Risk Management at Wellfleet Bank: Deciding about Megadeals

MSF 2013 Summer Case Study

Group 4
Bar Brieman
Vincent Zann
Carlos Castillo
Kevin Johnson
Kelin Xiang
Min Chen

Professor Dandapani
July 26th 2013

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

Table of content:

Abstract------------------------------------------------------------------------------------------------3
Part One: Strategy and Risks----------------------------------------------------------------------4-5
Different Types of Risks Regarding Wellfleet Bank-------------------------------------4
How did those risks affect Wellfleet----------------------------------------------------------4-5
Part Two: Risk Metrics-------------------------------------------------------------------------------6
Part Three: Proposals and Decisions---------------------------------------------------------------7-11
Proposal 1----------------------------------------------------------------------------------------7-8
Proposal 2----------------------------------------------------------------------------------------9-10
Final Decision-----------------------------------------------------------------------------------11
Part Four: Risk Management and Process------------------------------------------------------12-14
Appendix--------------------------------------------------------------------------------------------15-21

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

Abstract
Wellfleet Bank was founded in London in 1847 and used to be the bank that provides its services
to Asian and African colony. During the period of 1960 to 1990, the bank made major decisions
and decided to go global and focus in North American and Europe. After the European
property/credit crisis in 1989-1992, the bank switched its core markets in emerging economies.
Corporate Banking and Consumer Banking were the two main businesses the bank had
undertaken. It had 58% and 42% of its Pre-Tax profits respectively. In 2007, the bank operated
in 55 countries with total assets of $329 billion and market cap of $51 billion. The bank focused
more on the syndicated and leveraged loans segment to its large corporate clients. Syndicated
and Leveraged loans are carried through by Investment Banking division and Wellfleet had its
own IB decision. In this paper, we examined the kind of risks that were associated with Wellfleet
and analyzed the impact of those risks. We also compared the two major proposals and made
relative decisions.

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

Part One: Strategy and Risk

1.1 Given its strategy, what kind of risk does Wellfleet bank face?
In 2004, Wellfleets management had identified both syndicated and leveraged loans to
large corporate clients as areas of significant future growth for its corporate banking business,
and they strategically intended to pursue large transformational deals through its corporate
banking segment. They also formed a decision making forum consisting of three major members:
the group chief credit officer, deputy group chief risk officer and group head of client
relationships. Since the deals pursued by the bank were of large scale, these large scale credit
applicants itself could bring mega-risk to Wellfleet. Firstly, we can identify the first possible risk
would be the operational risk. In this case, it is mentioned that the chief credit officer can make
the final decision. The authority of this chief credit officer was unlimited as long as it is within
the bank regulatory limits. Further, the CEO/Board of Directors only reviews the corporate loan
portfolio and do not have any direct involvement with the process. If the deputy group chief risk
officer and group head of client relationship disagreed over a proposal, then the chief credit
officer can make the final decision. Industries with higher human interaction are likely to have
higher operational risk. Also, the bank had identified leveraged loans and syndicated loans as the
future growth segments. But those leveraged loans are provided to borrowers with existing high
debt risk of default. This could affect Wellfleet tremendously.
The second risk that Wellfleet is facing is the regulatory risk which is in compliance with
the Basel II standards and credit risks. Wellfleet should set aside and manage capital reserve to
be balanced with the riskiness of their activity. It defines as the risk that a change in laws and
regulations will materially impact a security, business, sector or market. A change in laws or
regulations made by the government or a regulatory body can increase the costs of operating a
business, reduce the attractiveness of investment and/or change the competitive landscape. 1
Wellfleet has a very high concentration on its Corporate Banking Group, which can be led
to concentration risk. In the case, Wellfleet corporate banking group constituted 58% of profit
before taxes and 72% of banks assets in 2007 while the remaining portion is attributed to its
consumer banking group. The consumer banking group accounted for bad debt provisions of
1

http://www.investopedia.com/terms/r/regulatory_risk.asp

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

$611 million in 2006 as compared to $214 million in 2004. 2 If the bank concentrated too much
on corporate banking, the probability of loss would be higher from heavy lopsided exposure.
Wellfleet could also risk its own reputation. Reputational risk is defined as a threat or
danger to the good name or standing of a business or entity.3 As mentioned in the case, Wellfleet
has two proposals to be reviewed. This two proposals concerns with large amount of money that
is around 2 billion. If the bank rejects, then the trustworthiness of this bank would drop.
Wellfleet is also associated with country risk: A collection of risks associated with investing in
a foreign country4. These risks include political risk, exchange rate risk, economic risk,
sovereign risk and transfer risk.
1.2 Given Wellfleets new focus on large corporate deals and its need to recruit relationship
managers from investment banks, what are the challenges for the risk culture of the
organization, and its style of risk management in particular?
According to the case, we have already known that Wellfleet concentrated on corporate
banking. Although it is very profitable for the bank to focus on enlarging transformational deals
with clients, it involves a lot of challenges and risks. Risk culture can be defined as the system of
values and behaviors present throughout an organization that shape risk decisions5. Risk culture
of the organization at Wellfleet focuses on the interaction between credit committee, clients and
client relationships managers. It can influence the decision making and relationship between
managers and employees. Client relationships managers are who directly contact each other and
understand their needs to find better profitable solution for both sides. Then the bank offers their
proposal via client relationship manager. However, most of the times, chief risk officer and head
of client relationship disagree over the proposals. In Wellfleet, it has a hierarchical work process
in credit officers. The credit committee has the ultimate authority on decisions.

Harvard Case: Risk Management at Wellfleet Bank

http://www.investopedia.com/terms/r/reputational-risk.asp
4
http://www.investopedia.com/terms/c/countryrisk.asp
5
http://www.businessweek.com/managing/content/may2009/ca20090512_720476.htm
3

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

Part Two: Risk Metrics

2.1 Calculate the Expected Loss, Economic Revenue and Economic Profit for both proposals?
Wellfleets credit risk management had taken a holistic picture of the risks associated with
the proposals. As importance was shined on their expected loss, economic revenue, and
economic profit, risk models associated with each exposure had been used for the risk-adjusted
revenues.
The following describes the metrics used in internal risk assessment methodologies:
Risk-Adjusted
Revenue (RAR)

Economic
Research (ER)

Economic Profit
(EP)

Exhibit 3 Internal Risk Assessment: Methodology

The risk-adjusted revenue measures revenues adjusted to the expected losses. This
measurement must be positive for it to be approved and any exceptions are must be reviewed by
the head of client relationship. The economic revenue measures revenues adjusted for expected
loss and capital charge. Lastly, the economic profit measures profits after accounting for
overhead costs from the finance department and taxes.6
The expected loss calculates a borrowers default and equals to: the Probability of Default (PD)
Loss Given Default (LGD%) Exposure at Default (EAD$). The probability of default
measures the likelihood the borrower would default in the next twelve months; thus, the lower
the better quality loan. Internal grades were developed based on internal loan ratings ranging
from 1A to 11B, from least likely to most likely to default, respectively. The LGD is the
percentage of the loan exposure that cant be recovered in the event of default. Lastly, the EAD
measured the total current outstanding credit to the borrower and the estimated future drawdown
on the account prior to default7. Additionally, the credit officers accounted for corporate ratings
from Moodys, Standard & Poors, and other rating agencies.

Anette Mikes, Risk Management at Wellfleet Bank: Deciding about Megadeals, (Harvard Business School 9109-071), 22.
7
Mikes, 6.
6

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

Part Three: Proposals and Decisions

Proposal 1:
Ashar Business Credit Proposal - Zellmont Acquisition
Counterparty:
Ashar Industries
Date: April 7, 2006
Wellfleet Rating 5A
Market Cap: UDS 25.2 billion
Probability of Default
(PD)
0.22%
Loss Given Default
(LGD)
56.86%
Exposure at Default (EAD$)
$850,000,000
Expected Loss
$1,063,282
PD*LDG*EAD =
Interest Income, based on draw amount
0.525%
$4,462,500
Plus Fee Income:
Underwriting Fee
0.20%
$1,700,000
Participation Fee
0.20%
$1,700,000
Total Revenue
$7,862,500
Risk Adjusted Revenue
$6,799,218
Total Revenue - Total Expected Loss =
Net Capital Charge
$2,200,000
Economic Revenue
Risk Adjusted Revenue - Net Capital Charge =
$4,599,218
Transaction Cost
$825,713
less
Tax
$1,500,000
less
Economic Profit
$2,273,505
3.1 Decision on Ashar-Zellmont acquisition:
Ashar Industries decision to aquire Zellmont will maintain its global position as the largest
steel producer to lead the competition. Its diversified revenue streams allow it to pull growth
within competitive markets like North America and Europe, 40% sales and 33% sales
respectively. Zellmonts peer analysis is considered to have fairly lower risk to its current
competitors at 0.09 asset volatility. In contrast, Ashars ratings are considered to have a higher
asset volatility at 0.16. Moodys grade considers Zellmont Baa2/positive and S&P with
BBB/watch developments, yet Ashars with Moodys grade level at Baa3/review for downgrade
and S&P ratings are BBB+/watch negative. Given these conditions, Ashar is performing well in
comparison its industry and strong fundamental growth is expected from this acquisition.
Their highly leveraged complex debt structure in the past created credit challenges to pin point
their sensitivity to interest rates and cost of debt or equity during acquisitions. On the contrary,
Ashar Indistries has a strong track record from deleveraging. Their highly acquisitive history
brings integration risk, yet their ability to have high EBITDA margins and consistently maintain
positive free cash flows create strong sentiment to its spending flexibilities. From the

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

fundamental standpoint their three-year revenue CAGR provides insight to their growth story
and reflects strong at 79.20%, year ended 2005.
14
12
10
8
6
4
2
0

3500
3000
2500
2000
1500
1000
500
0
2002
D&A

2003
EBITDA

2004

2002

2005

2003

2004

2005

Free Cash Flow

Net income

Its bottom line net income has improved since 2003 and reinforces trust that management
led by Amit Ashar and two sons have a positive effect on its earnings. Revenue diversification
through this acquisition will allow it to further expand their pallet into European jurisdictions and
further deepen their positions in North America, Western Europe, Africa, and South America.
Most of their sales within these markets will be mostly affected by new car sales, construction
and appliance & packaging. As their management team expects pre-tax cost synergies of $1
billion to be realized within the first three years from takeover, Ashar Industries will hold a
strong global market share position of 10% by volume.
In conclusion, the Zellmont acquisition provided Wellfleets risk management assumption of
Amit Ashars full control of management and relaxed their sensitivity assumptions to determine
if the Zellmont deal were unsuccessful. This provided positive free cash flows in both tested
scenarios apart from analyzing their credit risk and broader risk issues which were reviewed by
the Group Credit Committee.8

Mikes, 9.

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

Proposal 2
Gatwick Gold Corporation (GGC) Business Credit Proposal
Counterparty:
GGC
Date: October 10, 2008
Wellfleet Rating 5B
Market Cap: UDS 25.2 billion
Probability of Default (PD)
0.39%
Loss Given Default (LGD)
52.25%
Exposure at Default (EAD$)
$1,000,000,000
Expected Loss
$2,037,750
PD*LDG*EAD =
Interest Income, based on draw amount:
1st six
EAD*Rate*0.5
mo.
0.425%
$2,125,000
=
2nd six
EAD*Rate*0.5
mo.
0.525%
$2,625,000
=
Plus Up-front Fee Income
0.30%
$3,000,000
Total Revenue
$7,750,000
Risk Adjusted Revenue
$5,712,250
Total Revenue - Total Expected Loss =
Net Capital Charge
$3,800,000
Economic Revenue
Risk Adjusted Revenue - Net Capital Charge =
$1,912,250
Transaction Cost
$300,000
less
Tax
$920,000
less
Economic Profit (year 1)
$692,250

GGC Convertible Bond Expiration

Due February 27, 2009
Conversion Price
Out of the money
Convertible Bonds
Outstanding

$65
$18.40
15,384,615 estimated

3.2 Decisions on GGC

GGCs exposure to political risk in South Africa with about 72% of its current production
brings uncertainty of consistent future growth. In accounting for the three main components for
mining costs, including electricity, labor, and equipment costs, mining inflationary costs are
setting pressures in the rising competitive industry. The macro-economic agenda must be
considered to forecast future growth of GGC. Fundamentally, GGCs revenues have maintained
consistent over the prior years. Gold prices have fluctuated in most recent months during 2008
due to volatile uncertain markets. The greater issue stemming from bailouts, the more US Fed
Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

and global systemic risks will arise. The estimated convertible bond expiration GGC has to
refinance will bring sustainability through this facility request.
Wellfleets economic profits will be less than a percent: .069%, in economic profits within a
two year time frame, in comparison to the Zellmont acquisition at .26%. GGCs highly
leveraged environment has increased its debt to equity to 82% thus decreasing its interest
coverage ratio. Highly reliant on future financing and interest repayment, its ability to sustain
relies heavily on demand and gold price sentiments. Given their decreasing rates due to market
conditions, this deal becomes highly speculative in times of uncertainty and as Wellfleets
initiative to unwind its hedge book from losses. Its position had been affected due to the credit
crunch unfolding and should star considering reassessing its dividend payouts of 20%.
8

150.00%

100.00%

4
50.00%

2
0

0.00%
2003

2004

2005

2006

Net debt to EBITDA

2007

2003

2004

2005

2006

2007

-50.00%
Net margin

Total debt to common equity

ROE

Efficiency Ratio

On the positive note, considering they are the worlds third largest gold producer with 7%
global production, low-cost production levels in comparison to the lower 50% of global costs on
average, and their long term arena for safe investor exposures. This deal may be considered if
Wellfleet feels their holdings on precious metals percentage needs additional exposure to
increase their risk weighted asset consideration.

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

10

3.3 Closing Statement

From the Economic and Financial perspective, the Proposal 1 (Ashar Industries) holds a
stronger position in finance, such as growing at a rate thats higher than industry standards. It is
the worlds largest steel producer (high volume) and they specialize in low-end commodity steel
(low risk) with high level of raw material integration. Overall, they have good financial
performance, high EBITDA margins. From the managerial perspective, Ashar Industries run by
family for a long time and have been in the hands of experienced management that succeed in
turning around unproductive assets in the history. They also have abundant experience in
acquisitions and mergers. However, they have taken a huge amount of debt, which puts the
company at a risky financial position. Plus, the complexity of the financial structure has made it
harder to solve the current problem.
In Proposal 2, Gatwick Gold Corporation has had negative growth over the past 3 years and
was unable to service its present debt. Even though, the future outlook must be considered with
respect to the industry it operates in, we suggest that Wellfleet stay away from GGC until it
makes profit.

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

11

Part Four: Risk Management Process

4.1 Analyze the risk management process at Wellfleet Bank. What suggestions might you make to
the CEP about improving the process?
Risk management and internal control have crucial importance in banking activities. As
required by the Basel Committee of International Settlements, Wellfleet Bank implemented
Basel II Accord and guidelines and formalized their risk-management practices. The reserve
capital is monitored and managed to match the riskiness of their activities.
The internal control system within Wellfleet Bank is a balance of functions between
relationship managers and risk officers. Relationship managers court clients and bring in
business and revenues with margins and fee that the bank would earn. They would like to have
their proposals approved so that they could get their incentives. Meanwhile, risk officers would
undertake independent risk analysis to identify the internal risk within the proposal and make
reward characteristics transparent. Risk officers would hold or disapprove those proposals whose
built-in risk is beyond criteria and policies.
Within the risk-management function, a hierarchy structure exists on bases of individual
experience of credit officers. The lowest level is credit officer who is authorized to sign off
certain types of business proposals. The more experienced a credit officer is, the risker and larger
loans could be signed off. If a loan exceeds the credit officers limit, it should be passed forward
to regional credit officer for decision. At the paramount of this hierarchy is the Group Credit
Committee who obtains unlimited decision power on any loans within the banks regulatory
limits.
The Group Credit Committee consists of three senior members in the bank: the group chief
credit officer, who serves as chair, the deputy chief risk officer, and the group head of client
relationships, who represents the business viewpoint. This committee structure guarantees the
decision process is a balancing mechanism between credit function and relationship function.
Therefore, any credit proposal which is too big is required not signed-off before it gets the Group
Credit Committee.
Chief Credit Officer

Group
Credit
Committe
e

Deputy Chief Risk Officer

Regional Credit Officer

Head of Client Relationship

Credit Officer

Graph 1: Hierarchy Structure

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

12

Besides the Group Credit Committee, there are another seven risk committees operating
separately on additional sources of risks, covering market risk, operational risk, compliance risk,
country risk, reputation risk and business risk. These eight risk committees work under the
Group Risk Committee and deliver risk report quarterly. The chief risk officer report to the
board-level Audit and Risk Committee.
Board

Audit and Risk Committee

Group Risk Committee

Group
Credit
Committee

Market
Risk
Committee

Country
Risk
Committee

Reputation
Risk
Committee

Business
Risk
Committee
(Consumer)

Business
Risk
Committee
(Corporate)

Operational
Risk
Committee

Compliance
Risk
Committee

Graph 2: Committee Structure

4.2 Problems and Improvements
The first problem stems from the hierarchy structure within the credit function. To
relationship managers, the Alpine Pass approach is time-consuming and reduces their service
efficiency to their clients. If a proposal with known characteristics should go through the basic
levels to reach Group Credit Committee for final approval, it will take more time than necessary
to seal a deal. This inefficiency will reduce the attractiveness to potential clients and make the
bank lose competitiveness to other banks.
A solution would be to develop a flat decision structure based proposal characteristics, such
as loan size, applicant company size, applicant history records. While small loans by small
company with good records could be signed off by credit officers, big loan by large company
with spot records could directly go to the Group Credit Committee. The graph below
demonstrates how it works.

Credit

Officer

Regional Credit
Officer

Group Credit
Committee

Assessment
Loan Size Company Size History Record

Graph 3: Flat Structure

Loan
s
Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

13

Another main problem is due to the committee structure. The eight subordinate committees
could specialize in risk assessment by focusing on the risk of their individual field. However,
risk management is not particle physics. Risks of different types interact with each other. Defect
in reputation could impair credit risk and business risk. A recessional market would widen credit
spread. The analysis independence of different risks would lead to an inaccurate result, thus
impair the preciseness of interest rate for loan.
It would be not wise to merge all eight committees into one to manage all risk which will
take away the benefit of independence and balance between committees. However, considering
financial risks could be divided into micro and macro categories. It would be practical to merge
the eight committees into two functional committees (Graph 4). The systematic efficiency can be
improved by facilitating interaction between the two committees.

Board

Audit and Risk Committee

Group Risk Committee

Macro Risk Committee

Micro Risk Committee

Market Risk
Country Risk
Business Risk (Corporate)
Business Risk (Consumer)

Credit Risk
Reputation Risk
Operational Risk
Compliance Risk

Graph 4: Committee Merge

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

14

Appendix:
Table 1.1
Income Statement
Revenue
yoy%
D&A
yoy%
EBITDA
yoy%
EBIT
yoy%
Profit before tax
yoy%
Interest Expense
yoy%
Net income
yoy%
Minorities

ASHAR INDUSTRIES
2002
4889
177
395
218
-24
-208
49
0

2003
9567
96%
331
87%
1700
330%
1369
528%
1400
5733%
-200
-4%
1182
2312%
35

2004
22197
132%
553
67%
6827
302%
6274
358%
6133
338%
-265
33%
4701
298%
615

Revenue CAGR, year ended 2005

2005
28132
27%
829
50%
5575
-18%
4746
-24%
4703
-23%
-339
28%
3365
-28%
520
79.20%

Cash Flow
Funds from Operations (FFO)
Change in Working Capital
Cash from Operations (CFO)
Gross CAPEX
Other investment/acquisitions
Cash from investing activities
Cash dividend
Free Cash Flow

150
18
168
-108
28
-80
0
136

1413
-93
1320
-421
-275
-696
-164
999

5784
-1171
4613
-898
95
-803
-736
3185

4511
-537
3974
-1181
-6431
-7612
-2092
2476

Balance Sheet
Cash and equivalents
Marketable Securities
Fixed assets
Total assets

77
0
3035
5512

760
0
4654
10137

2495
1
7562
19153

2035
14
15539
31190

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

15

Short-term debt
Long-term debt
Gross debt
Net debt/(cash)
Common equity
Minority interests
Shareholder's equity
Profitability
EBITDA margin
yoy%
EBIT margin
yoy%
Net margin
yoy%
ROE
yoy%
Return on capital employed
yoy%
Efficiency Ratio
yoy%

262
2022
2284
2207
1280
0
128

8.10%
4.50%
1.00%
21.00%
-0.80%
89%

Capital Structure
Total debt to common equity
Net debt to common equity
Total debt to total assets
Total debt to EBITDA
Net debt to EBITDA
Historic market cap
Debt Protection
EBIT to interest expense
EBITDA to interest expense
(Coverage)
EBITDA - CAPEX to interest expense
Sources of Business Risk
Degree of Operating Leverage

780
2287
3067
2307
2561
261
2822

341
1639
1980
-516
5846
1743
7589

252
8056
8308
6259
10150
1834
11984

17.80% 30.80%
119.75% 73.03%
14.30% 28.30%
217.78% 97.90%
12.40% 21.20%
1140.00% 70.97%
87.90% 111.80%
318.57% 27.19%
3.40%
7.20%
-525.00% 111.76%
122%
152%
37.85% 23.96%

19.80%
-35.71%
16.90%
-40.28%
12.00%
-43.40%
42.10%
-62.34%
2.80%
-61.11%
112%
-26.26%

17.84
17.24
41%
5.78
5.59
267

1.2
0.9
30%
1.8
1.36
5679

0.34
-0.09
10%
0.29
-0.08
23708

0.82
0.62
27%
1.49
1.12
18879

6.8

23.7

14

1.9
1.4

8.5
6.4

25.8
22.4

16.4
13

9.11

4.16

4.57

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

16

Degree of Financial Leverage

Degree of Total Leverage

0.59
5.35

0.69
2.87

0.65
2.97

Table 2.2
GATWICK GOLD CORP.
Income Statement

2003

2004

2005

2006

2007

Revenue

2109

2297

2632

2975

3269

9%

15%

13%

10%

409

505

602

590

57%

23%

19%

-2%

642

682

820

235

-27%

6%

20%

-71%

233

177

219

-354

-62%

-24%

24%

-262%

116

-175

127

-428

-83%

-251%

-173%

-437%

yoy%
D&A

260

yoy%
EBITDA

878

yoy%
EBIT

618

yoy%
Profit before tax

676

yoy%
Interest Expense

48

yoy%
Net income

515

yoy%
Minorities

18

80

99

117

113

67%

24%

18%

-3%

113

-198

-87

-605

-78%

-275%

-56%

595%

19

23

30

31

CAGR, year ended 2007

11.58%

Cash Flow
Funds from Operations (FFO)

525

579

667

1224

1027

Change in Working Capital

-64

-121

-112

-129

-176

Cash from Operations (CFO)

461

458

555

1095

851

-363

-585

-725

-818

-1021

Other investment/acquisitions

55

-231

-63

57

-38

Cash from investing activities

-308

-816

-785

-761

-1059

Cash dividend

-328

-205

-165

-135

-149

348

-184

-530

-432

-1212

Cash and equivalents

503

288

210

496

493

Marketable Securities

26

Fixed assets

2753

5870

5911

6065

6672

Total assets

4838

8176

8303

8961

9747

Gross CAPEX

Free Cash Flow

Balance Sheet

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

17

Short-term debt

350

318

188

59

337

Long-term debt

804

1282

1708

1426

1522

1154

1600

1896

1485

1858

Net debt/(cash)

651

1286

1678

989

1365

Common equity

1621

3142

2617

2990

2362

Gross debt

Minority interests
Shareholder's equity

53

58

59

62

63

1674

3199

2676

3053

2424

41.60%

27.90%

25.90%

27.60%

7.20%

-32.93%

-7.17%

6.56%

-73.91%

10.10%

6.70%

7.30%

-10.80%

-65.53%

-33.66%

8.96%

-247.95%

4.90%

-7.50%

-2.90%

-18.50%

-79.92%

-253.06%

-61.33%

537.93%

5.10%

-7.30%

-3.10%

-23.00%

-84.78%

-243.14%

-57.53%

641.94%

35.30%

31.94%

34.46%

34.95%

-19.02%

-9.51%

7.89%

1.40%

0.51

0.72

0.5

0.79

Profitability
EBITDA margin
EBIT margin

29.30%

Net margin

24.40%

ROE

33.50%

Efficiency Ratio

43.59%

Capital Structure
Total debt to common equity

0.71

Net debt to common equity

0.4

0.41

0.64

0.33

0.58

23.85%

19.57%

22.84%

16.57%

19.06%

Total debt to EBITDA

1.31

2.49

2.78

1.81

7.89

Net debt to EBITDA

0.74

2.46

1.21

5.8

10467

9311

13103

13045

11848

EBIT to interest expense

12.9

2.9

1.8

1.9

-3.1

EBITDA to interest expense (Coverage)

18.3

8.1

6.9

2.1

EBITDA - CAPEX to interest expense

10.7

0.7

-0.4

-7

Degree of Operating Leverage

5.18

12.02

14.16

-46.25

Degree of Financial Leverage

0.41

-0.06

-0.19

-0.66

Degree of Total Leverage

2.14

-0.77

-2.69

30.34

Total debt to total assets

Historic market cap

Debt Protection

Sources of Business Risk

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

18

Exhibit 2
Corporate
Grades
1A
1B
2A
2B
3A
3B
4A
4B
5A
5B
6A
6B
7A
7B
8A
8B
9A
9B
10A
10B
11A
11B

Internal Credit Grades (by Probability of Default, PD)9

Mid-Point PD
PD Range
S&P mapping:
(Basis points)
Lower
Upper
Corporate
1
0
1.5
AAA
2
1.5
2.5
AA+
3
2.5
3.5
AA
4
3.5
4.5
AA5
4.5
6
A+
7
6
8
A
9
8
11
A13
11
17
BBB+
22
17
30
BBB+
39
30
43
BBB51
43
59
BB+
67
59
77
89
77
102
BB
117
102
135
154
135
175
BB203
175
235
267
235
305
B+
361
305
400
462
400
530
B
606
530
700
801
700
920
B1054
920
1200

Mikes, 22.

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

19

Exhibit 1a

Wellfleet Bank - Segmentation by Business Line ($million)

2004
2005
$
%
$
%
$

2006
%

Pre-tax Profit
Consumer Banking

1,058

47

1,273

47.5

1,322

41.5

Wholesale Banking

1,175

52.2

1,444

53.9

1,849

58.1

Corporate Items Not Allowed

18

0.8

(36)

-1.3

0.2

TOTAL
Assets Employed

2,251

100%

2,681

100%

3,178

100%

Consumer Banking

38,094

25.9

74,134

34.5

86,902

32.6

Wholesale Banking

108,712

73.9

140,464

65.3

178,688

67.1

Items Not Allocated

318

0.2

498

0.2

512

0.1

TOTAL

147,124

100%

266,102

100%

Exhibit 1b

100%

215,096

Wellfleet Bank - Balance Sheet ($million)

2004
73899.06
72017.12
147120.2

Tot Adv to Customers

Loans & Mortgages
Total Assets

2005
113522
117791
215096

2006
141508
139330
266047

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

20

Total Deposits
Total Liabilities
Total Shareholder's Equity
Shares Outstanding
Book Value per Share
Tangible Book Value per Share

Exhibit 1c

85090.78
137051.4
10068.74
1179
7.4
5.41

119931
202763
12333
1316
9.03
5.74

147382
248650
17397
1384
12.18
7.74

Wellfleet Bank - Income Statement ($million)

2004
2966.12
2317.53
2249
1619
1577
1.3
1.27
0.57
19.63

Net Interest Income Loss Provisions

Operating Profit (Loss)
Pre-tax income
Income before XO Items
Net Profit (Loss)
Basic EPS before Abnormal Item
Diluted EPS
Dividends per Share
Return on Common Equity

2005
4078
2731
2681
1971
1946
1.51
1.47
0.64
18.6

2006
4776
3195
3178
2354
2278
1.1
1.67
0.71
15.86

Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

21