AG: Credit Risk Evaluator

Credit Risk Evaluator

The Library of Credit Portfolio Management

With the completion of Basel 2 financial institutions have established the prerequisite of modern credit risk management.

The Credit Risk Evaluator enables financial institutions to take the next step over the rating of single customers to an integrated risk and return management of the full bank portfolio.

Internal rating methods can create additional value for banks and financial institutions beyond a more economical equity allocation.

The Credit Risk Evaluator rests upon the data foundation laid by Basel 2 and links it to the modern credit portfolio models. It delivers and reports to the bank risk and return analyses on all portfolio levels from the single client or even the single deal over arbitrary aggregation levels to the full bank portfolio.

It creates the basis for the identification of the well diversified and the highly concentrated business and market areas up to the single client where the intended return on equity is reached or failed, respectively. From the results impulses can be derived for sales and management.

Design

The Credit Risk Evaluator is designed as an open library of credit portfolio models. It comprises today 7 models which can be applied in analyses by mouse-click:

Credit Metrics
The KMV model
A copula asset value model
Credit Risk+
Credit Risk++ - a generalization of Credit Risk+ for rating migrations, intersectoral correaltions and variable recovery models
A multi-period model that generalizes Credit Metrics and the KMV model.
A model that generalizes the copula asset value model to multiple periods.

Further models can be easily integrated.

All portfolio models can be combined with several recovery models to allow for a precise valuation of sub-portfolios and for the trading of credit risks.



Results

The Credit Risk Evaluator aims at an integrated view of risk and return. Under both aspects it delivers a number of key indicators on all levels of the analysis:

Value at risk, shortfall, standard deviation, expected loss
RAROC, economic value added (EVA), risk adjusted return, costs of risk, costs of equity

The results are visualized by a large number of selectable standard reports and linked to each other to make them accessible for interpretation.

Technical aspects

The Credit Risk Evaluator is componente oriented in design. Data storage, business logic and control and reporting are technically fully separated from each other and can be distributed to different computers.

The performance is model dependent. It is for the single-period models between 3-7 minutes per 100,000 clients and 10,000 simulation runs on a standard pc. For the multi-period models the runtime slightly higher. In all cases the run times scales linearly in the number of clients and simulation runs.

Analyses can be done with manual intervention as batch-processes. Reports are automatically generated and archived at runtime.

Correlations and parametrization

Credit portfolio management often requires data that is not immediately at hand.

We aid you to determine correlations and other model parameters relating to your portfolio so that you can make full use of the potential of credit portfolio models.

Your advantages

Additional usage of the investments into Basel 2
Bank-wide portfolio management also in large institutions possible
State-of-the-art credit portfolio and recovery models at hand
Extendible for bank owned portfolio and recovery models
Simultaneous consideration of risks and returns
Highly automatized processing with minimum manual intervention

AG: A new way to value the market

(Fortune Magazine) -- Are stocks cheap yet? That slippery, eternal question is worth a look right now because a remarkable new set of data has just become available, allowing us to analyze the market in ways we never could before. I wish I could tell you that this new trove of numbers reveals that stocks are a screaming buy. It doesn't. But it does suggest that, amid all the recent tumult, just maybe the market is being rational.

The new data are derived from the most fundamental, capital-based way of analyzing a company's finances and value. How much capital is a company using? What is its return on capital? How much does the capital cost? Those questions hold the key to corporate performance, but finding the answers in most financial statements isn't easy, and many executives don't know the answers themselves. The Stern Stewart consulting firm began popularizing these concepts more than 15 years ago with the term EVA (economic value added), and the new data come from EVA Dimensions, a firm that is now the source of Stern Stewart's EVA data.

EVA-based analysis has proven extremely valuable in analyzing individual companies. I almost never make calls on specific stocks, but in late 1999 the EVA analysis of AOL was so compelling that I wrote a column declaring flatly that the stock price could not possibly be justified. That column was published on Jan. 10, 2000, right near the overall market peak (and the very day that AOL announced it was using its insanely overvalued stock to buy my employer, Time Warner (TWX, Fortune 500) - but that's another story). I also used EVA analysis to write last summer that Google (GOOGLE) was overpriced at $540; that call looked wrong for a while, though as I write this the stock is at $501.

One thing you couldn't do with EVA analysis was use it to value the whole market. Compiling the data for a significant number of companies used to take months. But now, through the miracles of our networked world, EVA Dimensions can compile it every day for 2,669 companies in the Russell 3000 (those for which at least two years of data are available). This is essentially the U.S. stock market. So: Is it worth what it costs?

Look first at how well the companies are doing at their most basic task, which is earning a return on their capital that's greater than the total cost of that capital. Turns out they've been doing very well. The dollar difference between their return on capital and cost of capital (their EVA) was $375 billion over the past four quarters. It was only half that much in 2005, and in 2004 it was negative, which isn't surprising. Over time, for the broader market, EVA should be more or less zero since competition is always forcing high returns down toward the cost of capital, while companies that can't meet their capital cost will eventually go under. So America's publicly traded companies did great last year; in fact, with economic growth strong through the third quarter, it's safe to say that they were at or near the top of the business cycle.

Next question: How are they being valued? On a recent day when the Dow closed at 12,265, the 2,669 Russell 3000 companies had a total enterprise value of $29.8 trillion (equity plus debt). To judge whether that's a lot or a little, consider that over the past four quarters these companies produced after-tax operating profits of about $1.8 trillion. Even if we assume that earnings will only match, not exceed, that level in future years, then the companies' aggregate market value today would still be $22.5 trillion (note to finance wonks: that's their profits capitalized at their capital cost of about 8.1%), which is about 75% of their actual market value.

So now we reach the central question. About 25% of the current market value of these companies is based on expectations of future profits above and beyond the profits they earned last year, at the top of the business cycle. Does that seem reasonable? Actually, it just might. The math gets a bit tedious, but you can assume no profit growth for the next several years and very modest growth thereafter, and the valuation still looks okay.

AG: Canada’s natural resource exports

Introduction
The recent boom in commodity markets has returned the spotlight to Canada’s natural resources, most of which are exported. The importance of resources to our overall exports is often discussed, with a figure of 40% commonly cited.1 This share has risen to 50% of gross exports thanks to the commodity boom of the last two years. But subtracting out the higher import content of manufactured exports raises the share of resources to over 60%. This puts Canada in a unique class of major industrial nations, alongside nations such as Norway and Australia, where resource exports dominate. They are the polar opposite of Japan, which imports most of its resources and exports almost none.

These estimates are usually arrived at by calculating the share of agricultural, energy, forestry and industrial materials in gross exports. But this method does not account for the difference between gross and value-added exports. As noted in our previous studies2, firms shifted to using markedly more imports in their production process in the 1990s. This phenomenon was most pronounced for autos and machinery and equipment, which import nearly half their inputs. This reflects the greater use by manufacturers of standardized parts, often made just across the US border or sometimes overseas.

As a result, much of the growth of gross exports in the last decade reflected the increasing use of imported components, not higher value-added exports. Value-added exports, which include only inputs purchased in Canada, are the key determinant of domestic output and jobs.

Conversely, many of our leading resource products have a largely extractive production process that requires few imports apart from machinery and equipment.

The implication is clear: the importance of industries such as autos that make liberal use of imports is overstated by gross exports, while industries that import less actually have a larger role than gross exports suggest, notably natural resources. This paper looks at the true role of resources in value-added exports in Canada.

The main motivation behind the growing use of imports was the relentless drive by firms to search out the lowest possible cost for inputs. As well, the rise in the Canadian dollar in the early 1990s lowered the cost of imports, giving firms an added incentive to purchase abroad. But the steady drop in the dollar from 1997 to 2003 took away much of this latter incentive, and the use of imported inputs leveled off in recent years. The recent recovery may encourage firms to buy more imported inputs.
Sectoral share of exports

In terms of the share of gross exports, autos and machinery and equipment led with about 22% in 2004. Despite their recent surge, the four resource sectors followed, led by industrial goods3 (notably metal products) and energy at 19% and 17% respectively. Forestry and agricultural products were next at 9% and 7%. Together, these four resource sectors accounted for just under half of all exports. Consumer goods trail at 4%, although they have grown the fastest, doubling their share since 1989, led by pharmaceuticals.
Figure 1

However, this ranking changes radically when the import content of exports is stripped out (Table 1). Total resource exports dominate overall value-added exports with a 20.9% share. Energy becomes our leading value-added export. Industrial goods follow closely, just behind machinery and equipment and ahead autos. The order of the last three sectors was unchanged, with forestry, at 11% and agriculture and consumer goods less than 10%.
Figure 2

Energy moves to the forefront for value-added exports because it has the lowest import content (12%) of any sector. Within energy, the import share of crude oil and natural gas production is the lowest, followed by electricity. Apart from an initial investment in some machinery and equipment, there are few opportunities to use imported parts.

The production of oil from the tar sands is a good example. After a large up-front investment in clearing the land and building structures, the crude bitumen is moved, often by large earth removers and trucks, for processing at an upgrader, before being shipped by pipeline. Apart from some imports embedded in the upgrader, few imports are used.

Further downstream, petroleum refineries raise the average for energy with a 41% import content. This partly reflects imported machinery and equipment used in refineries. More importantly, the crude oil being processed is often imported, either because foreign sources are cheaper (especially on the East Coast) or they are grades that are easier to process for particular uses (such as gasoline versus aircraft or diesel oil)

Industrial goods move up to the third-largest export share at 18.6% due to a relatively low import content of 28%. Most metals and non-metallic minerals import less than 20% of their inputs. Fertilizers have an especially low import content of about 10%, reflecting large domestic supplies of potash. Non-metallic minerals also use relatively few imported inputs. The low value-added of goods such as cement and concrete outweigh the cost of transporting these heavy goods very far (even inter-provincial trade in these goods is limited). An exception is aluminum’s 40% import content, mostly raw bauxite to be processed with Canada’s relatively cheap electricity. Excluding aluminum, other non-ferrous metals use imports for only one-quarter of their inputs.

Machinery and equipment and autos fall from our first and second largest gross exports to second and fourth for value-added exports because they import such a large share of their inputs. Autos fell the most as over half of all auto inputs were imported in 2001, and nearly 70% were imports of vehicles or parts. This industry has long had the highest import content, having pioneered the use of imported parts dating back to the Auto Pact in the 1960s. Firms are concentrated in southern Ontario, giving them ready access to parts makers in the northeast US. The growth of transplants of overseas producers has reinforced the trend to use more imports. The import content of vehicle assemblies is much higher than for parts manufacturers (59% versus 38%).

Machinery and equipment saw a rapid increase in its use of imports during the 1990s. Indeed, much of its rising share of gross exports during the 1990s reflected this change in its production process, not increased value-added output in Canada. Almost all these industries have a large import content, ranging from over one-third for aerospace, appliances and farm machinery to nearly one-half for ICT equipment. Over two-thirds of all imports by this sector are machinery and equipment itself, presumably parts (even in capital-intensive sectors like forestry and mining, machinery and equipment accounts for less than one-third of all imports).
Figure 3

Forestry products, our largest export decades ago, have slid to fifth place with 10.9%. They have a very low import content of just 19%, reflecting the relatively simple and local nature of logging, wood and pulp and paper production. Forestry, like its cousins in agriculture and mining, uses imported machinery and equipment and mining products.

Agriculture contributes 9.3% of our value-added export earnings. It imports 22% of its inputs, led by chemicals (mostly fertilizer). Like energy, primary producers of grain, livestock and fish have the lowest import content. Food manufacturers use imports (especially processed food) for over one-quarter of all inputs. This reflects how the manufacturing process, even for food, allows firms to search out better or lower-priced alternative sources both in Canada and abroad. Fish, fruit, vegetables and sugar refiners have the highest import content, reflecting limitations on domestic supply. Dairy, meat and grain products are less reliant on imports.

Within consumer goods, clothing and textiles have a relatively high import content of nearly one-third of all inputs. Over one-half of these imports are textiles and clothing destined for further processing. These industries increasingly outsource production overseas to maintain their competitiveness in the face of rising third-world supply. Pharmaceuticals, a driving force in the growth of consumer goods exports, also have a relatively high import content of 32%.

Not all imported inputs are goods. Globalization allows most industries to use a significant amount of imported services in producing exports, especially finance and business services. The finance and business services industries themselves import nearly one-quarter of their inputs from firms abroad in the same industry. But even in most natural resource industries, imported financial and business services account for between 6% and 10% of all inputs, slightly more than autos and machinery and equipment despite the latters’ longer experience in outsourcing abroad.
Conclusion

Canada’s export base has shifted in recent years from manufactured goods such as autos and machinery and equipment back to its traditional natural resource products, notably energy. The low import content of the booming resource sector is one reason our trade surplus has hit record highs, despite the slowdown in overall export growth after 2000.

This shift means a growing part of our economy does not face the intense global competition felt by many manufacturers. This may assure that Canada maintains its market share of exports, but could also dull our appetite for productivity gains and innovation.

The last decade highlights two facets of how globalization affects our trade flows. The 1990s were dominated by the increased use of imports as inputs, especially in manufacturing. But recent years have seen this process stall, and even partly reversed. Now the growth of natural resource exports is the most revealing measure of our integration into the world economy.

AG: Interbrand's Method for Valuating the Best Global Brands

Interbrand's Method for Valuating the Best Global Brands
Criteria for consideration

Using our database of global brands, populated with critical information over the past 20 years of valuing brands and more than 30 years of consulting with organizations, Interbrand formed an initial consideration set. All brands were then subject to the following criteria that narrowed candidates significantly:

01 There must be substantial publicly available financial data
02 The brand must have at least one-third of revenues outside of its country-of-origin
03 The brand must be a market-facing brand
04 The Economic Value Added (EVA) must be positive
05 The brand must not have a purely B2B single audience with no wider public profile and awareness

These criteria exclude brands such as Mars, which is privately held, or Walmart, which is not sufficiently global (it does business in some international markets but not under the Walmart brand).
Methodology