Portfolio Management A Bank of America Perspective

Executive Summary   Concept of Portfolio Management – an emerging strategy for excellence   Portfolio Management – reporting / monitoring function OR profit center   Origination versus ownership of risk   Key transfer pricing challenges   Maximizing shareholder value

Traditional Model   Philosophy of holding assets till maturity (or default)   Relationships have been perceived by the extent of paper / risk that is held by banks   Performance metrics have been driven by revenues & net income versus economic capital and ROE   Emphasis on primary distribution with no markets / products for secondary sales Use the drawing toolbar to draw the auto shapes BuyHold

Strategic Rationale for Change   Emergence of a secondary market. Flight to quality led to a smaller domain of issuers.   The new paradigm for return on capital Net Income Revenue Capital = Return on Capital X MarginVelocity

Concept of Portfolio Management   Advocate of shareholder value   Scope is not just limited to credit risk management, but more… Owners of risk and capital Investor driven approach. Hold positions benchmarked to market standards. Portfolio Management discipline - is this an emerging strategy for excellence ? YES

The New Structure BorrowersBorrowers Client Management Origination Portfolio Manager Credit decision Risk Rating Pricing Return Portfolio Decision Syndication Loan Trading Hedging & Securitization SecondaryMktSecondaryMkt Servicing

New Approach to Portfolio Management   Originate to distribute   Portfolio Management acts as buyer, seller and manager of risk   Support OR profit center ? – Support in a cross sell environment – ‘Hold’ to be at least SVA neutral   Fundamental shift in viewing exposures from ‘Approved commitments’ to ‘Economic capital usage’ BuySell, Hedge

Portfolio Management Philosophy Improve credit / risk and product delivery processes to transform the traditional lending business into an issuer and investor-driven, mark-to market-based, “Originate to Distribute” business.

Portfolio Management : Role Strategy DCMDerivativesOther products Origination Process Distribution Process Portfolio Management Process ISSUER Structuring Process Market Clearing Process

Key Attributes Strategic Risk Capital Allocation Risk capital to be BID for by Global Industry and Key Product groups Robust return measurement metrics will drive on-going capital allocation Strategy Process Creation of a common platform where all product partners will project their business and expected ROE. Risk capital will be allocated on this basis

Maximizing Shareholder Value - SVA SVA Drivers   Capital usage   Pricing discipline   Volume / pricing management   Mix of revenue   Credit quality

Maximizing Shareholder Value   The economic capital framework creates a common currency for measuring risks and returns   Different forms of risk: Credit, Market, Country and Business risks are quantified on a uniform scale   Performance is expressed as an after-tax return on economic capital   The framework creates incentives to deploy capital toward activities with better risk adjusted returns Measuring return relative to risk

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