™
FINANCE AND STRATEGY PRACTICE
BANK RAROC DIAGNOSTIC Bank Relationship Benchmarking
Sample Customized Report
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MethodRisk-Reward
Analysis(Page 3)
Tear Sheets
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
TABLE OF CONTENTS
© 2009 The Corporate Executive Board Company. All Rights Reserved. 3
EXECUTIVE SUMMARY
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
A strong and statistically significant correlation exists between banks’
credit facility exposure and total banking fees.
The Bank RAROC Diagnostic is designed to:
• Analyze your banking relationships like banks would
• Illustrate your bank’s position in the banking “risk-reward comfort zone”
• Provide credit received versus bank fees paid data points
• Equip you with quantifiable data to strengthen your bank credit negotiations
Bank RAROC Diagnostic outputs:
• Risk – Reward Sensitivity Plots:
Are you receiving the credit you should based on bank fees you are paying? Is your bank relationship at risk?
• Tear sheets
Where does your relationship fits with your specific banks?
© 2009 The Corporate Executive Board Company. All Rights Reserved. 4
Banks fall into one of five segments:
• Investment banks receive the most fee business relative to their levels of credit participation. Key differentiators are the materiality of their credit participation and the degree of variance in fee capture across the “bulge bracket” players.
• US commercial banks bifurcate into two segments:
(i) The large “global stakeholders” with high levels of both credit participation and fee business
(ii) Regional banks that resemble the investment banks with comparatively low credit participation and relatively high marginal fee business
• European and Canadian banks provide more credit at close-to-average fee allocation levels
• Asian banks participate in credit facilities with relatively low levels of ancillary fee business.
J.P. Morgan
Citigroup
Morgan Stanley
Bank of America
ABN AMRODeutsche Bank
UBS
Bank of NY
Bank of Tokyo Scotiabank
Merrill Lynch
BNP Paribas
Credit Suisse Group
US Bank
Barclay'sHSBC
Societe Generale
Goldman Schs & Co.
Wells Fargo
Royal Bank of ScotlandMizuho Bank
Lehman Brths.
Fifth Third Bank
Sumitomo
RBC
Wachovia Securities
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$160,000,000
$180,000,000
$200,000,000
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000
Total Bank Fees
Cre
dit E
xpos
ure
Low Boundary of Risk-Reward "Comfort Zone" High Boundary of Risk-Reward "Comfort Zone"
AVERAGE FEES TO AVERAGE EXPOSURE
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
RISK-REWARD SENSITIVITY PLOT
*Illustration from ’04 data set
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Fees Exposure Fees Exposure Fees ExposureWachovia Securities $0.2 MM $30 MM Bank of New York $0.41 MM $10 MM Goldman Schs & Co. $0.02 MM $5 MM
J.P. Morgan $0.5 MM $28 MM Royal Bank of Canada $0.98 MM $10 MM Deutsche Bank $0.06 MM $3 MM
Bank of America $0.24 MM $25 MM KBC Bank $0.03 MM $15 MM
Key Bank $0.13 MM $25 MM Bank of Tokyo $0.03 MM $15 MM
US Bank $0.57 MM $25 MM AG Edwards $0.04 MM $8 MM
Wells Fargo $0.47 MM $25 MM Credit Suisse Group $0.01 MM $5 MM please type here $0 MM
Union Bank of California $0.05 MM $18 MM Morgan Stanley $0.2 MM $5 MM
Banking Fees and Credit Exposure Positions on the Plot:
Wachovia Securities J.P. MorganKey Bank
Bank of America Wells Fargo
Bank of New York
Royal Bank of CanadaKBC BankBank of Tokyo
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000Fees
Exposure
RISK-REWARD RELATIONSHIP PLOT
Analysis of your banks’ risk-reward relationship suggests that relationship with Bank of Tokyo may be potentially under stress. At the same time, RBC may be receiving a disproportionate amount of banking fees relative to their credit facility participation.
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
BANK RELATIONSHIP ANALYSIS
High Boundary
“Risk-Reward Comfort Zone”
Low Boundary
*Illustration from ’04 data set
© 2009 The Corporate Executive Board Company. All Rights Reserved. 6
NEMO Credit Exposure Gross Margin Expected LossInterest on
CapitalRequired Capital RAROC**
Median RAROC for BBB
GAP
Wachovia Securities $30,000,000 $122,910 26,976$ 49,977$ 951,948$ 15.33% 12.29% 3.03%
J.P. Morgan $27,500,000 $292,394 24,728$ 45,812$ 872,619$ 35.92% 21.72% 14.21%
Bank of America $25,000,000 $136,712 22,480$ 41,648$ 793,290$ 19.65% 14.68% 4.97%
Key Bank $25,000,000 $65,994 22,480$ 41,648$ 793,290$ 10.74% 6.64% 4.09%
US Bank $25,000,000 $189,271 22,480$ 41,648$ 793,290$ 26.28% 10.47% 15.81%
Wells Fargo $25,000,000 $136,644 22,480$ 41,648$ 793,290$ 19.64% 11.21% 8.43%
Union Bank of California $17,500,000 $14,503 15,736$ 29,153$ 555,303$ 5.03% 9.00% -3.97%
Bank of New York $10,000,000 $333,636 8,992$ 16,659$ 317,316$ 107.56% 12.58% 94.98%
Royal Bank of Canada $10,000,000 $767,759 8,992$ 16,659$ 317,316$ 244.37% 15.30% 229.07%
KBC Bank $15,000,000 $3,054 13,488$ 24,989$ 475,974$ 3.06% 3.26% -0.20%
Bank of Tokyo $15,000,000 $3,054 13,488$ 24,989$ 475,974$ 3.06% 4.12% -1.06%
AG Edwards $7,500,000 $20,526 6,744$ 12,494$ 237,987$ 11.04% 0.00% 11.04%
Credit Suisse Group $5,000,000 $4,458 4,496$ 8,330$ 158,658$ 5.23% 17.38% -12.15%
Morgan Stanley $5,000,000 $132,296 4,496$ 8,330$ 158,658$ 85.80% 15.15% 70.65%
Goldman Schs & Co. $5,000,000 $12,436 4,496$ 8,330$ 158,658$ 10.25% 36.93% -26.68%
Deutsche Bank $2,500,000 $49,425 2,248$ 4,165$ 79,329$ 64.72% 10.81% 53.91%
AssumptionsLoss Given Default 54%
Probabilty of Default 0.23%
Required Capital, as % of CF* 3.17%
Exposure at default, as % of CF 72.00%
Interest on Required Capital 5.25%
Credit Facility 10.0%
Cash Management 20.0%
FX-Related Services 10.0%
Other Capital Markets Services (CP, etc.)50.0%
Debt Issuance Services 80.0%
Equity Issuance Services 90.0%
Advisory (e.g., M&A) Services 80.0%
Other Services: 80.0%
Gross Profit Margin
*Based on Basel II Model for Capital Requirement
REQUIRED CAPITAL = [LGD * N [(1 - R)^-0.5 * G (PD) + (R / (1 - R))^0.5 * G (0.999)] -
- PD * LGD] * (1 - 1.5 * b(PD))^-1 * (1 + (M - 2.5) * b (PD)), Where R = 0.12 * (1 - EXP(-50 * PD))/(1-EXP(-50))
+ 0.24 * [1 - (1 - EXP(-50 * PD))/((1 - EXP(-50))]
b(PD) = (0.11852 - 0.05478 * LN(PD))^2
PD – Probability of default
LGD – Loss Given Default
R – Asset correlation (to be determined by asset class)
**RAROC = GROSS MARGIN - EXPECTED LOSS + INTEREST ON ECONOMIC CAPITAL / REQUIRED CAPITAL, Where
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
BANK RAROC ANALYSIS
© 2009 The Corporate Executive Board Company. All Rights Reserved. 7
MethodRisk-Reward
AnalysisTear Sheets
(Page 8)
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
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Positions Total Fees Credit Exposure Bank Name RAROC Median RAROC GAP
Current J.P. Morgan $465,382 $27,500,000 J.P. Morgan 35.92% 21.72% 14.21%
Average J.P. Morgan $3,550,488 $133,498,402
Average bank in your facility $244,837 $15,625,000
Profitability of Bank RelationshipRisk-Reward Relationship
Credit Exposure Vs. Fees
Current J.P. Morgan
Fee change (directional)
Exposure change (directional)
-
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
180,000,000
- 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000
Total Fees
Cre
dit
Exp
osu
re
Current J.P. Morgan Average J.P. Morgan Average Company Facility
BANK RELATIONSHIP ANALYSIS: J.P. Morgan
NOTE: you will receive a tear sheet for each bank that you submit in the survey.
© 2009 The Corporate Executive Board Company. All Rights Reserved. 9
Positions Total Fees Credit Exposure Bank Name RAROC Median RAROC GAP
Current Wachovia Securities $240,174 $30,000,000 Wachovia Securities 15.33% 12.29% 3.03%
Average Wachovia Securities $1,872,694 $99,305,242
Average bank in your facility $244,837 $15,625,000
Profitability of Bank RelationshipRisk-Reward Relationship
Credit Exposure Vs. Fees
Current Wachovia Securities
Fee change (directional)
Exposure change (directional)
-
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
- 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000
Total Fees
Cre
dit
Exp
osu
re
Current Wachovia Securities Average Wachovia Securities Average bank in your facility
SAMPLE TEAR SHEET: WACHOVIA SECURITIES
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
NOTE: you will receive a tear sheet for each bank that you submit in the survey.
© 2009 The Corporate Executive Board Company. All Rights Reserved. 10
Method(Page 10)
Risk-Reward Analysis
Tear Sheets
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
© 2009 The Corporate Executive Board Company. All Rights Reserved. 11
Applying Basel II framework, the Roundtable derives a synthetic risk-adjusted return on required capital for the banks in your credit facility pool and compares it to the average RAROC realized by these banks in their relationships with other surveyed companies.
BANK RAROC TOOL
RISK-ADJUSTED RETURN ON CAPITAL (RAROC) CALCULATOR
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
© 2009 The Corporate Executive Board Company. All Rights Reserved. 12
Bank1
Bank3
Bank4
Bank16
y = 3E+07Ln(x) - 3E+08
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
- 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000
Total Fees Paid to the Banks by a Company
Ban
k's
Cre
dit
Exp
osu
re t
o a
Co
mp
any
The Roundtable’s analysis of bank relationship starts with the identification of potentially unhealthy bank relationships when compared to the lognormal relationship.
• In this example, relationships with Bank1, Bank4 and Bank3 may be potentially “stressed”, as these particular banks fall outside the risk-reward “comfort zone”. At the same time, Bank 16 appears to be receiving a disproportionate share of banking fees given its credit facility participation.
BANK RAROC METHODOLOGY
Comfort Zone
Grey lines delineate one
standard deviation above and below the risk-reward
relationship function
“Sleepers”: Potentially StressedRelationships
“Dealmakers”: Potentially Disproportionate Wallet Share
SAMPLE RISK/REWARD RELATIONSHIP PLOT
• Note:• A strong and statistically significant correlation exists between credit facility banks’ exposure and total banking fees. • This trend supports the assertion that banks’ participation in credit facilities is driven not only by credit facility fees and structure,
but also by total banking relationship wallet share. • The data suggests that as the amount of total fees received by a bank increases, their appetite for credit exposure increases
along with it, but at a decreasing rate. • This relationship appears to be best explained by a logarithmic function, suggesting that after bank exposure reaches a certain
threshold, the bank is less able to diversify company-specific or industry-specific risk within its portfolio.
RISK-REWARD ANALYSIS > TEAR SHEETS > METHOD
CORPORATE EXECUTIVE BOARD
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Economic Analysis and Decision Support Group
The Economic Analysis and Decision Support Group has worked to ensure the accuracy of the information it provides to the Corporate Executive Board members. This project relies upon data obtained from many sources, however, and the Economic Analysis and Decision Support Group cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, the Economic Analysis and Decision Support Group is not engaged in rendering legal, accounting, or other professional services. Its projects should not be construed as professional advice on any particular set of facts or circumstances. Members requiring such services are advised to consult an appropriate professional. Neither Corporate Executive Board nor its programs are responsible for any claims or losses that may arise from any errors or omissions in their reports, whether caused by Corporate Executive Board or its sources.
Professional Services Note
Thomas Roberts – DirectorDennis Gannon – Senior DirectorOleg Polishchuk – Senior DirectorMichael Griffin – Managing DirectorAnil Prahlad – Managing DirectorScott Bohannon – General Manager
Please contact the team with any questions or comments at (571) 303-6257
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