US BANKING SYSTEM

Presented by:Megha Bhalla – 11FN-063Rohil Mantri – 11FN-059Prince Gupta – 11IB-044Abhijeet Datta – 11FN-002Saurabh Bakshi - 11IB-052Saurabh Bansal - 11IB-053Sanket Mavlankar – 11FN-060

AGENDA

City Bank Analysis

City Bank Performance

About City Bank

Challenges and Outlook of US Banking

Effects of Recession 2008

Market Size of US Banking industry

History of US Banking and Regulations

EFFECT OF THE 1930S BANKING CRISIS

Federal Deposit Insurance Corporation (FDIC) is created to insure deposits in banks. This helps to restore confidence in

the banking system.

Securities and Exchange Commission (SEC) is created to regulate the securities industry.

Banking and Securities Operations must be separated. Many banks gambled in the stock market and lost money

during the stock market collapse of 1929.

Banks are not allowed to operate nor own banks outside of their state jurisdiction.This was to protect against

systematic risk.

Start of Investment Banking Era

BANKING REGULATION

State

Federal

Regula

tion

addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and

the promotion of lending to lower-income populations.

Comptroller of Currency(Natio

nal Banks)

Federal Reserve(memb

ers state banks)

FDIC(nonmember state banks)

• Commercial banks that accept deposits required to obtain FDIC insurance and to have a primary federal regulator

• Credit unions supervised by the National Credit UnionAdministration

• The Federal Financial Institutions Examination Council(FFIEC) establishes uniform principles, standards, and report forms for the other agencies.

REGULATORY BODIES

• conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions

• Provides deposit insurance, which guarantees the safety of deposits in member banks, up to $250,000 per depositor per bank

• serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States

BASEL NORMS

http://www.pwc.lu/en/risk-management/docs/pwc-basel-III-a-risk-management-perspective.pdf

Basel-I Basel-II

Basel-II.5

Basel-III

TIMELINE

AN OVERVIEW OF BASEL-III

US Banking Industry

•The total size of US Banks with respect to the assets they hold is as shown.

US BANKING INDUSTRY TOP 10 US BANKS

US Banking Industry

It illustrates the striking increase in banking industry capitalization in recent years, due to the issuance of new seasoned equity by many firms, as well as in retained earnings. This measure of industry capitalization reached 11.5 percent in 2012:Q2, compared with a low of 6.2 percent in 2008:Q4.

THE 2008 SUBPRIME MORTGAGE CRISISLed to the collapse of the United States housing bubble.

Failure or collapse of many of the United States' largest financial institutions: Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG

Contributed to a global financial crisis, even as oil and food prices soared

Crisis in the automobile industry

The government responded with an unprecedented $700 billion bank bailout and $787 billion fiscal stimulus package.

POST-RECESSION EFFECTSIMF estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.

Over 100 mortgage lenders went bankrupt during 2007 and 2008

Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase.

Several major institutions either failed, were acquired under duress, or were subject to government takeover.

These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup, and AIG

SIGNIFICANT GROWTH CHALLENGES

Macroeconomic• Unemployment• Extended low-

interest-rate environment

• Slowly stabilizing home values

Consumer Behaviour• New Debt - Reduced

willingness• Higher rate of savings• Deterioration in trust

leading to erosion of bank loyalty

Regulatory• Heightened

consumer protection laws• Reducing fees• Increasing

transparency• Increased capital

requirements

More stringent

risk management practice

Increased competitio

nfor

creditworthy

customers

High NPAsDeclining

profitability & Low ROE

Stagnant top-line revenue growth

REVENUE AND OPERATING PROFIT GROWTH

Stagnate in many product segmentsSource: Booz & Company “Capturing Growth in U.S. Retail Banking”

BANKS ARE INCREASINGLY COMPETING ONDistribution

Giants•Extensive branch network•Competitive pricing and convenience•Broadest range of products

Community Banks

•Trusted brand in the community•Deep local relationships•Traditional product set

Segment Specialists

•Targeting defined segments / products•Deep industry expertise•Specialized products and solutions

Product Innovators

•Dense branch network with online, mobile etc.•Product innovation•M&A to expand

Wells Fargo

Citi Bank

PNC Financial

USAABB&T

CITIBANK• One of the major international banks is the consumer

banking arm of financial services giant Citigroup

• Founded in 1812 as the City Bank of New York, later First National City Bank of New York

• Third largest bank holding company in the United States by total assets, after Bank of America and JPMorgan Chase

• Has retail banking operations in more than 160 countries and territories around the world

• In addition to the standard banking transactions, offers insurance, credit cards and investment products

CITIBANK- DURING RECESSION• Citi reported losing $8–11 billion from the subprime mortgage crisis in

the United States.

• On April 11, 2007, the parent Citi announced staff cuts and relocations.

• On November 4, 2007, Charles Prince quit as the chairman and chief executive of Citigroup. To be replaced by United States Secretary of the Treasury Robert Rubin.

• In August 2008, after a three-year investigation by California's Attorney General Citibank was ordered to repay the $14 million that was removed from 53,000 customers accounts over an 11-year period from 1992 to 2003. The money was taken under a computerized "account sweeping program“.

• On November 23, 2008, Citigroup was forced to seek federal financing to avoid a collapse.  The U.S. government provided $25 billion and guarantees to risky assets to Citigroup in exchange for stock. 

• On January 16, 2009, Citigroup splitted into Citicorp and Citi Holdings Inc.

• On October 19, 2011, Citigroup agreed to $285 million civil fraud penalty.

Threats

Erosion customer loyalty

Regulations that restrict future

revenue sources

New technologies vs traditional

branch network

Opportunities

Retain customers by delivering exceptional

experiences

Leverage trust and provide a full-service

relationship

Expand the value offered to customers

Monetize customer data through

analytics

Citi’s Goals

"We'll beat all our

competitors in productivity and client

satisfaction," said U.S. retail

and commercial

banking chief Cecilia Stewart

CITI BANK – GOALS & CHALLENGES

FINANCIAL STATEMENT

2009 2010 2011

Revenue 80285 86601 78353

Operating Expenses

47822 47375 50933

Provision for credit losses

40262 26042 12796

Net Income (1606) 10602 11067

In millions of dollars

Income Statement

INCOME STATEMENT

2009 2010 2011

-20000

0

20000

40000

60000

80000

100000

RevenueOp expensesNet Income

INCOME STATEMENT

Revenue Op expenses Net Income

-20000

0

20000

40000

60000

80000

100000

200920102011

FINANCIAL STATEMENT

2009 2010 2011

Total Assets 1856.6 1913.9 1873.9

Total Deposits 835.9 845 865.9

Equity 152.7 163.5 177.8

Book value per share

41.50 44.55 49.74

In billions of dollarsBalance Sheet

BALANCE SHEET

2009 2010 20110

500

1000

1500

2000

2500

AssetsDepositEquity

FINANCIAL RATIOS2009 2010 2011

Tier 1 common ratio

9.60% 10.75% 11.80%

Tier 1 capital ratio 11.67% 12.91% 13.55%

Total capital ratio 15.25% 16.59% 16.99%

Leverage ratio 6.87% 6.60% 7.19%

Return on common average equity

(9.4%) 6.8% 6.3%

RATIO

2009 2010 20110

2

4

6

8

10

12

14

Tier 1 common ratio

Tier 1 common ratioLinear (Tier 1 common ratio)

REVENUE (SEGMENT-WISE)

2009 2010 2011

North America 23615 33625 30161

EMEA 15084 11764 12265

Latin America 12711 12751 13552

Asia 14072 14436 15219

In millions of dollars

REVENUE (SEGMENT-WISE)

North America EMEA

Latin America Asia

0

5000

10000

15000

20000

25000

30000

35000

200920102011

CAMELS FOR CITI BANK• The financial soundness indicators for the banking sector can be

grouped according to six key areas of potential vulnerability known as CAMELS.

• Capital ratio, Asset quality, Management soundness, Earnings and profitability, Liquidity and Sensitivity.

A. Capital Ratio

• Tier 1 Capital Ratio has improved to 13.55% from 12.91%, which is a positive sign for the bank

• Total Capital Ratio has improved marginally from 16.59% to 16.99%.

2011 2010

Tier 1 Capital Ratio

13.55% 12.91%

Total Capital Ratio

16.99% 16.59%

CAMELS FOR CITI BANKAsset Quality

• The level of NPAs is recognized as a critical indicator for assessing banks' credit risk, asset quality and efficiency in allocation of resources to productive sectors.

• Net NPA’s to Net Advances has declined marginally which is a good sign for the bank. Although it still is at a relatively high levels of 7.175%.

• Gross NPA’s to Total Gross Loans has reduced marginally from th previous year which is a positive sign for the bank.

2011 2010 % Change

Net NPA’s to Net Advances

7.175% 7.418% -3.20%

Gross NPA to Total Gross Loans

7.777% 7.911% -1.72%

CAMELS FOR CITI BANKManagement Efficiency

• The profit per employee has increased by 6.85%, while the business per employee has increased by 4.46%.

• The bank has shown marginal growth in the total advances and total deposits section which clearly underlines the management efficiency.

• The number of employees have been reduced slightly, thereby indicating the management’s willingness to cut costs during the times of downturn.

$million 2011 2010 % Change

Profit per employee

42402 39685 6.85%

Business per employee

5682233 5439292 4.46%

CAMELS FOR CITI BANKEarnings and Profitability

• This ratio indicates the extent to which high non-interest expenses weakens earnings. The ratio of 0.813 is pretty high for the bank, although it has declined from the previous value of 0.847.

• ROA/ROE assesses scope for earnings to offset losses relative to capital or loan and asset portfolio. A relatively low ratio of 9.5% indicates the strong earnings capability of the bank and also the efficiency with which it performs, although it has increased from the previous year.

$million 2011 2010 % Change

Non-interest expenses to gross income

0.813 0.847 -4.06%

ROA/ROE 0.095 0.086 10.6%

CAMELS FOR CITI BANKLiquidity

• These ratios assess the vulnerability of the sector to loss of access to market sources of funding or a run on deposits. It assesses the liquidity available with the bank. The bank has shown a slight increase in these ratios over the previous year, which is a positive indication for the bank.

$million 2011 2010 % Change

Liquid assets to Total assets

0.260 0.244 6.45%

Liquid assets to short-term liabilities

1.577 1.463 7.79%

CAMELS FOR CITI BANKSensitivity

• It indicates the sensitivity of the bank to interest rate and foreign exchange risk.

• The bank has hedged its risk, which indicates the willingness of the bank to address sensitivity.

$million 2011 2010 % Change

Interest Rate Hedges

187433 208911 10.2%

Foreign Exchange Hedges

53796 56245 -4.3%

References:

•http://www.pwc.lu/en/risk-management/docs/pwc-basel-III-a-risk-management-perspective.pdf

•http://www.federalreserve.gov/newsevents/press/bcreg/20060224aa.htm

•Booz & Company “Capturing Growth in U.S. Retail Banking”

•http://online.wsj.com/article/BT-CO-20120207-714503.html

•www.citibank.co.in/

•en.wikipedia.org/wiki/Citibank