Agustin Mackinlay
a.mackinlay@euruni.edu
Session 8 - March 20, 2012
A REVIEW OF THE EXAM
_________________________________· Assets & Liabilities
· The Yield Curve· LIBOR futures
[1] A BANK IS A BUSINESS!
Banking is a business; as such, its aim is to make a profit. How? By making LOANS for which it charges an interest rate. LOANS => INTEREST RATE = > PROFIT[2] WHERE DOES THE MONEY COME FROM?
The money that is lent out at interest comes (mostly) from the capital of the owners and from DEPOSITS. Assets BANK Liabilities & Equity
| LOANS | DEPOSITS |
| | |
| | EQUITY |
[3] NET INTEREST MARGIN
Net interest margin, also sometimes referred to as the net yield on interest-earning assets, is usually defined as net interest income, divided by interest-earning assets. The margin is calculated for a period of time, a quarter or a year, and is expressed as a percentage.NIM = NET INTEREST INCOME / INTEREST-EARNING ASSETS
Where:
NET INTEREST INCOME = INTEREST EARNED ON ASSET LESS INTEREST PAID ON DEPOSITS (AND OTHER SOURCES OF FUNDING)
[4] TYPES OF LOANS
. US Federal Reserve: Assets and Liabilities of Commercial Banks in the United States (Weekly) - H.8. US Federal Reserve: Senior Loan Officer Opinion Survey on Bank Lending Practices
(a) Real Estate loans.
Residential real estate loans. A mortgage loan is a loan secured by real property. A home buyer can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, can vary considerably.
[Residential real estate loans of US Commercial Banks, March 7 2012: $ 2114.5 billion]
Commercial real estate loans are available on all types of income producing and commercial properties, including: Shopping centers; Motels and apartments; Office buildings; Automobile dealerships; Health care facilities; Manufacturing facilities and more. Commercial real estate loans can also be used to refinance existing debt. There are typically two main types of loans including short term and long term. The short term loans consist of bridge loans that are used to keep the business running until larger and more long term loans can be obtained. The larger loans are for larger amounts and typically last for the life of the commercial real estate property. Commercial real estate loans are important for the growth and expansion of companies.
[Commercial real estate loans of US Commercial Banks, March7 2012: $ 1424.4 billion]
(b) Commercial and Industrial loans.
Any type of loan made to a business or corporation and not to an individual. Commercial and industrial loans can be made in order to provide either working capital [SHORT-TERM] or to finance major capital expenditures [LONG-TERM]. More info.
[Commercial & Industrial loans of US Commercial Banks, March 7 2012: $ 1379.3 billion]
(c) Consumer loans.
Loans for purchasing automobiles and mobile homes, student loans, loans for medical expenses and vacations, and loans for other personal expenditures [MEDIUM TO LONG-TERM]. [Consumer loans of US Commercial Banks, March 7 2012: $ 1093.4 billion]
[EXERCISE: LOOK AT THE FOLLOWING TYPES OF LOANS; IN EACH CASE, IDENTIFY WHETHER THEY ARE COMMERCIAL & INDUSTRIAL, PERSONAL, OR REAL ESTATE LOANS]
Example 1. Trade Receivables Finance from Deutsche Bank
Trade Receivables are generated from the sale of goods or services to another company [goods are sold against payment in 30, 60, 90, 180 days]. Trade Receivables Finance enables a company to finance against these trade receivables in order to increase day-to-day cash-flow, improve its ability to fulfill further orders and meet the daily operating costs of the business.
Trade Receivables are generated from the sale of goods or services to another company [goods are sold against payment in 30, 60, 90, 180 days]. Trade Receivables Finance enables a company to finance against these trade receivables in order to increase day-to-day cash-flow, improve its ability to fulfill further orders and meet the daily operating costs of the business.
Example 2. Small Business loans from Bank from Sun Trust.
Sometimes all it takes to boost a small business is a business loan. SunTrust’s business loans and lines of credit offer that extra lift. Our small business loans offer competitive rates and flexible terms to help cover most of your financing needs, whether you want to build a new facility, furnish your existing space or stockpile inventory before your busiest time of year.
Example 3. Consumer Loans from Sun Trust
Equity Loans and Lines of Credit (Put your home’s equity to work for you with a range of home equity lending solutions); Auto Loans (Explore the benefits of refinancing or get approved before you shop for a new or used vehicle); Physician Loans (Cover a wide range of personal and business expenses with our physician loans); Personal Loans and Lines of Credit (Obtain the funds you need with our affordable and flexible personal loans and lines of credit); Marine and Boat Loans (Finance the purchase of a new or used boat or explore the benefits of refinancing); Motorhome and RV Loans (Select from a full range of motorhome and RV loans to fit your borrowing needs); Education Loans (Meet your college financing needs with private student loans from SunTrust.).Example 4. A Syndicated Loan to VTB Bank Austria arranged by Deutsche Bank
$280mn Syndicated Term Loan Facility for VTB Bank (Austria) AG (formerly Donau-Bank AG) arranged by Deutsche Bank signs over subscribed and increased . Mandated Lead Arranger, Deutsche Bank AG London today announced the signing in Vienna of the US$280mn, the largest syndicated loan for VTBA to date. The following banks joined the Facility as Mandated Lead Arrangers in syndication: Agricultural Bank of China, Singapore Branch, AKA Ausfuhrkredit-Gesellschaft mbH, BAWAG P.S.K. Bank fuer Arbeit und Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft, BayernLB, Erste Bank, KBC Bank NV Dublin Branch, HSH Nordbank AG Luxembourg Branch, Mizuho Corporate Bank, Ltd., Norddeutsche Landesbank Luxembourg S.A. A total of 15 other banks joined during the general syndication phase.
Example 5. CitiMortgage [see]. See interest rates at the bottom of the page!
[5] OTHER ASSETS
. US Federal Reserve: Assets and Liabilities of Commercial Banks in the United States (Weekly) - H.8
. US Federal Reserve: Senior Loan Officer Opinion Survey on Bank Lending Practices
(a) Government Bonds.
[Government Bonds of US Commercial Banks, March 7 2012: $ 459.7 billion]
(b) Corporate Bonds.
[Corporate Bonds of US Commercial Banks, March 7 2012: $ 824.2 billion](c) Mortgage-Backed Securities.
[MBS of US Commercial Banks, March 7 2012: $ 1297.2 billion]
(d) Overnight-loans to other banks.
[Residential real estate loans of US Commercial Banks, March 7 2012: $ 981.7 billion]
(e) Cash. Includes vault cash, cash items in process of collection, balances due from depository institutions, and reserves at the Federal Reserve.
[Cash balances of US Commercial Banks, March 7 2012: $ 1609.0 billion]
Example 1. VTB, Erste Bank.
VTB: “Financial assets”: 654.1 billions of Russian roubles [see].
Erste Bank: “Financial assets”: €38.4 billion [see].
[6] LIABILITIES: BANK DEPOSITS
[Retail deposits at US Commercial Banks, March 7 2012: $ 7.088.0 billion][Large time deposits at US Commercial Banks, March 7 2012: $ 1.499.0 billion]
Example. Retail Deposit accounts at SunTrust [see]
. Checking accounts with online banking + mobile banking.
. Certificates of deposit. Retail certificates of deposit (CDs) are defined as those under $100,000. “Our CDs pay competitive guaranteed fixed interest rates with maturities ranging from 7 days to 10 years. You can open a CD with a minimum deposit of $2,000. The more you save, the more you’ll earn”.
Large time deposits are defined as deposits larger than $100,000. Corporations are active players. Example: Apple has almost $98 billion in cash! See Adam Satariano: “Apple Seen Paying Some of $97.6 Billion in Cash as Dividend”, Bloomberg.
[7] LIABILITIES: BORROWING FROM BANKS
[Retail deposits at US Commercial Banks, March 7 2012: $ 1.872.3 billion]Very short term!
[8] BONDS ISSUED BY BANKS[Bonds issued by US Commercial Banks, March 7 2012: $ 779.0 billion]
[EXERCISE: LOOK AT LIABILITIES OF DIFFERENT SORTS]
Liabilities @ Erste Bank (www.erstebank.com)
. Deposits by corporations: €21.7 billion [see].
. Customer deposits: €121.6 billion [see].
. Debt securities in issue: €34.6 billion [see].
Web page devoted to debt investors [see]. The growing international activity of Erste Bank led it to develop alternative sources to the classic primary funding through customer deposits. The bank employs a wide range of funding sources and programmes to meet the funding requirements of the Group, its subsidiaries and the Austrian savings banks. The bank is active in Austria and internationally as a private placement issuer as well as making public issues in varying currencies, maturities and structures. Senior bonds are the biggest segment. They made more than a half of total outstanding debts. (Definition of senior bonds: In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid, the subordinated bond holders are paid. As a result, the risk is higher. Therefore, subordinated bonds usually have a lower credit rating than senior bonds).
[QUESTION: WHY WOULD A BANK DEVOTE A WEBPAGE TO INFORM ON ITS DEBT?]
[8] ASSETS & LIABILITIES: EXAMPLES
. Swedbank balance sheet (p.12):
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