow (MCO): MCO up to I month bucket should not exceed 20% of the balance sheet.
Liquidity Contingency Plan: A liquidity contingency plan needs to be approved by the board. A contingency plan needs to be prepared in a manner so that enough liquidity is available to meet any crisis situation.
Local Regulatory Compliance: There should be a firm policy on compliance to the Bangladesh Bank in respect of CRR (5%), SLR (18% including CRR), Capital adequacy (10% RWA) etc.
7.2 Action plan guidelines 7.2.1 Maturity Profile: A key issue that banks need to focus on is the maturity of its assets and liabilities in different tenors. A typical strategy of a bank to generate revenue is to run mismatch, i.e. borrow short term and lend longer term. To address this risk and to make sure a bank does not expose itself in excessive mismatch, a bucket-wise (e.g. next day, 2-7 days, 7 days-1 month, 1-3 months, 3-6 months, 6 months-1 year, 1-2 year, 2-3 years, 3-4 years, 4-5 years, over 5 year) maturity profile of the assets and liabilities is prepared to understand mismatch in every bucket. Banks prepare a forecasted balance sheet where the assets and liabilities of the nature of current, overdraft etc. are divided into ‘core and non-core’ balances, where core is defined as the portion that is expected to be stable and will stay with the bank; and non-core to be less stable. The distribution of core and non-core is determined through historical trend, customer behavior, statistical forecasts and managerial judgment; the core balance can be put into over 1 year bucket whereas non-core can be in 2-7 days or 3 months bucket. 7.2.2 Interest Rate Profile: Along with liquidity risk (discussed in last point), interest exposure can also be a great threat for a bank. As a result, an interest rate profile is prepared, where consolidated yield for assets and liabilities for different maturity buckets are shown for better understanding of interest profile. 7.2.3 Value at Risk (VaR): Specifically, VaR is a measure of potential loss from an event in a normal, everyday market environment. VaR is denominated in a currency, in here it is Taka, where it measures the chance of losing Taka for a movement in interest rates for a given balance sheet scenario. For example, if a bank only has 1 month borrowing to fund 1 year customer lending, an increase in 1 month rates would result in incremental expense for the bank. VaR is estimated by assuming a 97.5% confidence level for movement in relevant Market Risk Factors. An extensive illustration and application of this exist in the later section. VaR = 2 x Factor sensitivity x Volatility Factor sensitivity is the sensitivity of an instrument/book to changes in a particular risk factor. For example, PV01 = the impact of ‘+1bp’ parallel move in the zero curve. And, 2 relate to 2 standard deviations (97.5 % confidence level).
7.2.4 Management Action Trigger (MAT): The MAT is a trigger level to warn of a persistently loss-making position. It defines management's tolerance for accepting market risk related losses on a rolling 30 day calendar day basis. MAT = current VaR + latest rolling monthly P/L (21 business days) When a MAT is exceeded, trading management must review the current position and decide whether it should be maintained, reduced or closed out. Additionally BB speaks regarding critical matter like balance sheet risk, liquidity risk, interest risk and capital adequacy, which have already been discussed in early section. 8. HSBC Bangladesh alm practices The management of HSBC Bangladesh regularly reviews the Bank’s overall asset and liability position and makes necessary changes in its mix as and when required. The Bank also has liquidity position to maintain in a level to ensure financial flexibility to cope with unexpected future cash demands. In order to ensure liquidity against all commitments, the Bank reviews the behavior patterns of liquidity requirements. The Bank has an approved Liquidity Contingency Plan (LCP), which is reviewed and updated on an annual basis by the ALCO. All regulatory requirements including CRR, SLR, RWA are reviewed by ALCO. For better management of asset and liability, the Bank has an established Asset Liability Committee (ALCO) which meets at least once a month. 8.1 Objectives of ALM The objectives of ALM are: •
to manage growth in the balance sheet with a view to achieving efficient allocation and utilization of all resources;
to enhance economic profit by improving net profits and promoting efficiency in the use of capital by enhancing return on risk assets, in the context of a clearly defined growth policy;
to review all risks and ensure their prudent management, including,
interest rate risk
foreign exchange risk
liquidity and funding risk
credit and counterparty risk using a portfolio approach (including market sector risk)
country risk and
to monitor the external environment and measure the impact on profitability and the balance sheet of factors such as:
interest rate volatility/trends/expected future movements
exchange rate volatility/trends/expected future movements
monetary and fiscal policies
customer behavior and competitor bank actions;
accounting and regulatory changes; and
to understand the interaction between different portfolios in the balance sheet and the issues affecting them such as transfer pricing and resource allocation etc.
8.2 Roles of ALM The ALCO is the primary vehicle for achieving the objectives of ALM. The main purposes of an ALCO are to: •
provide strategic direction and ensure tactical follow-through to create an evolving balance sheet structure to meet a site’s performance objectives within prescribed risk parameters;
monitor the risks and influences outlined in last section;
provide a forum for discussing ALCO issues;
facilitate teamwork between different businesses/departments;
resolve departmental inter-face issues such as transfer pricing and resource allocation;
review overall sourcing and allocation of funds;
determine the most likely banking environment for asset/liability forward planning and review contingency scenarios;
evaluate alternative rate, pricing and portfolio mix scenarios; and
review the following, including responsibility for action:
funds acquisition and allocation strategies;
asset/liability distributions and maturities;
position and size of interest rate gap;
liquidity level; and
8.3 Devices for ALM 8.3.1 Capital Adequacy Ratio Capital adequacy is measured in terms of two ratios: • the published ratio; and • the supervisory ratio. These ratios, which are arrived at by comparing the level of capital requirement with the amount of regulatory capital that the Group holds, are to be calculated in the manner specified below. •
for public disclosure
Risk Asset Ratio (%) = eligible capital x 100 (banking book RWAs + trading book notional RWAs) Trading book notional RWA = trading book capital requirement x 12.5 •
for supervisory purposes
Supervisory capital adequacy (%) = eligible capital x 100 (banking book RWAs x banking book trigger ratio) + (trading book notional RWAs x trading book trigger ratio) ALCO reviews capital adequacy ratios on a monthly basis and ensure compliance with regulatory requirements. ALCO also review projections of regulatory capital ratios to ensure anticipated compliance with requirements. The calculation is as follows;
Total Risk Weighted Assets ( RWA) as on 31 December
10% of RWA for 2007 ( 9% of RWA for 2006)
Required capital :10% of RWA for 2007 ( 9% of RWA for 2006) or BDT 1,000,000,000 whichever is higher 3,374,583,789
Actual Capital maintained Tier I Fund deposited with Bangladesh Bank Retained Earnings Tax Rebate on Head Office Expenses
2,565,024,160 4,144,411, 114
2,581,016,848 2,440,877, 283
506,261,449 7,215,696, 723
330,627,699 5,352,521, 830
19,448,985 3,903, 107 772,108, 751 7,987,805,4 74 4,613,221,6 85
Tier II General Provision Unrealized surplus on revaluation of HTM securities Exchange Equalization
Surplus % of Capital adequacy required Tier -I 5% Total (Tier I+II) 10% % of Capital adequacy maintained Tier -I 21% Capital Adequacy Total (Tier I + II) 24% 25%
Total, 24% Tier-I, 21%
07 539,610, 737 5,892,132,56 7 3,377,334,31 3 4.5% 9% 19% 21%
Total, 21% Tier-I, 19%
15% 10% 5% 0% 2007
8.3.2 Risk-weighted assets Following the implementation of the CAD, risk weighted assets (RWAs) are calculated separately for the Banking Book and Trading Book. In the Banking Book, RWAs are the aggregate of: •
on-balance-sheet assets multiplied by the risk weight appropriate to each category of asset; and
Off-balance-sheet risks multiplied by a conversion factor to convert to on-balance sheet equivalents and then by the appropriate risk weight. In the Trading Book, the concept of notional RWAs applies.
The Trading Book capital requirement is first determined for the following types of risk using the CAD system: • Foreign Exchange Position Risk. • Equity Position Risk. • Interest Rate Position Risk. • Large Exposures. • Trading Book Counterparty and Settlement Risk. Notional RWAs are then calculated by aggregating the various types of risk indicated above and multiplying by a factor of 12.5, which is equivalent to the RWA position that would be permissible applying the minimum internationally agreed capital ratio of 8%. It is ALCO’s responsibility to ensure the entity’s capital resources are used efficiently. As at the 31st December 2007 the RWA of the bank according to Standardize approach was BDT 7,397,285,318 (see in the appendix). The bank has already implemented the Basel-2 guideline in terms of RWA calculation. Recently bank is started to calculate the real
weighting of basel 2, according to which the RWA would have been 19,604,105,985 (see the appendix). Please see the appendix for basel standards and ratings. As such ALCO should receive reports on RWAs and economic profit by customer groups. As part of its overall control function it is recommended that ALCO set RWA limits for individual businesses. These limits should be reviewed on a regular basis to take account of changes in the market and in the entityâ€™s strategy. 8.3.3 Economic profit The results the bank is assessed on the basis of the economic profit it generates. Economic profit arises when earnings from capital deployed exceed the cost of that capital. Expressing it as a formula: Economic profit = NOPAT - (capital x CoC%) Where NOPAT is net operating profit after tax, capital is either the cash capital invested in the business, or an estimate of the amount of capital required supporting operations; and CoC % is the percentage cost of the capital. NOPAT calculation Items
After tax profit
Less: Minority shares Interest adjustment on intra-group loan capital
Less: Dividend receives NOPAT
According to BB, banks incorporated outside Bangladesh are required to deposit with Bangladesh Bank the higher of BDT 1 billion or the minimum capital requirement calculated as 10% of risk weighted assets (RWA) Capital Items Funds deposited with
Exchange differences Total Capital maintained
= 91 days T-bill rate + beta*(Equity premium)
91 days T-bill rate Equity return Market return Equity Premium
2007 7.46% 25.30% 18.5% 11.04%
2006 7.44% 24.21% 16% 8.56%
Beta Prime Beta Prime CoC
1.3677 1.3914 22.82%
1.5132 1.6123 21.24%
1,200 1,000 800 600 400 200 -
Interpreting economic profit Economic profit is primarily a measure of past performance. A positive economic profit means that value has been created, that all after-tax costs, including the cost of capital, have been covered in monetary terms. A negative EP indicates that value has been destroyed (because the business has failed to cover its cost of capital). The key question to ask in evaluating performance is whether EP is as good as could reasonably have been expected given the prevailing economic and market conditions and the business strategy. It is emphasized that value is created by turning around poorly performing businesses and by
reducing economic losses over time. In fact incremental economic profit – the change from one period to another – is more closely correlated to shareholder value than absolute EP. Deeper insights are usually to be had from reviewing economic profit trends, measured on a consistent basis, than from the size of absolute numbers. However, absolute EP numbers are more informative than percentages. Expressing economic profits as a percentage of capital employed enables businesses to be compared and ranked according to their productivity. Yet businesses with positive EPs are all creating value from their capital, so adopting an approach which rations capital to the highest ranked businesses at the expense of the others, while maximizing an entity’s return on equity, may impede overall value creation. Analyzing economic profit Economic profit data is collected from the Hyperion software. It is essential that the principles underlying the computation of economic profit be applied consistently throughout the Group. Economic profit is most relevant when used to measure performance for which the business managers concerned are directly accountable. At entity level, it is calculated after deducting the cost of the entity’s average invested capital. This measure is likely to be of most interest to ALCO. EP is measured after deducting the cost of this required capital net of related funding credits. The difference between the capital invested and the total capital required, is held initially in the central pool, and managed centrally by the ALCO Committee. This committee is accountable for minimizing the cost of this centrally held capital, while maintaining a prudent overall level of capital. The economic profit or loss earned on the central pool is apportioned to the businesses as pro-rata to their required capital in the composition of its central pool. By doing so, the estimated contribution each business makes to the bank’s economic profit on its invested capital is highlighted. 8.3.4 Leverage ratio
The Risk Management Meeting has established minimum leverage ratios for the Group’s principal subsidiaries. The leverage ratio is defined for this purpose as the ratio of an entity’s 2006 Ye ar 2007
Tier 1 regulatory capital to its total balance sheet assets. For the purpose of this ratio, both Tier 1 capital and total assets are measured using the subsidiary’s local GAAP reporting requirements.
The leverage ratio is intended to control an entity’s overall balance sheet size and, in particular, to control risks arising from very large holdings of “low risk” assets, such as government bonds and certain trading balances. The leverage ratio will act to discourage entities from inflating their balance sheet in pursuit of narrow margin business. 8.3.5 Self-capitalization Self-capitalization is a measure of the degree to which actual risk asset growth has been financed by profit retentions while maintaining target capital ratio levels. It is Group policy that subsidiaries/areas should self-capitalize. Profit retentions are made up of: •
net profit of the preceding 12 months;
movements through reserves reflecting currency translation differences (the effect of which will also be reflected in the level of risk assets); NB currency translation differences on items which themselves form part of Tier 1 capital should be excluded as the impact on Tier 1 capital is neutral;
any regulatory adjustments to Tier 1 capital, e.g. goodwill impairment written off to the income statement is added back to net profit; and
a deduction for equity dividends in accordance with the individual entity’s Capital Plan payout ratio.
Tier 1 issues outside the Group can also be used to support RWA growth. The total of such issues plus the profit retentions figure divided by the entity’s target Tier 1 ratio gives the level of self-financed risk assets (note the target ratio should be approved by ALCO and incorporate a reasonable cushion above the minimum limit). Where self-financed risk assets are higher than the actual risk asset growth a self-capitalization ratio in excess of 1 arises indicating that the entity has self-capitalized. Self-capitalization is expressed as a ratio thereby allowing an assessment of the degree to which an entity has generated retained profits
to support its risk asset growth. In some cases a ratio of less than 1 may indicate planned reduction of excess capital. Example BDTm Growth in risk assets for 12 months as on 31 December 2007
Profit after tax for the 12 months as on 31 December 2007
Currency translation adjustment to reserves
Adjusted profit retention
Self-financed risk asset growth, being adjusted profit divided by capital plan Tier 1
Where RWA growth is negative, i.e. capital has been released, the ratio will require careful interpretation. For example, where both self-financed risk assets and actual growth in risk assets is negative, the ratio of self-financed risk assets to actual risk asset growth should be inverted. Entities should calculate self-capitalization ratios quarterly on a twelve-month rolling basis and report it in their ALCO pack. 8.3.6 Interest Risk Interest rate risk arises from holding assets and liabilities with different re-pricing dates, creating exposure to changes in the level of interest rates. An over-lent position, assets repricing later than liabilities, benefits if interest rates fall and suffers if interest rates rise. An over borrowed position, liabilities re-pricing later than assets, benefits if interest rates rise and suffers if interest rates fall. Interest rate risk can be divided into discretionary and structural (non-discretionary) interest rate risk. Discretionary interest rate risk is that which is managed in Global Markets with the objective of profiting from movements in interest rates. Structural interest rate risk is that which originates from the re-pricing of the banking assets and liabilities and from other balance sheet items such as fixed assets, and investments. Measurement of interest rate risk
Interest rate risk is measured in three ways by the HSBC: •
Present value of a basis point (PVBP)
NII projections and sensitivity modeling
Value at Risk (“VaR”) amounts.
In addition Basis Risk, Credit spread risk, Option Volatility Risk and Correlation Risk are also measured and controlled. In particular, Basis risk arises if sites have managed rate products against which inter-bank based transfer pricing is applied. ALCO monitors the amount of basis risk being taken and set appropriate referral limits. Simulation modeling Simulation modeling (also referred to as scenario or stress testing) is the evaluation of the bank’s expected net interest income and portfolio valuations under varying interest rate scenarios with differing balance sheet assumptions. Different assumptions and projections may be evaluated on a “what if” basis. The results present a panorama of performance rather than one right number. Simulation modeling aids ALCO in understanding and monitoring structural interest rate risk and in evaluating the risks and rewards of adding new positions to the book. Due to over complicacy of the system, here only VaR and Interest Risk Mismatch are set out below. The bank measures VaR in two format, one as per BB guideline and another is customize approach that solely concentrated on forward contract. As per BB method; VaR = 2 x Factor sensitivity x Volatility Var = 2 x 0.0064 x 16,024,103.08 According to this bank’s VaR is calculated BDT 205,494.181. For the sake of confidentiality and complexity the other method has not been shown here. As far as the interest risk is concern, bank calculate every the currency wise interest risk. A mainly bank poses assets and liabilities in five currencies (i.e., USD, BDT, EUR, GBP, JPY). 20.000 The
Interest Risk Mismatch (USD)
Interestmismatch Risk Mismatch (BDT) graphs presented below are the summery of interest of the bank as at 31 st 150.000
1Y - 3Y
9M - 1Y
6M - 9M
5M - 6M
4M - 5M
1Y - 3Y
9M - 1Y
6M - 9M
5M - 6M
4M - 5M
3M - 4M
2M - 3M
1M - 2M
3M - 4M
See appendix for the calculation.
2M - 3M
1M - 2M
1D - 1M
1D - 1M
Interest Risk Mismatch (EUR) 0.250 0.200 0.150 '000
(0.050) 1M M M M M M M Y - 2 M- 3 M-4 M- 5 M-6 M- 9 M- 1 1D 1M 2 3 4 5 6 9 Period
*See appendix for the detail situation Only four major currencies are presented above. Here it reveals that on 31 st December 2007 bank is in aggressive manner in all currencies. In USD, GBP & EUR bank is in matching situation in the long run, while in case of BDT it is not the same. 8.3.7 Foreign Exchange Risk Foreign exchange trading risk is that for which revaluation movements are posted directly to the income statement. Foreign exchange trading exposures are managed in Global Markets with the objective of profiting from movements in foreign exchange rates. Measurement of foreign exchange trading risk Forex Risk Foreign exchange trading risk is measured by the use of outright limits expressed in USD 7
6.00 terms on an overnight and intra-day basis. Limits are set for each subsidiary/branch by CIBM 6
TMR and are 5 approved by the Group Management Board. Amount in Mill$
Interest Risk Mismatch (GBP) 4.000 3.500 3.000 2.500 2.000 1.500 1.000 0.500 0.000
4 3 2 1
*Please refer to Appendix section for the table As par the stated above we can see that the bank is well under its limit (set out by Group) in terms of currency risk. This system actually monitors that how much each currency bank can hold for a trading day. Currency mix of risk weighted assets It is possible that a subsidiary may have no structural foreign exchange exposures and all trading exposures may be fully hedged, nevertheless, that subsidiary’s capital ratios are still exposed to movements in exchange rates if the subsidiary has RWAs denominated in foreign currency. ALCO regularly reviews the currency composition of the entity’s RWAs and evaluates the likely impact on capital ratios by stressing foreign currency exchange rates. 8.3.8 Liquidity and Funding The objective of liquidity management is to ensure that all commitments, both contractual and those determined on the basis of behavioral patterns, which are required to be funded, can be met out of readily available and secure sources of funding. The objective of funding management is to ensure that necessary funds will be available at all times to finance assets. Liquidity and funding management depends on the following factors: •
a bank’s expected cash flow;
its capacity to borrow in the market; and
its stock of readily available, high quality, liquid assets.
The HSBC follows this approach to liquidity and funding management takes these factors into account. The main elements of the liquidity and funding management are: •
compliance with relevant regulatory requirements
reporting of projected future cash flows stressed under varying scenarios and consideration of the level of liquid assets and maturing funding relative to the cash flow position
maintenance of a stock of high quality liquid assets sufficient to repay defined liabilities at the balance sheet date; and
maintenance of liquidity and funding contingency plans.
Where the emphasis is on liquidity management, the following measures will be important: •
projected net cumulative cash flows by time period stressed under various scenarios;
maintenance of the balance sheet ratios (1st and 2nd Line Liquidity) which are required by management;
monitoring of structural liquidity measures including balance sheet maturity analysis; and
commercial/professional funding and at the lower level of reliance on large individual depositors. Where the emphasis is on funding management: •
monitoring the maturity profile of wholesale debt issues with the aim of avoiding “bunching” (i.e. large maturities of debt in the same time period); and
maintaining diverse sources of funding and adequate back up lines.
1st line liquidity 1st line liquidity is the Bank’s balance sheet measure of the ability to meet cash demands that may be made on it within the next month. The calculation can be summarized as follows: LA LA– –Negative NegativeLA LA Customer Deposit + Professional borrowing over 1 month
Note; LA = Liquid Asset 1-month maturity refers to residual maturity rather than the original maturity at inception of the lending or borrowing.
2nd line liquidity 2nd line liquidity is calculated with a broader range of assets are considered as liquid (semiliquid assets). The calculation of 2nd line liquidity is: (LA + Semi LA) â€“ Negative LA Customer Deposit + Professional borrowing over 1 month
Based on the December 31st 2007 audited statements of the bank, the liquidities are set out below; Particulars 2007 Liabilities 36,729,187,630 LA 10,676,608,282 Negative LA 5,994,616,172 Semi LA 16,965,302,203 1st line Liquidity 12.75% 2nd line Liquidity 58.94% *Please see appendix for detail Calculation
2006 25,862,464,298 11,112,587,424 4,340,945,528 11,090,999,023 26.18% 69.07%
From the above table it is visible that as on 31 st December bank was in huge liquid situation mainly due to loan maturating within 1 month bucket. It is worthwhile to note that bank uses two lines liquidity as a requirement of its LCP. Liquid assets Liquid Assets comprise Cash, Reverse repos with a residual maturity of more than 1 month, Balances with other Banks and other Group companies up to 1 month (excluding core funding), committed facilities from other companies/branches with a residual maturity more than 1 month, Money at Call and Short Notice, Settlement Balances, Liquid Securities and Equities (as further defined below and at 90% of market value for securities, 80% for Equities and 100% for Government Treasury Bills), Bills and loans capable of being discounted with
the local central bank, Banks' negotiable CDs purchased and positive mark-to- market balances on derivatives maturing within 1 month. Liquid debt securities Liquid Securities are holdings of debt securities, irrespective of their accounting treatment and whether issued by governments or by other issuers, which can be sold or repo’s into deep and liquid markets. For the purpose of this definition, a "deep and liquid" market exists for a debt securities holding if it is reasonable to take the view that there is no doubt that the reporting entity's position in that security can be disposed of within a 1 week period for a sale consideration which is more than 95% of the current market value of the position. Relevant factors to validate this viewpoint are set out below. For the avoidance of doubt, it can be assumed that the following securities holdings (which should be reported as line “FA” in the monthly asset and liability statement) qualify for inclusion as Liquid Securities: Liquid equities Equities are included as 1st line liquid assets (in line FD). To be considered liquid, equities must also meet the following additional requirements: the equities must be in the trading book, they must be listed on a recognized exchange and be subject to a 20% haircut (to take account of their price volatility). Other Liquid assets Only Bills and Loans which are genuinely discountable in a recognized market (for example, wholesale Eligible Bills in the UK, Bankers’ Acceptances in the USA) are classified as Liquid Assets. Bills that are no more than a paper expression of customer debt are excluded irrespective of maturity and included in line FC in the monthly asset and liability statement. If portfolios within Liquid Assets are so large as to be judged unrealizable in a 1 month timeframe, a cap on the absolute amount of the relevant Liquid Assets used in the 1st line ratio. Repos and reverse repos As the accounting treatment of repo’s and reverses repo’s securities follows that applicable to the cash given rather than to the security, such instruments require special treatment in liquidity calculations. For reverse repos and repos with a residual maturity of less than one month, cash movements must occur within the one-month timeframe and as such the
positions must be recognized as liquid assets and negative liquid assets respectively (lines C and R). Pledged or otherwise encumbered liquid assets Banks are obliged to provide assets as collateral or margin for a variety of normal banking purposes, including central bank reserve requirements and initial margin to transact on clearing exchanges. Although such assets may still be recorded in the balance sheet in accordance with their product type, these assets may not be available for sale or repo. For liquidity measurement purposes these assets should not be considered as liquid assets and should be recorded in line K in the Assets and Liabilities Statement. Negative liquid assets - definition Negative Liquid Assets are up to 1 month Inter-Bank borrowings, Settlement Balances and Short Positions, up to 1 month Non-Bank Professional funds, up to 1 month Intra-Group borrowings which do not form part of core funding, committed facilities provided to other Group companies/branches with a maturity of more than one month, negative mark-to-market balances on derivatives maturing within 1 month and repos with a residual maturity greater than 1 month. For 1st and 2nd line liquidity reporting all non-bank professional funding with remaining maturities up to 1 month are included as Negative Liquid Assets. Semi-liquid assets - definition Semi-Liquid Assets is comprises with inter-bank placements from 1-12 months, Government Securities not qualifying as Liquid Assets (at 90% of market value) and non-Government Securities, securities under reverse repo arrangements and Equities (at 90% and 80% of market value respectively) not included in Liquid Securities as a result of exceeding the 25% cap, which are subject to judgment of liquid by the local ALCO. 8.3.9 Advance/Deposit ratio The A/D ratio is designed to monitor the extent to which loans to customers are made out of stable sources of long term funding (generally core customer deposits). In addition to core customer deposits (line U), professional funding are also be included in the ratio denominator if the following criteria are met: â€˘ the funding should not be of a capital nature; â€˘ the funding must have a remaining contractual maturity in excess of 1 year; â€˘ any funding linked to assets other than customer advances (as defined for the numerator in the ratio) must be excluded;
• the funds can be relied on in times of stress (e.g. it is reasonably expected that things such as material adverse change clauses, minimum credit rating requirements or other factors will not require early repayment); Any other source of funding may also be included if the funds are held as collateral against customer advances (as defined for the numerator), or are part of a structural arrangement, and the funds cannot be withdrawn before the advance is repaid. The advances/deposit ratio must be calculated as follows (using lines from the monthly Assets and Liabilities Statement):
8.3.10 Funding risk management As the bank is about to issue debt into the wholesale markets, it is exposed to funding, or refinancing, risk. A diverse range of funding sources will mitigate this risk. Debt securities in issue must monitor the maturity profile of those securities by security type and report the profile to ALCO on a quarterly basis. A distinction have to be made between debt issued for the entity’s funding purposes and debt issued as part of a client facilitation arrangement. For each debt issue, the analysis should include details of the value and nature of any hedging undertaken. Limits is to be set on the re-financing exposure by security type and by maturity profile (in rolling 3-month and rolling 12-month time periods). 8.3.11 Liquidity and funding contingency plans Day-to-day management of liquidity and funding within guidelines established by ALCO is the responsibility of Global Markets. In addition to the measures stated earlier, all ALCOs must ensure that a robust Liquidity and/or Funding Contingency Plan (LCP/FCP) is in place and is reviewed and approved by ALCO at least annually. A good LCP/FCP results from a sound Balance Sheet Maturity Analysis with the overlay of very conservative behavioral assumptions. LCPs and FCPs must state the options available to an area for garnering liquidity and/or funding and an agreed course of action must there be an unexpected crisis. Some of the options to be considered are: •
disposal of available liquid assets;
underwritten placement facilities, such as commercial paper programs;
access to the secondary markets to place an inventory of discountable instruments;
availability of re-discounting lines with local institutions/monetary authorities;
availability of Group funds within HGHQ country risk preferences;
avenues for securitization or loan participations/loan sales;
utilization of committed back up lines;
termination of asset generation;
recourse to the “lender of last resort” that is the Bangladesh Bank, and
restrict asset growth
The LCP/FCP must focus on two types of crisis. First; a liquidity crisis that is not expected to be a problem common to the financial system of a country as a whole (i.e. an HSBC specific liquidity crisis). Second; a market/systemic crisis. In the case of the latter, bank must evaluate the extent to which assets, which would normally be liquid, may be rendered illiquid and the extent to which committed facilities (in particular back stop lines) will be drawn down. For example, government paper may be rendered illiquid if a country’s credit standing deteriorates quickly and different types of government securities may have different liquidity characteristics in such a scenario. A primary aim of a Contingency Plan is to protect the bank’s franchise and manage the market’s perception of the it’s liquidity situation. If the market suspects (rightly or wrongly) that there may be a liquidity problem, the situation will get much worse. Crisis teams must therefore include individuals specifically charged with dealing with public relations. The action steps outlined in the plans must, in the first instance, aim to minimize alarm in the marketplace. Contingency plans should consider actions to be taken at three distinct stages of an HSBC specific liquidity crisis: (i) Before the crisis is known to outside parties, actions which can be taken by the entity to improve its liquidity position but which are not publicly visible and which will not alert outsiders to the existence of a potential problem. (ii) Once a crisis becomes known, actions which can be taken to meet the liquidity contingency while preserving the entity’s core business relationships as far as possible. (iii) Actions which would be taken at the peak of the crisis, with the aim of preserving the entity’s existence at any cost. LCPs and FCPs must:
Establish a crisis management team with identified jobholders;
Include clearly identified responsibilities;
Outline the action steps to be taken to mitigate the risk of deposit withdrawal and the steps to be taken to generate cash resources;
Establish measurable early warning indicators;
Assign responsibility for monitoring these indicators on a regular basis and the steps that will be taken once the indicators are triggered.
As a separate exercise from obtaining annual ALCO approval of the LCP and/or FCP, the nominated crisis management team meets at least annually to review and walk through the plan, and to confirm a clear understanding of the early trigger indicators and the respective roles, responsibilities and action steps that will be taken if an event occur. 8.3.12 Stress testing The aim of stress testing is to calculate the likely outcome of various predefined scenarios. Stress testing is a useful tool to evaluate the impacts of certain risks faced and to aid the exploration of business expansion. The scope of stress testing is wider than the evaluation of the results of movements in interest rates. It can also be used to consider the results on income, capital or liquidity of changing a variety of combinations of market risk, customer behavior, pricing, and geo-political circumstances. ALCO performs such analyses under set scenarios. The scenarios outlined by ALCO are generally events that have global market consequences and the results of these scenarios are usually reviewed on a timely manner. These scenarios are set and monitored by Global Market to determine the impact on the Group on a whole. ALCO is also designs scenarios that are specific to its businesses and local environment. The likelihood of each scenario occurring are carefully considered but such analyses will help gauge the impact of various exposures allowing mitigating actions to be considered and pursued if warranted. Stress testing is actually used to evaluate the liquidity and capital ratio implications of scenarios as well as the net income implications. ALCO determines trigger levels for stress tests above which action will be considered. 8.3.13 NII Sensitivity Calculations
As a complement to PVBP and VaR measures, Bank uses modeling techniques to gauge its sensitivity to interest rate movements. ALCO estimates sensitivity to interest rate movements on a monthly basis and report this data to Group ALM by the 21st calendar day of the following month. Bank calculates it sensitivity to parallel movements in the yield curve of +/-100 bps and the +/-100 bps ramp scenario, whereby rates are assumed to rise/fall in parallel by 25 bps on the first day of each quarter. From the Table below NII sensitivity is calculated based on the interest rate volatility of past 12 account month on the different interest earning source. It shows that bankâ€™s 11.67 million earning is rate sensitive of the total 3.99 billion total earnings. In terms of percentage its mere amount, because in the last year lending rate had not been moved rapidly. More over most of the lending are at fixed rate of existing amount did not effect of this taste.
2007 Interest Volatilit Real Amount y
Interest income sensitivity
2006 Interest Volatilit Real Amount y
Interest income sensitivity
Money market Correspondin g Bank Nostro Account BB FCY Account
Please see appendix section for the interest volatility table. The balance sheet
The balance sheet is envisaged by the Plan/Profit Estimates for the next twelve months. Reasonable assumptions are usually made for movements in the balance sheet if the period covered by the interest rate sensitivity calculations is longer than the period covered by the latest AOP/Profit Estimate. When the most recent Plan is some months old and evidence to date suggests that the original predictions are unlikely to be correct then the projected balance sheet is amended if any discrepancies are likely to be material. The balance sheet projection assumes no active management to mitigate exposures created under the different scenarios. However, significant changes in both the size and product mix of the balance sheet brought about by changing customer behavior under the different scenarios are taken into account if the resulting impact on the interest income sensitivity is considered to be material. The yield curve Bank uses future rates implied by the current yield curve for the Central rate scenario. Under the various scenarios, the rate shocks are applied to the yield curve before calculating the implied forward rates rather than calculating the implied rates and applying the shocks to those implied rates. Modeling of the balance sheet and economic environment As noted above, sensitivity calculations should reflect a bankâ€™s best estimates of the future moves in NII under the prescribed scenarios. Bank therefore considers the extent to which moves in interest rates will alter the demand for their products and how customersâ€™ behavior may change with moves in interest rates and take account of these shifts if material. Similarly, if the impact on sensitivity is considered to be material, bank is also reflect, to the best of its ability, any additional market environment changes and also any moves in managed rates (e.g. the Base Rate or BLR) that may arise under each scenario. 8.3.14 Maturity Gap and Duration Analysis From the maturity profile of the banks balance sheet it reveal that bank is in aggressive attitude up to 3 months bucket (in the graph below) after that it follows conservative approach(in the graph below). It is very logical in that sense that near future is quite predictable which is not true in long term. To maintain the liquidity position well the bank keeps short term liquid asset more than of its liquid liabilities. From another point of view
shown in the graph below that in the long run cumulative maturity reach to a matching approach.
Maturity Analysis 30 25 20 15 10 5 0 (5) th on (10) 1 m
ths on m o3 1t
ths on m 2
ars ye 5 o 1t
rs yea 5 er ov
Maturity Gap Analysis 6 4 2 ye ar s ov er 5
ye ar s 5 1
12 to 3
m on th s
s m on th 3 1
m on th
Amount in Billions
Maturity Gap Cumulative Gap
Before reaching to that it evidencing that in the short run (up to 1 yr bucket) it follows the huge aggressive approach that evidencing in the graph that trade of by the longer term bucket that ultimately reach to the matching principal. This maturity analysis in fact reveals only the assets and liabilities maturity position which actually might give wrong conclusion. That is why we have calculated the duration of the assets and liabilities to see the real position of the balance sheet. In duration we know internal cask generation is considered for which this technique give better result. But for real life complicacy here we have calculation duration in weighted average and present value approach, not the real one. The results are as below;
Period 1 month
Avg. Period (in days) Avg. Assets Weighted Avg Asset 30 25,574 767,225.64
1 to 3 months 3 to 12 months 1 to 5 years over 5 years
60 227.5 1095 2737.5 4150
Total Asset Duration =
9,098 6,166 11,592 3,103
545,892.52 1,402,751.41 12,692,855.03 8,495,300.43 23,904,025.02
Avg. Period (in Avg. Weighted Avg Period days) Liabilities Liabilities 1 month 30 23,987 719,603.27 1 to 3 months 60 4,688 281,270.59 3 to 12 months 227.5 11,356 2,583,443.35 1 to 5 years 1095 11,693 12,803,916.19 over 5 years 2737.5 3,810 10,429,336.50 Total 4150 26,817,569.90 Liability Duration = 6,462.07
It means bank uses relatively longer term liabilities to finance asset. In case of interest high it likely to rise in terms of equity size and vice-versa. While we look into another approach the PV factor approach it shows; Avg. Period (in days)
PV of Assets
1 to 3 months
3 to 12 months
1 to 5 years
over 5 years
2737.5 3,103 4150
Million Asset Duration =
Avg. Period (in days)
PV of Assets
1 to 3 months
3 to 12 months
1 to 5 years
over 5 years
2737.5 3,810 4150
Million Liability Duration = 10.10
the opposite scenario that is financing longer asset via shorter liabilities. It actually not favorable because interest rise will cause assets value down more than that of equity which might squeeze the equity size of the bank. 9. Conclusion ALM has evolved since the early 1980's. Today, financial firms are increasingly using market value accounting for certain business lines. This is true of universal banks that have trading operations. Techniques of ALM have also evolved. The growth of OTC derivatives markets has facilitated a variety of hedging strategies. A significant development has been securitization, which allows firms to directly address asset-liability risk by removing assets or liabilities from their balance sheets. This not only eliminates asset-liability risk; it also frees up the balance sheet for new business. Thus, the scope of ALM activities has widened. Today, ALM departments are addressing (non-trading) foreign exchange risks as well as other risks. Also, ALM has extended to nonfinancial firms. Corporations have adopted techniques of ALM to address interest-rate exposures, liquidity risk and foreign exchange risk. They are using related techniques to address commodities risks. For example, airlines' hedging of fuel prices or manufacturers' hedging of steel prices are often presented as ALM. Thus it can be safely said that Asset
Liability Management will continue to grow in future and an efficient ALM technique will go a long way in managing volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities so as to earn a sufficient and acceptable return on the portfolio.
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Published on Jul 29, 2013
Beginnings, 1865 The HSBC Group’s name is derived from The Hong Kong and Shanghai Banking Corporation Limited, the founding member of the mo...