Managing interest rate risk - CommBank · Managing interest rate risk Assets Liabilities plus...

1

Commonwealth Bank of Australia ACN 123 123 124

David CraigCHIEF FINANCIAL OFFICER

Managing interest rate risk

9 September 2009

Determined to offer strength in uncertain times.

Alden ToevsCHIEF RISK OFFICER

Lyn CobleyGROUP TREASURER

2

Disclaimer

The material that follows is a presentation of general background information

about the Bank’s activities current at the date of the presentation, 9

September 2009. It is information given in summary form and does not

purport to be complete. It is not intended to be relied upon as advice to

investors or potential investors and does not take into account the

investment objectives, financial situation or needs of any particular investor.

These should be considered, with or without professional advice when

deciding if an investment is appropriate.

3

Agenda

Introduction David Craig

Replicating Portfolios Lyn Cobley

Balance Sheet Lean and Alden Toevs

Duration of Equity

Questions & Answers Panel

4

Group NIM FY09

* Includes ASB and other offshore

Jun 08 Assets Deposits Mix & Liquids Treasury Other* Jun 09

Replicating

Portfolio

Capital

DOE & Balance

Sheet positioning

Personal Lending

Business Lending

Home Loans

Transactions

Savings

Investment

Domestic Pricing

+13 -24

+24

202 210

+4

-6

-7

+16

+2+3

-9 +4

+6-9

+4

bpts

Management of interest rate

risk contributed 24 bpts to the

Group’s FY09 NIM movement

5

CBA Balance Sheet - Overview

6%1%

4%7%

4%

18%

33%14%

49%55%

4% 5%

Other Assets

Other Lending

(2.5 yrs)

Home Loans

(4 yrs)

Trading Securities

Cash Capital

Deposits

Commercial (2 yrs)

Household (4 yrs)

Long Term

(3.6 yrs)

Short Term

Other LiabilitiesTrading Liabilities

CBA balance sheet as at 30 June 2009

Balance sheet does not include derivative assets and liabilities

(21%

household

deposits)

Assets Liab + Equity

Other Fair Value assets

Balance sheet has a

high level of natural

hedging

Interest rate risk

arises from re-pricing

characteristics

6

Managing interest rate risk

Assets Liabilities plus capital

Rate

insensitive

deposits

Portfolio of

fixed rate

assets

Portfolio of

fixed rate

assets

Duration of

Equity

Equity and

retained

earnings

Assets Liabilities

Balance

Sheet Lean

(if any)

Replicating

Portfolios

Liabilities

plus capital

Assets

Illustrative only. Not drawn to scale.

To smooth the impact

of interest rate

volatility on the

Group’s NIM and

earnings through a

combination of passive

(RP, Duration of

Equity) and active

(Balance Sheet Lean)

management

strategies

1

3

2

7

Agenda




Duration of Equity


8

Replicating Portfolios


Rate

insensitive

deposits

Portfolio of

fixed rate

assets

Portfolio of

fixed rate

assets

Duration of

Equity

Equity and

retained

earnings

Assets Liabilities

Balance

Sheet Lean

Replicating

Portfolios

Liabilities

plus capital

Assets


1A selected portfolio of

fixed rate assets with

repricing

characteristics that

mirror that subset of

the Group’s retail

deposit base which is

less than 100% rate

sensitive

9

Replicating Portfolios

In place for over 15 years – a consistent strategy

Represents approximately $70bn of retail deposit balances

Includes 15 different deposit products

All products individually assessed

Formal annual review, ongoing monitoring, APRA oversight

No executive discretion – predetermined, modelled approach

Smooths NIM/earnings volatility through the cycle

10

Replicating Portfolio over time

1%

2%

3%

4%

5%

6%

7%

8%

1996 Current

Replicating

Portfolio Yield

Official Cash

Rate

2001 2005

11

Rising Rate Scenario #1

1%

2%

3%

4%

5%

6%

7%

8%

Scenario #1:

Rising Rate Period

1996 2001 2005 Current 2015

Replicating Portfolio Yield

Official Cash Rate

12

Rising Rate Scenario #2

1%

2%

3%

4%

5%

6%

7%

8%

1996 2001 2006 2011

Scenario #2:

Rising Rate Period

1996 2001 2005 Current 2015

Replicating Portfolio Yield

Official Cash Rate

13

Agenda




Duration of Equity


14

Balance Sheet Lean


Rate

insensitive

deposits

Portfolio of

fixed rate

assets

Portfolio of

fixed rate

assets

Duration of

Equity

Equity and

retained

earnings

Assets Liabilities

Balance

Sheet Lean

(if any)

Replicating

Portfolios

Liabilities

plus capital

Assets


2

Active management of

the Group’s asset and

liability “mis-match”

within a carefully

managed risk and

regulatory framework

15

Duration of Equity


Rate

insensitive

deposits

Portfolio of

fixed rate

assets

Portfolio of

fixed rate

assets

Duration of

Equity

Equity and

retained

earnings

Assets Liabilities

Balance

Sheet Lean

Replicating

Portfolios

Liabilities

plus capitalAssets


3

Managing the earnings

impact of free

capital, primarily with

regard to term invested

(Investment Term of

Capital or ITOC)

16

Duration of Equity

0%

2%

4%

6%

8%

10%

12%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Official Cash RatePortfolio of 1 year fixed

rate instruments

(APRA preference in APS117)

Portfolio of 5 year fixed

rate instruments

(CBA preference)

Scenario:

Rising Rate Period

17

Duration of Equity

Potential Offset to Credit Cycle Losses(US industry perspective 1963-2003)

Source: Historical interest rates from Federal Reserve data. Net charge-offs data from FDIC

(weighted average for all FDIC-insured commercial banks)

LIE (bpts)Realised Gains Coupon Income 10 Year UST Yield

18

Interest rates vs credit spreads

0%

1%

2%

3%

4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2002 2003 2004 2005 2006 2007 2008 2009

3 year swap rate (LHS)

BBB spread (RHS)

19

Jun 08 Dec 08

Optionality (retail)

Basis Risk

Repricing and

Yield Curve Risk

Embedded Loss

Jun 09

$1,286m

-$70m

(ie zero)

$716m

Embedded Gain

(offset to capital)

Repricing and

Yield Curve Risk

Basis Risk

Optionality

(retail)

Fixed rate asset portfolios serve to offset NIM

compression in falling and low rate environment -

less APS117 capital needs to be held

Capital Impacts - APS117

20

Commonwealth Bank of Australia ACN 123 123 124

Questions &

Answers

9 September 2009

Determined to offer strength in uncertain times.

Managing interest rate risk - CommBank · Managing interest rate risk Assets Liabilities plus...

Documents

Transcript of Managing interest rate risk - CommBank · Managing interest rate risk Assets Liabilities plus...