Anz Group Holdings Limited · ASX:ANZ
Anz — Australia and New Zealand Banking Group — Investor Day (August 2004)
58 slides from Anz's investor day presentation, Aug 16, 2004
Slide 1: The ANZ Risk Management Framework
The ANZ Risk Management Framework Australia and New Zealand Banking Group Limited 27 July 2004 Dr Mark Lawrence Chief Risk Officer
Slide 2: Creating a more sustainable, lower risk business
Creating a more sustainable, lower risk business « Significantly improved credit risk framework, profile and outcomes + Strong market & operational risk capability + Economic capital models embedded for all major risks across all businesses + Independent central risk team is formally involved in all
Slide 3: The Broad Framework
The Broad Framework
Slide 4: Context: ANZ has been building its Risk Management Capability
Context: ANZ has been building its Risk Management Capability for more than a decade Prior to 1994 1995 1996-97 1999 2000 2001 2002 2003 2004 27 July 2004 No formal "Risk Management” function, but ANZ had a credit “workout” area and an operational risk function; Rudimentary risk grading and pricing
Slide 5: ANZ Organisation & Board Governance
ANZ Organisation & Board Governance i T Principal Executive Risk Committees ~ + Policy + Balance Sheet * Compliance + Project risk * Major Lending Risk * Payments/ © Project Decisions operational risk governance Asset Waiting * Security + Project Strategies priorities * Portfolio Trading Risk 27 Jul
Slide 6: Governance Role of Group Risk Management
Governance Role of Group Risk Management * Final authority to determine the risk boundary conditions for the Group and for each business * Responsible for risk policies, principles and process standards that define ANZ Group's risk strategy and appetite * Satisfy the Board that controls, skills and
Slide 7: Group Risk Management Structure July 2004
Group Risk Management Structure July 2004 27 July 2004
Slide 8: ANZ Culture: A Question of Balance
ANZ Culture: A Question of Balance * ANZ is focused on achieving growth within appropriate risk/control boundaries * Balance is the KEY to ANZ’s success & PEOPLE provide that balance | Risk | CULTURE The Challenge is to bring together disparate parts to form a cohesive whole Portfolio monitoring & e
Slide 9: Market Risk
Market Risk
Slide 10: Market Risk: Current Risk Profile
Market Risk: Current Risk Profile * Based on publicly-reported VAR measures, ANZ now has the lowest trading risk profile of the major Australian Banks Total "Value At Risk" (VAR) from Annual Reports (normalised to 97.5% confidence level) ome am yeaa 27 July 2004 Page 10
Slide 11: What is VaR?
What is VaR? The "Value at Risk” (VAR) of a portfolio: * is a statistical estimate of the potential daily loss to a specified confidence level (eg, 97.5%) + is based on an historical simulation using changes in market prices over the past 500 days... + ... which takes into account correlated movemen
Slide 12: Value-at-Risk Limits and Exposures
Value-at-Risk Limits and Exposures * ANZ utilitises VAR limits as an “outer-bound" constraint on dealer activity * Limits are allocated by Market Risk at Global ANZ Trading Book level, by each business line down to individual trading desks, by product line, and by geography * VAR Limits are monitore
Slide 13: Detailed Control Framework
Detailed Control ‘s Framework * There are several Detailed Control Limits which further constrain risk levels in different books. Some examples applicable to specific portfolios: ‘Open Position Limits ‘Open position limits are used to limit the outright currency risk position for the Spot FX trading
Slide 14: Credit Risk
Credit Risk
Slide 15: Volatility in specific provisions generally driven by large single name losses
Volatility in specific pro single name losses ions generally driven by large Specific Provisions $m Significant impact from ‘single customers 400 | WN, 350 ‘=m Net specific provisions + ELP charge Mar- Sep- Mar- 03 0304 27 July 2004 Page 15
Slide 16: Larger loans require sound judgement, rating tools, and a dual approval process
Larger loans require sound judgement, rating tools, and a dual approval process Business Unit re Risk e.g. Institutional Banking Secup Ris Lae Prepares credit pape Ue) patent aubiiieelons cl Dual approval relationship team relationship . ; bs Remuneration not Financial Analysis—| linked to'deal flow
Slide 17: Ratings tools are increasingly powerful
Ratings tools are increasingly powerful * ANZ customer credit rating (CCR) must be at or below the equivalent rating from a ratings agency + KMY tool can be a useful early warning indicator. Policy in place now requires material movements in KMV rating be investigated and CCR signed off by credit ch
Slide 18: Single customer concentration limits are in place to cap single name exposures
Single customer concentration limits are in place to cap single name exposures within the portfolio ‘otex Orect Maximum Direct Credit Lending Limits for Individual Customers Credit its 100% BS 2333 8 i 2 AAA AM OAK AM A+ A BBB+ BBB BBB. BB+ BB BB. B+ BB. CCC 1 Ofshore (Collateral < 60%) = Ofshore (C
Slide 19: Portfolio caps also help drive diversification
ification liversi Portfolio caps also help drive di % of ANZ Group Lending Assets (Australia and New Zealand) 4210 2Be101s rg Hodsues, sqnid ‘sand “uiuios3y SO21A105 dey 8 1eanginD 420 = soueuly s901M125 ssoujsng eanynouby ape aresajoum syueg - eoueulg epeas ey 6urunoesnuew Ayedoig leroseuwi0g
Slide 20: Credit Policies & Scorecards: the key risk management tools in retail lending
Credit Policies & “Scorecards”: the key risk management tools in retail lending Write-offs in the personal loan portfolio % 12 42 * Scorecard rebuilt to target 3.5% loss rate 10 * Retail risk capabilities 9 enhanced 8 7 6 5 4 3 2 1 of 2000 2001 2003 2004* 27 July 2004
Slide 21: Key challenge: achieving the appropriate risk-vs-return trade-off
Key challenge: achieving the appropriate risk-vs-return trade-off Scorecards aim to achieve an appropriate risk/return trade-off Ratio of ‘good’ customers to ‘bad’ customers Ratio of ‘good’ to "bad! : 450 [Goods 400 350 ‘Ata score of 600, expect 150 ‘good’ ano customers for each ‘bad’ ais customer 2
Slide 22: Low exposure to Inner City residential mortgage lending
Low exposure to Inner City residential mortgage lending * Total Lending for inner city property at 3.9% of Australian Mortgages portfolio, with 2.2% for investment purposes. Tight policies to control emerging risks include: ~ valuations required on all new properties ~ rental income allowable in deb
Slide 23: Operational Risk
Operational Risk
Slide 24: The Oldest Risks?
The Oldest Risks? E 2 thquak, Stor, oe” é s 2nd fire, TMS a k of Uitetin Ros 6 gs ee? Resulting in: an’ ie <of sions \ direct loss mics PI we™ * expense pande! ned! _ « distraction Fines indirect loss r) System failures ro, ecg © reputation oa Pity, A © opportunity uman © quit wre? iric? he, war, PO
Slide 25: More diverse & complex banking activities
More diverse & complex banking activities Deregulation & globalisation of financial services Growing sophistication of financial technology + Recent experience makes it clear that risks other than credit and market risks can be substantial: > Barings > Enron > 9/11 > Allfirst (Allied Irish) > Life i
Slide 26: Greater focus on Operational Risk by financial services providers, government & others
We are now seeing greater focus on Operational Risk by financial services providers, government & others... Financial Services (Banks, Insurance Companies, Fund Managers) Specialist Operational Risk functions Framework, policy, measurement and monitoring Capital allocation for operational risk - now
Slide 27: Key Elements of an Effective Operational Risk Framework
Key Elements of an Effective Operational Risk Framework Once Operational Risk is defined within the organisation, what are the other key elements the need to be designed and implemented? + Governance Structure ‘* Operational Risk Identification & Assessment methodology/process ‘* Operational Risk Me
Slide 28: Operational Risk Categories
Operational Risk Categories + Asset of common operational risk categories have been adopted by ANZ, which further define what operational risk means in ANZ. These risk categories are represented below: Regulatory & Statuto ‘compliance failure Failure of suppliers) Toutsourcers, 27 July 2004
Slide 29: Central Operational Risk Management Structure
Central Operational Risk Management Structure BU Managing Directors 27 July 2004
Slide 30: Impact of Basel II
Impact of Basel II Regulatory Capital for Operational Risk: * Basel I (1988) - zero * Basel II (2007 onwards) - substantial! 27 July 2004 Page 30
Slide 31: The Big Controversy!
The Big Controversy! * How much capital should be held for Operational Risk? > ~20%? (Basel CP2, January 2001) >» ~12%? (Basel CP3, April 2003) > (Other?) * The magnitude of this shift illustrates the difficulty of the measurement challenge! 27 July 2004 Page 31
Slide 32: The Difficulty of Measurement
The Difficulty of Measurement « Inrecent years, we have seen the first serious attempts to measure operational risk... really the birth of a new discipline + The industry has made great progress, but difficult questions remain: What are the principal determinants of the level of Operational Risk? 2.
Slide 33: The Difficulty of Measurement
The Difficulty of Measurement * The industry has made great progress, but difficult questions remain: 5. When is external information (including loss data) relevant? How should it be used? 6. How should specific operational scenarios be incorporated in the measurement of Operational Risk? What about
Slide 34: Approaches to Measuring Operational Risk
Approaches to Measuring Operational Risk Although "1,000 flowers are blooming”, there are 3 principal methods in use in banks today: + Loss Distribution Approach (statistical) * “Scorecard” or “Risk Drivers and Controls” Approaches (more qualitative) * — Scenario-driven methods Regardless of which m
Slide 35: ANZ's Operational Risk Measurement Objectives (1999)
ANZ’s Operational Risk Measurement Objectives (1999) * Directly connects risk measurement with the operational risk management process; * Provides increased understanding and transparency of operational risk exposures; * Provides a ‘road map’ for reducing risk; and * Provides transparent incentives
Slide 36: Risk Drivers and Controls Approaches
“Risk Drivers and Controls” Approaches * A “Scorecard” methodology refers to a class of diverse approaches to operational risk measurement and capital determination, which all have at their core an assessment of specific operational risk drivers and controls. These can also be called “Risk Drivers a
Slide 37: Key Features of RDCAs
Key Features of RDCAs * A measurement framework designed to focus on the principal drivers and controls surrounding operational risks * Aseries of weighted, risk-based questions by risk type or category * Reflects the organization's unique operational risk profile by: » Devising organization-specifi
Slide 38: Key Benefits of RDCAs
Key Benefits of RDCAs Business Line Involvement ‘+ RDCAs leverage the collective operational risk knowledge of the organization * Business line involvement underpins their “ownership” of the results. Forward-looking —RDCAs attract capital when vulnerabilities & weaknesses are identified * RDCAs prov
Slide 39: Key Benefits of RDCAs (cont.)
Key Benefits of RDCAs (cont.) Transparency * All risk assessments are explicit and transparent, especially to line managers, and are regularly subjected to managerial, audit and/or supervisory interrogation . The linkage to capital is formula-driven, transparent and risk sensitive, reflecting risk p
Slide 40: Risk & Performance
I & Performance... ",..and one of the things I think that really does matter to this is the earlier introduction of EVA at the transactional and the customer level, means that we have a self-correcting mechanism that is in fact ensuring that risk comes down over time, without it being necessarily dr
Slide 41: Specialised framework for project risk management
We have also implemented a specialised framework for project risk management Group Project Centre of Technology Risk Excellence (GPCE) Management (TRM) Project Management QA Technology Risks in the project Financial QA (not Project Management Risks) “Is it still sensible to Risk Management consultin
Slide 42: Simplifying and strengthening Compliance: a holistic approach
Simplifying and strengthening Compliance: a holistic approach * Strengthening compliance oversight has been identified as a key component to achieving operational excellence. New model extends compliance to address: | + financial & prudential contro! = credit, market & other operational control. | P
Slide 43: Strategy & Business Risk
Strategy & Business Risk
Slide 44: Strategy and Business Risks: important risk dimensions
Strategy and Business isks important risk dimen: ns Credit, Market and Operational Risks are now documented Strategy and business risk is now at the forefront of risk management capability Business Risk is the risk that value will be lost through the selection of specific business 27 July 2004 ‘ecti
Slide 45: Strategy and Business Risks: a differentiator for ANZ
Strategy and Business ‘isks: a differentiator for ANZ * Group Chief Risk Officer is accountable to the Board for oversight of risk in the integration. * Accountability includes the development of a framework that assigns accountability for the management of integration risks. + Day-to-day management
Slide 46: Strategy Engagement
Strategy Engagement + A substantial part of the bank’s risk profile is determined by its strategy and growth initiatives + “Best practice” risk management involves an independent group providing input into strategy development and key investment decisions, ensuring that all the risks are transparent
Slide 47: Capital Allocation, Risk-Adjusted Pricing, and Basel II
Capital Allocation, Risk- Adjusted Pricing, and Basel II
Slide 48: Economic Capital: Conceptual Framework
Economic Capital: Conceptual Framework on rt Fre wk: » Risk models employed to quantify economic risk are used to allocate economic capital - the amount of capital needed to support a bank’s risk taking Probability of loss activities » Credit risk capital allocation systems typically based on instit
Slide 49: Risk adjusted EVA based pricing methodology
Risk adjusted EVA based pricing methodology makes the risk/return trade-off explicit to relationship managers Illustrative example Component Example Source Cost of Funds 6.00% Funds Transfer Pricing Systems Loan Loss Provision 0.53% Credit Risk Models Direct Expense* 0.15% Indirect Expense* 0.15% Pr
Slide 50: ANZ's Basel II Programme
ANZ’s Basel II Programme * ANZ formally established its Basel II Programme in December 2001. ‘* Our objective is compliance with the Advanced IRB approach for Credit Risk and the AMA approach for Operational Risk. + The Programme has, at its core, a central programme office, with multiple core proje
Slide 51: Basel II benefits
Basel II benefits * QIS 3 - the first comprehensive survey of likely Basel II effects on Pillar 1 capital - forecasts large regulatory capital reductions for ANZ and other Australian banks. + While based on Sept 02 data and CP2 capital formulae, it is directionally in line with what could be expecte
Slide 52: We have transformed ANZ into a more sustainable, lower risk business
We have transformed ANZ into a more susti business able, lower risk ) Sa ) SERE mm NPAT Volatility’ 12% — NPAT Growth 10% 8% 6% 4% 2% oe! | Last 10 Years Last 5 Years Last 3 Years Standard deviation in six monthly NPAT growth for ANZ, excluding abnormal significant itoms 27 July 2004 Poge A
Slide 53: Supplementary info
Supplementary info
Slide 54: US power exposures continue to reduce
US power exposures continue to reduce, although lagged cre effects continue to affect the portfolio Total US Limits(») US: March 2004 ‘+ Outstandings: $0.6bn (70%) ‘+ Other Committed: $0.2bn (25%) + Uncommitted: $0.1bn (5%) Customers: * Investment Grade: 10 ‘= Non Accrual: 4 © Total: 19 AAR to BBB B
Slide 55: The quality of the Telcos book continues to improve
The quality of the Telcos book continues to improve Total Telcos Limits‘) A$5.3bn KMV Median Expected Default Frequency EDF % (Max KMV EDF = 20.00) 20.00 AAA to 888 A$3.5bn 1.00 es 28+ to Be- Be tocce ay 00 BRS, 3 sep-02 Sep-03.—Mar-4 March 2004 ‘+ Outstandings: $0.6bn (70%) ‘= Other Committed: $0.2
Slide 56: Proactive reduction in volume of Top 10 client committed exposures
Proactive reduction in volume of “Top 10” client committed exposures S&P Top 10 Committed Exposures ‘Top 10 Lending Exposures as % of Rating "ACEC © 200 400-600» 800-«1009 AUD A; ms — 120% + Implementation of credit ‘management policies to oo = diversify the loan book 100% ‘exposure, has resulted in
Slide 57: Quality of Consumer & SME portfolios again better than expected
Quality of Consumer & SME portfolios again better than expected + Mortgage delinquencies (60 days) improved over the half + Delinquency for customers new to SME since September 2002 is. in line with delinquency on legacy SME portfolio * Strong economic conditions and prudent credit practices have co
Slide 58: Searchable text section of graphics
Searchable text section of graphics shown above The ANZ Risk Management Framework Australia and New Zealand Banking Group Limited 27 July 2004 Dr Mark Lawrence Chief Risk Officer [LOGO] Cre ating a more sustainable, lower risk business • Significantly improved credit risk framework, profile and outc
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