Finance and Banking

Unit 7
Prof. Dr. Srebren Dizdar

Have you ever heard or been to Siena?

Siena within the Province of Siena and Tuscany, Italy

What is in Siena?

Banca Monte dei Paschi di Siena S.p.A. (MPS)

Banca Monte dei Paschi di Siena S.p.A. (MPS) is the oldest surviving bank in the world. Founded in 1472 by the Magistrate of the city state of Siena, Italy, it has been operating ever since. Today it consists of approximately 3,000 branches, 33,000 employees and 4.5 million customers in Italy, as well as branches and businesses abroad.

Banking in the modern sense

Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.

Palazzo Medici-Ricardi in Florence

Now Italy's seventh largest bank, Banca Monte dei Paschi di Siena has 1,478 branches, 603 of them in Tuscany.

Recent operations
Between 1991 and 1996, its share rose to five percent of Italy's mutual funds market. Today it leads the Italian market for total sales of life insurance at bank branches. Tuscany's leading bank, 95 percent of its customers are small- and medium-sized companies. Earlier in 2011, it bought the Banca Agricola Mantovana, added a stake in a Parma savings bank and offered 500 million shares to the public. The revenues will be used to improve the retail banking operations.

Origin of the term bank

The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank - "bench, counter". Benches were used as desks or exchange counters during the Renaissance by bankers from Florence, who used to make their transactions atop desks covered by green tablecloths.

Firenze
Coat of arms

Firenze, Italia

What is the oldest bank in Bosnia and Herzegovina?

In 1883, the first modern bank with the Austrian capital was established in Bosnia and Herzegovina. It was the branch of Viennese Union Bank. Two more foreign assets bank operated during the period the Provincial Bank of Bosnia and Herzegovina (Austrian capital) and Bosnian Industrial and Trade Bank (Hungarian capital).

Many turbulent changes in banking system

At the end of the Austro-Hungarian rule in 1918 in Bosnia and Herzegovina there have been 37 banks, dominantly with the private capital. The banking system in the country underwent many turbulent changes in the past from capitalist to state-controlled (socialist/communist) to capitalist again in 1990s.

The longest bank in operation in Bosnia and Herzegovina?

How many banks operate today in our country?

5 10 15 25 35 45 50

Bank list - Federation of Bosnia and Herzegovina

ABS Banka Sarajevo Privredna Banka Bosna Bank Sarajevo International Sarajevo
Hypo Hypo Alpe- Investicijska Adria-Bank Banka Mostar Federacije BiH

FIMA Banka Sarajevo

InvesticionoKomercijalnoKomercijalna Banka Investiciona

Zenica Banka V.Kladua

NLB Tuzlanska
Banka, Tuzla

List of banks ... continued

Postbank BH Sarajevo Turkish Ziraat Bank Bosnia Sarajevo ProCredit Bank Raiffeisen Sarajevo Intesa Sanpaolo Bank Bank BiH UniCredit Bank

Union Banka
Sarajevo

Vakufska Banka
Sarajevo

Volksbank BH

Bank list - Republic of Srpska

Balkan Investment Bobar Banka
Bank Banja Luka Hypo Alpe-AdriaBank Banja Luka Nova Banjaluka Banka Banja Luka Volksbank Banja Luka Bijeljina Komercijalna Banka Banja Luka Nova Banka Bijeljina

EEFC Bank, Banja

Luka NLB Razvojna banka Pavlovi International Bank

+ Investment + Central Bank

Bank of FBiH of Bosnia and Herzegovina

The actual number is:

How many of them are branches of foreign banks? Any bank with a sole B&H capital? Although most of them happen to be multinational, the majority of active banking capital is in the hands of banks from ... What country?

What is the most popular bank in Bosnia and Herzegovina?

What is the most successful bank in B&H?

What is the most successful bank in B&H?

According to official data and statistics, Raiffeisen Bank BiH.

 The bank was founded on 7th November 1992 and started its operations as Market banka dd Sarajevo, a stock corporation of private shareholders owning the vast majority of shares (more than 90 per cent).

 On 21st July 2000, Raiffeisen Zentralbank sterreich AG acquired the majority of the banks shares (89.71 per cent). This transaction was followed by an integration of the bank, now operating as Raiffeisen BANK dd Bosna i Hercegovina, into the RZB Group covering 15 countries throughout Central and Eastern Europe.

What is a bank?

A bank is a financial intermediary and appears in several related basic forms:

a central bank issues money on behalf of a government, and regulates the money supply.

commercial bank accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses on the world's open financial markets. a savings bank, also known as a building society in Britain, is only allowed to borrow and save from members of a financial cooperative.
a

Banking and Finance

The banking sector consists of all resident corporations engaged in financial intermediation in any given economy. Financial intermediation is a productive activity in which these corporations raise funds by incurring liabilities on their own accounts for the purposes of channeling these funds to other institutional units by way of lending resource allocation from saves to investors.

Some banking terms

Bond a document which can be bought and sold and which is produced by a government or organisation, promising that it will pay back money it has borrowed, usually with interest Equity or equities the capital that a company has from shares rather than from loans; trading equities means trading in companies shares on the stock market, rather than trading on other markets.

More banking terms

Securities a financial investment such as a bond or share, or the related certificate to show who owns it. Share one of the parts into which the ownership of a company is divided. Letter of credit used to guarantee payment and delivery of goods, whereby the importers bank guarantees payment to the exporters bank once it receives the realted shipping documents.

ATM = Automated Teller Machine or cash point (BE)

A bank teller is an employee of a bank who deals directly with most customers

Banks offer many different channels to access their banking and other services:

Channels

ATM is a machine that dispenses cash and sometimes takes deposits without the need for a human bank teller. Some ATMs provide additional services. A branch is a retail location Call centre Mail: most banks accept check deposits via mail and use mail to communicate to their customers, e.g. by sending out statements.

New technologies
Mobile banking is a method of using one's mobile phone to conduct banking transactions Online banking is a term used for performing transactions, payments etc. over the Internet

Contemporary attitudes in banking

Relationship Managers mostly for private banking or business banking, often visiting customers at their homes or businesses Telephone banking is a service which allows its customers to perform transactions over the telephone without speaking to a human being.

Video banking
Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a videoconference enabled bank branch.

British (BE) and American (AE) terms for banking and finance services

Beware it is not the same!!!

British English
cheque current account share shareholder stock

American English
check checking account stock stockholder inventory

British English
Buildings society (or buildings bank
merchant bank Unit trust creditors debtors

American English
Savings and Loans Association (SLA)
Investment bank Mutual fund or Mutual savings bank (MSB) Accounts payable Accounts receivable

Banking Sector
Central Bank: Highest monetary
authority in the country that issues money on behalf of a government, and regulates the money supply.

Depository corporations
1.Commercial banks, 2.Merchant banks, 3.Savings, 4.Credit union, 5.Rural 6.Development banks, etc. They are all engaged in allocation of savings to investment opportunities in the interest of profit making.

Keeping in touch with business news and information

Financial Sector includes: Banking sector and other financial institutions: 1. security markets, 2. brokers, 3. insurance, 4. pension funds, etc.

Central Banks objectives are:

Formulate and implement policies to ensure monetary stability; and Undertake actions to ensure financial sector soundness All of these are geared to creating the enabling environment for financial intermediation.

Commercial and savings banks

A commercial bank (or business

bank) is a type of financial institution and intermediary. It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits.
A savings bank, also known as a
building society in Britain is only allowed to borrow and save from members of a financial cooperative.

Cashflow vs. profitability

All business activity carries a risk, and any company can fall. Cashflow is not the same thing as profitabilty, and a common cause of failure is rapid growth, causing costs to rise steeply ahead of income.

The causes of failure are complex

Once stable market goes into decline, reducing income and cashflow.

 Operations problems create large, unforeseen costs that eat up profits. Investors begin to lose confidence, the share price falls, credit ratings are reduced, and it becomes more difficult to borrow.

Raising cash?
Profitable parts of the company may be sold to raise cash. However, this works in the short term, but long-term revenue declines. That is why they need to borrow fresh assets from banks.

Corporate restructuring
Sometimes the senior management team is changed, which is known as corporate restructuring, in the hope that the new managers will make a difference.

Some studies of US companies that change their top management in response to crises show that one third make a full recovery.

Good Luck and Good Job Hunting!!!!!!!!!!

The French drug maker Sanofi-Aventis continued to reorganize and slash jobs in anticipation of its acquisition of Genzyme. The company disclosed that it would shed another 700 jobs from its European operations.

The job cuts came amid the companys reorganization of its units in Austria, Germany, Switzerland, Portugal Spain, Holland, the Czech Republic and the United Kingdom (basically the entire EU). The goal was to consolidate and reorganize the 30 European subsidiaries into only 10.

Declarations of insolvency and bankruptcy

As a last resort declarations of insolvency and bankruptcy can create a breathing space, and compel lenders and investors to come to terms with problems and bear some of the losses. Not every insolvent company is written off. Many recover and return to successful trading.

Bankruptcy
The word bankruptcy is formed from the ancient Latin bancus (a bench or table), and ruptus (broken). A bank" originally referred to a bench, which the first bankers had in the public places, in markets, fairs, etc. on which they tolled their money, wrote their bills of exchange, etc.

 Hence, when a banker failed, he broke his bank, to advertise to the public that the person to whom the bank belonged was no longer in a condition to continue his business.

Notice of closure attached to the door of a computer store the day after its parent company declared "bankruptcy" in the United Kingdom.

Insolvency
Insolvency exposes deeper problems. Then the only choice is liquidation, with assets sold at auction and staff made redundant.

Insolvency in Europe During 2004, the number of insolvencies reached all time highs in many European countries. In France, company insolvencies rose by more than 4%, in Austria by more than 10%, and in Greece by more than 20%.

 The increase in the number of insolvencies, however, does not indicate the total financial impact of insolvencies in each country because there is no indication of the size of each case. An increase in the number of bankruptcy cases does not also necessarily entail an increase in bad debt write-off rates for the economy as a whole.

Size of global banking industry

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record $96.4 trillion while profits declined by 85% to $115bn. Growth in assets in adverse market conditions was largely a result of recapitalisation.

EU and Asian banks

EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totalled $66.3bn in 2009, up 12% on the previous year.

Finance sector

Finance
Finance is primarily concerned with the way of funds management. The general areas of finance are business finance, personal finance, and public finance. Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted.

Main area of finance industry

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance) and by a wide variety of other organizations, including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting. Finance is one of the most important aspects of business management and includes decisions related to the use and acquisition of funds for the enterprise.

Financial services
An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income.

Lender & borrower

The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan.

Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality.

Uninsured risks: 1. Bad debt 2. Changes in fashion 3. Time lapses between ordering and delivery 4. New machinery or technology 5. Different prices at different places

Advantages of credit trade

1. Usually results in more customers than cash trade. 2. Can charge more for goods to cover the risk of bad debt. 3. Gain goodwill and loyalty of customers. 4. People can buy goods and pay for them at a later date. 5. Farmers can buy seeds and implements, and pay for them only after the harvest.

More advantages
6. Stimulates agricultural and industrial production and commerce. 7. Can be used as a promotional tool. 8. Increase the sales. 9. Modest rates to be filled. 10. Can be a marketing tool

What problems lie ahead?

Disadvantages of credit trade

1. Risk of bad debt. 2. High administration expenses. 3. People can buy more than they can afford. 4. More working capital needed. 5. Risk of Bankruptcy.

Stocks and securities

Institutions such as stock exchange provide a market for existing securities, which include stocks and bonds

Personal financial difficulties

 Lack of cash, or funds Big bills, Overspending, Ironing credit cards, Living above your own financial means,

Corporate financial difficulties

Reasons?
Slow company response to change in industry Major technological changes Troubles with environment in the form of natural or man-caused disasters Upheavals in the structure of society leading to political unrest and destabilisation of government

More troubles ...

Dramatic changes in corporate structure Weak financial managers Over diversification Corruption, bribery, scandals in business operations Autocratic Chief Executive officer (CEO), or Chairperson of the company vs. passive Board of Directors members High administrative costs that include executive salaries

Markets plumetting down!

How to get out of trouble?

Sound and profitable business

An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In order to succeed in business one has to decide what, how much and when to invest.

A road to success

starts with the first step: PLANNING!

To do this, a company must:

1. Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations; 2. Identify the appropriate strategy: active v. passive hedging strategy 3. Measure the portfolio performance

8 tips to getting preparing a business plan for an investor

1. Explain the concept and competitive advantage 2. The potential market for the concept 3. The business model 4. The marketing strategy 5. The use of funds 6. Time frame to commercialization 7. Risks involved 8. Who is involved with the project

Ask yourself many more questions

1. Will the company be able to maintain high profit margins?

Low profit margins are dangerous to your company's survival. If you only have a tenuous 2% net profit margin and prices rise a few percent, you are in trouble. Higher profit margins allow room for error and changing cost structures. Who cares if your business generates millions of dollars in revenue, but only can earn $10,000? It is what you keep that matters.

2. Good Revenue per sale.

It is difficult to succeed if you are selling a one-dollar product. To make a million dollars means you must sell one million of your product. That's a lot of sales. If you are selling a $1,000 product then to make a million dollars you only need a thousand sales. Guess which level of sales is an easier to process and fulfill for a smaller company?

3. A proprietary product.
A proprietary product is one which your company exclusively controls. This means another company can't just begin producing and selling your product. Patents and copyrights are two ways to secure a proprietary product.

4. Something that you love to do.

It is difficult to do something well if you don't feel passionate about it. Choose to build a business in a field that you love, and you will find yourself enjoying it. This will help lead to success. Never just enter a business because the financial numbers seem to indicate a great business. To really make money demands growing a business, and this will take years. Be sure it's something you want to do. Something related to a life-long hobby or interest is ideal.

5. Will the business have good cash flow?

It is possible for a business to be generating excellent sales and profits, and yet be losing cash. You need cash to pay bills. A cash strapped business is a business that will struggle to grow. Do a cash flow projection for your start-up business.

6. What are the growth prospects for your business?

Many entrepreneurs start a business and are happy when they see it making money. They are often not as happy when they realize that profits have reached the sky.

Think how and until when ...

Think about how you will grow. If you start a restaurant, for example, your profits will certainly level off. You will only have so many customers eating at your restaurant in any given year. To grow would require adding a second restaurant. But you cannot run two restaurants as you do one restaurant. You can be on top of everything at one location, but you must be away at least part of the time when you have two restaurants. And what if you had ten?

Learn to delegate work and responsibility to others

As you grow you will need to learn to delegate. You will need multiple locations. Compare this to a mail-order business. It can be run from one location. Yet, sales are essentially potentially unlimited with only small structural changes to the business. Doing more of the same thing in the same way is easier than changing the way you operate.

7. The business must be something you are psychologically suited to do

This is not the same as loving the area. Some people are more outgoing and social than others. Other people are more reserved. Each is suited to building different types of businesses. Needless to say, a business that demands much personal selling and personal customer contact might not be ideal for the more reserved person. Yet, such a person could very successfully run a mail-order or Internetbased company.

How do you imagine yourself? Success or failure?

Learn to be on top, study to be the best

It starts with ENG401 Midterm test

April 02, 2012 16.30 & 18.00 April 03, 2012 17.30 & 19.00