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MODULE 4: ANALYSIS OF FINANCIAL INSTITUTIONS - Coggle Diagram
MODULE 4: ANALYSIS OF FINANCIAL INSTITUTIONS
3 pillars of Basel III
Minimum capital requirement
Minimum % of its risk weighted assets (RWA) that a bank must fund with equity capital
The riskier a bank’s assets are, the higher its required capital
Minimum liquidity
High-quality liquid assets to cover liquidity needs in a 30-day liquidity stress scenario
Should have enough cash to cover a partial loss of funding sources or a cash outflow from off-balancesheet funding commitments
Stable funding
Minimum amount of stable funding relative to the bank’s liquidity needs over a 1-year horizon
Based on: • Tenor of deposits • Type of depositors
Basel III has forced banks to
Focus on asset quality
Hold capital against other types of risk
Develop improved risk assessment processes
Camels
Capital adequacy
Potential losses is first absorbed by capital → Adequate capital helps bank to avoid become financially weak or insolvent when it incur losses.
Described in terms of the proportion of the bank’s assets funded with capital.
Assets are adjusted based on their risk, with riskier assets requiring a higher weighting.
Tier 1 cap: Common stock + Additional paid-in capital + Retained earnings + OCI - Intangibles & DTA, min 4.5%
other tier 1 cap: min 6%
Subordinated instruments with
• No specified maturity
• No contractual dividends or interest
Tier 2 cap
Subordinated instruments with original maturity of more than five years, min 8%
Asset quality
Asset quality pertains to the amount of existing and potential credit risk associated with a bank’s assets, focusing primarily on financial assets.
• Measured at amortized cost.
• Shown on the balance sheet net of allowances for loan losses.
Hoặc measure bằng FVTPl and FVOCI
Management capabilities
Sound internal
controls
Transparent management communication
Financial reporting quality
Earnings sufficiency
Trend in earnings should be upward.
Underlying accounting estimates should be unbiased
Earnings should be derived from recurring sources.
Net interest income
Service income
Trading income: volatile
Liquidity position
Liquidity coverage ratio – LCR = highly liquidity asset/ cash out flow, minimum = 100%
Net stable funding ratio - NSFR = available stable funding / require stable funding
Concentration of funding: funding từ source nào
Contractual maturity mismatch: Need to monitor maturity mismatch, xem xét độ exposure vs các kỳ hạn
Sensitivity to market risk
Sensitivity to market risk is an important consideration for analysts:
• How an adverse change in the market would affect a bank’s earnings.
• Evaluate the strength of a bank’s ability to manage market risks.
Yield curve shape changes impact bank’s earnings based on assets and liabilities compositions. Bank often disclose exposure to a variety of market and nonmarket risks.
Banks respond to opportunities presented in the market and alter their balance sheets.
Bank specific factor
Gov support
Gov own
Mission of bank
Culture
Cạnh tranh trong ngành
off-balance sheet
Segment information
Currency exposure
risk factor
basel iii disclosure
Insurance company
Business profile: Property insurance policies protect against loss or damage to property – buildings, automobiles, environmental damage, and other tangible objects of value.
The property and casualty insurance business is cyclical and price sensitive
Earnings characteristics
Combined ratio = Underwriting loss ratio + Expense ratio
Underwriting loss ratio = (Claims paid + Δloss reserves) / Net premiums earned
Expense ratio = Underwriting expenses including commissions/ net premium writen
Prob ratio
( Loss expense + Loss adjustment expense) / Net premium paid
Underwriting expense ratio = (Underwriting expense) / Net premium written
Combined ratio = Loss and loss adj. expense ratio + Underwriting expense ratio
Dividends to policyholders / Net premiums earned
Combined ratio after dividends = Combined ratio + Dividends to policyholders ratio
Investment performance = Total investment income/ invested asset