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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Fx borrowing by Banks

Fx borrowing by Banks

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1Fx borrowing by Banks Empty Fx borrowing by Banks Sat Mar 23, 2013 3:53 pm

salt

salt
Vice President - Equity Analytics
Vice President - Equity Analytics
Anybody can explain how banks foreign borrowing works with Swaps of CBSL.

As far as I know, this amount is capped at USD50 million per bank. DFCC & NDB limit were raised by another USD 250 million each.
However, when there was a lending restriction, banks which borrow in FX were allowed to use that's for loaning out above the credit ceiling.

This swap was a big gains when currency was heading north, same way probably it costed little extra in last 2 quarters

Can anybody explain this clearly

Further, only comb Place separately disclose profits from its FX dealing operation

2Fx borrowing by Banks Empty Re: Fx borrowing by Banks Sat Mar 23, 2013 4:26 pm

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@salt the swaps which the CB does with international banks is different to what the CB does with commercial banks in SL.

Say COMB borrows $100M. The CB agrees to take the $100M from COMB and instead COMB gets LKR. The rate of exhange at a later date is also predetermined - hence the name "swap"


Naturally, the swap brings a lot of liquidity into the money market as it has the same effect as printing money or FDI - i.e. when foreign cash is passed through the local currency, local cash has to be printed and hence money expansion occurs. This is a concept that many don't understand.


However the CB is very clever at getting back all the LKR. It's called open market operation where most of the cash will be absorbed via repos. See this link. Look at the column titled "Net Absorption/Injection".

http://www.cbsl.gov.lk/htm/english/_cei/omo/omo_1.asp



Also look at this article if you don't understand the above:

http://www.lankabusinessonline.com/fullstory.php?nid=1670452217

3Fx borrowing by Banks Empty Re: Fx borrowing by Banks Sat Mar 23, 2013 4:54 pm

salt

salt
Vice President - Equity Analytics
Vice President - Equity Analytics
To the point you explain , I too understand.what I am confused, how it affect bottomline in each quarters & where the impact is disclosed in the financials.

Generally, FX gains/loss on income statement contains the spread they make in FCBU. That's is called FX dealing operations profits, right?

4Fx borrowing by Banks Empty Re: Fx borrowing by Banks Sat Mar 23, 2013 5:38 pm

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
The impact really depends on whether they are in the balance sheet or not. Swaps generally do not impact the balance sheet. There is no provision reserve made for swaps. Hence the term off-balance sheet risk.

If it is not in the BS, there is no impact on the financial statements until the end of the term of the swap. The impact on the income statement will be similar to COMB's 1 B deficit (must be more now) in gratuity. *

If it is in the BS, then there will be unrealised gain/loss on assets


*Note when Amitha was boss he used to discuss a lot about this pension liability which takes up a lot of the management/investor meeting time. Hence COMB shareholders should take note of this. The below is from a old fitch report. The problem is still there.

COMB estimates its present funding gap on account of future pension liabilities at approximately Rs 1.2bn, and is making annual contributions based on actuarial recommendations to catch up. Recognising that the pension scheme is not sustainable, the bank has taken several mitigating steps to reduce its pension liability such as employing more outsourced personnel (6.7% of work force in 2003), extending a Volunteer Retirement Scheme, and discontinuing the defined benefit pension scheme for new recruits. The bank is also evaluating a more substantive solution of disbanding the scheme by compensating staff with lump sum payments.





Last edited by rainmaker on Sun Mar 24, 2013 7:12 am; edited 1 time in total

5Fx borrowing by Banks Empty Re: Fx borrowing by Banks Sun Mar 24, 2013 12:23 am

salt

salt
Vice President - Equity Analytics
Vice President - Equity Analytics
You are a great observer men. That's why i like you. That's what make you a great analyst!

Who is this Amal? ( Amal Sandaratne?).. bit confused?

Going back to original question, why then there is interim gain/loss from this swap arernegment if it is for One year and remain off balance sheet

6Fx borrowing by Banks Empty Re: Fx borrowing by Banks Sun Mar 24, 2013 7:18 am

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Sorry it should be Amitha. I always get that name mixed up..... not the first to do so!

As per your question, I'm not sure if that is due to the swap arrangement with the CB or with it's corporate clients. Like HSBC, COMB allows its corporate account holders to enter into swaps with the bank.

The large FX gain/loss you see in the profit/loss of the banks is also due to the letters and credit that is opened for trade payables. The banks hedge their risk but tell the clients to pay when the rupee moves unfavorably.... its a bit cunning though Razz

I suggest you should ask them directly.

7Fx borrowing by Banks Empty Re: Fx borrowing by Banks Sun Mar 24, 2013 11:01 pm

raptor


Manager - Equity Analytics
Manager - Equity Analytics
From what I understand on the swaps is they remain off balance sheet liabilities. Any gains or losses flow through the Income Statement when the swap is concluded or unwound before conclusion. You will have to check with an accountant on where the swap needs to be marked-to-market, my guess is if you are using the swap in general business activities as a hedging tool then you dont. Its like an investment held to maturity.

Also note, the local USD/LKR swap market only goes out to 1-year, if you borrow money longer than 1-year you need to keep resetting the swap each year therefore you are vulnerable to FX risks. What the CB is doing with DFCC and NDB is takin on that FX risk. Last time I spoke to NDB on the subject (Jan) they were working out the exact terms on how this will happen with the Treasury and CB. I understand they have moved a little ahead and are on the verge of appointing lead managers for the bond, I expect them to appoint JP Morgan, Barclays and DBS, the latter due to the JV they have. Frankly DBS adds no value to a USD bond transactions, they should only use them as passive leads but they insisted on including them. Hopefully for NDB shareholders having JPM on the ticket will save the bond deal.

8Fx borrowing by Banks Empty Re: Fx borrowing by Banks Sun Mar 24, 2013 11:06 pm

raptor


Manager - Equity Analytics
Manager - Equity Analytics
Forgot to add, the pension issue is due to COMB having a 'defined benefit' scheme where the pension holders know what they are to get and the bank is legally bound to pay them a certain amount on retirement. So when the portfolio that the pension money has been invested in flucuates so does the deficit/surplus. If there is a deficit the bank has to 'top up' the scheme each year until the deficit is erased. Essentially its a black hole that needs to be plugged, a liabilty similar to debt. This is a huge problem for a lot of western companies, GM was taken down on its pension hole.

All western companies have now switched to 'defined contribution' schemes, you know what you put in but what you get out depends on how well the portfolio has performed when its time for your retirmend. The risk of the scheme is shifted from the company to the employee.

9Fx borrowing by Banks Empty Re: Fx borrowing by Banks Mon Mar 25, 2013 12:09 pm

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@raptor
All gratuity is defined benefit.

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