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How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
How to do Stress
Testing in 2021
Brought to you by the Financial Services Faculty

                                         © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
Presenters

         Phil Seymour        John Mongelard          Shuvo Banerjee
     Company President and   Risk & Regulation   Challengers & Automotive
       Head of Advisory      ICAEW Financial             BRS FS
             IBA                Services             Grant Thornton

                                                                            © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
Agenda – Stress testing in 2021
1. Regulatory Approach
2. Practical insights
3. Aviation – a deep dive

                                  © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
1. Regulatory Approach

                         © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
1. Regulatory Approach - What is different? (I)
• Not for capital setting
• Not for ring-fenced banks
• Call out for certain sectors.
• Accelerated timetable

                                                  © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
1. Regulatory Approach - What is different? (II)

                          “Unemployment rises sharply in the stress, with
                          certain sectors such as hospitality, leisure,
                          construction and transport more affected than
                          others.”

                          “Spending on travel, entertainment and hospitality
                          has fallen sharply as a result of mandated closures
                          and reduced capacity, as well as a general increase
                          in precautionary behaviour by consumers”

                          “The 2021 stress scenario assumes these
                          developments are even more pronounced, with
                          sectors such as hospitality, leisure, construction and
                          transport particularly affected.”

                                                                          © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
1. Regulatory Approach – Key scenario statistics

• UK GDP 37%
• Residential and
  Commercial property 33%
• World GDP 31%
• Unemployment 11.9%
• Bank rate - 0.10%

                                               © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
1. Regulatory Approach & IFRS 9

 Source: Deloitte - IFRS 9 | 2020 Year End Results in 10 Charts

                                                                  © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
2. Practical Insights

                        © ICAEW 2021
How to do Stress Testing in 2021 - Brought to you by the Financial Services Faculty - ICAEW.com
Stress Testing Webinar
Banks and Building Societies
Shuvo Banerjee
Head of Retail Banking – Challenger Banks and
Automotive Finance
shuvo.Banerjee@uk.gt.com
Contents
                                                                   1. The State of the Economy view from the
                                                                      ground up

                                                                   2. Basel guidance

                                                                   3. PRA feedback on the application of Basel
                                                                      Principles

                                                                   4. EBA guidance

                                                                   5. PRA guidance on Models

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                 11
FCA’s 2nd Financial lives survey –
                            2020

                            16,000 respondents

                            View of the Economy from the
                            Ground up

© 2018 Grant Thornton UK LLP. Confidential and information only.   12
Impact of Covid-19

© 2018 Grant Thornton UK LLP. Confidential and information only.   13
How many vulnerable customers were there
                                   pre Covid 19?

                                                                      MISSED
                                                                      PAYMENTS

© 2018 Grant Thornton UK LLP. Confidential and information only.                 14
Impact of Covid -19 – low financial resilience

                                          • Between March and October 2020, the number of adults with low financial resilience increased
                                            overall by 3.5 million to 14.2 million, or 27% of UK adults
                                          • London has the highest levels of vulnerability in October 2020 and the biggest percentage increase
                                            since February 2020 (up by about a third from 44%)
                                          • Almost two-fifths (38% or 19.6m) of adults anticipate either struggling to make ends meet, seeing
                                            their debt levels increase, not being able to pay domestic bills, or not being able to keep up with
                                            their mortgage, rent or credit and loan commitments over the next six months.

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                  15
Profile of low financial resilience - 2020
                                      1. This was a slight improvement on the 2017 results, where 11.6 million (23%) had low financial
                                         resilience, 7.5 million (15%)were over-indebted and 4.1 million (8%) were in financial difficulty.

                                      2. Financial resilience improved in this three-year period more so for men than women
                                         (18% of men had low resilience in 2020, down from 21% in 2017, compared with
                                         24% and 23% for women, respectively)

                                      3. Those least able to cope with a financial shock included: unemployed adults (47%),renters
                                         (47%), adults with a household income of less than £15,000 (43%) and Black adults
                                         (34%).

                                      4. 23.7 million adults (45%) were unable to cover their living expenses for three
                                         months or more or were borrowing inone of these ways in February 2020. This placed them at
                                         greater risk if they were to experience a persistent drop in income, for example due to
                                         furlough or losing their job

                                      5. One in ten (10% or 5.1m) were constantly or usually overdrawn. There was no
                                         significant change in these numbers between 2017 and early 2020. Many were using their
                                         overdraft facility to pay for essential living expenses, such as their rent or mortgage payments.

                                      6. One in twenty (5% or 2.8m) had persistent credit card debt because they were revolving
                                         a balance on a credit card and had paid more in interest, fees and charges over the previous 12
                                         to 18 months than they had actually paid off on their card(s).
                                      •

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                         16
Covid 19 - Impact on Unsecured debt – by
                                   lender profile (FLS) - decrease

© 2018 Grant Thornton UK LLP. Confidential and information only.              17
Impact of Covid 19 - Mortgage payment
                                   deferrals by lender profile- increase

© 2018 Grant Thornton UK LLP. Confidential and information only.           18
Profile of mortgage payment deferral
                                   requestors

© 2018 Grant Thornton UK LLP. Confidential and information only.          19
Covid 19 impact - Self-employed businesses

                                                Seven in ten (71%) self-employed businesses experienced a reduction in business
                                                revenues between March and October. One in ten (9%) ceased trading altogether.

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                  20
Basel guidance on stress
                                                        testing – October 2018

© 2018 Grant Thornton UK LLP. Confidential and information only.                   21
Stress testing principles – BCBS October
                                   2018 – ‘Guidance not standards’
                                     Principles                    Key points

                                     1- Objectives                 •   To inform capital and liquidity planning OR to their role as an integral element of Risk Management.

                                     2- Framework &                •   Framework – (a) scenario development and approval (b) model development and validation (c ) reporting and
                                     Governance                        challenge of results (d) use of stress test outputs
                                                                   •   The roles of the second and third line should be specified
                                                                   •   Board has ultimate responsibility
                                                                   •   Can delegate the development and implementation of the framework to senior management or a Stress Testing Committee
                                                                   •   The board, OR an appropriately senior-level governance body, should have an understanding of the material aspects of
                                                                       the framework and engage actively and challenge key modelling assumptions and scenario selection

                                    3- Risk Management tool        •   Stress testing constitutes a key input related to risk identification, monitoring and assessment
                                                                   •   Stress tests should contribute to formulating and pursuing strategic and policy objectives
                                                                   •   Results of stress tests should, where appropriate, inform banks’ calibration of risk appetite and limits, financial and capital
                                                                       planning, liquidity and funding risk assessment, contingency planning and recovery and resolution planning.

                                     4- Capture material and       •   Stress testing should capture material and relevant risks
                                     relevant risks                •   If certain risks are excluded, their exclusion should be explained and documented
                                     Apply stresses that are       •   Scenarios should be severe but plausible and should not be limited to the supervisory scenarios
                                     sufficiently severe

                                     5- Resources should be        •   Resources should have the appropriate skill sets to execute the framework & to facilitate insights from business lines
                                     adequate                      •   The set of skills typically required includes (but are not limited to) expertise in liquidity risk, credit risk, market risk, capital rules,
                                                                       financial accounting, modelling and project management.
© 2018 Grant Thornton UK LLP. Confidential and information only.
Stress testing principles – BCBS
                                       October 2018 – ‘Guidance not
                                       standards’
                                      Principles                     Key points

                                      6- Accurate and sufficiently   •   Data used should be accurate, complete, available at a sufficiently granular level and in a timely manner – reference to
                                      granular data and by robust        BCBS 239
                                      IT systems                     •   Robust data infrastructure capable of retrieving, processing, and reporting information used in stress tests to ensure
                                                                         information is of adequate quality

                                      7- Models and                  •   Models should adequately define the coverage, segmentation and granularity of data and types of risk
                                      methodologies should be fit    •   Level of sophistication should be appropriate
                                      for purpose                    •   Overlays if used should be well justified & documented
                                                                     •   Links between solvency & liquidity stresses should be considered
                                                                     •   Include a certain amount of expert judgment, justified, challenged & documented
                                                                     •   Should have adequate inventory
                                                                     •   Robust model validation functionand be available to Senior Management

                                      8- Subject to challenge and    •   Review of all aspects of the Stress Testing framework on a periodic basis
                                      regular review                 •   Reviews should include a validation
                                                                     •   Other types of independent reviews should include key components of the stress testing process - methodologies, scenario
                                                                         assumptions, estimations of the stressed losses, revenues and liquidity forecasts
                                                                     •   Internal audit reviews should review the stress testing framework, be comprehensive and be available to senior
                                                                         management
                                                                     •   Challenge from the Business areas on the assumptions and plausibility of outcomes

                                      9- Communication               •   Banks should consider ways to ensure that market participants understand the data that are disclosed, including the limitations
                                                                         of and the assumptions on which it is based

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                                                                           23
PRA assessment against
                                                        Basel principles in the ACS

© 2018 Grant Thornton UK LLP. Confidential and information only.                      24
PRA feedback against the 9 Basel
                                   principles
                                                                   Positives                     Areas for Improvement
                                        Principles 1 & 2           ▪ Stress testing objectives   ▪ Close links to their Risk Management framework
                                        (Obj, Framework,             largely defined in most     ▪ Processes and governance are appropriate to the
                                        Governance)                  banks                         nature of the stress test

                                         Principle 3 (Risk         ▪ Most Banks are using        ▪ Use insights from Stress Testing more
                                         Management tool)            stress tests to calibrate     systematically and consistently in Business
                                                                     Risk Appetite and             Planning and Risk Management
                                                                     Limits                      ▪ Stress testing results could also be used, where
                                                                                                   appropriate, to support financial and capital
                                                                                                   planning, contingency planning, recovery and
                                                                                                   resolution planning, portfolio management and new
                                                                                                   trade/product approval processes

                                         Principle 4               ▪ Some relevant risks are     • Banks capture some relevant risks in their internal
                                         (Capture material           captured                      scenarios but improvements are needed to ensure
                                         risks)                                                    that risk identification processes comprehensively
                                                                                                   capture these risks and feed into the design of
                                                                                                   internal stress scenarios
                                                                                                 tests at various levels of the organisation
                                                                                                 and of varying severity to gain insights
© 2018 Grant Thornton UK LLP. Confidential and information only.
                                                                                                 into risks associated                                   25

                                                                                                 with their business model
PRA feedback against the 9 Basel
                                   principles
                                                                    Positives                     Areas for Improvement
                                         Principles 5 & 6          ▪ Improvements made to         ▪ Further improvements to data quality, granularity
                                         (Resources,                 infrastructure, execution,     and the reconciliation of risk to finance data
                                         granularity of data)        delivery and                 ▪ Assessment of BCBS 239
                                                                     management of data
                                         Principle 7 (Models       ▪ Strong methodologies -       ▪ Expectation that the principles of SS3-18 need to
                                         and Methodology)            Adequate justification of      be further embedded
                                                                     the assumptions,
                                                                     limitations and overlays
                                                                     applied

                                         Principle 8 (Subject      ▪ Some Banks had               • Review and challenge to be enhanced to ensure
                                         to challenge and            comprehensive review           reliability of stress test results and aid an
                                         regular review)             and challenge                  understanding of limitations or areas for
                                                                                                    improvement
                                                                                                  tests at various levels of the organisation
                                         Principle 9                                              • Communication of Business insights along with
                                         (Communication)                                            quantitative results
                                                                                                  • Stress testing could be systematically
                                                                                                    communicated to relevant stakeholders – this could
                                                                                                    enhance the use of stress testing

© 2018 Grant Thornton UK LLP. Confidential and information only.
                                                                                                  tests at various levels of the organisation            26
EBA guidance on Stress Testing –
                            July 2018

© 2018 Grant Thornton UK LLP. Confidential and information only.   27
EBA Guidance – July 2018 – ‘to be complied with’
                                                                                              Stress Testing                           Annual assessment
                                                                                                                                       of the stress testing
                                                                                                                                           programme +
                                                                                                                                         challenge by the
                                                                    Application                                                        Risk Committee and                Linkage
                                                                                                                                         internal auditors              between
                                                                                                                                                                      solvency and
                                                                                                                                                                     liquidity stress
                                                                                                                                                                           tests
                                                                   Data including                                                             Governance
                                                                    BCBS 239                           Individual Risk
                                                                                         Types              areas

                                                                                     Model Risk      Credit &                          Scope & Coverage
                                                                   Proportionality                   Counterparty
                                                                                     Sensitivity
                                                                                                     Securitisation
                                                                                     Scenarios
                                                                                                     Market
                                                                                     Severe &                            Interest rate from
                                                                                     plausible                           Non-trading                  PD/ LGD/ EAD
                                                                                                     Operational
                                                                                     Reverse         Conduct related     Concentration
                                                                                     Stress test
                                                                                                     Liquidity           FX lending

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                                                        28
The Stress test – key elements

                                   Focus                             Details
                                                                     Institutions should maintain a list of the risk factors identified
                                          Identified risk factors    The set of risk factors also aim to reveal, to the maximum extent possible, the nature of linked
                                                                     risks across portfolios and across time, system-wide interactions and feedback effects
                                           Definitions and
                                                                     The assessment of the resilience of an institution or of a portfolio to a given scenario that
                                        reasoning for relevant
                                                                     comprises a set of risk factors
                                             scenarios
                                           Sensitivity of            Institutions should assess at which aggregation level sensitivity analyses are meaningful or
                                       assumptions to results        even feasible.

                                                                      Institutions should include scenarios identified through the reverse stress testing to
                                           Reverse Stress tests       complement the range of stress test scenarios they undertake and, for comparison purposes,
                                                                      in order to assess the overall severity, allowing the identification of severe but still plausible
                                                                      scenarios.

                                          Aligning risk appetite
                                                                       The outputs of stress tests should be used as inputs to the process of establishing an
                                          with risks revealed by
                                                                       institution’s risk appetite and limits.
                                          reverse stress testing

                                               Data infrastructure     Application of BCBS 239 – Risk Data Aggregation and Reporting even if not a GSIB. Should have
                                                                       regard to both on and off balance sheet risk data

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                                        29
SS3-18 Model Risk Management

© 2018 Grant Thornton UK LLP. Confidential and information only.   30
PRA (UK) – ‘Model risk management
                                                     principles for stress testing’ (April 2018)
                                PS 7/18 “The principles are intended to be relevant to all model types, not only those used in a
                                stress-testing context. In future, the PRA will consider whether it should further extend the principles to
                                be applied to other types of models.”

                                    Principle 1                    Banks have an established definition of a model and maintain a model inventory

                                                                   Banks have implemented an effective governance framework, policies, procedures
                                    Principle 2                    and controls to manage their model risk

                                                                   Banks have implemented a robust model development and implementation process,
                                    Principle 3                    and ensure appropriate use of models

                                                                   Banks undertake appropriate model validation and independent review activities to
                                    Principle 4                    ensure sound model performance and greater understanding of model
                                                                   uncertainties.

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                       31
PRA ‘Self-assessment’ reported in ICAAP - 21 Data Points
                                                                     Principle 1              Principle 2                   Principle 3                Principle 4
                                                                                                Model
                                                                                                                             Model
                                                                    Definition of a          governance,
                                                                                                                          development
                                                                     model and                 policies,                                             Model validation
                                                                                                                              and
                                                                   model inventory           procedures,
                                                                                                                         implementation
                                                                                               controls
                                                                                              Board of Directors and      Model purpose and design
                                                                                              Senior Management’s                                        Scope of validation
                                                                                                  responsibility
                                                                                                                                Use of data
                                                                     Definition of a model
                                                                                                                                  Testing
                                                                                                Model risk policies                                        Independence

                                                                                                                               Documentation

                                                                                              Roles of model owners,
                                                                                                                              Use of judgement         Competence & influence
                                                                                               developers and users

                                                                                                                             Supporting systems

                                                                                               Role of internal audit                                 Treatment of model issues
                                                                                                                            Business involvement
                                                                       Model inventory
                                                                                                                              Model uncertainty
                                                                                                                                                         Frequency of model
                                                                                             Use of external resources
                                                                                                                                                              validation
                                                                                                                              Model monitoring

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                                                  32
The devil is in the detail
                                         Model risk management principles for stress testing – PRA publication – April 2018:
                                           PS 7/18 “It is not the PRA’s intention that Boards should understand the statistical and mathematical underpinnings of models. However, both senior
                                           management and the Board should ensure that they possess a general understanding of the most material models, the uncertainty around
                                           judgements, where the model is expected to work well and in what circumstances it is likely to break down.”

                                            Board of Directors &      P2.2 The Board of Directors AND Senior Management are expected to provide challenge to model outputs and
                                           Senior Management’s             understand model capabilities, the model limitations, and the potential impact of model uncertainty for the most material
                                               responsibility
                                                                           models and the aggregate outputs

                                                                      P1.2 Model Inventory – should also include all model uses and direct or material dependencies ie models that depend or use the
                                                Model inventory       output of other models

                                             Model purpose and         P3.1 Model purpose and design – model results should be supported by a comparison with alternative theories / approaches or
                                                  design               assessing sensitivities of changes in model inputs

                                               Competence and         P4.3 Competence and influence – banks should consider whether people performing validation have the necessary knowledge,
                                                  influence           skills, and expertise to perform model validations

                                                                      P2.4 Role of internal audit – internal audit should assess the overall effectiveness of the model risk management framework.
                                            Role of internal audit
                                                                      Internal audit should evaluate and independently verify whether model risk management practices are comprehensive,
                                                                      rigorous, and effective.

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                                                                       33
Speech by Andrew Bailey – November 2015
                                    What does a Board need to understand? Try the following:
                                    •       key elements of model design;
                                    •       significant assumptions and expert judgements;
                                    •       key sensitivities; and
                                    •       significant limitations and uncertainty in the model.

                                    To restate, the challenge is to reduce complexity to simplicity, so that Board members feel that they understand:
                                    •       where is the model expected to work well;
                                    •       in what circumstances is it likely to break down;
                                    •       is the overall model output credible;
                                    •       what “moves the dial” in terms of key assumptions or judgements; and
                                    •       are those assumptions and judgements reasonable?

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                        34
Your presenter from Grant Thornton

                                                                         He is a UK Chartered Accountant and experienced Head of Audit (including
                                                                         LBG and RBS) with over 25 years of Assurance experience. Currently at
                                                                         Grant Thornton he leads Retail Banking Internal Audit work for Challenger
                                                                         Banks and Automotive Finance.
                                                                         The Internal Audit work has included Enterprise Wide Risk Management
                                    Shuvo Banerjee                       (PRA-initiated review), Credit Risk, Recovery Planning, Compliance and
                                    Head of Retail Banking, Challenger   Transaction monitoring frameworks, Financial and Regulatory Reporting and
                                    Banks & Automotive Finance
                                                                         Model frameworks, including IFRS 9 and Stress Testing – referring to Basel,
                                    E: shuvo.banerjee@uk.gt.com          European Banking Authority (EBA), European Central Bank guidance or
                                    T: +44 (0)20 7865 2096               other Industry best practice where applicable

© 2018 Grant Thornton UK LLP. Confidential and information only.                                                                                       35
3. Aviation

              ‘For the 2021 solvency stress
              test, banks will be expected to
              stress the airline and airline
              leasing sector as well as
              identifying their most
              significant sectorial cohort of
              Covid-related exposure under
              the stress.
              Stress testing the UK banking system:
              Key elements of the 2021 stress test
3. Aviation – deep dive

                          © ICAEW 2021
THE AVIATION ECO-SYSTEM:
THE DRIVERS OF DEMAND AND
SUPPLY - UK OUTLOOK

Phil Seymour
Company President & Head of Advisory
ISTAT Certified Senior Appraiser Fellow
phil.seymour@iba.aero
                                          24th March 2021
www.iba.aero
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    Appraisal:         aviation value                            extensive values
 “Appraiser of the          chain          Hands-on technical    and fleet data to
    Year 2020”                              and management           create a
                                            support for lease     comprehensive
                                           and asset partners   data platform for
                                                                real-time analysis

www.iba.aero                                                                         39
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www.iba.aero                                                                   40
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AIRLINE FAILURES/ADMINISTRATION
                                                                                                        Airline Failures & those in Administration (Jets & TPs >25 seats) - 15th March 2021
                                                                                                                      (Assuming Operators in Administration do not re-emerge)
                                                                                                                   Brent (EIA)                   Failures (iQ)   Annualised # of Aircraft           # of Aircraft (iQ)
                                                                                          200                                                                                                                            2000
               Brent Oil Price USD/bbl & Number of Airline Failures & in Administration

                                                                                                        Average Failed Fleet Size (# aircraft/failure)
                                                                                                40.00
                                                                                          180   35.00                                                                                                                    1800
                                                                                                30.00
                                                                                                25.00
                                                                                          160   20.00                                                                                                                    1600
                                                                                                15.00
                                                                                                10.00
                                                                                          140    5.00
                                                                                                                                                                                      April 2020 prediction              1400
                                                                                                 0.00

                                                                                                                                                                                                                                Number of Aircraft
                                                                                          120                                                                                                                            1200

                                                                                          100   > Powered by                                                                                                             1000

                                                                                           80                                                                                                                            800

                                                                                           60                                                                                                                            600

                                                                                           40                                                                                                                            400

                                                                                           20                                                                                                                            200

                                                                                            0                                                                                                                            0
www.iba.aero                                                                                                                                                                                                                                         42
AIRLINE FAILURES/ADMINISTRATION
2020/2021 FAILURE/ADMINISTRATION PROGRESS
   2021 so far Air Namibia, Sky Regional                                                                            Airline Failures & those in Administration (Jets & TPs >25 seats)
   December    Interjet, Montenegro Airlines, Palestinian Airlines                                          1,700
   November    Norwegian Air International                                                                  1,600                                                                31    1548
   October     Air Asia Japan, Cathay Dragon                                                                        > Powered by                                     52     28
   September   Go2Sky                                                                                       1,500                                         132   3
                                                                                                            1,400
   August      ExpressJet                                                                                                                           182
                                                                                                            1,300
   July        Aeromexico Connect, Aeromexico                                                                                                                                                 65% of CH11 aircraft
                                                                                                            1,200                              62

                                                                              Number of Aircraft Involved
               OpenSkies, Virgin Atlantic, Jet Time                                                                                                                                           remain in service
                                                                                                            1,100                        588                                     898          (active & short-term
   June        Flyest, Level Europe, SunExpress Deutscheland                                                                                                                                  parking)
                                                                                                            1,000
               One Airlines, NokScoot, LIAT
               Tigerair Australia                                                                            900
                                                                                                             800
               South African Airways
               Comair                                                                                        700
   May         Miami Air International                                                                       600
               Avianca
                                                                                                                                   367
               TAME EP                                                                                       500                                                                              24% of failure related
               LATAM                                                                                                                                                                          aircraft remain stored
                                                                                                             400
               Air Georgian
                                                                                                                                                                                 650          with the Airline (50:50
                                                                                                             300                                                                              leased)
               Trans States Airlines, Ravn (inc in Penair and Corvus)
                                                                                                             200
   April       Compass Airlines, BRA Braathens Regional Airlines                                                              73
               LGW - German Airways, Germanwings, CityJet, Virgin Australia                                  100         26                                                                                  25
                                                                                                                     4                                                                          0      8
               Virgin Australia, Air Mauritius, South African Express
                                                                                                               0
   March       FlyBe
   February    Air Italy, AtlasGlobal, Connect Cargo
   January     Ernest Airlines, Nantucket Express
                                                                                                                                                Failure    Administration
www.iba.aero                                                                                                                                                                                                            43
UTILISATION
PASSENGER & FREIGHT
                             All Passenger Flights                                                      Freight/Combi/QC Flights
3,500,000                                                                   90.0%   160,000                                                             70.0%

                                                                            80.0%   140,000
3,000,000                                                                                                                                               60.0%

                                                                            70.0%
                                                                                    120,000
2,500,000                                                                                                                                               50.0%
                                                                            60.0%
                                                                                    100,000
2,000,000                                                                   50.0%                                                                       40.0%

                                                                                     80,000

1,500,000                                                                   40.0%                                                                       30.0%
                                                                                     60,000
                                                                            30.0%
1,000,000                                                                                                                                               20.0%
                                                                                     40,000
                                                                            20.0%

 500,000                                                                                                                                                10.0%
                                                                            10.0%    20,000

       0                                                                    0.0%         0                                                              0.0%

               Domestic Flights     Int'l Flights    Load Factor % (IATA)                     Domestic Flights   Int'l Flights   Load Factor % (IATA)

www.iba.aero         > Powered by                                                                                                                               44
AVIATION INTERDEPENDENCIES

www.iba.aero                 45
AVIATION INTERDEPENDENCIES

www.iba.aero                 46
AVIATION INTERDEPENDENCIES
                                           GDP
                                         Global and
                                          regional
                                         variations
                                                      Air traffic
                        Supply chain
                                                       Pax and
                           into MRO                    Freight

                                        Aviation
               Supply chain
                into OEM
                                          Eco                       Oil price

                                        System

                                                        USD
                           Regulators
                                                      dominant
                           (UK CAA)
                                                      FX impact
                                        Maintenance
                                         Repair and
                                          Overhaul
                                           (MRO)
www.iba.aero                                                                    47
AVIATION INTERDEPENDENCIES
                                                       GDP – global
                                                      consideration
                                                      – desire to get
                                                          away –                   Air traffic: Pax
                                                         business,                  and Freight:
                                  ESG,                 tourism, VFR                   IATA not
                             especially the                                          expecting
                                  ‘E’                                               recovery to
                                                                                  2019 levels until
                                                                                        2024

                                                                                                  Oil price: has
                                                                                                had a big impact
                                                                                                   on aviation
               Finance/Leasing
                                                     Aviation                                   businesses, less
                                                                                                 so now but will
                                                       Eco                                         return (FX)

                                                     System
                                                                                            USD dominant:
                                                                                               UK airlines
                      Insurance                                                             have suffered-
                                                                                              fuel, parts,
                                                                                            finance in USD

                                                                         MRO: Rolls
                                         Regulators (UK                 Royce heavily
                                          CAA/EASA)                       reliant on
                                                                         aftermarket

www.iba.aero                                                                                                       48
UK EXPOSURE
                                                    Travel agents
                                                     and portals
                        Legal,
                      Finance,
                                                                                 Manufacturers
                     Insurance
                                                                                 – not just BAE
                    consulting –
                                                                                    and RR, a
                   English Law still
                                                                                  multitude of
                   a precedent in
                                                                                 other suppliers
                    aviation, Intl
                        banks

                                                 UK Aviation Eco
                                                System BAG 2017
                                                   20bn/250K
                                                    employed
                                                                                        Maintenance,
               UK CAA/NATS                                                               Repair and
                                                                                       Overhaul (MRO)

                                                                     Airports, MRO,
                                  Airlines: BA,                      catering, ATC,
                                                                    Fuel emergency
                                 Virgin, Easyjet,
                                                                     services – not
                                   Jet2, (new                       only commercial:
                                     flybe?)                          business jet
                                                                          sector

www.iba.aero                                                                                            49
MACRO ISSUES – DRIVING CHANGE

    > Aviation drives new tech but what about the ‘E’ in ESG?

           > Driving change towards zero carbon emissions – UK at the centre of innovation

           > RR and BA at the centre of SAF, Electric and Hydrogen initiatives – job creation

    > Aviation related skills are transferable:

           > Generally, highly trained and skilled: Pilots/Technicians/Design/Manufacturing/Tech and
           across the maintenance

           > Fitters, cabin safety, etc. Very transferable skill sets

www.iba.aero                                                                                           50
ASSET VALUES

    > What’s happening to my security?

    > Aircraft values dropping – some are improving, but which ones?

    > IAS 36 – FVLCS and VIU – typical questions we are being asked to consider (ISA 620/500)

    > IFRS 16 – leased assets – airlines particularly impacted by treatment of leased assets
    - rights of use/liabilities

www.iba.aero                                                                                    51
A320CEO VALUE PROFILE
BASE REMAINS STEADY BUT OLD/MID BUILDS ON WATCH
EXAMPLE: BA AND EASYJET OLDER FLEETS
                                  Base Value        Soft Value          Market Values 1998       Market Values 2008          Market Values 2018           Parked & Stored %

                      50.00                                                                                                                                              100%

                      45.00                                                                                                                                              90%

                      40.00                                                                                                                                              80%

                      35.00                                                                                                                                              70%

                                                                                                                                                                                Parked & Stored %
                      30.00                                                                                                                                              60%
               US$m

                      25.00                                                                                                                                              50%

                      20.00                                                                                                                                              40%

                      15.00                                                                                                                                              30%

                      10.00                                                                                                                                              20%

                       5.00                                                                                                                                              10%

                       0.00                                                                                                                                              0%
                           1998    2000    2002   2004   2006    2008    2010    2012   2014   2016   2018   2020     2022   2024   2026    2028   2030      2032    2034

                              > Powered by                        TRENDS
www.iba.aero                                                                                                                                                                                        52
737-800 VALUE PROFILE
BASE REMAINS STEADY BUT MID BUILDS ON WATCH
EXAMPLE: JET2.COM FLEET
                                  Base Value        Soft Value          Market Values 1998       Market Values 2008          Market Values 2018           Parked & Stored %

                      50.00                                                                                                                                              100%

                      45.00                                                                                                                                              90%

                      40.00                                                                                                                                              80%

                      35.00                                                                                                                                              70%

                                                                                                                                                                                Parked & Stored %
                      30.00                                                                                                                                              60%
               US$m

                      25.00                                                                                                                                              50%

                      20.00                                                                                                                                              40%

                      15.00                                                                                                                                              30%

                      10.00                                                                                                                                              20%

                       5.00                                                                                                                                              10%

                       0.00                                                                                                                                              0%
                           1998    2000    2002   2004   2006    2008    2010    2012   2014   2016   2018   2020     2022   2024   2026    2028   2030      2032    2034

                         > Powered by                            TRENDS
www.iba.aero                                                                                                                                                                                        53
IBA’S TAKEAWAYS
KEY COMMENTS AND CONCLUSIONS
> Carefully consider the sector that the specific business is
  operating in
> Not every sector of the aviation industry is negatively
  impacted
> Consider unencumbered assets – some are retaining value
  better than others
> Innovation is at the heart of UK aerospace:
  > Carbon emission reduction initiatives
  > Investment returns may be long-term
  > SAF/Electric/Hybrid/Hydrogen

www.iba.aero                                                    54
CONTACT US
KEEP UP TO DATE
WITH OUR AVIATION
INTELLIGENCE: IBA.AERO

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               IBA Group Ltd, IBA House, 7 The Crescent,
               Leatherhead, Surrey, KT22 8DY

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DISCLAIMER: Our discussion may include predictions, estimates or other information that might be
considered forward-looking. While these forward-looking statements represent our current judgment on
what the future holds, they are subject to risks and uncertainties that could cause actual results to differ
materially. You are cautioned not to place undue reliance on these forward-looking statements, which
reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating
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All materials are intellectual property of IBA Group

www.iba.aero                                                                                                    56
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