200514-Streamlining Your Processes for Managing

STREAMLINING YOUR PROCESSES FOR MANAGING CAPITAL MARTIM ROCHA, ADVISORY BUSINESS SOLUTIONS MANAGER, SAS RISK CENTRE OF EXCELLENCE- EMEA/AP MAY 20, 2014

• Context • Risk and Capital Management • The market status • Status in the Banks • Drivers for change and action • Capital Planning and Management • SAS Approach • Architecture • Process and Model • Live Demo • Case-studies

RISK AND CAPITAL MANAGEMENT

• The objective of capital management is to optimize the Banks's capital structure given the adopted risk profile. Financial institutions operate • With capital being the foundation of which every bank is on Capital, the best built upon., it is important to properly prepare for the expected and unexpected. they manage it, the better they will do • To understand and optimize the bank’s capital adequacy on Returns for each business model, capital must be viewed from many perspectives. Growth, credit issues, earnings, interest rate fluctuations, and dividends have an effect on each of these perspectives.

Lessons from the financial crisis:

• In the absence of information banks spent capital that could have insulate them from losses

• Sound capital planning is critical for determining the prudent amount, type and composition of capital that is consistent with a longer-term strategy …, while also withstanding a stressful event.

• Banks’ processes were(are) not sufficiently comprehensive, appropriately forward-looking or adequately formalized

• Management teams underestimated the risks inherent in their banks’ business strategies and, in turn, misjudged capital needs

Issues Risk / Finance Translating data to Treasury knowledge manual interfaces Excel based Guerilla-tactics Decision support analytics Heterogeneous across ? silos Little firm-wide scenario analysis Sales Operations Results Decisions based on intuition Manual processes and low sophisticated technology. Not in support of the Higher risk on the reliability of the results. business process Regulators and shareholders uneasy

RISK AND CAPITAL MARKET STATUS MANAGEMENT

• Data discrepancies that require added reconciliation effort • IT systems are organized by departments – each uses it’s own coding, grouping, hierarchies, time reference, … • Combined data doesn’t match, added effort for reconciliation and data quality

• Cross reporting happens only in very aggregated levels, losing important detail and in many cases hiding problems that could be otherwise addressed pro-actively. • To overcome the difficulties on combining data, reporting is done in very aggregated levels – limits effectiveness

• Difficulties on accurately calculate risk adjusted measures at the right level of detail, making decision around which products and which regions to invest almost only based on gut feeling. • The world is flat but each region, demographic group, provided service has its particular characteristics – the devil is in the details as well as the return

• Undermine any attempt of creating a framework of predictive analytics due to the lack a historical integrated information. • To anticipate the future you should look into the past, the more detailed you have on the past the best estimate you do on the future

• Reduce drastically the number and depth of scenarios analyzed for planning. • The cumbersome and manual based processes you have today take too much time for each analysis you do thus limiting the scenarios you analyze

Standalone impact of Basel III on Capital and Funding of Banks is Euro 1.6 Trillion (2019 target) : Roughly a drop of 400 bp in RoE

Higher Costs of Capital

• BCBS277 – A Sound Capital Planning Process Fundamental Elements • Basel III - ICAAP • EBA Stress-testing (EUR) • Risk Appetite Framework • BCBS239 – Principles for effective risk data aggregation and risk reporting • CCAR – Comprehensive Capital Analysis and Review (US)

• Banks across many developed markets remain undercapitalized. • Unwilling, or unable, to write down asset values to more realistic levels and accept credit losses. • Many still under liquidity support from central bank with tight repayment deadlines. • Sub-10% ROEs have rendered many North American and European business models obsolete

“lack of integration between risk and finance has limited the effectiveness of “Financial institutions can decision-making around boost profitability by a risk versus return, capital better alignment of risk and management and finance” regulatory charge “investing more in optimization” technology to improve their ability to integrate risk information into financial and performance management”

“Integration of risk and finance reporting, together with greater analytical capabilities, is enabling financial institutions to manage the risk, funding, liquidity and capital requirements of their business in a more dynamic fashion”

Capital Planning

(Optimized) allocation of Forward Looking Planning capital to profit centers Capital Estimate surplus / deficit in capital over projected Capital planning horizon Planning and Management Risk Adjusted Performance Measurement Capital Allocation Integrated Risk and Financial reporting Risk Adjusted Performance of Capital

Capital Monitoring, Capital Projections, Capital Alocation, Return on Capital

Reporting Risk and Finance Reporting

Projection Capital Planning & Management

Risk and Finance Integrated Datamart Consolidation

Credit Credit Risk Scoring Market Portfolio ALM & Liquidity Op Risk Calculation and Rating Risk Risk

Collection Data Collection / Data Quality

Trading Loans Treasury Deposits General Ledger

New or Reuse existing Risk Engines

Consolidation and Analysis, Reports & Prepare Data Model Workflow Review Templates

Model Manual

Balance Sheet Line of Business Rate Tables Income Statement Economic • Loss rates Input • Prepay rates • Operating Budgets Forecasts • Payment • New Loans • Charge offs • Deposits • Loan rates • … • Deposits rates ….

Finance Data

Business Rules Risk Capital Available Data Projections Capital Ratios

Formula example: 푃퐷 ln = −2,264 − 2,916 × ∆푃퐼퐵 − 3,892 × ∆퐶푃퐼 1 − 푃퐷 푞−2 푞−3

• Planning inputs • GL (accounting actuals) • Total • Total • Group • Balance Sheet (IFRS) • RSK (Risk book value) • Baseline • Business Unit • Region • Income Statement • Vxxxx forecast version • Economic Downturn • Line of Business • Country • Capital xxxx • Severe Downturn • Product Type • Division • Business Rates • Comparison (abs and %) • SCNxxx scenario xxx • Product • Depart • Measures • Sub Product • Risk Adjusted Mesures (non-additive members)

Account Analysis Scenario Business Organization

Finance Risk Data Data

• Annual • 21 currencies total (tied to • Counterparty Type • Total • Quarter list of country in • Central banks • Standardized 1 to 10 • Month Organization dimension) • General governments • Credit institutions • 2010 – 2022 horizon • Financial corporations other than credit institutions • Non-financial corporations • Households Rating Time Currency Counterparty Grade

 Business rates that drive the performance of the different portfolios are loaded by:  Region/entity  Time  Business/Product  Scenario  Rating Grade

Assets Balance Sheet Cash Previous Opening Period Balance - Net Loans Payments Gross Loans Central Forecast - Charge ALLL Rates/Amounts offs + New Charge offs LOB Input Loans L & SE Recoveries

Ending Retained ∆ Balance Earnings

Net Income

Interest Income

Provisions

Non-Interest Income Income Statement

 Data-entry forms allow growth assumptions to be entered for each crossing of Organization, Business, Scenario, Rating and Time as in the Loan Projections below

Roberto Monachino, CFO Head of Data Governance - UniCredit Group

• Data governance organization is an enabler to apply the target performance risk adjusted measurement framework starting from product, customer and businessRisk area Adjusted consolidated Performanceby legal entity and country by Product,up to group level, Customer reconciled with accounting with integration of risk related data. Consistent Group Golden Profitability Rules (PGR) and Data Governance Rules were adopted across the organizationSegment, and laid down Business in a single vocabulary Area, Legaland a common Entity logical and data Groupmodel to ensure comparability at Group level. Therefore, business data elements (BDEs) were produced locally and merged into a unique DWH repository aimed at avoiding overlapping and redundancies, creating a common language and optimizing data flows. BDEs for localRisk needs and may Finance be added but Reconciled require Central approval before implementation. A governance tool within the DWH controls transparent workflows for parameters, rules and adjustments across business areas. Alignment between business and IT is also enabled by a data lab environment. It fills the gap between a business idea and the ability to implement it. Existing data can be accessed and new data be added intoSingle a „sandbox‟ Vocabulary to prototype new and BI deliverables a Common for business. Logical When approved Model they can be implemented in the production database.

In this presentation he will go through all the above steps, showing concrete experience on how the entire value chain from OneData Unified Production source to Data Delivery for Capitalhas been considered Planning a success and experience Regulatory for the final Exercises business community. Shorten the data process is a key element for having more time to do better analysis and support the decision making process. – EBA Stress-test, ICAAP and BCBS239 compliant UniCredit is one of 25 banks operating worldwide with extensive international presence spanning 50 markets and about 9,400 branches. The company is the result of the merger of nine of Italy‟s largest banks, the Capitalia Group and their combination with the German HVB Group, including Bank Austria and its 19 Eastern European country organisations. The divisional business model structured by customerBusiness segments and Model regions issupported supported by global by servicesGlobal including Services the Group‟s for centralised about risk management and information technologies.9400 branches and 50 markets where Unicredit is present

. Improve timeliness and • The bank has integrated already finance accuracy of reporting. and risk figures using SAS. . Streamline budgeting and • Recently enhanced the application with forecasting process sales planning . Minimize manual spreadsheet • and is now moving forward to an integrated processing finance and risk plan. . Support various reporting • Next project will be RWA planning, using requirements from dashboard Portfolio based Asset plans and applying to KPIs, from static reports to migration matrices on customers rating to multidimensional analysis determine the change of RWA over the plan . Roadmap for Risk Adjusted period of 5 years Performance Management

STRESS TEST AND CAPITAL MANAGEMENT (CCAR) One of the Review andAnalysis CapitalComprehensive The

Business Issue oldest financial • Understand macro-economic institutions in scenarios and their correlation with Solution the United retail losses • Capital Management solution that States with • Project next 9 quarter losses for the correlates macroeconomic assets of $2.4 retail portfolio scenarios with loss drivers. trillion. • Produce CCAR files/reports for the • Integrate Stress Test and Capital Operate in more retail portfolio. Management than 60 • Risk Management for Stress Testing, countries with and Capital Planning investment banking, financial services for consumers, Benefits small business, • Analyze, understand and establish and commercial relationship between macro-economic banking, variables and loss drivers. financial • Product regulatory files/reports transaction • Macro-economic variables, and portfolio Data visualization processing, asset management and private equity.

• Business Issue • The customer has been growing their business rapidly during the last few years and they have diversified opening up subsidiaries in different business areas and growing their overseas’ business. The current financial management processes were taking 2-3 months and this could no longer cater of their business requirements.

• Solution • SAS for Financial Management

• Results/Benefits • With the SAS solution, BOC can • Improve overall timeliness and accuracy of reporting with more than 30% • Streamline budgeting and forecasting process by 60%, reduction from 5 months to 2 months • Minimize manual spreadsheet processing • Flexible system to support various reporting requirements from dashboard to KPIs, from static reports to multidimensional analysis across the region • Roadmap for performance management including financial modelling, scorecards and compliances • Save 15% headcounts in budget preparation and reporting