Institutional asset and liability management

 

This is an individual assignment.

 

  1. This assessment is designed to test your achievement of Objectives 1 to 4 as detailed in the section titled “Topic Schedule and Assessment Summary” on the Unit Moodle site.

 

  1. The maximum word limit for this assignment is 2000 words. This includes all parts of the report except for the Title Page, Cover letter, Executive Summary, Table of Contents, Appendices and the Bibliography.

 

  1. The assignment will be marked out of a total of 100 marks and will count toward 25% of the total marks for this Unit. The criteria used for assessment are detailed below.

 

  1. The assignment must be submitted on Moodle on or before Friday 30 October 2020 by 5.00pm. Please note penalties will apply to late submissions.  A penalty of 5% of the total mark allocated to this assessment task will be deducted for each day, or part thereof, it is late.

 

  1. If you have any queries regarding the assignment contact your Tutor or the Unit Co-ordinator by attending designated Consultation times and/or using your Monash student email address and have “BFC5280 Assignment” and your Tutorial Time (e.g. Tuesday 11:00 am) as the subject line in the email. Be sure to include your name and student number  in any email sent.  The unit co-ordinator can be contacted by email at: pfitzner@monash.edu

 

 

    

DETAILS OF THE INDIVIDUAL ASSIGNMENT

For the purpose of the assignment, you are undertaking a 12-month internship at the National Australia Bank (NAB) and for the next 4 months have been placed in the credit risk division for the Institutional Bank. The Institutional Bank looks after clients that have more than A$500m in loans and are typically listed entities on the local or overseas stock exchange.

 

The credit risk division is responsible for credit risk assessment and evaluation of clients ranging from large well-known manufacturing corporations to telecommunications to significant mining projects both offshore and in Australia. Your internship is in the area that specialised in Financial Institutions (FI’s). You have arrived at a very fortunate time; the internal annual report for the 3 other major Australian Banks is due for review in the middle of November 2020. This is a very important report because the major Australian banks represent some of the largest non-Sovereign risk exposures of the NAB.

 

Your task is to submit a comparative risk assessment report that will go to the NAB Credit Risk Committee (the NAB CEO and CRO will be attending the meeting). The analysis will include Commonwealth Bank of Australia (CBA), Australia and New Zealand Bank (ANZ) and Westpac Banking Corporation (WBC). NAB should be included in all graphs for comparison purposes. You will need to choose a sample period for your analysis from the Bank Focus database (these data files have been downloaded and are available along with other support material for the task). The minimum sample period is the most recent 5 years.

 

The Credit Committee expects to see a financial ratio analysis for each bank over the period that can be calculated from publicly available data (in Bank Focus) for the risk assessment. Utilise lower/upper control limits for each ratio to identify ‘red flags’ that require management attention. Your report should contain insightful data/trend analyses. The report should include a specific recommendation to the Committee about whether the CBA, ANZ and WBC represent a reasonable risk and whether the NAB should renew all lending facilities for another year.

 

The report must include a wider bibliography, including recent press and business magazine commentaries and news stories about the topic. This is to ensure that you undertake wide, self-motivated research and reading in completing the report.

 

Your written professional-standard report must include the following components (reports not in this format will be penalised):

  1. Title Page for the report including Unit, name, student ID and word count;
  2. Cover letter or memo to the Secretary of the Credit Risk Committee outlining the contents of the report and a request to schedule a meeting to review this work;
  3. Executive Summary which highlights the scope of the report and its significant findings. This should be a stand-alone document regarding the content of the report (typically 1-2 pages);
  4. Table of Contents;
  5. Introduction that discusses the purpose of the report, the report structure (which should reflect the scope of work performed) and any report limitations;
  6. Part 1 – The comparative analysis of the NAB, CBA, ANZ and WBC using financial ratio and written analysis (see further detail below);
  7. Part 2 – Bring together the research in Part I to provide an analysis and evaluation of the risk of each bank, including any red flags or risks that should be brought to the attention of the Credit Risk Committee;
  8. Part 3 – Recommendation;
  9. Appendices for tables of data that were used in the report; and
  10. A bibliography of references.

 

 

Resources that are available to complete the report include:

  • Bank Focus data on each bank (available on Moodle)
  • A definition of key financial ratios from the Orbis Bank Focus database (Moodle).
  • FI annual reports which are publicly available (Internet search).
  • Other relevant online research and available databases.
  • Snapshot from a Canadian Bank report from last year.

 

DO NOT CONTACT THE BANK/S DIRECTLY. (Most companies have better things to do than to respond to lots of questions from university students)

 

Work submitted for assessment must be consistent with the guidelines set down in the Q Manual, which is the faculty’s student guide for producing quality work on time. Copies of this manual can be purchased at the bookshop or accessed online at:

https://www.monash.edu/business/5931328906e0c/pdf_file/currentstudents/qmanual.pdf

 

Marks may be deducted where in-text citations and/or the reference list is not consistent with the American Psychological Association (APA) style, which is illustrated in the Q Manual.

 

           

Part 1. Ratio Analysis – Further Detail

Perform a comparative analysis of the CBA, ANZ, WBC and NAB. Your analysis must consider the following highlighted topics (Note: Questions are posed against each topic to trigger your own analysis with suggested ratios to explore the topic):

Part 1.1 Strategic risk:

  • What is the strategic focus of each Bank? o Are they a Retail/ Corporate/ Institutional Bank?
  • How big are they? o How many branches and employees do they have?
  • Are there any current events in the financial market that will challenge the strength of the banks?
  • Will each bank have enough capital to survive a downturn in the economy?

Capital ratios, bank annual reports and industry research are key for this analysing this risk.

 

Part 1.2 Interest rate risk:

  • What are the main sources of income for the bank? o What has been happening to Net Interest Margins?  o What is happening with the balance between interest/non-interest income contribution to returns?
  • How is each bank managing its costs compared with its income? Operations/Profitability ratios are a key indicator for this risk.

 

Part 1.3 Market risk:

  • What is the VaR reported for each bank? o Which market products carry the greatest risk?  o What methodology does each bank use to calculate market risk?
  • Are there any diversification benefits in their trading book?

The Annual report of the bank and Operations/Profitability ratios are a key indicator for this risk. 

 

Part 1.4 Credit risk and credit portfolio risk:

  • What is the level of non-performing loans of each bank? o What amount of reserves do they have in place to cover non-performing loans?
  • Are they making loan loss provisions to cover non-performing loans? Asset Quality ratios are a key indicator for this risk.

 

Part 1.5 Liquidity risk:

  • How much liquidity does each bank have? o Does each bank have enough stable funding to survive a bank run?
  • Is it compliant with BIS requirements for Liquidity? Asset Quality ratios are a key indicator for this risk.

 

You are not limited by these suggestions. You will need to think innovatively in performing your analysis and make justifiable assumptions where necessary to overcome the hurdles you may confront such as any deficiencies in data availability.

 

A suggestion for completing the comparative ratio analysis is that you use Excel to develop graphs that utilise lower/upper control limits for each ratio based on a 95% confidence level to identify ‘red flags’ that require management attention. Steps for this analysis:

  1. Calculate an average across the across all banks across your defined time period.
  2. The upper limit = Average of the ratio + 1.96 x Standard Deviation.
  3. The lower limit = Average of the ratio – 1.96 x Standard Deviation.

 

BFC5280 Institutional asset and liability management    S2 2020 tim.pfitzner@monash.edu

August 2020

 

Criteria for assessment:

The assignment will be marked out of a total of 100 marks, and will count toward 25% of the total marks for this Unit. Marks will be awarded based on the assessed quality of answers – so the following rubric provides information regarding the criteria that will be used in marking.   

Component   Unsatisfactory <50% Adequate

50% to

60%

Satisfactory

60% to 70%

Good

70 to 80%

 

Very Good

80 to 90%

 

Excellent

>90%

  Marks allocated Fails to satisfy the minimum requirements Satisfies the minimum

requirements

Demonstrates an average level of understanding, interpretation, originality, insight

and presentation

 

Demonstrates a high

standard of understanding,

interpretation, originality, insight and presentation

Demonstrates a very high

standard of understanding,

interpretation, originality, insight and presentation

Demonstrates an outstanding

or exceptional standard of understanding,

interpretation, originality, insight and presentation

1. Depth and quality of

research  in Part I

 

25            
2. Depth and quality of

analysis in Part II

 

25            
3. Application of

knowledge

 

25            
4. Report quality and

compliance

 

10            
5. Originality and

Innovation

 

15            

 

5