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Global Banking Industry: Analysis and Recommendation. Boris Wang Daniel Zhou Jingmei Qin Hannah Sun. Presentation Overview. Industry Analysis HSBC JPMorgan Chase Citigroup. Industry Analysis. Industry Synopsis Primary Products and Services Revenue Composition and Cost Structure
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Global Banking Industry:Analysis and Recommendation Boris Wang Daniel Zhou Jingmei Qin Hannah Sun
Presentation Overview • Industry Analysis • HSBC • JPMorgan Chase • Citigroup
Industry Analysis • Industry Synopsis • Primary Products and Services • Revenue Composition and Cost Structure • Industry Risks • Regulatory Environment • Valuation Methodologies
Industry Synopsis • Banks are the cornerstone of the modern economy • Help to finance capital, provide liquidity, transfer risk, facilitate financial transactions, and monitor credit • Banks consist of 9 of the 20 largest companies in the world • Top 10 largest banks in the world have an aggregate asset of over $24 trillion
Primary Products and Services • Account services -Deposits, debit and credit cards • Granting loans and advances -Mortgages, business loans • Facilitation of financial transactions -Fund transfers, payment services • Capital financing -Debt and equity market financing
Revenue Composition • The primary component of a bank’s revenue comes from Net Interest Income (NII), which is the interest earned from the bank’s earning assets (loans, advances, securities), minus the interest paid on the bank’s liabilities (customer deposits, bank borrowings) • Second largest component of revenue comes from Fees which the bank charge on financial transactions and services
Cost Structure • A bank has two primary expenses: • Interest expense, which comprises of the interest paid on the bank’s liabilities such as customer deposits and other debt • Employee salaries and benefits
Industry Risks • A bank face five main type of risks: • Credit risk, potential for loss due to borrower or counterparty failing to fulfill obligations, this is the most important risk that banks have to manage • Market risk, potential for adverse changes in the price or volatility of financial assets and liabilities
Industry Risks • Interest rate risk, potential for adverse change in interest spread and profitability due to changes in the interest rate • Liquidity risk, possibility that a bank cannot meet a demand for cash or fund it obligations • Operational risk, potential for loss resulting from inadequate or failed internal processes
Regulatory Environment • Banking industry is highly regulated not only by local government but also by global regulatory authorities • Regulations require banks to comply to certain capital, leverage, and liquidity ratios in order to control risk • Regulations also require banks to monitor for illegal transactions and to provide consumer protection • Changes in regulations can significantly influence a bank’s profitability and operations
Regulatory Environment • 2008 Financial Crisis resulted in the introduction of many new regulations aimed at protecting consumers and increasing accountability • Dodd-Frank Wall Street Reform and Consumer Protection Act in the US • Independent Commission on Banking in the UK • Basel III global banking standards
Dodd-Frank Wall Street Reform and Consumer Protection Act • Federal law aimed at promoting the financial stability of the US by improving accountability and transparency of the financial system, to end “too big to fail” to protect American taxpayers by ending bailouts, and other purposes. • Volcker Rule: Restriction on US banks from making certain kinds of speculative investments that do not benefit their customers. Commonly known as a ban on proprietary trading by commercial banks.
Independent Commission on Banking • Vickers Report: Requirement on UK banks to ring-fence retail banking from investment banking, in order to protect retail banking customers from the more risky investment banking activities
Basel III • The Third Basel Accord is a global, voluntary regulatory standard which builds on the Second Basel Accord to improve bank capital adequacy, stress testing, and market liquidity risk • Main focus of Basel III is foster greater resilience at the individual bank level in order to reduce the risk of system wide shocks like that of the 2008 Financial Crisis
Valuation Methodologies • Valuation of banks and financial firm differ from that of conventional firms in many fundamental aspects: • Cash flows can not be easily estimated, since capital expenditure, working capital, and debt are not clearly defined • Banks are subject to capital requirements, in order for banks to grow their business, they must set aside a certain portion of their earnings as regulatory capital
Valuation Methodologies • A bank’s assets and liabilities are accounted marked-to-market instead of on a historical basis, therefore book value of equity is an accurate measure of current value • Debt resembles working capital or raw materials rather than source of capital, making the cost of capital for banks meaningless • Cannot calculate reinvestment because capital expenditure and working capital cannot be defined
Company Overview • Second largest bank in the world by total assets ($2,671 billion) • Operate in 75 countries and serve 54 million customers • Headquartered in London with 254,000 employees worldwide • Ticker: HSBC (NYSE), HSBA (LSE), 0005 (SEHK) • Market Capitalization: $207 billion
Company Overview • HSBC operates through four global businesses: • Retail Banking and Wealth Management • Commercial Banking • Global Banking and Markets • Global Private Banking
Management Team • Stuart Gulliver • Group CEO. Chairman of The Hongkong and Shanghai Banking Corporation Limited. • Age: 54 • Became Group CEO in 2011 • Masters in Jurisprudence, Oxford University • Joined HSBC in 1980, rose through the ranks in the Global Banking and Markets division • Held key positions in London, Hong Kong, Tokyo, Kuala Lumpur, and UAE
Management Team • Douglas Flint • Group Chairman of HSBC Holdings plc. • Age: 58 • Became Group Chairman in 2011 • Bachelors in Accounting, University of Glasgow, Chartered Accountant • Began career with KPMG, joined HSBC in 1985, former Group Finance Director
Management Team • Iain Mackay • Group Finance Director • Age: 52 • He was appointed as Group Finance Director of HSBC Holdings plc in December 2010. • MA in Business Studies and Accounting from Aberdeen University in Scotland. • Before joining HSBC, Mr Mackay worked at General Electric in the US from 1996 to 2007 as Controller of the Global Consumer Finance unit, which specialised in providing credit cards and personal loans. He then became Chief Financial Officer of GE Consumer Finance - Americas, then Chief Financial Officer of GE Healthcare - Global Diagnostic Imaging.
Management Team • Sir Simon Robertson • Executive Director and Group Chief Risk Officer • Age: 72 • Sir Simon joined the Board in 2006. His extensive international experience included working in France, Germany, the UK and the USA. • He was educated at Eton College. • His previous roles included non-executive Chairman of Rolls-Royce Holdings plc; a partner of NewShore Partners LLP; Managing Director of Goldman Sachs International and chairman of Dresdner Kleinwort Benson.
Company Strategy • HSBC seeks to be the leading international bank with balanced global business model which emphasizes on resilience to market volatilities • Possess banking network covering 85% of international trade and capital flows • Has strong presence and capabilities in growth markets such as China, ASEAN, Latin America, and Middle East • Seek growth by capturing growth among high growth economies
