Banking New Realities, New Challenges Eng V3
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Transcript of Banking New Realities, New Challenges Eng V3
Banking: New Realities, New Challenges
Impact on Emerging Markets
Alejandro Dillon
October, 2009
2
Agenda
I The Financial Crisis
II New Scenarios
III The Future of Banking
IV Looking Ahead
I The Financial Crisis
II New Scenarios
III The Future of Banking
IV Looking Ahead
4
Overview of the US Financial CrisisThe US house hold price bubble was the main cause of the problem
The combination of both delinquency and the erosion of lending standards was a disaster – The latter eased when they should have tightened
Ample liquidity and low interest rates fueled housing price inflation. The FED has great responsibility for these monetary excesses through interest rate relief and also the US Treasury by taking wrong decisions at crucial moments (e.g: Lehman case)
Increased securitization channeled funds into the subprime mortgage market and masked the risks faced by investors. Credit rating agencies and the US SEC failed to warn buyers and investors of real dangers & rewards (e.g: Madoff case)
Lenders moved into riskier lending – “reaching for yield” – at very easy borrowing parameters
Banker were very eager to originate high yield “complex products” using “very cheap money”
Credit default swaps (“CDS”), originally used to provide insurance against default on mortgage-backed securities (“MBS”) and Collateral Debt Obligations(“CDO’s”), became trading instruments for hedge funds and I-Banks. Most of sellers of CDS did not have the capital to cover a broad market downturn (e.g.: AIG)
There was a “Spill over” effect from US to world markets, and the US crisis became global
“We are at the end of an era”George Soros March-2008
5
The Vicious CycleWhen the defaults started, financial institutions became reluctant to lend to each other around the globe. Intermediaries could not roll over their short-term borrowing. Markets started to freeze up world-wide achieving its peak in last quarter 2008. There was a vicious cycle, which drove further illiquidity.
6
The Big Problem: Global Savings Imbalance
-1,004-1,073-465-31-9,860TOTAL
-73-51-1-17-263Italy
1,4431,315237588,899TOTAL
-16-8-18-10-264Mexico
-43-57-7-5-529Australia
-45-81-304-695United Kingdom
-154-145-24-5-773Spain
-673-731-3852-7,336United States
In deficit
8462281444Norway
3847100523Netherlands
4543200597Switzerland
10276340614Russia
2352500-141,047Germany
34225440821,404Middle East
4403721701,522China
15721188-112,748Japan
In Surplus
2008200720011980Accumulated 1980-2008(US$ Bn)
Source: Ricardo Arriazu & Asociados
7
Equity Markets – Comparative Performance
Volatility, Uncertainty and Risk are not any more an intrinsic Emerging Markets problem, but now they are also present in OECD and in the rest of the World
FTSE: -30%
NYSE: -36%
Nikkei: -35%
Bovespa: -30%
IPC: -20%
Merval: -30%
8
The Great Dilemma
Largest Exporter in the current recessionVs.US Citizen as the
World’s consumer of last resort
World biggest Investor in US TreasuriesVs.World largest Debtor
China
Vs.
USA
“Geitner’s tough times with China”Washington Post – June 14th, 2009
I The Financial Crisis
II New Scenarios
III The Future of Banking
IV Looking Ahead
-Your credit card is ok, I’m just checking if your bank isn’t expired-
11
Market Realities
Market Cap as of second quarter 2007 (US$ bn) Market Cap as of first quarter 2009 (US$ bn)
-87.9%
91
11
Barclays
As of first quarter of 2009, American banks lost approximately US$ 1 trillion and received over US$ 800 bn in new capital
-92.5%
253
19
Citigroup
Aa3*-90.0%
120
12
RBS
Aa3*-45.0%
165
91
JP Morgan
Aa1*-57.2%
215
92
HSBC
Aa1*-70.7%
116
34
UBS
Aa2*
-63.8%
116
42
Santander
Aa1*-61.0%
100
39
GoldmanSachs
A1* Aa3*-62.1%
77
29
RBC
Aa3*-75.8%
62
15
Deutsche Bank
Aa1*
* Credit ratings of long-term bank deposits (Moody’s, as of fourth quarter 2008)
12
Government Intervention in the Industry: Nationalizations and Bailouts
6 (Merrill Lynch, Citigroup, Bank of
America, Wells Fargo, JP Morgan, Goldman Sachs)
8 (Bear Stearns, Citigroup, Bank of
America, Wells Fargo, Merrill Lynch, Morgan Stanley, JP Morgan,
Goldman Sachs)
-Federal government launched the
Troubled Asset Relief Program (TARP)
-2 (Allied Irish, Bank of Ireland)
1 (Anglo Irish)Top 3 banks bailed out or nationalized
-1 (ING)1 (Fortis Netherlands)Government fund available to boost bank capital
1 (Swedbank)1 (Nordea)-Swedish government announced scheme to strengthen banks’ capital
1 (UniCredit)--First bank applied for government capital rescue (UniCredit)
-2 (Dexia, KBC)1 (Fortis Belgium)Further government capital unlikely given Fortis and Dexia rescue
1 (Postbank)1 (Commerzbank)1 (Hypo Real Estate)Government ready for intervention to nationalize Banks
1 (Credit Suisse)1 (UBS)-Bad bank rescue system for toxic assets
-4 (Credit Agricole, BNP, SocGen, Dexia)
-State capital plan launched
2 (Barclays, HSBC)-5 (Northern Rock, B&B, RBS, HBOS, Lloyds)
Most Banks already nationalized
Capital RaisingBailouts (loans or <50% stake)
Effectively nationalized (>50% stake)
Current Capital Situation
13
New Players are challenging the leadersJP Morgan (JPM) vs. ICBC -China
Price variation: 19 Sept 2008 – 19 May 2009
- JP Morgan: -23.9%
- ICBC: 3.9%
Market Cap (US$):
- JP Morgan: 91 Bn
- ICBC: 40 Bn
Credit Rating
- JP Morgan: Aa1
- ICBC: A1
Source: finance.yahoo
Source: finance.yahoo
Citigroup (C) vs. Santander (STD)
Price variation: 19 Sept 2008 – 19 May 2009
- Citigroup: -81.1%
- Santander: -38.3%
Market Cap (US$):
- Citigroup: 19 Bn
- Santander: 42 Bn
Credit Rating
- Citigroup: Aa3
- Santander: Aa1
14
New Players
Bank of America (BAC) vs. Itaú
Price variation: 19 Sept 2008 – 19 May 2009
- Bank of America : -68.3%
- Itaú: -20.3%
Market Cap (US$):
- Bank of America : 34 Bn
- Itaú: 43 Bn
Credit Rating
- Bank of America: A1
- Itaú: Ba2
Source: finance.yahoo
Source: finance.yahoo
Deutsche Bank (DB) vs. ICICI Bank Ltd -India
Price variation: 19 Sept 2008 – 19 May 2009
- Deutsche Bank: -27.2%
- ICICI Bank Ltd: 4.6%
Market Cap (US$):
- Deutsche Bank: 15 Bn
- ICICI Bank Ltd: 16 Bn
Credit Rating
- Deutsche Bank: Aa1
- ICICI Bank Ltd: Baa2
15
Structural Transformation in Financial Intermediation*
65%32%8%Subtotal
35%68%92%Subtotal
100%100%100%Total
3%0%0%Finance corporations
4%1%2%Stock exchange houses
1%0%0%Mortgage trusts
3%5%1%Financial companies
7%0%0%Asset baked securities issuers
7%2%0%Mortgages pool
5%4%1%Government supported companies
19%3%1%Mutual & other funds
16%17%3%Pension funds
10%14%17%Insurance companies
1%1%0%Credit institutions
3%17%9%Savings institutions
19%32%49%Commercial Banks
2%4%17%Monetary authority
200819801945
*Percentage over total assets - USASource: Ricardo Arriazu & Asociados
16
Lessons LearnedSophisticated Financial Instruments (CDS, CDO, MBS, etc): Clearinghouse and proper regulation needed
Banking leverage: Asset value support by capital requirements
Regulation: Reform and supervision has to include changing market conditions in different regions
Hedge Funds: Leverage, exposure and disclosure have to be monitored by third parties
Madoff Case: No more safe heavens for investor confidence
False decoupling: The world is totally interconnected
Compensation: Bonuses based on the past year’s financial performance must give way to one that better aligns compensation to a longer timescale
Rating Agencies: Limit conflict of interest by regulatory adjustment.
Transparency: needed for products, players and markets
Good and Bad Bailouts?: OECD 08 vs. EM ’90s
Exchanges vs. Banks: new battle?
Open debate: Insurance instruments ( USA) vs. Counter-cyclical regulation (Europe)
“A full-blown financial crisis can exact an enormous toll in both human and economic terms. Financial disruptions do not respect borders. The crisis has been global, with no major country having been immune. The strong and unprecedented international policy response proved broadly effective; it
averted the imminent collapse of the global financial system”
by Ben Bernanke – Chairman, US Federal Reserve Board,August - 2009
I The Financial Crisis
II New Scenarios
III The Future of Banking
IV Looking Ahead
18
The Rules of the Game within the Banking Sector Have Changed
Pre-Crisis decisions made on overall value
Growth
Cost efficiency
Credit risk
Liquidity
Solvency
During-Crisis decisions made on cash
Solvency
Liquidity
Credit risk
Cost efficiency
Growth
19
New Expectations and Needs have emerged in the Sector
New Shareholder/Regulatorexpectations
Focus on the core business
Contribution to the domestic economy
Long-term orientation
Lower financial rewards
More accurately risk evaluation across the cycle
New Customer needs
Lower volatility
Simpler products
Increased transparency
Multi-bank relationships
Stronger balance sheets
Multi-currency risk management
20
Bankers: Back to Basics5 C’s
Credit
Cash Flow
Collateral
Counterparty
Credentials
21
New Commercial Banking Models
Dispose of high risk / international portfolio
Aggressively manage costs down
Define boundaries of government direction
Plan for return to private ownership
Define the “public service” mission
Redefine incentives to motivate organization and retain talent
Restructure portfolio and business model
Build scale in home country and selectively in other key markets
Manage default and credit risk in high growth segments
Tightly manage cash / liquidity to maintain independence from government
Define the future sustainable core
Divest non-core assets
Upgrade risk management
Acquire / retain top talent as others restructure
Global specialists Global universals
“Back to basics” universalLocal Banks
Policy Banks
LowLow
High
High
Size / depth of business and geography
Level of independence
from government
22
Wealth Management (Ex-Private Banking) Evolution
Service model adapted to the needs of each segment
One fits all service model
More consolidated Industry (economies of scale)Fragmented Industry
Clear country focusStock in mature countries but higher net inflows from emerging countries
Provide IB AdvisoryNo IB deals
Annuity pricingTransactional pricing
Research driving investment insights Research as generic service
Open architectureProprietary products
Personalizing the portfolio advisory role Product sales force
Full client balance sheet (asset allocation as a key driver of success, advice adapted to broadened product range)
Investment focus (alternative & structured products, stocks, “beating the market”)
On-shore driven growthOff-shore “dominant” culture
Value added solution and servicesSecrecy and asset preservation
Tomorrow’s PracticesTraditional Practices
23
New generation Investment Banks
Focus on advisory & value added servicesSeller of commoditized products
Operations through horizontal integration across businessesOperating in vertical product silos
More rational and stable payroll structuresExcessively generous and volatile compensations
Risk management as a competitive differentiatorRisk management as a support function
New deals originated + executed by experienced teamsDeal flow based on credentials
Specialization (“Boutique approach to profitable business, products and clients”)
Supermarket offering (“Be all things to all people”)
Driven by risk-adjusted profitabilityFocus on aggressive revenue growth
Government will demand cooperation from Private Sector
Non government intervention
Higher cost of capital & reduced leverageLow cost of capital & high leverage
Emerging local & regional competition with the disappearance of US Investment Banks Global dominance of US Investment Banks
New ModelOld Model
But more importantly concentrate on the“Relationship Concept with Client”
24
Different Institutional Goals among major participants
Regulators GovernmentsBanks
De-leverage balance sheet
Provide credit to sustain the economy
Price risk correctly Increase credit margins on mass clients
Preserve access to credit to mass clients
Constitute reserves in high cycles
Limit high-risk activities
Increase profitability on core activities
Adapt cost base through FTE reductions
Keep prices for retail and corporate clients stable
Sector to remain strong employer
Capitalize net worth
Will these issues create new tensions?
25
Challenges for Banking SectorStrengthening of capital adequacy in line with more stringent regulations.
Global banks aim to reach a higher capitalization, focusing mainly on domestic markets and less on foreign markets
Emergence of powerful regional banks with a strong local potential and global reach
Systemic shocks accelerate process of consolidation, primarily in the USA
Withdrawal of monetary stimulus/credit easing in the US and de-nationalization in the UK
Tighter lending standards restore industry focus on traditional financial instruments
Intensifying participation of the State and Monetary Institutions to manage systemic risk
Higher participation of multilateral agencies in the corporate and government financing
Re-launching of the “Relationship” and “Advisory” role in the banking industry
“Several things were achieved, but there is still much to do”
“The recovery will come sooner or later, depending on the cleaning of the banking sector balance sheets”
Dominique Strauss-Kahn – Director, FMI April-2009
I The Financial Crisis
II New Scenarios
III The Future of Banking
IV Looking Ahead
27
New M&A Trends in Emerging MarketsCREDIT CYCLE Strategic (not speculative) buyers pave the way for an emerging buyer’s market
MONETARY CONTEXT Low-interest rate environment favours corporate investing
OWNERSHIP TRANSFER Sellers will be more willing to negotiate on an exclusive basis
INTENSIFYING REGULATION Derivatives instruments in M &A deals subject to rigorous scrutiny
EMERGING INVESTORS Sovereign Wealth Funds will act as key strategic investors
ASSET QUALITY IMPROVEMENT Distressed-debt transactions will increase
PURSUIT OF SIMPLICITY LBO-type transactions will be significantly reduced
BRIC(+) PROMINENCE Increasing transactional flow lead by BRIC(+) countries
There will be more investment banks acting regionally and locally than globally in the near future, due to the changing path of financial intermediation and to the
implementation of the new models created
28
35%
52%
47%
23%
60%
33%
39%
48%
72%
36%
32%
9%
5%
5%
4%
0% 20% 40% 60% 80% 100%
Argentina
Brazil
Chile
Colombia
Mexico
Local Foreign Cross Border Regional Cross Border
Latam Cross Border M&A Deals 2006-2008
North America
Europe
Asia
M&A by Acquiror Nationality
% of Total M&A Deal Value
Source: Thomson Financial
29
ConclusionsBanking Industry needs “Our Mea Culpa”.
Stronger and better capitalized financial institutions are needed.
One World + Different Markets = New risks & opportunities.
New Rules for a New Era: Still to be defined.
Top credit names will capture the market available financing, with BRIC (+)issuers being a key relevant player.
Emerging Markets will receive more foreign direct investments in strategic assets than investments in financial securities.
Latam is a clear leading Player in this new scenario with new assets classes (e.g: Agribusiness).
Latam should use the new Strategic M&A and the more Solid Capital Markets to consolidate corporate growth.
“The crisis was created and extended around the world by the irrational behavior of white people with blue eyes who, before the crisis, seemed to know everything and now have proved to know nothing.
The G8 has no longer a reason to exist now. Developing countries must have higher decision power in this new era”
Lula da Silva-Brazilian President
March 2009
30
Final Remark
“Capitalism, with all its market mechanisms, has to survive…”“ No doubt about it. What I excoriate is that today there is only one incentive for doing business, and that is the maximization of profits…But the incentive
of doing social good must be included…”
Muhammad Yunus - Nobel Peace Prize 2006May-2009