Moody's Corporation · NYSE:MCO
Moody's — Investor Presentation (April 2023)
22 slides from Moody's's investor presentation, April 2023
Slide 1: Know Your Balance Sheet: Developing an Effective ALCO for Today’s Environment
Know Your Balance Sheet: Developing an Effective ALCO for Today’s Environment April 2023
Slide 2: Today’s Speakers
Today’s Speakers Chris Jones Jon Kiessling Director, Product Management Senior Director, Commercial Development Former ALM practitioner at regional banks with experience Former Bank Executive (Chief Risk Officer, Director of Corporate in Capital Planning, Liquidity and Balance Sheet Finance, Chief A
Slide 3: The Role of ALCO
Developing an Effective ALCO for Today’s Environment: The Role of ALCO
Slide 4: The Role of ALCO
The Role of ALCO Regulatory Perspective “Asset/Liability Committee (ALCO) … should ensure the committee actively monitors the IRR profile and has sufficiently broad representation across major functions that can directly or indirectly influence the institution’s IRR exposure (e.g., lending, investme
Slide 5: The Role of ALCO: Managing the Risk/Return Tradeoff
The Role of ALCO Business Perspective: Managing the Risk/Return Tradeoff Accounting FP&A ALCO Where have we been? Where are we going? How do we get there? Actual results provide a starting point. Forecasts provide the objectives that Responsible for developing and Knowing current risk and profitabil
Slide 6: Sample ALCO Meeting Agenda: Traditional
Sample ALCO Meeting Agenda: Traditional SECTION 01 Fundamental Analysis: Economic & Market Review A fundamental review of current economic and market conditions, including key economic indicators such as elements of GDP, inflation, unemployment, etc. as well as relevant key rate indices and/or yield
Slide 7: Sample ALCO Meeting Agenda: ROE Focused
Sample ALCO Meeting Agenda: ROE Focused SECTION 01 Economic/Market Review & Current ROE Decomposition A fundamental review of current economic and market conditions, including key economic indicators such as elements of GDP, inflation, unemployment, etc. as well as relevant key rate indices and/or y
Slide 8: IRR Measures
IRR Measures Using a variety of measures Interest Rate Risk provides a holistic view of risk Some risk measures such as income forecasting are forward looking, while others such as EVE provide a snapshot at a specific point in time. » Static NII is the simplest form of rate sensitivity measure, but
Slide 9: Policy, Governance and Communication
Developing an Effective ALCO for Today’s Environment: Policy, Governance and Communication
Slide 10: Policies Govern Risk Appetite
Policies Govern Risk Appetite Policies define the who, what, and how of risk management for the organization Interest Rate Risk Policy Makes ALCO responsible for managing interest rate risk (IRR), defines the risk measures to be used such as EVE, EaR, FTP, and lays out risk remediation actions. Cred
Slide 11: Re-thinking Risk Appetite Calibration
Re-thinking Risk Appetite Calibration How do you know if your processes reflect your risk appetite? Risk Identification Limit Calibration Model Risk Risk Buffers Are we capturing all pertinent Do our current policy limits truly If assumptions are incorrect If inherent risk approaches or risk in our
Slide 12: The “Art and Science” of Communicating Risk
The “Art and Science” of Communicating Risk How to communicate risk to a broad range of stakeholders By design ALCO will be composed of a group with a range of expertise and perspectives that capture the broad interests of the firm. All of these members will not be risk modeling experts. 03 » Ensure
Slide 13: A Deeper Dive into Valuation and FTP
Developing an Effective ALCO for Today’s Environment: A Deeper Dive into Valuation and FTP
Slide 14: EVE = MV Assets – MV Liabilities
EVE is a Measure of Future Earnings Potential4 EVE = MV Assets – MV Liabilities = Present Value (Asset Cash Flows) – Present Value (Liability Cash Flows) = Present Value (Asset Cash Flows – Liability Cash Flows) = Present Value (Asset Principal Cash Flows – Liability Principal Cash Flows) + Present
Slide 15: Valuation and Effective Duration
Valuation and Effective Duration Price/Yield Relationship of a Bond (10-year, 11% semi-annual coupon) 225 200 175 150 Duration is an estimate of the price/yield relationship based on three data points 125 106.23 Price 100 100.00 94.27 75 -100 BPS MV 50 Base Case MV +100 BPS MV 25 0 Yield Actual Pric
Slide 16: Applying Effective Duration to the Balance Sheet
Applying Effective Duration to the Balance Sheet » Duration: A measurement of price sensitivity to interest rates – The average percentage change in price for a 100 bps change in rates – Calculation: MV−100 BPS − MV+100 BPS Duration = 2( MVBase )r Market Value Sensitivity Book Base » Applying dur
Slide 17: Deposit assumptions drive the EVE sensitivity profile
Deposit assumptions drive the EVE sensitivity profile Deposit Assumption Sensitivity Testing 8% 6% Deposit Duration 4.0 4% 2% Deposit Duration 5.0 (Base) 0% -100 Base +100 -2% -4% Deposit Duration 6.0 -6% -8% Developing Developingand an Effective ALCO 17
Slide 18: FTP Creates Transparency Around Return
FTP Creates Transparency Around Return IRR and Liquidity Risk Transferred to Risk Center Using FTP Baseline Business Unit Profitability 12-month Forecast Treasury Total BU_01 BU_02 BU_03 BU_04 BU_05 BU_Total Risk Center Bank Income Cash 14.5 14.5 Investments 52.4 52.4 Loans Interest Income 41.4 165.
Slide 19: Dynamic Risk-Adjusted Forecast
Dynamic Risk-Adjusted Forecast » Apply rate shocks to the baseline forecast to observe the change in income » BU profit is stabilized by FTP » Risk center profit now becomes the measure of sensitivity, and can be managed via product mix, pricing, hedging, or other balance sheet strategies Income Sen
Slide 20: Parting Shots
Developing an Effective ALCO for Today’s Environment: Parting Shots
Slide 21: moodysanalytics.com
Ed Young Jon Kiessling Chris Jones Senior Director Senior Director Director Ed.young@moodys.com Jon.Kiessling@moodys.com Chris.jones@moodys.com moodysanalytics.com
Slide 22: Developing Developing and an Effective ALCO
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