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Profitability: will allow us how much returns the bank is generating, referred to
what it poses. The larger profitability ratios, the better the bank is performing in its
already-functioning business areas.
Operation efficiency: European banking sector will be shaped in the future by
channelled investments aiming to reduce operating costs and offer a better
costumer experience.
Liquidity: it is to be expected, that those banks that have landed in new markets or
are exploring emerging opportunities outdoors have lower liquidity and a higher
part of its assets come from leveraged debt.
Growth prospects: either at home having a Bond-like strategy, in new locations
or markets defining Equity-like objectives or somewhere in between, reinvestment of earnings stated in balance sheets will let us estimate the pace of
growth.
Risk: risk of operation can be portrayed by the associated risk coming from the
assets related to such operations.
Next table shows which Key Ratios did we finally choose, and its value calculated
from the banks financial statements (Data from 2013):
Profitability
Return on equity
Operations efficiency
Net Interest Margin
Cost to income
Liquidity
Loans to assets
Growth
Plowback ratio(1-Payout)
Risk
Tier-1 Ratio
Hybrid Bank
0,0312
0,0795
0,214
0,0986
0,0948
0,023
4,053
0,0268
2,222
0,0671
1,007
0,0354
1,984
0,0214
4,054
0,439
0,2978
0,695
0,3294
0,222
0,925
0,718
0,871
0,804
0,7573
0,107
0,136
0,104
0,097
0,213
INBETWEENERS
Operating efficiency
Investments based on
new products and
segments
Exportable
competencies
Low risk
Domestic champions in lowgrowth markets with limited
to access to emerging markets
Dividends could possibly
impact on share price
Significant access to
emerging markets
Greater dispersion in
performance
Market skepticism in
short term
Where and how gain
access to growth and
high returns
So we know, having checked the ratios and the strategies of each bank, feel in the
position to try to stick each Bank to one of the above categories, in order to try to pin
down Hybrids relative position (Functioning better or worse than them) later on.
Bonds
Bank A
Bank D
Somewhere
in between
Equity-like
HYBRID
BANK
Bank B
Bank C
BANK A: this bank has chosen a rather risk adverse policy (Aim to low RWAs and
reduce activities in risky areas), get new clients and look for new products in its
strongest areas, and leave unprofitable international ventures. For all this reasons
we qualify Bank A as a BOND. Lower-than-the-average ROE, operating margins
and liquidity make us think this Bank is not an European champion, and that due
to its relatively-small scale it still has work to do to increase operating margins
(Which precisely fits with its strategy).
BANK B: this bank is the largest of all analysed (when considering fixed assets)
and has a ROE that almost doubles the average of all others. Its large scale enables
it to have the best operating margins. From its strategy, we would underline: quite
ambitious international expansion plans, a general need for great investments
(Costumer oriented in the domestic sector, and for expansion outdoors) which is
not surprising when we remark its low liquidity and plowback ratio (Leveraged and
re-investing retained earnings) We gave this bank an EQUITY rank.
BANK C: although smaller than Bank B, this bank has still a large scale compared
to our client. Showing the second best ROE and good operation margins and belothe-average liquidity and average plowback ratio. This bank has the most risky
assets. Its lack of risk aversion, prospects of growth in Asia and a stream of
investments in new products and customers which are based in innovation, highindividualisation and technology made us think this bank is closer to the EQUITY
type.
Bank B:
"The big
boy"
Who
should our
client look
up to ?
Banks A and D:
"The caoutious
kids"
Bank C: "The
daydreamer"
Business Areas
Profit share
(%) of total
profits
Cost-toincome of
operations
(Operating
income
/overhead)
Private customers
14.91
0,899
Corporate
banking
84.20
Corporates &
markets
Eastern Europe
Commercial Real
Estate (CRE)
0,443
ROA (%)
Employees
share (%)
Loan-loss
provision
(total in MM)
0.373
43.97
63
1.710
14.58
20
11.99
0,844
0.092
5.04
35
14.63
0,578
0.966
21.09
70
-25.89
0,713
-0.231
15.30
412
The table above shows some key figures to understand what every business area
of Hybrid Bank has been performing like.
3.2 Should our client go quiet for a Bond strategy, get Equitized or simply
remain Hybrid Bank?
With brief words, our opinion towards our clients current situation is as follows:
1.
CRE situation requires for distancing of its illiquid or high risk assets (Bondlike measure)
2.
3.
With limited resources playing a role, C&M division should be able to gain
new clients and rocket profits if the right new markets are explored, and it
manages to find the right new products to offer and target clients. (Behave
like equity in this sector)
4.
Bond-like
measures
Equity-like
meassures
HYBRID BANK
SHALL REMAIN
"HYBRID" BANK
STRATEGY 2017
CRE
C&M
P. Costumers
E. Europe
C. Banking
Improve profitability
and above all shrink
operation costs by
creation of a more
efficient branch
model.
We advice to
reinforce
current position
but not to aim
for growth in
this area and
save those
resources for
the CRE and
C&M potential
changes
Similar thoughts to
Eastern Europe. We
dont see the point of
that expansionist
aims. We believe
Hybrid bank can
create more value by
shifting those
resources to CRE and
C&M change plans.
Risk
Exposure
Bad Bank
creation
Growth
Decoupling
New markets
Entry
Offer new
products
Strategic
Acquisitions
Better customer
service
Rented offices,
new ATMs
Outsourcing
services
Strengthen
the Core
Carrying out these strategies will end up making a shift in the ratio values. We have estimated
this for the following five years from 2017. The results are based on the current ratio values
and target values that we have taken from some competitors as a reference:
CAGR (5 years)
ROE
Net interest margin
0,0312
0,0985
25,87%
0,023
0,035
8,76%
Cost to income
Loans to assets
Plowback
Tier-1
4,053
2,2
-11,50%
0,439
0,044
-36,88%
0,925
0,8
-2,86%
0,107
0,095
-2,35%