Lecture 1 8-2-17
Case 20%
Presentation case 10%
Banks in society 20%
Regulation 15% (no American things and duration on exam, so no questions about the FED. Most in
chapter 1 to 4 is about US)
Balance sheet 10%
Credit function 25%
In a bank: don’t talk about equity, but about capital
Bank management
Risk framework = tells you something about how governance and culture is organized. Principles and
policies: what do we finance, do we finance for example real estate, what are the terms and
conditions, do we finance it for 5 years or 10 years? What is the maximum amount?
Risk appetite statement: How many clients? For example, one client has a loan of 2 billion and you
have a capital of 10 billion, is it worth it? Because if the client goes bankrupt, then you will have a
loss of 2 billion.
So you don’t want to put too much risk on 1 client. One event can turn into a loss for you. Also not
too much in the same country, because it will be risky.
Do you trust savings to the banks? Reputation is important.
Credit risk: loans, which are 70 – 80 %.
Market & liquidity risk: is about ALM (asset and liability management).
Compliance risk is really important: know you customer is key.
The book
Investors versus public (chapter 15). Investors should guarantee, not the public.
Exam question: what do you think about the future of banking?
Credit process
What the bank asks (3 questions):
1. Who are you? > you should fit the bank, otherwise we don’t do it.
2. How much money do you want? And what for? What are you going to do with it?
o Working capital (for how long do you need it?): building a factory takes a lot of time.
3. How are you going to repay the bank? > there are 3 ways to repay
o Generate cash flow (by doing business)
o Sell the loan (to another bank and get money in return) > issue/problem: there
happens nothing, you still have money on your balance sheet, you don’t make any
profit anymore. But that is why you have a company or bank. You want to do
something with your money. So it’s ok to do this, but not so good as the first option.
o Sell collateral (=onderpand) > don’t have sufficient EBITDA and can’t pay interest, so
bank wants loan back, but company does not have cash (because of bad EBITDA). But
you do have assets (for example a house), assets could be turned into cash and pay
back the loan. But then you end up in situation 2, you don’t have any interest income
anymore. What makes it worse selling a collateral? So this is not good, because next
year you do not earn any money. > this leads also to bad reputation (high reputation
risk), because the bank closed my company, sold my house, etc. So selling collateral
is all about reputation. This is the worst option. Do we need a collateral? Yes!
Because we can turn assets into cash. How much collateral do we need?
,Structured approach;
Do we have enough cash flow? We look at 3 things
1. Business risk: what is your business model, that is what we are going to assess. Do you trust
the business model?
2. Financial risk: is there sufficient cash and will there be sufficient cash, will your company
survive, how will it survive, how much cash does it take.
a.
b.
c. Overleveraged (he called it S)
3. Structure risk: if there is cash, who gets the money and who gets the money first?
This is about business model/business risk, 4 m’s and 2 c’s:
- Macro: in which country are you? > What is the political risk?
- Market: in which market are you? What are the risks involved? How long is your asset
conversion cycle?
- Manufacturing: about the production facilities, the assets. What is the quality of the
machines? Important to go to customer, look around.
- Management: age, experience. Who do we see? Who is in the board, is it one person, how
big is it? How is the governance, how is the strategy: how are they going to make money, do
they do a lot of innovation, are they focusing on locals, do they have?
- Concentration risk:
- Contingent: what happened in the past, are there any claims?
Exam question: what is the most important risk, and why? > Management ( they manage all the risk;
determine the macro, the market risk)
Financial risk:
- Profit/loss, balance sheet, cash flow statement etc. Start analyze it.
Bank is interested in the interest of EBITDA
You never find 100% (of LTV?), because you depreciate. Who is going to pay for the difference? The
risk is fully with the bank.
Depreciation is a related to fixed assets and fixed assets are related to loans. So also your loan
depreciates.
You need to have efficient EBITDA.
Risk:
You can accept it > will do something with your structure (how much you will do in some
countries, and maybe take collateral).
Loan-to-value (LTV): 20%, the farmer we want to finance has to bring a lot of equity, does he have
the equity. Probably not > problem. We have to find a mix between strategy and ….
, Lecture 2 10-2-17
Direct lending = me giving a loan to neighbor
Production of prices important. For producers it’s important to know whether prices are rising or not.
Surplus and deficit household
Surplus household = people that save.
Deficit household= often companies that invest and have to borrow. Nothing wrong with being a
deficit household.
Money should be brought together. This happens in the system.
Most important agents
Money market = where large players (banks, companies) …
Private households = do financial transactions, but not do it themselves, banks are in between.
Direct financing vs indirect
Direct financing = direct from surplus household to deficit household
Indirect financing = there is an intermediary
Intermediary is for example an investment company.
Advantages and disadvantages direct finance
Advantage: Yield is usually high
Disadvantages:
You run all risk yourself (invest in a company, company goes bankrupt, you lose your money)
> credit risk. So run the credit risk yourself
Liquidity risk: lend money to someone, most people want some … on the money. Liquidity
risk to borrower: lend money for only 5 years. Risk to lenders: lend money for 30 years. So
there is a gap between lenders and borrowers.
Concentration risk: if one company goes down, you also go down.
Advantage and disadvantage indirect finance
advantage
Credit risk is run by the bank.
Transformation of size: money is pooled by the bank
Economies of scale: administrative processes are done by professionals. Less overload of
information. It’s their job, they know how to do it.
Disadvantage
Intermediary would like to make some money. You receive less interest on savings account
than you pay on a loan. So you have less yield.
Banks versus other intermediaries
Investment fund: you can have potentially higher yield. You make more money than on a savings
account. Flip side: if stock exchange goes down, you lose money.
With a bank it’s not. If bank invests money, profit is for the bank, not for you. If those companies go
down, it’s the problem of the bank, not your problem.
