Asset Liability Management

& asset liability management system

Hendrix Yapputro

to manage asset and liability in a short term (less than 1 year)

Asset Liability Management Approach

Pool of Fund

Short-term debts

Long-term debts

Capital

Primary Reserve

Secondary Reserve

For main liquidity purpose, operational fund, clearing settlement, withdrawal.

For a back-up of Primary Reserve, e.g. Sertifikat Bank Indonesia, Marketable Securities.

Loan For the profitability purpose. (Interest-based Income)

Long-term Investment

For the profitability & fixed-income purpose. E.g. Fixed-Income Investment (or Bond).

Fixed Asset For infrastructure purpose. E.g. office space, office technology

Pool of Fund Approach

Asset Liability Management Approach

Short-term debts

Long-term debts

Capital

Primary Reserve

Secondary Reserve

For main liquidity purpose, operational fund, clearing settlement, withdrawal.

For a back-up of Primary Reserve, e.g. Sertifikat Bank Indonesia, Marketable Securities.

Loan For the profitability purpose. (Interest-based Income)

Long-term Investment

For the profitability & fixed-income purpose. E.g. Fixed-Income Investment (or Bond).

Fixed Asset For infrastructure purpose. E.g. office space, office technology

Conversion of Fund Approach

Goal of Asset Liability Management Net Interest Margin = Interest income (%) - Interest cost (%)

Asset Liability

Asset, 1 year, 12% p.a. Liability, 2 years, 10% p.a.

Case 1 Year 1 Year 2

Asset, 12% p.a. Has to find other loan?

Liabilities 10% p.a. Liabilities 10% p.a.

Gross margin 2% Expense 10%

Case 2 Asset Liability

Asset, 2 years, 12% p.a. Liability, 1 year, 10% p.a.

Year 1 Year 2

Asset, 12% p.a. Loan, 12% p.a.

Liabilities 10% p.a. Has to find other

liabilities

Gross margin 2% ?

Case 3

Interest rate decrease

Case 4

Case n

Find out other funding source

need a system to help to manage the asset &

liabilities

Asset Liability Management Method

Asset Group Liabilities Group

Cash NRSA Money Market liabilities RSL

Marketable Securities RSA Short-term Liabilities RSL

Long-term Securities NRSA Long-term Liabilities NRSL

Short-term Loan RSA Equity RSL

Long-term Loan (variable interest) RSA

Long-term Loan (fixed- interest) NRSA

Other Long-term Asset NRSA

NRSA NRSL

RSL RSA

Negative gap

NRSA NRSL

RSL RSA

Zero gap

NRSA NRSL

RSL RSA

Positive gap

Legend

NRSA Non Rate Sensitive Asset

RSA Rate Sensitive Asset

NRSL Non Rate Sensitive Liabilities

RSL Rate Sensitive Liabilities

1. Re-pricing Method

Changes in Interest Rate 1. Re-pricing Method

Asset RSA NRSA Liabilities RSL NRSL

Cash 50 Short-term liabilities 200

Long -term Securities 150 Long-term Liabilities 250

Short-term Loan 200 Equity

Long-term Loan (Variable-rate Interest) 200 Share 250

Long-term Loan (Fixed-rate Interest) 150 Premium 25

Fixed Asset 50 Retained Earning 75

Total 400 400 Total 200 600

Gap = 400-200

= 200

Relative Gap Ratio = 200 ÷ 800

= 0.25 (or 25%)

Interest sensitivity Ratio= 400 ÷ 200

= 2

Changes in Net Interest Income:

If the spread is 5%, then changes in

the net interest income equals to 10

(200x5%)

Current Gap Changes in

Future Interest

Rate (Δ i)

Changes in

Income due to

Δ i

Positive Gap ↑ ↑

Positive Gap ↓ ↓

Negative Gap ↑ ↓

Negative Gap ↓ ↑

Zero Gap ↑ Zero

Zero Gap ↓ Zero

Asset Liability Management Strategy

1. Defensive Strategy To adjust the changes in the asset & liability volume over the interest rate changes to stay at zero gap position.

2. Aggressive Strategy Current Gap Changes in

Future Interest

Rate (Δ i)

Changes in

Income due to

Δ i

Positive Gap ↑ ↑

Positive Gap ↓ ↓

Negative Gap ↑ ↓

Negative Gap ↓ ↑

Zero Gap ↑ Zero

Zero Gap ↓ Zero

If interest rate ↑, then adjust to Positive Gap

If interest rate ↓, then adjust to Negative Gap

need a system to help to manage the asset &

liabilities

Changes in Interest Rate 2. Maturity Method

Asset $ Liabilities $

$200,000 asset, 5 years, 15% p.a. 179,887.07 $ 360,000 liability, 2years, 15% p.a. 342,442.35

$200,000 asset, 10 years, 15% p.a. 169,887.39 Equity 7,332.10

Total 349,774.46 Total 349,774.46

Asset $ Liabilities $

$200,000 asset, 5 years, 15% p.a. 200,000 $ 360,000 liability, 2years, 15% p.a. 360,000

$200,000 asset, 10 years, 15% p.a. 200,000 Equity 40,000

Total 400,000 Total 400,000

need a system to help to manage the asset &

liabilities

Because of ↓ asset; Equity also ↓ $32,667.90

(40,000 – 7,332.10)

Asset Liability Management Strategy 2. Maturity Method

Asset $ Liabilities $

$200,000 asset, 5 years, 15% p.a. 179,887.07 $ 360,000 liability, 2years, 15% p.a. 342,442.35

$200,000 asset, 10 years, 15% p.a. 169,887.39 Equity 7,332.10

Total 349,774.46 Total 349,774.46

Current Gap Changes in

Future Interest

Rate (Δ i)

Changes in the

Equity due to

Δ i

Positive Gap ↑ ↓

Positive Gap ↓ ↑

Negative Gap ↑ ↑

Negative Gap ↓ ↓

Zero Gap ↑ Zero

Zero Gap ↓ Zero 2. Defensive Strategy

1. Aggressive Strategy

Changes in Interest Rate 3. Duration Method

duration time period

market value of asset

present value of future discounted cash flow

$1000 bond, 3 years, coupon 8%, market interest 10%

Period Cash inflow ($) PV Factor PV Cash inflow PV Cash inflow x

time period

1 80 0.9091 72.73 72.73

2 80 0.8264 66.12 123.32

3 1,080 0.7513 811.40 2,434.21

950.25 2,630.36

Duration = 2.77 years (2,630.36 ÷ 950.25)

Changes in Interest Rate

Asset $ Duration Liability $ Duration

Cash 100 0 Liability (1 year) 600 1

Asset 1 400 1.25 Liability (5 year) 300 5

Asset 2 500 7 Total Debt 900 2.33

Equity 100

Total Asset 1,000 4 Total Liability 1,000

Description Interest Yield Market Value to

Total Asset

Interest to Total

Asset (%)

Change in Net

Income

Interest Revenue

Cash 0 0.1 0

Asset 13 0.9 11.7 11.7

Interest Expense

Liability 11 0.9 9.9 9.9

Net Income 1.8

0.1 = 100 ÷ 1000

0.9 = (400+500) ÷ 1000

0.9 = (600+300) ÷ 1000

0 = (0÷1000) x 100%

11.7% = [(900x13%) ÷] x 100%

9.9% = [(900x11%) ÷] x 100%

1.8 = 11.7 – 9.9

3. Duration Method

Asset Liability Management Strategy 3. Duration Method

If interest rate ↑ 200 point from its initial 11% , then how much $ Equity ↓ ?

Current Gap Changes in

Future Interest

Rate (Δ i)

Changes in the

MV of Equity

due to Δ i

Positive Gap ↑ ↓

Positive Gap ↓ ↑

Negative Gap ↑ ↑

Negative Gap ↓ ↓

Zero Gap ↑ Zero

Zero Gap ↓ Zero 2. Defensive Strategy

1. Aggressive Strategy

Liquidity Measurement & Its Crisis

Reserve

Asset to Liability Ratio

Cash Flow Method

Basic Surplus Method

Liquidity Projection Ratio

Liquidity Index

1. Asset to Liability Ratio > 115%.

2. Very small reserve.

3. Money center.

4. Evergreen loan (very risky in the tight money

policy condition).

5. Very aggressive loan granted (expansion).

6. Secondary reserve is not adequate.

Capital Management

Capital Management

Leverage Ratio

ROE

Internal Capital

Generation Rate

RAROC

EFC

Equine FSI Consulting is an experienced consulting

who has experience in Project Advisory

Some selected projects are:

1. Loan System

a. Lead Management System

b. Loan Origination System

c. Loan Collateral System

d. Loan Management System

e. Loan Collection System

2. Treasury System

3. Asset Liability Management System

4. IFRS System

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