Int Finance Ppt

7/31/2019 Int Finance Ppt

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Advantages

Tax evasion

Protection from lawsuits

Fostering international trade

Protection against fluctuating domestic interest rates

Disadvantages

Economic Instability

Political Instability

Stiff Penalties

Currency exchange rates fluctuations 2


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INTERNATIONAL BANKING HUBS

Countries having similar characteristics

Usually smaller wealthy countries

Small island countries (where the term "offshore" banking comes from)

Countries generally offer low (at times zero)taxes to international clients

Keep clients' information secret

Have little transparency

Have no residency requirements

Examples :Aruba, Belize, Bermuda, Cayman Islands, Cyprus, Isle ofMan, Macau (China), Panama, Samoa, San Marino, Switzerland , U.S.Virgin Islands , etc

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CORRESPONDENT BANKING

Relationship between banks that have mutual accounts or at leastone of them has the account with the other

Bank establishes presence in inaccessible market via relationshipwith the local bank

Conduct business transactions, accept deposits and gatherdocuments

Act as a domestic bank's agent abroad

Used by domestic banks in order to service transactions originatingin foreign countries

It is used to avoid high costs associated with operating global branchsystems

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CORRESPONDENT BANKING Allows banks to take advantage of business opportunities abroad

Expansion of correspondent networks helps develops greater customer basefor banks

Due to logistical difficulties a bank can have limited number ofcorrespondent relationships at a time

It has been primarily an international business

Twoimportant payment networks are

Society for Worldwide Interbank Financial Telecommunication (SWIFT)

Clearing House Interbank Payments System (CHIPS)

Clearing House Automated Payment System (CHAPS) [British Equivalent for CHIPS]These payment networks are connected via system called the Gateway

Correspondent banks act on behalf of clients to prepare and presentnegotiable instruments

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INVESTMENT BANKINGDefinition : Financial intermediary that performs variety of servicesincluding aiding in sale of securities, facilitating mergers and othercorporate re-organizations, acting as a brokers to both individual andinstitutional clients and trading on its own

Investment Banks offer:

Merchant banking services : Issue management

Business and Financial Advisory services: M&A, Projectfinance

Asset management services: Portfolio management, MF,VC

Secondary market services : stock broking , equity research


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HISTORYOFINVESTMENTBANKING In USA in 1920s commercial banks started to acquire stock

broking business in order to have presence in booming capitalmarkets

First of such acquisition was National city bank of New Yorkand Halsey Stuart and Co. in 1916

Commercial banks took up underwriting and securitiesbusiness through investment banking affiliates

In 1927 passage of McFadden act allowed bank subsidiariesto take up underwriting

The stock market got overheated with investment banksborrowing money from parent banks in order to speculate instocks

The bubble of overpriced stocks burst in 1929 wiping outmillions of dollars of bank deposits

In order to restore the banking and financial system GlassSteagall act was passed in 1933, which restricted commercialbanks from engaging in security markets and investment

banks from accepting deposits

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HISTORYOFINVESTMENTBANKING In 1990s Securities acts amendments 1975 allowed commercialbanks to have subsidiaries and J.P Morgan was the first bank to

open a subsidiary

In 1999 Glass Steagall act was repealed and replaced by Financialmodernization act 1999 which removed anti affiliation restrictionamong commercial banks , investment banks and insurance

companies

Mega institutions created after this were Citibank and travelersmerged to be Citigroup and Salomon Smith Barney

Chase Manhattan Bank (commercial bank) acquired JP Morgan(investment bank) (2000) for $34.5 billion

UBS Switzerland bought Paine Webber (brokerage) 2000 Credit Suisse bought Donaldson Lufkin Jenrette (investment bank)

2000

In financial crisis of 2008, investment banks Bear Stearns andLehman Brothers collapsed; Merrill Lynch was acquired by Bank ofAmerica, which remained in trouble, as did Goldman Sachsand Morgan Stanley

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INVESTMENTBANKSTRUCTURE

TraditionalInvestment

Banking

Capital raisingDebtEquity

Strategic advisoryservicesMergers &acquisitionsRestructuringTakeover defense

Sales & Trading

Distribution andexecution arm ofthe investmentbank

Sells and tradesstocks and bonds

Manages the firmsrisk and makesmarkets for the

securitiesunderwritten bythe investmentbank

Research

Analysis andrecommendationsof stocks andbonds

Includes companycoverage andsector coverage

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TOP GLOBALINVESTMENTBANKS

FINANCIALDATAInvestment

BankRevenue Net income Total assets

Assets under

management

JPMorgan Chase(JPM)

97.23 18.98 2265.79 1923.88

Bank of America(BAC)

94.43 1.45 2129.00 647.13

Citigroup (C)78.35 11.07 1873.00 250.00

Barclays (BCS) 50.20 6.14 2431.48 253.39

Deutsche Bank(DB)

43.00 5.57 2802.71 1445.83

Morgan Stanley(MS)

32.41 4.11 807.69 781.48

UBS29.59 4.43 1510.95 2307.16

Goldman Sachs(GS)

28.81 4.44 923.00 828.00

Credit Suisse(CS)

27.08 2.08 1308.49 1309.56

NomuraHoldings (NMR)

22.35 0.14 430.80 296.87

Lazard (LAZ) 1.92 0.18 3.08 141.39

Amounts in $US billion

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CORPORATEVALUATIONAND

INVESTMENTBANKING

Corporate valuation is valuation of corporate formof the business to derive he underlying value .

Investment bankers need to handle corporatevaluation for dealing with various transactionssuch as raising of capital, LBOs, M& As, equitybuybacks etc.

Corporate valuation is an intricate processbecause of the complex business structures and ishighly subjective because of several methodologiesused.

Basic corporate valuation methods are aboutmeasuring the continuing value of a company on agoing concern concept as against methods to valuecompanies which are distressed, restructured or ina mode of turnaround or liquidation

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CORPORATEVALUATIONMETHODS Discounted Cash flow method

It uses expected cash flow of the company to measure the value. Value ofthe company comes from capacity to generate future cash flows

Cash flow to the enterprise: FCFF

FCFF= Net operating cash flow after tax +/- non operating income/Expenditure+/- changes in non operating assets +/- additionalinvestment in capital assets +/- changes in noncash working capital

Enterprise value= PV of FCFF ( discounted by WACC) + PV of terminalFCFF ( discounted by WACC and based on constant growth, 2 stage or 3stage growth models)

Terminal value: FCFF( terminal) / (WACC- g) , g= terminal growth rate

Value of equity = PV of FCFF ( discounted by WACC) + PV of terminalFCFF- market value of outstanding debt

Cash flow to the shareholders: FCFEFCFE= net income- net expenditure +/- changes in non operating

assets +/- change in non cash working capital ( debt repaid- new debtissued)

Value of equity= PV of FCFE (discounted by Cost of equity (CAPM )+ PVof terminal value of FCFE ( discounted by cost of equity)

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CORPORATEVALUATIONMETHODS Asset based valuation

It uses existing assets as a base for valuation. Used for capital intensive industries driven by assets such as

cement, steel , metals, utility companies, infra companies etc.also for financially distressed companies having significantassets but no future business model.

It is either on book value of the assets or current market value( break up value)

Book value/Net asset value

Net asset value = Equity shareholders fund/ No. outstandingequity shares

Break up valueBreak up value per share = Liquidation value of assets-

outstanding debt

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CORPORATEVALUATIONMETHODS

Relative valuation methods It uses standardized multiples to derive value and allow inter

firm comparison.

Useful for investors who give more importance to comparison ofmarket values than intrinsic value.

The most used multiple is P/E ratio

Enterprise value/EBITDA = value of the firm/EBITDA

Higher is the ratio higher is the value of the firm

Price to book value multiple : Value of the firm/ networth

Contingent claim valuation methods

This method is used for valuing companies with high intangibleassets or with patents on products yet to be exploited.

In these future cash flows may not be determined with certainty.Therefore option pricing models are used.

These are also used for companies in turnaround mode. 14


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NEEDFOR EXPANSION

Empire Building

Profit Maximization

Ease of Operations

Better Customer Service


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ExpansionStrategies

GreenfieldInvestment

Acquisitions

Setting upof a branch

Setting upof a

Subsidiary

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GREENFIELD INVESTMENT

Setting up a separate institution from scratch

Generally require capital infusion

Developing countries often offer prospective companies tax-breaks,subsidies and other types of incentives to set up such investments

Parent companies create new long-term jobs in the foreign countryby hiring new employees

Allows the foreign bank to take advantage of its internationalreputation in less developed countries

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SETTINGUPOFA SUBSIDIARY

They are legally independent from their mother company

They use their own capital for performing their activities

Foreign banks need to invest more capital abroad if they wantto facilitate the same level of lending activity through asubsidiary

A subsidiary may fail even if the mother company is solvable

The supervisory authorities from the host country areresponsible for prudential supervision of subsidiaries

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ACQUISITIONS

Takeover of a control position from a local institution

The size can range from a 100% purchase of the social capitalof a given institution to a minority stake

Foreign banks get access to the profiles of the old local bank

Foreign bank entry provides access to local knowledge

It provides immediate access to deposits, which allows animmediate signing up for local currency lending

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SETTINGUPOFA BRANCH

It is not an independent legal entity

It is an integral part of the mother company

The decision making process is not fully delegated to theforeign branch

The activities of the branches are based on the social capitalof the mother company

They are subject to banking supervision both at home and inthe host country

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BASEL II

Issued by the Basel Committee on Banking Supervision onJune 2004

The three pillars of this banking law and regulation are :

Maintenance of regulatory capital calculated for threemajor components of risk that a bank faces: credit risk,

operational risk and market risk It deals with the regulatory response to the first pillar,

giving regulators much improved 'tools' over thoseavailable to them under Basel I

To complement the minimum capital requirements and

supervisory review process by developing a set ofdisclosure requirements which will allow the marketparticipants to gauge the capital adequacy of aninstitution

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OFFSHORE BANK

Located outside the country of the depositor, typically in low taxjurisdiction (or tax haven) that provides financial and legaladvantages.

Offshore banking constitutes sizable portion of internationalfinancial system.

An estimated 13-20 trillion is hoarded away in offshore accounts

Some $3 trillion is in deposits in tax haven banks and the rest isin securities held by international business companies (IBCs) andtrusts.

Tax havens have 1.2% of the world's population and hold 26% ofthe world's wealth, including 31% of the net profits of UnitedStates multinationals.


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OFFSHORE BANK

Advantages

Greater privacy (bank secrecy)

Low or no taxation (i.e. tax havens)

Operate with a lower cost base, thus can provide higherinterest rates

Easy access to deposits (less regulated)

Protection against local, political or financial instability

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OFFSHORE BANK Disadvantages

Less financially secure

Offshore banking has been associated in the past with the

underground economy and organized crime, through moneylaundering.

Offshore jurisdictions are often remote, and therefore costly tovisit, so physical access and access to information can bedifficult.

Offshore private banking is usually more accessible to thoseon higher incomes, because of the costs of establishing andmaintaining offshore accounts.

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TAX HAVEN A tax haven is a state, country or territory where certain taxes

are levied at a low rate or not at all while offering due process,good governance, and a low corruption rate.

Characteristics of Tax Haven (by the U.S. Government

Accountability Office)

Nil or nominal taxes

Their banking assets are a disproportionate multiple of theirGDP

Lack of effective exchange of tax information with foreign taxauthorities;

Lack of transparency in the operation of legislative, legal oradministrative provisions;

Self-promotion as an offshore financial center.25

T H GDP B ki A DTAA


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Tax Haven GDP Banking Assets DTAA

Cayman Islands $ 2.25 b $1,305 b YesThe Bahamas $7.5 b $348 b YesBritish Virgin Islands$1.1 b $65 b Yes

Isle Of Man $2.7 b $56.3 b Yes

Switzerland $522.4 b $838 b Yes. India recentlyconcluded an amendedDTAA, which is awaitingapproval from Swissparliament. So far, theSwiss government hasamended five DTAAs.

Their parliament alsohas approved it, but it issubject to publicreferendum.

Mauritius $9.4 b $14.5 b Yes

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INDIA MAURITIUS DTAA The Mauritius route is a channel use by foreign investor to

invest in India, Mauritius is the main provider of Foreigndirect investment to India.

Under the DTAA, a company registered in Mauritius isrequired to pay capital gains tax in the island nation oncapital gains from investments in India. As Mauritius does notlevy capital gains tax, the companies escape liability.

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INDIA MAURITIUS DTAA

Mauritius has a very unique and very favourable tax treatywith India;

The effective tax rate is only 3% and there are no capital gainstax;

Corporate laws in Mauritius allow enough flexibility forrepatriation of capital;

There are no exchange controls in Mauritius hencerepatriation of income is easy;

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INDIA MAURITIUS DTAA

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TRANSFER PRICING

Transactions between cross border related partiesshould be at the arms length price.

Need for transfer pricing regulations

CountryA

CountryB

Parent Co

Subsidiary

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WHATIS MONEY LAUNDERING?o It is a process of making dirty money clean

o Money is moved around the financial system again and again in suchmanner that its origin gets hidden

o Money generated from illegitimate source is converted into that derived

from legitimate source

MONEY LAUNDERING IS ANY TRANSACTION WHICH


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MONEYLAUNDERINGISANYTRANSACTIONWHICHSEEKSTOCONCEALORDISGUISEPROCEEDSFROMILLEGALACTIVITIES.

After foreign exchange and the

oil industry, the laundering of

dirty money is the worlds third-

largest business.

Jeffrey Robinson, The Laundrymen

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PENALTIESIMPOSEDONBANKS

Aug 2012 Standard Chartered US $ 340 mn

Jan 2006 ABM AMRO US$ 80 mn

Aug 2005 Arab Bank US$ 24 mn

Feb 2005 City National Bank US$ 750,000

Jan 2005 Riggs Bank US$ 41 mnOct 2004 AmSouth Bank US$ 50 mn

Sep 2004 City Bank Japan Licence cancelled

May 2004 Riggs Bank US$ 25 mn

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Anti-money laundering guidelines came into prominenceglobally as a result of the formation of the Financial

Action Task Force (FATF)Exercise constant vigilanceright from opening of new accounts.

Guidelines followed by banks:

Know your customer & know your colleagues

They are required to identify and report transactions of asuspicious nature to the financial intelligence unit in therespective country.

Separate legitimate business & illegitimate /irregular/suspicious business.

Develop a risk aware culture

Involve in public awareness of KYC issues

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KYC

Making reasonable efforts to determine the trueidentity and beneficial ownership of accounts;

Sources of funds

Nature of customers business

What constitutes reasonable account activity?

Who your customers customer are?

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Preventionof ML

Observing

rules forbankers

KYCNorms

Identifyingirregular

/suspicioustransactions

Compliancewith laws

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TYPESOF RISK Credit Risk1. Quality of Risk - Outstanding loan balance as on the date of

default

2. Quantity of Risk - The severity of loss defined by Probabilityof Default as reduced by the recoveries that could be made

in the event of default

Market Risk - Market risk is the risk of adversechanges in the value of on-/off-balance sheet positions caused bymovements in equity and interest rate markets, currencyexchange rates and commodity prices.


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TYPESOF RISK

Liquidity Risk1. Funding Risk - It is the necessity to replace net out flows owing

to unanticipated withdrawal of deposit

2. Time Risk - It is the need to reimburse for non-receipt ofexpected inflows of funds, i.e. performing assets turning intononperforming assets

3.Call Risk - Inability to undertake profitable businessopportunities when desired

Interest Rate Risk1. Gap Mismatch Risk - It occurs due to holding assets and

liabilities and off balance sheet items with different principalamounts, maturity dates & re-pricing dates thereby exposing tounexpected fluctuations in the level of market interest rates

2. Basis Risk - It is the risk that the Interest rate of differentassets/liabilities and off balance items may change in differentmagnitude

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Forex Risk - It is the risk that a bank may face loss dueto adverse exchange rate movement during a period in whichit has an open position, either spot or forward or both in sameforeign currency

Country Risk - Country arises because of cross bordertransactions which are growing dramatically in the recentyears due to economic liberalization and globalization. It is therisk that a country will not be able to repay debts to foreignlenders in time

1.Sovereign Risk- Associated with lending to governmentof a sovereign nation or taking government guarantee

2.Political Risk- When political environment or legislativeprocess of country leads to government taking over theassets of the financial entity and preventing discharge of

liabilities in a manner that had been agreed to earlier

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TOOLSTOMITIGATERISK

Credit Risk1. Exposure Ceilings - A threshold limit is fixed whichis at a level lower than Prudential Exposure2. Risk Rating Model - Set up comprehensive riskscoring system on a six to nine point scale as well as

clearly define rating thresholds and review the ratingsperiodically preferably at half yearly intervals

Liquidity Risk1. Liquidity Management Policy

Interest Rate Risk

1. Maturity Gap Analysis It distributes interest ratesensitive assets, liabilities and off-balance sheet positions intoa certain number of pre-defined time-bands according to theirmaturity (fixed rate) or time remaining for their next repricing(floating rate)

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2.Duration Gap Analysis - Duration gap model focuses onmanaging economic value of banks by recognising the changein the market value of assets, liabilities and off-balance sheet(OBS) items

3.Simulation - Balance sheet simulation models to gauge theeffect of market interest rate variations on reportedearnings/economic values over different time zones

Forex RiskSet appropriate limitsopen positions and

gaps Country Risk Internal analysis of political /

economical / social issues and risks prepared by country riskofficers or international economists, external analysisprepared by rating agencies or consultants

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THANK YOU !!

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Int Finance Ppt