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PRESENTATION TO BOARD OF DIRECTORS 2015 By Joseph Rizzi 1 MacroStrategies, LLC.

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Presentation on theme: "PRESENTATION TO BOARD OF DIRECTORS 2015 By Joseph Rizzi 1 MacroStrategies, LLC."— Presentation transcript:

1 PRESENTATION TO BOARD OF DIRECTORS 2015 By Joseph Rizzi 1 MacroStrategies, LLC

2 Banking consultant and private investor. Prior to that, he was Senior Investment Strategist for CapGen Financial, a private equity firm focused on financial institutions. Previous to that, he also worked at ABN AMRO for over 20 years, in both the U.S. and Holland, in the areas of risk management, structured finance, acquisition finance and asset liability management. Author of numerous articles on lending, risk management, and financial accounting, he is also a frequent lecturer to academic and professional groups. Mr. Rizzi holds a B.A. (summa cum laude) from DePaul University, an M.B.A. from University of Chicago, and a J.D. from The Notre Dame Law School (magna cum laude). See joerizzi.com for a complete list of publications and presentations.joerizzi.com Contact: rizzirisk@aol.com; 708-446-6632rizzirisk@aol.com MacroStrategies, LLC 2

3 Executive Summary Framework Strategy XYZ Bank Conclusion MacroStrategies, LLC 3

4 o Banking is undergoing structural changes impacting existing business models o Greatest challenge facing Bank CEO’s, Chairmen and their boards is to generate acceptable long term returns to shareholders defined as returns on equity greater than the cost of equity o This requires adjusting business models to fit the evolving low growth environment o Strategies and acquisitions need to be valued and based on plausible value drivers o Base case value needs to be compared against strategic alternatives and tied to incentives MacroStrategies, LLC 4

5 5

6 6 … operating performance)

7 (Capital goes where it is welcome… Relationships M = ROE-g B COE-g V = FCFE COE-g g = Rf FCFE = NI – CC CC = Assets X RCR EVA = Capital X(ROE – COE) Cost of Equity (COE) – market price for risk and level of risk CAPM: R f + B(ERP) + Sf DDM: D/P + g + Sf ROT: 8 – 10% ROE - COE Positive – Create Value Negative – Destroy Value Franchise Value = M - B …and stays where it is treated well) MacroStrategies, LLC 7

8 8 …and not just at the current point in time)

9 (Reflects downward shift in valuation… YearTrading Multiple (%) 2015 (YTD) 130 2014133 2013130 2012 99 2011 92 2010112 2009107 2008117 2007151 2006210 2005208 2004232 2003255 2002214 2001269 2000244 …due to performance concerns) MacroStrategies, LLC 9

10 (Stagnation or… MacroStrategies, LLC 10 …regression to mean)

11 (Structural decline of net interest margin… MacroStrategies, LLC 11 …reflects changing competitive dynamics)

12 (Repeat after me… Impact on NIM - positive initially. Magnitude depends on shape of yield curve Offsets Investment portfolio losses Gap Repricing of deposits Valuation impact – negative as discounting income (albeit somewhat larger) at a higher rate …rate Increases are not your friend) MacroStrategies, LLC 12

13 MacroStrategies, LLC 13

14 ( Buckle your seatbelts… Volatile Macro Conditions Low Growth Uncertain Rates Credit Environment Concerns New Competitors ReRegulation Technology …we are experiencing some turbulence) MacroStrategies, LLC 14

15 (Management involves doing things right… Old Approach – Real Estate focused 5L – regulatory constraints and investor recognition in COE have permanently reduced attractiveness long low large leveraged (i)lliquid Suggestions Competitors – Avoid trying to do better what they already do well and focus on what they do not do well Identify Competitive Advantages Active Competitive Sustainable Incorporate Risk, Capital and Value Considerations …leadership involves doing the right things) MacroStrategies, LLC 15

16 Return Opportunit ies Governa nce VolatilityLiquidity Strategic Capital Budgeting (CEO) Correlations Risk Management (CRO) Risk Appetite Capabilities External Stakeholders Shareholders Risk/Return Regulators Performance Capital Structure CFO Rating Agencies (creditors) …with strategy.) MacroStrategies, LLC 16

17 Choice of Markets with Attractive economics in which the organization enjoys a competitive advantage Risk the organization is willing and able to accept in pursuit of its strategy Risks underwritten and retained Capital relative to Creditors and Regulator expectations and peers Return capital to shareholders when actual capital exceeds need, or raise capital when exceeds actual capital Allocation to business units based on an economic capital determination 17 (Risk and capital as inputs into strategic planning… …and not just consequences.) Strategy Risk Appetite Risk Assessment Capital Need and Capital Assessment Capital Plan Capital Allocation MacroStrategies, LLC

18 (High returns evidence of skill… Profit/Loss Distribution Profit Warning Dividend Cut Raise Capital Management Replaced Regulatory Action Failure - 0 +Profitability …or risk taking?) MacroStrategies, LLC 18

19 MacroStrategies, LLC 19

20 (Investors are making short term bets… Trading at XX % of Book Value PEERS SNL Index Consequences Value Gaps Expectation Strategic Activists and Alternatives …on long term performance) MacroStrategies, LLC 20

21 (There ain’t no good way… ROE Relative to COE COE: Range 8 – 10% ROE Issues NIM Efficiency Excess Capital Growth Challenges Should you grow: not all growth is the same Value Additive Regulatory Issues Interchange Regulatory Cost Capital Implications Shareholder Distributions Impact Risk Appetite How Should You Grow Organic M&A … to do the wrong thing) MacroStrategies, LLC 21

22 (Do you have a competitive advantage, and… Factor Relative Position Proposed Position Rationale/Initiatives Size Product Breadth Pricing Credit Policies (Risk Appetite) Operational Efficiency Technology Relationships Client Managers Service Brand Scope … how will competitors respond) MacroStrategies, LLC 22

23 (Acquirer’s gain equals… Should we buy and if so why Alternatives Strategy What should we buy Screens What is it worth Value & Synergies What do we pay Price Costs How do we pay Consideration Capital structure Risks – How risky is the deal – what could go wrong Scenarios SVAR How do we execute Deal – negotiations, due diligence and documentation Post close – integration … synergies less premium) 23 MacroStrategies, LLC

24 (Action without vision… Industry Changes Still Unfolding Value Strategies to Ensure Value Creation Correct Performance Gap Be Sure About Growth Consider Activists and Alternatives …is confusion) MacroStrategies, LLC 24


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