Manage Banks - From credit analytical viewpoint
Shinhwa Chou, Director
Relationship Management
Financial Institutions Group
Mar 25, 2009
Strictly Private and Confidential
Mar 2009
2
Agenda
45Cost Management-48Capital Adequacy Management-
39Risk Management-36Business Development-34Strategies & Tactics to become a better FI3.
9From quantitative point of view-
52Case Study - Citigroup4.
29From qualitative point of view-
6Analysis of banks2.
4Introduction1.
Introduction
4
Citigroup’s stock price performance over the past year
Triggered by the financial crisis in late 2007, Citi’s stock price has gone downhill from its peak in May 2007.
TARP II ($20 bn) & FDIC Loss sharing Program ($301 bn)
Realignment of Organization
Oct.15 2008, closing price @ $45.69
Mar.5 2009, closing price @ $1.02
Mar.18 2009, closing price @ $3.08
How to Analyze Banks
6
Rating News
RATING ACTION: MOODY’S UPGRADES RATINGS OF E SUN COMMERCIALBank TO Baa1/P-2/C- from Baa2/Prime-3/C-CREDIT: E Sun Commercial Bank
RATING ACTION: MOODY’S DOWNGRADE RATINGS OFCathay United Bank (A2/P-1/C-)CREDIT: Cathay United Bank
7
CAMEL Approach
Earnings PowerEEarnings Powerarnings Power LiquidityLLiquidityiquidity
Asset QualityAsset QualityAsset Quality
MManagementanagement
CCapital Adequacyapital Adequacy
How to Analyze Banks
From quantitative point of view
9
Capital Adequacy
BIS Ratio: Shareholders commitment in absorbing loss from risk assets
Tier 1= common stocks, perpetual non-accumulated preferred shares/sub-debts, legal reserves,..etc.
Tier 2= Perpetual accumulated preferred shares/sub-debts, convertible bonds, bad debt reserves, 45% of re-valuation of LT capital gains, sub-debt > 5 yrs …etc.
Tier 3= ST sub-debt, and non perpetual preferred shares
Tier 1 + 2 + 3 capital - LT investment without consolidation
Credit risk assets + Capital charge on market risk X 12.5
> 8%
10
Capital Adequacy
Basel IIEffective since 2006/12/31
3-pillar concept (Min Capital, Supervisory Reach, Market Disclosure)
In addition to Credit Risk, Market Risk & Operational Risk are taken into consideration
Regulation requirement: BIS ≧ 8%, semi-annual release
11
10.75%
10.11%
11.45%
10.83%
10.01%10.58%
11.17%
10.75%
10.40%
10.63%10.09% 10.69%
10.27%
10.62%10.33%
11.57%11.92%
8.41%8.53%
8.22%
9.17%
9.48%
8%
9%
9%
10%
10%
11%
11%
12%
12%
1998/12 2000/12 2002/12 2004/06 2005/06 2006/06 2007/06 2008/06 2008/12
Capital Adequacy
BIS ratio is dropped to 10.83% by 2008 due to losses and MTM from global financial crisis
Tier I is slightly improved to 8.53% by 2008
12
Capital Adequacy
TCE (Tangible Common Equity): NW – intangible asset (goodwills, deferred expense, etc.)
Define the strongest support from shareholder commitment and bank’s earnings buffers
A new trend of capital strength measurement amid global financial crisis
TCE
Total Assets
2%≧
13
Asset Quality
NPL Ratio: The potential credit cost in risk asset taking
90-day Based NPL
Net Loans
< 2.5%
Non Performing Loan (NPL)– Since 2005/7/1, Taiwanese banks have complied with international standard for
90 days PDO (past due obligation) disclosure
14
Asset Quality
NPL Ratio is disclosed in quarterly financial statements
15
Asset Quality
NPL Ratio is improving since 1Q02, industry average is 1.54% as of YE’08
NPL is under pressure to maintain at low level after global financial crisis
2.24%
11.74%
1.84%
1.54%
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08
(NT$Bn)
0%
2%
4%
6%
8%
10%
12%
14%
16
Asset Quality
Charge-off: Credit cost of credit card revolving and cash card loans
Charge-off from Card Portfolio
Revolving Balance
COR is evaluated with reference to :– Margin after funding cost and marketing cost– 90D / 180D card delinquent ratio
≦ ?
17
Asset Quality
Starting from 6/2004, separate disclosure for COR of credit / cash card portfolio is mandatory
Since 2005, around 40% of card portfolio has been charged off
16.93%
31.15%
24.58%
2.08%
0
100
200
300
400
500
600
700
800
900
1,000
2004
/6Sep
-04Dec
-04Mar-
05Ju
n-05
Sep-05
Dec-05
Mar-06
Jun-0
6Sep
-06Dec
-06Mar-
07Ju
n-07
Sep-07
Dec-07
Mar-08
Jun-0
8Sep
-08Dec
-08
NT$Bn
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Card Portfolio Charge-off
18
Asset Quality
Delinquent ratio of card portfolio maintains below 3% to meet government’s 3-5-8 policy
COR hiked in 2006 and remained relatively high in 2008
0%
5%
10%
15%
20%
25%
30%
35%
J-04 S-04 D-04 M-05 J-05 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J-08 S-08 D-08
Delinquent Ratio COR
19
Asset Quality
Coverage Ratio: Loss estimation from bad loans
Loan Loss Reserve
Non Performing Loan
> 60%
Reserve adequacy is subject to:– LTV Ratio: Loan / Collateral Value– Evaluation of collateral
Appraisal baseUpdate frequency
20
Asset Quality
Coverage Ratio
21
Asset Quality
Coverage ratio is improved significantly since 2004
By 2008, industry coverage ratio was reported at 69.48%
2004 Industry Average 30.34%
2004 2004 Industry Industry Average 30.34%Average 30.34%
2008 Industry Average 69.48%20082008 Industry Industry
Average 69.48%Average 69.48%
2004
16.33%
57.14%26.53%
<40% 40-60% >60%
2008
56.41%
28.21%
10.26%
<40% 40-60% >60%
22
Earnings Power
ROA & ROE: Performance efficiency of booking $1 asset and asking $1 shareholder money
ROA > 1%
ROE > 15% ~ 20%
A business indicator for assessment of:– Revenue Stream: diversified, sustainable– Cost Control: credit cost, funding cost, operational cost– Business Strategy: pricing strategy, asset growth plan– Financing Strategy: capital structure
23
ROA & ROE
2008 Taiwan banking’s avg. ROA: 0.15% & avg. ROE: 2.47%
The best ROA performer is 0.98% and the best ROE performer is 15.75%
Compared to international standard, over 50% Taiwan banks with less than 0.5% ROA and less than 5% ROE
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
ROA
0.5%~1%
0~0.5%
<0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
ROE
>5%
0~5%
<0%
24
Earnings Power – Income Statement analysis
Bank A Bank B
25
Earnings Power
Efficiency: cost to income ratio (SG&M / operating income before provisions) < 40%
2008 Taiwan banking’s avg. 62.33%
70.27%
29.73%
0.00%
<40% 40-60% >60%
26
Liquidity
Loan to Deposit Ratio: Self-funding capability
Total Net Loans
Total Customer Deposits
Too high or too low, for assessment of:– Efficiency of fund’s flow utilization– Adequacy of liquidity strain buffer
Funding source consideration– Diversified funding: retail or wholesale– Alternative funding source– Sustainable deposit base
≦ 85%
27
L/D
40%
50%
60%
70%
80%
90%
100%
110%
120%
Liquidity
2008 Taiwan banking’s avg. L/D ratio was 79.87%
In short, Taiwan Banks have adequate liquidity for asset origination
How to Analyze Banks
From qualitative point of view
29
Management - Qualitative point of view
Risk Architecture
Management Reputation Franchise
30
Risk Architecture
Credit Risk
Market Risk
Track Recordof Credit
Management
- level of sophistication of a bank’s credit committee - management team’s credit awareness- roles and responsibilities of credit management- systems and infrastructures to detect and manage the risk- the evaluation model to reflect its customer’s credit soundness- the risk profile and the composition of its customers
- analyze whether the bank take appropriate positions and protectagainst losses that result from market fluctuations, both price andliquidity risk- we evaluate a bank’s risk identification and quantifying capabilitiessuch as market-to-market system, its risk management skills, the limit setting, approval controls, regular reporting, ongoing validation
-The track record reflects how a bank has managed its credit exposure and gives us an idea of where this bank stands in the industry-Also, we can further evaluate whether a better bank can continue its
strength
31
Management Reputation
IntegrityIntegrity
Strategic Strategic Vision of Vision of BusinessBusiness
Execution Execution and and
LeadershipLeadership
• the bank’s level of compliance with regulations• accounting methods and information disclosure• factors that may influence management integrity ( which include the background and composition of the board members, whether the bank has close relationshipwith local conglomerate, the operation and financial soundness of the conglomerate, the level of professionalism of the team )
• Strategic vision is one of the most important factors in shaping a business and anchoring the direction to which a business is heading. • A sound management team must demonstrate that they know where they are today, where they used to be in the past, and where they want to be in the future.• A sound management also needs to have a clear vision on how the business will be developed and the vision must be successfully implemented in each functionareas, business units, product development, risk management, etc.
• Whether the management team could establish the link between the management of human assets and the bank’s vision and strategies• Whether the bank can realize its competitive advantage through leadership and human resource management all the way from recruitment, selection, training, retention, performance management and evaluation, • Whether the bank could aligning the management system with business goals and the organizational structures.
32
Franchise
Scale Scale / Diversification / Diversification
of Businessof Business
Product Product InnovationInnovation
FinancialFinancialFlexibilityFlexibility
• number of branches, • asset size, • number of customers, • deposit and loan portfolio, • power and niche of the franchise and whether the value can be replaceable or replicated by other bank.
• The bank has right people and mechanism to design, sell, and provide after-sales service for new products.• The bank can leverage on other entities to provide new products to clients. • Whether the bank has incentives to motivate the product innovation.• Whether the new products suitable and appropriate for this bank’s client. • Whether the product innovation fit in the bank’s vision and will benefit the bank in the long term.
• Evaluate a bank’s historical financials, the capital structure, the financial instruments it has been using to raise capital.• Evaluate how diversified the instruments are, and how successful each fund-raising was.• Whether a bank is closely followed by foreign brokers and investment companies, including the percentage of foreign FIs holding, how is it rated by international rating agencies.
Strategies & Tactics to Become a Better FI
34
A Good Financial Institution
Reflect shareholders’ interest with:– Growth potential– Growth sustainability
Approach– Business development– Risk management– Cost management– Capital adequacy management
Time
Per
form
ance
Time
Per
form
ance
v.s.
Time
Per
form
ance
Time
Per
form
ance
v.s.
Strategies & Tactics to Become a Better FI
Business Development
36
Business Development
By ProductsBy Products
• Loan / Deposit
• Investments
• FX / Derivatives
• Custody
• Cash Management
• Trade Finance
• Wealth Mgmt
• Loan / Deposit
• Investments
• FX / Derivatives
• Custody
• Cash Management
• Trade Finance
• Wealth Mgmt
By CustomersBy Customers
• Individual
• Big corporate
• FI
• SME
• Public sector
• Individual
• Big corporate
• FI
• SME
• Public sector
By ChannelsBy Channels
• Direct Sales
• Branch
• Third Party
• Telemarketing
• DM
• Direct Sales
• Branch
• Third Party
• Telemarketing
• DM
By GeographyBy Geography
• Urban
• Island-wide
• Regional
• Global
• Urban
• Island-wide
• Regional
• Global
37
Business Development
Revenue Growth– New customer / Selective Target Market– New product / Innovation– New market development / penetration– Organic growth vs Inorganic growth (M&A e.g.)
Revenue Sustainability– Create customer loyalty (active card usage, low mortgage attrition, high insurance
retention, less frequent redemption, better x-sell ..etc)– Develop appropriate product mix (annuity revenue v.s. deal revenue)– Build cross-sale to same customer base ( finance v.s. investment v.s. risk hedging)– Build franchise coverage/value
Strategies & Tactics to Become a Better FI
Risk Management
39
Risk Management
Credit Risk Market Risk Other Major Risks
Lending
Direct
Clearing
Issuer
Counterparty
Contingent
Settlement
Pre-settlement
Price
Liquidity
Interest Rates
Stock /Commodity
Currency
Funding
Trading
Country
FiduciaryDocumentation
Political
Transfer/Convertibility
Underwriting
Volatility in Options Disclosure
Legal & Regulatory
FranchiseFraud
ProcessingSystem
40
Credit Risk Management
Asset quality management to achieve the desired Risk /Return– Dynamically diversify credit portfolio by:
Business segmentCorporate banking, Consumer banking, Investment banking, Credit card, etc.
IndustryIndustry limit determined by industry life cycle
Customer baseProduct
Trade finance, Securities investment, Bilateral/syndication loan, Mortgage, Credit card, Vehicle loan
CollateralProperty / Mortgage, PDC, Deposit, Standby LC, Equity, Chattel, etc.
Geography / SovereignObligor Risk Rating
41
Credit Risk Management
Use risk rating methodology to reflect risk level of the credit portfolio– Scoring method– Forced ranking method
Develop early warning / classification process to proactively monitor the credit quality
Establish control limit within portfolio via segment, product
Establish effective / efficient remedy management process
A required factor for BIS ratio determination under the new Basel Capital Accord
42
Market Risk Management
Liquidity Management– Diversified funding sources
Deposit / interbank borrowing / capital marketcommitted v.s. un-committedshort-term v.s. long-term
– Appropriate liquid asset level– Dynamic asset/liability management : tenor, interest rate, currency match– Stress test
Rate Risk Management– VAR / Loss Limit / Sensitivity Limit– Stop loss discipline
Underwriting / Syndication Risk
43
Operation Risk Management
Operational performance– Infrastructure
System implementation and employee trainingRoutinely update infrastructure and maintain its reliability and productivity
– Process efficiencyStandard procedure enhances efficiencyInterfaces for optimum access
– Back-up planBusiness continuity test
Compliance risk– Internal control– Regulations
Strategies & Tactics to Become a Better FI
Cost Management
45
Cost Management
Marketing & Distribution– Measure the effectiveness & efficiency
Marketing : DM / AdvertisementDistribution :
BranchATM or other automation platformsInternetTelemarketingDirect sales / RM / AO3rd party
46
Cost Management
Processing– Regionalization / Centralization / Outsourcing– Automation / Straight-through Processing (STP)– ATM, E-trade, on-line insurance, phone-banking– Back-end automation / rationalization – re-engineering– quality projects
Strategies & Tactics to Become a Better FI
Capital Adequacy Management
48
Capital Adequacy Management
Risk assets requires capital reserve, and capital comes with cost. Therefore, earning power of asset is determined by :
ROA ≅ ROE x BIS
Calculate min ROA based on required ROE (IRR), and BIS
Below-than-hurdle ROA will lead to BIS lower than minimum requirement
Control BIS to improve ROE without increasing asset pricing
49
Strategies to Improve BIS
Financial solutions
Balance SheetBalance SheetBalance Sheet
AssetsAsset Securitization
- Credit Card- Cash Card- Mortgage Loan- Corporate Loan
Fixed Assets (Real Estate)- Sell & Lease back- CMBS / REIT
NPL disposal- Sell down to AMCs- Securitization
Liabilities Capital TierDeposit
- FRN / FRCDBond / Debenture
- ST Sub-Debt III- LT Sub-Debt II- Convertible Bond II
Equities Capital TierPerpetual accumulatedPreferred share IIHybrid capital note ICommon Stock I(ADR/GDR)
50
Strategies to Improve BIS
Business model adjustment
NW
Risk Assets
BIS =
Earnings power improvementEarnings power improvement• Cross-sale• Price to risk• Product breadth
Credit portfolio optimizationCredit portfolio optimization• Credit risk mitigation• Risk assets reallocation
Risk weight transparencyRisk weight transparency• Credit risk rating model
Eliminate market / operational riskEliminate market / operational risk• Operation outsourcing• Insurance • Hedging
Case Study
Citigroup
52
The Perfect Storm for Financial Institutions
Since 2H’07, market uncertainty has left participants concerned about the next piece to fall.
Nex
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Firm
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arke
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unds
AIG
Lehm
an
Fann
ie/Fr
eddie
Bear S
tearns
Auctio
n-rate
Preferr
eds
Monoline
Insur
ers
CDOs, SIVs,
CLOs
ABCP
Leverage Finance Market
Subprime Market
Reduced Lending StandardsCovenant-lite Transactions
Tight Spreads & Excess Liquidity
Nex
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Firm
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unds
AIG
Lehm
an
Fann
ie/Fr
eddie
Bear S
tearns
Auctio
n-rate
Preferr
eds
Monoline
Insur
ers
CDOs, SIVs,
CLOs
ABCP
Leverage Finance Market
Subprime Market
Nex
t Pie
ce?
Nex
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WaM
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via
WaM
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Firm
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Firm
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unds
Mon
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arke
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unds
AIG
AIG
Lehm
an
Lehm
an
Fann
ie/Fr
eddie
Fann
ie/Fr
eddie
Bear S
tearns
Bear S
tearns
Auctio
n-rate
Preferr
eds
Auctio
n-rate
Preferr
eds
Monoline
Insur
ers
Monoline
Insur
ers
CDOs, SIVs,
CLOs
CDOs, SIVs,
CLOs
ABCPABCP
Leverage Finance Market
Leverage Finance Market
Subprime Market
Subprime Market
Reduced Lending StandardsCovenant-lite Transactions
Tight Spreads & Excess Liquidity
53
Escalation of Storm
17 Jul ’07: Two Bear Stearns hedge funds investing in sub-prime investment collapse
10 Mar ’08: Further US$236bnBoost from Treasury security loans and cash loans to banks in Europe
14 Mar ’08: FedAnnounces emergency lending facility for Bear Stearns through JPMorgan
7 Sep ’08: US Government bails out Fannie Mae and Freddie Mac, the mortgage financiers. Agreeing to inject up to
US$100bn per company
14 Sep ’08: Lehman, the 158 year-old investment bank files for bankruptcy after failing to attract Fed help,or a buyer
15 Sep ’08: Bank of America buys
Merrill Lynch in US$50bnemergency acquisition
17 Sep ’08: Treasury backs
US$85bndeal to fund AIG, to stave off collapse of the giant insurer that plays a crucial part in the global financial system
7 Mar’ 08:
US$20bnCash loan Fed intervention tobanks and bond market dealers
17 Mar’ 08: Bear Stearns collapses sold to JPMorgan for
US$20bn
21 Sep ’08: Governments of the Netherlands, Belgium and Luxembourg agree to a partial nationalisation deal worth
US$15.5bnto stabilise Fortis. Subsequently, Fortis’operations in Belgium and Luxembourg were purchased by BNP Paribas for
US$20.1bn30 Sep ’08: DexiaPartly Nationalised by Governments of Belgium, Luxemburg and the Netherlands in a deal worth
US$9bn
8 Oct ’08: UK Government announces a scheme to provide
£400bn of support to the banking sector including a capital injection and guarantees for banks’
borrowings. Co-ordinated 50bpsbenchmark rates cuts by all major central banks. Nationalisation of all three major Icelandic banks
13 Oct ’08:European Governments unveil
€1.85tn co-ordinated plan to recapitalise banks and guarantee banks’ borrowing. UK Government
announces £37bn investments in RBS, HBOS and Lloyds TSB. UAE
Ministry offers US$19bnliquidity injection to banks
18 Sep’08:
Lloyds US$22bnRescue take over of HBOS. Government waives antitrust provision toallow merger
16 Oct ’08:UBS agrees “bad bank” deal with the central bank to take
US$60bn in toxic assets off its balance sheet inaddtion to a
SFr6bn capital injection
2 Apr ’07: Bankruptcy filing of New Century Financial, one of the biggest sub-prime lenders in the US
16 Aug ’07: Countrywide Financial, the largest mortgage in the US run into liquidity
problems. Fed responded by a 50 bpscut of the discount rate
14–17 Sep ’07: Northern Rock experienced a bank run until a government blanket guarantee was issued on 17 Sep 07.
Jul ’08: Alliance & Leicester, a UK mortgage lender experiencing stress was bought by Spanish bank Banco Santander.
14 Oct ’08:US government guarantees new debt issued by banks for 3 years and announces plans
to inject US$250bnin banks
21 Oct ’08:Fed announces it would finance up
to US$540bn in purchases of short term debt from money market mutual funds
Nov 24’08Received US$20BnGuarantee of 301Bn
Dec 20’08Received US$20BnGuarantee of 100Bn
54
FY’07 External Funding of Citi
In 2007, Citi raised over $30 billion of funding through several public/private offerings to strengthen capital.
Issuance Type of Fund Raised Amount ($ bn) Dividend RemarkPrivate Offering Convertible Preferred Shares $12.50 7% per annum, payable
quarterlyInvestors: The private offering includeda $6.88 bn from Government ofSingapore Investment Corporation PteLtd as well as investments from CapitalWorld Investors; the Kuwait InvestmentAuthority; the New Jersey Division ofInvestment; HRH Prince Alwaleed binTalal bin Abdulaziz Alsaud; andSanford I. Weill and The Weill FamilyFoundation
Public Offering Series T Non-CumulativeConvertible Preferred Stock.
$3.20 6.5% per annum, payablequarterly
Public Offering Series AA Non-CumulativePreferred Stock
$3.70 8.125% per annum, payablequarterly
Public Offerings Enhanced Trust PreferredSecurities (TruPS)
$4.2875 7.785% annual coupon for the$ 787.5 MM issuance on Nov.27, '07) and 8.3% for the $3.5bn issuance on Dec. 21, '07)
Private Offering Equity Units with 4 series of trustpreferred securities and 4 series offorward purchase contracts toacquire Citigroup common stock
$7.50 Each Equity Unit will pay afixed annual rate of 11%,payable quarterly
Investor: Abu Dhabi InvestmentAuthority (ADIA)
$31.1875
55
Citi In The Storm
Since 4Q’07, Citi recorded consecutive 5-quarter loss.
(1) NM Not meaningful(2) 4Q’08 recorded a $9.6 billion pretax goodwill impairment. The primary cause for the good will impairment was the rapid deterioration in the
financial markets and the global economic outlook particularly during the period beginning mid-Nov through year end 2008.
($MM) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q2007 2007 2007 2007 2008 2008 2008 2008
Total Revenues, Net of Interest Expense 24,646$ 25,790$ 21,640$ 6,419$ 12,441$ 18,077$ 16,680$ 5,595$ Total Operating Expenses 15,121 14,429 14,152 16,100 15,775 15,644 14,425 25,290 Provision for Loan Losses and for Benefits and Claims 2,810 2,579 4,867 7,661 5,852 7,100 9,067 12,695 Income Taxes 1,797 2,619 492 (7,406) (3,939) (2,404) (3,294) (10,975) Minority Interest 47 123 20 95 (21) 76 (95) (309)
Income (Loss) from Continuing Operations 4,871$ 6,040$ 2,109$ (10,031)$ (5,226)$ (2,339)$ (3,423)$ (21,106)$ Discontinued Operations, After-tax 141 186 103 198 115 (156) 608 3,843
Net Income (Loss) 5,012$ 6,226$ 2,212$ (9,833)$ (5,111)$ (2,495)$ (2,815)$ (17,263)$
Full Full Full YTD 2007 vs. YTD 2008 vs.($MM) Year Year Year YTD 2006 Increase/ YTD 2007 Increase/
2006 2007 2008 (Decrease) (Decrease)
Total Revenues, Net of Interest Expense 89,615$ 78,495$ 52,793$ (12%) (33%)Total Operating Expenses 52,021 59,802 71,134 15% 19%Provision for Loan Losses and for Benefits and Claims 7,955 17,917 34,714 125% 94%Income Taxes 8,101 (2,498) (20,612) (131%) NMMinority Interest 289 285 (349) (1%) NM
Income (Loss) from Continuing Operations 21,249$ 2,989$ (32,094)$ (86%) NMDiscontinued Operations, After-tax 289 628 4,410 117% NM
Net Income (Loss) 21,538$ 3,617$ (27,684)$ (83%) NM
56
Write-downs of Exposures
Citi wrote off $19.9 billion and $41.4 billion loss on exposures in FY’07 and FY’08, respectively.
(1) Net of impact from hedges against direct subprime ABS CDO super senior positions.(2) Net of underwriting fees. (3) Net of hedges. (4) Excludes write-downs of $306 million in 3Q’08 and $87 million in 4Q’08arising from the ARS legal settlement. (5) Excludes positions in SIVs. (6) Recognized $182MM in 1H'07.
($MM) 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08 FY'07 FY'08
Write-downs on sub-prime related direct exposures (1) (1,831) (16,481) (5,912) (3,395) (394) (4,582) (18,312) (14,283)
Monoline Credit Value Adjustment (CVA) --- (967) (1,495) (2,430) (919) (892) (967) (5,736)
Write-downs on highly lev’d finance commitments (2) (1,352) (135) (3,078) (428) (792) (594) (1,487) (4,892)
Write-downs on Alt-A mortgages (3, 5) --- --- (1,015) (325) (1,153) (1,319) --- (3,812)
Mark to market on ARS (4) --- --- (1,457) 197 (166) (307) --- (1,733)
Write-downs on CRE (5) --- --- (573) (545) (518) (991) --- (2,627)
Write-downs on SIVs --- --- (212) 11 (2,004) (1,064) --- (3,269)
CVA on Citi Liabilities at Fair Value Option (6) 194 512 1,279 (228) 1,526 1,981 888 4,558
Goodwill impairnment --- --- --- --- --- (9,568) 0 (9,568)Total Revenue Marks (2,989) (17,071) (12,463) (7,143) (4,420) (17,336) (19,878) (41,362)
57
Unpleasant Trend of Stock PriceDue to deterioration of the turmoil, Citi’s stock price has dropped dramatically. The U.S Gov. and Citi worked together closely to turn things around.
TARP II ($20 bn) & FDIC Loss sharing Program ($301 bn)
Bankruptcy of Lehman Brother
Realignment of Organization
TARP I ($25 bn)
Overall Confidence Crisis
Rumors about Citi’s cost cutting, layoff, and off-balance-sheet assets
Qualm about nationalization
Federal Reserve Bank provided emergency fund
to Bear Stern
CEO’s profit announcement
Speculations of preferred stock exchange offer
Announcement of $9.83 bn loss
in 4Q’07
Announcement of $17.3 bn loss
in 4Q’08
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Government’s First Capital Injection - TARP I
In Oct 2008, the U.S. Congress passed the TARP, which covered the said $700 billion budget, and later incorporated into the Emergency Economic Stabilization Act (EESA).
On Oct 28, 2008 U.S. Government injected $250 billion (TARP I) out of the $700 billion to financial institutions. Each bank could received injection up to $25 billion or 3% of risk-weighted assets (RWA)
To stimulate the liquidity of the secondary mortgage market and consequently bailout financial institutions in the sub-prime mortgage crisis, the U.S. Government launched The trouble Assets Relief Program (TRAP).
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Rumors About Further Loss in Citi’s 4Q’08
Financial market went into credit crunch spiral after Lehman bankrupt in 2008/9/15
Dow Jones plummet 19% in 4Q’08
CDS of major banks/brokers shot up to 200~500bps (MS went even higher to above 1000bps)
Citi’s stock price plunged and closed at $3.77 per share on Nov. 21, 2008, down 60% from Nov. 14, 2008. The stock market value dropped to $6 billion, down from $244 billion two years ago.
Despite of the $25 billion fund infusion, the financial market was still unsettling and the economic outlook continued weakening. Speculators criticised on Citi’s capability to pull itself out of the swamp, which caused the stock price to drop below $4.
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On Nov 23, 2008, the U.S. Government decided to provide Citi additional capital of $20 billion . – Citi issued perpetual preferred share with cumulative dividends at a rate of 8% per
annum for the said infusion– Citi also issued warrants to the Treasury for purchase of 66,531,728 million common
shares in the company at a strike price of $10.61 per share.
Citigroup also entered into a loss sharing program with the U.S. Department of Treasury, The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank of New York. The definitive agreements, entered into on January 16, 2009, cover $301 billion of loans and securities backed by residential and commercial real estate, consumer loans and other assets. – Under the agreements, Citi absorbs all losses in portfolio up to $29 billion (in addition
to existing reserves). Any losses in portfolio in excess of that amount are shared by the US Government (90%) and Citi (10%)
– In consideration of the loss sharing program, Citi issued a combined $7 billion in cumulative, perpetual preferred stock to the Treasury ($4 billion ) and the FDIC ($3 billion), with a dividend of 8% per annum
– Citi gain US$40Bn capital benefit to improve Tier I capital ratio
Government’s Second Capital Injection On Nov. 23, 2008, the U.S. Government agreed to provide addition $20 billion capital to Citi and $301 billion loss sharing agreement of to stabilize market confidence on Citi
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Consumer Loans:– First Mortgages $98.9– Second Mortgages 55.2– Retail Auto Loans 16.2– Other Consumer Loans 21.3
Total Consumer Loans $191.6
Corporate Loans– CRE loans $12.4– Leveraged Finance Loans 2.3– Other Corporate Loans 11.1
Total Corporate Loans $25.8
Securities:– Alt-A $11.4– SIVs 6.4– CRE 2.1– Other 12.0
Total Securities $31.9
ULC – 2nd mortgages $22.4– Other consumer loans 5.2– Leveraged Finance 0.2– CRE 5.4– Other Commitments 18.3
Total ULC $51.5(1) Assets ($Bn) –aas of 11/21/2008. (2) Subject to post-closing confirmation process.
FDIC Loss Sharing Arrangement (Con’t)The Loss Sharing Agreement covered $301 billion assets, which are divided into 4 categories: consumer loans, corporate loans, securities, and unfunded lending commitments (ULC)
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Joint Venture with Morgan Stanley
Citi Smith Barney is Citi's global private wealth management unit, providing brokerage, investment banking and asset management services to corporations, governments and individuals around the world. With over 800 offices worldwide, Smith Barney holds 9.6 million domestic client accounts, representing $1.562 trillion in client assets worldwide.Citi announced on January 13, 2009 that they would give and exchange 100 percent of its Smith Barney, Smith Barney Australia and Quilter units to Morgan Stanley investment bank for a 49% stake in the joint venture and an upfront cash payment of $2.7 billion. Morgan Stanley will exchange 100 percent of its Global Wealth Management business for a 51 percent stake in the joint venture. After year three, Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi will continue to own a significant stake in the joint venture at least through year five. The joint venture combines businesses that have: – More than 20,000 high-quality financial advisors; $1.7 trillion in client assets – $14.9 billion in pro-forma combined revenues; $2.8 billion in pro-forma combined pre-tax profit – 6.8 million client households globally - with a strong presence in the critically important high-net-
worth client segment; and, A footprint of more than 1,000 offices around the globe.
On Jan. 13, 2009, Citi announced that it will form a industry leading wealth management business with Morgan Stanley through a joint venture. Citi will take 49% shareholdings and $2.7 billion in the JV.
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Realignment of Citi
Citicorp
Citigroup
Citi Holdings
Global Institutional Bank– Transaction Services– Corporate and Investment Bank– Private Bank
Retail Bank– Branded card businesses– Regional consumer and commercial
banking franchises
Brokerage and Asset Management– Smith Barney JV – Nikko Cordial– Nikko Asset Mgmt.Local Consumer Finance– North America
CitiFinancial, Mortgage, Student Loans, Auto Loans, Retail Partner Cards, Primerica
– Select Global Consumer FinanceSpecial Asset Pool– Key S&B risk exposures
E.g., CDOs, SIVs, etc.– Other Covered Assets
On Jan 16, 2009, Citi announced its intention to split Citigroup into to Citicorp and Citi Holdings. Despite of the seeming of dividing legal vehicles claimed by outsiders, the essence of the realignment, in fact, is to rearrange its reporting links of businesses and consequently enhance the information transparency.
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Government’s 3rd Supporting Action-Preferred Share Exchange Offer
The propose of this securities exchange is to increase Citi’s TCE to a level that removes uncertainty and restores investor confidence in the company.
Citi plans to substantially increase its tangible common equity (TCE) without any additional U.S. government investment. – Citi will offer to exchange common stock for up to $27.5 billion of its existing preferred
securities and trust preferred securities at a conversion price of $3.25 a share.– The U.S. government will match this exchange for up to a maximum of $25 billion face
value of its preferred stock at the same conversion price.– This transaction could increase the TCE of the company from the fourth quarter level
of $29.7 billion to as much as $81 billion, which assumes the exchange of $27.5 billion of preferred securities, the maximum eligible under this transaction.
The conversion would not cause nationalization of Citi under any definition. Citiwill remain a majority privately-owned company. – Based on the maximum eligible conversion, the U.S. government would own
approximately 36% of Citi’s outstanding common stock and existing shareholders would own approximately 26% of the outstanding shares. All investors’ new stakes will be determined following the exchange.
On Feb. 27, 2009, Citi announced that the U.S. government would take 36% of Citigroup’s shareholdings by converting up to $27.5 billion preferred shares into common shares.
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($Bn)Required minimum
Well-capitalized minimum 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08
TCE 58.10 81.00Tier 1 Capital 92.37 89.23 99.09 106.92 96.28 118.76Tier 2 Capital 41.45 44.90 44.52 43.43 41.09 37.64RWA 1261.79 1253.32 1279.59 1223.31 1175.71 996.25
TCE Ratio 2.63% 4.03%TCE/RWA 4.64% 8.13%Tier 1Ratio 4% 6% 7.32% 7.12% 7.74% 8.74% 8.19% 11.92%BIS Ratio 8% 10% 10.61% 10.70% 11.22% 12.29% 11.68% 15.70%Leverage Ratio 3% 5% 4.13% 4.03% 4.39% 5.04% 4.70% 6.08%
Improvement of Regulatory Capital Ratios
Through infusing capital and streamlining business, Citi’s capital position is strong.
(1) Risk-based capital ratio guidelines of required minimum ratios are issued by the Federal Reserve Board (FRB).(2) TCE Ratio = TCE/ adjusted average assets(3) Tier 1 Capital Ratio = Tier 1 Capital/ RWA(4) BIS Ratio = (Tier 1 + Tier 2)/ RWA(5) Leverage Ratio = Tier 1 capital / adjusted average assets.
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2.362.19 2.20 2.10 2.05 1.94
3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08
2008 Divestitures
Total of 19 divestitures in 2008
– German retail banking operations
– Citi Capital
– Citi Street
– Diners International
– Citigroup Global Services Ltd.
Asset Reduction Continues($T)
GAAP Assets Legacy Assets
Down ~35%
Down 18% or $420B
Balance Sheet – Assets
4
67
234 238 238 250 266 270 261 277 290
478 500 534 563 560 561 543 503 484
4Q'06 1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08
Deposits
U.S.: up 5% sequentially
Int’l: down 4% sequentially
739 772813 826 831 804 780 774
712
U.S. International
End Of Period, $B
Deposit Base Remains Stable
9
68
1.59 1.71 1.88 2.01 1.95 1.88 1.79 1.71 1.64
2.41% 2.43% 2.37% 2.34%2.49%
2.80%
3.14% 3.13% 3.22%
4Q'06 1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08
Average Interest Earning Assets ($Tr) NIM
Net Interest Margin
Net Interest Margin improved 73 basis points Y-o-Y
13
69(1) Reflected in 2008 restructuring charges.Note: 4Q’08 adjusted expenses and target headcount do not include impact of Smith Barney joint venture.
~
16.1 15.8 15.6 14.4 15.3 12.8
19% 15% 8% 2% (5)%
4Q'07 1Q'08 2Q'08 3Q'08 4Q'08
375 369 363 352 323 300
15% 8% 1% (5)% (14)%
4Q'07 1Q'08 2Q'08 3Q'08 4Q'08 Target
Systematically Lowering Expense Base
4Q’08 Adjusted
Y-o-Y
Excludes $2.0B restructuring charge and $0.6B Nikko
Asset Management Impairment
($B)
Headcount (‘000)
~6 in non-working notice (1)
~2 CTS divestiture ~15 identified reductions (1)
Y-o-Y
Progress In Cost ManagementDespite of headwinds, Citi keeps its promise in cost reduction through controlling expenses and reducing headcount while maintaining the efficiency of operation.
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Citi Capital & Liquidity Position
(1) Structural Liquidity equals deposits, long-term debt and equity, as a % of total assets.
Tier 1 Capital Ratio
55%
62% 63%65%
63%66%
3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08
Structural Liquidity (1)
7.1%7.7%
8.7%
11.9%
8.2%7.3%
3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08
5
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Improvement of Regulatory Capital Ratios
Citi’s capital position is gradually improved.
(1) Large banks: Citi, BAC, JPM (not pro-forma for BSC in 2006 and 2007), WFC, UBS, DB, RBS, BARC, and HSBC(2) In FY’08, Citi’s TCE/TA factored in the effect of fully conversion of preferred stocks (1.48%, if excluded).
Large Banks’ Tier 1 and TCE Capital Average
3.5%2.8%
2.1%
3.8%
2.6%
4.0%
8.8%8.0%
9.8%
8.6%
7.12%
11.92%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY'06 FY'07 FY'08
TCE/TA Citi's TCE/TA Tier 1/ RWA Citi's Tier 1/RWA
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Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.
efficiency, renewable energy & mitigation