A presentation on subprime mortgage crisis and its impact on Indian Banking Sector. This also includes the debacle of lehman Brothers which laid the foundation of Recession

1. Global business
scenario
&
recession effects on
bankinG sector

2. Road Map
Recession
 Subprime- The Villain for Recession 2007 & 2008
 Case Studies
 Impact on Indian Banking Sector
 Conclusion
 Vote of Thanks

3. Declining Market Economy
Starting Point = Unwillingness to buy

4. recession

5. Defining Economic Depression “ RECESSION”
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
DEPRESSION
WHEN YOU LOSE YOUR JOB

6. What Causes SLOWDOWN of Economy?
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”.

7. Recession: Past Trends
Year /
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.
−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.
−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.
1948 –49
1953 –54
7.9%
(Oct 1949)
6.1%
(Sep 1954)

8. Recession: 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
1990 oil price shock
recession
−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.
2007 –08
9.7%
(Aug 2009)
interest rates, and the
contributed to a shallow

9. Recession Effects on Industries
Least Impacted
Mildly Impacted
Most Impacted
 Pharmaceuticals
 Banks
 Oil & Gas
 Power
equipments &
 Services
 FMCG
 Auto
 Real Estate
 Media &
Entertainment
 Retail
 Infrastructure
 Logistics
 Information
Technology
 Hospitality and
tourism
 Financial Services

10. subPriMe

11. Subprime Loans – Meaning & Features
• Also Termed as “B” loans or “second chance” loans Balance-ofpayments 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, Apaper 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.

12. (Entrepreneur)
(Financial
Institution)

13. Causes of Subprime Failure
• Boom and bust in the housing sector
• Reckless Borrowing and Lending
• Securitization practices
• Others
– Inaccurate credit ratings
– Government policies

14. CASE STUDY I -LEHMAN
BROS.

15. •
Fate
•
Headquarters New York City,
New York, US
•
Area served
Worldwide
•
Key people
Richard S. Fuld, Jr.
Former (Chairman)
& (CEO)
•
Industry
Investment services
•
Products
•
Employees
Financial Services
Investment Banking
Investment management
26,200 (2008)
Chapter 11 bankruptcy
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

16. Lehman Brother’s Broad Recognition
Leading Global Banking Franchise
Broad Recognition
“Bank of the Year 2002”
The Best-Managed Investment Bank on Wall
Street.
The Firm received the following awards
for 2002, which reinforce the depth and
strength.
 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
4 ranked research franchise.
Bond House of the Year & Best
Lead Manager of Subordinated
Debt”
Deal of the Year: M&A” –
Olivetti's $34.8 billion acquisition
of Telecom Italia
29

17. 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.

18. In Comparison to others

20. Core reasons for failure…
Standard US Leverage $ is 10 Debt - 1 equity Lehman has more
than 30Debt -1equity

21. Core reasons for failure…
In Comparison to others

22. Exposure of Investments In Comparison to others

23. 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

24. 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,)

25. Henry Paulson, Treasury Secretary
=======
legislation to support Fannie Mae and Freddie
Mac but not Lehman
•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.

26. 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 )

27. 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

28. 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

29. CASE STUDY ii ( CiTiGROUP )

30. INTRO 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)

31. Analysis 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
Stockholder
Equity
Stated Leverage
%
Equity/Liabilities
1,381,500 1,511,123 1,764,535 2,093,112 2,069,108
112,537
115,428
119,783
127,754
113,598
12.3
13.1
14.7
16.4
18.2
8.10%
7.60%
6.80%
6.1%
5.50%

32. The Real Picture….
Particulars (Amt
in USD Millions)
Total Liabilities
Stockholder Equity
Intangible Assets
Tangible Assets
31-Dec-05 30-Jun-06 31-Dec-06 30-Jun-07 31-Dec-07
1,381,500 1,511,123 1,764,535 2,093,112 2,069,108
112,537
115,428
119,783
127,754
113,598
47,879
48,760
49,316
62,206
63,891
1,446,158 1,577,791 1,835,002 2,158,660 2,118,815
Tangible Equity
64,658
66,668
Real Leverage
21.4
22.7
4.50%
4.20%
T-Equity/T-Assets
70,467
65,548
49,707
25.0
31.9
41.6
3.80%
3.00%
2.30%

33. CITIGROUP’s Quarterly Results
Year 2008
Year 2009
20,000
17,569
Net Profit (USD Millions)
Net Loss (USD Millions)
15,000
10,000
5,000
5,127
2,423
2,908
0
Mar'08
June'08
Quarter Ended
Sept'08
Dec'08
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
4,245
1,577
Mar'09
June'09
Quarter Ended

34. Share price Movement
$55
$3

35. 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)

36. 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

38. 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.

39. 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.

40. The 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.

41. CITI’s SPLIT PERSONALITY
On January 16, 2009 Citigroup announced that it was splitting into two companies:
CITIGROUP
CITICORP
Core Business
Global Institutional Bank
CITI HOLDINGS
Non Core Business
Retail Bank
Global Transaction
Services
Corporate & Investment
Bank
Citi Private Bank
Brokerage and
Asset
Management
Local Consumer
Finance
Special Asset Pool

42. CITI Holding – Cloak for Disposal of Toxic
Assets…..
49% stake in
Morgan Stanley
Smith Barney
Primerica
Financial
Services
Brokerage &
Asset Management
Nikko Cordial
Securities
Nikko Asset
Management

43. Tough 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

44. Impact of recessIon on
IndIan bankIng sector

45. Approach of Two Different Type of Banks
Public Sector Banks Vs. Private Sector Banks
Public Sector Banks : Risk-averse approach
Private Sector Banks : Aggressive approach

46. Performance
of
two
different
types
of
(in March 2009 (4th Quarter) as compare to March 2008)
Increase in
bank
Public Sector
Banks
46.0 %
Private Sector
Banks
1.5 %
26.1 %
14.7 %
Interest Income
30.0 %
14.5 %
Non Performing Assets
(NPA)
20.4 %
37.8 %
Net Profit
(BSE Banker Index)
Net Sales

47. Recessionary Effects on Indian Banks
Emkay GlobalLehman Holdings
at 4.05%
ICICI- reported exposure
of $80 mn, $12 mn
provisions
Expected loss at $ 28
mn
PNB- reported
exposure at $5 mn
Expected loss at $
2 mn
Edelweiss: 2.6%
stake bought by
Lehman
Axis Bank- reported
exposure $ 1.5 mn through
mark to market forex
counter party deal. Impactnegligible
SBI- reported exposure
at $5 mn, expects to
recover 70%
BOBreported exposure
Expected loss of $ 5 mn
of $ 10 mn
Expected loss at $ 4 mn
BOI- reported exposure
of $ 11 mn,
expected loss of $ 5 mn

48. How Indian Banks are Safe?

49. Thank You!!!