Module 1 Reviewer PDF

MODULE 1 - BPI is an example of Universal Bank of the Philippine Islands I. INTRODUCTION TO BANKING Commercial Bank – without bank it’s only...

MODULE 1 - BPI is an example of Universal Bank of the Philippine Islands I. INTRODUCTION TO BANKING Commercial Bank – without bank it’s only commercial bank – target market: Corporate Banks – acts as intermediary between borrowers Clients. (need access to additional funds) & Lenders (people who have funds they wish to lend out) Savings / Thrift Bank – Target market : Retail Clients (Ex, BFB, BPI Direct & Banko) Rural Banks – intended for the needs of rural communities, extend loans to farmers, fisherman families & communities. - Privately owned & managed. Cooperative Banks – same with all service of rural banks except it’s owned by cooperative / federation of cooperatives. Specialized government banks – industrial, agricultural & real estate sectors of the economy - Bank plays a significant role as financial Landbank – implementing agency of intermediary in borrowing & lending Comprehensive agrarian reform; official transactions. depository of government funds. - They don’t just provide supply for money Development bank of the Phils. – caters but offer and efficient allocation of fund small and medium-scale enterprises; between lenders & borrowers as this may perform all functions of a thrift efficiency results to cost advantages. bank. Al-Amanah Islamic Investment Bank – Focus on the diagram provides Islamic banking, financing and investment services. Concept of Reserve Requirement Given the volume of financial transactions that go through a bank: - The bank may have access to surplus funds are strategically deployed to Financial Markets to further earn and generate additional funds. Banking Classification in the Philippines Universal Banks – Largest Type of bank in terms of resources & scope of banking activities - It combines the services of commercial bank thus of investment bank. Digital Banks – end to end through a digital Trade and Payment Facilities – These are usual platform and/or electronic channels with no platforms that carry out payments for utility bills. physical branch. (Water, Electricity & Etc.) Currency Exchange – Trading of one currency for another. Safekeeping of Valuables / Safety deposit boxes – Locker system wherein the bank charge fees to safekeep valuables. Marketable Securities – Asset that can be liquidated to cash quickly. - Short-term liquid security can be bought or sold in a public stock exchange/ public bond exchange. - These securities can mature in a year/less can either be debt/security. Non-Bank Financial Institution o Common Stock, Treasury Bills & money market Securities. - w/ quasi banking function Trust Products – Loans, Stock & Bonds, wherein - Forex dealers, Money financial exposure to the assets are split into changersBank-affiliated Non-Banking FIs securities or what we call trust products. - Pawnshops, Remittance Agents - These are sold to investors by a trust - Non-stock savings loans association company. Common Products & Services offered by Banks The Philippine Financial System Debt Markets – new debt issued is called the Deposits – money placed in bank usually to earn primary market & where debt securities are interest, usual types: bought & sold called the secondary market. Savings – intended to stay in the account Checking – intended for use in Equity market – Buying and Selling of Stock both transactions / to be transactional public & privately traded stocks are done. Time Deposit – Can’t be withdrawn for a set date / notice of withdrawal is required FX Market – Global / Decentralized OTC market & selling of currencies Loans – Sum of Money that’s lend out/borrowed - This market determined the foreign that’s expected to be paid with interests. exchange rate of currencies. Consumer loans Derivatives & Alternate Assets – More complex o Auto, Housing, & Personal Loans products that do not fall to the conventional Commercial Loans categories. Credit Card - Private Equit, Ventric Capital, Hedge Funds & Derivatives  - The difference between the cost it invest such as loans & securities & the cost of its funds such as deposits and other sources. Where do we know if a bank is indeed profitable? ** We look at its financial statements SOURCES OF BANK INCOME & PROFITABILITY Interest Income – Cost of borrowing money - Interest represents operation revenue Fee Based – revenue the FIs earns on services rather than interest payments. Ex. Safety deposit box charge, charges for fund - The objective of financial statement is to transfer & etc., provide information about the financial position, performance & changes in Interest Rate Differential (IRD) financial position of an enterprise that’s - Measures the difference of interest rate useful to a wide range of user in making between 2 securities. economic decision. - If 1 bond yield 5% and another 3% then the - Financial statements are intended to be IRD will be 2%. understandable by readers who have a reasonable knowledge of business & Spread (The Margin Income) economic activities & accounting & who - Difference between income & cost for a are willing to study the information depository institution. diligently.  BSP Functions & Powers COMMON FS 1. Balance Sheet - provides a snapshot of the financial condition of an organization at a given point in time. (as of dec. YE) - The BS shows how the bank’s asset is equal to its liability and owner’s equity. 2. Income Statement - Shows the financial performance, revenue & expenses of an organization Liquidity Management – it formulates and over a particular period of time. implement monetary policy in that influencing - Its shows the breakdown of revenues & money supply. expenses to arrive at a net income of the company. Cuurecy Issue – The BSP has the exclusivepower 3. Cash Flow Statement to issue national currency - Show how changes in balance sheet accounts & income affect cash & cash Lender of Last Resort – BSP extends equivalent. discounts/loans & advances to banking - It breaks the analysis down t: operation, institutions for liquidity purposes. investing & financiang activities Financial Supervision – Supervises banks & UNDERSTAND WHO REGULATES THE BANK execises regulatory powers INDUSTRY Foreign Currency Reserves Management – The - BSP is the main regulator BSP maintains sufficient international reserves to - Republic Act 7653, the new central maintain foreceable demand for foreighn bank Act currency to preserve the international stability & o The BSP was established as the convertability of the Philippine perso. central bank via RA. 7653 - It enjoys fiscal & administrative Exchange Rate Determination – BSP adheres to autonomy from the national gov’t market overrated foreign exchange rate policy pursuit of its mandated responsibility. - The BSP carries out its mandate through the following: review diagram Read the Objectives: - The BSP provides policy direction in the areas of Money, banking & credit. It - Given the position of the country which acts as supervisor of banks & exercises there’s still unbank, the BSP has been regulatory powers over non-bank known for advocating for financial financial institution w/ quasi banking inclusion, a stake wherein there’s functions. effective access to wide range of Financial services for all. Concept of Financial Inclusion II. FINANCIAL MANAGEMENT - Wealth optimization of the Bank. Effective access - The customer understand his/her financial position needs and is able to determine what products/ services that he/she needs to avail. Wide-range of Financial Services Accounting - Involves various products/services that - A system of recording financial are designed specifically to address the transactions needs of different clients/customers. - Measurement of performance ** PH Bank shifts to Digital Transformation Economics - Study of how to allocate scarce resources for unlimited wants - Supply & Demand** - Allocation of Resources** Finance - Study of Money & Investment - We need to be able to understand both accounting & economics  - Lenders don’t like it when a company has a large volume of liabilities - Losses is a reduction in your equity. - In the PH the widely used is Accrual Accounting o It’s the exchange of products but the payment is still for collection in the form of Accounts recevibanles Financial Ratios - Makes it easier to compare companies across all sizes. Dividend – is a portion of your revenue that you want to take out from the business. 1. Liquidity Ratio Investment Activities - Long term assets like property, plant & equipment - Big Capital needed - It only says do we have enough cash to pay-off all the debts?  - Least liquid assets > inventory - A higher current ratio is always good - Compare your ratio to your industry 3. Turnover Ratio peers **Too high on current/quick ratio is not always good because it can be an inefficiency in management of funds. - Is the company using its assets to generate sales efficiency? - The higher the ratio the better - It translates to how fast you sell your inventory. **Convert to the no. of days 2. Financial Leverage Ratio - Get the ratio first then divide 365 to the ratio - How dependent a company on debt? - The lower the ratio the better - Lower means that the company is not too dependent on debt 4. Profitability Ratio - How much is your revenue relative to your sales? - Measure of efficiency of managing cost & generated income. **ROE – return on equity  _____________________ Earnings / share - When a stock price is oerva;ued, it’s a good thing for the owner. - But if you’re a buyer, you have to take into consideration the risk. PE Ratio – Someone is willing to pay to buy a stock and get a certain amount of X pesos over a year. 5. Market Value Ratio Financial Management: Part II Risk – something undesirable happens, there’s uncertainty. Balance of Risk & Return - Not every company has this ratio - Only companies that is publicly listed w/stock price - Market Value ratio is heavily dependent on stock - Stock price move dependent on the perception of the public. - Market Value is the outlook of the market. 6. PE Ratio Price to Earnings Ratio PE = market Price / Share Cost of Equity = Dividends Cost of Debt (Source: Bank and paid thru Interest) Source of Funds will determine your source of debt. **Risk-free investment = Gov’t Investments (Gov’t bonds) **Risk Premium – add on interest rate on top of the risk-free rate for taking on additional risk. Yield to Maturity (GOv’t Bonds) *Interest rate of bonds: - Coupon (Fixed interest rate that you’ll - Money now is more valuable than the earn) money tomorrow: consider inflation - Yield to Maturity (Effective interest rate that you can earn) **Yield to maturity will depend if you bought the bond on a discount of premium ** The highest the price of bond the lower the return **The lower the price of bond the higher the return STUDY THE FOLLOWING: - Ratios - Importance of what you need to look at - Relationship between ratios - Time Value of Money - Risk & return  - Cost of Investment - There’s a large number of americans & - Yield to Maturity those who have green cards that doesn’t pay their taxes. - Failure to file taxes will result to civil penalties/criminal offense. III. FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA) How it is implemented in UK? - US tax legislation first enacted in March 2010. - All foreign institution must report all US citizens’ money - FIs need to report on an annual basis - In BPI it is the responsibility of the client facing personnel to identify IRS – Internal Revenue Service individuals who are under FATCA IGA – Inter government agreement through due diligence. - 5 countries announced in Feb 2012 namely: UK, Germany, France, Spain, Italy - You’ll no longer suffer the 30% penalty but you have to comply to FATCA. You’ll no longer sent report to US but must submit all US investor/person to your local gov’t. **FFIs failure to comply will be blacklisted and penalized with 30% withholding tax. GIIN – Global Intermediary Identification Number BPI Europe uses IGA model 1 since it’s in UK and What to do? KYC / Client onboarding UK uses IGA model 1 BPI IFL uses IGA model 2 since it’s in HK and HK FATCA’s role in improving Global Tax System uses IGA Model 2 - Americans are required to report their money but this has been passed to the financial institution. **BPI only prepares the annual report of US reportable account. Who is the IRS going after? ** FATCA is not yet concurred in the PH senate, it’s not yet a law in the Philippines but we are already practicing it. All documents are not submitted but safekeep for future reference. FATCA CLASSIFICATION: INDIVIDUAL US INDICIA – it is an indicator that a client might be a US person but still has to based final assessment using the presented documents. Individual FATCA is a required document as an additional document on top of the usual account opening requirement. W-8 Ben (w/Indicia & classified as Non US-Person) W-9 (w/ Indicia & US Person) FATCA declaration – must not be blank  IMPORTANT! IMPORTANT!!  IMPORTANT!! IMPORTANT!! IMPORTANT!! IMPORTANT!! EXERCISES!!