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Global Business Scenario
&
Recession Effects on
Banking Sector
Road MapRoad Map
Recession
Subprime- The Villain for Recession 2007 & 2008
Case Studies
Impact on Indian Banking Sector
Conclusion
Vote of Thanks
Declining Market Economy
Starting Point = Unwillingness to buy
Recession
Defining Economic Depression “ Defining Economic Depression “ RECESSIONRECESSION””Defining Economic Depression “ Defining Economic Depression “ RECESSIONRECESSION””
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
DEPRESSIONWHEN YOU LOSE YOUR JOB
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”.
What Causes What Causes SLOWDOWNSLOWDOWN of Economy? of Economy? What Causes What Causes SLOWDOWNSLOWDOWN of Economy? of Economy?
Recession: Past TrendsRecession: Past TrendsYear / 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.
1948 –49 7.9%(Oct 1949) −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.
1953 –54 6.1%(Sep 1954) −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.
Recession: Past TrendsRecession: 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 interest rates, and the 1990 oil price shock contributed to a shallow recession
2007 –08 9.7%(Aug 2009) −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.
Recession Effects on IndustriesRecession Effects on Industries
Least Impacted
Pharmaceuticals
Oil & Gas
FMCG
Media & Entertainment
Mildly Impacted
Power equipments & Services
Auto
Retail
Logistics
Hospitality and tourism
Most Impacted
Banks
Financial Services
Real Estate
Infrastructure
Information Technology
SUBPRIME
• Also Termed as “B” loans or “second chance” loans Balance-of-payments 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, A-paper 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.
Subprime Loans – Meaning & FeaturesSubprime Loans – Meaning & FeaturesSubprime Loans – Meaning & FeaturesSubprime Loans – Meaning & Features
(Financial Institution)
(Entrepreneur)
Causes of Subprime FailureCauses of Subprime Failure
• Boom and bust in the housing sector
• Reckless Borrowing and Lending
• Securitization practices
• Others
– Inaccurate credit ratings
– Government policies
CASE STUDY I -LEHMAN BROS.
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
• Fate Chapter 11 bankruptcy
• Headquarters New York City, New York, US
• Area served Worldwide
• Key people Richard S. Fuld, Jr.Former (Chairman) & (CEO)
• Industry Investment services
• Products Financial ServicesInvestment BankingInvestment management
• Employees 26,200 (2008)
Lehman Brother’s Broad Recognition
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
Leading Global Banking Franchise
“Bank of the Year 2002”
The Firm received the following awards for 2002, which reinforce the depth and strength.
Broad Recognition
29
4 ranked research franchise.
Deal of the Year: M&A” – Olivetti's $34.8 billion acquisition of Telecom Italia
Bond House of the Year & Best Lead Manager of Subordinated Debt”
The Best-Managed Investment Bank on Wall Street.
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.
In Comparison to others
Standard US Leverage $ is 10 Debt - 1 equity Lehman has more than 30Debt -1equity
Core reasons for failure…Core reasons for failure…
In Comparison to others
Core reasons for failure…Core reasons for failure…
Exposure of Investments In Comparison to others
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
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,)
•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.
Henry Paulson, Treasury Secretary ======= legislation to support Fannie Mae and Freddie Mac but not Lehman
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 )
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
Indian Bank’s Exposure 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
CASE STUDY ii (CITIGROUP)
INTRO OF CITIINTRO 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)
Analysis of Balance SheetAnalysis 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 1,381,500 1,511,123 1,764,535 2,093,112 2,069,108
Stockholder Equity 112,537 115,428 119,783 127,754 113,598
Stated Leverage 12.3 13.1 14.7 16.4 18.2
% Equity/Liabilities 8.10% 7.60% 6.80% 6.1% 5.50%
The Real Picture….The Real Picture….
Particulars (Amt in USD Millions) 31-Dec-05 30-Jun-06 31-Dec-06 30-Jun-07 31-Dec-07
Total Liabilities 1,381,500 1,511,123 1,764,535 2,093,112 2,069,108
Stockholder Equity 112,537 115,428 119,783 127,754 113,598
Intangible Assets 47,879 48,760 49,316 62,206 63,891
Tangible Assets 1,446,158 1,577,791 1,835,002 2,158,660 2,118,815
Tangible Equity 64,658 66,668 70,467 65,548 49,707
Real Leverage 21.4 22.7 25.0 31.9 41.6
T-Equity/T-Assets 4.50% 4.20% 3.80% 3.00% 2.30%
CITIGROUP’s Quarterly ResultsCITIGROUP’s Quarterly Results
Year 2008
17,569
2,9082,4235,127
0
5,000
10,000
15,000
20,000
Mar'08 June'08 Sept'08 Dec'08
Quarter Ended
Net L
oss (U
SD M
illion
s)
Year 2009
1,577
4,245
0500
1,0001,5002,0002,5003,0003,5004,0004,500
Mar'09 June'09
Quarter Ended
Net P
rofit
(USD
Mill
ions
)
Share price MovementShare price Movement
$3
$55
Insult to an Injury…..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)
CITI AWAKENS…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
Liquidity Injection…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.
The Cleaning Process….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.
• Further losses to be absorbed by the Federal Government
The Last Resort…2008The 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.
CITI’s SPLIT PERSONALITYCITI’s SPLIT PERSONALITY
CITIGROUP
CITICORPCore Business
CITI HOLDINGSNon Core Business
Global Institutional Bank Retail Bank
Global Transaction Services
Citi Private Bank
Corporate & Investment Bank
Brokerage and Asset
Management
Local ConsumerFinance
Special Asset Pool
On January 16, 2009 Citigroup announced that it was splitting into two companies:
CITI Holding – Cloak for Disposal of Toxic CITI Holding – Cloak for Disposal of Toxic Assets…..Assets…..
Primerica Financial Services
Nikko Cordial Securities
Nikko Asset Management
49% stake in Morgan Stanley
Smith Barney
Brokerage &Asset Management
Tough Decisions…2009Tough 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
Impact of recession on Indian banking sector
Approach of Two Different Type of Banks Approach of Two Different Type of Banks Public Sector Banks Vs. Private Sector Banks
Public Sector Banks : Risk-averse approachPrivate Sector Banks : Aggressive approach
Performance of two different types of bankPerformance of two different types of bank(in March 2009 (4th Quarter) as compare to March 2008)(in March 2009 (4th Quarter) as compare to March 2008)
Increase in Public Sector Banks
Private Sector Banks
Net Profit (BSE Banker Index)
46.0 % 1.5 %
Net Sales 26.1 % 14.7 %Interest Income 30.0 % 14.5 %Non Performing Assets (NPA)
20.4 % 37.8 %
ICICI- reported exposureof $80 mn, $12 mn
provisionsExpected loss at $ 28
mnSBI- reported exposure
at $5 mn, expects torecover 70%
PNB- reportedexposure at $5 mnExpected loss at $
2 mn
BOI- reported exposureof $ 11 mn,
expected loss of $ 5 mn BOB- reported exposure
Expected loss of $ 5 mnof $ 10 mn
Expected loss at $ 4 mn
Axis Bank- reportedexposure $ 1.5 mn through
mark to market forexcounter party deal. Impactnegligible
Edelweiss: 2.6%stake bought by
Lehman
Emkay Global-Lehman Holdings
at 4.05%
Recessionary Effects on Indian BanksRecessionary Effects on Indian Banks
How Indian Banks are Safe?How Indian Banks are Safe?
Thank You!!!Thank You!!!
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