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

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Strategic Valuation Challenges Facing Banks

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: [email protected]; 708-446-6632

Joe Rizzi


http://www.joerizzi.com/

mailto:[email protected]

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Table of Contents

Executive SummaryFrameworkStrategyXYZ BankConclusion


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Executive Summaryo Banking is undergoing structural changes impacting existing

business modelso 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


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Framework


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Role of Finance in Corporate Strategy(Valuation as pricing…

… 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 - COEPositive – Create ValueNegative – Destroy ValueFranchise Value = M - B

…and stays where it is treated well)MacroStrategies, LLC

Valuation Basics

8MacroStrategies, LLC

Link between Performance and Value(Key is stability of relationship through the cycle…

…and not just at the current point in time)

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(Reflects downward shift in valuation…

Year Trading Multiple (%)2015 (YTD) 1302014 1332013 1302012 992011 922010 1122009 1072008 1172007 1512006 2102005 2082004 2322003 2552002 2142001 2692000 244

…due to performance concerns)MacroStrategies, LLC

SNL U.S. Bank and ThriftPrice to Book (YE)

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(Stagnation or…


Bank ROE 1984 - 2015

…regression to mean)

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(Structural decline of net interest margin…


Net Interest Margin Over TimeBank Net Interest Margin 1984 - 2015

…reflects changing competitive dynamics)

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(Repeat after me…

Impact on NIM - positive initially. Magnitude depends on shape of yield curve

OffsetsInvestment portfolio lossesGapRepricing of deposits

Valuation impact – negative as discounting income (albeit somewhat larger) at a higher rate

…rate Increases are not your friend)


Rate Increase: Friend or Foe

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Strategy

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(Buckle your seatbelts…

Volatile Macro ConditionsLow GrowthUncertain RatesCredit Environment Concerns New CompetitorsReRegulationTechnology

…we are experiencing some turbulence)


Current Environment

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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 attractivenesslonglowlargeleveraged(i)lliquid

SuggestionsCompetitors – Avoid trying to do better what they already do well and focus on what they do not do wellIdentify Competitive AdvantagesActiveCompetitiveSustainableIncorporate Risk, Capital and Value Considerations

…leadership involves doing the right things)MacroStrategies, LLC

Strategic Response

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Strategic Management Framework(The integration of capital structure, risk management…

Return Opportuni

ties

Governance

Volatility LiquidityStrategic CapitalBudgeting (CEO)

Correlations

Risk Management

(CRO)Risk Appetite

Capabilities

External Stakeholders

ShareholdersRisk/Return Regulators

Performance

Capital StructureCFO

Rating Agencies (creditors)

…with strategy.) MacroStrategies, LLC

Elements of an Integrated Value Based Strategy

Choice of Markets with Attractive economics inwhich the organization enjoys a competitive advantage

Risk the organization is willing and able to accept in pursuit of its strategyRisks underwritten and retainedCapital relative to Creditors and Regulator expectations and peers

Return capital to shareholders when actual capital exceedsneed, or raise capital when exceeds actual capitalAllocation to business units based on an economiccapital determination

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(Risk and capital as inputs into strategic planning…

…and not just consequences.)

Strategy

Risk Appetite

Risk Assessment

Capital Need andCapital Assessment

Capital Plan

Capital Allocation


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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?)


Risk Appetite Continuum

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XYZ Bank

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(Investors are making short term bets…

Trading at XX % of Book ValuePEERSSNL Index

ConsequencesValue Gaps

ExpectationStrategic

Activists and Alternatives

…on long term performance)


Current Situation

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(There ain’t no good way…

ROE Relative to COECOE: Range 8 – 10%ROE Issues NIM Efficiency Excess Capital

Growth ChallengesShould you grow: not all growth is the same

•Value Additive•Regulatory Issues•Interchange•Regulatory Cost

•Capital Implications•Shareholder Distributions Impact

Risk AppetiteHow Should You Grow

•Organic•M&A … to do the wrong thing)


Performance

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(Do you have a competitive advantage, and…

Factor Relative Position Proposed Position Rationale/InitiativesSize Product Breadth Pricing Credit Policies (Risk Appetite) Operational Efficiency Technology Relationships Client Managers Service BrandScope

… how will competitors respond)


Organic Growth OptionsStrategic Positioning to Enhance

Performance

(Acquirer’s gain equals… Should we buy and if so why

AlternativesStrategyWhat should we buy ScreensWhat is it worth Value & SynergiesWhat do we pay PriceCostsHow do we pay ConsiderationCapital structureRisks – How risky is the deal – what could go wrongScenariosSVARHow do we execute Deal – negotiations, due diligence and documentation Post close – integration … synergies less premium)

Value Creating M & ASEVEN QUESTION FRAMEWORK

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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)


Conclusion

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

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