Successfully reported this slideshow.

Presentation on banking

536 views

Published on

A presentation on subprime mortgage crisis and its impact on Indian Banking Sector. This also includes the debacle of lehman Brothers which laid the foundation of Recession

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

Presentation on banking

  1. 1. Global business scenario & recession effects on bankinG sector
  2. 2. Road Map Recession  Subprime- The Villain for Recession 2007 & 2008  Case Studies  Impact on Indian Banking Sector  Conclusion  Vote of Thanks
  3. 3. Declining Market Economy Starting Point = Unwillingness to buy
  4. 4. recession
  5. 5. Defining Economic Depression “ RECESSION” Recession is the economy shrinking for two consecutive quarters (=6 months) with a decrease in the GDP (=Gross Domestic Product) IMF Depicted Formula for Global Recession = Global Growth Rate < 3% There is a joke that economists quote to explain the Difference between “Recession & Depression” (BY RONALD REAGAN) RECESSION WHEN YOUR NEIGHBOR LOSES HIS JOB DEPRESSION WHEN YOU LOSE YOUR JOB
  6. 6. What Causes SLOWDOWN of Economy? It is due to cyclical movement of economy or by some external elements. Few major causes of Recession are: •Tendency of the rate of profit to fall •Balance-of-payments Crisis •Energy Crisis •Historical Crises •Financial Crisis •Social & Economic Effects •War •Under Consumption & Over Production “Inflation of money supply or mishandling of excessive liquidity or even crunch of liquidity also invites recession”.
  7. 7. Recession: Past Trends Year / Period Peak unemployment GDP decline Factors affected economy resulting into “RECESSION” 1929 -33 35.3% (1933) −26.7% Stock markets crashed worldwide, and a banking collapse took place in US. 1937 –38 26.4% (1938) −3.4% The Recession of 1937 is only considered minor when compared to the Great Depression, but is otherwise among the worst recessions of the 20th century. Feb–Oct 1945 5.2% (1946) −12.7% The decline in government spending at the end of World War II led to an enormous drop in gross domestic product making this technically a recession. −1.7% Recession was a brief economic downturn; forecasters of the time expected much worse, perhaps influenced by the poor economy in their recent life time. −2.6% After a post-Korean War inflationary period, more funds were transferred into national security. The Federal Reserve changed monetary policy to be more restrictive in 1952 due to fears of further inflation. 1948 –49 1953 –54 7.9% (Oct 1949) 6.1% (Sep 1954)
  8. 8. Recession: Past Trends Year / Period Peak unemployment GDP decline Factors affected economy resulting into “RECESSION” 1969 -70 6.1% (Dec 1970) −0.6% The relatively mild 1969 recession followed a lengthy expansion resulted into rising inflation. 1973–75 9.0% (May 1975) −3.2% A quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War led to stagflation in the US. 1990 7.8% (June 1992) −1.4% An increase in 1990 oil price shock recession −3.9% The collapse of the housing market led to bank collapses in the US and Europe, causing the amount of available credit to be sharply curtailed, resulting in huge liquidity and solvency crises. In addition, record oil prices and food prices, stock markets crashed globally, and several high profile banking, automotive, and manufacturing giants collapsed. 2007 –08 9.7% (Aug 2009) interest rates, and the contributed to a shallow
  9. 9. Recession Effects on Industries Least Impacted Mildly Impacted Most Impacted  Pharmaceuticals  Banks  Oil & Gas  Power equipments &  Services  FMCG  Auto  Real Estate  Media & Entertainment  Retail  Infrastructure  Logistics  Information Technology  Hospitality and tourism  Financial Services
  10. 10. subPriMe
  11. 11. Subprime Loans – Meaning & Features • Also Termed as “B” loans or “second chance” loans Balance-ofpayments Crisis • Originated to borrowers who do not qualify for market interest rates due to bad credit history Historical Crises • Carry higher interest rates than conventional loans for higher-rated, Apaper borrowers. • Different types of subprime mortgages including “interest only mortgages” which allow borrowers to only pay interest for a period of time, “pick a payment” which gives the borrower the option on how to repay the loan and “initial fixed rate mortgages” which convert to variable rate loans like ARM’s.
  12. 12. (Entrepreneur) (Financial Institution)
  13. 13. Causes of Subprime Failure • Boom and bust in the housing sector • Reckless Borrowing and Lending • Securitization practices • Others – Inaccurate credit ratings – Government policies
  14. 14. CASE STUDY I -LEHMAN BROS.
  15. 15. • Fate • Headquarters New York City, New York, US • Area served Worldwide • Key people Richard S. Fuld, Jr. Former (Chairman) & (CEO) • Industry Investment services • Products • Employees Financial Services Investment Banking Investment management 26,200 (2008) Chapter 11 bankruptcy Henry set up a general store in Alabama in 1844 and was later joined by his brothers. The 158-year-old firm was founded by brothers Henry, Emanuel and Mayer Lehman, Jewish immigrants to the US from Germany, in 1850 by setting up merchant bank in New York after having made money in railway
  16. 16. Lehman Brother’s Broad Recognition Leading Global Banking Franchise Broad Recognition “Bank of the Year 2002” The Best-Managed Investment Bank on Wall Street. The Firm received the following awards for 2002, which reinforce the depth and strength.  U.S. Investment Grade Corporate Bond House  Financial Bond House (Subordinated Debt)  Financing Package of the Year: Qwest Dex  U.S. Leveraged Loan: Qwest Dex  U.S. Dollar Bond: CFC (National Rural Utilities Cooperative Finance Corp.)  Borrower of the Year: GECC 4 ranked research franchise. Bond House of the Year & Best Lead Manager of Subordinated Debt” Deal of the Year: M&A” – Olivetti's $34.8 billion acquisition of Telecom Italia 29
  17. 17. Subprime Mortgage Crisis Exposure • In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction in goodwill. • In 2nd Qtr Sept 2008 results Net Loss of ($3.9) Billion Still exposure of 54bn to MBS to write off • • • • • On 15th Sept 2008 Lehman Brothers Holdings announced filing for Chapter 11 bankruptcy protection citing bank in debt of $613 billion, in bond debt $155 billion, assets worth $639 billion.
  18. 18. In Comparison to others
  19. 19. Core reasons for failure… Standard US Leverage $ is 10 Debt - 1 equity Lehman has more than 30Debt -1equity
  20. 20. Core reasons for failure… In Comparison to others
  21. 21. Exposure of Investments In Comparison to others
  22. 22. SARBANES-OXLEY SECTION ACT 2002 401(a); RULES ON DISCLOSURE OF OFF-BALANCESHEET ITEMS ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS • Guarantee contracts • Contingent obligation • Derivative Instruments • Hedging Activities • Unconditional Purchase Obligations • Capital Lease /Operating Leases Obligations
  23. 23. Statements of Financial Accounting Standards No. 157, Fair Value Measurements • FAS 157is an standard issued in September 2006 by the (FASB) which became effective for entities with fiscal years beginning after November 15, 2007. • companies to adjust the value of marketable securities (such as the mortgage-backed securities (MBS) to their market value. than just their historical purchase price • triggered a margin call,. • Markdowns requiring additional capital raising • financial leverage (i.e., borrowing to invest,)
  24. 24. Henry Paulson, Treasury Secretary ======= legislation to support Fannie Mae and Freddie Mac but not Lehman •Failed negotiations with the Treasury Department taxpayer-funded rescue was allowed to fail •Conflicting interests between investment banks and agencies • Treasury Secretary Henry M.Paulson had a conflict of interest in bailout negotiations, given his role as the former Chairman of Goldman Sachs.
  25. 25. Potential Buyers Lost • Barclay’s Bank ( backed out of agreements, but then bought a portion of the portfolio AFTER the Chapter 11.) • Bank of America ( opted for Merrill Lynch, which was priced more reasonably) • Korean Development Bank (faced difficulties pleasing regulators and attracting partners for the deal )
  26. 26. Controversy of executive pay during crisis • Richard , head of Lehman Brothers gets to keep $480 million (£276 million) in pay and bonuses • Increased significantly before filing for bankruptcy. • CNBC reported that Lehman, including Richard , several executives have been involved a case relating to securities fraud
  27. 27. Indian Bank’s Exposure • Country's largest private sector lender, ICICI Bank today said its London subsidiary has 57 million Euro (about Rs 375 crore) exposure in the Lehman Brothers • Part of treasury operations. • ICICI Bank shares plunged by 5.82 per cent to Rs 591.35 on the Bombay Stock Exchange. • Nomura Holdings, Inc. acquired Lehman Brothers' franchise in the Asia Pacific
  28. 28. CASE STUDY ii ( CiTiGROUP )
  29. 29. INTRO OF CITI • Major Financial Services Company based in New York • Formed from one of the largest mergers in history by combining the banking giant Citicorp and financial conglomerate Travelers Group on April 7, 1998. • World’s Largest Bank by total customers (200 million plus) and worldwide branch network (Over 16000 offices spread across 140 countries)
  30. 30. Analysis of Balance Sheet Particulars (Amt in USD Millions) 31-Dec-05 30-Jun-06 31-Dec-06 30-Jun-07 31-Dec-07 Total Liabilities Stockholder Equity Stated Leverage % Equity/Liabilities 1,381,500 1,511,123 1,764,535 2,093,112 2,069,108 112,537 115,428 119,783 127,754 113,598 12.3 13.1 14.7 16.4 18.2 8.10% 7.60% 6.80% 6.1% 5.50%
  31. 31. The Real Picture…. Particulars (Amt in USD Millions) Total Liabilities Stockholder Equity Intangible Assets Tangible Assets 31-Dec-05 30-Jun-06 31-Dec-06 30-Jun-07 31-Dec-07 1,381,500 1,511,123 1,764,535 2,093,112 2,069,108 112,537 115,428 119,783 127,754 113,598 47,879 48,760 49,316 62,206 63,891 1,446,158 1,577,791 1,835,002 2,158,660 2,118,815 Tangible Equity 64,658 66,668 Real Leverage 21.4 22.7 4.50% 4.20% T-Equity/T-Assets 70,467 65,548 49,707 25.0 31.9 41.6 3.80% 3.00% 2.30%
  32. 32. CITIGROUP’s Quarterly Results Year 2008 Year 2009 20,000 17,569 Net Profit (USD Millions) Net Loss (USD Millions) 15,000 10,000 5,000 5,127 2,423 2,908 0 Mar'08 June'08 Quarter Ended Sept'08 Dec'08 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 4,245 1,577 Mar'09 June'09 Quarter Ended
  33. 33. Share price Movement $55 $3
  34. 34. Insult to an Injury….. • During the eleven year period, 1992-2003, under a computerized "account sweeping program" , money was removed from 53,000 customers accounts having any positive balances from over-payments or double payments • The Citibank appropriated the money without notifying the customer • In August 2008, after a 3 year investigation by California's Attorney General Jerry Brown, Citibank was ordered to repay the $14 million (close to $18 million including interest and penalties)
  35. 35. CITI AWAKENS… • On 4 November, 2007, Charles "Chuck" Prince quit as the Chairman and chief executive • Job Cuts and Relocations: • • 2007 : 17000 Job cuts and 9500 jobs relocated 2008 : 23000 Job Cuts and Plans announced for 52000 new job cuts
  36. 36. Liquidity Injection…  In October, 2008, the Treasury injected $25 billions in Troubled Asset Relief Program (TARP) in exchange for preferred shares on which it is to pay 5% interest for five years and then 9%. On February 27, 2009 it was announced that the United States government would be taking a 36% equity stake in the company by converting $25 billion into common shares.  In November, 2008, additional $20 billion was injected into the company in exchange for 8% preferred shares.
  37. 37. The Cleaning Process…. The federal government guaranteed removal of $306 billion of troubled assets from Citi's $2 trillion balance sheet under the following arrangement: • First $29 billions of these assets : Citigroup • Losses in excess of $29 billions : 90% by Government 10% by Citigroup • Treasury via TARP to absorb the first $5 billion of the government's losses • The FDIC takes the next $10 billion.
  38. 38. The Last Resort…2008 • Sold German Retail Banking Operation Citibank Privatkunden AG & Co to Credit Mutuel in July, 2008 • Tata Consultancy Services acquired Citigroup Global Services, the India-based captive business processing outsourcing (BPO) in October, 2008 • Wipro acquired Citi Technology Services Ltd, the India-based captive provider of information technology services and solutions in December, 2008.
  39. 39. CITI’s SPLIT PERSONALITY On January 16, 2009 Citigroup announced that it was splitting into two companies: CITIGROUP CITICORP Core Business Global Institutional Bank CITI HOLDINGS Non Core Business Retail Bank Global Transaction Services Corporate & Investment Bank Citi Private Bank Brokerage and Asset Management Local Consumer Finance Special Asset Pool
  40. 40. CITI Holding – Cloak for Disposal of Toxic Assets….. 49% stake in Morgan Stanley Smith Barney Primerica Financial Services Brokerage & Asset Management Nikko Cordial Securities Nikko Asset Management
  41. 41. Tough Decisions…2009 • Citi announced in January, 2009 that they would give Smith Barney to Morgan Stanley Investment bank to combine their brokerage firms in exchange for $2.7 billion and 49% interest in the joint venture • Citi decided to sell Nikko Cordial Securities (Japanese domestic securities business) to Sumitomo Mitsui Banking Corporation in May,2009 • Citi decided to sell Its Entire Ownership Interest in Nikko Asset Management (Japan's leading asset management company) to Sumitomo Trust in July, 2009
  42. 42. Impact of recessIon on IndIan bankIng sector
  43. 43. Approach of Two Different Type of Banks Public Sector Banks Vs. Private Sector Banks Public Sector Banks : Risk-averse approach Private Sector Banks : Aggressive approach
  44. 44. Performance of two different types of (in March 2009 (4th Quarter) as compare to March 2008) Increase in bank Public Sector Banks 46.0 % Private Sector Banks 1.5 % 26.1 % 14.7 % Interest Income 30.0 % 14.5 % Non Performing Assets (NPA) 20.4 % 37.8 % Net Profit (BSE Banker Index) Net Sales
  45. 45. Recessionary Effects on Indian Banks Emkay GlobalLehman Holdings at 4.05% ICICI- reported exposure of $80 mn, $12 mn provisions Expected loss at $ 28 mn PNB- reported exposure at $5 mn Expected loss at $ 2 mn Edelweiss: 2.6% stake bought by Lehman Axis Bank- reported exposure $ 1.5 mn through mark to market forex counter party deal. Impactnegligible SBI- reported exposure at $5 mn, expects to recover 70% BOBreported exposure Expected loss of $ 5 mn of $ 10 mn Expected loss at $ 4 mn BOI- reported exposure of $ 11 mn, expected loss of $ 5 mn
  46. 46. How Indian Banks are Safe?
  47. 47. Thank You!!!

×