STRATEGY WATCH
and 'country banking' is moving in that
direction too, in the professional prod-
ucts pillar, 90% of business is sold to
professional counterparties, only 10%
is clearly F&A. Of course, it's always
difficult to define exactly what consti-
tutes F&A. The current discussion
within senior management about the
issue of F&A profitability is partly
about how to interpret the numbers.
Clearer definitions are needed. They
must be applied consistently as we go
forward. In this way we can set clear
targets and measure our success more
precisely. It is firmlv believed that if
there is any area where we can be more
profitable and make progress, it is in
F&A.
TW: S'<olvency was another bot topic on
the meeting agenda.
RD: Yes, it was. Three years ago, we
implemented a strategy specifying
greater efficiency for solvency usage.
We began looking at the Return on
Solvency (ROS) figure and not Net
I'rofit to quantify RI's success. The
result was solvency use went down
while revenues went up. Now people
are keenly aware of the net ROS of
every deal, which is excellent. In the
past, we advised people to be careful
with solvency because, in theory, it's
scarce. But the implicit notion was that
there will always be solvency for deals
with good ROS. Things are different
now. Nearly every business across RI is
making an incredible 15% ROS or
more, certainly anticipating the Bank
of International Settlement Accord II
(BIS II) rules. This creates tough compe-
tition for solvency. Cirowth opportuni-
ties also continue to present themselves
- it adds up to a 10% predicted
increase in solvency required. And the
Group's decision to target the domestic
market and increase our insurance
offering signifies that solvency will
become even scarcer.
TW: How does that affect Rif
RD:This solvency issue is particularly
pressing for RI because of strong
growth in 'country banking'. Growth
plans here aim to aggressively grow the
balance sheet. The ACG Bank in Ireland
is bringing in 100 million per month in
assets. They have a full solvency
weighting of 8% but promise tremen-
dous returns and are low risk, so we
really want these deals. The same goes
for Australia and VIB in the States.
In all these areas our strategy is one of
fast-paced growth, but given the prob-
able absolute scarcity of capital in the
group, we are poised for problems.
This issue demands more discussion.
But there's no need to panic; for the
coming year we have adequate capital.
Nevertheless, we need to think carefully
about how to pursue this growth strate
gy over the long-term - because that is
what we want.
TW: What about liquidityf
RD:Th is is the next issue that is top of
mind for management now. I.iquidity
refers to the amount of cash available
to pay creditors and is an important
criterion in rating agencies' assess-
ments. In ideal circumstances, the
amount of cash we need to pay to our
creditors at any point in time should, at
the same time, be fully off-set by the
amount we receive from our debtors.
The success we have in getting new
long-term assets on our books has thus
ideally to be matched by long-term
liabilities. Getting these long-term
liabilities in the international financial
markets, the core task of Group
Treasury (GT), is becoming more and
The Word I 5