report snk - final

8/6/2019 Report SNK - Final

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An Assessment on AB Bank Treasury

And

Strategic Recommendations


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An Assessment on AB Bank Treasury

And

Strategic Recommendations

Prepared for:

Mr. Mohammad Saif Noman Khan

Assistant Professor

Institute of Business Administration

University of Dhaka

Prepared by:

Mohammad Mahfuz-ul-Islam (Group Leader)

EMBA 6th batch, Roll 26

1398/15 G Riazbagh, Khilgaon

Dhaka -1219.

Cell: 01191040688

May 07, 2010


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May 7, 2010

Mr. Mohammad Saif Noman Khan

Assistant Professor

Institute of Business Administration

University of Dhaka

Dear Sir:

Here is the report on the comparative performance analysis of Treasury Operation of AB Bank

Limited with the market leader that you asked us to conduct on March 16, 2010.

Our observational study between AB Bank and the market leader revealed significant differences in

four areas: structure of treasury, product line, risk management efficiency and profitability. Based on

the study we made some recommendations for AB Bank that will help it to tackle the shortcoming

and lead it to be the market leader both in terms of risk management and profitability.

We appreciate you for choosing us for such an important assignment. If you need further

clarification about the report, please contact us at [email protected] or 01191040688.

Sincerely yours,

Mohammad. Mahfuz-ul-Islam

(Group Leader)

EMBA Rpt 6th, 17, 25, 26, 28, 31
mailto:[email protected]:[email protected]


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Table of Contents:

Executive Summary vi

1.0. Introduction 1

1.1. Objective of the study 1

1.2. Methodology 1

1.3. Definitions, Initialisms, and Acronyms 2

1.4. A preview of the Presentation 2

2.0. Role of Treasury Operations in Banks 3

2.1. Structure of Treasury 3

2.1.1. AB Bank Scenario

2.1.2. Market Leader Scenario

2.2. Treasury Functions 5

2.2.1. ALM Desk

2.2.1.1. MM Desk

2.2.1.2. Fixed Income Desk

2.2.2. FX Desk

2.2.2.1. Corporate desk

2.2.2.2. Interbank Desk

2.3. Role of Treasury as Market Risk Manager 7

2.3.1. Interest rate Risk Management

2.3.2. FX Risk Management

2.4. Role of Treasury as Profit contributor 10

2.4.1. Interest Earning

2.4.2. Exchange Earning

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3.0. Recommendation 14

3.1. Implementation of Proper accounting system

3.2. Improvement in product line

3.2.1. Money Market Products

3.2.2. FX Products

3.3. Growth in balance sheet and business volume

3.4. Human Resources Development

Bibliography 15

Appendix 1 16

Appendix 2 17

List of Figures

Figure 1: Profit Contribution by AB Treasury '08 11

Figure 2 : Profit Contribution by AB Treasury '09 11

Figure 3: Profit Contribution by Market Leader '08 11

Figure 4: Profit Contribution by Market Leader '09 11

Figure 5: Interest Income Comparison (in crore taka) 12

Figure 6: Exchange Income Comparison (in crore taka) 12

Figure 7: AB Treasury Income Distribution '08 13

Figure 8: AB Treasury Income Distribution '09 13

Figure 9: Market Leader Treasury Income Distribution '08 13

Figure 10: Market Leader Treasury Income Distribution '09 13

Glossary 18

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Executive summary

To enhance the performance of AB Bank Treasury and to be the market leader in terms of risk

management and profitability, this report recommends following measures to be taken by AB Bank

treasury division:

Implementation of proper accounting system

Improvement in product line

MM desk should run a trading book

Security trading in secondary market

FX desk should introduce derivative products

Corporate sales desk should be introduced

Growth in balance sheet and business volume

Human Resources Development

These recommendations are on the bases of the comparative analysis of the structure, functions

(product line), risk management efficiency and profitability between AB Bank Treasury and the

market leader in treasury business. The two banks are compared on their current structure, product

line and efficiency level while comparison of profitability is done on their income statement of 2008

and 2009.

The study shows that in terms of treasury structure, both AB Bank and the market leader follow the

standard structure of treasury operation but the market leader has the superiority of having separate

Mid Office that can produce rigorous market analysis and provide inputs to the treasury.

Analysis of balance sheets of these two banks revealed that the market leaders balance sheet size

is 25% higher than that of AB Bank and the volume of money that the market leader is dealing with

in the interbank money market is 16% higher than that of the AB Bank. It has been observed

comparing the ALM operation between these two that the market leaders asset liability

management process is more efficient and they are focused in arbitrage opportunity both in money

market and fixed income market while AB banks money market activity is limited to own book

funding. The study also revealed a striking difference in foreign exchange business volume between

these two banks. The market leaders foreign exchange business volume is more than five times

than ABs foreign exchange volume. These huge differences in business volumes arises from the

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fact that major MNCs, Tele communication companies, airlines and other large corporates bank with

the market leader.

Observations in the aspect of interest risk management showed that, AB treasury is lagging behind

to the market leader. As the market leaders ALM process is rigorous enough and they arecomplying meticulously different risk ratios, they can efficiently and effectively minimize the interest

rate risk whereas the business reality and competition among the peer groups do not allow AB bank

treasury always to comply with the different risk ratios. Thus AB Bank sometimes is running its

business exposing itself to interest rate risk.

The comparative analysis of the income statement of the two banks for the year 2008 and 2009

indicates a remarkable difference between their profitability. AB bank Treasury contributed to its

total income by BDT 110 crore and 132 crore which is 18% and 19% of total income in the year

2008 and 2009 respectively. Whereas the market leader contributes to its total income by BDT 207

crore and BDT 241 crore which is 19% and 20% of total income in the year 2008 and 2009

respectively. There are also differences in patterns of profit attribution between these two banks.

The major income attributed to interest income in case of AB Treasury while the opposite scenario

prevails for the market leader. AB Treasury earned interest income of BDT 66.5 crore and exchange

income of BDT 43.8 crore in 2008 while the market leader earned interest income of BDT 52.6 crore

and exchange income BDT 154 crore in the same period. In 2009, AB Treasury earned interest

income of BDT 91.43 crore and exchange income of BDT 40.67 crore while the market leaderearned interest income of BDT 59.70 crore and exchange income BDT 181 crore in the same

period.

Finally, it has been observed that modern, standard and logical accounting principal that has been

practiced by the market leader is not followed in calculation of interest income for AB Treasury.

According to standard accounting practice, inter- branch transactions accounting should be done

under bucket wise transfer pricing instead of general accounting system and SLR cost for treasury

should be zero. Moreover, treasury should be entitled for the Banks capital. Observation of income

accounting revealed that unlike the standard practice, AB Treasury is bearing the banks SLR cost

and yet not entitled for the banks capital which hinders the AB treasurys earnings potential.

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Introduction:

All financial activities involve a certain degree of risk and particularly the financial institutions of the

modern era are engaged in various complex financial activities requiring them to put proper

attention to every detail.

The success of the trading business depends on the ability to manage effectively the various risks

encountered in the trading environment, and the organizations policies and processes require

development over time to ensure that this is done in a controlled way.

The key risk areas of a financial institution can be broadly categorized into:

- Credit risk

- Market risk and

- Operational risk

In view of the significance of the market risk and in order to aggregate all such risks at a single

department and to bring expertise in such functions, the concept of TREASURY has evolved.

Todays financial institutions engage in activities starting from import, export and remittance to

complex derivatives involving basic foreign exchange and money market to complex structured

products. All these require high degree of expertise that is difficult to achieve in the transaction

originating departments and as such the expertise is housed in a separate department i.e. treasury.

(Bangladesh Bank Focus Group, 6)

Objective of the report:

AB Bank is the pioneer in private sector banks in Bangladesh. To cope up with the complexity of

modern financial transactions as well as to manage the different market risk, it has adopted the

concept of Treasury. AB Bank formally established its Treasury in the year 2003. The purpose of

this report is to analyze the present status of the AB Bank Treasury in terms of structure; role and

functions as well as its contribution to banks profit. Though AB Bank Treasury is operating with a

positive growth over the years yet there is a significant gap between the market leader and itself.The objective of this report is also to figure out the reasons for this disparity and to recommend for

being the market leader.

Methodology:

This report is based on the comparative analysis of AB Bank treasury with the Market Leader in

Treasury business in Bangladesh. The comparison is made based on their structures, functions

(product line), efficiency in risk management and profitability. In doing so, financial statements of

these two banks for the year ended 2008 and 2009 are compared. As Treasury balance sheet and

Profit & Loss statement is not readily available, some approximations are made based on the total

banks balance sheet and some ballpark figures for profit & loss account are taken in to

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consideration. As the operational structures and work processes and practices are confidential

information and are not disclosed to all, general discussion with the industry experts have been

undertaken to get an idea of the structures and process.

Definitions of Initialisms, and Acronyms:Throughout the report, some Initialisms and acronyms have been used. Here are the definitions of

different terminologies:

Forex: - refers to Foreign Exchange

SWIFT: - Society for Worldwide Interbank Financial Telecommunication.

ALM: Asset Liability Management.

Fcy: - refers to foreign currency

MM: Money Market

Fx: - Foreign Exchange

ALCO: - Asset Liability Committee.

CRR: - Cash Reserve Requirement.

SLR: Statutory Liquidity Requirement

T-Bills: - Treasury Bills

A preview of the Presentation:

We have designed the report highlighting major four areas. We started with focusing on treasury

structure - what should be the standard and a comparative analysis between the two banks based

on that. We proceed on to our next section describing the functions of Treasury. Here we described

the general functions of treasury and undertook an analysis on the treasury products these two

banks have been practicing. Then, we focused on risk management aspect. Here we discussed

about different risk management tools and also compared these two banks on their risk

management efficiency. Finally, we focused on profitability. In this section, we discussed about

different types of treasury income and compared between two treasuries in terms of their

profitability.

Thus we under took a comparative analysis between these two treasuries in terms of their

structures, functions (product line), risk management efficiency and profitability. We also placed our

recommendations for AB Bank treasury to enhance their performance at the end of our report.

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Role of Treasury Operations in Banks:

The Treasury is the department in the banks that undertake the responsibility of interest and

exchange rate risks in the balance sheet and also manage proprietary trading positions. The

integrated treasury through integration of forex and money market activities, more significantly

manages the market risk for the bank as a whole under a single roof. The Treasury functions within

a bank the clearing house for matching, managing and controlling market risks.

The main risks treasuries have to manage in the financial markets are credit risk i.e. the settlement

of transactions and market risk, which includes liquidity risk and price risk.

Some of the risks that are to be monitored and managed by a treasury can be defined as follows:

Credit risk - Arises from an obligors failure to perform as agreed.

Interest rate risk - Arises from movements in interest rates in the market. The interest rate exposure

is created from the mismatches in the interest re-pricing tenors of assets and liabilities of an

organization.

Liquidity risk - Arises from an organizations inability to meet its obligations when due. The liquidity

exposure is created by the maturity mismatches of the assets and liabilities of the organization.

Price risk - Arises from changes in the value of trading positions in the interest rate, foreign

exchange, equity and commodities markets. This arises due to changes in the various market rates

and/ or market factors.

Compliance risk - Arises from violations of or non-conformance with laws, rules, regulations,

prescribed practices, or ethical standards.

Strategic risk - Arises from adverse business decisions or improper implementation of them.

Reputation risk or franchise risk - Arises from negative public opinion.

(Bangladesh Bank Focus Group, Fx, 7)

Structure of Treasury:

In performing the treasury functions in an appropriate manner and depending on the nature of

business of the financial organization and its size, an organization would best determine the

appropriate organization structure for its treasury and treasury back-office functions. However,

irrespective of the size, nature of business, all treasury functions require to have clear demarcation

between the direct dealing and all settlement and support functions i.e. the treasury that would be

involved only in dealing activities and the treasury support unit (commonly known as the treasury

back-office) that would be responsible for all related support functions. This is required for control

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reasons meaning that different persons/ department should be responsible for the dealing and the

settlement, measurement, reporting etc.

In order to monitor and manage the organizations balance sheet risk in a more detailed level, large

financial institutions have the setup of an additional unit named the treasury mid-office. In smaller

organizations where a separate treasury mid-office is not justified, the responsibility of the balance

sheet risk measurement and reporting lies with the treasury back-office.

(Bangladesh Bank Focus Group, Fx, 21)

1.1.1. AB Bank Scenario: AB Bank treasury has Centralized Foreign Exchange

and Money Market Activities. It has Separate Trading and Risk Management Units i.e. separated

Front office (Dealing Room) and Back Office (Treasury Support Unit). As the reporting lines of front

office and back office are different, there is a check and balance of Treasury operations which is

also internationally recognized guidelines for treasury structure.

AB Bank Treasury has the required equipments and facilities for standard trading operation like

follows:

Front office equipment:

Reuters 3000xtra

Reuters Dealing 3000

Online Trading Platforms

Internet connection

Financial TV channel

PC with necessary software

ISD telephone with Fax

Mobile phone with ISD line for the dealers supervisors

Voice recorder

Back office equipment:

SWIFT Connectivity

PC with necessary software

Telephone & Fax

1.1.2. Market Leader Scenario: The market leader in treasury business in the

market does have the integrated treasury; i.e. centralized FX and MM activities. They also have

separate reporting lines for Front office (The trading unit) and Back Office (The settlement Unit).

Unlike the AB Bank Treasury, they do have a separate Mid Office (The Risk Management Unit). The

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mid Office reports directly to ALCO (asset Liability Committee). The mid office also provides market

information and market analysis to both ALCO and front office dealers. The equipments and

facilities available in their Treasury are similar to that of AB Bank Treasury.

In terms of treasury structure, both AB Bank and the market leader follow thestandard structure. The market leader has the benefit of having separate Mid Office that can

produce rigorous market analysis and provide inputs to the treasury. The organizational structure of

AB Bank Treasury and the market leader is shown in Appendix 1 & Appendix 2.

Treasury Functions:

In this section we will discuss the general functions of different desks in treasury. Then we will have

a comparative discussion on treasury products that have been practiced by both of the treasuries.

1.1.3. ALM Desk: The key roles and responsibilities of the ALM Desk:

1) To assume overall responsibilities of Money Market activities.

2) To manage liquidity and interest rate risk of the bank.

3) To comply with the local central bank regulations in respect of banks statutory obligations as

well as thorough understanding of the risk elements involved with the business.

4) Understanding of the market dynamics i.e competition, potential target markets etc.

5) Provide inputs to the Treasurer regarding market views and update the balance sheet

movement.

6) Deal within the dealers authorized limit.

The ALM desk is headed by The Head of ALM and its functions are distributed among the Money

Market desk (MM desk) & fixed Income desk.

1.1.3.1. MM Desk: Money market desk is responsible for following

activities:

1) Overnight/ Call money activities

2) Term market activities

3) Currency swaps

4) Fcy placements

5) MM pricing of Fcy

6) Nostro fundings

7) Spot any arbitrage opportunities and take advantage

8) Remaining within all counterparty limits at all times

9) Operating within all given balance sheet gap limits

10) Profitably trading/ squaring the positions

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1.1.3.2. Fixed Income desk: The fixed income desk is responsible for

following activities:

1) Maintenance of CRR and SLR

2) Investment in Treasury Bills and Treasury Bond Portfolio

3) Repo activities

4) Propose to the ALCO (through the head of treasury) of statutory investments

5) Create opportunity for trading securities in secondary market.

Comparison: Both AB Bank and the market leader practice the same money market and fixed

income products but the difference is created by the balance sheet size and the volume on

which they are operating. The market leaders balance sheet size is approximately 25% greater

than AB Banks Balance sheet. Again the money market volume with which the leader plays

around in the market is almost 16% higher than that of AB Banks volume. Moreover, as the

market leaders bank book is long; they managed the ALM process in such a way that gives

them higher interest margin. On the other hand AB Banks book is short which it manages by

funding from interbank with less interest margin. The market leader is always looking for

arbitrage or trading opportunity both in MM and Fixed income market, whereas AB Bank

Treasury confined its MM operation in mere funding of their book. The MNCs and large

corporate customers keep the market leader in upper hand for managing their balance sheet

effectively.

1.1.4. FX Desk: The key roles and responsibilities of the FX Desk:

1) To assume overall responsibilities of Foreign Exchange activities.

2) To manage Exchange risk of the bank.

3) To comply with the local central bank regulations in respect of banks statutory obligations as

well as thorough understanding of the risk elements involved with the business.

4) Understanding of the market dynamics i.e competition, potential target markets etc.

5) Provide inputs to the Treasurer regarding market views and update the Exchange Positionmovement.

6) Deal within the dealers authorized limit.

The FX desk is headed by The Head of FX and its functions are distributed among the

Corporate FX desk & interbank desk.

1.1.4.1. Corporate Desk: Corporate FX desk is responsible for

following activities:

1) Earn revenue out of corporate FX deals with the corporate customers in spot and forward.

2) Monitor overall Exchange Position of the bank and manage the exchange risk.

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3) Derive market views.

4) Prepare Daily Exchange Rate Sheet.

5) Provide rate quotation to corporate clients and branches.

6) Accommodate the corporate customers by offering tailor made Fx products.

7) Preparation of different necessary MIS

1.1.4.2. Interbank Desk: Interbank FX desk is responsible for following

activities:

1) Forming Market Views

2) Monitoring cross currency exchange positions

3) Counterparty limits monitoring

4) Remaining within all given internal and regulatory limits

5) Remaining within all counterparty limits at all times

6) Profitably trading/ squaring the positions in interbank.

7) Proprietary deal on the basis of fundamental and technical analysis.

Comparison: The FX operation of AB Bank treasury and the market leader differs

both in volumes and products. The FX business volume of the market leader is far higher than that

of AB Banks volume - more than five times. The corporate FX desk of the market leader contributes

the lion portion of their exchange income. They have dedicated corporate sales desk. Again the

MNCs and large corporate customers keep the market leader in upper hand for fx business volume.

Moreover, they have been practicing FX derivatives with their corporate customers that award them

a clear supremacy over ABs FX operation.

Role of Treasury as market Risk Manager:

The Treasury has a responsibility to manage market risks in accordance with instructions received

from the banks ALCO. This is undertaken through the Dealing Room which is the main component

of Treasury Division and acts as the banks interface to international and domestic financial

markets.

The dealing Room is the centre for market risk management activities in the bank. As stated earlier,

it is the clearinghouse for such risks and has the responsibility to manage the treasury risks taken in

all areas of the bank, on behalf of customers, and on behalf of the bank, within the policies and

limits prescribed by the Board. For this reason significant authority is given to the Treasurer and the

Dealing Room staff to commit the bank to market risk. Thus controls over these staff are critical to

ensure the bank is protected from undue market risk.

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In general, authority is granted to the Treasury function to manage and control risks on the balance

sheet created by the activities of the bank arising from its operations with its customers. However,

some proprietary dealers are authorized to buy and sell risk on the banks be half to generate

profits on market price changes.

(Madhavan, 8)

In following paragraphs we will discuss about the risk management tools and their efficient use by

both AB Bank and the market leader. And then make a comparative analysis of their efficiency in

interest rate risk and Exchange risk management.

1.1.5. Interest Rate risk Management: To manage the Interest rate risk and

liquidity risk banks should have an ALM manual. The ALM manual consists of Board or

Management Committee approved policy statement for the different parameters of the balance

sheet and an annual review should be done taking into consideration of changes in the balance

sheet and market dynamics. Following the policy manual meticulously and technical expertise of the

dealers ensure the efficient risk management. The important parameters are following:

1) Loan Deposit Ratio (LD): The AD ratio should be 80%-85%. However, the Loan Deposit ratio

of the bank should go up to 110%.

The Loan Deposit ratio = Loan/ (Deposit+Capital+Funded Reserve)

The ratio will be fixed based on the banks capital, Banks reputation in the market and overall

depth of the money market.

2) Wholesale Borrowing Guidelines (WBG): The guideline should be set in absolute amount

depending on banks borrowing capacity, historic market liquidity. The limit should be capped at

the banks highest level of past borrowings. However, this limit can be increased based on the

match-funding basis.

3) Commitments: The commitments Guideline limits should not exceed 200% of the unused

wholesale borrowing capacity of the last twelve months. The limit can be increased if there are

natural limitations on customer discretion to draw against committed lines or a banks access to

additional funds via realization of surplus statutory holdings.

4) Medium Term Funding Ratio (MTF): The MTF of a bank should not be less than 30%. The

ideal scenario should be 45%. Given, the overall scenario of current market, it will be suitable to

move towards the MTF limit of 45% as we progress.

5) Maximum Cumulative Outflow: MCO up to I month bucket should not exceed 20% of the

balance sheet.

6) Liquidity Contingency Plan: A liquidity contingency plan needs to be approved by the board. A

contingency plan needs to be prepared keeping in mind that enough liquidity is available to meet

the fund requirements in liquidity crisis situation. An annual review of the contingency planning

should be made.


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7) Local Regulatory Compliance: There should be a firm policy on compliance to the Bangladesh

Bank in respect of CRR, SLR, Capital adequacy etc. (Bangladesh Bank Focus Group,ALM,7)

AB Bank Scenario: AB Bank Treasury has its board approved ALM policy

guidelines. The staffs related to ALM process do have the technical knowhow of the ALM operation.

But there is a difference between the policy and practice. The business reality and competition

among the peer groups does not allow AB bank treasury to follow the WBG or LD ratio guidelines

always. Some other important parameters like - commitments, medium term funding ratio, maximum

cumulative outflow and Maturity mismatch profiles are not working out considerably.

Market Leader Scenario: The market leader has also its ALM policy guidelines

approved from its regional Treasury Risk Unit. The market leader is a foreign bank operating in

Bangladesh and their ALM process is governed by their regional treasury risk management unit.

Both the local management and local treasury meticulously comply with the guidelines. In practicing

the ALM process, the market leader is involved in rigorous analysis on the parameters discussed

earlier. Thus they can manage the interest rate risk of the bank efficiently.

1.1.6. FX Risk Management: Exchange rate risk is the risk of loss on open un-

hedged positions, arising from adverse movements in the market price. An open un-hedged position

arises when a bank buys or sells currency and does not square it up by undertaking an opposite

transaction. An open un-hedged long position may give rise to exchange loss if the currency boughtweakens and short position may result into loss it the currency sold appreciates.

To manage the Exchange risk banks should have an FX manual. The FX manual consists of Board

or Management Committee approved policy statement for the different limit structure and code of

conducts for the dealers accompanied by the delegation authority. An annual review should be done

taking into consideration of changes in the Dealers performance and market dynamics. Following

the policy manual meticulously and technical expertise of the dealers ensure the efficient risk

management.

Fixing the following limits can control exchange rate risk:

Daylight limit

Overnight limit

Stop-loss limit

a) Daylight limit:

Day light limit is the maximum total exchange, currency wise, permitted during the day to the trading

room. Daylight limit is fixed depending upon the risk perception of the management, size of

merchant/ trading volume, volatility of exchange rates, liquidity and depth of the market etc. These

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are fixed currency wise/dealer wise. It becomes the responsibility of the individual trader to comply

with limits allotted to him.

b) Overnight Limits:

A Bank, at the end of the day, may like to square all its open positions. This is not always

practicable since small positions, which are not marketable lots, may be left uncovered. Such

positions, which are kept overnight, are called overnight positions and limits fixed for carrying such

overnight position is called overnight limits.

Overnight limits are usually smaller in size compared to daylight limits. The risk in overnight

positions arises from the fact that no corrective action can be taken on adverse currency

movements since no dealer is present in the dealing room. Banks can go for higher overnight

exposure if they have arrangements like stop-loss orders with overseas correspondents or round-

the-clock dealer to monitor overnight rate movements.

C) Stop-loss limit:

Depending upon the risk appetite of the management, cut-off points in the amount of loss on trading

transactions are fixed. The stop-loss limits may be fixed either in terms of absolute amount or in

percentage terms.

Absolute amount refers to total amount of loss, a trading room is permitted to make, on a single day.

Otherwise, a fixed percentage of the exchange rate, say % can also be fixed towards stop-loss

limits.

If the rates move adversely, then the trader has to necessarily square his position so that the total

loss does not exceed the limit. Any loss over and above these limits has to be approved by the Top

Management.

AB Bank Scenario: AB bank Treasury has its board approved FX policy

guidelines. The FX dealers are well trained and have the technical knowledge of FX operation. AB

bank treasury meticulously follows the different fx limits mentioned earlier. Thus efficiently manages

the exchange risk of the Bank.

Market leader Scenario: The market leader also has a detailed Fx manual

approved by their regional Treasury risk unit. Their dealers are technically sound and comply with

different set limits meticulously. Thus they manage the exchange risk efficiently.

Role of Treasury as Profit Contributor:

Treasury contributes a lion share of banks profit. Generally, treasury profits are of two types:

1) Interest Income

2) Exchange Income.

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Treasury earns interest income by running mismatches in their balance sheet i.e. borrow short term

and lend longer term. The investments in Gov. T-bills or T-bond also give the treasury handsome

interest income. Apart from these interest

incomes, treasury can earn interest income

through trading in MM instruments and Govt.

securities.

On the other hand, exchange income of treasury

comes from the margin between buy and sell of

foreign currencies with the customers. It is pretty

obvious that exchange income has a positive

relation with the FX business volume. Exchange

margin comes from spot transactions as well as

from forward transactions. Obviously forward

transaction gives higher margin. Apart from this

exchange income also comes from proprietary

trading of foreign currencies in interbank. In this

section we will go through a comparative

analysis of Treasury income between AB bank

treasury and the market leader in terms of

interest income and exchange income over the

year 2008 & 2009. AB bank Treasury contributedto its total income by BDT 110 crore and 132

crore which is 18% and 19% of total income in

the year 2008 and 2009 respectively.

Whereas the market leader contributes to its

total income by BDT 207 crore and BDT 241

crore which is 19% and 20% of total income in the year 2008 and 2009 respectively.

So

urce: AB Bank Profit &Loss Statement-

Figure 1: Profit Contribution by AB

'

Figure 2: Profit Contribution by

Source: AB Bank Profit &Loss Statement-

2009

Source:Market Leader Profit &Loss

Figure 3: Profit Contribution by Figure 4: Profit Contribution by

So

urce: Market LeaderProfit &Loss Statement-11


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Interest Income: AB Treasury earned interest income of BDT 66.5 crore and BDT 91.43 crore

whereas the market leader

earned BDT 52.6 crore and

59.70 crore in the year 2008 and

2009 respectively as per the

accounting procedures followed

in the respective banks. These

interest income figures are not

comparable as different

accounting principles are

followed in these banks. But we

can say that AB ran short book

by BDT 590 crore and BDT 720

crore whereas the market leader

ran book long by BDT652crore

and BDT 997 crore in the year

2008 and 2009 respectively.

1.1.7. Exchange income: AB Treasury earned exchange income of BDT 43.8 crore

and BDT 40.67 crore whereas the market leader earned BDT 154 crore and 181 crore in the year

2008 and 2009 respectively.

These exchange income

figures are comparable as

similar exchange arithmetic

accounting principles are

followed in these banks. AB

Treasurys exchange income

was based on the sales

volume of USD 648 million

and USD 678 million

whereas the market leaders

exchange income was based

on the sales volume of USD

5,200 million and USD 6,270

million in the year 2008 and

2009 respectively.

11

So

urce: Profit &Loss Statement-2008 &2009(AB &Market

2008

Figure 5: Interest Income Comparison (in crore

S

ource: Profit &Loss Statement-2008 &2009 (AB & Market

Leader)

2008

Figure 6: Exchange Income Comparison (in crore

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In case of AB Treasury, interest income was the major share of total treasury income. Data shows it

was about 60% and 69% in the year 2008 and 2009 respectively. Exchange income was not the

major share of total treasury income. Data shows it was about 40% and 31% in the year 2008 and

2009 respectively.

On the other hand the market leaders interest

income contributes to their total treasury income by a little portion. It was about 25.00% in the year

2008 and 2009 respectively. Exchange income contributes to their total treasury income by a major

portion. It was about 75.00% in the year 2008 &

2009 respectively.

Recommendation:

12

S

ource: AB Bank Profit &Loss Statement-

Figure 7: AB Treasury Income Figure 8: AB Treasury Income

S

ource: AB Bank Profit &Loss Statement-

Figure 9: Market Leader Treasury

Income Distribution '08

So

urce: Market Leader Profit &Loss Statement-

2008

Figure 10: Market Leader Treasury

Income Distribution '09

So

urce: Market Leader Profit &Loss Statement-

2009

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Considering the organizational structure, product line and profitability we have following

recommendations for AB Bank Treasury to be the market leader.

1.2. Implementation of proper accounting system: In AB Bank, pool account system

(or, General account system) is prevailed in case of inter branch accounting rather than maturitybucket wise transfer pricing. The pool account system is more costly for treasury unit. Again SLR

cost is borne by treasury in AB Bank but in ideal case SLR cost should be zero for Treasury.

Moreover, treasury should be entitled for banks capital as they are managing the market risk but in

prevailing system treasury is not entitled for Banks capital in AB Bank. If these accounting systems

are implemented properly like the market leader, AB Treasurys interest income will grow even with

the existing balance sheet size.

1.3. Improvement in product line: AB Treasury should introduce new products and

emphasize on it both in money market and in Fx market.

1.3.1. Money market products: Instead of concentrating on book funding, MM

desk should run a trading book. Emphasis on security trading in secondary market should be given.

It will generate additional income for treasury.

1.3.2. FX products: Instead of practicing only plain vanilla products, FX desk

should introduce derivative products like forwards and options. Introduction of commodity

derivatives could be new avenue for treasury. Under the FX desk, corporate sales desk should beintroduced to increase the Fx business volume.

1.4. Growth in balance sheet and business volume: To be the market leader AB

banks balance sheet should have a growth rate of about 40% which is currently around 30%.In

doing so, large corporate and MNC accounts should be booked. It will also help increasing the FX

business volume. To be the market leader Fx sales volume should be increased at least by 5 times.

1.5. Human Resources Development: Two more corporate dealers should be appointed

to increase the FX business volume and to introduce derivative products. Advanced treasury

management training should be arranged for the dealers.

Bibliography:

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1. Bangladesh Bank Focus Group. Bangladesh Bank. Core Risk Management in Banking,

Foreign Exchange Risk Management.

2. Bangladesh Bank Focus Group. Bangladesh Bank. Core Risk Management in Banking,

Asset Liability Management.

3. E. Madhavan, Treasury Management in banks-Concept & Practice, Bankers Training

College, Reserve Bank of India, Mumbai.

15

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Structure of AB Bank Treasury Appendix 1

FX

Corporate

Dealer

FX

Interbank

Dealer

MM

Dealer

Fixed

Income

Dealer

Managing Director

Head of Treasury

Chief Dealer &

Head of ALM

CFO

Head of Treasury Back

Manager

Local

Currency

Nostro

Reconciliatio

Manager

Foreign

Currency

Nostro

Reconciliatio

Manager

Foreign

Currency

Position

Reconciliatio

Manager

Local

Currency

Position

Reconciliatio

Manager

Foreign

Currency

Settlement

Manager

Local

Currency

Settlement

Manager

Central Bank

Reporting

Manager

Risk

Reporting

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Structure of Market Leader Appendix 2

Regional Treasurer

Head of Global

Markets

Head of FX Head of ALM

FX

Corporate

Dealer

FX

Corporate

Dealer

FXInterbank

Dealer

Manager

Risk

Analysis

Money

Market

Dealer

Fixed

Income

Dealer

Balance

Sheet

Manager

eporting

COO

Head of Treasury Back

Office

Manager LocalCurrency Nostro

Reconciliation

Manager ForeignCurrency Nostro

Reconciliation

Manager ForeignCurrency Position

Reconciliation

Manager LocalCurrency Position

Reconciliation

Manager ForeignCurrency

Settlement

Manager LocalCurrency

Settlement

Manager Central

Bank Reporting

ALCO

Head of

Mid Office

Manager

Limit

Monitoring

Manager

Limit

Utilization

Manager

Market

Risk

Report

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Glossary:

Forex: - refers to Foreign Exchange

Reuters 3000xtra:- Internet based Financial Market information system provided by Thompson

Reuters

Reuters Dealing 3000:- On line trading platform, provided by Thompson Reuters, used to trade

with different banks worldwide.

SWIFT: - Society for Worldwide Interbank Financial Telecommunication. It is a Belgium Based

organization. SWIFT connectivity is used for authenticated financial transactions related

communication among the banks.

ALM Desk: Asset Liability Management Desk. Deals with Balance Sheet gap management.

Statutory obligation: Legitimate obligation for the Financial Institutions to maintain certain

portion of their deposit with the central bank in the form of cash and legitimate securities.

Fcy Placement: - refers to foreign currency deposit/ placement.

MM Pricing: Money Market product pricing

Nostro Account: - A banking term to describe an account one bank holds with a bank in a foreign

country, usually in the currency of that foreign country.

Fx Desk: - Foreign Exchange desk. Deals with foreign exchange risk management and Foreign

exchange trading.

ALCO: - Asset Liability Committee. A senior management committee in a bank or thrift institution,

responsible for coordinating the institution's borrowing and lending strategy, and funds acquisition to

meet profitability objectives as interest rates change. This committee also monitors actions by the

central bank that may affect interest rates.

Dealing Room: The front office of the Treasury is also called as Dealing Room where traders or

dealers sit together and undertake the Foreign exchange and money market transactions in the

market.

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Loan Deposit Ratio: A measure of banks liquidity scenario. Generally, explains how much loan a

bank disbursed out of its total deposit.

Wholesale borrowing Guidelines (WBG) Under the internal policy how much amount f money a

bank can borrow from the interbank to maintain their liquidity.

Medium Term Funding Ratio (MTFR): - Banks typically make money by running mismatches, that

is, by borrowing short term and lending long term. However, short term deposits may go out of the

bank upon maturity, whereas a bank cannot call back long term landings. Thus a bank has to find

the right combination for longer term mismatch. Medium term funding ratio is calculated as the ratio

of liabilities with a contractual maturity of more than one year to assets with a contractual maturity of

more than one year. This ratio is intended to highlight the extent to which we are dependent on

being able to roll over short term deposits in order to fund medium term assets.

Maximum Cumulative Outflow (MCO): - Under normal conditions, the day-to-day management of

liquidity relies on the effective control of cash flow. Maximum cumulative outflow (MCO) guidelines

control the net outflow (inflow from asset maturity minus outflow from liability maturity) over the

following periods: overnight, one week and one month.

CRR: - Cash reserve Requirement. The amount of money the Financial Institutions to maintain with

the central bank in the form of cash.

SLR: - Legitimate obligation for the Financial Institutions to maintain certain portion of their deposit

with the central bank in the form of cash and legitimate securities.

Fcy Placement: - refers to foreign currency deposit/ placement.

T-Bills: - Treasury Bills

MM instruments: synonymous to money market product. Example: Overnight call, term

placement, SWAP.

Proprietary trading: - Trading of Stocks and Foreign currencies just to capitalize the market

movement without underlying customer requirement.

Pool Account system: One kind of accounting system applied for intra department or intra

branch adjustment.

report snk - final

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