Derivative assets in the current economic climate. Share investment assessment - BoA, Citigroup

PROJECT IN INVESTMENT TECHNIQUES

Submitted to

The European School of Economic for

MBA Investment Techniques Module

© Azahir Abdalla

© Vera Koubkova

© Danial Javandel

29nd June 2009

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© Azahir Abdalla, © Vera Koubkova, © Danial Javandel. All rights reserved.

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Table of Content ............................................................................................................................... 2

Table of Figures................................................................................................................................ 3

Executive Summary (all)................................................................................................................... 4

PART 1: Given the current international financial climate/situation, are derivative assets good

vehicles for personal investment? (Azahir + Vera) ............................................................................ 5

Introduction (Azahir, Vera)............................................................................................................... 5

Derivatives (Azahir).......................................................................................................................... 5

The Current Economic Climate (Azahir, Vera) ................................................................................. 6

Personal finance (Vera)..................................................................................................................... 6

Derivative Assets as Vehicles for Personal Investment...................................................................... 7

The practicalities (Azahir)............................................................................................................. 7

Derivatives as a form of protection (Vera)..................................................................................... 8

Derivatives as a form of profit leverage (mainly Azahir) ............................................................... 9

Conclusion and Recommendations (Azahir, Vera) .......................................................................... 10

PART 2: Which assets or asset types, in place of or in addition to the above-mentioned, would you

recommend and why to a client to invest in if she/he came to you for such advice? (Danial) ........... 12

The reasons for recommendation:................................................................................................ 15

PART 3 - CASE STUDY: Bank of America Corp’s Vs. Citigroup inc – ......................................... 16

which of the two would be a better investment? (All)...................................................................... 16

Introduction (all)............................................................................................................................. 16

Background (Danial)....................................................................................................................... 16

The past: Financial statements (Vera).............................................................................................. 18

Profit and loss ............................................................................................................................. 18

Balance sheet and Cash Flow Statement...................................................................................... 20

The future (Danial)...................................................................................................................... 22

The Industry Analysis (Azahir) ....................................................................................................... 23

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Introduction ................................................................................................................................ 23

The overall market ...................................................................................................................... 24

Industry Overview ...................................................................................................................... 25

Conclusion.................................................................................................................................. 26

Appendices ..................................................................................................................................... 29

Definitions of the Most Common Derivatives ............................................................................. 29

More Complex Derivatives ......................................................................................................... 29

Development in the world stock markets indices over the last 5 years ........................................ 30

Investment objectives of derivatives-based funds ........................................................................ 32

Industry analysis – criteria........................................................................................................... 32

Share price moves ....................................................................................................................... 34

Financial Statements ....................................................................................................................... 36

Profit & Loss Statements............................................................................................................. 36

Balance Sheets ............................................................................................................................ 39

Cash Flow Statements ................................................................................................................. 41

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Figure 1: shift in the market behaviour............................................................................................ 8

Figure 2: Debt Deflation Theory ................................................................................................... 10

Figure 3: Dow Jones Index Fluctuations for The Past Year ........................................................... 24

Figure 4: S&P 500 Index Fluctuations for The Past Year .............................................................. 25

Figure 5: SPDR KBW Bank (KBE) .............................................................................................. 26

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• The aim of this report is to discuss suitability of derivative assets for personal investment

during the current economic climate. The report provides background information on

derivative assets, the current economic climate, personal investment areas, and how these are

link to each other. The advantages and disadvantages of derivatives as investment tool are

then evaluated.

• A derivative is a financial instrument derived from an underlying asset. Its main use is to

either reduce risk (hedging) or increase risk (speculation). There are a number of financial

instruments categorized as derivatives; futures, forwards, options and swaps being by far the

most common.

• The current economic recession was triggered by the drop in property market in the U.S., loss

of confidence in the value of securitized mortgages and following liquidity crisis in the

banking sector. Commonly blamed for the crisis is the high complexity of the financial assets

which made the risk associated with those assets difficult to calculate and manage.

• In the context of personal investment, derivatives are relevant for personal investment and

life & pension products. Buy-and hold, which is a successful strategy during a bull market, is

significantly less profitable in times we’re experiencing now due to markets’ high volatility.

Moreover, the unpredictability of the markets is higher - i.e. the high-risk events are more

likely to occur. A suggestion to a rational investor is to use all available tools to manage and

reduce the risk of loss; one of the tools being the derivative assets, another one being simple

portfolio diversification. The debt deflation theory, however, suggests that now is not the

right time to invest in derivatives in order to leverage profit.

• There is a need for any financial institution to be well capitalized to support its financial

commitments, to regulate credit derivatives and ensure they are traded on well-capitalized

exchanges to limit counterparty risk.

• One other derivative which we might consider could be a Credit derivative, for several

reasons. The major advantage is the ability to separate market risk and transfer the buyer's

credit risk to a third party. The derivatives can also be sold short and allow for the trading of

credit spreads. They can be tailor-made; separate packages can be structured. Credit derivates

are off balance sheet instruments. These are amongst some of the core significant advantages

and work well in favour of the lenders using such instruments. Credit derivates, however, are

terminated when there is a credit event. By protecting with credit derivatives significant

losses can be avoided.

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PART 1: Given the current international financial climate/situation, are derivative assets good vehicles for personal investment? (Azahir + Vera)

�� !��

The aim of this report is to discuss whether derivative assets are good vehicles for personal

investment in the current economic climate. The report consists of five main sections.

• The first section provides background information about derivatives such as futures,

forwards, options and swaps.

• In the second section, we discuss the current international financial climate.

• In the third section, we look at “personal finance” and what it means.

• In the fourth section, we assess where derivatives can be used – from the point of hedging as

well as speculation.

• The report then concludes with recommendations on when and how derivatives can be good

instruments for personal investment.

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A derivative is a financial instrument which is derived, or developed, from an underlying asset. Its

main use is to either remove risk from or take on risk of a particular market position (Pike, and

Neale, 2006). Instead of trading the actual asset itself, counterparties execute an agreement to

exchange money or some other consideration at a future point in time based upon the underlying

asset. A common example of this operation is a futures contract, which is nothing more than an

agreement to buy, sell or trade the underlying asset (or a cash flow from that asset) at a specific

future point in time. The terms of the derivative depend upon the performance of the underlying

asset, although they may not necessarily correspond to that performance.

There is a number of financial instruments categorized as derivatives; futures, forwards, options

and swaps are by far the most common1. Derivatives can be based on different types of assets, such

as stocks, bonds, commodities, interest and exchange rates, or indices. The diverse range of

potential underlying assets and payoff alternatives has led to a huge array of derivatives contracts

available to be traded. As the growth of this market continues, derivatives are being used ever-

1 More details on the individual derivative types can be found in the Appendix.

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increasingly to protect assets from drastic price fluctuations and at the same time they continue to be

redesigned to cover the many different types of risk that today’s investor faces.

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The current financial crisis started to show in July 2007 (Wall Street Journal, 2007). The loss of

confidence by investors in the value of securitized mortgages in the United States resulted in a

liquidity crisis that prompted a substantial injection of capital into financial markets by the central

banks of the USA (Norris, 2007), the UK and the Eurozone (Elliott, 2008).

The crisis in real estate, banking and credit in the United States had a global reach, affecting a wide

range of financial and economic activities and institutions, including:

• Initial steep decline followed by an increased volatility of the financial markets. Since

October 2007, most market indexes and funds have lost between 40% and 60% of their

values2

• Liquidity problems occurred in equity funds and hedge funds

• Overall tightening of credit policies of banks and financial institutions making both corporate

and consumer credit harder to obtain (Whitney, 2009)

• Devaluation of the assets underpinning insurance contracts and pension funds leading to

concerns about the ability of these instruments to meet future obligations

• Increased public debt public finance due to the provision of public funds to the financial

services industry and other affected industries

• Devaluation of some currencies3 and increased currency volatility. Etc.

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Before we assess how the derivative assets can be utilised in personal financial planning, we need to

define what we mean by “personal finance.”

Traditionally, when talking about “personal finance”, the following areas are considered:

2 Development of the main world stock market indices and bond yield curves can be found in the appendix.

3 Icelandic crown, some Eastern European and Latin American currencies

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• Saving and investment products, such as saving accounts or term deposits but also personal

investments using financial markets instruments, particularly applicable for the high net

worth individuals but also used by the mass affluent individuals, for example in their ISAs

• Borrowing, such as a mortgage or a personal loan

• Insurance and protection for both the saving and borrowing products. This may either be a

financial product itself, such as a payment protection of loan interest payments typically sold

together with a loan, or “hidden protection”, inherent to the financial product, such as a

guaranteed gain of a saving account or a term deposit, or a financial instrument used to hedge

the risk of a fund.

The different areas of personal financial planning can be illustrated by the following picture:

From this list, derivative assets are relevant vehicles for Personal investments and Life & Pension.

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The practicalities (Azahir)

In contrast to corporate investors, whose investments are usually managed by their bankers, most

private investors are unlikely to become directly involved in the derivatives markets. Two most

common routes are through accounts and pools/funds (Securities and Investment Institute, 2007).

• Accounts means a discretionary account where the client entrusts money to a regulated firm,

which then undertakes the management of funds according to the client’s objectives and risk

preferences.

Savings & investm

ents Current account

Life & pension

Saving account and other saving products

Personal investments

Borrow

ing

Overdraft

Personal loan – secured, unsecured (incl. credit cards)

Mortgage

Insurance and protection

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• Pool/Funds are collective investment scheme managed by regulated fund management

companies on behalf of investors whose money is pooled together and invested. These

collective schemes can include derivatives. The main advantage of pooling is portfolio

diversification, therefore risk diversification.

Investment objectives of derivatives-based funds are discussed in more detail in the Appendix.

The use of derivatives by private investors can range from cautious to speculative depending on their

knowledge/understanding of the markets and their arrangements with their broker. The institutions

that execute trades for these investors are, at least technically, regulated not to mis-sell or mis-

represent the risk associated with the trades, particularly those involving derivatives.

Thanks to the technology, a savvy individual investor can now also use a direct access to the

derivative markets and place the bets and invest on their own.

Derivatives as a form of protection (Vera)

Buy-and hold is the best strategy in a bull market (Malkiel, 1973). During the times of a bear market,

however, the markets are much more volatile4 and the buy-and-hold strategy is significantly less

profitable.

Moreover, the markets behaviour during the volatile times does not follow the commonly used

normal (Gaussian) distribution, but Cauchy’s distribution (“black swan”) - with fatter tails at the

distribution extremes as (Mandelbrot, Hudson, 2004). In other words, the “unexpected events” -

moves of three, four or more standard deviations from the mean - occur more than a normal

distribution would allow.

Figure 1: shift in the market behaviour

4 Behaviour of the main world stock market indices can be found in the Appendix.

Normal (Gaussian) distribution “the black swan”

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An advice for a rational investor therefore is to reduce the risk through all possible tools, one of them

being derivative assets. On the top of that, with unstable stock and fixed income markets, individuals

as well as companies tend to invest their money into commodities, which implies using options

(which is one category of derivative assets).

Overly complex derivatives being the key reason behind the current recession, our advice would be

to use simple derivatives.

As with any investment, it is highly advisable to diversify one’s portfolio. This diversification itself

can reduce a risk of the investment (Markowitz, 1952).

Derivatives as a form of profit leverage (mainly Azahir)

One of the reasons why derivatives are so popular is the leverage, or gearing. In other words, this is

the ability for a derivative to soar 100% in a few days, when the underlying security has only risen

by a far smaller amount (say 10%). (Similarly, anyone who has a mortgage is geared to the property

market).

In an assessment of using the derivatives as a part of one’s personal investment strategy, we

necessarily need to ask ourselves whether under the current economic conditions, it is wise to invest

into derivatives in order to leverage the initial investment.

According to the debt deflation theory a sequence of effects of the debt bubble bursting occur that

can be summarized in nine steps:

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Figure 2: Debt Deflation Theory

All these effects together indicate that it is not the right time to invest in derivatives to leverage

profit.

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Derivative assets are typically used in two ways – as a protection (hedging) or as a profit leverage

(speculation).

The main area of personal finance exposed to financial markets risk is personal investment. B.B.

Mandelbrot’s paper seems to suggest that during the time of high market volatility – which is what

we are experiencing now – there is a higher probability of unexpected events, i.e. a higher probability

of a gain but also a loss of an investment. It would therefore make sense to use all available tools to

manage and minimize the risk. One of the ways to do it may be through derivatives another one is

A fall in nominal interest rates and a rise in deflation adjusted interest rates

Hoarding of money

Pessimism and loss of confidence

A reduction in output, in trade and in employment

A fall in profits

A still greater fall in the net worth of businesses, precipitating bankruptcies

A fall in the level of asset prices

Contractions of the money supply as bank loans are paid off

Debt liquidation and distress selling

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through portfolio diversification (without including derivatives into the portfolio). In practical ways,

this can be done through accounts, pools/funds or through direct investment into derivative assets by

individual investors.

We would not recommend using derivative assets as a profit leverage in the current economic

climate, the opinion being supported by the debt deflation theory.

During the last decade, the financial assets became more and more complex, and harder and harder to

value, and the new products especially derivatives became so complicated that many in the field

could no longer calculate the risks. For derivative assets to be good vehicles of personal investment

there is a need to ensure any financial institution has the necessary capital to support its financial

commitments and to regulate credit derivatives and ensure they are traded on well-capitalized

exchanges to limit counterparty risk.

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PART 2: Which assets or asset types, in place of or in addition to the above-mentioned, would you recommend and why to a client to invest in if she/he came to you for such advice? (Danial) In the second part, we look at other types of assets that a client may consider investing in. One other

derivative which we might offer could be a Credit derivative.

A credit derivative is an OTC (over the counter) derivative designed to transfer credit risk from one

party to another. The value of a credit derivative has been derived from the credit risk on an

underlying bond or loan; the credit risk is on an entity5 other than the counterparties to the

transaction itself. Credit derivatives are bilateral between a buyer and seller under which the seller

sells protection against the credit risk of the reference entity. By creating or eliminating credit

exposures, the credit derivative allows institutions to manage credit risks more effectively.

The parties will select which credit events apply to, usually consisting of one or more of the

following:

� Bankruptcy (risk that the reference entity will go bankrupt)

� Failure to pay (risk that the reference entity will default on one of its obligations such as a

bond or loan)

� Obligation default (risk that the reference entity will default on any of its obligations)

� Obligation acceleration (risk that an obligation of the reference entity will be accelerated e.g.

a bond will be declared immediately due and payable following a default)

� Repudiation/Moratorium (risk that the reference entity or a government will declare a

moratorium over the reference entity's obligations)

� Restructuring (risk that obligations of the reference entity will be restructured).

Unfunded credit derivative: credit protection bought and sold between two counterparties.

Funded credit derivative: credit derivative is entered into by a financial institution or a special

purpose vehicle (SPV) and payments under the credit derivative are funded

using securitization techniques (debt obligation is issued by the financial institution or SPV etc.)

Three basic structures include:

• The credit default swap (CDS) has become the cornerstone product of the credit derivatives

market. This product represents over thirty percent of the credit derivatives market.

5 This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity which

has incurred debt Credit derivatives take many forms.

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A CDS in its simplest form (unfunded single name credit default swap) is a bilateral contract

between a protection buyer and a protection seller. The CDS will reference the creditworthiness of a

third party called a reference entity; usually a corporate or sovereign. The CDS will relate to the

specified debt obligations of the reference entity: perhaps its bonds and loans, which fulfil certain

pre-agreed characteristics. The buyer will pay a periodic fee to the seller in return for a contingent

payment by the seller upon a credit event affecting the obligations of the reference entity specified in

the transaction.

In the case of cash settled transaction, a relevant obligation of the reference entity will be valued and

the seller will pay the buyer the full face value of the reference obligation less its current value (i.e.

compensating the protection buyer for the decline in the obligation's creditworthiness).

CDSs have unique characteristics that distinguish them from insurance products and financial

guaranties.

• The buyer does not need to own an underlying obligation of the reference entity.

• The buyer does not need to suffer a loss.

Since the reference entity is not a party to agreement between the buyer and seller, the seller of

protection has no inherent recourse to the reference entity in the event of default and no right to sue

the reference entity for recovery. However, if the transaction were to be physically settled the seller

could derive a right to take action against the reference entity on the basis of the loan or securities

acquired during the settlement process.

• A total return swap (also known as Total Rate of Return Swap) is a contract between two

counterparties whereby they swap periodic payments for the period of the contract. Typically,

one party receives the total return (interest payments plus any capital gains or losses for the

payment period) from a specified reference asset, while the other receives a

specified fixed or floating cash flow that is not related to the creditworthiness of the reference

asset, as with a vanilla Interest rate swap. The payments are based upon the same notional

amount. The reference asset may be any asset, index or basket of assets.

The TRS is simply a mechanism that allows one party to derive the economic benefit of owning an

asset without use of the balance sheet, and which allows the other to effectively "buy protection"

against loss in value due to ownership of a credit asset.

The essential difference between a TRS and a CDS is that the CDS provides protection against

specific credit events. The TRS protects against the loss of value irrespective of cause, whether

default, credit spreads widening or anything else; it isolates both credit risk and market risk.

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• A credit linked note (CLN) is a note whose cash flow depends upon an event, which may be

a default, change in credit spread, or rating change. The definition of the relevant credit

events must be negotiated by the parties to the note.

A CLN in effect combines a credit-default swap with a regular note (with coupon, maturity,

redemption). Given its note like features, a CLN is an on-balance-sheet asset, in contrast to a CDS.

Typically, an investment fund manager will purchase such a note to hedge against possible

downgrades, or loan defaults.

Numerous different types of CLNs have been structured and placed in the past few years.

There are several different types of securitized product, which have a credit dimension. CLN is a

generic name related to any bond whose value is linked to the performance of a reference asset, or

assets.

CDSs and TRSs are considered unfunded; CLN is one of the founded credit derivatives. Other type

of these derivatives could be:

Unfounded Founded

• Constant maturity credit default swap

• First to Default Credit Default Swap

• Portfolio Credit Default Swap

• Secured Loan Credit Default Swap

• Credit Default Swap on Asset Backed

Securities

• Credit default swaption

• Recovery lock transaction

• Credit Spread Option

• CDS index products

• Synthetic Collateralized Debt

Obligation

• Constant Proportion Debt Obligation

• Synthetic Constant Proportion

Portfolio Insurance

The fundamental difference between a CDS and a TRS is the fact that the CDS provides protection

against specific credit events. The TRS provides protection against loss of value irrespective of

cause.

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The reasons for recommendation:

There are several reasons to credit derivatives. The major advantage is the ability to separate market

risk and transfer the buyer's credit risk to a third party. These derivatives can also be sold short and

allow for the trading of credit spreads. Another advantage is the ability to be tailor-made; separate

packages can be structured. Credit derivates are off balance sheet instruments. These are amongst

some of the core significant advantages and work well in favour of the lenders using such

instruments.

In light of these advantages, however, credit derivates are terminated when there is a credit event6.

Upon termination the protection of such instruments are no longer valid. By protecting with credit

derivatives significant losses can be avoided.

6 A credit event is any event that causes the credit derivate to become on-existent or terminated. Some of these events

may include a lowering of the buyer's credit rating by a rating company, bankruptcy, going into default etc.

Borrowers

Originator

SPV

Investors

Cash flows before

securitization

Adminis trator

Cash flows after

securitization

Asset sale

Sale price of securities

Sale price

Profit extraction

Interest and principal

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PART 3 - CASE STUDY: Bank of America Corp’s Vs. Citigroup inc –

which of the two would be a better investment? (All)

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As an investor in a share of either of the companies, we are aiming to gain profit from

a) increase in the company share price

b) dividends

To assess which of the two companies would be a better investment, we will be using techniques of

the fundamental analysis and we are going to look at:

The industry sector

o customer base

o market share among firms

o industry-wide growth

o competition, how well are the companies rated

The company itself

o History and background of the companies

o Quantitative measures - Financial statement analysis:

� Revenue and profit (is the company’s revenue growing, is it actually making a

profit), Assets (is it able to repay its debts), stock’s annual dividend payout,

earnings per share, P/E ratio etc.

o Qualitative measures:

� Future business strategy – given the current financial state, what is the future

going to bring.

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Citigroup Inc is a major American financial services company based in New York, NY. Citigroup

was formed from one of the world's largest mergers in history by combining the banking

giant Citicorp and financial conglomerate Travelers Group on April 7, 1998. Citigroup Inc. has the

world's largest financial services network, spanning 140 countries with approximately 12,000 offices

worldwide. The company employs approximately 300,000 staff around the world, and holds over

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200 million customer accounts in more than 140 countries. It is the world's largest bank by revenues

as of 2008. It is a primary dealer in US Treasury securities. Citigroup suffered huge losses during

the global financial crisis of 2008 and was rescued in November 2008 in a massive bailout by the

U.S. government. Its largest shareholders include funds from the Middle East and Singapore. On

February 27, 2009 Citigroup announced that the United States government would be taking a

36% equity stake in the company by converting $25 billion in emergency aid into common shares.

Citigroup was formed on October 8, 1998, following the $140 billion merger of Citicorp

and Travelers Group to create the world's largest financial services organization. The history of the

company is, thus, divided into the workings of several firms that over time amalgamated into

Citicorp, a multinational banking corporation operating in more than 100 countries; or Travelers

Group, whose businesses covered credit services, consumer finance, brokerage, and insurance.

Bank of America Corporation based in Charlotte, North Carolina is one of the largest financial

services companies, largest bank by assets, third largest commercial bank by deposits, and

(previously) third largest by market capitalization in the United States. Also, Bank of America is the

number one underwriter of global high yield debt, the third largest underwriter of global equity and

the ninth largest adviser on global mergers and acquisitions.

Bank of America serves clients in more than 150 countries and has a relationship with 99 percent of

the U.S. Fortune 500 companies and 83 percent of the Fortune Global 500. The company is a

component of the Dow Jones Industrial Average (DJIA) and a member of the Federal Deposit

Insurance Corporation (FDIC).

The Bank, at one point considered one of the winners and healthiest survivors of the 2007 credit

crisis, plunged in market value due in part to massive losses caused by its purchase of Merrill Lynch.

Its Q1 2009 profit was 4.2 billion with 3.7 billion having come from Merrill Lynch.

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In the following paragraphs, we are going to assess the financial health of the companies7

Profit and loss

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Although the Gross profit figures look fairly healthy for both companies, the Net income graphs

show that the Citigroup made a substantial loss in the year 2008 (as opposed to Bank of America that

made, albeit small, a profit).

7 The detailed statements can be found in the Appendix.

Gross Profit

0

20

40

60

80

100

120

140

160

180

2006 2007 2008

Milli

ons

BoA

Citi

Net Income

-40

-30

-20

-10

0

10

20

30

2006 2007 2008

Milli

ons

BoA

Citi

- 19 –


The Price Earnings ratio is also more favourable for the Bank of America and so is the share price at

the end of each year movement (details of the share price movement can be found in the Appendix).

The P/E ratio of the Citigroup has been skewed due to a negative earning per share in 2008 (-5.19

US$).

Despite the low (or negative) profit, both companies paid dividends in 2008. As the graph shows, the

dividend per share of the Bank of America has been significantly higher than that of the Citigroup.

This leads to a higher dividend yield for BoA.

The steep increase in the BoA dividend yield in 2008 was caused by the drop in the BoA share price.

Price / Earnings

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

2006 2007 2008

P/E

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

shar

e p

rice

P/E - BoAP/E - Citishare market value - BoAshare market value - Citi

Dividend per share

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

2006 2007 2008

divi

dend

per

sha

re

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

divi

dend

yie

ld

Dividend per share - BoA ($)Dividend per share - Citi ($)Dividend yield - BoA (%)Dividend yield - Citi (%)

- 20 –


Balance sheet and Cash Flow Statement

Even though the P&L statement paints a picture highly favourable for the Bank of America, the

Balance sheet shows a little different story,

The graph above shows a breakdown of the companies’ assets (including current assets as a

percentage of tangible assets) and already from that graph we can see that the level of Total Current

Assets for the BoA seems to be very low, at least comparatively to the Citigroup.

Assets

0

500

1,000

1,500

2,000

2,500

2006 2007 2008

Milli

ons

Total Assets - BoATotal Tangible Assets - BoATotal Current Assets - BoA

Total Assets - CitiTotal Tangible Assets - CitiTotal Current Assets - Citi

Total Current Assets : Total Tangible Assets

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2006 2007 2008

BoA

Citi

- 21 –


The Cash Flow statement shows a similar story – the operating cashflow of the BoA (and

consequently the total cashflow) is much lower than the same measure of the Citigroup.

Total C/F from Operating Activities

-80

-60

-40

-20

0

20

40

60

80

100

120

2006 2007 2008

Milli

ons

Total CF from OperatingActivities - BoA

Total CF from OperatingActivities - Citi

Total Cash Flow

-15

-10

-5

0

5

10

15

2006 2007 2008

Mill

ion

s

BoA

Citi

- 22 –


The “Acid test” ratio of the BoA is well below the Citigroup’s ratio. We have calculated an industry

benchmark, using the Acid test ratios of the banks considered as “financially healthy”8 and even

then, the ratio of the Bank of America is well below.

We believe that the biggest drop, in 2008, was caused by the acquisition of Merrill Lynch at the end

of 2007.

The ratio of total tangible assets vs total liabilities – indicating the long-term solvency of the business

– is similar in both cases and in both cases reasonably healthy.

Total tangible assets vs Total liabilities 31-Dec-06 31-Dec-07 31-Dec-08

BoA 1.05 1.04 1.05

Citi 1.04 1.02 1.06

The future (Danial)

Bank of America

According to CEO: They believe the successful universal bank will be one that achieves leading

positions in the markets in which it competes; integrates operations to create value for customers;

and creates a strong, binding culture across the enterprise that supports the institutional mission.

8 Radical shift in the banking power base, The Financial Tines, 1.7.2009. The banks are - JPMorgan Chase & Co. (JPM),

Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Deutsche Bank AG (DB), Credit Suisse Group (CS)

"Acid test" ratio

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2006 2007 2008

BoA

Citi

Industry benchmark

- 23 –


This is the strategy they’ve followed at Bank of America throughout their tenure as CEO. Also he

stated “I continue to believe it is the strategy that will enable us to outperform our competitors when

the economy finally strengthens”.

According to CEO statement they plan to have their clear strategy on delivering great value to their

customers. In times like these, it would be easy to sit on the sidelines and wait for better days. But

they didn’t become a premier financial services company by letting others lead, and they have no

intention of doing so now.

Over the past few months, they have taken a number of important steps to strengthen their company

and position themselves for growth. They’ve raised capital and fortified their balance sheet in order

to continue to support the millions of Americans who rely on us for banking, credit and investment

services. They’ve made the hard choice to reduce their common stock dividend to $0.01 per share.

They’ve taken a conservative view of managing their liquidity position, which they believe is one of

the strongest in their industry.

Citigroup

Changes to Citi’s Organizational Structure

On January 16, 2009, given the economic and market environment, Citi announced the acceleration

of the implementation of its strategy to focus on its core businesses. As a result of its proposed

realignment, Citigroup will be comprised of two businesses, Citicorp and Citi Holdings. Citigroup

believes that the realignment will optimize the Company’s global businesses for future profitable

growth and opportunities and will assist in the Company’s ongoing efforts to reduce its balance sheet

and simplify its organization. Citigroup’s plan is to transition to this structure as quickly as possible,

taking into account the interests of all stakeholders, including customers and clients, debt holders,

preferred and common stockholders, employees, and the communities it serves. The Company

recognizes that major legal vehicle restructuring changes such as the realignment will require

regulatory approvals and the resolution of tax and other issues. Citigroup has, however, managed the

Company consistent with this structure since February 2009 and management reporting will reflect

this structure starting with the second quarter of 2009.

��

Introduction

The environment is what gives organisations their means of survival, however it also the source of

threats. This section provide framework for analysing changing and complex environments. These

framework organised in a series of layers which the macro-environment, the industry or sector and

- 24 –


competitors and market. In this report we will discuss the meddile one in more details which is the

industry.

Industry is made up of organisations producing the same products or services. Here the five forces

framework is particularly useful in understanding the attractiveness of the particular industries and

potential threats from outside the present set of competitors.

The five forces are: the threat of entry into an industry, the threat of substitutes to the industry’s

products or services

The overall market

The world’s economy is facing its toughest time since the great depression of 1929, and tough times

call for tough decisions, particularly those related to financial investments. Given the turbulent and

volatile conditions of the market, it has become increasingly hard to identify potential investments

that will result in sustainable profits. Since the collapse of second largest investment bank, Lehman

Brothers, in September 2008 the main New York Stock Exchange (NYSE) indexes like the Dow

Jones and S&P 500 have experienced a significant loss which has resulted in a notorious decrease of

value for many of the companies there listed, which include the Citi Group and Bank of America.

Figure 3: Dow Jones Index Fluctuations for The Past Year9

9 Dow Jones Index – www.ft.com

- 25 –


Figure 4: S&P 500 Index Fluctuations for The Past Year10

Industry Overview

The banking industry has been one of the most affected by the current recession, and it faced a

massive nationalisation process in order to keep the industry alive. Despite of this, the last 2 months

have shown signs of improvement. This is shown in the notorious increment of the SPDR KBW

ETF, which mirrors the shares of the top banks, and which has soared more than 130% since early

March, when it reached its lower level caused by investors’ panic over the threat of nationalisation

(see the chart below).

10 S&P 500 Index – www.ft.com

- 26 –


Figure 5: SPDR KBW Bank (KBE)

As a countries economy shrinks and comes to a hold, central banks tend to lower their interest rates

in order to ‘kick-start’ them again. This is what happened in the UK (Bank of England official

interest rate is ~ 0.5%) and in America (Federal Reserve Interest Rate is ~ 0.25%). Low interest rates

reduces the cost of access to capital from different banking institutions, although given the lack of

confidence in the environment, getting the actual loans is not easy. Despite low interest rate could

provide banks with an advantage, this does not necessarily mean than their performance will be

better since they had lower bad debt than they actually could face (more people will not meet their

financial obligations).11

Conclusion

The world’s economy is facing its toughest time since the great depression of 1929, and the financial

services has been hit the hardest. However, the industry is slowly recovering and therefore may be a

good industry to invest in if we aim for long-term returns.

Having compared the financial heath of Bank of America and the Citigroup, it became apparent that

in terms of profit, dividend payments and P/E ratio, the BoA highly outscores the Citigroup. The

potential problem of the Bank of America is low liquidity – their acid ration is well below the

industry average – however, this has been the case for the last few years (at least since 2006) and we

therefore believe that it is not a warning sign to an investor but a part of the bank’s financial strategy.

We would therefore recommend to invest into the shares of the Bank of America .

11 Repaying Tarp (2009) – www.ft.com

- 27 –


% �� '��

• Elliott, L., 2008. "Credit crisis - how it all began", The Guardian, [Internet] 5 August.

Available at: http://www.guardian.co.uk/business/2008/aug/05/northernrock.banking,

[Accessed 3 June 2009]

• Norris, F., 2007. "A New Kind of Bank Run Tests Old Safeguards", The New York Times,

[Internet] 10 August. Available at:

http://www.nytimes.com/2007/08/10/business/10liquidity.html, [Accessed 3 June 2009]

• Pike, R. and Neale, B., 2006. Corporate Finance and Investment: Decisions and Strategies.

5th Edition, Financial Times Prentice Hall.

• Securities and Investment Institute, 2007. Securities and Financial Derivatives: Part 2:

Financial Derivatives. 5th Edition, London, Securities and Investment Institute.

• Wall Street Journal, 2007. "TED Spread spikes in July 2007". Wall Street Journal. [Internet]

7 July. Available at: http://www.princeton.edu/~pkrugman/ted-spread-wsj.gif. [Accessed 3

June 2009]

• Whitney, M., 2009. "Credit Cards Are the Next Credit Crunch: Washington shouldn't

exacerbate the looming problem in consumer credit lines". Wall Street Journal. [Internet] 10

March. Available at: http://online.wsj.com/article/SB123664459331878113.html.

[Accessed 3 June 2009]

• Mandelbrot, B.B, Hudson, R.L., 2004: The (Mis)behavior of Markets: A Fractal View of

Risk, Ruin, and Reward. London: Profile Books

• Markowitz, H., 1952: Portfolio Selection in Journal of Finance

• Malkiel, B, 1973: A Random Walk Down Wall Street

• Radical shift in the banking power base, The Financial Tines, 1.7.2009

• Dow Jones Industrial Average (2009). Accessed on 06/2009 from:

http://markets.ft.com/ft/tearsheets/performance.asp?s=599362

• S&P 500 Index (2009). Accessed on 06/2009 from:

http://markets.ft.com/ft/tearsheets/performance.asp?s=593933

• Repaying Tarp (2009) Accessed on 06/2009 from: http://www.ft.com/cms/s/2/b93cd090-

43bc-11de-a9be-00144feabdc0.html

- 28 –


Further Reading:

• http://www.ft.com

• http://www.eurojournal.com

• www.bloomberg.com

• http://www.numa.com

• http://www.finweb.com

- 29 –


�''��

Definitions of the Most Common Derivatives

Derivatives: Instruments whose price is derived from another asset. Examples include futures,

forwards, option, and swaps.

Futures: A future is a legal agreement between two parties to make or take delivery of a specific

quantity of a specified asset on a fixed future date at a price agreed today.

Forwards: Forwards contract are very similar to futures contacts as they are similarly legally

binding agreements between two parties to make or take delivery of a specific quantity of a specified

asset on a fixed future date at a price agreed today. However, forwards are settled only on the

delivery date. These types of contracts are mainly commodity based contacts.

Options: An option is a contact that gives the buyer the right, but not the obligation, to sell or buy a

particular asset at a particular price, on or before a specified date. The seller of the option,

conversely, assumes an obligation in respect of the underlying asset upon which the option has been

traded. The class of option either gives holders the right to buy (call) or the right to sell (put).

Swaps: A contact to exchange a series of payments with counterparty, eg, fixed for floating interest

rates, currency A for currency B, income from asset C for income from asset D etc.

More Complex Derivatives

Credit default swap (CDS): Two parties enter into an agreement whereby one party pays the other a

fixed periodic coupon for the specified life of the agreement. The other party makes no payments

unless a specified credit event occurs. Credit events are typically defined to include a material

default, bankruptcy or debt restructuring for a specified reference asset. If such a credit event occurs,

the party makes a payment to the first party, and the swap then terminates. The size of the payment is

usually linked to the decline in the reference asset's market value following the credit event.

Total return swap: Two parties enter an agreement whereby they swap periodic payment over the

specified life of the agreement. One party makes payments based upon the total return—coupons

plus capital gains or losses—of a specified reference asset. The other makes fixed or floating

payments as with a vanilla interest rate swap. Both parties' payments are based upon the

same notional amount. The reference asset can be almost any asset, index or basket of assets.

Credit linked note: A debt instrument is bundled with an embedded credit derivative. In exchange

for a higher yield on the note, investors accept exposure to a specified credit event. For example, a

- 30 –


note might provide for principal repayment to be reduced below par in the event that a reference

asset defaults prior to the maturity of the note.

Development in the world stock markets indices over the last 5 years 12 S&

P 50

0

The red line shows the steeply declining trend that started in October 2007. The blue line shows the previous growth of the index. The green line shows the highest resistance level, reached around Sept 07.

12 Source: www.bloomberg.com

- 31 –


FTSE

100

The FTSE100 shows a similar story as the S&P index. The highest resistance level (the green line) has been reached twice in the year 2007 – once in May and the second time in September. Ever since the September/October time, however, the index shows a declining trend (the red line) and increased volatility.

NIK

KE

I 225

The Japanese index Nikkei225 behaves in a slightly different way. The growth pre-July 2007 has not been as strong as the growth of the US market and the UK market, possibly due to the overall state of the Japanese economy. However, even this index shows a continuous decline between July 2007 and April 2008 (the red line).

- 32 –


Investment objectives of derivatives-based funds

Investment objectives of derivatives-based funds vary, but can be categorised by three main types:

• Speculative: Highly geared funds investing in derivatives to try and produce high returns, at

high risk.

• Guaranteed: Funds that lock-in the investor’s money for a minimum period and at the same

time, provide a guaranteed of a maximum possible loss (e.g. that, in the worst case, the

investor will not lose more than 5% of their initial investment). Most of these funds will

typically invest in low-risk instruments such as zero coupon bonds, or cash, with the balance

being used to buy options, e.g. FTSE put options for an index bear fund. The lock-in periods

can be quite long, however, typically from one to seven years.

• Synthetics: Funds designed to replicate the performance of an index. By combining future

and options it is possible to create positions synthetically.

Industry analysis – criteria

Qualitative Factors

Each industry has differences in terms of its customer base, market share among firms, industry-wide

growth, competition, regulation and business cycles. Learning about how the industry works will

give an investor a deeper understanding of a company's financial health.

• Customers

Some companies serve only a handful of customers, while others serve millions. In general, it's a red

flag (a negative) if a business relies on a small number of customers for a large portion of its sales

because the loss of each customer could dramatically affect revenues. For example, think of a

military supplier who has 100% of its sales with the U.S. government. One change in government

policy could potentially wipe out all of its sales. For this reason, companies will always disclose in

their 10-K if any one customer accounts for a majority of revenues.

• Market Share

Understanding a company's present market share can tell volumes about the company's business. The

fact that a company possesses an 85% market share tells you that it is the largest player in its market

by far. Furthermore, this could also suggest that the company possesses some sort of "economic

moat," in other words, a competitive barrier serving to protect its current and future earnings, along

with its market share. Market share is important because of economies of scale. When the firm is

- 33 –


bigger than the rest of its rivals, it is in a better position to absorb the high fixed costs of a capital-

intensive industry.

• Industry Growth

One way of examining a company's growth potential is to first examine whether the amount of

customers in the overall market will grow. This is crucial because without new customers, a

company has to steal market share in order to grow. In some markets, there is zero or negative

growth, a factor demanding careful consideration. For example, a manufacturing company dedicated

solely to creating audio compact cassettes might have been very successful in the '70s,

'80s and early '90s. However, that same company would probably have a rough time now due to the

advent of newer technologies, such as CDs and MP3s. The current market for audio compact

cassettes is only a fraction of what it was during the peak of its popularity.

• Competition

Simply looking at the number of competitors goes a long way in understanding the competitive

landscape for a company. Industries that have limited barriers to entry and a large number of

competing firms create a difficult operating environment for firms.

One of the biggest risks within a highly competitive industry is pricing power. This refers to the

ability of a supplier to increase prices and pass those costs on to customers. Companies operating in

industries with few alternatives have the ability to pass on costs to their customers. A great example

of this is Wal-Mart. They are so dominant in the retailing business, that Wal-Mart practically sets the

price for any of the suppliers wanting to do business with them. If you want to sell to Wal-Mart, you

have little, if any, pricing power.

• Regulation

Certain industries are heavily regulated due to the importance or severity of the industry's products

and/or services. As important as some of these regulations are to the public, they can drastically

affect the attractiveness of a company for investment purposes.

In industries where one or two companies represent the entire industry for a region (such as utility

companies), governments usually specify how much profit each company can make. In these

instances, while there is the potential for sizable profits, they are limited due to regulation.

In other industries, regulation can play a less direct role in affecting industry pricing. For example,

the drug industry is one of most regulated industries. And for good reason - no one wants an

ineffective drug that causes deaths to reach the market. As a result, the U.S. Food and Drug

Administration (FDA) requires that new drugs must pass a series of clinical trials before they can be

- 34 –


sold and distributed to the general public. However, the consequence of all this testing is that it

usually takes several years and millions of dollars before a drug is approved. Keep in mind that all

these costs are above and beyond the millions that the drug company has spent on research and

development.

All in all, investors should always be on the lookout for regulations that could potentially have a

material impact upon a business' bottom line. Investors should keep these regulatory costs in mind as

they assess the potential risks and rewards of investing.

Share price moves13

Bank of America (BAC)

13 Source: www.bloomberg.com

$14.08

$40.56

$53.39

- 35 –


Citigroup (C)

�

�

$7.14

$28.56

$54.38

� ��

The values in red are those we found “out of ordinary” – as a sign of a significant change or a possible financial problem.

Profit & Loss Statements

All numbers in thousands Bank of America Corp (BAC) Citigroup, Inc. ( C) PERIOD ENDING 31-Dec-06 YOY

change 31-Dec-07 YOY

change 31-Dec-08

31-Dec-06 YOY


change 31-Dec-08

Total Revenue 117,017,000 6.24% 124,321,000 -0.15% 124,132,000 146,558,000 8.65% 159,229,000 -18.35% 130,005,000 Cost of Revenue 14,480,000 24.95% 18,093,000 -15.71% 15,250,000 - - 20,271,000 Gross Profit 102,537,000 3.60% 106,228,000 2.50% 108,882,000 146,558,000 8.65% 159,229,000 -31.08% 109,734,000 Operating Expenses

Research Development - - - - - -

Selling General and Administrative 33,037,000 5.71% 34,924,000 10.98% 38,760,000 52,988,000 13.16% 59,960,000 15.69% 69,368,000

Non Recurring 805,000 -49.07% 410,000 128.05% 935,000 - 1,528,000 15.58% 1,766,000

Others 7,208,000 110.77% 15,192,000 161.22% 39,685,000 6,988,000 164.87% 18,509,000 218.56% 58,963,000

Total Operating Expenses - - - - - -

Operating Income or Loss 61,487,000 -9.41% 55,702,000 -47.04% 29,502,000 86,582,000 -8.49% 79,232,000 -125.70% -20,363,000 Income from Continuing Operations

Total Other Income/Expenses Net - - - - - -

Earnings Before Interest And Taxes 61,487,000 -9.41% 55,702,000 -47.04% 29,502,000 86,582,000 -8.49% 79,232,000 -125.70% -20,363,000

Interest Expense 29,514,000 17.84% 34,778,000 -27.90% 25,074,000 56,943,000 36.16% 77,531,000 -57.83% 32,692,000

Income Before Tax 31,973,000 -34.56% 20,924,000 -78.84% 4,428,000 29,639,000 -94.26% 1,701,000 -3219.05% -53,055,000

Income Tax Expense 10,840,000 -45.18% 5,942,000 -92.93% 420,000

8,101,000 -

127.17% -2,201,000 836.48% -20,612,000

Minority Interest - - - -289,000 -1.38% -285,000 -222.46% 349,000

Net Income From Continuing Ops 21,133,000 -29.11% 14,982,000 -73.25% 4,008,000 21,249,000 -82.98% 3,617,000 -987.31% -32,094,000 Non-recurring Events

Discontinued Operations - - - 289,000 - 4,410,000

Extraordinary Items - - - - - -

- 37 –


All numbers in thousands Bank of America Corp (BAC) Citigroup, Inc. ( C) Effect Of Accounting Changes - - - - - -

Other Items - - - - - - Net Income 21,133,000 -29.11% 14,982,000 -73.25% 4,008,000 21,538,000 -83.21% 3,617,000 -865.39% -27,684,000 Preferred Stock And Other Adjustments - -182,000 697.80% -1,452,000 - - - Net Income Applicable To Common Shares

21,133,000 -29.97% 14,800,000 -82.73% 2,556,000

21,538,000 -83.21% 3,617,000 -865.39% -27,684,000

number of shares (in mil.) 4,527 4,480 4,612 market value of a share ($) $53.39 $40.56 $14.08 $54.38 $28.56 $7.14

diluted earnings per share income/loss from continuing operations (in $) $4.59 $3.30 $0.55 $4.25 -83.06% $0.72 -$5.59

P/E ratio 11.63 12.29 25.41 12.80 210.01% 39.67 -1.28 dividends per share $2.12 13.21% $2.40 -6.67% $2.24 $0.49 10.20% $0.54 -70.37% $0.16 dividend yield 3.97% 5.92% 15.91% 0.90% 1.89% 2.24%

- 38 –


“Vertical analysis” – P&L expressed as a percentage of revenue

All numbers in thousands Vertical Analysis:

% of revenue BoA Citigroup PERIOD ENDING 31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-06 31-Dec-07 31-Dec-08 Total Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Revenue 12.37% 14.55% 12.29% 15.59% Gross Profit 87.63% 85.45% 87.71% 100.00% 100.00% 84.41% Operating Expenses

Research Development

Selling General and Administrative 28.23% 28.09% 31.22% 36.15% 37.66% 53.36% Non Recurring 0.69% 0.33% 0.75% 0.96% 1.36%

Others 6.16% 12.22% 31.97% 4.77% 11.62% 45.35%

Total Operating Expenses

Operating Income or Loss 52.55% 44.80% 23.77% 59.08% 49.76% -15.66% Income from Continuing Operations 0.00% 0.00% 0.00%

Total Other Income/Expenses Net

Earnings Before Interest And Taxes 52.55% 44.80% 23.77% 59.08% 49.76% -15.66%

Interest Expense 25.22% 27.97% 20.20% 38.85% 48.69% 25.15%

Income Before Tax 27.32% 16.83% 3.57% 20.22% 1.07% -40.81%

Income Tax Expense 9.26% 4.78% 0.34% 5.53% -1.38% -15.85%

Minority Interest -0.20% -0.18% 0.27%

Net Income From Continuing Ops 18.06% 12.05% 3.23% 14.50% 2.27% -24.69% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Non-recurring Events

Discontinued Operations 0.20% 3.39%

Extraordinary Items

Effect Of Accounting Changes

Other Items Net Income 18.06% 12.05% 3.23% 14.70% 2.27% -21.29% Preferred Stock And Other Adjustments -0.15% -1.17% Net Income Applicable To Common Shares 18.06% 11.90% 2.06% 14.70% 2.27% -21.29%

- 39 –


Balance Sheets

All numbers in thousands Bank of America Corp (BAC) Citigroup, Inc. ( C) PERIOD ENDING 31-Dec-06 YOY


change 31-Dec-08

31-Dec-06 YOY


change 31-Dec-08

Assets

Current Assets

Cash And Cash Equivalents 203,433,000 6.36% 216,368,000 -80.39% 42,427,000 462,961,000 39.66% 646,556,000 -69.13% 199,584,000

Short Term Investments 135,478,000 -4.37% 129,552,000 -36.34% 82,478,000 282,817,000 -3.09% 274,066,000 -16.63% 228,502,000

Net Receivables - - - 44,445,000 57,359,000 44,278,000

Inventory - - - - - -

Other Current Assets - - - Total Current Assets 338,911,000 2.07% 345,920,000 -63.89% 124,905,000 790,223,000 23.76% 977,981,000 -51.70% 472,364,000 Long Term Investments 916,804,000 21.82% 1,116,821,000 32.05% 1,474,758,000 943,843,000 3.50% 976,884,000 28.93% 1,259,543,000 Property Plant and Equipment 9,255,000 21.45% 11,240,000 17.09% 13,161,000 - - - Goodwill 65,662,000 18.07% 77,530,000 5.68% 81,934,000 33,415,000 23.31% 41,204,000 -34.15% 27,132,000 Intangible Assets 9,422,000 9.28% 10,296,000 -17.10% 8,535,000 15,901,000 42.68% 22,687,000 -37.59% 14,159,000 Accumulated Amortization - - - - - - Other Assets 119,683,000 28.62% 153,939,000 -25.52% 114,650,000 100,936,000 67.31% 168,875,000 -2.13% 165,272,000 Deferred Long Term Asset Charges

- - -

- - -

Total Assets 1,459,737,000 17.54% 1,715,746,000 5.96% 1,817,943,000 1,884,318,000 16.10% 2,187,631,000 -11.39% 1,938,470,000 Tangible Assets 1,384,653,000 17.57% 1,627,920,000 6.12% 1,727,474,000 1,835,002,000 15.74% 2,123,740,000 -10.67% 1,897,179,000 Liabilities Current Liabilities

Accounts Payable 42,132,000 28.10% 53,969,000 -31.53% 36,952,000 85,119,000 -0.20% 84,951,000 -16.52% 70,916,000

Short/Current Long Term Debt

358,827,000 14.96% 412,524,000 -11.60% 364,654,000

450,068,000 0.15% 450,731,000 -15.10% 382,677,000

Other Current Liabilities 693,497,000 16.10% 805,177,000 9.66% 882,997,000 857,928,000 -3.69% 826,230,000 -6.30% 774,185,000 Total Current Liabilities 1,094,456,000 16.19% 1,271,670,000 1.02% 1,284,603,000 1,393,115,000 -2.24% 1,361,912,000 -9.85% 1,227,778,000 Long Term Debt 230,009,000 -4.38% 219,931,000 62.00% 356,288,000 288,494,000 48.05% 427,112,000 11.53% 476,378,000

- 40 –


All numbers in thousands Bank of America Corp (BAC) Citigroup, Inc. ( C) Other Liabilities - 77,342,000 - 82,926,000 285,009,000 92,684,000 Deferred Long Term Liability Charges

- - -

- - -

Minority Interest - - - - - - Negative Goodwill - - - - - - Total Liabilities 1,324,465,000 18.46% 1,568,943,000 4.59% 1,640,891,000 1,764,535,000 17.54% 2,074,033,000 -13.36% 1,796,840,000 Stockholders' Equity Misc Stocks Options Warrants - - - - - - Redeemable Preferred Stock - - - - - - Preferred Stock 2,851,000 54.65% 4,409,000 755.09% 37,701,000 1,000,000 0 70,664,000 Common Stock 61,574,000 -2.02% 60,328,000 27.25% 76,766,000 55,000 0.00% 55,000 3.64% 57,000 Retained Earnings 79,024,000 3.00% 81,393,000 -9.30% 73,823,000 129,267,000 -5.68% 121,920,000 -29.03% 86,521,000 Treasury Stock - - - -25,092,000 -21,724,000 -9,582,000 Capital Surplus - - - 18,253,000 18,007,000 19,165,000 Other Stockholder Equity -8,177,000 -108.23% 673,000 -1769.84% -11,238,000 -3,700,000 25.95% -4,660,000 440.67% -25,195,000 Total Stockholder Equity 135,272,000 8.52% 146,803,000 20.61% 177,052,000 119,783,000 -5.16% 113,598,000 24.68% 141,630,000 Net Tangible Assets 60,188,000 -2.01% 58,977,000 46.81% 86,583,000 70,467,000 -29.46% 49,707,000 101.86% 100,339,000

- 41 –


Cash Flow Statements

All numbers in thousands Bank of America Corp (BAC) Citigroup, Inc. ( C) PERIOD ENDING

31-Dec-06 YOY change


31-Dec-08



31-Dec-08

Net Income 21,133,000 -29.11% 14,982,000 -73.25% 4,008,000 21,538,000 -83.21% 3,617,000 -865.39% -27,684,000 Operating Activities, Cash Flows Provided By or Used In Depreciation 2,869,000 -0.87% 2,844,000 16.70% 3,319,000 2,790,000 0.00% 2,790,000 -4.23% 2,672,000 Adjustments To Net Income 7,303,000 2.04% 7,452,000 167.04% 19,900,000 4,617,000 -511.11% -18,981,000 -64.56% -6,727,000 Changes In Accounts Receivables - - - 12503000 -224.20% -15529000 -672.99% 88979000

Changes In Liabilities 4,517,000 -7.24%

4,190,000 -444.84% -

14,449,000 131,622,000 -127.42%

-36,090,000 214.64% -

113,554,000 Changes In Inventories - - - - - - Changes In Other Operating Activities -21,313,000 -13.52% -18,432,000 -52.56% -8,744,000 -173,057,000 -95.82% -7,237,000 -2206.63% 152,457,000

Total Cash Flow From Operating Activities 14,509,000 -23.94%

11,036,000 -63.45%

4,034,000 13,000 -

549561.54% -71,430,000 -234.60%

96,143,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures -748,000 186.50% -2,143,000 -2.10% -2,098,000 -4,035,000 -0.79% -4,003,000 -36.52% -2,541,000 Investments -63,035,000 45.42% -91,665,000 -101.65% 1,516,000 -201,777,000 -76.70% -47,013,000 -104.10% 1,929,000 Other Cashflows from Investing Activities -4,521,000 224.53% -14,672,000 -84.00% -2,348,000 1,606,000 -807.41% -11,361,000 577.75% -76,999,000 Total Cash Flows From Investing Activities -68,304,000 58.82% -108,480,000 -97.30% -2,930,000 -204,206,000 -69.45% -62,377,000 24.42% -77,611,000 Financing Activities, Cash Flows Provided By or Used In

Dividends Paid -9,661,000 12.60%

-10,878,000 5.98% -

11,528,000 -9,826,000 9.69%

-10,778,000 -30.17%

-7,526,000 Sale Purchase of Stock -8,662,000 -87.14% -1,114,000 -4127.74% 44,869,000 -5,327,000 -70.83% -1,554,000 -5060.30% 77,083,000

Net Borrowings 32,951,000 111.89%

69,820,000 -184.29% -

58,852,000 101,122,000 -37.30%

63,404,000 -188.77%

-56,283,000 Other Cash Flows from Financing Activities 38,505,000 18.38% 45,584,000 -67.50% 14,816,000 120,461,000 -22.45% 93,422,000 -140.47% -37,811,000 Total Cash Flows From Financing Activities 53,133,000

94.63% 103,412,000

-110.34% -10,695,000 206,430,000

-30.00% 144,494,000

-116.98% -24,537,000

Effect Of Exchange Rate Changes 92,000 45.65% 134,000 -161.94% -83,000 645,000 55.81% 1,005,000 -393.33% -2,948,000

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All numbers in thousands Bank of America Corp (BAC) Citigroup, Inc. ( C) Change In Cash and Cash Equivalents -570,000 -1170.53% 6,102,000 -258.54% -9,674,000 2,882,000 305.69% 11,692,000 -176.57% -8,953,000

Derivative assets in the current economic climate. Share investment assessment - BoA, Citigroup

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Transcript of Derivative assets in the current economic climate. Share investment assessment - BoA, Citigroup