the new financial services landscape global financial ... butters-new fin… · current status of...

The New Financial Services LandscapepGlobal Financial Services Industry

Steven M. Butters

Deputy Managing Partner

Global Financial Services Industry PracticeGlobal Financial Services Industry Practice

February 3, 2010

Unprecedented turmoil ………

$1.6 -1.8 trillion in Losses $and Write-downs

M k t C it li tiMarket Capitalization Down Over 50% in 2008

Relationships with financial providers will change

Mega Bank Mergers and Failures Credit and capital become scarcer

Stalled Credit MarketsCredit spreads will be higher

Government withdraws

Massive Government Intervention

Government withdraws

Global Contagion

© 2010 Deloitte Touche TohmatsuSource: Bloomberg, The Deloitte Center for Banking Solutions2

Current Status of the Global Financial Services Industry

Market Capitalization of Top 100 Financial Institutions$6.6 trillion

$3.2 trillion$4.5 trillion

20092008 2007

Number of Financial Institutions >$50bn Market Capitalization45

14

28

© 2010 Deloitte Touche Tohmatsu

20092008 2007

3

Current Status of the Global Financial Services IndustryDomicile Market Capitalization of the Top 20 Banks

29% 21% 19% 38% 18% 11%

2007 2009

Size of Government Financial Services Bailouts

$

EU - $5.5 trillion

China - $0.9 trillion

US - $3.6 trillion

© 2010 Deloitte Touche Tohmatsu4

A ‘tsunami’ wave of new regulation is driving major uncertainty

A large number of regulatory and industrial organizations are proposing regulations and other means to ‘fix the industry’ e.g., BIS, FSB, CEOPS, Senior Supervisors, etc., all driving uncertainty. The i d t k it f l t h b t d t t k th d t il f th h

Treasury Blueprint,Mar 2008

Senior Supervisory Report, Mar 2008 & Oct 2009 G30 Financial

Reform, Jan 2009

Financial Supervision in the EU, de Larosiere

Report Feb 2009

industry knows it faces regulatory change but does not yet know the detail of those changes.

IIF Report,Jul 2008

The Turner Review, Mar 2009

G30 Structure of Financial Supervision,

Oct 2008

Counterparty Credit Risk Management

Aug 2008Jul 2008 Mar 2009Oct 2008 Aug 2008


Changing industry landscape globally

f F fi i d l

What used to be constant… …and how it’s now playing out

• Institutions were often highly leveraged utilizing short term financing

• Broker/dealers & investment banks as

• Face new financing models• The growing predominance of the

universal banking modelindependent players

• Mono-line institutions• Strategic market consolidation

• Rapid market consolidation• Return to core businesses• Government as guarantor owner andStrategic market consolidation

• Cutting-edge financial instruments• Liberal regulation and oversight

Government as guarantor, owner, and administrator

• Increased regulation and oversightSi lifi ti d t f• Rising asset prices

• Belief in ratings agencies• Emphasis on supply side of capital

• Simplification and transparency of financial products

• Rating agency reputation weakenedp pp y p• Cheap and available capital and

financing • Predominance of Western wealth

• Strong and growing emphasis on demand side of capital

• Realistic pricing of capital• Predominance of Western wealth g• Rapid growth of emerging market

wealth


The credit markets are improving…

Counterparty anxieties are much lower

5 0

Bank Risks DiminishCDS Rates (Basis Points)*

TED Spreads Normalize

4.0

4.5

5.0

3.0

3.5

Poi

nts

Poi

nts

1.5

2.0

2.5

Bas

is

Bas

is

0.5

1.0

0.0

01/05/05

01/05/06

01/05/07

01/05/08

01/05/09


Source: Bloomberg, FDIC, The Deloitte Center for Banking Solutions*CDS rates for the following institutions: Citigroup, Morgan Stanley, American Express, Bank of America, Capital One, GoldmanSachs, Wells Fargo, JP Morgan Chase

7

…But risks remain

A recent surge in failed banks and distinctly different views about future growth rates emphasize remaining risks to recovery

Charge-Offs and Delinquency Rates IncreaseFailed U S Banks Increase to Charge Offs and Delinquency Rates Increase Top 100 Banks

Failed U.S. Banks Increase to December 2009

9.0%

10.0%

Business LoansCredit Card Loans Charge-Offs

ks

7.0%

8.0%

9.0% Credit Card Loans Mortgages"Business Loans"Credit Card Loans"Mortgages

g

Delinquency

Num

ber o

f Ban

k

4.0%

5.0%

6.0%

2.0%

3.0%

0.0%

1.0%

Q1 06

Q2 06Q3 06

Q4 06

Q1 07

Q2 07Q3 07

Q4 07

Q1 08Q2 08

Q3 08

Q4 08

Q1 09Q2 09

Q3 09


Source: FDIC, Federal Reserve, The Deloitte Center for Banking Solutions

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

8

A new consumer is emerging

The new U.S. consumers are living more within their means

3.5%4.0%

% Change in Personal Disposable Income % Change in Consumer Expenditure

1.5%

1.0%1.5%2.0%2.5%3.0%

‐0 5%

0.0%

0.5%

1.0%

2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009

‐1.5%‐1.0%‐0.5%0.0%0.5%

2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009

2 5%

‐2.0%

‐1.5%

‐1.0%

0.5%

6 0%

2,500

Savings as % of Personal Disposable Income Consumer Debt‐2.5%

3.0%

4.0%

5.0%

6.0%

1,000

1,500

2,000

0.0%

1.0%

2.0%

2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q20090

500

,


2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, The Deloitte Center for Banking Solutions

2004 2005 2006 2007 2008 Q1 2009 Q2 2009 Jul

Revolving Non Revolving

9

A new financial services marketplace will emerge

We’re not going back to ‘business as usual’

Shadow banking pulls back

‘Cash is king’

Government withdraws support, declares ‘recession over’

Alpha gives way to beta

Awaiting the solidification of new regulation


Shadow banking pulls back - Markets shift in favor of banks

Alternative markets are severely constrained

Total U.S. Capital Markets IssuanceTotal Credit MarketU.S. Financial System

50%

38% 40%

26% 27%35%

80.0%

90.0%

100.0%

47%80.0%

90.0%

100.0%

53% 50%

50 0%

60.0%

70.0%

93% 81%

66%

50% 47%54%

50 0%

60.0%

70.0%

ship

Spl

it

Spl

it

47% 50%

62% 60%

74% 73%65%

30.0%

40.0%

50.0%

50% 53%46%

30.0%

40.0%

50.0%

Ass

et O

wne

rs

Issu

ance

47%

0.0%

10.0%

20.0%

Q4 06 Q1 07 Q4 07 Q1 08 Q4 08 Q1 09 Q3 09

7% 9%

34%

50% 46%

0.0%

10.0%

20.0%

Q4 06 Q1 07 Q4 07 Q1 08 Q4 08 Q1 09 Q3 09

Non Securitized Securitized1975 1985 1995 2005 2008 Q3

2009

Alternate Financial Segment Traditional FinancSource: Federal Reserve L1 Flow of Funds Report, SIFMA, The Deloitte Center for Banking Solutions.Definitions: Traditional Sector: Fed Commercial Banks Savings and Credit Unions Insurance Companies Public and Private Pensions Funds


Definitions: Traditional Sector: Fed, Commercial Banks, Savings and Credit Unions, Insurance Companies, Public and Private Pensions Funds.Alternative Sector: Mutual Funds, Closed End Funds, ETFs, GSEs, ABS issuers, Broker-Dealers, REITS, Finance Companies, Hedge Funds and PE firms.

Broker-Dealers transition to the traditional sector in Q4 2008 and Finance Companies in 2009.Securitization issuance includes mortgage backed securities, ABS and Global CDO.11

‘Cash is king’ - Banks are cleaning house

The cost of financial intermediation will rise

U.S. Banks Tier One Capital Ratios U.S. Banks Loan/Deposit Ratios

8.0%

9.0% Q1 09

Q2 09

100 0%

120.0%Q1 09

Q2 09

6.0%

7.0%

80.0%

100.0%

4.0%

5.0%

60.0%

1 0%

2.0%

3.0%

20.0%

40.0%

0.0%

1.0%

BAC C JPM FITB Key PNC WFC0.0%

BAC C FITB JPM Key PNC WFC

S SNL Th D l itt C t f B ki S l ti


Source: SNL, The Deloitte Center for Banking Solutions

12

‘Cash is king’ – Corporations build fortress balance sheets

While banks seek shorter loan maturities, corporations seek to borrow longer

Total Debt/Market Cap % Short Term Debt as % of Long Term Debt

74%

80.0%

40% 41%

40 0%

45.0%

Total Debt/Market Cap % Selected U.S. corporations

Short Term Debt as % of Long Term Debt Selected U.S. Corporations

66%

60.0%

70.0%

32%

35%

30 0%

35.0%

40.0%

48%

40.0%

50.0%

20 0%

25.0%

30.0%

28%

20.0%

30.0%

15.0%

20.0%

10.0%5.0%

10.0%


0.0%

2006 2007 2008 Q1 2009

0.0%2006 2007 2008 Q1 2009

Source: Annual Reports, The Deloitte Center for Banking Solutions13

Government withdraws support and declares ‘recession over’

Government support to the market falls by ~$5.9 trillion. About $1 trillion

Summary of Government Commitments Major Programs

Government support to the market falls by $5.9 trillion. About $1 trillion remains in place

Major Programs

Program Expiration Commitment Outstanding Balance

Money Market Mutual Fund Guarantee Sept 18, 2009 $3. 5 trillion 0Guarantee

Contingency Fund No longer needed $750 billion 0

TARP Continues in place $700 billion $377 billion

Commercial Paper Funding Facility April 30, 2009 Limits per issuer $45 billion

Term Auction Credit OngoingAs required

$447 billion (peak)$212 billion

Mortgage Backed Securities Dec 30, 2009 $1.25 trillion $625 billion

Central Bank Swaps OngoingAs required

$375 billion (peak)$61 billion

S U S T Th F d l R B d Th D l itt C t f B ki S l ti

Term Asset Backed Securities Lending Oct 30, 2009 $200 billion $37 billion

Total ~7.2 trillion ~$1.4 trillion


Source: U.S. Treasury, The Federal Reserve Board, The Deloitte Center for Banking Solutions

14

Alpha gives way to beta

The new marketplace reflects more beta characteristics than alphamarkets

Ret

urn High

Less SystemicMore Systemic

Systemic institutions adopt a more

Contraction of alternative

investments

balanced approach to risk and returnsIllustrative

Risk

HighLow HighLow

Consolidation in large banks and asset managers

Low

Pre-Crisis Model


Source: The Deloitte Center for Banking Solutions

15

While regulation is slow to change, the Institute of International Finance report on strengthening practices for a more stable system shows progress being made……

• Risk Management• Risk Management

• Liquidity Risks

Strengthening Practices for a More Stable System – The Report of the IIF Steering

• Valuation Issues

p gCommittee on Implementation. Progress is being made in all the following

• Compensation Policiesthe following


……While new proposals are coming in waves

Current Financial System Stability Bills passed by the U.S. Congress and Senate aim:

• to close loopholes that allowed big financial firms to trade risky financial d t ith t i htproducts without oversight;

• to identify system-wide risks that could cause a meltdown;• to strengthen capital and liquidity requirements to make the system more• to strengthen capital and liquidity requirements to make the system more

stable;• to ensure no large firm could take down the entire economy if it failed. g y

President Obama has added two additional reforms:• “Volcker Rule:” banks will no longer be allowed to own, invest, or sponsorVolcker Rule: banks will no longer be allowed to own, invest, or sponsor

hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. P t th f th lid ti f th U S fi i l t• Prevent the further consolidation of the U.S. financial system.


Regulatory reform, some thoughts ….

Global coordination and cooperation must remove the ability to perform regulatory arbitrage.

Any reform needs to ensure that: Fi i l i tit ti ll it li d• Financial institutions are well capitalized

• Financial institutions maintain adequate liquidity levels• Financial institutions have adequate risk management• Financial institutions have adequate risk management

procedures• Financial institutions exercise good corporate governanceFinancial institutions exercise good corporate governance• Provide increased transparency• Address procyclicality that is inherent in the financial systems p y y y


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