RETAIL CONSTRUCTION WILL NOT FALL OFF RIGHT WAY AS PIPELINE OF SHOPPING CENTERS IS STILL VERY FULL OFFICE VACANCY NATIONALLY IS 13.5% LOWEST SINCE MARCH 2001 MCGRAW HILL OVERALL CONSTRUCTION WILL BE DOWN 1% - FIRST DECLINE SINCE 1991 – 5% FALL IN RESIDENTAL AND 3% DECLINE IN SHOPPING CENTERS AND STORES.
Housing inventory at 7.3 months
SUB PRIME MARKET HAS ALLOWED ALLOWED 2 MILLION FAMILIES INTO HOMES OVER THE PAST DECADE HELPING TO PUSH US HOMEOWNERSHIP RATES UP TO 69% FROM 65%
The World’s Financial Crisis What Happened and When will it be Over? Robert W. Frentzel Executive Vice President and Managing Director The PrivateBank
A Correction Seemed Likely In Certain Markets Source: LoanPerformance
Fed intervention pushes mortgage rates to all time lows…
Housing Market Beginning to Clear at Low Levels Source: MDA DataQuick and KBW calculations. Third Quarter Home Resales in California
Deleveraging Begins with the Consumer Source: U.S. Department of Commerce: Bureau of Economic Analysis and KBW research. * Personal savings as a percentage of disposable personal income. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods. ** Monthly data updated through October 2008.
Source: SNL Financial. Data as of 1/8/09. The KBW Regional Banking Index (KRX) is an equal weighted index of 50 geographically diverse companies representing regional banking institutions listed on U.S. stock markets. KBW Regional Bank Performance
Source: SNL Financial. Data as of 1/8/09. The KBW Regional Banking Index (KRX) is an equal weighted index of 50 geographically diverse companies representing regional banking institutions listed on U.S. stock markets. Note: This graph is a continuation of the graph on the previous page. KBW Regional Bank Performance (continued)
September 15, 2008 – Lehman Brothers files for bankruptcy, Bank of America acquires Merrill Lynch for $50 billion
September 16, 2008 – Fed announces $85 billion rescue package for AIG
September 18, 2008 – Reserve primary fund “breaks the buck” triggering exodus from money market funds
September 19, 2008 – Bush announces plan to buy troubled assets from financial firms, Treasury guarantees money market funds
September 22, 2008 – Goldman Sachs & Morgan Stanley convert into bank holding companies
September 25, 2008 – Federal regulators seize WaMu and sell it to J.P. Morgan for $1.9 billion
September 30, 2008 – FDIC increases deposit insurance to $250,000
October 3, 2008 - House approves revised $700 billion economic rescue package by vote 263-171 and President Bush signs into law, Wachovia snubs Citigroup and agrees to be purchased by Wells Fargo for $15.1 billion
Net interest margins fell steadily from 1995 – 2008YTD
Competition among lenders caused spreads to narrow substantially
Competition for deposits created increased borrowing costs and dependence on wholesale deposit sources
De novo banks formed at unprecedented pace heightened competitive dynamics
Financial Institutions are not being paid for the risk
Source: SNL Financial. Data as of 9/30/08. Note: Metric is the median of the top tier consolidated banks and thrifts with assets greater than $500 million. 5B-$30B in Assets All Banks and Thrifts Competition Among Banks Drove Behavior
NPAs have spiked over the last several quarters, increasing from $39B in December of 2006 to over $150B currently (9/30/08)
Source: SNL Financial. Data as of 9/30/08. Metric displayed is the median. Note: Analysis includes top tier consolidated banks and thrifts with assets greater than $500 million. NPAs include nonperforming loans and leases, renegotiated loans and leases, and real estate owned. Bank Loan Portfolios are Undergoing Significant Distress 5B-$30B in Assets All Banks and Thrifts
Historical Bank Offering Activity Levels Source: Dealogic. Note: US and Puerto Rican bank IPO, follow-on, 144A, PIPE and Convertible offerings since 1998. As of January 9, 2009. Only $44.3B Raised in the Previous Decade Over $151 billion if capital from Sovereign Wealth Funds included Millions ($) Number of Deals
Source: SNL Financial. Data as of 9/30/08. Metric displayed is the median. Note: Analysis includes top tier consolidated banks and thrifts with assets greater than $500 million.
Accounting dictates, lax credit underwriting standards and overly optimistic reserve levels have caused under reserved balance sheets for most U.S banks, necessitating significant adjustments
Balance Sheets are Not Positioned to Cover Losses 5B-$30B in Assets All Banks and Thrifts 5B-$30B in Assets All Banks and Thrifts
Source: FDIC. 1/12/09. Nationwide Bank & Thrift Failures Bank & Thrift Failures since 1990
Bank and thrift failures remain well below those levels seen in the early 1990s, though they are on the rise, with year-to-date failures already exceeding all of 2007.
Searching for a Second Derivative on Credit Source: ABX Net, company reports, and KBW calculations Delinquency Data * Total subprime delinquencies as represented by ABX. ** Downey Financial NPAs, excludes total debt restructured. *** Washington Mutual: nonaccrual prime home equity loans as a percent of WM's prime home equity held for investment loan portfolio; data represents quarter (e.g., Mar-07 = 1Q07). **** Freddie Mac single-family delinquencies. .
Home Equity Delinquencies and Net Charge-offs at Banks (in $ billions) Based on Data filed with Bank regulators. Home equity loans and lines = revolving lines of credit secured by one- to four-family properties + junior lien loans secured by one- to four-family properties. Delinquent home equity = Home equity loans and lines that are more than 30 days past due or non accruing Source: SNL Financial
Credit spreads hover near record highs… 5 yr Industrial Corporate Bond Spreads over LIBOR
A contraction phase of the business cycle, or "a period of reduced economic activity."
"a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment, industrial production, and wholesale-retail sales”*
Rule of thumb: Two quarters of negative GDP growth
The Big Question: Recession or Depression?
An extended period of chronically weak economic performance and financial instability
Characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations.