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Richard K. DavisChairman, President and CEOOctober 27, 2009
Richard K. DavisChairman, President and CEOOctober 27, 2009
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Right Brain
3
The Way Forward?The Way Forward?
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Banking Industry 2006
Strong
Healthy
Vibrant
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Banking Industry Today
Strong?
Healthy?
Vibrant?
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You Might be an Banker if ...
Your 4th grade daughter asks you to cancel your appearance at her class’s career day
You’re afraid to go to Washington, D.C.
Your spouse tells everyone you’re a pizza delivery driver
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The Economic Outlook
GDP
Unemployment
Labor compensation
Housing
Automotive
Economic growth
Consumer spending
Consumer confidence!?
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Intersection:
BankingBanking U.S. U.S. EconomyEconomy
U.S. U.S. EconomyEconomy
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Intersection:
U.S. U.S. EconomyEconomy
U.S. U.S. EconomyEconomyBankingBanking
Global Global EconomyEconomy
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Catalyst?Catalyst?
Banking!Banking!
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Liquidity Crisis …to Credit Crisis …to Solvency Crisis
Liquidity Crisis …to Credit Crisis …to Solvency Crisis
% change in S&P market index (and related proxies for early years) by year
18621879188519331954
18431863192819351958
183019081927193619381945195019551975198019851989199119951997
18461852188019001901190919151922192419251942194319511961196319671976198219831996199819992003
182918321834183818471848184918501855185818641878188618921897189819041905191819191921192619441949195219591964196519681971197219791986198820042006
182618361840184218441856
1866186718681869187018711872187418751877188118871889189118941895189618991902190619111912191619231947194819561960197019781984198719921993199420052007
18591865
18251828183118371841185418731884189319101917192019411957196619732001
183918571907193019742002
193719312008
182718331835184518511853
187618821883188718901903191319141929193219341939194019461953196219691977198119902000
18601861
60504030200-20-30-40-50 -10 10
2008 was different from any crisis in living memory
Current crisis
2009 Q3
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SOURCE: Eichengreen and O’Rourke, 2009, Center for Economic and Policy Research
The global financial crisis shrunk the world economy at a similar rate as the start of the Great Depression
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Bailouts – capital infusions
Liquidity support – bank run protections
Guarantees of risky assets
10,985
4,873
5,220
892
$ Billions
Bear Stearns
Citi
Bank of America
FDIC Guarantee to GE
FHA Hope for Home Owners
FDIC Liquidity Guarantees
Net Portfolio CP Funding
TAF
MMIFF
TSL
Primary Credit Discount
ABCP Liquidity
Primary Dealer and others
Securities Lending Overnight
Secondary Credit
TARP
Fannie/Freddie (ex TARP funding)
AIG (ex TARP funding)
29
301
118
139
300
1,400
1,800
900
540
250
93
62
47
10
118
700
400
123
Program
Maximum Notional amount
P-PIP (ex TARP funding) 900
Credit easing by MBS purchase 1250
Agency debt/ treasury securities 500
TALF (ex TARP funding) 1000
– Further intervention?
– Exit strategy?
U.S. government and others have taken unprecedented efforts to support the financial system
Key questions
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Scenario 4: Double dip
Shallow recovery followed by second
downturn
Scenario 3: Stalled globalizationModerate recession, followed by structurally slower global growth
Scenario 1: Quick fixRebound by end of 2009, sustained in
2010-11
The global macro outlook remains highly uncertain
2009 ‘10 ‘11 ‘12 2013 2009 ‘10 ‘11 ‘12 2013
Scenario 2: Battered, but resilientProlonged stress through mid-2010, recovery begins 2011
Base case
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1,575
1,065
Total
~2,640
Other business debt
240
LL Loans
130
HY Bonds
200
Other consumer loans
400
Consumer credit cards
390
CRE
380
Residential real estate
900
More pain to come – $1.5 trillion of an estimated $2.6 trillion in global credit losses on U.S. assets has been recognized
Losses writtenoff through July 2009
Scenario 2: ‘Battered, but resilient’ - Estimated cumulative U.S. loan losses and mark-downs USD billions, global losses on U.S.-issued assets
Estimated cumulativeLosses
Total outstandings
% of losses recognized1
Loss as % of outstanding
~90%
8%
11,140
~40%
11%
3,480
~25%
46%
840
~40%
24%
1,680
~60%
29%
680
~60%
22%
590
~45%
~4%
6,410
~60%
11%
24,820
1 Total write-offs as of July, 2009
▪ ~60% or $600B borne by banks
▪ Of this, ~70% or $400B borne by 19 SCAP banks
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Future outlook for banking is linked to the macro economy and the regulatory and political environment
Key sources of uncertaintyKey drivers of change
▪ What will be the depth and shape of the global recession and recovery?
▪ What is the magnitude of balance sheet write-offs yet to come?
▪ When will the global capital markets and credit markets recover?
▪ To what extent will consumers and corporates continue to deleverage?
Macro economy
▪ How will regulators intervene?
▪ How will the political environment impact the industry?Re-regulation and political environment
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Banking – next 3-5 years
▪ Still attractive
– Economic recovery
– Normalized loan provisions
– Shrinking of shadow banking
– Widening credit spreads
– More safety/ soundness
Profitability will return to 2006 levels by 2013
Bank estimated pre-tax profits (after provision for losses)
2012-2013E
$45-47B
2008
($2B)
2006
$48B
ESTIMATES
ROA 1.4% (0.5%) ~1.3%
ROE 13% (0.5%) 11-12%
Beyond the current uncertainty, banking will re-emerge as an attractive space
+
▪ New headwinds
– Impact of regulations
– Larger capital requirements
– Countercyclical provisions
– Higher deposit insurance
– Lower EPS due to dilution
(after tax)
(after tax)
?
–
▪ Valuation uncertainty
– Higher PE due to lower risk
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Industry structure in the next 3 years
▪ Banks will largely focus on traditional less-risk businesses
▪ Regulators will be more strict
▪ Failure / consolidation of mid-tier and smaller banks
▪ Deposits/ savings/ investments will grow faster, and credit will grow slower (as households save and deleverage)
▪ Smaller, more vanilla securitization market; rise of on-balance sheet banking
▪ Rise of boutiques, especially in talent-driven businesses (M&A advisory, proprietary trading, etc.)
▪ Monolines/ credit unions/ ILCs will remain
▪ Crisis will accelerate the shift of economic growth to developing markets
19
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Proposed Financial Regulatory Changes
New Financial Consumer Agency
Systemic Oversight Council
Resolution Mechanism for Large Institutions
Regulatory Consolidation and Restructuring
Stress Testing Requirements (liquidity / capital / economic)
“Living Will”
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Intersection:
U.S. U.S. EconomyEconomy
U.S. U.S. EconomyEconomyBankingBanking
Global Global EconomyEconomy
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Recovery?
Expansion?
Adjustment?
The Next Phase:The Next Phase:
Banking’s Role in the Economic Expansion
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The BankingBanking System Purpose
To bear risk and allocate capital
But: (in recent years)
The outcome was to have created risk
(risk sharing)
(risk creation)
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The BankingBanking System Purpose
To bear risk and allocate capital
And: (going forward)
The outcome is to create growth
(risk sharing)
(create leverage)
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Intersection:
BankingBanking LeadershipLeadershipLeadershipLeadership
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Management
“The secret of successful managing is to keep the five guys who hate you away from the five guys who haven’t made up their minds yet.”
- Casey Stengel
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Leadership“The best leader is the one who has sense enough to pick good people to do what he wants done, and self-restraint enough to keep from meddling with them while they do it.”
- Theodore Roosevelt
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Balance
“Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall.”
- Stephen R. Covey
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The Way Forward?The Way Forward?
Richard K. DavisChairman, President and CEOOctober 27, 2009
Richard K. DavisChairman, President and CEOOctober 27, 2009