sub prime crisis ver 2.0
TRANSCRIPT
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Group:
Puneet Singh Putiani
Sneha Choodamani
Sachin Jain
Shraddha Master
Nikit Shah
Impact of
Sub-Prime Crisis on the World FinancialMarket and IndiaWith causes of Subprime, Economy, Stock Markets, Forex, Debt and Industries
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September 7, 2008:Federal takeover of Fannie
Mae and Freddie Mac
September 14, 2008:Merrill Lynch sold to Bank ofAmerica amidst fears of aliquidity crisis and Lehman
Brothers collapse September 15, 2008:Lehman Brothers files for
bankruptcy protection
September 16, 2008:Moody's and Standard andPoor's downgrade ratings
on AIG's credit on concernsover continuing losses to
mortgage-backed securities,sending the company into
fears of insolvency.
September 17, 2008:The US Federal Reserve
loans $85 billion toAmerican International
Group (AIG) to avoid
bankruptcy.
September 19, 2008:Paulson financial rescue
plan unveiled after a volatileweek in stock and debt
markets.
September 25, 2008:Washington Mutual wasseized by the Federal
Deposit InsuranceCorporation, and its banking
assets were sold to JPMorgan Chase for $1.9bn.
September 29, 2008:The House rejected bail-out
bill, DJIA down 7%October 3,2008: The
House pass the bail out bill
Sep-08 Sep-08 Sep-08 Sep-08 Sep-08 Oct-08
Subprime Mortgage Crisis - "Red September"
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Outline of the Presentation
About Subprime CrisisBy Puneet Singh Putiani
Impact of Subprime Crisis - Indian Economy & USA EconomyBy Sneha Choodamani
Impact of Subprime Crisis Indian IndustriesBy Sachin Jain
Impact of Subprime Crisis Equity Markets & LiquidityBy Shraddha Master
Impact of Subprime Crisis Indian & USA Forex MarketsBy Nikit Shah
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The mayhem caused by sub-prime primarily in U.S. then
the rest of the world in 2008 is named as Subprime Crisis.
This crisis brought the world to the doorstep of financial
doom.
It started in U.S. and spread within few days to the rest of
the world.
It was related to American housing loan.
The housing loans provided to people with low income andless creditworthiness which was the negative part of this
loan structure.
What is Subprime Crisis?? - Meaning
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The main reason for the financial crisis were sub-prime
loans.
Sub-prime or mortgage loans are the loans provided to
people with less creditworthiness or low income.
The loans were given so as to have their dream of their own
house fulfilled as everyone couldnt afford one.
The lending institutions took loan from bank dividing these
into small portions providing loans to people with abovecriteria at higher interest rates.
They had two advantages: firstly they hedged their bets,
secondly they securitized these loans which paid them a
fixed rate of interest.
Main reason for sub-prime crisis..
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The main investors which took interest in investing in this
sub-prime or mortgage loans were the leading investment
banks, lending and financial institutions like Lehman
brothers and Morgan Stanley.
Other culprit were lenders, central banks and financial
institutions which provided loans.
The list also includes credit rating agencies, underwriters of
CDOs and mortgage and asset backed securities.
Lastly the blame goes to hedge fund industry. Overall it was
a mix up fault of investors and participants.
Main Investors
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Sub Prime Mortgage Originations
Figure: 1Note: The data presented herein are believed to be reliable but have not been
independently verified. Any such information may be incomplete or condensed.
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Sub Prime Mortgage Originations
Figure: 1Image courtesy Hammond Associates. The data presented herein are believed to
be reliable but have not been independently verified. Any such information may
be incomplete or condensed.
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1. Increase in banking rates To control inflation they cut
their lending and policy rates.
2. FII pulled out their huge amount of money leaving investor
with bear market and stock fall.
3. Backing of FDI US has 17.08% of FDI in India in almost
every sector whereas in banking sector they have 49% of
FDI. When US lost their income they pulled out money.
4.
Exports to India from US reduced which included variousmetals also which affected many sectors.
5. Panicking environment Investors lost their faith and
hope in market.
Effect of sub-prime on Indian market
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Outline of the Presentation
About Subprime CrisisBy Puneet Singh Putiani
Impact of Subprime Crisis - Indian Economy & USAEconomy
By Sneha Choodamani
Impact of Subprime Crisis
Indian IndustriesBy Sachin Jain
Impact of Subprime Crisis Equity Markets & LiquidityBy Shraddha Master
Impact of Subprime Crisis Indian & USA Forex MarketsBy Nikit Shah
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ECONOMY United States v/s Indian GDP Growth Rate
It all started in 2007, US GDP has
shown negative growth rate starting
from start of Sep 2008 till date.
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ECONOMY United States v/s Indian GDP Per Capita(Purchasing Power Parity)
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ECONOMY United States v/s Indian Inflation Rate
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ECONOMY United States v/s Indian IIP Numbers
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ECONOMY United States v/s Indian MORE Indicators
Existing Housing Sales
Housing Sales & InventoriesHousing Structure
HomeOwner Vacancy Rate
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ECONOMY United States v/s Indian MORE Indicators
FED, PRIME & DISCOUNT
Vehicles Miles DrivenUS Vehicle Sales
Job Less Claims
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Outline of the Presentation
About Subprime CrisisBy Puneet Singh Putiani
Impact of Subprime Crisis - Indian Economy & USA EconomyBy Sneha Choodamani
Impact of Subprime Crisis Indian Industries
By Sachin Jain
Impact of Subprime Crisis Equity Markets & LiquidityBy Shraddha Master
Impact of Subprime Crisis Indian & USA Forex MarketsBy Nikit Shah
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Sub prime impact on Indian Industries
US sub-prime crisis started hitting Indian market like Banks, Financial services, Real Estate, Infrastructure, Information
Technology, Auto.
Banks in India
India largest private sector bankICICI Bank was the 1st bank to announce a loss of Rs 10.56 billion.
Public sector Banks like Punjab National Bank, Bank of India, State Bank of India, Bank of Baroda were the majorBank of India were having an exposure to the instruments issued by
Lehman Brothers and Merrill Lynch.
Punjab National Bank reported total exposure of $5 million,
expected loss of $2 million.
Bank of India reported total exposure of $11 million,
expected loss of $5 million.
State Bank of India reported total exposure of $5 million,
expected loss of $3.5 million.
Bank of Baroda reported total exposure of $10 million,
expected loss of $6 million.
Banking sector have to face tight liquidity condition a part form mark-to-market losses.
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Future growth prospects of Indian Banks
The Banks are expected slow and stable growth due to limited impact from exposures, the profitabilitymay see lower growth on account of rising cost of funds and lower credit growth.
Tight liquidity continuous, may impact bond portfolio of the banks.Banks need to avoid high NPA and low Capital Adequacy Ratio.
Financial servicesFinancial institution were most impacted on account ofglobal uncertainty.
Broking firms have been seeing low volumes with investorspooling hands to invest in stock market.
This effect on revenue streams of insurance companies and
AMCs, that would have limited impact based on their boundportfolios.
Financial institutions need to avoid less diversified businessfor some time.
Global banks and Brokerage firm, an estimated amount $512billion in Sub-prime losses. Where largest hits taken by,
Citigroup $55.1 bn and Merrill Lynch $ 52.2 bn.
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An sudden collapse of world leading financial houses, the Indian real estate players whowere already facing a problem like
RBI increased the interest rates to contain inflation. RBI put the restriction on Indian banks to finance real estate companies in the country. lack of funds due economic slowdown. correction in stock prices, would find it difficult to raise a funds.
Among the US financial houses - Lehman Brothers was very bullish on Indian Reality Sectorand had
an investment in excess of US $700 million (Maximum amongst peers).
Lehmans PE investments in India:Amt (US $ Mn) Year
Hyderabad IT park project of peninsula. 12.5 2008
Unitechs Mumbai Pune Expressway. 175 2008
Hotel project of Future Capital. 200 2007
Realty companies having direct exposure of sunked financial institution like Lehmanbrothers faced
selling pressure.
INDUSTRY REAL ESTATE
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Infrastructure companies were adversely impact, specially their financial positionswas disturbed which were in growth stage.
Companies who raised money through IPO many have gone in for QIP issues withthe financial majors across the world.
Growth declined from 5.2% June, 07 to 3.4% June, 08.
Information Technology
Subprime crisis had limited impact on IT companies, growth will happen but at 22 23 % it will be lower than in the last two three years.
IT - enabled services (ITES) such as (BPO) comprising voice and data processeshad an impact on their businesses.
Impact on revenue for two-three quarters from financial sector clients, conservativespending from clients on new projects and delay expansion.
INDUSTRY INFRASTRUCTURE
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IT companies with USA clients and Banking Financial Services and Insurance (BFSI) as biggestrevenue earners, yet in sub-prime crisis still these companies are the safest bet.
Companies having significant non USA focus eg: Educomp having 13% outside India revenue.This company is in safest bet.
IT companies are focused on profitability and growth and have continues revenue visibility.However this growth are for long term at least for 2 3 years.
Automobiles
Credit crunch event from US to India, auto sales were impact due to tougher credit availability,
higher interest rates and higher fuel prices.
Two wheelers had decent growth in last 2 months, over all 2% drop in tow wheelers sales,more due to low base effect.
Exports of top-line auto companies might not have significant impact, as the percentagecontribution of sales form export is less form Indian auto.
Over all auto industries sales fell 4% as compared to last years growth of 13.5%.
INDUSTRY GROWTH & PROFITABILITY
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Outline of the Presentation
About Subprime CrisisBy Puneet Singh Putiani
Impact of Subprime Crisis - Indian Economy & USA EconomyBy Sneha Choodamani
Impact of Subprime Crisis Indian Industries
By Sachin Jain
Impact of Subprime Crisis Equity Markets & LiquidityBy Shraddha Master
Impact of Subprime Crisis Indian & USA Forex MarketsBy Nikit Shah
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Impact on USA
Dow Jones Industrial Average hit a record high, closing above 14,000 for the first
time. By August 15, the Dow had dropped below 13,000 and the S&P 500 had
crossed into negative territory year-to-date. Similar drops occurred in virtually every
market in the world, with Brazil and Korea being hard-hit. Large daily drops became
common, with, for example, the KOSPI dropping about 7% in one day, although
largest daily drop by the S&P 500 in the U.S. was in February, a result of the
subprime crisis.
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Domino Effect across the World
The world market capitalization had fallen by 20% since March 2007 and by 31%
since December 2007. Year to date, the Indian and Chinese markets have been the
worst performers amongst the larger indices
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Domino Effect in India
FII investments increased in most of
2007 in a booming Indian economy, as
the Sensex was on its way to a historic
peak of over 20,000 points
Since the inflow of dollars in the Indian
economy increased, the dollar
exchange rate decreased
In 2008, however, due to the effect of
the sub prime crisis, FIIs liquidated their
equity investments in a big way
leading to a crash in the stock markets
Simultaneously international commodity
prices, including oil prices, were on a
rise due increasing demand for these
commodities
The combined effect resulted in an
increase in the dollar exchange rate
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Journey of Sensex from 20,000 to 8,000
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Outline of the Presentation
About Subprime CrisisBy Puneet Singh Putiani
Impact of Subprime Crisis - Indian Economy & USA EconomyBy Sneha Choodamani
Impact of Subprime Crisis Indian Industries
By Sachin Jain
Impact of Subprime Crisis Equity Markets & LiquidityBy Shraddha Master
Impact of Subprime Crisis Indian & USA Forex MarketsBy Nikit Shah
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FOREX - Introduction
Falling exchange rate directly impacts the real trade
flows and foreign currency capital flows and its
expectations
The RBI uses interest rate measure to control the
exchange rate, in times of extreme volatility in the
exchange rate
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FOREX United States v/s Indian Exports
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FOREX United States v/s Indian Imports
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FOREX United States v/s Indian Exchange Rate and Reserve
42.01
50
42.08
43.28
45.61
47.5348.27
45.83
44.8444.13
39.97
38.5
40.5
42.5
44.5
46.5
48.5
50.5
52.5
1998-
99
1999-
00
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
2005-
06
Mar-08 May-
08
Feb-09
EXCHANGE RATE(against Dollar)
India
USA
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FOREX United States v/s Indian Fiscal Deficit
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CONCLUDINGREMARKS
Indeed, the worst of recession may be over but the U.S. economy is far from a
sustainable recovery. In fact, most of the improvement in consumption and housing
market has been coming from the government pumping money in the economy. For
example, consumers this quarter have benefited from the cash-for-clunkers plan
and extended jobless benefits aimed at stimulating spending, which accounts for 70
percent of the economy. Also, government stimulus efforts and low interest rates
have made homes more affordable to first-time buyers, spurring increases in sales inJuly.
But will the US economic recovery be sustainable when the effect of stimulus
package fades? Probably not. After all, we cant forget the fiscal stimulus comes with
a massive fiscal deficit. So the government needs to find money to finance the gap
and it may need to sell more government bonds to pay for interest of bonds sold inthe past to bailout major financial instructions which are now making billions of
dollars in profits. Moreover, the Obama administration may need to increase taxes or
not extend previous administration tax cuts engendering available income and
consumer spending.