BK12 - MANA130107 Bank Management 1 Lecture Twelve Consumer...

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Unformatted text preview: MANA130107 Bank Management 1 Lecture Twelve Consumer Lending and Off-balance Sheet Activity (chap 18 &14 ) Topics in Commercial Bank Management MANA130107 Bank Management 2 Consumer Lending & Off-balance Sheet Activity ¡ Topics covered in this lecture ¢ Consumer Lending ¢ Pricing Consumer Loans ¢ Investment Banking ¢ Other Fee Income Resources MANA130107 Bank Management 3 About Consumer Loan ¡ Consumer Loan ¢ Individuals and households ¢ Borrow to supplement income and enhance lifestyle ¢ Used to be ignored by banks but becomes important recently ¢ Can be costly and risky- due to quickly changes in financial conditions ¡ Why banks welcome consumer loans? ¢ A tie to deposits ¢ Becoming profitable- With a declining margin though MANA130107 Bank Management 4 Type of Consumer Loans ¡ Classified by purpose ¢ Residential loan- home mortgage- home equity loan ¢ Nonresidential loan- Installment loans: Auto loans, education loans- Noninstallment loans: Cash advances - Revolving credit loans: Credit card loans MANA130107 Bank Management 5 Residential Loans ¡ Residential mortgage loans ¢ Fund the purchase of a home or improvement of private residence ¢ Long term (5-30 years) with property as collateral ¢ Fixed or float rate ¡ Home equity loans ¢ Use equity (MV – mortgage loans) in homes as a borrowing base (used as collateral) ¢ Fund a second home, remodel the home etc ¢ Traditional home equity loan- For renovation and new purchase, equal installment repayment, secured, fixed rate and maturity ¢ Lines of credit against a borrowing base - Used for any purpose, normally with longer maturity and a lower rate due to the better security MANA130107 Bank Management 6 Nonresidential Loans ¡ Installment loans ¢ Short or medium term ¢ Two or more consecutive repayments ¢ Fund big-ticket items (Auto, furniture and appliances) ¡ Noninstallment loans ¢ Short-term for immediate cash needs ¢ Single repayment in a lump sum ¢ Fund vacations, medical care and repairs etc ¡ Credit card loans ¢ Either installment or noninstallment credit ¢ Installment credit use is more profitable ¢ Merchants discount fee income as well ¢ Offer convenience and revolving credit ¢ Require scale economy and careful management MANA130107 Bank Management 7 A Summary of Cards Prepaid or Purchase Card Use Yesterday ’ s money Debit Card Use Today ’ s money Credit Card Use Tomorrow ’ s money MANA130107 Bank Management 8 Characteristics of Consumer Loans ¡ Profit with “ sticky ” interest rates ¢ Normally priced based on fund costs and fixed rate ¢ Price high enough to cover potential market risk- small size and costly to process- risky due to cyclically sensitive- interest inelastic: available amount matters not IR- Education and income positively affect credit use MANA130107 Bank Management 9 Evaluating Consumer Loans ¡ What makes a good consumer loan?...
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This note was uploaded on 10/17/2011 for the course FINANCE CFA 201 taught by Professor Leo during the Spring '09 term at Fudan University.

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BK12 - MANA130107 Bank Management 1 Lecture Twelve Consumer...

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