PRESENTATION TO
BOARD OF DIRECTORS
2015
By Joseph Rizzi
MacroStrategies, LLC
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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.
Contact: rizzirisk@aol.com; 708-446-6632
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Executive Summary
Framework
Strategy
XYZ Bank
Conclusion
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o
o
o
o
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Banking is undergoing structural changes impacting
existing business models
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
This requires adjusting business models to fit the evolving
low growth environment
Strategies and acquisitions need to be valued and based
on plausible value drivers
Base case value needs to be compared against strategic
alternatives and tied to incentives
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MacroStrategies, LLC
… operating performance)
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(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: Rf + B(ERP) + Sf
DDM: D/P + g + Sf
ROT: 8 – 10%
ROE - COE
Positive – Create Value
Negative – Destroy Value
Franchise Value = M - B
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…and stays where it is treated well)
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…and not just at the current point in time)
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(Reflects downward shift in valuation…
Year
2015 (YTD)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Trading Multiple (%)
130
133
130
99
92
112
107
117
151
210
208
232
255
214
269
244
…due to performance concerns)
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(Stagnation or…
…regression to mean)
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(Structural decline of net interest margin…
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…reflects changing competitive dynamics)
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(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)
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(Buckle your seatbelts…
Volatile Macro Conditions
Low Growth
Uncertain Rates
Credit Environment Concerns
New Competitors
ReRegulation
Technology
…we are experiencing some turbulence)
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(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)
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Volatility
Strategic Capital
Budgeting (CEO)
Liquidity
Capital Structure
CFO
Return
Capabilities
Risk
Management
(CRO)
Risk Appetite
Opportunit
ies
Correlations
Performance
External Stakeholders
Shareholders
Risk/Return
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Regulators
Governa
nce
Rating Agencies
(creditors)
…with strategy.)
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(Risk and capital as inputs into strategic planning…
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
Strategy
Risk Appetite
Risk Assessment
Capital Need and
Capital Assessment
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
Capital Plan
Capital Allocation
…and not just consequences.)
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(High returns evidence of skill…
Profit/Loss Distribution
Profit Warning
Dividend Cut
Raise Capital
Management Replaced
Regulatory Action
Failure
-
0
+
Profitability
…or risk taking?)
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(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)
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(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)
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(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)
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(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)
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(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)
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