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

PROJECT IN INVESTMENT TECHNIQUES

Submitted to The European School of Economic for MBA Investment Techniques Module

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 -2– © Azahir Abdalla, © Vera Koubkova, © Danial Javandel. All rights reserved.

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

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

•

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. -4– © Azahir Abdalla, © Vera Koubkova, © Danial Javandel. All rights reserved.

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.

" 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-

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.

! 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.

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:

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

•

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:

Saving account and other saving products Life & pension Current account

Borrowing

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

Insurance and protection

Savings & investments

Personal investments

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

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. -7– © Azahir Abdalla, © Vera Koubkova, © Danial Javandel. All rights reserved.

•

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 misrepresent 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.

Normal (Gaussian) distribution

“the black swan”

Figure 1: shift in the market behaviour

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:

Debt liquidation and distress selling

Contractions of the money supply as bank loans are paid off

A fall in the level of asset prices

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

A fall in profits

A reduction in output, in trade and in employment

Pessimism and loss of confidence

Hoarding of money

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

Figure 2: Debt Deflation Theory

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

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

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.

PART 2: Which assets or asset types, in place of or in addition to the abovementioned, 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.

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

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

•

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

•

Constant Proportion Debt Obligation

•

Secured Loan Credit Default Swap

•

Synthetic Constant Proportion

•

Credit Default Swap on Asset Backed

Synthetic Collateralized Debt Obligation

Portfolio Insurance

Securities •

Credit default swaption

•

Recovery lock transaction

•

Credit Spread Option

•

CDS index products

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.

Cash flows before

Borrowers

securitization

Originator Asset sale

Profit extraction

Adminis trator

Cash flows after securitization

SPV Sale price

Sale price of securities

Interest and principal

Investors

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.

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

PART 3 - CASE STUDY: Bank of America Corp’s Vs. Citigroup inc – which of the two would be a better investment? (All)

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.

% &

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

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.

(

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

Profit and loss

Gross Profit

Millions

180 160

BoA Citi

140 120 100 80 60 40 20 0 2006

2007

2008

Net Income

Millions

BoA

Citi 10 0 2006

2007

2008

-10 -20 -30 -40

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).

P/E

50.00

$60.00

40.00

$50.00

30.00

$40.00

20.00

$30.00

10.00

$20.00

0.00

share price

P/E - BoA P/E - Citi share market value - BoA share market value - Citi

Price / Earnings

$10.00 2006

2007

2008

-10.00

$0.00

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$). Dividend Dividend Dividend Dividend

Dividend per share $3.00

per share - BoA ($) per share - Citi ($) yield - BoA (%) yield - Citi (%) 35.00% 30.00% 25.00%

$2.00

20.00% $1.50 15.00% $1.00

dividend yield

dividend per share

$2.50

10.00%

$0.50

5.00%

$0.00

0.00% 2006

2007

2008

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.

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,

Total Current Assets : Total Tangible Assets BoA

50.00%

Citi

40.00% 30.00% 20.00% 10.00% 0.00%

Millions

2006

2007

Assets

2,500

2008 Total Assets - BoA Total Tangible Assets - BoA Total Current Assets - BoA Total Assets - Citi Total Tangible Assets - Citi Total Current Assets - Citi

2,000

1,500

1,000

500

0 2006

2007

2008

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.

Millions

Total C/F from Operating Activities

Total CF from Operating Activities - BoA Total CF from Operating Activities - Citi

120 100 80 60 40 20 0 2006

-20

2007

2008

-40 -60

Millions

-80

Total Cash Flow

BoA Citi

10 5 0 2006

2007

2008

-5 -10 -15

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.

"Acid test" ratio 0.80

BoA Citi Industry benchmark

0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2006

2007

2008

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.

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

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

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

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).

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 .

' •

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/b93cd09043bc-11de-a9be-00144feabdc0.html

Further Reading: •

http://www.ft.com

•

http://www.eurojournal.com

•

www.bloomberg.com

•

http://www.numa.com

•

http://www.finweb.com

'' 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

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.

S&P 500

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

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.

FTSE 100 NIKKEI 225

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.

The Japanese index Nikkei225 behaves in a slightly different way. The growth preJuly 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).

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

bigger than the rest of its rivals, it is in a better position to absorb the high fixed costs of a capitalintensive 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 - 33 – © Azahir Abdalla, © Vera Koubkova, © Danial Javandel. All rights reserved.

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)

$53.39 $40.56

$14.08

Citigroup (C)

$54.38

$28.56 $7.14

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

PERIOD ENDING

Bank of America Corp (BAC)

Total Revenue Cost of Revenue

117,017,000 14,480,000

YOY change 6.24% 24.95%

Gross Profit Operating Expenses Research Development Selling General and Administrative Non Recurring Others

102,537,000

3.60%

33,037,000 805,000 7,208,000

5.71% -49.07% 110.77%

Total Operating Expenses

31-Dec-06

Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest

Non-recurring Events Discontinued Operations Extraordinary Items

61,487,000

-9.41%

61,487,000 29,514,000 31,973,000 10,840,000

-9.41% 17.84% -34.56% -45.18%

146,558,000 -

106,228,000

2.50%

108,882,000

146,558,000

34,924,000 410,000 15,192,000

10.98% 128.05% 161.22%

55,702,000

-47.04%

55,702,000 34,778,000 20,924,000 5,942,000

-47.04% -27.90% -78.84% -92.93%

-29.11%

31-Dec-06

8.65%

4,008,000

13.16%

6,988,000

164.87%

159,229,000

-31.08%

59,960,000 1,528,000 18,509,000

15.69% 15.58% 218.56%

31-Dec-08 130,005,000 20,271,000

86,582,000

-8.49%

86,582,000 56,943,000 29,639,000 8,101,000

109,734,000 -

69,368,000 1,766,000 58,963,000 -

79,232,000

-125.70%

79,232,000 77,531,000 1,701,000 -2,201,000

-125.70% -57.83% -3219.05% 836.48%

-20,363,000 32,692,000 -53,055,000 -20,612,000

-289,000

-8.49% 36.16% -94.26% 127.17% -1.38%

-285,000

-222.46%

349,000

21,249,000

-82.98%

3,617,000

-987.31%

-32,094,000

289,000 -

159,229,000

YOY change -18.35%

52,988,000

29,502,000 25,074,000 4,428,000 420,000

31-Dec-07

29,502,000

-73.25%

YOY change 8.65%

14,982,000

38,760,000 935,000 39,685,000

21,133,000

31-Dec-08

124,132,000 15,250,000

Net Income From Continuing Ops

124,321,000 18,093,000

YOY change -0.15% -15.71%

Operating Income or Loss

31-Dec-07

Citigroup, Inc. ( C)

-20,363,000

4,410,000 -

All numbers in thousands

Effect Of Accounting Changes Other Items Net Income Preferred Stock And Other Adjustments Net Income Applicable To Common Shares

Bank of America Corp (BAC) -

Citigroup, Inc. ( C)

21,133,000

-29.11%

14,982,000 -182,000

-73.25% 697.80%

4,008,000 -1,452,000

21,133,000

-29.97%

14,800,000

-82.73%

2,556,000

21,538,000

-83.21%

21,538,000

-83.21%

3,617,000

-865.39%

3,617,000

-865.39%

-27,684,000 -27,684,000

4,612

number of shares (in mil.) market value of a share ($)

4,527 $53.39

4,480 $40.56

$14.08

$54.38

diluted earnings per share income/loss from continuing operations (in $) P/E ratio

$4.59 11.63

$3.30 12.29

$0.55 25.41

$4.25 12.80

dividends per share dividend yield

$2.12 3.97%

$2.24 15.91%

$0.49 0.90%

13.21%

-6.67%

$2.40 5.92%

$28.56

$7.14

-83.06% 210.01%

$0.72 39.67

-$5.59 -1.28

10.20%

$0.54 1.89%

-70.37%

$0.16 2.24%

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

All numbers in thousands

PERIOD ENDING Total Revenue Cost of Revenue

Gross Profit Operating Expenses Research Development Selling General and Administrative Non Recurring Others

Vertical Analysis: % of revenue 31-Dec-06 31-Dec-07 100.00% 100.00% 12.37% 14.55%

BoA

31-Dec-08 100.00% 12.29%

Citigroup 31-Dec-06 100.00%

31-Dec-07 100.00%

31-Dec-08 100.00% 15.59%

87.63%

85.45%

87.71%

100.00%

84.41%

28.23% 0.69% 6.16%

28.09% 0.33% 12.22%

31.22% 0.75% 31.97%

36.15% 4.77%

37.66% 0.96% 11.62%

53.36% 1.36% 45.35%

52.55%

44.80%

23.77%

59.08%

49.76%

-15.66%

0.00%

52.55% 25.22% 27.32% 9.26%

44.80% 27.97% 16.83% 4.78%

23.77% 20.20% 3.57% 0.34%

59.08% 38.85% 20.22% 5.53% -0.20%

49.76% 48.69% 1.07% -1.38% -0.18%

-15.66% 25.15% -40.81% -15.85% 0.27%

18.06% 0.00%

12.05% 0.00%

3.23% 0.00%

14.50% 0.00%

2.27% 0.00%

-24.69% 0.00%

Total Operating Expenses Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income From Continuing Ops Non-recurring Events Discontinued Operations Extraordinary Items Effect Of Accounting Changes Other Items

0.20%

3.39%

Net Income Preferred Stock And Other Adjustments

18.06%

12.05% -0.15%

3.23% -1.17%

14.70%

2.27%

-21.29%

Net Income Applicable To Common Shares

18.06%

11.90%

2.06%

14.70%

2.27%

-21.29%

Balance Sheets All numbers in thousands

PERIOD ENDING

Assets Current Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets

Bank of America Corp (BAC) 31-Dec-06

203,433,000 135,478,000

YOY change

31-Dec-07

6.36% -4.37%

216,368,000 129,552,000

YOY change

31-Dec-08

-80.39% -36.34%

42,427,000 82,478,000 -

338,911,000

2.07%

345,920,000

-63.89%

124,905,000

Long Term Investments Property Plant and Equipment Goodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long Term Asset Charges Total Assets Tangible Assets

916,804,000 9,255,000 65,662,000 9,422,000

21.82% 21.45% 18.07% 9.28%

32.05% 17.09% 5.68% -17.10%

119,683,000

28.62%

1,116,821,000 11,240,000 77,530,000 10,296,000 153,939,000 -

1,474,758,000 13,161,000 81,934,000 8,535,000 114,650,000 -

Liabilities Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt

-25.52%

31-Dec-06

YOY change

31-Dec-07

462,961,000 282,817,000 44,445,000

39.66% -3.09%

646,556,000 274,066,000 57,359,000

Total Current Assets

Citigroup, Inc. ( C)

YOY change

-69.13% -16.63%

790,223,000

23.76%

943,843,000

3.50%

23.31% 42.68%

100,936,000

67.31%

977,981,000

-51.70%

472,364,000

976,884,000

28.93%

41,204,000 22,687,000

-34.15% -37.59%

168,875,000

-2.13%

1,259,543,000 27,132,000 14,159,000 165,272,000 -

199,584,000 228,502,000 44,278,000 -

33,415,000 15,901,000

31-Dec-08

1,459,737,000 1,384,653,000

17.54% 17.57%

1,715,746,000 1,627,920,000

5.96% 6.12%

1,817,943,000 1,727,474,000

1,884,318,000 1,835,002,000

16.10% 15.74%

2,187,631,000 2,123,740,000

-11.39% -10.67%

1,938,470,000 1,897,179,000

42,132,000 358,827,000

28.10% 14.96%

53,969,000 412,524,000

-31.53% -11.60%

36,952,000 364,654,000

85,119,000 450,068,000

-0.20% 0.15%

84,951,000 450,731,000

-16.52% -15.10%

70,916,000 382,677,000

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

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

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

All numbers in thousands

Other Liabilities Deferred Long Term Liability Charges Minority Interest Negative Goodwill Total Liabilities Stockholders' Equity Misc Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets

Bank of America Corp (BAC) -

77,342,000

1,324,465,000

18.46%

1,568,943,000

4.59%

2,851,000 61,574,000 79,024,000

54.65% -2.02% 3.00%

Citigroup, Inc. ( C) 82,926,000

755.09% 27.25% -9.30%

1,764,535,000

-13.36%

1,796,840,000

-8,177,000

-108.23%

673,000

-1769.84%

-11,238,000

25.95%

0 55,000 121,920,000 -21,724,000 18,007,000 -4,660,000

440.67%

70,664,000 57,000 86,521,000 -9,582,000 19,165,000 -25,195,000

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

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

37,701,000 76,766,000 73,823,000

2,074,033,000

17.54%

1,000,000 55,000 129,267,000 -25,092,000 18,253,000 -3,700,000

4,409,000 60,328,000 81,393,000

92,684,000

1,640,891,000

285,009,000

0.00% -5.68%

3.64% -29.03%

Cash Flow Statements All numbers in thousands

PERIOD ENDING Net Income

Bank of America Corp (BAC) 31-Dec-06

21,133,000

Operating Activities, Cash Flows Provided By or Used In Depreciation 2,869,000 Adjustments To Net Income 7,303,000 Changes In Accounts Receivables Changes In Liabilities Changes In Inventories Changes In Other Operating Activities

4,517,000 -21,313,000

Total Cash Flow From Operating Activities

14,509,000

Investing Activities, Cash Flows Provided By or Used In Capital Expenditures -748,000 Investments -63,035,000 Other Cashflows from Investing Activities -4,521,000 Total Cash Flows From Investing Activities -68,304,000 Financing Activities, Cash Flows Provided By or Used In Dividends Paid Sale Purchase of Stock

-9,661,000 -8,662,000

Net Borrowings Other Cash Flows from Financing Activities Total Cash Flows From Financing Activities Effect Of Exchange Rate Changes

32,951,000 38,505,000 53,133,000 92,000

YOY change -29.11%

-0.87% 2.04% -7.24% -13.52% -23.94%

186.50% 45.42% 224.53% 58.82%

12.60% -87.14% 111.89% 18.38% 94.63% 45.65%

31-Dec-07

14,982,000

2,844,000 7,452,000 4,190,000 -18,432,000 11,036,000

-2,143,000 -91,665,000 -14,672,000 -108,480,000

-10,878,000 -1,114,000 69,820,000 45,584,000 103,412,000 134,000

Citigroup, Inc. ( C)

YOY change -73.25%

31-Dec-08 4,008,000

21,538,000

16.70% 167.04%

3,319,000 19,900,000 14,449,000 -8,744,000

2,790,000 4,617,000 12503000 131,622,000 -173,057,000

4,034,000

13,000

-2,098,000 1,516,000 -2,348,000 -2,930,000

-4,035,000 -201,777,000 1,606,000 -204,206,000

-444.84% -52.56% -63.45%

-2.10% -101.65% -84.00% -97.30%

5.98% -4127.74% -184.29% -67.50% -110.34% -161.94%

11,528,000 44,869,000 58,852,000 14,816,000 10,695,000 -83,000

31-Dec-06

-9,826,000 -5,327,000 101,122,000 120,461,000 206,430,000 645,000

YOY change -83.21%

31-Dec-07

0.00% -511.11% -224.20% -127.42%

2,790,000 -18,981,000 -15529000

3,617,000

-95.82%

-36,090,000 -7,237,000

549561.54%

-71,430,000

-0.79% -76.70% -807.41% -69.45%

9.69% -70.83% -37.30% -22.45% -30.00% 55.81%

-4,003,000 -47,013,000 -11,361,000 -62,377,000

-10,778,000 -1,554,000 63,404,000 93,422,000 144,494,000 1,005,000

YOY change -865.39%

-4.23% -64.56% -672.99% 214.64% -2206.63% -234.60%

-36.52% -104.10% 577.75% 24.42%

-30.17% -5060.30% -188.77% -140.47% -116.98% -393.33%

31-Dec-08 -27,684,000

2,672,000 -6,727,000 88979000 113,554,000 152,457,000 96,143,000

-2,541,000 1,929,000 -76,999,000 -77,611,000

-7,526,000 77,083,000 -56,283,000 -37,811,000 -24,537,000 -2,948,000

All numbers in thousands

Change In Cash and Cash Equivalents

Bank of America Corp (BAC) -570,000

-1170.53%

6,102,000

-258.54%

Citigroup, Inc. ( C) -9,674,000

2,882,000

305.69%

11,692,000

-176.57%

-8,953,000