The BKS LN Flashcards
Financial Markets
Indirect Finance: Lender-Servers: 1. Households 2.Business firms 3. Government 4. Foreigners Funds from above ->Financial Intermediary -> Borrower-Spenders: 1. Business firms 2. Government 3. Households 4. Foreigners Direct Finance: All 4 lender-Servers->Financial Markets ->Borrower-Spenders
Financial Intermediaries
Central Banks (US Federal Reserve)
Commercial Banks
Investment Banks (i.e. Securities Dealers)
Insurance Companies
Asset Management (Mutual Funds, Hedge Funds, etc.)
Role of Financial Intermediaries
Provide credit Maintain a payment and clearing system Establish liquid markets to buy and sell financial assets and instruments Mobilize savings Allocate capital to highest and best use Reduce risk (via diversification)
Role of Central Banks
Control the domestic supply of money to:
Control inflation
Maintain steady economic growth (promote full employment)
Provide market and price stability
Central Bank tools for managing money supply:
Purchase and sale of bonds (In U.S., through open market operations
Controlling bank borrowing rates (In U.S., through Federal Funds and Discount rate)
Changing reserve requirements
Capital controls
Private Sector Bank Categories
Commercial/Wholesale vs Retail
Bank vs Securities Brokerage
Money Center/International vs Regional
Universal Services vs Specialized
Banks in the United States
Significantly improvement in profitability and capitalization
Consolidation trend over last several decades
Big 4 commercial banks now control 40%+ of Deposits
JP Morgan Chase
Bank of America
Citigroup
Wells Fargo
Main investment banks trimmed to:
Morgan Stanley
Goldman Sachs
Merrill Lynch
Citigroup
US has a wide variety of smaller regional players
Hawaii market?
Banks in Europe 1
EU moving toward unified bank regulatory system after credit/sovereign debt crisis.
Many of the larger banks (Barclays, UBS, BNP) have followed a “Universal Bank” model.
Mixing of private and public ownership and interests are not uncommon, especially on the continent (Utility model).
Continental European banks often have stronger deposit bases than U.S. and U.K. banks.
Although each country differs, when compared to the U.S., Europe tends to have fewer and larger scale banks.
Intermediation model still prevails so banks are powerful.
Banks in Europe 2
Germany – Large number of domestic banks with a few international players (Deutsche, Commerzbank). Has both private and public sector banks
France – Second to Germany in number of Banks with a few large money center banks such as BNP and Soc Gen
Great Britain – Dominated by a half dozen banks (Barclays, RBC and HSBC). London is major, global financial center.
Switzerland – Solid banking tradition especially in asset management (Big two: Credit Suisse and UBS)
Italy, Spain, Ireland and Greece – Struggling to work through global financial crisis.
Banks in Asia 1
China
Big 4 government backed Banks are being restructured and privatized over time
Other domestic Private Banks are expanding
Foreign players beginning to participate
Japan
“Main Bank” system tied to industrial group is strong
Banks provide both debt and equity funding
After bubble economy deflated, consolidation has left market dominated by the Big Three (MUFJ, SMBC, Mizuho) with 100+ Smaller Regional Banks and around 70 Foreign Banks
Banks in Asia 2
Second Thoughts
Bank Financial Statements
Report of Condition – Balance Sheet
Report of Income – Income Statement
Report of ConditionA Bank’s Balance Sheet
Assest = Liability and Equity Assets: Cash Assets Loans Security Holdings Other Assets Liab and Equity: Deposits Non-deposit Borrowings Equity Capital
Assets: Investment Securities
Primary low risk but low return
Accounted for as Buy and “Hold to Maturity” or in Trading Accounts
Major Types
Government Agency Securities (Fannie and Freddie MBS)
U.S. Government Notes
Asset and Mortgage backed Securities
Securities provides a flexible investment vehicle to smooth the asset side of B/S during business cycle
Assets: Loans
Three Major Categories
Corporate Loans (Commercial and Industrial)
Consumer Loans (Loans to Individuals)
Real Estate Loans (Residential and Commercial)
Other Categories include Financial Institution Loans Foreign Loans Security Loans Leases
Loan Accounts
Gross Loans – Sum of All Loans
Allowance for Possible Loan Losses (“ALL”)
Contra Asset Account
Used as a buffer of reserve to absorb future Charge-offs or Loan Losses
Net Loans (Gross Loans – ALL)
Nonperforming Loans (foot note to B/S)
Calculating Allowance for Loan Losses (“ALL”)
Beginning “ALL” \+ Provision for Loan Loss (Non-cash Expense on Income Statement) = Adjusted Allowance for Loan Losses - Actual Charge-Offs \+ Recoveries from previous Charge-Offs = Ending “ALL”
Specific and General Reserves
Specific Reserves
Amounts set aside to cover a particular troubled loan or asset
Designated portion of ALL
General Reserves
Covers overall expected credit losses of loan portfolio
Remaining ALL that is not designated as Specific Reserves
ALL levels are determined by Bank management but influenced by Accounting Standards, Tax Laws and Government Regulation
Assets: Miscellaneous or Other
Bank Premises and Fixed Assets
Other Real Estate Owned (OREO)
Goodwill and Other Intangibles
(Typically non-interest bearing)
Liabilities: Deposit Accounts
Non interest-bearing Demand Deposits
Interest-bearing Savings Deposits
Money Market Deposit Accounts (MMDA)
Time Deposits (CDs)
Liabilities: Non-deposit Borrowings
Fed Funds Purchased
Securities sold under Agreement to Repurchase (Repos)
Long-term Debt (Bonds issued by Bank)
Subordinated Debt
Equity Capital
Core: Common Stock Outstanding Capital Surplus Retained Earnings (Undivided Profits) Other forms: Contingency Reserve ALL Subordinated Debt
Off-Balance-Sheet Items
Unused Commitments Standby Credit Agreements Derivative Contracts Futures Contracts Options Swaps
Key B/S Issues 1
Financial Leverage Book and Regulatory capital position Types and strength of equity capital Liquidity Position Asset Analysis Growth in assets, particularly loans Credit Risk (NPLs, Delinquencies) Adequacy of loan loss reserves (ALL) Mark-to-Market Diversity of loan and security types
Key B/S Issues 2
Deposit Base Size, stability and cost of deposits Consumer or Institutional Interest bearing or Non-interest bearing Non-deposit Funding Interest Rate Risk (Duration and ALM) Level of Off B/S exposure Window dressing
Report of IncomeBank’s Income Statement
\+ Interest Income - Interest Expense = Net Interest Income - Provision for Loan Loss = Net Income After PLL \+/- Net Noninterest Income = Net Income Before Taxes - Taxes = Net Income
Net Interest Income = Interest Income – Interest Expenses
--Interest Income Interest and Fees on Loans Coupons on Securities portfolio --Interest Expenses Deposit interest Interest on Non-deposit borrowings
Loan-loss Provision/Expense
Non-cash expense which is an estimate of future losses due to defaulting loans and leases that are currently on the balance sheet
Calculated using either
Specific Charge-off Method or
Experience (portfolio) Method
Determined by management but influenced by Accounting rules, Taxes and Government Regulation
Net Noninterest Income = Noninterest Income – Noninterest Expenses
Noninterest Income : Fees earned from Fiduciary Activities Service Charges on Deposit Accounts Trading Account Gains and Fees Mortgage Servicing and Sales Noninterest Expenses: Wages, Salaries, and Employee Benefits Premises and Equipment Expense Other Operating Expenses (marketing)
Key I/S Issues 1
Net Interest income (NIM)
Key profitability driver: Expanding or contracting? Why?
Impact of yield curve changes
Loan Loss Provisions and Charge-offs (credit risk expense)
Impacted by credit cycles
Underwriting criteria and analysis
Net Non-Interest Margin (NNIM)
Fee and Trading income versus operating expenses
Measure of efficiency, typically negative number
Expanding or contracting? Level and growth of Fee income
Key I/S Issues 2
Volatility of Income Especially in Trading and Credit Are earnings sustainable? What items are Reoccuring and Non-reoccuring? Growth in Earnings Dividend policy and safety of dividend Window dressing
