The Changing Shape of Global Finance Tuesday, May 1, 2012; 8:00 AM - 9:15 AM

Transcription

1 The Changing Shape of Global Finance Tuesday, May 1, 212; 8: AM - 9:15 AM Moderator: Timothy O'Hara, Managing Director and Co-Head of Global Securities, Credit Suisse Speakers: Richard Baker, President and CEO, Managed Funds Association Evan Bayh, Senior Advisor, Apollo Global Management; former U.S. Senator Joshua Friedman, Co-Chairman and Co-CEO, Canyon Partners, LLC Bennett Goodman, Senior Founding Member, GSO Capital Partners Tom Joyce, Chairman and CEO, Knight Capital Group, Inc. Carey Lathrop, Managing Director and Head of Global Credit Markets, Citi 1

2 Timothy O'Hara s slides 2

3 The financial sector has yet to return to pre-crisis equity values despite government stimulus and regulations US Dow Jones Financial Services Index 15 Europe Stoxx 6 Banks Jan-6 May-7 Jul-8 Oct-9 Jan-11 Apr-12 Jan-6 May-7 Sep-8 Feb-1 Jun-11 Source: Bloomberg, Credit Suisse 3

4 Funding costs for Banks and Brokers were similar to those of the best industrials CDS Spreads as of 1/1/ Lockheed Martin IBM United Tech Glaxo Dupont Siemens CS Barc JPM BoA GS Citi Source: Bloomberg, Credit Suisse 4

5 But are now significantly higher CDS Spreads as of 4/2/ Lockheed Martin IBM United Tech Glaxo Dupont Siemens CS Barc JPM BoA GS Citi Source: Bloomberg, Credit Suisse 5

6 Banks and Broker/Dealers have significantly reduced securities positions Aggregate Securities Positions of Primary Dealers $25bn $2bn $15bn Peak: $233bn (Sep-7) Latest: $43bn (Apr-12) $1bn $5bn $bn Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Apr-12 Source: Federal Reserve, Credit Suisse 6

7 Challenges for Banks under Basel III Recalibrating to Basel III Implications 16% 14% 12% 1% 8% 6% 4% 2% % 8% Tier 2 4.% Hybrid T1 2.% CET 1 2.% Basel I & II 15.5% CET 1 2.5% CET 1 2.5% CET 1 2.5% Tier 2 2.% HT1 1.5% CET 1 4.5% Basel III Surcharge for Global SiFI Countercyclical Buffer Capital Conserv. Buffer B3 Minimum CET1 $485bn Balance Sheet (RWA) Funding ( NSFR ) $1T $4T Source: The Quantitative Impact Study Group of the Basel Committee on Banking Supervision, Credit Suisse 7

8 Traditional investment strategies not meeting return hurdles Yield on Moody s Aggregate Corporate Bond Index Value of S&P 5 2% 1,6 15% 1% 5% 1,4 1,2 1, 8 % Jan-6 Jan-73 Jan-86 Jan-99 Jan-12 6 Jan- Oct-1 Jul-3 Apr-5 Jan-7 Oct-8 Jul-1 Apr-12 Source: Moody s, Bloomberg, Credit Suisse 8

9 AUM in many traditional long only strategies has not grown from 27 Assets Under Management of Long-only Equity and Bond Income Mutual Funds ($ in millions) 1,679 2,27 2,633 2,886 1,566 6,521 3,74 4,959 5,588 5, Source: ICI, Credit Suisse Equity Bond 9

10 In favor of ETFs or higher returning alternative investment strategies ETF AUM 1,2 Alt. Mutual Fund AUM 25 Hedge Fund AUM 2,5 1, , 1,5 1, 5 '8 '9 '1 '11 '8 '9 '1 '11 '8 '9 '1 '11 Source: SIMFUND, Hedge Fund Research, Credit Suisse 1

11 Carey Lathrop s slides 11

12 Nominal GDP growth % More borrowing = more growth Over the last thirty years, growth has become steadily more growth-dependent GDP has always been correlated with borrowing US debt growth vs nominal GDP growth, but if anything our dependence is increasing Credit growth per unit of GDP growth, rolling 5yr avg R 2 = Real credit (%) Credit per unit of GDP (ratio) Debt growth % Real GDP (%) Source: Federal Reserve, Haver Analytics, Historical Statistics of the United States. Source: Haver Analytics, Federal Reserve. 12

13 More borrowing = more growth Debt has now reached unsustainable levels. But deleveraging will have implications for growth too. That 193s feeling US debt/gdp across nonfinancial sectors (%) 3 The growth triangle Love triangle, or pyramid scheme? 25 2 Household Corporate Government GSE Credit growth Bust Asset price growth Economic growth Source: Federal Reserve, Haver Analytics, Historical Statistics of the United States. Source: Citi. 13

14 Additional slides 14

15 Growth of the biggest U.S. bank holding companies over 4 years Percent 1 Combined assets of the 5 biggest U.S. bank holding companies (% of U.S. GDP) 98% % 2 25% 33% 33% Sources: The Banker, Milken Institute

16 Large banks become larger Share of assets of all U.S. depository institutions Percent of total banking assets Smaller banks Large banks Note: Large banks are banks with assets > $1 billion. Source: Federal Deposit Insurance Corporation. 16

17 Importance of banks, stock and bond markets Selected countries and country groups Bank assets Bonds Equities Total financial assets (US$ trillions, 21) $2.5 $14.8 $23.4 $11.8 $25.1 $ % 11.9% 28.5% 12.1% 22.% 26.9% 23.3% 35.% 2.1% 45.5% 37.9% 5.7% 59.1% 53.1% 51.3% 42.3% 4.% 22.3% United Kingdom France Emerging Asia Germany World United States Source: IMF Global Financial Stability Report. 17

18 Banks hold more capital % Capital ratios: All FDIC-insured financial institutions Total risk-based capital Tier 1 risk-based capital Equity capital to assets 9 Leverage ratio Q4 26 Q4 27 Q4 28 Q4 29 Q4 21 Source: Federal Deposit Insurance Corporation. 18

19 Return on equity in banking was worse than other sectors (%) 25 2 Return on equity for the U.S. publicly traded companies Non financial corporations Non-bank financials Banks -5 Source: Bloomberg. 19

20 Growing importance of the U.S. parallel banking system 1945 Total financial assets: US$.24 trillion 211 Total financial assets: US$63 trillion Depository institutions 7% Contractual institutions 24% Parallel banking institutions 6% Contractual institutions 28% Depository institutions 28% Parallel banking institutions 44% Sources: Federal Reserve Board, Flow of Funds Accounts, Milken Institute. 2

21 U.S. BHCs rely more heavily on borrowing to finance their activities (Liability composition of U.S. BHCs) Long-term funding, 2.8% Equity, 5.7% 1986 Total BHC assets = US$2.4 trillion Other liabilities, 5.5% Equity, 9.8% 211 Total BHC assets = US$16.8 trillion Other liabilities, 11.2% Shortterm funding, 14.4% Deposits, 71.6% Long-term funding, 11.2% Shortterm funding, 19.4% Deposits, 48.4% Note: The 211 data are as of Q3. Sources: Reserve Bank of Chicago; Milken Institute. 21

22 The world s 5 biggest banks have gotten even bigger Percent 1 Combined assets of the world's 5 biggest banks (% of world GDP) 8 94% 6 66% 4 45% 2 15% 24% Sources: The Banker, Milken Institute. 22

23 Many large banks work broadly across the global financial system 1 % Foreign assets (% of total bank assets) Data as of 21 Sources: Bloomberg. 23

24 Government bailouts worldwide Government capital investments in financial firms Outstanding balance: US$414 billion Data as of April 12, 212 Netherlands, $15 France, $6 Rest of the world, $29 Ireland, $28 Germany, $44 United States, $196 United Kingdom, $97 Source: Bloomberg. 24

25 Credit default swap spreads for European banks are narrowing CDS spreads (basis points) Northern Rock taken over by U.K. Treasury (2/17/28) Lehman Brothers files for bankruptcy (9/15/28) Europe subordinated financial Europe senior financial Europe index Greek bailout (5/2/21) Source: Bloomberg. 25

26 Emerging markets lead a global rebound January 26 = Emerging markets 12 8 S&P 5 Europe Source: Datastream. 26

27 U.S. bond issuance Up sharply in 212 Monthly issuance (US$ billions) Investment grade High yield Source: Securities Industry and Financial Markets Association. 27

28 U.S. bond issuance Total issuance (US$ billions) 1,8 1,6 Investment grade 1,4 High yield 1,2 1, * * 212 data are annualized based on January March data. Source: Securities Industry and Financial Markets Association. 28

29 U.S. high-yield bond spreads slightly widen Basis points 2,5 Spread of the ML high-yield index over 1-year Treasury bonds 2, 1,5 1, Source: Bloomberg. 29

30 Volatile market Chicago Board Options Exchange Market Volatility Index (VIX) Index 8 7 Volatility index (VIX) VIX long-term average, Lehman Brothers collapsed (September 28) Long-Term Capital Management bailout (September 1998) Dot-com bubble burst (March 2) Source: DataStream. 3

31 Global growth forecasts Key countries/regions, % 7.9% 6.5% 4.4% 4.1% 2.5% 2.1% 1.4%.6% China India Asia (excluding Japan) MENA Latin America Eastern Europe U.S. Japan Western Europe Source: Economist Intelligence Unit. 31

32 U.S. stock market s share is shrinking Share of the world s market capitalization 23 Total market cap = US$27 trillion 212 Total market cap = US$5 trillion Hong Kong 3% U.K. 8% Japan 1% China 2% Rest of the world 33% U.S. 44% U.K. 6% Japan 7% Hong Kong 6% China 6% Rest of the world 42% U.S. 33% Note: The 212 data are as of April 11, 212. Source: Bloomberg. 32