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RISK MANAGEMENT AT WELLFLEET BANK

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by

Low Syeh Chen

on 8 December 2013

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Transcript of RISK MANAGEMENT AT WELLFLEET BANK

CASE STUDY 3:
RISK MANAGEMENT OF WELLFLEET BANK
"MegaDeals"
PREM KUMAR A/L GABRIEL 212970

LOW SYEH CHEN 214165

ARUN A/L RAJAH MANICKAM 214177

LEW MEI FONG 214442

PREPARED BY
Wellfleet bank focus more on the syndicated and leverage loan segment.

The corporate bank recruited relationship managers from leading investment banks and hired a senior risk officer name Catherine Richards. This gave Wellfleet a risk perspective while analysing its proposals

Wellfleet was based in London even though majority of its customers resided outside UK.

Wellfleet Bank gave importance to internal controls and risk management as it considered them to be very crucial part of banking.

The dilemma of this bank is the CEO Alastair Dawes wonder how to best evaluate the quality and riskiness of mega-deals.
Overview of Wellfleet bank
Proposal 1 : ASHAR INDUSTRIES

EL=0.22% x $850 Million x 56.86%
= $1063282

Proposal 2 : GATWICK GOLD CORPORATION

EL=0.39% x $1 Billion x 52.25%
=$2037750

Total Revenue =Interest Income + Fee Income

Proposal 1 :
($850 Million x 52.5bp) +($850 Million x 40bp)
=$4462500 + $3400000
=$7862500

Proposal 2:
($1 Billion x 47.5bp) + ($1 Billion x 30bp)
=$4750000 + $3000000
=$7750000

Risk Adjusted Revenue (RAR)=
Total Revenue- Total Expected Loss

Proposal 1:
RAR= $7862500 - $1063282
=$6799218

Proposal 2:
RAR=$7750000 - $2037750
=$5712250

Economic Revenue = RAR- Net Capital Charge

Proposal 1:
ER=$6799218 - $2200000
=$4599218

Proposal 2:
ER=$5712250 - $ 3800000
=$ 1912250

Economic Profit =
Economic Revenue – Cost – Tax

Proposal 1:
$4599218- $825713-$1500000
=$2273505

Proposal 2:
$1912250-$300000-$920000
=$692250

Core Business
Corporate banking
Consumer banking
~Thank You~
Proposal 1
While revenue has grown at a CAGR of 12.48% over the last 3 years, the profitability has taken an enormous hit with EBIT having a
negative
growth

Proposal 2
CAGR over the last 3 financial years of Revenue has been at 74.84% while that of EBIT has been at a phenomenal 180.52%
There has been a steady and healthy growth in Net Income of over 17.68% over the last 3 years
There is a
negative
net income (loss) in the last 3 financial years
In the recent years, the company has increased its long term borrowings for investment activities raising its D/E ratio to 0.82 in 2005 from the previous 0.34
The company has shown
decrease
in EBITDA margin from 27.6% to 7.20% in the past year having a
negative
ROI in the present year
Company has a history of overleveraging to acquire assets and then deleveraging (seen during 2002-03 and again in 2004-05)
The EBIT to interest expense is
negative
indicating the inability of the firm to service the present debts it has undertaken
From the Economic and Financial Analysis of the two proposals it can be seen clearly that
Proposal 1 (Ashar Industries) seems to be in strong financial position
, growing at at a rate higher than industry standards and is in the hands of experienced management that has a history of turning around unproductive assets
Proposal 2, GGC is in the
red.
Having
negative growth
over the past 3 years, the statements show of
loss
and the company is unable to service its present debt.
We will prefer to approved the credit proposal from Ashar industries.
Advantages of Ashar industries:
World largest steel producer and their turnover rise in 2005 $28.1 billion from $5.4 billion in 2001.
Stable income statement, high figure regarding their revenue, EBIT, and net income.
Ashar corporation is really diversifed company.
Ashar industries
credit grade is 5A
production across developed market(the sale is 40 % from north America, 33 % Europe)

Even the company have a long term debt, this steel company need to acquire a lot of fixed cost in order to grow and maximize their profit.

This
is family business
it is something that they should
take a good care
of the business.

41 % in South Africa, this mean that this
business will be under control of political risk in Africa
in the future.
Total
debt to EBITDA was 800% in 2007
( up from 200 % in 2006 ; 130 % in 2003 )
Mining cost is rapidly growing.
Credit grade is 5B
Balance sheet and income statement is shown
poor performance
Analyse the risk management process at Wellfleet Bank. What suggestions might you make to the CEO about improving the process?
What kind of risks does Wellfleet Bank face?
Given Wellfleet’s new focus on large corporate deals and its need to recruit relationship managers from investment banks, what are the challenges for the risk culture of the organisation, and its style of risk management in particular?
What is your decision regarding the two credit proposals?
Calculate the Expected Loss, Economic Revenue and Economic Profit for both proposals.
Expected Loss =
Probability of default x Exposure at default ($) x Loss Given Default (%)

WELLFLEET BANK ORGANIZATION CHART
Full transcript