Building a System of Corporate Risk Management in Leasing Companies. Sieglinde Johannes Insurance Officer International Finance Corporation

Transcription

1 Building a System of Corporate Risk Management in Leasing Companies Sieglinde Johannes Insurance Officer International Finance Corporation Leasing in Russia and CIS September 2011

2 AGENDA Introduction What is Risk Management? Risk Management Culture Key risks pertaining to Leasing Companies Conclusion 2

3 International Finance Corporation (IFC) The largest multilateral institution focused on private sector development, widely seen as an essential source of job creation, growth, and poverty reduction 2010 Highlights Investments: 528 new projects in 103 countries $18 billion in financing: $12.7 billion for IFC s own account, $5.3 billion mobilized $48.8 billion committed portfolio, representing investments in 1,656 firms Advisory services: $268 million in annual expenditures IDA countries account for half of IFC projects 3

4 Investments by Region, FY10 Commitments for IFC s Account: $12.7 Billion Middle East and North Africa 12% Global 1% Sub-Saharan Africa 19% East Asia and Pacific 13% Latin America and the Caribbean 24% Europe and Central Asia 23% South Asia 8% 4

5 What is Risk Management? 5

6 What is Risk Management? Risk = Threats x Vulnerabilities x Impact 6

7 Risk Management 4 Frameworks at a glance Enterprise Wide Risk Management Strategies for linking risk and opportunity (EWRM) Risk Management Standard (FERMA) Enterprise Risk Management - Integrated Framework ERM (COSO 2) Risk Management (AS/NZ) 7

8 Risk management process based on ISO

9 Risk Management Culture 9

10 How can a culture of Risk Management be created? Boards must put Risk Management on the Agenda; Identify the key drivers of the business; Pinpoint the points of change in the business environment; Link the risk management goals to the firm s business objectives; o o o Leadership communication; Clearly defined roles and responsibilities of risk management and audit; Addressing rationale and emotional dimensions of organisational change; 10

11 How can a culture of Risk Management be created? Stretch the influence of risk management; o o Educate all stakeholders/employees on the importance of managing risks; Company wide awareness and engagement; Compensation and personal objectives in alignment with risk-based strategy; Operations management review (OMRs) meetings should be conducted on regular basis Establish effective communication channels between risk players, as well as top management 11

12 What drives a good risk culture? BELIEF belief that managing risk effectively is a good thing for the business to do EMOTION personal commitment to ensure risks are well managed Belief Emotion BEHAVIOUR conviction that you personally make a difference to risk management Behaviour Positive Risk Culture Leads to inclusive Risk Management 12

13 Key Risks to be addressed in the Risk Management program of Leasing Companies 13

14 Source: AIRMIC, ALARM, IRM: 2002 Drivers of Key Risks for Leasing Companies FINANCIAL RISKS Funding Risk Interest Risk Currency Risk Credit Risk, incl Asset Risk Management Regulations Culture Board Composition OPERATIONAL RISKS EXTERNALLY DRIVEN STRATEGIC RISKS Competition Customer Changes Liquidity & Cash Flow Accounting Sector Changes Equipment changes Controls Information Systems New product development Intellectual Capital Customer demand Diversification INTERNALLY DRIVEN Public Access Management Strategy Employees Recruitment Properties Supply Chain Products & Services Contracts Equipment Suppliers Technological Obsolesence Environment EXTERNALLY DRIVEN HAZARD RISKS

15 Key Risks Leasing Companies FUNDING / LIQUIDITY RISK o One of the most important aspects of running a leasing companies o Capital structure types of debt and equity utilized by the lessor o Financial risk due to uncertain liquidity Important for independent leasing companies o Cost of financing o Cashflow monitoring 15

16 Key Risks Leasing Companies INTEREST RISK o Risk that the lessor s spread will not remain constant during the term of the lease o Possible loss due to unfavorable movements in interest rates o One solution is to sign lease agreements with a floating rate Could result in further problems o Risk could also be hedged 16

17 Key Risks Leasing Companies CURRENCY RISK o Lessor particularly vulnerable, if : there are operations across national borders, OR there are loans or borrowings in a foreign currency o To neutralize the risk of a loss, the risk can be hedged o Very tight controls necessary, if decision is made NOT to hedge the open positions o Sign lease agreements in the same currency as the borrowings o Cross currency leases to be avoided 17

18 Key Risks Leasing Companies CREDIT RISKS o Very important area of the operation o Role of credit department Should be clearly defined in the strategic plan of the organization Profit center or service center? o Customer default risk Credit approval system Credit policy Provisioning system Credit risk assessment and forecast procedures Independent verification of customer 18

19 Key Risks Leasing Companies ASSET QUALITY - linked to Credit Asset management - 4 phases: o Management o New-business processing Includes residual value analysis and lease documentation o Servicing Maintenance and insurance of leased asset o Secondary market analysis Performed shortly before and after the lease term has expired 19

20 Key Risks Leasing Companies ASSET RISK (cont) o Can mean the difference between profit and loss on a transaction basis, and overall long-term company viability 20

21 Key Risks Leasing Companies OPERATIONAL RISK o MANAGEMENT IS EVERYTHING! o Business process regulations and guidelines o Authorization procedures o Are adequate IT systems in place? Should be automated business operation o Cost control by the budget/auditing services o Repossession and regulatory environment Insurance element, once repossessed 21

22 Key Risks Leasing Companies MARKET RISK o Who is the competition? o Where do you position yourself? who is the target market? what is your strength? 22

23 Key Success Factors in Leasing Excellent Management o Credit Risk Management: High Standards of cash-flow analysis o Asset-Liability Management o Internal Control and Financial Control Sound Strategy o o Growth perspectives, diversified portfolio and funding sources Competitive niche and natural market share for stand-alone leasing companies (ie. independent from banking groups) Financial Strength and Profitability o Equity, leverage, return on assets Stable and Conducive Environment o o Regulatory framework establishing level-playing field for Leasing Contract enforcement, property rights, efficient judicial system 23

24 Key Success Factors in Leasing To summarise: The combination of a sound strategy, excellent management and good risk management ultimately leads to a successful leasing company. 24

25 Thank you for your attention 25