the top 10 global retail banks report -...

F I N A N C E

The Top 10 Global Retail Banks

Growth strategies and best practices of the leadingplayers

By Barbara Kubis-Labiak

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Copyright © 2005 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for anypurpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not ofBusiness Insights. Business Insights Ltd accepts no liability for the accuracy orcompleteness of the information, advice or comment contained in this ManagementReport nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for itscompleteness or accuracy.

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Table of Contents

The Top 10 Global Retail Banks

Growth strategies and best practices of the leading

players

Executive Summary 12

The global retail banking landscape in 2005 12

Best-practice company analysis: Citigroup 13

Best-practice company analysis: Fortis 14

Best-practice company analysis: Crédit Agricole 14

Best-practice company analysis: HSBC 15

Best-practice company analysis: Deutsche Bank 16

Best-practice company analysis: BNP Paribas 16

Best-practice company analysis: Royal Bank of Scotland 17

Best-practice company analysis: Barclays Bank 17

Best-practice company analysis: Credit Suisse 18

Best-practice company analysis: Bank of America 19

Chapter 1 Introduction 22

Report structure 22

Assessing the major influencers in global banking 22

Introducing the top 10 global banks 22

Chapter 2 The Global Retail Banking Landscape in 2005 26

Summary 26

Introduction 27

China 27

Central and Eastern Europe 28

iv

Mergers and acquisitions in retail banking 31

2005: entering a new M&A era 33

Global M&A in 2004 35

Will we witness a new wave of M&A, both domestic and cross-

border? 36

Basel II overview 37

Chapter 3 Best-Practice Company Analysis: Citibank 42

Summary 42

Citibank overview 43

The Citibank timeline 43

Financial analysis of Citigroup 44

Financial ratios for Citigroup 45

SWOT analysis of Citibank 46

Strengths 46

Weaknesses 47

Opportunities 47

Threats 48

Analysis of Citigroup in 2004 49

Chapter 4 Best-Practice Company Analysis: Fortis 52

Summary 52

Fortis overview 53

The Fortis timeline 54

Financial analysis of Fortis 55

Financial ratios for Fortis 55

SWOT analysis of Fortis 56

Strengths 56

Weaknesses 57

Opportunities 57

Threats 58

Analysis of Fortis in 2004 58

v

Chapter 5 Best-Practice Company Analysis: Crédit Agricole 60

Summary 60

Crédit Agricole overview 61

The Crédit Agricole timeline 62

Financial analysis of Crédit Agricole 63

Financial ratios for Crédit Agricole 63

SWOT analysis of Crédit Agricole 64

Strengths 64

Weaknesses 65

Opportunities 65

Threats 66

Analysis of Crédit Agricole in 2004 66

Chapter 6 Best-Practice Company Analysis: HSBC 68

Summary 68

HSBC overview 69

The HSBC timeline 70

Financial analysis of HSBC 71

Financial ratios for HSBC 71

SWOT analysis of HSBC 72

Strengths 73

Weaknesses 74

Opportunities 74

Threats 75

Analysis of HSBC in 2004 76

Chapter 7 Best-Practice Company Analysis: Deutsche Bank 79

Summary 79

Deutsche Bank overview 80

The Deutsche Bank timeline 81

Financial analysis of Deutsche Bank 82

Financial ratios for Deutsche Bank 82

vi

SWOT analysis 83

Strengths 83

Weaknesses 84

Opportunities 84

Threats 85

Analysis of Deutsche Bank in 2004 85

Chapter 8 Best-Practice Company Analysis: BNP Paribas 88

Summary 88

BNP Paribas overview 89

The BNP Paribas timeline 90

Financial analysis of BNP Paribas 91

Financial ratios for BNP Paribas 92

SWOT analysis 93

Strengths 93

Weaknesses 94

Opportunities 94

Threats 95

Analysis of BNP Paribas in 2004 95

Chapter 9 Best-Practice Company Analysis: Royal Bank of Scotland 98

Summary 98

The Royal Bank of Scotland overview 99

The Royal Bank of Scotland timeline 100

Financial analysis of the Royal Bank of Scotland 102

Financial ratios for Royal Bank of Scotland 102

SWOT analysis 103

Strengths 104

Weaknesses 104

Opportunities 105

Threats 105

Analysis of the Royal Bank of Scotland in 2004 106

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Chapter 10 Best-Practice Company Analysis: Barclays Bank 108

Summary 108

Barclays overview 109

The Barclays Bank timeline 111

Financial analysis of Barclays Bank 112

Financial ratios for Barclays Bank 112

SWOT analysis 113

Strengths 114

Weaknesses 114

Opportunities 115

Threats 115

Analysis of Barclays in 2004 116

Chapter 11 Best-Practice Company Analysis: Credit Suisse 118

Summary 118

Credit Suisse overview 119

The Credit Suisse timeline 119

Financial analysis of Credit Suisse 121

Financial ratios for Credit Suisse 121

SWOT analysis 122

Strengths 122

Weaknesses 123

Opportunities 123

Threats 124

Analysis of Credit Suisse in 2004 124

Chapter 12 Best-Practice Company Analysis: Bank of America 128

Summary 128

Bank of America overview 129

The Bank of America timeline 131

Financial analysis of Bank of America 132

Financial ratios for Bank of America 132

viii

SWOT analysis 133

Strengths 133

Weaknesses 134

Opportunities 134

Threats 135

Analysis of Bank of America in 2004 136

Chapter 13 Appendix 140

Definitions 140

Index 143

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List of Figures Figure 2.1: Composition of household assets, CEE 3 versus Euro region 30

Figure 2.2: FTSE 100 Performance 32

Figure 3.3: SWOT analysis of Citibank 46

Figure 4.4: SWOT analysis of Fortis 56

Figure 5.5: SWOT analysis of Crédit Agricole 64

Figure 6.6: SWOT analysis of HSBC 72

Figure 7.7: SWOT analysis of Deutsche Bank 83

Figure 8.8: SWOT analysis of BNP Paribas 93

Figure 9.9: SWOT analysis of the Royal Bank of Scotland 103

Figure 10.10: SWOT analysis of Barclays Bank 113

Figure 11.11: SWOT analysis of Credit Suisse 122

Figure 12.12: SWOT analysis of Bank of America 133

List of Tables Table 1.1: Top 10 global banks, by revenue income in 2003 23

Table 2.2: The top 10 foreign banks in Central and Eastern Europe 29

Table 2.3: Leading U.S. bank M&A deals 34

Table 3.4: Financial ratios for Citigroup 45

Table 4.5: Financial ratios for Fortis 55

Table 5.6: Financial ratios for Crédit Agricole 63

Table 6.7: Financial ratios for HSBC 71

Table 7.8: Financial ratios for Deutsche Bank 82

Table 8.9: Financial ratios for BNP Paribas 92

Table 9.10: Financial ratios for Royal Bank of Scotland 102

Table 10.11: Financial ratios for Barclays Bank 112

Table 11.12: Financial ratios for Credit Suisse 121

Table 12.13: Financial ratios for Bank of America 132

11

Executive Summary

12

Executive Summary

The global retail banking landscape in 2005

� Economists predict China's economy will grow by 7-7.5% in 2005 and a further

average of 6% annually during the coming two decadesi, making it the second

largest country in the world next to the United States by 2030 in financial terms.

� In terms of growth and profitability, Central Eastern European (CEE) countries

offer more prospects than the mature markets of Western Europe. Over the last

three years, loans in the CEE region increased by 12%, while within the Euro

region growth was 4% respectively. Personal loans have grown 20%, compared

with 6% in the Euro region, according to the European Banker.

� According to many industry experts, a new era of global banking giants is gradually

emerging. The existing global banks are HBSC and Citigroup, however, thanks to

merger and acquisition activity, there are other large groups joining the team,

namely JP Morgan Chase and Bank One (merger completed in July 2004) as well

as Bank of America and Fleet Boston (completed in April 2004). U.S. banks are

undoubtedly the leaders in forming large financial groups and some European

banks are starting to appear small by comparison with the likes of Bank of

America.

� The aim for Basel II Framework is to promote the “adequate capitalisation of banks

and to encourage improvements in risk management, thereby strengthening the

stability of the financial system”. This goal is to be accomplished by introducing

three pillars, where the first pillar represents a significant strengthening of the

i and International Investment Bank report

13

minimum requirements set out in the 1988 Accord, while the second and third

pillars represent innovative additions to capital supervision.

Best-practice company analysis: Citigroup

� Citigroup offers a wide range of financial products and services in 40 countries,

including retail banking, investment banking, life insurance and private banking,

targeting individual clients, small and large businesses, as well as both individual

and institutional investors.

� The United States represents the biggest market of Citigroup accounting for 64% of

total net income in 2003. Asia accounted for 10%, Japan 4%, Mexico 8%, EMEA

10% and Latin America 4%.

� In 1998 Citibank merged with Travellers Group, the insurance company, which at

the time was considered to be one of the most significant mergers in the financial

services industry, mainly because it was one of the first cross industry mergers,

where a bank would merge with an insurer in order to enhance its expertise and

product offering.

� In 2003, Citigroup's revenues increased 9% on 2002, reaching $77.4 billion, and the

net income from continuing operations of $17.85 billion was up 33% from the prior

year.

� Net interest margin for Citigroup has been relatively stable for the last few years,

and it is average in comparison to other U.S. banks, meaning that in terms of

profitability Citigroup is not doing exceptionally well, but it is maintaining its

stable level.

14

Best-practice company analysis: Fortis

� Fortis provides financial products and services to both retail and corporate

customers worldwide, and specializes in the areas of insurance, banking and

investments. The company has been formed through a joint venture between

AMEV/VSB, the Dutch bank insurer and AG Group, Belgian insurer.

� The retail banking part of Fortis, Fortis Bank, focuses on the distribution of retail

banking products (for the private banking operation Fortis uses the brand name

MeesPierson), and apart from the typical banking products, Fortis Bank also offers

asset management, bancassurance, and investment banking services.

� For the year 2003, net profit increased from €532 million to €2,197 million,

bringing return on equity for the year to 19% (compared with 4% in 2002). Fortis

obtained almost 30% of its revenues from Belgium. The Netherlands accounted for

almost 23% and United States nearly 27%.

� Return on equity ratio after a significant decrease in 2002 to 4, has now made an

impressive increase to19 in 2003, indicating that Fortis has recovered smoothly

from the financial problems due to the recession of 2002.

Best-practice company analysis: Crédit Agricole

� Crédit Agricole S.A. is the largest banking institution in France, serving 16 million

customers in 60 countries worldwide.

� Crédit Agricole is a diversified retail banking group and one of Europe's leading

service providers in banking, it is the largest banking company in France in terms

of market share, earnings and total capital.

� In 2003 Crédit Agricole, acquired Crédit Lyonnais, and in June of that year,

France’ highest administrative court maintained the approval for the deal to go

15

ahead. This acquisition has strengthened Crédit Agricole’s position not only in

France, but also in Europe.

� The overall net banking income of the company for the fiscal year ended December

2003 was €23.9 billion, compared with €22.1 billion in 2003. The French retail

banking segment contributed 15% of net banking income and the asset

management; insurance and private banking segment accounted for 29% of the total

net income.

� The net interest margin for Crédit Agricole has been lower than the French average

for some time. The profitability of French banks is lower than UK and Spanish

banks - the average net interest margin in France was 0.69 in 2003, 2.0 in the UK

and in Spain the same margin was more than 2.5. This reinforces that French banks

suffer from low profitability.

Best-practice company analysis: HSBC

� HSBC operates a global network of more than 9,500 offices in 79 countries and

territories. The bank provides a comprehensive range of financial services to

personal, commercial, corporate, institutional and investment banking (including

private banking) clients.

� For the fiscal year ending December 2003, HSBC reported operating income of

$41.07 billion, an increase from $26.60 billion in 2002. The large rise in income

was due to the acquisition of Household in March 2003 and HSBC Mexico in

November 2002.

� Net interest margin, a guide to the profitability of a company's investments, has

been one of the highest in the UK, indicating that HSBC is maintaining its

profitability.

16

Best-practice company analysis: Deutsche Bank

� Deutsche Bank is the one of the four largest banks in Germany and has a strong

position in Europe. It offers a full range of corporate and investment banking,

private clients and asset management products and services. The company has an

extensive global presence, serving more than 13 million customers in over 75

countries, although dependence on its domestic market is still high.

� For the fiscal year ended December 2003, Deutsche Bank generated €21,268

million in revenues, compared with €26,547 in 2002, a decline of almost 20%.

� Cost to income ratio for Deutsche Bank is higher than the German average of 77,

indicating that the company is not being operated efficiently, while return on equity

ratio for Deutsche Bank is one of the worst ratios for the company (however in line

with the German average) and indicates that not only Deutsche Bank but most of

the German banks are having difficulties achieving a reasonable return on equity.

Best-practice company analysis: BNP Paribas

� BNP Paribas was formed in 1999 after a merger between BNP and Paribas. BNP

Paribas is a retail bank in France, distributing its products and services to about six

million individual customers and around 450,000 businesses and self-employed

professionals through its 2,100 plus branches and via its new Internet and telephone

distribution channels. It also has a presence in over 80 different countries.

� For the fiscal year ended December 2003, BNP Paribas generated revenues of

€17,935 million, up 6.8% on the previous year. Net income for the year totalled

€3,761 million.

� Net interest margin is a guide to the profitability of a company's investments, and

the higher it is the better it is for the bank, and BNP Paribas ratio twice that of an

average French bank, indicating strong profitability. Cost to income has been much

lower than the French average, meaning that BNP Paribas is run efficiently with

strong financial performance.

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Best-practice company analysis: Royal Bank of Scotland

� The Royal Bank of Scotland is the largest bank in Scotland and the second largest

in the United Kingdom. It specializes in many different areas of financial services.

The company provides insurance products, private banking (through the acquired

Coutts), corporate, retail, commercial and offshore banking.

� In terms of retail banking, the Royal Bank of Scotland and NatWest operate the

largest retail-banking network in the UK serving over 13.7 million personal

customers and 1.1 million small business customers.

� In March 2000, RBS acquired National Westminster Bank following a long take-

over battle with rival Bank of Scotland. The deal, worth £21 billion, was one of the

largest of its kind in British banking. The merger made RBS the second largest

bank in the UK, and one of the top 10 in Europe.

� For the fiscal year ended December 2003 the Royal Bank of Scotland Group

reported revenues of £19,229 million, an increase of 14% against 2002 revenues

that were £16,815 million. Corporate Banking & Financial Markets accounted for

33%, Retail Banking for 21%, Wealth Management for 9%, and RBS Insurance for

4% of 2003 revenues.

� The return on equity ratio for RBS is higher than the UK banking average of 15,

and it is still on the increase. Although the recession years of 2001 and 2002 saw a

decline, the ratio was still positive and picked up again in 2003.

Best-practice company analysis: Barclays Bank

� Barclays is the UK's third largest banking company and its focus is in retail

banking, investment banking and investment management. Through its subsidiary

Barclays Bank, the company operates about 2,000 offices in the UK.

� In 2003, operating income at Barclays increased by 10% to £12,411 million,

compared with £11,327 million in 2003. Operating expenses rose by 9% £7,253

18

million, compared with £6,624 million in 2002. Restructuring costs amounted to

£209 million, and operating profit rose by 18% to £3,812 million, compared with

£3,218 million in 2002. Profit before tax rose by 20% to £3,845 million.

� Cost to income for Barclays shows a positive result, and Barclays had one of the

lowest cost to income ratios among UK banks, indicating that it is managed

efficiently, and profitability is likely to return in the near future.

Best-practice company analysis: Credit Suisse

� Credit Suisse Group is the second-largest financial services firm in Switzerland,

provides a wide range of financial and asset management services through Credit

Suisse Private Banking, Credit Suisse First Boston, and Credit Suisse Asset

Management. The company also offers banking and insurance services, using

various channels through Credit Suisse Financial Services and Winterthur Group.

� For the fiscal year ended December 2003, the company generated revenues of

$20,676 million (CHF26, 322 million), and net income for the year was CHF1, 861

million ($1,473 million).

� Net interest margin, a guide to the profitability of a company's investments, has

been stable but relatively low for Credit Suisse, indicating that this ratio could be

improved in the future.

� Cost to income ratio has been high in 2002 and 2003; indicating that year 2002 was

a difficult year for the company. Such high cost to income ratio shows that the

company is not managed efficiently and should work towards decreasing this ratio.

19

Best-practice company analysis: Bank of America

� Bank of America provides a diversified range of banking and non-banking financial

services and products through its various subsidiaries. It serves 28 million

customers, managing assets of $474,000 million. It also provides services to 25,000

midsize companies and 2 million small businesses.

� In October 2003, Bank of America reached an agreement for a $47 billion take-

over of FleetBoston Financial Corporation, to create the United States' second-

biggest bank by assets.

� Bank of America Corporation generated revenues of $38,529 million in 2003, up

9.8% on the previous year. The company also recorded record net earnings of

$10,810 million, up 17% on 2002.

� Bank of America’s net interest margin has been high, much higher than the U.S.

average of 2.7 indicating that the bank is achieving high profitability levels. Cost to

income, the key ratio for the operative expenditure-profitability has been relatively

low for the bank, in line with the U.S. average, (however much lower than most

European banks) indicating a higher efficiency level.

21

Chapter 1

Introduction

22

Chapter 1 Introduction

Report structure

Assessing the major influencers in global banking

This chapter looks at the most important issues surrounding global retail banking, and

attempts to analyze the main forces affecting retail banking at present. These issues

include the growth markets of China and the new EU member states, as well as Basel II

and trends in mergers and acquisitions in Europe.

Introducing the top 10 global banks

The chapters that follow have been written to a templatized formula, providing

comprehensive information on each of the top 10 global banks. Each chapter includes

an overview of the company’s main activities, its history, financial analysis,

comprehensive SWOT analysis and analysis of the current company status. The

companies profiled in this report are:

1. Citigroup

2. Fortis

3. Crédit Agricole

4. HSBC

5. Deutsche Bank

6. BNP Paribas

7. Royal Bank of Scotland

8. Barclays Bank

9. Credit Suisse

10. Bank of America

23

These companies are considered to be the largest and the most important banks

globally. The main purpose for presenting these companies in this report is to highlight

examples of best practice among banks, analyzing the reasons behind the growth of

these businesses, and indicating any potential problems they could face in the short-

term future. In this way, these profiles serve as examples for other financial services

providers of what strategies to implement in order to expand their businesses and

achieve higher profitability. One of the important characteristics of the majority of

these profiles (as shown in the table below) is the decrease in revenues in 2002-2003

due to the global recession. This aspect of insurance business is analyzed within the

profiles, in most cases indicating that there are signs of recovery among global insurers

for 2005.

Table 1.1: Top 10 global banks, by revenue income in 2003

U.S.$million 2003 1. Citigroup 45,883 2. Fortis 60,349 3. Crédit Agricole 6,974 4. HSBC 41,070 5. Deutsche Bank 75,790 6. BNP Paribas 23,471 7. Royal Bank of Scotland 36,079 8. Barclays Bank 21,253 9. Credit Suisse 20,676 10. Bank of America 38,529

Source: Author analysis of annual reports Business Insights

25

Chapter 2

The Global Retail Banking Landscape in 2005

26

Chapter 2 The Global Retail Banking Landscape in 2005

Summary

� Economists predict China's economy is expected to grow by 7-7.5% this year,

and according to a report by the International Investment Bank, China's economy

is forecast to grow at an average 6% annually during the coming two decades,

and become the second largest in the world next to the United States by 2030.

� In terms of levels of growth and profitability, CEE countries offer more prospects

than the mature markets of Western Europe. Over the last three years, loans in the

CEE region have increased by 12%, while within the Euro region, the growth was

4% respectively. Personal loans have grown 20%, compared with 6% in the Euro

area, according to European Banker.

� According to many industry experts, a new era of global banking giants is

gradually emerging. The existing global banks are HBSC and Citigroup,

however, thanks to M&A, there are other large groups joining the team, namely

JP Morgan Chase and Bank One (merger completed in July 2004) as well as

Bank of America and Fleet Boston (completed in April 2004). U.S. banks are

undoubtedly the leaders in forming large financial groups, and some European

banks are starting to look small by comparison with the likes of Bank of America.

� The aim for Basel II Framework is to promote the “adequate capitalization of

banks and to encourage improvements in risk management, thereby strengthening

the stability of the financial system”. This goal is to be accomplished by

introducing three pillars, where the first pillar represents a significant

strengthening of the minimum requirements set out in the 1988 Accord, while the

second and third pillars represent innovative additions to capital supervision.

27

Introduction

This chapter looks at the most important issues surrounding global retail banking, and

attempts to analyze the main forces affecting retail banking at present. These issues

include the growth markets of China and the new EU member states, as well as Basel II

and trends in mergers and acquisitions in Europe.

China

China, now a member of the World Trade Organisation since 2001, has become a

promise land to many global financial services companies, including banks, and also

insurers. It is difficult to come across a global company who is not investing or

planning to expand, in China. According to analysts, the potential for growth is

enormous. China opened its market to foreign companies on a limited experimental

basis in 1992, however with entering the WTO, the opportunities are much wider and

gradually all the restrictions are being eliminated. Economists predict China's economy

is expected to grow by 7-7.5% this year, and according to a report by the International

Investment Bank, China's economy is forecast to grow at an average 6% annually

during the coming two decades, and become the second largest in the world next to the

United States by 2030.

According to the Standard Chartered's chief executive officer of China, foreign banks

cannot take more than 10% of the China market in terms of assets until the year 2010.

Foreign banks will still be subject to some restrictions over their business licensing, but

China will remove its geographical and client restrictions on foreign banks to conduct

business on December 11, 2006.

China, although it is experiencing higher growth than other economies, and offers

many prospects for foreign banks to invest, is not an easy market to expand into,

28

mainly due to the above mentioned restrictions, and the fact that China is such a

heavily regulated market.

According to an article “China's market is not so lucrative “published in the Financial

Times on December 4, 2004, “the fact is that foreign earnings from the Chinese

economy have increased quickly, but from a low base. Indeed, many foreign businesses

in China are still struggling to make money at all. We know this from surveys such as

the one conducted annually by the American Chamber of Commerce. Even in 2003 -

when the economic environment was extraordinarily favorable - most respondents were

unable to achieve a profit margin above their global average.”

All these potential obstacles have to be taken into account when considering expansion

in China, nevertheless, it is the global, most powerful businesses that stand the best

chance to establish themselves and profit from this impressive growth that China has

been experiencing. Although the Chinese market might seem difficult to enter, the fact

that it offers returns not seen in Europe for a long time means that banks will try to

overcome the difficulties.

Central and Eastern Europe

In May 2004, 10 Central and Eastern European countries (CEE) joined the EU. This

accession is expected to have a positive impact on the stability of the financial services

in these countries, and also have a favorable effect on the ‘old’ member states. Already

at the beginning of the year 2005, less than a year after the accession, ratings agency

Fitch upgraded its ratings of 13 CEE banks following the introduction of new sovereign

ratings for EU accession markets.

In terms of levels of growth and profitability, CEE countries offer more prospects than

the mature markets of Western Europe. Over the last three years, loans in the CEE

region have increased by 12%, while within the Euro are the growth was 4%

29

respectively. Personal loans have grown 20%, compared with 6% in the Euro area,

according to European Banker.

With the growing demand for financial services products and services, and consumer

goods, some of the foreign banks and financial services companies offering consumer

credit have entered the CEE markets, and have been offering personal loans, credit

cards, mortgages, car loans and retail finance for some time already. Examples of

companies who have entered the CEE markets include GE, Citibank, Cetelem

(subsidiary of BNP Paribas, Banco Santander, and Sofinco (owned by Crédit Agricole).

Table 2.2: The top 10 foreign banks in Central and Eastern Europe

Bank CEE bank assets % share

€ billion

1. KBC 24.2 11.5 2. Erste Bank 22.7 10.8 3. Bank Austria Creditanstalt 19.7 9.3 4. UniCredito Italiano 17.3 8.2 5. Citigroup 12.7 6.0 6. Société Generale 12.3 5.8 7. RZB 12.0 5.7 8. Banca Intesa 11.7 5.5 9. ING 10.4 5.0 10. Commerzbank 6.7 3.2

Notes: Percentage share of all CEE bank assets owned by foreign banks

Source: European Banker/Bank Austria Creditanstalt Business Insights

Markets of Poland, Czech Republic and Hungary, considered the most developed in the

CEE region, have witnessed companies like Household International (subsidiary of

HSBC), and Provident Financial, enter these markets with their offering in sub-prime

lending sector.

Although loans have been growing fast in the CEE region, there is still great potential

for development in this sector, since loans represent only 34% of GDP in the CEE

region, compared to 102% in the Euro area, according to European Banker. Over the

30

next 10 years Mr Bruckbauer, an economist with Bank Austria Creditanstalt expects

that lending in CEE region will increase by 14% per year, and will increase to 59 of

GDP in 2013. In terms of deposits, CEE region accounts for 44% of GDP, compared to

73% in the Euro area. Banks deposits account for 69% of personal sector assets in

Hungary, Poland and the Czech Republic (the CEE 3), compared to 44% in the Euro

area, where insurance and pension funds and mutual funds are popular investment

alternatives to deposits.

The fact that these countries are now EU members, and now have to comply with the

EU regulations, makes it easier for the Euro area businesses to invest in the region,

since the they can expect the same requirements and laws as in their home markets.

Foreign banks now account for 75% of bank assets in the CEE region compared to 24%

in the Euro area.

Figure 2.1: Composition of household assets, CEE 3 versus Euro region

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CEE 3 EURO region

Deposits

Insurance

and pension

funds

Mutual funds

69%

21%

10%

44%

38%

18%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Deposits

Insurance

and pension

funds

Mutual funds

69%

21%

10%

44%

38%

18%

Notes: CEE 3 includes Poland, Hungary and the Czech Republic. Euro area is represented by the weighted average

Source: Bank Austria Creditanstalt Business Insights

With 274 inhabitants per bank employee in the CEE region, compared to 136 in Euro

region markets, Bank Austria Creditanstalt research indicates that the CEE markets are

underbanked: "There are many indicators that the banking market in Central and

31

Eastern Europe will maintain the strong growth achieved in the past few years,"

according to Mr Kager from Bank Austria Creditanstalt.

According to Mr Rybinski, deputy governor of the National Bank of Poland, the central

bank, “The Polish banking sector is very dynamic and very stable. Bank credit risk

procedures are good.” There are of course some downsides to the expansion in CEE

region, since the 2002 recession has hit the businesses in the region even harder than in

the Euro area, and businesses in the CEE are rather cautious about taking on new loans

(Credits to non-financial companies fell 2.1% in the first eight months of 2004, mainly

because of stricter banks’ credit rules).

An example of retail banks which have already benefited from the growth opportunities

in the CEE region, faced with limited potential in their home markets, include the

Austrian banks Erste Bank, BACA and RZB, as well as (KBC and ING from the

Benelux region and Portugal's Banca Comercial Português. According to the RZB

spokesman Michael Palzer, (interview with the European Banker) "It is becoming more

and more questionable that we can prolong the growth in the CEE region, which has

around 350 million people, from Austria with a population of only 8 million people."

Mergers and acquisitions in retail banking

Global banks have just enjoyed one of their most profitable periods for some years,

maintained by higher levels of consumer borrowing and low bad debt provisions, and

as the European banks have seen return on equity improve to 14% from 11% in 2002,

the idea of cross-border consolidation following Spanish Banco Santander’s bid for

Abbey National, the UK bank, is becoming more evident.

Looking back, years 2001 and 2002 have witnessed a rapid decline in stock market

growth worldwide resulting in investors’ assets decreasing in value, with the German

index, the DAX, having suffered the most, falling by 58.4% in the period 1999 and

32

2002. In 2003 equities recovered sharply, performing well around the globe, something

that all investors have been looking forward to, after two years of worldwide recession.

Figure 2.2: FTSE 100 Performance

Source: FTSE Group Business Insights

Stock market performance has a direct impact on the M&A activity globally, and

higher stock market prices encouraged a greater number of transactions in which stock

was the acquisition consideration. Therefore during the time when stock market

performance and returns were positive, M&A activity was at its peak. This trend was

reflected in recent years, when in 2001 and 2002 stock markets declined significantly,

while 2003 saw slight improvement in both directions, and 2004 showed signs of active

recovery.

The most difficult year for financial institution was 2002, when both banking and

insurance sectors were experiencing difficult market conditions. These difficulties, both

economic and financial, meant that many companies had to change their long-term

strategies, especially regarding expansion and consolidation. In most cases, both banks

33

and insurers had to focus their efforts primarily around their home markets, since

declines in equity markets worldwide meant that safer investments were sought and

businesses were facing problems with raising capital market funding. The main strategy

adopted by financial institutions at the time was to limit the presence in foreign markets

and focus on their core activities in the home markets. However, banks with an

established presence within the EU and also in Central Eastern Europe, in many cases

experienced more favorable conditions, thanks to their strong position in more than one

market, which offers wider access to different distribution channels to maintain some

level of profitability.

Fewer M&A deals were completed in 2002 mainly because both banks and insurers

were scaling down their operations by reducing costs and expansion plans. The main

reason why the year 2002 witnessed such changes was the worldwide economic

recession and stock market downturns, discussed earlier in this chapter. The great

majority of M&A completed during in 2002 centered on smaller companies in domestic

markets, where merging with other businesses was the best way to survive in the

increasingly competitive markets. This in turn further increased consolidation and

competition in Europe.

2005: entering a new M&A era

According to many industry experts, a new era of global banking giants is gradually

emerging. The existing global banks are HBSC and Citigroup, however, thanks to

M&A, there are other large groups joining the team, namely JP Morgan Chase and

Bank One (merger completed in July 2004) as well as Bank of America and Fleet

Boston (completed in April 2004). U.S. banks are undoubtedly the leaders in forming

large financial groups, and some European banks are starting to look small by

comparison with the likes of Bank of America which has a market capitalization of

£100 billion. The $58 billion take-over of Bank One by JP Morgan Chase in 2004 and

Bank of America’s $47 billion take-over of FleetBoston Financial in the same year,

have created giants with vastly greater capital bases and resources than their European

competitors. Some U.S. giant banks are now close to the limitations of the market share

34

of deposits they are permitted to acquire under U.S. rules. Instead they are seeking

possible acquisition targets outside of the States, particularly in Europe.

Table 2.3: Leading U.S. bank M&A deals

Announced Target Acquirer Transaction

Value (in billion)

Jan, 2004 Bank One J.P. Morgan Chase $60.0 Oct, 2003 FleetBoston Financial Bank of America $49.3 Oct, 2000 U.S. Bancorp, Minneapolis Firstar, Milwaukee $21.1 Sep, 2000 J.P. Morgan & Co Chase Manhattan $33.6 March, 1999 BankBoston, Boston Fleet Financial Group $15.9 June, 1998 Wells Fargo Capital Norwest, Minneapolis $34.4 April, 1998 First Chicago NBD Banc One, Columbus $29.6 April, 1998 BankAmerica NationsBank, Charlotte $61.6 April, 1998 Citicorp Travelers Group $72.6 Nov, 1997 CoreStates Financial, First Union, Charlotte $17.1

Source: United States TODAY research Business Insights

The domestic expansion in banking is under way, which will increase consolidation

even further, eventually leading to more cross-border mergers. Many European, Asian,

and U.S. businesses are now considering geographical expansion as part of their

business development strategy, which in turn means the creation of significantly larger

financial groups. This subsequently means that smaller companies will be forced to

consider M&A deals in order to compete with the growing number of multinationals.

According to Mr. Soudah of Millenium Associates, there is still scope for further

consolidation in the United States and the creation of more financial giants. Even if

some of the mergers and acquisitions do not take place, it is certain that financial

services companies are increasingly looking for partners to enable them to offer a wider

range of products and boost their position in such a competitive marketplace.

Mergers and acquisitions are becoming an increasingly popular subject of global

discussions. This is primarily because M&A now more concerns large institutions

merging, which undoubtedly have a significant impact on the shape of the global

financial services industry, especially if they are cross-border. M&A activity is mainly

taking place within the banking industry, however insurers have also started to take

35

part in the M&A process. The search for new distribution channels and a wider client

base have led many businesses to at least consider the possibility of merging with

another company or form joint ventures or partnerships. M&A has always been a

fundamental part of the European banking arena, however in recent years technological

developments have further accelerated the process. Talks about the creation of

universal banks and financial groups has been on the agenda for some time now, and

only the recession of 2002 slowed the process, however, once the financial services

companies have regained their financial strength and confidence, the process will

continue, at an even faster rate.

Global M&A in 2004 � In the first half of 2004, the deals involving European targets reached the value of

$266 billion, while those where a U.S. company was the target, totaled $394

billionii;

� According to Citigroup analysisiii, global M&A transaction volumes for 2004 can

be expected to be around 29% higher than the figures recorded for 2003, with

domestic M&A remaining the major type of deal. According to Paulo Pereira, Head

of European M&A at Morgan Stanley: “In the early stages of M&A recovery, the

proportion of domestic transactions tends to be much higher than that of cross-

border deals”;

� Some analysts thought that the strength of the Euro against the dollar would result

in more deals between the United States and Europe, however the weak European

economy in recent years meant that it was primarily the United States targeting

Europe, rather than vice versa. According to an industry expert from Millenium

Associates, Mr. Soudah, if one of the larger U.S. companies decides to merge or

ii The Financial Times, August 2004

iii Thomson Financial

36

acquire in Europe, this is likely to have a significant impact on M&A activity in

Europe, since such a move would spread the fear of increased competition and

potentially, further acquisitions. This impact is likely to be reflected in increased

M&A activity among companies in Europe: “The level of activity in Europe is

dramatically different from that in the United States,” according to Don Johnston,

Head of European M&A at Deutsche Bank in London. “There is a number of

factors at work, not least of which is a fundamental lack of confidence,” he added.

“Equity markets are still turbulent, and while corporate profitability is on the rise in

Europe, that is still not enough to spur CEOs to do the transformational deals”;

� Wealth management acquisitions have also been taking place. For example, HSBC

and Bank of America are acquiring banks with large private banking operations.

HSBC recently acquired Bank of Bermuda - a bank with a significant presence in

private banking. Other banks involved include UBS, since the company acquired

the German private client business of Merrill Lynch. Barclays is buying Gerrard

Management Services, the UK private client manager, from Old Mutual. Coutts is

buying Bank von Ernst, the Zurich-headquartered private banking subsidiary of

Germany's Bayerische Hypo-und Vereinsbank (HVB).

Will we witness a new wave of M&A, both domestic and cross-border?

In fact, the wave of M&A has already started, although to the end of 2004 it has

primarily centered on the United States (JP Morgan Chase with Bank One, and Bank of

America with Fleet Boston). Since the U.S. banks are expanding, with Citibank ahead

of the game, once expansion in the home market has reached its limit, the following

step will be to look cross-border. Europe is not the only investment target, emerging

markets in Asia are also looking increasingly attractive, especially China.

According to industry experts, the M&A activity will be driven by the largest financial

services institutions, such as Citibank, which will lead the way forward. Others will

mainly focus on maintaining their position in the domestic market. However, this

prediction, expressed by many analysts, has its shortcomings. There is a limit as to how

big the company can become. The main problem is that the creation of mega financial

37

institutions may jeopardize financial stability and influence the level of competition in

the given market, which is where the competition commission comes into play in order

to safeguard the market. In some countries, high levels of concentration are already

creating causes for concern in relation to anti-competitive rules, while in others highly

fragmented markets lead to the overall weakness of the banking sector. Therefore,

when discussing the future of M&A, it is important to consider the specific features of

individual markets. It is necessary to take into account the fact that competition is

being taken seriously by the national governments as well as the EU Competition

Commission - their decisions will also influence the future of M&A in Europe, not just

the desire and expansion plans designed by individual institutions.

For more information about M&A in Europe, please refer to the Business Insights’

report “Mergers and Acquisitions in European Financial Services”, published in

November 2004

Basel II overview

The International Convergence of Capital Measurement and Capital Standards: a

Revised Framework, or the ‘Basel II Framework’, “offers a new set of standards for

establishing minimum capital requirements for banking organisationsiv”.

The aim for the Basel II Framework is to promote the “adequate capitalisation of banks

and to encourage improvements in risk management, thereby strengthening the stability

of the financial system”. This goal is to be accomplished by introducing three pillars,

where the first pillar represents a significant strengthening of the minimum

iv Bank for International Settlements

38

requirements set out in the 1988 Accord, while the second and third pillars represent

innovative additions to capital supervision.

Basel II is therefore likely to affect bank sectors, for example, lending, because it cuts

the amount of capital many mortgage lenders need to allocate against loans on

residential property. According to a study of 97 bank by consultants SAP and

Accenture, more than half of the banks surveyed expected to increase the amount of

unsecured retail loans as a result of Basel II. The banks also expected a decline in

lending to corporates, while some believed the changes introduced by Basel II would

force banks to restructure their core businesses and look for new merger targets.

Private banking is likely to benefit the most from the introduction of Basel, according

to Pierre Mathe, head of Société Generale's private banking divisionv. He said: “Banks

were already investing more in private banking, through acquisitions or internal

growth, ahead of the Basel II rules, designed to match capital requirements more

closely to the levels of risk in different activities. Private banking is less risky than

areas such as corporate finance, because of its higher quality of assets and more

reliable clients. So it should be a big beneficiary from the new rules”.

Basel II distinguishes between banks with simple operations that can take a

"standardized" approach to capital adequacy and those with more complex activities

that can apply an "internal ratings based" approach. This approach in turn identifies

"foundation" banks that base their calculations on criteria set by their regulator and

"advanced" banks that can calculate weightings based on their own internal estimates.

The standardized approach applies risk weightings according to the credit rating

allocated to the debt.

v Quoted in the Financial Times in December 2004

39

According to George Anastasiadis, Director of the Economic Development &

Transition Unit, CITY, Affiliated Institution of the University of Sheffield: “Basel II

will allow banks to expand their lending activities in retail banking, since the risk

weights in consumer and mortgage credits are low. The smaller banks will be faced by

considerable expenditure and those with less favorable credit structure will have to

change their portfolios. All large banks will definitely choose Basel II, except the

larger [banks], who have no choice”.

Ideally, the regulators would like all core banks to have implemented their Basel II

programs by the end of 2006. This would mean that in the following year they could

test the new approach while still calculating their regulatory capital under the

provisions of Basel I; a process referred to as "parallel running." And if all goes

according to plan, the Basel II rules would take effect in early 2008.

Most of the discussions between banks and regulators over the last four years has

centered on the relative risk weightings of different asset classes - the above mentioned

first pillar of the new accord. The lowering of capital requirements for retail products

such as residential mortgages is expected to encourage banks to shift more capital

towards consumer finance operations, at the expense of investment banking and

structured finance products such as securitization. The other two pillars of Basel II

have attracted less attention, with their promises of improved disclosure by banks and

more intense supervision by regulators.

The use of internal risk management systems is central to Basel II. Banks can opt to use

either a “standardized” approach, in which their capital requirement will continue to be

set by their national regulator, or an approved internal ratings system, based on their

own experience of the performance of their assets.

Most large European banks are expected to opt for the internal system. This is more

expensive because it requires the gathering and processing of much more data; usually

five years’ of history for a particular asset class. However, the more precise

40

measurement of actual risks is expected to lead to a lower capital charge compared

with the standard approach, making it an attractive option that will allow banks to

pursue a competitive advantage over rivals through the more efficient use of capital.

Basel II has provided banks with a huge incentive to improve their risk management

systems. It aims to provide regulators and financial analysts with better information to

assess their relative performance.

41

Chapter 3

Best-Practice Company Analysis: Citigroup

42

Chapter 3 Best-Practice Company Analysis: Citibank

Summary

� Citigroup offers a wide range of financial products and services in 40 countries,

including retail banking, investment banking, life insurance and private banking,

targeting individual clients, small and large businesses, as well as both individual

and institutional investors.

� The United States represents the biggest market of Citigroup accounting for 64%

of total net income in 2003. Asia accounted for 10%, Japan 4%, Mexico 8%,

Europe, Middle East and Africa (EMEA) 10% and Latin America 4%.

� In 1998, Citibank merged with Travellers Group, the insurance company, which

at the time was considered to be one of the most significant mergers in the

financial services industry. This was one of the first cross industry mergers,

where a bank would merge with an insurer in order to enhance its expertise and

product offering.

� In 2003, Citigroup's revenues increased 9% on 2002, reaching $77.4 billion. The

net income from continuing operations of $17.85 billion was up 33% from the

prior year.

� Net interest margin for Citigroup has been relatively stable for the last few years

and average in comparison to other U.S. banks, reflecting the fact that in terms of

profitability Citigroup may not be doing exceptionally well, but managing to

maintain its stable level.

43

Citibank overview

Citibank forms the consumer and corporate banking division of Citigroup, one of the

largest financial services companies worldwide. Citigroup offers a wide range of

financial products and services in 40 countries, including retail banking, investment

banking, life insurance and private banking, targeting individual clients, small and

large businesses, as well as both individual and institutional investors. Citigroup

operates primarily in the United States, but it has an extensive network in Asia, Europe,

Latin America, the Middle East and Africa. Citibank is the consumer and corporate

banking subsidiary owned by Citigroup. The company has operations in over 100

countries, providing a range of financial solutions aimed at individual clients, small

business, and larger corporations and institutions.

The United States represents the biggest market of Citigroup accounting for 64% of

total net income in 2003. Asia accounted for 10%, Japan 4%, Mexico 8%, EMEA 10%

and Latin America 4%.

The Citibank timeline

Citibank was created in 1812 as City Bank of New York. It began operating

internationally in 1902, when it opened offices in Asia. The company started expansion

in 1918 with the acquisition of International Banking Corporation, a U.S. overseas

bank and later merged with the Farmers' Loan and Trust Company, to become the City

Bank Farmers Trust Company. In 1955, the company changed its name to The First

National City Bank of New York, and in 1962 this was shortened to the First National

City Bank. Later on, in the 1970s, the bank yet again changed its name to Citibank,

N.A. (for National Association), while the First National City Corporation holding

company became Citicorp, the parent of Citibank.

44

Further expansion of Citibank was marked by the acquisition of Diners Club in 1981,

and in 1993 it merged the savings banks it acquired in 1980s under the Citibank

umbrella. At the same time its global expansion continued, including the opening of a

bank in Russia in 1994 and a branch in China, 1995, as well as in Vietnam.

In 1998 the bank merged with the insurance company Travellers Group, which was

considered to be one of the most significant mergers in the financial services industry.

This was mainly because it was one of the first cross industry mergers, where a bank

would merge with an insurer in order to enhance its expertise and product offering.

Following this, all Citicorp (parent of Citibank) and Travelers Group divisions merge

to become Citigroup.

In 1999 Citibank bought Financiero Atlas, the second largest consumer finance

company in Chile, and in 2000 Citibank became the first international bank to open a

full-service branch in Israel. In 2002 Citibank announced it was to open retail-banking

operations in Moscow, and in the same year announced a co-operation agreement with

Galaxy Securities, China's leading brokerage. This was followed by a purchase of a

minority stake in China-based Shanghai Pudong Development Bank in January 2003.

The company also launched Citibanking in Malaysia in March 2004, and June 2004

saw the opening of a first dedicated CitiGold Wealth Management Center, designed to

meet growing demand for wealth management services in Shanghai.

Financial analysis of Citigroup

In 2003, Citigroup's revenues increased 9% on 2002, reaching $77.4 billion, and the net

income from continuing operations of $17.85 billion was up 33% from the prior year.

For Global Consumer Group (Citibank is part of this division of Citigroup), net income

totaled $4.2 billion in 2003, compared with $3.2 million in 2002.

45

Financial ratios for Citigroup

Table 3.4: Financial ratios for Citigroup

1999 2000 2001 2002 2003 Net Interest Margin 3.5 4.1 4.3 4.2 3.9 Cost To Income Ratio 68 66 65 57 56 Return On Avg. Equity (ROAE) 19 21 18 17 18

Source: Bank’s annual accounts and author’s calculations Business Insights

� Net interest margin for Citigroup has been relatively stable for the last few years. It

is average in comparison to other U.S. banks, meaning that in terms of profitability

Citigroup is not doing exceptionally well, but it is maintaining a stable level.

� The cost to income ratio for Citigroup has shown a decline in the recent years,

indicating an improvement in the bank’s efficiency. It remains in line with the

average level for U.S. banks, which was 60 in 2003.

� Return on equity ratio for Citigroup has been stable and higher than the U.S.

banking average of 12, indicating that the company is relatively effective in

generating profits.

46

SWOT analysis of Citibank

Figure 3.3: SWOT analysis of Citibank

•Size of the business: strong brand,

extensive network, largest global bank

•Global reach through acquisitions

•Financial strength

•Focus on growth markets

•Continue with the expansion

•Continue its strategy of innovation

•Growing interest in emerging markets

•Weakened reputation

•Company’s size and reach: more difficult to

Manage and maintain corporate goals

•Uncertain economic conditions and

unfavourable legal battles

•Risks in the emerging markets

•Foreign exchange risk

Strengths Weaknesses

Opportunities Threats

•Size of the business: strong brand,

extensive network, largest global bank

•Global reach through acquisitions

•Financial strength

•Focus on growth markets

•Continue with the expansion

•Continue its strategy of innovation

•Growing interest in emerging markets

•Weakened reputation

•Company’s size and reach: more difficult to

Manage and maintain corporate goals

•Uncertain economic conditions and

unfavourable legal battles

•Risks in the emerging markets

•Foreign exchange risk



Source: Author analysis Business Insights

Strengths

Thanks to the vast size of the company, Citigroup operates an extensive financial

services network worldwide. The company enjoys a strong position in many countries,

including Europe and Asia, which combined with a strong brand, means that Citigroup

has a unique position in the retail banking market. Because of its size it is able to

provide a complete range of products and services to its customers.

Global reach through acquisitions: Citigroup has completed many acquisitions in its

history, and it is aiming for more, at the moment targeting Germany and Asia. The

company has made acquisitions one of its key methods in achieving successful growth,

47

carefully selecting its acquisition targets. Being able to identify successful acquisition

targets in a unique skill and Citigroup has mastered it well.

Financial strength: Citigroup is well protected against unfavorable economic conditions

and turbulent times. This was especially evident during the 2002 recession, when many

banks experienced significant financial losses, and Citigroup managed to maintain its

profitability levels. Citibank enjoys the financial backing of Citigroup and is therefore

able to approach new business opportunities with less anxiety than smaller retail banks,

as well as receive more financial backing to fund its new business ideas.

Focus on growth markets: Citibank is known for its focus on emerging markets, for

example by launching retail-banking operations in Moscow. It is also focusing on

building strength in China.

Weaknesses

Weakened reputation: although Citigroup is one of the strongest financial companies

worldwide, the investigation into the practices of its subsidiary Salomon Smith Barney

in 2002 had a negative impact on Citigroup’s reputation. The investigation of Salomon

Smith Barney stock fraud was based on findings that stock analysts misled investors

about stocks’ performance. Another PR problem surfaced when Citigroup was accused

of tricking their customers into taking out overly expensive loans.

Company’s size and reach: this can be a positive as well as a negative aspect, since the

large size makes the company more difficult to manage and to control its corporate

culture and values.

Opportunities

Continue with the expansion: Citigroup can maintain its strategy of expansion through

acquisitions, and continue to grow. It is increasingly evident that Citigroup is looking

to expand in Europe, and Germany seems to be the focus of its attentions at present.

48

Continue its strategy of innovation: the company is known for its good quality, user-

friendly banking services and innovative approach. It is working on seizing the

growing opportunity in the growing U.S. Hispanic population, for example, Citigroup

launched a strategy to take advantage of the funds being forwarded from the United

States back to Mexico.

Growing interest in emerging markets: China still can offer many opportunities, as well

as the new EU member states, where growth is accelerating at a higher rate than in

Western Europe.

Threats

Uncertain economic conditions and unfavorable legal battles: the U.S. economy,

although having recovered from the 2002 recession and now looking positive, could

still weaken. Citigroup’s reputation was weakened by the investigation into Salomon

Smith Barney.

Risks in the emerging markets: although entering the growth markets of China or

Brazil can be profitable for the company, there are risks involved, since these

economies are often vulnerable when it comes to economic fluctuations. In May 2004,

Citigroup announced that it would be forced to settle a class-action lawsuit filed by

shareholders of the bankrupt telecoms company, WorldCom, for $2.65 billion. The

company was sued by owners of WorldCom stock and bonds over its Salomon Smith

Barney brokerage unit's close relationship to WorldCom, which went bankrupt in 2002

after it was revealed that it had misled investors about their earnings and engaged in a

massive accounting fraud.

Foreign exchange risk: Citibank, due to its global reach, is vulnerable to foreign

exchange fluctuations and economic recessions in its markets. For example, in

Argentina and Brazil Citigroup incurred losses, and also exposure to high-risk sectors,

such as telecom and tech stocks, which resulted in Citigroup suffering significant

losses in its equity portfolios.

49

Analysis of Citigroup in 2004

� In April 2004 Citigroup announced the successful completion of its public tender

for the outstanding shares of common stock of KorAm Bank Co., based in Seoul,

Korea, which, together with shares acquired from an investor consortium, would

give Citigroup an overall shareholding of approximately 97.5% in KorAm Bank.

� In May 2004 Citigroup settled class action litigation brought on behalf of

purchasers of WorldCom securities. Under the terms of the settlement, Citigroup

would make a payment of $2.65 billion, or $1.64 billion after tax, to the settlement

class, which consists of all persons who purchased or otherwise acquired publicly

traded securities of WorldCom from April 29, 1999 through and including June 25,

2002. Charles Prince, Chief Executive of Citigroup, said: “Citigroup is a growth

company. It is important that we put this unfortunate chapter behind us so we can

focus on our continuing prospects for growth. Today’s settlement is a milestone

event in that effort. We are taking a leadership position in bringing to a close this

difficult era in the history of our industry and our company”.

� Also in May 2004 Citigroup announced that it would acquire Principal Residential

Mortgage, one of the largest independent mortgage servicers in the United States.

The transaction includes approximately $6.9 billion in assets and also includes

$137 million of franchise premium.

� In July 2004 Citigroup launched retail-banking services in St Petersburg, Russia's

second largest city, with the aim of launching a full suite of banking services, with

a strong focus on lending products. Citigroup has over 200,000 retail clients in

Russia, and has been present in the country since 1993.

� In September 2004 Citigroup and the Association of Community Organizations for

Reform Now announced a landmark partnership that promotes homeownership in

low- and moderate-income neighborhoods (especially in immigrant communities)

increases the availability of affordable credit, and promotes financial education.

The partnership was devised to reinforce Citigroup's position as a “key industry

leader in responsible and innovative lending practices”.

51

Chapter 4

Best Practice Company Analysis: Fortis

52

Chapter 4 Best-Practice Company Analysis: Fortis

Summary

� Fortis provides financial products and services to both retail and corporate

customers worldwide, and specializes in the areas of insurance, banking and

investments. The company has been formed through a joint venture between

AMEV/VSB, the Dutch bank insurer and AG Group, Belgian insurer.

� The retail banking arm of Fortis, Fortis Bank, focuses on the distribution of retail

banking products (Fortis uses the brand name MeesPierson for its private banking

operation), and as well as the typical banking products, Fortis Bank also offers

asset management, bancassurance, and investment banking services.

� For the year 2003, net profit increased from €532 million to €2,197 million,

bringing return on equity for the year to 19% (compared with 4% in 2002). Fortis

obtained almost 30% of its revenues from Belgium. The Netherlands accounted

for almost 23% and the United States nearly 27%.

� Return on equity ratio after a significant decrease in 2002 to 4, then made an



53

Fortis overview

Fortis provides financial products and services to both retail and corporate customers

worldwide, and specializes in the areas of insurance, banking and investments. The

company was formed through a joint venture between AMEV/VSB, the Dutch bank

insurer and AG Group, Belgian insurer. Fortis is mainly concentrated around the

Benelux countries where it dominates the market.

The main fields of specialization for Fortis are insurance and banking. Fortis Insurance

offers a wide range of financial services through third parties, and insurance companies

gathered under the Fortis umbrella work through independent intermediaries, via

financial institutions and electronic channels, providing insurance products that include

life, accident insurance, health, fire and motor insurance and other. Fortis offers

insurance products in France, Luxembourg, the UK, Spain, Australia and Singapore,

and the company is currently gaining strength in the U.S. market, specifically with its

credit-related services, life and healthcare insurance, employee benefits and

investment-linked insurance products.

The retail banking arm of Fortis, Fortis Bank, focuses on the distribution of retail

banking products (Fortis uses the brand name MeesPierson for its private banking

operation), and as well as the typical banking products, Fortis Bank also offers asset

management, bancassurance, and investment banking services.

In terms of the share of profits, approximately 50% of profits are from the banking

business, and 50% are from insurance.

54

The Fortis timeline

Fortis started life in 1990 when N.V. AMEV, a Dutch insurer and VSB, a Dutch bank,

merged. The new group then acquired Belgian insurer AG Group, marking this event as

the first cross-border merger in the financial sector. Since then the company has

expanded rapidly, mainly through acquisitions. In the following years, Fortis acquired

Interlloyd, a Dutch insurance company, and in 1993 acquired ASLK-CGER, a Belgian

bank and insurer, from the Belgian government, which enabled it to expand further into

bancassurance and banking.

In 1997 Fortis merged with Generale Bank in Belgium, which in turn merged with

ASLK-CGER in 1999 to form Fortis Bank. In 1998 Fortis also acquired the John Alden

Financial Corporation, an independent provider of group health insurance and

healthcare services for small businesses in the United States. 1999 was characterized

by further acquisitions, and Fortis took over American Bankers Insurance Group, Inc.,

one of the two leading U.S. credit-related insurers, and Northern Star, the UK insurer.

One of its major acquisitions took place in 2000, when Fortis acquired ASR

Verzekeringsgroep through the merger of ASR and AMEV Nederland, which made it

the largest insurer in the Benelux and the second-largest insurer operating through

insurance intermediaries in the Netherlands. In the following years, Fortis acquired

many smaller businesses globally, in Singapore, Spain, China, Thailand, Italy and

Portugal. Altogether the group has grown mainly due to its expansion through M&A,

which is primarily why Fortis was able to achieve the strong position it holds at the

moment as the ultimate leader in the Belgian market.

55

Financial analysis of Fortis

For the year 2003, net profit increased from €532 million to €2,197 million, bringing

return on equity for the year to 19% (compared with 4% in 2002). The net operating

profit of the banking business increased by 25% from 1,154 million to €1,446 million,

and the insurance business’ net operating profit improved by €1,612 million to €996

million.

For the fiscal year ended December 2003, Fortis achieved total revenues of €48,193

million, compared with €37,043 million in 2002. Banking operations accounted for

nearly 60% of the total revenues. Fortis obtained almost 30% of its revenues from

Belgium. The Netherlands accounted for almost 23% and United States nearly 27%.

Financial ratios for Fortis

Table 4.5: Financial ratios for Fortis

1999 2000 2001 2002 2003

Net Interest Margin 1.8 1.6 1.7 1.6 1.6 Cost To Income Ratio 68 70 72 82 74 Return On Avg. Equity (ROAE) 17 17 16 4 19


� Net interest margin for Fortis has remained stable for the last few years, and it is in

line with other banks in the region, where the average was 1.3 for 2003. This

indicates that Fortis has been able to maintain its level of profitability in the recent

years.

� Cost to income ratio has fluctuated in recent years, reaching 82 in 2002 and then

falling down to 74 in 2003, indicating that the profitability of Fortis was affected by

the recession of 2002.

56

� Return on equity ratio after a significant decrease in 2002 to 4, has now made an



SWOT analysis of Fortis

Figure 4.4: SWOT analysis of Fortis

•Unbeatable position in the Belgian market

•Integration of retail banking operationsand branches

•Cost control measures improved company’s•erformance

•Decreased sensitivity to stock marketmovements•Further improve its efficiency in banking

and insurance in the Benelux

•Sale of equities means lowerpotential benefits

•Overdependence on Benelux region

•The new business margins saw a relatively

strong decline•Increasing pressure in Fortis revenues

from the relatively strong banking segment

•Competition from foreign banks andinsurers



•Unbeatable position in the Belgian market

•Integration of retail banking operationsand branches

•Cost control measures improved companyperformance

•Decreased sensitivity to stock marketmovements•Further improve its efficiency in banking

and insurance in the Benelux

•Sale of equities means lowerpotential benefits

•Over-dependence on Benelux region

•The new business margins saw a relatively

strong decline•Increasing pressure on Fortis revenues

from the relatively strong banking segment

•Competition from foreign banks andinsurers




Strengths

Fortis has an unbeatable position in the Belgian market: it is the market leader in

providing financial services in Benelux, it is the largest insurer in Benelux, the top

retail bank in Belgium and fourth in the Netherlands. It also has the largest private

banking business in the Benelux.

57

Integration of retail banking operations and branches: The process of integration, which

included the integration of the Belgian bank branches, decreased operating expenses

down by 9% in 2002. Services, organization and staff training have focused on the

Customer Bank concept launched in 2002. Fortis is now increasingly operating as an

adviser, both in Belgium and the Netherlands. Customers are encouraged to go to the

branches for advice on investments, pensions, mortgages and insurance.

Cost control measures: Cost control measures on the banking side have proven

effective and are helping stimulate growth and decrease cost base. Fortis is planning to

decrease the costs even further, mainly by reducing the headcount by 5% in the near

future.

Weaknesses

Sale of equities means lower potential benefits: The sale of €1.8 billion equities in the

second quarter of 2003 and a further €400 million in July 2003 to reduce company’s

exposure also meant that Fortis has now deprived the company and the shareholders of

the benefits of potentially growing markets.

Over-dependence on Benelux region: Fortis largely depends on the Benelux countries

in terms of its profits, and has a limited exposure to markets outside of Benelux, which

means that it is potentially deprived of high returns which other markets can offer. At

the same time the company relies entirely on mature markets which cannot offer

significant growth prospects.

Opportunities

Decreased sensitivity to stock market movements: in June 2003 Fortis sold €1.9 billion

equities followed by €400 million in July 2003, resulting in the group’s exposure to

stock markets being greatly reduced - by approximately 50%.

Further improve its efficiency in banking and insurance in the Benelux region:

although Fortis is a market leader in Benelux, there is still room for improvement and

58

the company can benefit from an improvement in efficiency, and strengthening its

performance and risk management systems. Further development of advisory services

available to retail customers would also benefit the business in view of the increasing

popularity of independent advice in Europe.

Threats

The new business margins saw a relatively strong decline in the Netherlands and

Belgium, falling from over 17% in fiscal year 2001 to just under 13% in fiscal year

2002 and continuing to decline in 2003. There is increasing pressure in Fortis for

revenues from the relatively strong banking segment and high loan losses, which

according to Fortis management, might remain at high levels for a longer period of

time than expected.

Competition from foreign banks and insurers: with many financial services companies

worldwide looking to expand through organic growth or acquisitions, the Benelux

region could be a potential target for global banking players.

Analysis of Fortis in 2004

� In September 2004 Fortis announced a surprise management change, that saw a

former Citigroup executive take over the management of Fortis. Jean-Paul Votron,

who had been responsible for Citigroup's retail banking in Europe, the Middle East

and Africa, took over as a chief executive. Fortis has long been the subject of

merger speculation and repeatedly linked to banks like BNP Paribas of France and

BBVA of Spain.

� In January 2005, Fortis decided to sell its remaining stake in Assurant, the U.S.

insurer, which the company successfully floated in February 2004. Analysts

suggested that the move was designed to allow Fortis to make acquisitions in

Europe. It has been suggested that Fortis could pursue small to medium targets in

areas such as vendor leasing in Italy or Germany.

59

Chapter 5

Best-Practice Company Analysis: Crédit Agricole

60

Chapter 5 Best-Practice Company Analysis: Crédit Agricole

Summary

� Crédit Agricole S.A. is the largest banking institution in France, serving 16

million customers in 60 countries worldwide.

� Crédit Agricole is a diversified retail banking group and one of Europe's leading

service providers in banking, it is the largest banking company in France in terms

of market share, earnings and total capital.

� In 2003 Crédit Agricole, acquired Crédit Lyonnais, and in June of that year, the

highest administrative court in France maintained the approval for the deal to go

ahead. This acquisition has strengthened Crédit Agricole’s position not only in

France, but also across Europe.

� The overall net banking income of the company for the fiscal year ended

December 2003 was €23.9 billion, compared with €22.1 billion in 2003. The

French retail banking segment contributed 15% of net banking income and the

asset management, insurance and private banking segment accounted for 29% of

the total net income.

� The net interest margin for Crédit Agricole has been lower than the French

average for some time. The profitability of French banks is lower than those in

the UK and Spain - the average net interest margin in France was 0.69 in 2003,

2.0 in the UK and in Spain the same margin was more than 2.5. This reinforces

that French banks have a tendency to suffer from low profitability.

61

Crédit Agricole overview

Crédit Agricole S.A. is the largest banking institution in France, serving 16 million

customers in 60 countries worldwide. The company has a decentralized operating

structure and its client base includes households, self-employed citizens, companies

and the local government. The company also offers asset management and private

banking services in France and Europe.

Crédit Agricole S.A offers a wide range of banking and financial products and services

through the following divisions: French retail banking, asset management, insurance

and private banking, corporate and investment banking, international retail banking,

and proprietary asset management banking and other activities. Crédit Agricole is a

diversified retail banking group and one of Europe's leading service providers in

banking. It is the largest banking company in France in terms of market share, earnings

and total capital. The bank's primary subsidiaries include Crédit Agricole Indosuez,

Predica and Pacifica, which provide a wide range of services in corporate banking,

asset management and capital markets.

The French retail banking segment provides retail-banking services for over 16 million

customers through its network of nearly 7500 branches. The acquisition of Sofinco

enabled the company to strengthen its position in consumer credit services and through

its subsidiary, Foncaris, Crédit Agricole provides lending services.

The company's asset management, insurance and private banking segment provides life

insurance and disability insurance to individual customers, and the Corporate

Investment Banking segment provides capital market and investment banking services

to corporate and institutional investors. Through its International Retail Banking

segment, the company offers leasing and consumer credit services to its customers,

involving subsidiaries in Italy (Banca Intensa), Poland (Lukas) and Portugal (Banco

Espirito Santo).

62

The Crédit Agricole timeline

Crédit Agricole was founded in 1894 when a new law created the agricultural credit

companies, giving the French agricultural sector the means to develop. Farmers began

to receive assistance from government officials and educators. Crédit Agricole started

operating with limited funds to provide short-term personal loans to the agricultural

sector. The company's business expanded in 1906 to provide long-term loans to farm

co-operatives.

Until 1998, it operated as a part-private, part-public sector company, after which it

became 100% private sector. The company's services expanded quickly following

World War I. It began to finance public infrastructure projects such as providing

electric services to the rural areas and financing one-third of the French wheat harvest.

The Second World War provided the bank with an opportunity to develop its five-year

savings bonds to offer farmers a profitable way of investing their cash.

Crédit Agricole started offering investment and lending services by providing

educational lessons to rural people on how to prepare financial plans and manage their

cash and savings. It began to offer mortgages for main residences in rural areas,

allowing more homes to be built in the countryside. In 1991, Crédit Agricole became a

fully-fledged universal bank when the French government removed all remaining

restrictions on lending. The company merged with Indosuez Asset Management and

Segaspar in 1996 to create the Crédit Agricole Indosuez Asset Management Firm,

which is an international and wholesale banking organisation.

In 2003 Crédit Agricole acquired Crédit Lyonnais, and in June of that year, the highest

administrative court in France maintained the approval for the deal to go ahead. This

acquisition has strengthened Crédit Agricole’s position not only in France, but also in

Europe. After this deal, Crédit Agricole, which was Crédit Lyonnais' top shareholder

for more than three years before the deal, had achieved a market share of 25% in

French retail banking market.

63

Financial analysis of Crédit Agricole

The overall net banking income of the company for the fiscal year ended December

2003 was €23.9 billion, compared to €22.1 billion in 2003. The French retail banking

segment contributed 15% of net banking income and the asset management, insurance

and private banking segment accounted for 29% of the total net income. The French

region contributed 60% of Crédit Agricole's net banking income and Europe

contributed 18%. Net banking income from North America contributed 6%.

Financial ratios for Crédit Agricole

Table 5.6: Financial ratios for Crédit Agricole

1999 2000 2001 2002 2003

Net Interest Margin 0.8 0.3 0.3 0.4 0.6 Cost To Income Ratio 64 63 66 74 74 Return On Avg. Equity (ROAE) 6.5 9.4 8 5.7 5


� The net interest margin for Crédit Agricole has been lower than the French average

for some time. The profitability of French banks is lower than in the UK and Spain

- the average net interest margin in France was 0.69 in 2003, 2.0 in the UK and in

Spain the same margin was more than 2.5. This reinforces that French banks have a

tendency to suffer from low profitability.

� The cost to income ratio has been higher than the French average of 67 in 2003,

indicating some efficiency problems. This can, however, be justified with the

merger between Crédit Agricole and Crédit Lyonnais.

� Return on equity has also remained low for the same reason and it is hoped that

Crédit Agricole will return to profitability once it is able to fully benefit from the

distribution network created by Crédit Lyonnais, as well as their banking expertise.

64

SWOT analysis of Crédit Agricole

Figure 5.5: SWOT analysis of Crédit Agricole

•Strong position in several areas ofbanking services with 16 mln retail customers

•Merger with Credit Lyonnais

•Good performance of FrenchRetail Banking division

•Targeting specialised consumer segmentswith new products

•Developing new products•Profitable partnerships with businessessuch as Fiat, BMW

•Low net interest margin and return onequity

•Worsening performance of asset

management, insurance and privatebanking sector

•Threat from new entrants

•Adverse stock market conditions meaningthat customers prefer less risky products



•Strong position in several areas ofbanking services with 16 million customers

•Merger with Credit Lyonnais

•Good performance of FrenchRetail Banking division

•Targeting specialised consumer segmentswith new products

•Developing new products•Profitable partnerships with businessessuch as Fiat, BMW

•Low net interest margin and return onequity

•Worsening performance of asset

management, insurance and privatebanking sector

•Threat from new entrants

•Adverse stock market conditions encouragecustomers to prefer less risky products




Strengths

Strong position in several areas of banking services: Crédit Agricole enjoys a strong

position in European and French banking and financial services, with 16 million retail

customers and a number one retail-banking network in France. Crédit Agricole is also

the top bancassurer in France, and holds the second position in the French mutual funds

market.

Merger with Crédit Lyonnais: the main strength of the new business following the

acquisition is the position that the company has now gained, not only in France but also

in Europe, with increased market share in the banking market. Another major strength

is the expanded distribution channel and new access to a wider customer base.

65

Good performance of French retail banking division: French retail banking segment

maintains its leadership position despite difficult economic conditions in the recent

years.

Targeting specialized consumer segments with new products: the company has targeted

several specialized customer segments by developing carefully targeted services such

as electronic data transfer services, electronic transfer of healthcare refund claim forms,

services for public bodies and public procurement cards.

Weaknesses

Low net interest margin and return on equity: these ratios remain lower than the French

average following the merger with Crédit Lyonnais. The cost cutting program that

followed the merger made many employees redundant, which resulted in criticism from

the French trade unions, inflicting negative publicity on the bank.

Worsening performance of asset management, insurance and private banking sector:

these divisions have all been affected by the slump in equity markets in 2002.

Opportunities

Developing new products: the company has targeted several specialized customer

segments by developing new services such as electronic data transfer services,

electronic transfer of healthcare refund claim forms, services for public bodies and

public procurement cards.

Profitable partnership businesses: Crédit Agricole is associated with renowned partners

such as Fiat, BMW and Banque Accord, and through such alliances, the company is

able to offer technology-based services such as Internet lending. The resulting

businesses offer substantial volume growth prospects for the company and are likely to

boost margins in the near future.

66

Threats

Threat from new entrants: in the deregulated banking and general financial services

sectors in France there are limited entry barriers for foreign competitors, new players

may have the capacity to offer cheaper financial products and launch a price war in the

French banking industry.

Adverse stock market conditions: the adverse stock market conditions in France

resulted in individual customers favoring less risky products that carry capital

guarantee or protection. Consequently, mutual funds performed well at the expense of

other traditional financial products. A prolonged decline in capital markets, coupled

with adverse forex effects, is likely to mean eroded margins for the company in future.

Analysis of Crédit Agricole in 2004

� In December 2004, AGF and Crédit Agricole signed an agreement under which

Pacifica, the property and casualty insurance subsidiary of Crédit Agricole, will

buy 35% of the share capital of Assurances Fédérales IARD. The agreement is

subject to the approval of the committee of insurance companies (comité des

entreprises d'assurance) and would become effective in 2005. Assurances Fédérales

would then be held at 60% by AGF and at 40% by Crédit Agricole. The AGF

Group would put a hold on its 60% of the share capital, exercisable at any time

until 30 June 2007.

� In January 2005, Crédit Agricole announced that it had become full owner of

consumer-credit company Finaref. Crédit Agricole bought the remaining 10% of

Finaref from former owner Pinault-Printemps-Redoute for $360.4m. In addition,

Crédit Agricole will also buy PPR's remaining 10% stake in Finaref Group AB,

Finaref's Scandinavian. PPR sold a controlling interest in Finaref to Crédit Agricole

in 2003 as part of an effort to finance its expansion in the luxury-goods industry.

67

Chapter 6

Best-Practice Company Analysis: HSBC

68

Chapter 6 Best-Practice Company Analysis: HSBC

Summary

� HSBC operates a global network of more than 9,500 offices in 79 countries and

territories. The bank provides a comprehensive range of financial services to

personal, commercial, corporate, institutional and investment banking (including

private banking) clients.

� For the fiscal year ending December 2003, HSBC reported operating income of

$41.07 billion, an increase from $26.60 billion in 2002. The large rise in income

was due to the acquisition of Household in March 2003 and HSBC Mexico in

November 2002.

� Net interest margin, guide to the profitability of a company's investments, has

been one of the highest in the UK, indicating that HSBC is maintaining its

profitability.

� HSBC has been successful in its methods of choosing acquisition targets - the

deals confirmed in 2003, including the Bank of Bermuda, the Mexican AFORE

and Lloyds TSB Brazilian have helped the company strengthen its position in

global banking. The deals completed in 2004 included the acquisition of Bank of

Communications, China’s fifth largest bank.

� HSBC is Britain’s most admired bank for the fourth year running, according to a

survey of some of the banking industry’s most senior executives and analysts,

announced in December 2004.

69

HSBC overview

HSBC is one of the largest banking and financial services organizations in the world,

headquartered in the UK. HSBC operates a global network of more than 9,500 offices

in 79 countries and territories. The bank provides a comprehensive range of financial

services to personal, commercial, corporate, institutional and investment banking

(including private banking) clients.

The personal financial services division of HSBC provides a wide range of banking and

related financial services including current, cheque and savings accounts, loans and

home finance, cards, payments, insurance and investment services, including securities

trading. Insurance products sold and distributed by HSBC through its branch networks

include loan and health protection; life, property, casualty and health insurance; and

pensions. HSBC acts as both a broker and an underwriter, and aims to continue to

deliver insurance products to its personal customer base.

HSBC has its principal banking subsidiaries in Europe, including HSBC Bank, CCF

and HSBC Private Bank. HSBC's principal banking subsidiaries in Hong Kong are the

Hong Kong and Shanghai Banking Corporation and Hang Seng Bank, in which HSBC

has a 62.14% stake. In the rest of Asia-Pacific, HSBC's main operations are conducted

by the Hong Kong and Shanghai Banking Corporation, which offers personal,

commercial, corporate and investment banking and markets services in mainland

China. Outside Hong Kong and mainland China, the HSBC Group conducts business in

the Asia-Pacific region primarily through branches and subsidiaries of the Hong Kong

and Shanghai Banking Corporation, with particularly strong coverage in India,

Indonesia, Korea, Singapore, Taiwan and Thailand. HSBC's presence in the Middle

East is led by HSBC Bank Middle East Limited, the largest foreign-owned bank in the

region; in Australia by HSBC Bank Australia Limited; and in Malaysia by HSBC Bank

Malaysia Berhad, which has the second largest presence of any foreign-owned bank in

70

the country. HSBC's operations in South America principally comprise HSBC Bank

Brasil and HSBC Bank Argentina.

HSBC Private Bank is the brand name for the private banking business conducted by

the private banking subsidiaries of the HSBC Group worldwide. Private Banking

services are also provided by HSBC Guyerzeller and HSBC Trinkaus & Burkhardt.

The HSBC timeline

The HSBC Group name comes from the Hong Kong and Shanghai Banking

Corporation Limited, which was established in 1865 to finance the growing trade

between China and Europe. The bank began it expansion with the creation of a network

of agencies and branches based mainly in China and South East Asia, although, it also

had representation in the Indian sub-continent, Japan, Europe and North America.

In 1965, HSBC purchased a controlling interest in Hang Seng Bank and by the 1970s

the policy of expansion by acquisition of subsidiaries with their own identities was

firmly in place. In 1971, HSBC took over British Bank of the Middle East and

Mercantile Bank. In 1991, the group's companies were brought together under HSBC

Holdings. In 1992, the company acquired Midland Bank, which made HSBC one of the

largest banking and financial services organizations in the world.

Throughout the 1990s, HSBC continued its policy of growth through mergers and

acquisitions, including banks in Brazil and Argentina and the purchase in 1999 of

Republic New York Corporation. Growth through acquisitions continued in 2000 with

the acquisition of Crédit Commercial de France. In 2002 the group completed the

acquisition of Grupo Financiero Bital de C.V. in Mexico and announced it was to

acquire Household International, a major U.S. consumer finance company with 53

million customers and over 1,300 branches in 45 states. In October 2003 HSBC

announced that it had reached an agreement to buy the Bank of Bermuda.

71

In October 2003, HSBC Insurance Brokers Limited entered into a joint venture

agreement to offer insurance broking and risk management services to domestic and

international clients in Mainland China. In December 2003, the Hong Kong and

Shanghai Banking Corporation Limited, the founding and a principal member of the

HSBC Group, entered into an agreement to acquire 50% of Fujian Asia Bank Limited.

In March 2004, HSBC Bank Canada signed an agreement to acquire all the shares of

Intesa Bank Canada. In April 2004 the company sold its Canadian Direct Insurance

business to Canadian Western bank. In August 2004, HSBC paid $1.75 billion for a

20% stake of China's Bank of Communication, which would make HSBC the largest

foreign investment in China's financial industry. Also, in November 2004, HSBC

entered into talks with Newbridge Capital, the U.S. private equity fund, to acquire

Korea First Bank, the fifth largest lender in Korea, for as much as $3.2 billion.

Financial analysis of HSBC

For the fiscal year ending December 2003, HSBC reported operating income of $41.07

billion, an increase from $26.60 billion in 2002. The large rise in income was due to the

acquisition of Household in March 2003, and HSBC Mexico in November 2002. HSBC

saw net interest income increase by $10.18 billion to $25.6 billion in fiscal 2003

accounting for 62.3% of total operating income.

Financial ratios for HSBC

Table 6.7: Financial ratios for HSBC

1999 2000 2001 2002 2003



72

� The net interest margin, which is a good guide to the profitability of a company's

investments, has been one of the highest in the UK, indicating that HSBC is in fact

maintaining a stable level of profitability.

� Cost to income ratio is an indicator of how efficiently a company is managed,

which has been rather high for HSBC in recent years, highlighting that the bank

aims to improve its operative expenditure-profitability ratio.

� Return on equity ratio for HSBC in the last two years has been among the lowest in

the UK.

SWOT analysis of HSBC

Figure 6.6: SWOT analysis of HSBC

•HSBC is one of the largest banking and

financial services organisations in the world•Growth in private banking

•Successful acquisitions, including Bank ofBermuda and Bank of Communications

in China•Strong brand: change from mutlibrand

strategy to strengthen HSBC brand name

•Further diversify its products offering•Developments in Internet banking•Investing in the future growth markets

•Problems with staff retention•Outsourcing created bad publicity, due to

subsequent redundancies in the UK

•Exposure to vulnerable markets in Asia

•Growing threat from supermarkets, othernon FS organizations



•HSBC is one of the largest banking and

financial services organisations in the world•Growth in private banking

•Successful acquisitions, including Bank ofBermuda and Bank of Communications

in China•Strong brand: change from multi-brand

strategy to strengthen HSBC brand name

•Further diversify its products offering•Developments in Internet banking•Investing in the future growth markets

•Problems with staff retention•Outsourcing created bad publicity, due to

subsequent redundancies in the UK

•Exposure to vulnerable markets in Asia

•Growing threat from supermarkets, othernon-FS organisations




73

Strengths

HSBC is one of the largest banking and financial services organizations in the world:

the company has 9,500 offices in over 79 countries and territories, operating in the

Asia-Pacific region, Europe, the Americas, the Middle East and Africa. It enjoys a

strong presence in key growth markets including new ties in China. The company’s

size and global reach provides HSBC with many benefits such as cost reductions

through economies of scale.

Growth in private banking: HSBC is now the world's fifth largest private bank, with

$278 billion in assets under management at the end of 2003. Strong growth made

HSBC decide to adopt HSBC Private Bank as the global name for its private banking

businesses from January 1, 2004. In addition, HSBC group private banking offers

banking services through the following subsidiaries: HSBC Guyerzeller, HSBC

Trinkaus & Burkhardt, HSBC Private Bank France, Banque Dewaay, Property Vision

and Wealth & Tax Advisory Services, Inc.

Successful acquisitions: HSBC has been successful in the way it chose its acquisition

targets and the deals confirmed in 2003, including the Bank of Bermuda, the Mexican

AFORE and Lloyds TSB Brazilian have helped the company strengthen its position in

global banking. The deals completed in 2004 include the acquisition of Bank of

Communications, China’s fifth largest bank with total assets of $111.9 billion at 31

December 2003. An ability to integrate new businesses successfully is a fundamental

skill in retail banking and a major contributor to HSBC’s success.

Strong brand: HSBC has changed its multi-brand strategy from a range of different

brands towards a consolidated brand under the HSBC umbrella.

74

Weaknesses

Problems with staff retention: HSBC is still struggling to retain staff in key areas of its

businesses, especially its equity research staff, as over half the bank's London-based

team of insurance analysts left the company, primarily due to the decision to cut

bonuses as part of a cost reduction measure.

Outsourcing created negative publicity: HSBC outsourced a number of call centers to

India, which meant redundancies of 4,000 in Swansea, Birmingham, Sheffield and

Brentwood, which angered many employees. Although the company faced initial

criticism, many other financial services providers followed suit and moved their call

centers to cheaper locations.

Opportunities

Further diversify the product offering: this could provide a more robust revenue base,

for example through the establishment of a new hedge funds business, HSBC

Alternative Investments, within its fund management division.

Developments in Internet banking: Internet banking is an important part of HSBC's

service, and offers strong potential for growth. In 2002 HSBC became the second

foreign bank to gain a license to provide online banking services in China.

Investing in the future growth markets: according to analysts, in the next 25 years

around 50% of the increase in world demand will come from developing countries such

as China, India, Mexico and Brazil. HSBC has a presence in these countries and will be

able to benefit from this demand, especially in the Chinese market. HSBC is in a good

position to capitalize on this market.

75

Threats

Exposure to vulnerable markets: HSBC has been investing greatly in Asian economies,

which on one hand can be profitable, however, placing too much faith these economies

(in case another recession takes place) can be rather risky.

Increasing competition worldwide: in the UK market, building societies and online

banks are making inroads by offering much higher rates of interest, which means that

competition in the usually stable current accounts market is becoming more fierce.

According to the Cruickshank reportvi the industry can expect to see government

encouragement behind such strategies, especially in lending to small businesses, a

sector Cruickshank identified as in need of greater competition. The big four have more

than 80% of this market and the Competition Commission is already looking at ways to

open it up to new entrants. This could threaten HSBC's position as the biggest bank in

the UK, a recent example of which is the merger between Banco Santander and Abbey,

announced in 2004.

Growing threat from supermarkets and other non-financial organizations: competition

for savings and credit cards is becoming more intense and cheap loans are tempting

homebuyers to re-mortgage at a time when they have become profitable for their

previous lenders. Household names such as Sainsbury's bank, Tesco personal finance

and Intelligent Finance are now present in the UK personal banking market and

competitor numbers are set to further increase.

vi ‘Competition in UK Banking’, a report to the Chancellor of the Exchequer by Mr Cruickshank, which

was published in March 2000.

76

Analysis of HSBC in 2004

� HSBC is Britain’s most admired bank for the fourth year running, according to a

survey of some of the banking industry’s most senior executives and analysts, as

announced in December 2004. The poll, conducted by Nottingham Business

School, put HSBC ahead of competitors such as Barclays, HBOS and Lloyds TSB

across nine categories measuring financial soundness and management quality as

well as product and marketing performance. HSBC averaged a score of more than

seven in each category, with 0 being poor and 10 excellent. It’s total score of 66.34

moved it up to eighth position in the overall rankings table, which included 22

industry sectors and 220 British companies, a rise from 19th place in 2003.

� Also in December 2004, HSBC was voted International Retail Bank of the Year at

the Retail Banker International awards. It also picked up the award for Retail Bank

of the Year in China, Hong Kong and Taiwan. The annual Retail Banker

International awards recognize financial bodies across the world for their

achievements, commitment and market leadership, both within their individual

regions and the retail banking industry as a whole. The two Retail Banker

International awards were the latest of several prestigious accolades won by HSBC

in 2004. In the past few months, HSBC has been voted Global Bank of the Year by

the Banker magazine for the third consecutive year, Best Consumer Bank by Global

Finance, and World's Best Bank by Euromoney.

� In November 2004, HSBC Bank and Marks and Spencer Group completed the sale

of 100% of Marks and Spencer Retail Financial Services Holdings Limited (M&S

Money) to HSBC for a consideration of £762 million. HSBC will manage the

existing and new accounts generated during the period of the partnership, which

has an initial 10-year term. The business, which will continue to operate under the

M&S Money brand, will be developed by the respective efforts of HSBC and

Marks & Spencer.

� In May 2004 HSBC became the first UK high-street bank to offer a pension fund

that meets the requirements of Shariah (Islamic law). The HSBC Life Amanah

Pension Fund was the latest addition to a portfolio of products offered by HSBC

77

Amanah Finance, the Group’s global Islamic financial services division, which was

established in 1998 to provide Islamic alternatives to conventional banking.

HSBC’s new pension fund is available to UK employers, who can then offer it to

their workers. It is designed so that it does not hold shares in certain industry

sectors, including alcohol production or distribution, pork products, tobacco and

conventional financial services. The fund is currently available only in the UK, but

may be rolled out in other countries according to demand. With a total population

of more than 1.5 billion Muslims worldwide, there is strong demand for financial

products and services that conform to Shariah, which restricts the payment and

receipt of interest and prevents some Muslims from investing in equities.

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Chapter 7

Best-Practice Company Analysis: Deutsche Bank

79

Chapter 7 Best-Practice Company Analysis: Deutsche Bank

Summary

� Deutsche Bank is the one of the four largest banks in Germany and has a strong

position in Europe. It offers a full range of corporate and investment banking,

private clients and asset management products and services. The company has an

extensive global presence, serving more than 13 million customers in over 75

countries, although dependence on its domestic market is still high.

� For the fiscal year ended December 2003, Deutsche Bank generated €21,268

million in revenues, compared with €26,547 in 2002, a decline of almost 20%.


indicating that the company is not being operated as efficiently as it could be.

While return on equity ratio for Deutsche Bank is one of the worst ratios for the

company (however in line with the German average) and indicates that not only

Deutsche Bank but also most of the German banks are experiencing difficulties in

achieving a reasonable return on equity.

� Although revenues have been declining quite significantly, Deutsche Bank

remains a powerful player in the global banking market, with resources and

capabilities higher than most competitors.

� Deutsche Bank offers retail services primarily in Germany, but operates

investment banking and asset management businesses on an international scale,

including the European market, Asia Pacific and the Americas. Deutsche Bank's

presence in a number of important global markets protects it from adverse market

conditions in individual countries or area markets.

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Deutsche Bank overview

Deutsche Bank is the one of the four largest banks in Germany and has a strong

position in Europe. It offers a full range of corporate and investment banking, private

clients and asset management products and services. Deutsche Bank serves more than

13 million customers in more than 75 countries worldwide, operating primarily in

Europe, with an especially strong presence in its domestic German market, and also a

significant presence in the UK. In addition, the company operates in Italy, Spain,

Belgium, and Poland with its own branch networks. Deutsche Bank is organized into

three groups; the corporate and investment bank group, the private clients and asset

management group and corporate investments. Within these groups, the company has

seven core businesses.

The global markets business comprises various trading, sales and research in foreign

exchange, government, agency and investment grade debt, emerging markets,

exchange-traded, over-the-counter (OTC) and credit derivatives, commodities,

structured transactions, money markets and securitization. The global equities business

comprises cash equities, research, sales and trading, equity derivatives structuring and

trading as well as equity prime services.

Deutsche Bank's global corporate finance business handles various aspects of corporate

finance, including traditional corporate loans and the issuance of corporate bonds and

convertibles. The division also advises corporations on M&A and divestments, and

provides support with Initial Public Offering (IPOs) and capital actions. The company's

global banking division comprises relationship management, global cash management,

global trade finance, trust and security services and asset finance & leasing.

The fifth business unit is private and business clients, serving 12.5 million retail and

small business clients in important European countries, focusing on the German

market. Finally, Deutsche Bank's asset management business combines asset

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management for institutional clients and private investors. As a global provider, the

group offers tailored products in equities, bonds and real estate.

In addition to the three business groups, the corporate and investment bank group, the

private clients and asset management group and corporate investments, in which the

client-focused business activities are combined, is the corporate center. The corporate

center is primarily responsible for strategic implementation of group initiatives,

including audit, risk management and human resources.

The Deutsche Bank timeline

Adelbert Delbruck is considered the founder of Deutsche Bank, when the bank was

granted a banking license in 1870 by the Prussian government, with an aim to

challenge the hegemony of British banks, which continued to dominate the German

foreign trade.

International business at Deutsche Bank grew in the 1970s. With the evolution of

financial markets, technological progress and the acquisition of major banks in Italy,

Spain, the UK and the U.S. Deutsche Bank changed more in the 1970s to 1990s than in

the preceding century. Deutsche Bank continued to grow during the late 1990s, through

both organic growth and acquisitions. It bought Crédit Lyonnais Belgium (1998) and

Bankers Trust Corporation (1999) and in 2000 purchased Prudential UK Institutional

Asset Management business, First Australian Property Group Holdings, National

Discount Brokers Group, and National Discount Brokers Group.

In January 2002 Deutsche Bank restructured yet again, creating three groups: corporate

and investment bank, corporate investments, and private clients and asset management,

each headed by distinct operating committees. In November 2003, Deutsche Bank

announced the acquisition of a 40% stake in United Financial Group, a Moscow-based

investment bank. The deal was reported to be worth approximately $70 million.

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In April 2004, Deutsche Bank's UK subsidiary, Morgan Grenfell, was fined £190,000

by the Financial Services Authority (FSA), the UK's financial authority, for breaching

FSA Principles by failing to act in its customer's best interests and failing to manage its

conflicts of interests. According to the FSA’s Morgan Grenfell: “[It] commenced

proprietary trading in seven of the constituent securities of a client's program trade,

prior to its award, based on limited information provided to enable the firm to quote for

that business. The proprietary trading resulted in the client paying more for the

program trade than they would otherwise have done”.

Financial analysis of Deutsche Bank

For the fiscal year ended December 2003, Deutsche Bank generated €21,268 million in

revenues, compared with €26,547 million in 2002, a decline of almost 20%.

Financial ratios for Deutsche Bank

Table 7.8: Financial ratios for Deutsche Bank

2000 2001 2002 2003

Net Interest Margin 0.9 1.1 1.1 0.9 Cost To Income Ratio 84 89 86 81 Return On Avg. Equity (ROAE) 34 0 1 4


� It is evident that the net interest margin ratio in the case of Deutsche Bank is

extremely low, lower than the German average of 1.3.


indicating that the company is not being operated efficiently.

� Return on equity ratio for Deutsche Bank is one of the worst ratios for the company

(however in line with the German average) and indicates that not only Deutsche

Bank but most of the German banks are having difficulties achieving a reasonable

return on equity.

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SWOT analysis

Figure 7.7: SWOT analysis of Deutsche Bank

•Financial strength despite problems, the

bank’s resources are still higher than itscompetitors’

•Implementing cost cutting measures•Global presence including Europe,Asia Pacific and the Americas

•Domestic retail banking in order to lowerthe exposure in investment banking•Expansion in Asia, the only region where

the bank recorded positive growth

•Exposure to market fluctuations•Problems within Private Wealth

Management because of low profits

•Weak 2003 and 2004 revenues in theCorporate and Investment Bank’s

•Strong competition from other banks in

Germany•Weak German economy



•Financial strength despite problems - the

bank’s resources are still higher than itscompetitors’

•Implementing cost cutting measures•Global presence including Europe,Asia Pacific and the Americas

•Domestic retail banking in order to lowerthe exposure in investment banking•Expansion in Asia, the only region where

the bank recorded positive growth

•Exposure to market fluctuations•Problems within Private Wealth

Management because of low profits

•Weak 2003 and 2004 revenues in thecorporate and investment banks

•Strong competition from other banks in

Germany•Weak German economy




Strengths

Financial strength: although revenues have been declining quite significantly, Deutsche

Bank remains a powerful player in the global banking market, with resources and

capabilities higher than most competitors.

Implementing cost cutting measures: Deutsche Bank has been focusing on restructuring

internally and has perhaps the most significant internal restructuring potential of any

major European bank. Management comments suggest the company's primary focus is

revenue growth, although the company has achieved a lot through cost cutting recently.

Global presence: Deutsche Bank offers retail services primarily in Germany, but

operates its investment banking and asset management businesses on an international

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scale, including the European market, Asia Pacific and the Americas. Deutsche Bank's

presence in a number of important global markets protects it from adverse market

conditions in individual countries or area markets.

Weaknesses

Exposure to market fluctuations: since Deutsche Bank decided to focus on the

development of its investment banking business, the group is more exposed to the

effects of adverse market conditions.

Problems within its private wealth management business: Deutsche Bank is having

difficulties managing its private wealth management business. In the first and second

quarters of fiscal 2003, this business recorded profits of just €5 million and €19 million

respectively, which is still an improvement on the third quarter of 2002, when the

business made a loss of €40 million. In 2004 revenues declined again, compared to

2003, according to the bank, this was predominantly caused by the stronger Euro as

well as lower brokerage revenues resulting from the ongoing uncertainty in stock

markets.

Weak 2003 and 2004 revenues: the Corporate and Investment Bank’s (CIB) third

quarter 2004 pre-tax profit was €555 million, a decline of 20%, from €695 million in

the third quarter 2003. Underlying revenues of €2.9 billion in the third quarter of

2004were down by 12%, versus the third quarter 2003. While underlying revenues for

the first nine months of 2004 were below those of the same period in 2003, most of the

decline, according to Deutsche Bank, was due to the effects of unfavorable movements

in foreign exchange rates in 2003.

Opportunities

Domestic retail banking: to lower the exposure to investment banking, the company

could look to develop its domestic retail banking division. This would lessen the

company's exposure to fluctuations within the volatile investment banking market and,

by increasing its exposure to a more stable market, improve the company's risk profile.

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Expansion in Asia: a comparison of revenue breakdown by geography in 2002 and

2003 shows that the only growth area for Deutsche Bank during the last few years was

the Asia-Pacific region. This region saw its revenues increase, while other geographic

areas, Germany, the rest of Europe, North America and South America recorded

declines. Furthermore, all of these areas, except South America, have posted continued

declines since 2000, whereas the Asia-Pacific region has achieved continued growth;

representing more evidence to suggest that this area holds major expansion

opportunities for the company.

Threats

Strong competition: the company faces tough competition in Germany, from the other

top banks: Dresdner Bank, Commerzbank and HVB. If the group is unable to respond

to the competitive environment in any major markets with attractive product and

service offerings it could lose market share in important business areas or incur losses

on some of its activities.

Weak German economy: Germany's economy, once affluent and technologically

powerful, is now experiencing a weak performance and economic stagnation. Since

Deutsche Bank generates so much of its total revenues in its home country

(approximately 44%) the state of the German economy is of considerable concern for

the company.

Analysis of Deutsche Bank in 2004

� According to Finextra, Deutsche Bank announced in December 2004 that it will axe

1,920 jobs in Germany, mainly from its back office operations, over the next two

years under plans to streamline administration and transaction processing

operations and re-focus on customer-facing functions. Deutsche Bank is cutting a

total of 2,720 jobs in Germany, but around 800 new "client-facing" jobs will be

created, including 350 at its domestic subsidiaries. Overall the number of full time

staff in Germany will fall from 27,330 to 25,410 by December 2006. The majority

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of the jobs being cut (a total of 1650) will come from the bank's IT, risk

management, operations, human resources and controlling departments.

Commenting on the job losses, Jürgen Fitschen, CEO of the bank's German

management committee said: “Through streamlined procedures in transaction

processing and administration, we intend to lower costs and become faster, and to

concentrate our full attention on our clients”.

� Also in December 2004, Deutsche Bank announced the acquisition of asset

manager Wilhelm von Finck AG as the company continues to expand its private

wealth management franchise in Germany. The transaction took effect on January

3, 2005. Johannes Baratta, Head of Deutsche Bank Private Wealth Management

Germany, said: “With the acquisition of Wilhelm von Finck AG, Deutsche Bank

private wealth management is consistently pursuing its strategy of offering a

qualitatively unparalleled range of services for large sets of private assets. This

includes building up the increasingly important family office unit. We feel a

commitment towards the tradition and good name of Wilhelm von Finck AG. That

is why we have agreed to continue to deliver the firm's established service on an

independent basis”. Eberhard Buschmann, Member of the Board of Management of

Wilhelm von Finck AG added: “For wealthy families in Germany, this link-up

creates an attractive structure, namely an independent family office with

possibilities of accessing the comprehensive know-how and full product and

service range of an international leader in the financial services industry”.

� In November 2004 Deutsche Bank opened another branch office in China where it

now has three branches - in Shanghai, Guangzhou and now Beijing. “China is a

global priority market for Deutsche Bank,” said Dr Ackermann. “The pace and

progress that China has made in opening up the financial services sector is

impressive. Now is the time for sustained investment in the growth of our

businesses to support our domestic and international clients` activities in this major

growth market”.

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Chapter 8

Best-Practice Company Analysis: BNP Paribas

88

Chapter 8 Best-Practice Company Analysis: BNP Paribas

Summary

� BNP Paribas was formed in 1999 after a merger between BNP and Paribas. BNP

Paribas is a retail bank in France, distributing its products and services to about

six million individual customers and around 450,000 businesses and self-

employed professionals through its 2,100 plus branches and via its new Internet

and telephone distribution channels. It also has a presence in more than 80

different countries.

� For the fiscal year ended December 2003, BNP Paribas generated revenues of

€17,935 million, up 6.8% on the previous year. Net income for the year totaled

€3,761 million.

� The BNP Paribas net interest margin ratio is twice that of an average French

bank, indicating strong profitability. Cost to income has been much lower than

the French average, indicating that BNP Paribas is efficiently run with strong

financial performance.

� BNP launched the wealth management business at the end of fiscal 2002,

targeting customers with €250,000-750,000 to invest. In this target market, it has

a distinct advantage since there is a lack of dedicated competition.

� BNP Paribas is established in 85 countries around the world and the bank is

pursuing further expansion with conviction, enhancing its position with a

continuing string of deals, including the May 2002 acquisition of Cogent from

Australian AMP, followed by the official opening and establishment of BNP

Paribas Limited in China in November 2003.

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BNP Paribas overview

This chapter assesses BNP Paribas, one of the largest banks in France. The company

was formed in 1999 after a merger between BNP and Paribas. Initially, BNP wanted to

take over both Paribas and Société General. BNP won 65% of the shares of Paribas in

its hostile tender for the company, however it failed to secure a majority of its other

target, Société Generale. This merger created one of the largest and strongest forces in

French banking.

BNP Paribas is a retail bank in France, distributing its products and services to about

six million individual customers and around 450,000 businesses and self-employed

professionals through its 2,100 plus branches and via its new Internet and telephone

distribution channels. It also has a presence in over 85 different countries including the

UK, United States, and the main European markets, including Central and Eastern

Europe.

BNP Paribas has corporate, retail, and investment banking operations, also focusing on

international retail banking, specialized financial services, private banking, asset

management, and insurance. It operates through three core businesses: corporate &

investment banking; retail banking; and private banking, asset management, securities

services & insurance.

The corporate & investment banking division offers advisory services for mergers and

acquisitions and primary equity market transactions, while the retail banking division

offers a line of products and services, ranging from current account services to the most

complex financial services in the areas of corporate financing and asset management.

The private banking, asset management, securities services & insurance division offers

a range of products and services tailored to the financial and wealth management needs

of private clientele. BNP Paribas also offers a range of property-related products and

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services in France and has teams who specialize in managing portfolios of quoted

stocks and sovereign risks.

The BNP Paribas timeline

BNP Paribas was created in August 1999 through the merger of Banque Nationale de

Paris and Paribas. The bank strengthened its position as a custodian bank through the

acquisition of the securities division of AXA Banque in September 1999. The

acquisition raised its value of securities under management to over €100 million,

making it the sixth largest custodian bank in the world.

At the start of 2000, BNP Paribas decided to restructure its Internet subsidiaries by

removing some of them or consolidating or creating others, as a part of its development

strategy. Shortly after the announcement of this strategy, the company launched the

IssueMaster Internet bond syndication system, a major step in its eCommerce business.

The final important development in its eCommerce mission was the launch of BNP

Paribas on May 24, 2000, starting up the new groups' information and communication

site. Further restructuring went ahead on February 9, 2000, as BNP Paribas completely

reorganised its Spanish market by selling off a number of unprofitable branches and

consolidating others.

On May 8, 2001, BNP Paribas announced it was spending $2.45 billion on buying the

55% of BancWest it did not already own. BancWest, was created in 1998 from the

merger of First Hawaiian with Bank of the West (and then wholly owned by BNP).

This consolidated the company's presence in the U.S. market and further expanded

global operations.

In April 2002, BNP Paribas completed the $2.4 billion acquisition of United California

Bank (UCB). UCB subsequently became part of BNP's BancWest unit, which boasted

1.5 million customers and assets exceeding $30 billion.

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In the same year, BNP Paribas acquired Cogent, the UK investment administration arm

of AMP, the Australian based financial services group. The deal, which was rumored to

be for around €363 million, positioned the French bank as the sector leader in the UK.

BNP Paribas' purchase not only heightened its UK position, but also provided further

access to continental European markets and Australasia, where Cogent also had

operations.

In late 2003, BNP Paribas Peregrine launched a Chinese investment banking business,

a joint venture with Wuhan-based Changjiang Securities. BNP said at the time that the

joint venture would be among the top 10 underwriters in China within two years.

In March 2004, BNP Paribas agreed to pay $1.2 billion in cash for Fargo, North

Dakota-based Community First Bankshares, in order to gain customers in 12 U.S.

states. Under the deal, BNP's BancWest said it would pay $32.25 for each share of

Community First Bankshares.

Financial analysis of BNP Paribas

For the fiscal year ended December 2003, BNP Paribas generated revenues of €17,935

million, up 6.8% on the previous year. Net income for the year totaled €3,761 million.

The retail banking segment generated revenues of €9,636 million in 2003, up 0.9% on

the previous year. This segment was the largest contributor to revenue accounting for

53.8% of total revenues in 2003. The private banking, asset management, insurance

and securities services segment generated total revenues of €2,476 million in 2003, an

increase of 12% on 2002. This segment accounted for 13.8% of total revenues in 2003.

In August 2004 BNP Paribas reported second-quarter net profit well above market

expectations, driven by income from its retail-banking business, as well as capital gains

on investments and lower bad-debt provisions. Net profit shot up 50% to €1.35 billion

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from €902 million the previous year. BNP Paribas said further signs of an economic

recovery in the second quarter, which appeared stronger in the United States than in

Europe, boosted results.

Financial ratios for BNP Paribas

Table 8.9: Financial ratios for BNP Paribas

1999 2000 2001 2002 2003



� BNP Paribas’ net interest margin ratio stands at twice that of an average French

bank, indicating strong profitability.

� Cost to income has been much lower than the French average, indicating that BNP

Paribas is run efficiently with strong financial performance.

� Return on equity ratio has been relatively high, especially if compared with other

French banks, such as Crédit Agricole, which reported ROAE of 5 in 2005.

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SWOT analysis

Figure 8.8: SWOT analysis of BNP Paribas

•Strong retail banking division

•Global exposure in 85 countries through

successful acquisitions and partnerships

•Recovery after losses in 2002

•Acquisition of Consors Discount-Broker

and other brokerages

•Strengthen retail banking through further

acquisitions

•Expand asset management business,

e.g. in China

•Does not hold reputation to compete with

many U.S. investment banks

•Private banking problems due to low

revenues

•Threat of US investment banks and

brokerage firms entering the European

market

•Too much exposure into Asian market



•Strong retail banking division

•Global exposure in 85 countries through

successful acquisitions and partnerships

•Recovery after losses in 2002

•Acquisition of Consors Discount-Broker

and other brokerages

•Strengthen retail banking through further

acquisitions

•Expand asset management business,

e.g. in China

•Does not hold reputation to compete with

many U.S. investment banks

•Private banking problems due to low

revenues

•Threat of US investment banks and

brokerage firms entering the European

market

•Too much exposure into Asian market




Strengths

Strong retail banking: retail banking is particularly important to BNP’s performance, its

strength has helped BNP to recover from the current economic downturn.

Global exposure: BNP Paribas is established in 85 countries around the world and the

bank is pursuing further expansion with conviction, enhancing its position with a

continuing string of deals, including the May 2002 acquisition of Cogent from

Australian AMP, followed by the official opening and establishment of BNP Paribas

Limited in China in November 2003. Also, BNP Paribas Immobilier and Atisreal

signed an agreement in January 2004, whereby BNP Paribas Immobilier would take a

49.9% stake in the capital of Atisreal International SAS, the remaining 50.1% being

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retained by the Vendôme Rome Group and Credit Lyonnais Private Equity. This

merger between Atisreal International and BNP Paribas Immobilier creates a major

force in the commercial real estate business in Europe, with 2,000 employees and the

capacity to offer a comprehensive range of services to clients.

Weaknesses

It does not have the reputation of many U.S. investment banks: despite its strides

forward in performance in most business units and its acquisitive approach, BNP

Paribas has still not reached a level where it is able to effectively rival top players such

as Citigroup and HSBC. It is increasingly difficult to break into the top tier of

investment banking and if the company has aspirations to do so it will have to adopt a

different strategy.

Private banking hurdles: BNP's private banking activities, in common with most of the

major banks in the sector, are of questionable efficiency, and revenues are being

outstripped by those achieved by much smaller competitors. BNP has been working to

actually expand its private banking products and services further.

Opportunities

Acquisition of Consors Discount-Broker and other brokerages: acquisition of Consors,

the German eBrokerage in a €287 million deal in April 2002, has placed BNP at the top

of the European eBrokerage sector. Integrated with BNP's existing Cortal eBroker, the

new CortalConsors business is Europe's largest online broker, with 1.2 million clients.

By driving IT the company hopes to take advantage of the move towards electronic

capital markets, establishing a strong competitive advantage, particularly in the

brokerage sector. The recent partnership agreement with Exane solidifies the group’s

position within brokerage, spreading the net further over Europe.

Strengthen retail banking: BNP Paribas should continue to acquire within the retail

banking industry, establishing a solid, low margin and stable growth pattern. Currently,

domestic retail banking accounts for 26% of company revenue.

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Expand asset management business: BNP launched the wealth management business at

the end of fiscal 2002, targeting customers with €250,000-750,000 to invest. In this

target market, it has a distinct advantage since there is a lack of dedicated competition.

Thus far the only competition it faces is the revamped CitiGold from Citigroup. The

company has the chance to transfer this to China, in a bid to gain an early hold on high

net worth clients in that region.

Threats

Threat of U.S. firms entering European market: U.S. brokerage firms and investment

banks continue to expand the European market, aiming for a share from the likes of

BNP Paribas and other established European banks. At the same time the U.S. market

continues to pose increasing problems in terms of market entry for European banks,

with entry into the investment banking sector even more restricted. The company needs

to balance its expansion policy to maintain a hold in Europe, otherwise it is in danger

of losing revenues on both sides of the Atlantic.

Too much exposure into the Asian market: recently the company has strengthened its

position in the Asian markets in expectation that the market will strengthen in line with

expected upturns in European and U.S. markets. The potential danger related to

excessive exposure in Asian markets puts BNP Paribas’ risk strategy into question.

Analysis of BNP Paribas in 2004

� In February 2004 Baudouin Prot, chief executive of BNP Paribas, said in an

interview with French daily Le Monde that the company would aim its acquisition

strategy at developing its retail banking operations in both Europe and the United

States. "Our priority will be the reinforcement of retail banking in Europe and the

United States, that is to say, the acquisition of agency networks or companies

offering specialized financial services," Prot said. "But other targeted acquisitions

in other business areas are not excluded," he added. Although the banking sectors

in France, Spain and the UK are already fairly concentrated, he said: "In Germany,

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on the other hand, the banking system remains very fragmented, as in the United

States." Prot also said that BNP Paribas was gaining market share in the French

retail banking market and added that in 2004 the aim was to increase the number of

employees in its French retail network, for the first time in more than 10 years.

� In July 2004, Cetelem, a BNP Paribas subsidiary and a leader in consumer credit in

continental Europe, signed an agreement with the Russian Standard group

represented by Roustam Tariko, the group's founder. Under the agreement, Cetelem

would acquire a 50% stake in the holding company that controls more than 90% of

Russian Standard Bank (RSB).

� In November 2004, Cetelem and Dresdner Bank signed a major agreement aimed at

expanding their partnership on the long term and developing their business in

Germany, the leading European market in consumer finance. This agreement

provides for an increase in their joint company's capital with Cetelem and Dresdner

Bank holding 50.1% and 49.9% of the capital respectively. Over 2005, this joint

company will progressively integrate all standardized installment loans produced

by Dresdner Bank AG's branch distribution network, one of the major German

retail banks. This operation is in line with the BNP Paribas strategy, which relies on

its specialized subsidiaries to ensure its international development in the field of

customer services. In this way, Cetelem consolidates its position in Germany by

capitalizing on the network of 740 Dresdner Bank own branches and of Allianz

agencies, and also reinforces is leading position in consumer finance in continental

Europe. Cetelem and Dresdner Bank have been partners since 2001, via a joint

company which operates in all fields of consumer finance: point-of-sale and direct-

to-customer finance, installment and revolving loans. This joint company aims at

becoming one of the premier specialists in consumer finance in Germany.

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Chapter 9

Best-Practice Company Analysis: Royal Bank of

Scotland

98

Chapter 9 Best-Practice Company Analysis: Royal Bank of Scotland

Summary

� The Royal Bank of Scotland is the largest bank in Scotland and the second largest

in the United Kingdom. It specializes in many different areas of financial services

providing insurance products, private banking (through the acquired Coutts),

corporate, retail, commercial and offshore banking.

� In terms of retail banking, the Royal Bank of Scotland and NatWest operate the

largest retail-banking network in the UK serving over 13.7 million personal

customers and 1.1 million small business customers.

� In March 2000, RBS acquired National Westminster Bank following a long take-

over battle with rival Bank of Scotland. The deal, worth £21 billion, was one of

the largest of its kind in British banking. The merger made RBS the second

largest bank in the UK, and one of the top 10 in Europe.

� For the fiscal year ended December 2003, the Royal Bank of Scotland Group

reported revenues of £19,229 million, an increase of 14% against 2002 revenues

of £16,815 million. Corporate Banking & Financial Markets accounted for 33%,

Retail Banking for 21%, Wealth Management for 9%, and RBS Insurance for 4%

of 2003 revenues.

� The return on equity ratio for RBS is higher than the UK banking average of 15,

and it is still on the increase. Although the recession years of 2001 and 2002 saw

a decline, the ratio was still positive and picked up again in 2003 and 2004.

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The Royal Bank of Scotland overview

The Royal Bank of Scotland is the largest bank in Scotland and the second largest in

the United Kingdom. It specializes in many different areas of financial services. The

company provides insurance products, private banking (through the acquired Coutts),

corporate, retail, commercial and offshore banking.

The Royal Bank of Scotland Group (RBS) is a diversified financial services group

engaged in a wide range of banking and financial activities in the UK, Europe, the

United States and Asia. RBS operates through eight main divisions: corporate banking

and financial markets, retail banking (includes RBS and NatWest Retail), retail direct,

wealth management, RBS insurance, Ulster Bank, citizens (United States) and

manufacturing.

In terms of retail banking, the Royal Bank of Scotland and NatWest operate the largest

retail-banking network in the UK serving over 13.7 million personal customers and 1.1

million small business customers. It has over 2,290 RBS and NatWest branches and

also provides a 24-hour telephone banking service, as well as over 5,900 ATMs and

boasts more relationship managers than any other bank. Also, as part of its retail

banking services sector, Retail Direct is responsible for the group's cards and non-

branch based retail businesses. Retail Direct issues a range of credit, charge and debit

cards to personal and corporate customers and engages in acquisition and processing

facilities for retail businesses. It also includes the group's Internet banking platforms,

Tesco Personal Finance, Virgin Direct Personal Finance, Direct Line Financial

Services, Lombard Direct and Comfort Cards.

Although RBS is concentrated in the UK and increasingly in Europe, it also has a

North American division - Citizens Financial Group. It has more than 850 branches and

1,691 ATMs in Rhode Island, Connecticut, Massachusetts, New Hampshire, and the

Mid-Atlantic region.

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Apart from retail banking, RBS also offers wealth management services through Coutts

and insurance products. RBS Insurance started operating in September 2003, bringing

together the Direct Line Group and the Churchill Insurance Group. The two companies

together make RBS Insurance the second largest general insurer, the number one motor

insurer and the number two home insurer in the UK.

RBS’ main focus in terms of future strategy, according to Mr Wilson, Head of Media

Relations is on the following issues: income growth, build on competitive advantage,

internal architecture, corporate strategy and work towards reduction of volatility of

income and profits.

The Royal Bank of Scotland timeline

Royal Bank of Scotland was founded in 1727. During the 19th century RBS expanded

in Scotland, opened its first English-based branch in London in 1874 and later started

to increase its presence in England through acquisitions.

In 1988 the group acquired Citizens Financial Group of Providence, based in the

United States, which led to the purchase of a number of struggling U.S. banks. In the

meantime, it started an alliance with Banco Santander of Spain in 1989, launching a

joint venture, RBS Gibraltar, which engaged in private and offshore investment

banking.

During the early 1990s, RBS maintained its focus on its core business of retail banking,

selling off its merchant bank interests and acquiring, in 1992, the Edinburgh-based

private bank of Adam & Company.

RBS launched a 24-hour telephone service, Direct Banking, in 1994, and established an

independent offshore bank, Royal Bank of Scotland International, in 1996.

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In March 2000, RBS acquired National Westminster Bank following a long take-over

battle with rival Bank of Scotland. The deal, worth £21 billion, was one of the largest

of its kind in British banking. The merger made RBS the second largest bank in the UK

and one of the top 10 in Europe. At the time, NatWest was perceived as vulnerable and

acquisition was widely expected. This take-over was the biggest ever in British

banking and took about two years to complete - the integration of the two companies’

IT systems proved to be a major challenge. As a result of this merger, NatWest

operates as a retail bank, still under its own brand. Royal Bank of Scotland was keen on

maintaining the identity of NatWest and one of its initial decisions was to halt the

branch closure program started by NatWest.

In 2001 RBS purchased the entire share capital of the Virgin One business from its

joint-venture partners; the Virgin Group and the Australian financial services company

AMP.

In mid-December 2002, the UK financial industry regulator fined RBS after it became

evident that the bank had failed to implement sufficient procedures to prevent money

laundering. The regulator imposed a fine of £750,000, which was the first of its kind.

In 2003, RBS continued its expansion in Europe and the United States. In Europe, it

purchased Nordisk Renting, a leasing company based in Sweden and Finland and the

credit card and loan portfolio of Santander Direkt Bank in Germany. In the United

States, Citizens acquired Commonwealth Bancorp, Feitelberg Company, one of New

England's largest insurance agencies, and Port Financial Corp.

The RBS Group completed the acquisition of Churchill Insurance Group plc,

announced in June 2003, having received all regulatory approvals by September 2003.

In the same month Citizens Financial Group, a wholly owned subsidiary of RBS,

agreed to acquire the entire issued share capital of the holding company for

Roxborough Manayunk Bank for $136 million (payable in cash).

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In October 2003, Coutts bank, a wholly owned subsidiary of the RBS group, reached

an agreement with Bayerische Hypo-und Vereinsbank (HVB) to acquire its private

banking subsidiary, Bank von Ernst & Cie, based in Zurich.

The RBS Group reached an agreement with People's Bank to acquire its credit card

business at a premium of $360 million, in February 2003. The credit card business of

People's Bank, based in Connecticut, was established in 1985 and had approximately

1.1 million customer accounts nationwide, around $2.3 billion of receivable balances

and employed 540 people.

In May 2004, RBS agreed to purchase Charter One Financial, one of the major

financial holding companies operating in the United States, for $10.5 billion in cash.

The acquisition of Charter One would make RBS one of the 10 largest commercial

banks in the United States.

Financial analysis of the Royal Bank of Scotland

For the fiscal year ended December 2003 the Royal Bank of Scotland Group reported

revenues of £19,229 million, an increase of 14% against 2002 revenues that were

£16,815 million. Corporate Banking & Financial Markets accounted for 33%, Retail

Banking for 21%, Wealth Management for 9%, and RBS Insurance for 4% of 2003

revenues.

Financial ratios for Royal Bank of Scotland

Table 9.10: Financial ratios for Royal Bank of Scotland

1999 2000 2001 2002 2003



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� The average net interest margin for the top UK banks in 2003 was 2.0, which

indicates that RBS has done well in terms of profitability of its investments (with a

margin of 2.3 in 2003).

� The cost to income ratio, the indicator of how efficiently the company is managed,

is also positive at 60 in 2003, compared with the UK average of 55.

� The return on equity ratio for RBS is higher than the UK banking average of 15

and it is still on the increase. Although the recession years of 2001 and 2002 saw a

decline, the ratio was still positive and picked up again in 2003.

SWOT analysis

Figure 9.9: SWOT analysis of the Royal Bank of Scotland

•Successful acquisitions, for example

acquisition of NatWest

•Brand strategy through different brands

•Distribution channel strategy

•Various sources of income and diversification

•Emerging markets in Asia

•Central and Eastern European new EU

Members

•Focus on improvements in European

and US operations

•Potential problems with acquisitions, due

to new costs associated with integration

and management systems

•High exposure to investment banking and

therefore negative performance in 2002

•Increasing competition and threats to the

banking industry from other companies



•Successful acquisitions, for example

acquisition of NatWest

•Brand strategy through different brands

•Distribution channel strategy

•Various sources of income and diversification

•Emerging markets in Asia

•Central and Eastern European new EU

Members

•Focus on improvements in European

and US operations

•Potential problems with acquisitions, due

to new costs associated with integration

and management systems

•High exposure to investment banking and

therefore negative performance in 2002

•Increasing competition and threats to the

banking industry from other companies




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Strengths

Successful acquisitions: the acquisition and relatively painless integration of NatWest

had a positive impact on RBS growth, ensuring it remains the fastest growing company

in the industry, averaging growth of around 15% a year compared with 10% for its

closest competitor - HBOS. RBS has the ability to integrate acquisitions with a relative

lack of disruption and it is a great advantage for the group.

Brand strategy: as opposed to some of its competitors (e.g. HSBC), RBS operates a

multi-brand strategy. The company operates under numerous well-known brand names,

which allows the company to appeal to many different segments of the market.

Distribution channel strategy: RBS is continuously improving the distribution of its

products. Its online and Internet-based access offers a combination of excellent growth

prospects and its retail direct business also saw growth of 27% in 2002 and 15% in

2003. Another example is Tesco Personal Finance, the UK's most successful

supermarket bank, with over four million customer accounts.

Various sources of income: RBS has many sources of income throughout the group,

and this diversity within the group makes the company more flexible and resistant to

economic and environmental changes.

Weaknesses

Potential problems with acquisitions: RBS has been successful in its integration of

acquisitions such as NatWest, however these transactions also have negative aspects.

New costs associated with integration and management systems can leave the group

more vulnerable to shifts in the market and the economy.

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Opportunities

Emerging markets: since there is more investment demand in the United States, Japan

and the rest of Asia, RBS should concentrate on these markets, especially in view of

low global interest rates.

Central and Eastern European new EU members: growth is picking up with exports and

private consumption. Also, because of their size, the new EU member states are a

profitable investment target.

Focus on improvements in European and U.S. operations: RBS has increased its

European operations with the purchase of the European motor insurance business of

AllState Corporation, which gave it access to the German and Italian markets. It also

strengthened its U.S. operations through the acquisition of the regional retail and

commercial banking operations of Pennsylvania-based Mellon Financial Corporation.

Further acquisitions are planned in the near future to achieve further aggressive growth

in these markets.

Threats

High exposure to investment banking: RBS has been increasing its exposure to

investment banking and since this industry has been hard hit during 2002 this had a

negative impact on RBS performance. This, however, may be seen as a short-term

threat and should not overshadow the highly profitable nature of the sector during

economic booms.

Increasing competition and threats to the banking industry from other companies: for

example supermarkets offering financial products. Competition is fierce for savings

and credit cards, while cheap loans are tempting homebuyers to re-mortgage just at a

time when they have become profitable for their previous lender.

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Analysis of the Royal Bank of Scotland in 2004

� In September 2003, the Royal Bank of Scotland announced the launch of its new

Flexible Business Loan, which allows customers to hand pick the best repayment

options to suit their business. These options are available not only at the start of the

loan but also throughout the repayment period. Extensive customer research from

the Royal Bank of Scotland revealed that when it comes to borrowing funds, small

business owners want flexible repayment terms, advice and control over the options

open to them as well as quick decision-making. In response to these findings, the

new Flexible Business Loan aims to deliver an increased range of repayment

options, combined with greater control of when they are exercised. Some choices

are immediate, whilst others can be implemented after 12 months of the loan term.

This strategy continued successfully in 2004.

� In May 2004, RBS announced an increase to savings rates of up to 0.25%. The

increase on savings accounts took place from June 1, 2004. Accounts to benefit

include tax-free ISAs, offering a top rate of 4.70%, Direct Saver, with a top rate of

4.25%, and Instant Savings Tracker, offering rates up to 3.75% which includes a

0.50% bonus for the first six months the account is open. The RBS 60 Day Savings

Account offers a top rate of 3.50% and the Bonus 90 Account’s top rate is 4.05%

gross which includes a 1% bonus if no withdrawals are made in a year. In addition,

the Royal Bank is increasing its Standard Variable Mortgage Rate (SVR) by 0.25%,

from 6.04% to 6.29%. The effect takes place for new and existing borrowers from

June 1, 2004.

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Chapter 10

Best-Practice Company Analysis: Barclays Bank

108

Chapter 10 Best-Practice Company Analysis: Barclays Bank

Summary

� Barclays is the UK's third largest banking company and its focus is on retail

banking, investment banking and investment management. Through its subsidiary

Barclays Bank, the company operates about 2,000 offices in the UK.

� In 2003, operating income at Barclays increased by 10% to £12,411 million,

compared with £11,327 million in 2003. Operating expenses rose by 9% to

£7,253 million, compared with £6,624 million in 2002. Restructuring costs

amounted to £209 million and operating profit rose by 18% to £3,812 million,

compared with £3,218 million in 2002. Profit before tax rose by 20% to £3,845

million between 2002 and 2003.

� Cost to income for Barclays shows a positive result, which had one of the lowest

cost to income ratios among UK banks, indicating that it is managed efficiently

and that profitability is likely to return in the near future.

� Barclays has achieved some successful acquisitions and these have contributed

greatly to company’s success. The acquisitions include Gerrard, one of the UK's

leading private client wealth managers, with £12.5 billion assets under

management and 116,000 client accounts as well as Banco Zaragozano in Spain.

� Barclays has suffered from historically weak performance in the private clients

and wealth management area, despite the potential this division of Barclays holds.

109

Barclays overview

Barclays is the UK's third largest banking company and its focus is on retail banking,

investment banking and investment management. Through its subsidiary Barclays

Bank, the company operates about 2,000 offices in the UK. Barclays has been involved

in banking for over 300 years and operates in around 60 countries with more than

76,200 employees. Its overseas business is managed by Barclay Bank International and

other subsidiaries include the Woolwich, Barclaycard, Barclays Capital, and Barclays

Global Investors. Barclays is headquartered in London, UK. In terms of market

capitalization Barclays is one of the top 10 largest banks in the world.

Barclays is a UK-based financial services group engaged primarily in banking,

investment banking and investment management. In terms of assets employed, it is one

of the largest financial services groups in the UK. The group also operates in many

other countries around the world and is a provider of coordinated global services to

multinational corporations and financial institutions in many of the world's main

financial centers.

The two core interests are primarily retail banking and investment banking. In addition

to servicing domestic markets, the group is a principal provider of ocordinated global

services to multinational corporations and financial institutions around the world. The

Group structure includes: Retail Financial Services, Corporate Banking, Barclays

Capital, Barclays Global Investors, Businesses in Transition and other operations.

Personal Financial Services provides various products and services to personal

customers throughout the UK, including current accounts, savings, mortgages,

consumer loans, general insurance and the provision of independent financial advice.

These are available to all customers through integrated channels comprised of the

branch network, telephone banking and online banking.

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Business Banking provides relationship banking to small, medium and large business

customers in the UK. Customers are served by a network of relationship and industry-

sector specialty managers who provide local access to an extensive range of products

and services, as well as offering information and support.

Barclaycard is the group's European credit card business. The division has operations

in the UK, Germany, France, Spain and Greece. It offers a full range of credit card

services to individual customers, together with card payment facilities to retailers and

other businesses.

Barclays Africa provides banking services to personal and corporate customers in

North Africa, sub-Saharan Africa and islands in the Indian Ocean. The portfolio is

comprised of banking operations in Botswana, Egypt, Ghana, Kenya, Mauritius,

Seychelles, South Africa, Tanzania, Uganda, Zambia and Zimbabwe.

Barclays Global Investors (BGI) is a global provider of investment management

products and services, offering structured investment strategies including indexing,

asset allocation and risk-controlled active strategies. BGI's investment philosophy

focuses on managing all dimensions of performance including return, risk and cost.

Barclays Capital conducts the company's investment banking business. As Barclays'

principal point of access to the wholesale markets, it provides corporate, institutional

and government clients with solutions to their financing and risk management needs.

Barclays Private Clients provides banking and asset management services for wealthy

individuals and their families. It operates from around 14 locations, serving clients in

more than 100 countries with over 900 employees.

In addition, Barclays also offers a range of financial services through its Internet

banking service. It offers online personal banking and business banking. Personal

banking includes services such as checking accounts, setting up standing orders and

transferring money. Business banking offers a similar service, and enables business

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customers to pay suppliers and make transfers to any bank account. It also allows

customers to download online account information into money management software.

The Barclays Bank timeline

Barclays’ history can be traced back to 300 years ago when John Freame and his

partner Thomas Gould founded a business in 1690. The name Barclay became

associated with the company in 1736, when James Barclay became a partner. The bank

was named Barclay and Company and later became known as the Quaker Bank,

because of the tradition of the founding families.

The new bank had 182 branches, mainly in the East and South East of England, it

expanded its branch network rapidly by taking over other banks, including Bolithos in

Cornwall and the South West in 1905 and United Counties Bank in the Midlands in

1916. In 1918 the company merged with the London, Provincial and South Western

Bank to become one of the UK's 'big five' banks. By 1926 the bank had 1,837 outlets.

Barclays acquired Martins Bank in 1969, the largest UK bank to have its head office

outside London and later in 2000 it took over The Woolwich, a leading mortgage bank

and former building society.

In 1981, Barclays became the first foreign bank to file with the U.S. Securities and

Exchange Commission and raise long-term capital on the New York market. In 1986 it

became the first British bank to have its shares listed on the Tokyo and New York

stock exchanges. Barclays' global expansion was given added impetus in 1986 with the

creation of an investment banking operation. This has developed into Barclays Capital,

a major division of the bank that now manages larger corporate and institutional

business.

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In 1995 Barclays purchased the fund manager Wells Fargo Nikko Investment Advisers

and in July 2003 it completed the acquisition of Banco Zaragozano, one of Spain's

largest private sector banking group.

Barclays most recent acquisition, announced in October 2003, was the purchase of

Gerrard Management Services Limited. This acquisition brought together one of the

UK's leading private client wealth managers with the Barclays Investment management

part of Barclays Private Clients. In January 2003 Barclays also acquired the retail

stockbroking business Charles Schwab Europe.

Financial analysis of Barclays Bank

In 2003, operating income at Barclays increased by 10% to £12,411 million, compared

with £11,327 million in 2003. Operating expenses rose by 9% £7,253 million,

compared with £6,624 million in 2002. Restructuring costs amounted to £209 million

and operating profit rose by 18% to £3,812 million, compared with £3,218 million in

2002. Profit before tax rose by 20% to £3,845 million.

Although not immune to the uncompromising economic environment, Barclays posted

satisfactory results in the difficult year of 2002. The company generated revenues of

£11,327 million, up from £11,200 million in the previous financial year.

Financial ratios for Barclays Bank

Table 10.11: Financial ratios for Barclays Bank

1999 2000 2001 2002 2003



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� Net interest margin for Barclays indicates that it is in line with the UK average,

however compared to 1999, it is evident that the bank has lost some of its

profitability. If compared with other UK banks, Barclays is far behind HSBC for

example, where the ratio was 2.2 in 2003.

� Cost to income for Barclays shows a positive result, it in fact has one of the lowest

cost to income ratios among UK banks, indicating that it is managed efficiently and

profitability is likely to return in the near future.

� Return on equity ratio for Barclays has been positively high, especially if compared

with HSBC, where the ratio was 9, indicating that Barclays is able to achieve high

returns.

SWOT analysis

Figure 10.10: SWOT analysis of Barclays Bank

•Barclays is one of the largest financial

groups in the UK

•Geographical diversity through presence

in 60 countries

•Good acquisition strategy expanding company’s distribution platform

•Expansion in wealth management and

private banking

•Offering of life, pensions and investment

products to Barclays customers

•Bad publicity in the past due to CEO’s

comments and reduction in the number

of branches

•Weak performance of Private Clients

business

•Lack of cross-selling initiatives in wealth

management

•Increasing competition in the UK from UK

clearing and mortgage banks



•Barclays is one of the largest financial

groups in the UK

•Geographical diversity through presence

in 60 countries

•Good acquisition strategy expanding company’s distribution platform

•Expansion in wealth management and

private banking

•Offering of life, pensions and investment

products to Barclays customers

•Bad publicity in the past due to CEO’s

comments and reduction in the number

of branches

•Weak performance of Private Clients

business

•Lack of cross-selling initiatives in wealth

management

•Increasing competition in the UK from UK

clearing and mortgage banks




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Strengths

Barclays is one of the largest financial groups in the UK: Barclays has been involved in

banking for over 300 years and with over 73,600 employees. Its vast size and solid

reputation, as well as strong brand name, make it one of the strongest banks worldwide.

Geographical diversity: Barclays operates in over 60 countries worldwide. This diverse

global reach allows the company to spread its risk.

Good acquisition strategy: Barclays has been able to achieve some successful

acquisitions and these have contributed greatly to company’s success. The acquisitions

include Gerrard, one of the UK's leading private client wealth managers with £12.5

billion assets under management and 116,000 client accounts as well as Banco

Zaragozano in Spain. The combination of the banking operations of Barclays Spain and

Banco Zaragozano create an international distribution platform, combining the existing

Barclays Spain customer base and branch network.

Weaknesses

Bad publicity in the past: towards the end of 2003 Barclays faced negative publicity

when the CEO Matt Barrett expressed a comment to one of the MPs. He said he did not

use credit cards as they were "too expensive", adding that he would advise his children

to not get into too much credit card debt. Also, the Office of Fair Trading (OFT)

described the marketing campaign as "misleading" and potentially illegal, which

offered "0% interest forever". It was also criticized in 2002 for its reductions in local

and village branches and accused of arrogance for its "Big Bank" advertising

campaign. The strategic reorientation towards higher-profit business, especially online

services, was said to be behind this move, also drawing criticism.

Weak performance of Private Clients business: Barclays has suffered from historically

weak performance in the Private Clients and wealth management area, despite the

potential this division of Barclays holds, due to the company’s diversity and structure.

In 2002 Barclays Private Clients operating profit fell 44% from 2001 to £333 million.

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Opportunities

Expansion in wealth management and private banking: Barclays has great potential in

this area due to its global reach and financial strength. Barclays is now working to

expand its wealth management business, trying to adopt a pro-active approach to the

increasingly competitive marketplace and intends to double the size of its European

business over the next five years. The group is also looking to potential expand into

Italy and Germany.

Offering of life, pensions and investment products to Barclays customers: through a

strategic alliance with Legal & General, Barclays is offering life, pensions and

investment products to Barclays’ customers - areas that were traditionally relatively

weak. This offers an opportunity to add life into the group's bancassurance operations.

Threats

Lack of cross-selling initiatives in wealth management: Barclays need to turn around

its poor cross-selling performance within the UK wealth management field, otherwise

it will struggle to meet its expectations, which could also undermine plans for

European expansion of the business.

Increasing competition in the UK: competition from other UK clearing and mortgage

banks is becoming fierce, and although Barclays remains the market leader, this

competition can affect its performance. In banking, Abbey National, Nationwide and

Intelligent Finance are - via the provision of cheaper overdrafts and higher interest

rates - attracting new customers.

Regulatory pressures: Barclays, along with other "Big Four" UK banks, have been

under increasing pressure from the Treasury Select Committee and other regulators

regarding the level of transparency they show for service charges and the high level of

credit card charges imposed. Alterations to the Banking Code have removed some of

the administrative barriers. Under the Code banks are now required to transfer full

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banking details to another bank within five working days, heightening the competitive

nature of the marketplace

Analysis of Barclays in 2004

� In August 2004 Barclays and the Woolwich announced an increase of all savings

rates by at least 0.25% with effect from September 1, 2004. Customers with

eSavings accounts saw an increase of up to 0.73% and benefit from interest rates on

their savings of up to 5.00% AER. Customers with Barclays Tracker and Woolwich

Branch Saver have seen an increase of 0.25%, effective from August 5, 2004.

� In June 2004 Barclays announced that it was creating 1,000 new customer-facing

jobs in its branch network. Two hundred new staff were hired. These actions follow

the formation of ‘UK Banking’ in January 2004, which brought together three

separate businesses, Personal Customers, Business Banking and Premier Banking.

The costs of the new staff are being funded in part by cost savings from synergies,

which derive from the formation of UK Banking. The objective is to reduce head

office and back office costs and re-invest savings in the people, fabric and

equipment in the branch network. Roger Davis, Chief Executive of UK Banking

said. “Barclays has a great high street brand and offers like Open Plan which

customers clearly want. It’s a strong base but there is much more to do to ensure

that we deliver excellent service and value for money consistently to all our

customers. We have many great people working hard every day for their customers,

but they must have the right leadership and the right tools for the job. These are the

priorities and are two of the critical success factors, which will underpin growth in

this business”.

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Chapter 11

Best-Practice Company Analysis: Credit Suisse

118

Chapter 11 Best-Practice Company Analysis: Credit Suisse

Summary

� Credit Suisse Group is the second largest financial services firm in Switzerland,

(UBS is the largest, and its main focus is on private banking and wealth

management) providing a wide range of financial and asset management services

through Credit Suisse Private Banking, Credit Suisse First Boston, and Credit

Suisse Asset Management. The company also offers banking and insurance

services, using various channels through Credit Suisse Financial Services and

Winterthur Group.

� For the fiscal year ended December 2003, the company generated revenues of

$20,676 million (CHF 26,322 million) and net income for the year was ($1,473

million (CHF 1,861) million.

� Net interest margin has been stable but relatively low for Credit Suisse, indicating

that this ratio could be improved in the future.

� The cost to income ratio was high in 2002 and 2003, indicating that year 2002

was difficult year for the company. Such high cost to income ratio shows that the

company is not managed efficiently and should work towards decreasing this

ratio.

� Credit Suisse distributes through its network of 223 branches serving corporate

and retail and private banking clients in Switzerland, various private banking

locations abroad, approximately 526 insurance locations in Switzerland and in

more than 23 countries worldwide.

119

Credit Suisse overview

Credit Suisse Group is the second largest financial services firm in Switzerland,

providing a wide range of financial and asset management services through Credit

Suisse Private Banking, Credit Suisse First Boston, and Credit Suisse Asset

Management. The company also offers banking and insurance services, using various

channels through Credit Suisse Financial Services and Winterthur Group. The group's

operations are structured into two business units: Credit Suisse Financial Services and

Credit Suisse First Boston.

Credit Suisse First Boston (CSFS) is a major provider of financial services in Europe

and under the brands of Credit Suisse, Credit Suisse Private Banking and Winterthur it

offers investment products, private banking and financial advisory services, including

insurance and pension solutions, for private and corporate clients, corporate and retail

banking, life and pensions, and non-life insurance business. The second business unit,

CSFB, includes: institutional securities (formerly Investment Banking), its global

business providing financial advisory, lending and capital raising services, sales and

trading for users and suppliers of capital, as well as CSFB Financial Services, which

provides asset management products and financial and advisory services.

The Credit Suisse timeline

Credit Suisse was created in 1856 in Switzerland and in 1940 it opened its first branch

outside Switzerland in New York. Its growth continued in 1978, when Credit Suisse

began co-operation with the First Boston Corporation. A decade later, Credit Suisse

acquired a controlling stake in the corporation, which created Credit Suisse First

Boston.

120

Credit Suisse continued its expansion in the 1990s, acquiring Bank Leu in 1990 and

Swiss Volksbank in 1993, which strengthened the company’s position in Europe. In

1994, the company began a strategic alliance with Swiss Re, followed by a similar

alliance with the Winterthur Group and in 1997 Credit Suisse merged with Winterthur

providing the company with more distribution channels.

In September 2001, the group continued its strategy of expansion into private banking

when it acquired Frye Louis, a U.S. investment management house with a specific

focus on high net worth clients. The year 2002 was not profitable for the Credit Suisse

Group, as for other financial services companies facing the economic recession. In June

2002, it announced that it was to slash 500 jobs as part of the restructuring in its private

banking operations. This came on top of a previous 700 redundancies in its private

client division. In the summer of 2002, the company announced it was to slash its

dividend after reporting a net loss for the second quarter. By September 2002, the

group's share price had fallen almost 50% from the previous year. In November 2002,

Credit Suisse announced that it had cut its dividend by 95% as it struggled to rebuild its

capital base following a record Q3 loss of CHF 2.1 billion.

In late November 2002, Credit Suisse announced plans to raise around CHF 1 billion to

support its capital base. The company said it was to issue mandatory convertible

securities, automatically converted into registered shares of the group no later than

December 2005. The following month, Credit Suisse First Boston, the group's U.S.

based investment-banking operation, was fined £4 million by the UK financial

watchdog for attempting to mislead the Japanese regulatory and tax authorities.

In December 2002, Credit Suisse First Boston was again fined $400 million. The fine

was imposed by regulatory bodies, including New York attorney general Eliot Spitzer,

for the investment bank's activities during the dot.com boom in the late 1990s and early

2002. In 2003, the head offices of Winterthur Insurance and Winterthur Life &

Pensions were merged resulting in the creation of a single management structure in

Winterthur Group.

121

Financial analysis of Credit Suisse

For the fiscal year ended December 2003, the company generated revenues of $20,676

million (CHF 26,322 million), and net income for the year was CHF1,861 million

($1,473 million).

Financial ratios for Credit Suisse

Table 11.12: Financial ratios for Credit Suisse

1999 2000 2001 2002 2003

Net Interest Margin 0.9 0.7 0.8 0.9 0.9 Cost To Income Ratio 77 73 87 97 82 Return On Avg. Equity (ROAE) 17 20 5 -10 17


� Net interest margin has been stable but relatively low for Credit Suisse, indicating

that this ratio could be improved in the future.

� Cost to income ratio was high in 2002 and 2003, indicating that year 2002 was a

difficult year for the company. Such high cost to income ratio shows that the

company is not managed efficiently and should work towards decreasing this ratio.

� Return on equity ratio has decreased significantly in the recent years, especially in

2002, when it reached negative values. In 2003 the ratio recovered to a high level

of 17.

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SWOT analysis

Figure 11.11: SWOT analysis of Credit Suisse

•Strong private banking division

•Extensive distribution network

•Credit Suisse First Boston is one of the

largest European investment banks

•Improvements at Winterthur due to

additional investments

•Cost restructuring and reduction by 22%

•Complicated organisational structure,

including reporting in different currencies

•Problems at Winterthur experiencing

losses

•Poor cost control and the need to reduce

costs due to falling revenues

•Problems associated with Basel II due to

significant increase in capital supporting

'operational risk'.



•Strong private banking division

•Extensive distribution network

•Credit Suisse First Boston is one of the

largest European investment banks

•Improvements at Winterthur due to

additional investments

•Cost restructuring and reduction by 22%

•Complicated organisational structure,

including reporting in different currencies

•Problems at Winterthur experiencing

losses

•Poor cost control and the need to reduce

costs due to falling revenues

•Problems associated with Basel II due to

significant increase in capital supporting

'operational risk'.




Strengths

Strong private banking division: private banking is the one area where Credit Suisse is

not only the market leader, but also achieves high returns.

Extensive distribution network: Credit Suisse distributes through its network of 223

branches serving Corporate & Retail and Private Banking clients in Switzerland,

various Private Banking locations abroad, approximately 526 insurance locations in

Switzerland and in more than 23 countries worldwide.

123

Credit Suisse First Boston is one of the largest European investment banks: CSFB is

one of the largest international investment banking companies in the world, with some

70 offices in more than 30 countries.

Weaknesses

Complicated organizational structure: the company derives more than half of the

revenues from CSFB, its U.S. oriented business, and has around 64% of its personnel

outside Switzerland. At the same time CSFB reports in dollars, and the consolidated

group as a whole uses Swiss francs. Also, the company has two co-CEOs: one based in

the United States, one based in Switzerland. It has a very rare mix of investment

banking, private banking and insurance, which is not replicated in other European

investment banks. Credit Suisse Group's structure is highly fragmented, making it

difficult to maintain a common strategy.

Problems at Winterthur: Capital at Winterthur Group has been a significant concern in

2002. Without the additional capital of CHF 2.6 billion, Winterthur Group would have

recorded a net loss of CHF 2.1 billion. Further, the shareholders' fund would have

fallen to CHF 2.4 billion.

Poor cost control: this has been a long-standing weakness for Credit Suisse and cost

burden has hindered the growth of the business. Looking at the cost to income ratio, it

seems that the company is having cost efficiency problems.

Opportunities

Improvements at Winterthur: Winterthur remains a potential for growth, even though it

has been experiencing financial difficulties in 2002, but with the overall improvement

in CS profitability there is an opportunity to improve Winterthur’s performance.

Cost restructuring: the company is now working on bringing the costs down, in view of

falling revenues. Credit Suisse decreased its costs by 22%, which meant that the asset

quality has improved significantly in 2003. Despite impaired loans still representing

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4.9% of total loans, the coverage of impaired loans by provisions has increased by four

percentage points between 2001 and 2002 to reach 64%.

Threats

Problems associated with Basel II: in terms of regulatory changes, the most important

are those led by the Basel Committee guidelines to which Switzerland, the United

States and EU countries are committed. The new capital guidelines (referred to as BIS

II), to be implemented from 2007, are likely to change the banking sector landscape

and the banks most likely to lose out are the capital markets banks such as Deutsche

Bank, UBS and CSG. The main reason for this is the significant increase in capital

supporting 'operational risk'.

Analysis of Credit Suisse in 2004

� In June 2004, Credit Suisse Group announced a series of strategic initiatives,

including structural and management changes. The Group announced it was to be

structured along three business lines:

1. Investment banking and wealth and asset management under the legal entity

Credit Suisse First Boston,

2. Financial services, including global private banking and corporate

3. Retail banking in Switzerland.

� Chairman Walter B. Kielholz said: "At this point in time, we have no interest in

pursuing a merger with another financial institution. Credit Suisse Group's financial

performance has improved significantly as a result of strong measures taken by

management. Our goals now are to accelerate organic growth and strengthen the

competitive positioning of our core banking businesses; further improve the

profitability of Winterthur and explore all options for capturing the value of our

insurance business for stakeholders; and, finally, to position the Group to play a

leading role in the evolution of the global financial services industry.”

125

� In August 2004, Credit Suisse First Boston's Shanghai Bank Branch received

approval from the China Banking Regulatory Commission to engage in financial

derivatives business in China. Paul Calello, Chairman & CEO for CSFB in Asia

Pacific, said he envisaged demand for such products among government agencies,

large domestic financial institutions, foreign and domestic corporates, as well as

institutional investors. He said: “Our expansion into financial derivative products in

China highlights the Firm's broad-based approach in building an integrated,

comprehensive global financial services platform in the country”. CSFB is regarded

as a leading global player in derivatives and structured products.

127

Chapter 12

Best-Practice Company Analysis: Bank of America

128

Chapter 12 Best-Practice Company Analysis: Bank of America

Summary

� Bank of America provides a diversified range of banking and non-banking

financial services and products through its various subsidiaries. It serves 28

million customers, managing assets of $474,000 million. It also provides services

to 25,000 midsize companies and two million small businesses.

� In October 2003, Bank of America reached an agreement for a $47 billion take-

over of FleetBoston Financial Corporation, to create the United States' second-

biggest bank by assets.

� Bank of America Corporation generated revenues of $38,529 million in 2003, up

9.8% on the previous year. The company also recorded record net earnings of

$10,810 million, up 17% on 2002.


average of 2.7, indicating that the bank is achieving strong profitability levels.

Cost to income has been relatively low for the bank, in line with the U.S. average,

(however much lower than most European banks) indicating a higher efficiency

level.

129

Bank of America overview

Bank of America provides a diversified range of banking and non-banking financial

services and products through its various subsidiaries. It serves 28 million customers,

managing assets of $474,000 million. It also provides services to 25,000 midsize

companies and two million small businesses. The company segments its operations into

four main business groups, including consumer and commercial banking, global

corporate and investment banking, asset management and equity investments.

The consumer banking segment provides comprehensive retail banking products and

services to individuals and small businesses through multiple delivery channels

including over 5,700 banking centers and 16,500 ATMs. This division also deals with

residential mortgage loans, issuance and servicing of credit and debit cards, direct

banking via telephone and Internet, student lending and certain insurance services. The

consumer finance component provides mortgage, home equity and automobile loans to

consumers, retail finance programs to dealers and lease financing to purchasers of new

and used cars.

The commercial banking division provides commercial lending, treasury and cash

management services, asset-backed lending and factoring for businesses with annual

revenues of up to $500 million. This section also provides the corporation's commercial

finance operations, which provide equipment loans and leases, loans for debt

restructuring, mergers and working capital, real estate and health care financing and

inventory financing to manufacturers, distributors and dealers. It also delivers many

investment services.

The global corporate and investment banking division is a primary dealer of U.S.

government securities. It underwrites and makes markets in equity securities,

underwrites and deals in high-grade and high-yield corporate debt securities,

commercial paper, mortgage-backed and asset-backed securities, federal agencies

130

securities and municipal securities through a separate subsidiary, Bank of America

Securities.

Bank of America Securities also provides correspondent-clearing services for other

security brokers, offers traditional brokerage service to high net worth individuals and

provides prime-brokerage services. Debt and equity securities research, loan

syndications, mergers and acquisitions advisory services and private placements are

also provided through Bank of America Securities.

The investing and asset management division includes Principa. Additionally, the

global corporate and investment banking division is a specialist in derivative products,

which include swap agreements, option contracts, forward settlement contracts,

financial futures, and other derivative products in certain interest rate, foreign

exchange, commodity and equity markets. In support of these activities, the global

corporate and investment banking division takes positions in securities and derivatives

to support client demands and for its own account. The principal investing division

includes direct equity investments in businesses and investments in general partnership

funds, while asset management includes the Private Bank, Bank of America Capital

Management, and Bank of America Investment Services.

Private Bank offers financial solutions to wealthy clients in the United States and

internationally. Bank of America Capital Management offers management of equity,

fixed income, cash and alternative investments, manages the assets of individuals,

corporations, municipalities, foundations and universities, and public and private

institutions, as well as providing advisory services to the corporation's affiliated family

of mutual funds. Bank of America Investment Services provides both full-service and

discount brokerage services through investment professionals located throughout the

franchise and a brokerage website that provides customers market analyses, investment

research and self-help tools, as well as account information and transaction capabilities.

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The Bank of America timeline

BankAmerica was founded as Bank of Italy in 1904. After the consolidation of other

companies started to affect its competitive position, the company decided the best way

forward was a merger. BankAmerica approached NationsBank, and the merger became

effective in July 1999. NationsBank was founded as the Commercial National Bank in

1874 and in 1901, (George Stephens and Word Wood formed what became American

Trust Company and the banks merged in 1957 to become American Commercial Bank,

which in 1960, merged with Security National to form North Carolina National Bank).

Following the merger, the combined company changed its name to Bank of America.

Merger difficulties forced the bank to cut back on its overseas operations, selling its

private banking operations in Europe and Asia to UBS. Acquisitions in 1999 included

Associates First Capital, 50% of Denver-based mutual fund firm Marsico Capital

Management (later acquired in full), and BA Merchant Services.

In 1999, the bank also began offering online banking through America Online (now

part of AOL Time Warner). It started a business-to-business eCommerce unit, the Banc

of America Marketplace, in 2001. In August 2001, the company announced a new

strategic direction. It planned to exit its sub-prime real estate lending and auto leasing

businesses. Part of this strategy was realised in December 2001, when the company

sold its real estate operations to Fairbanks Capital, a financial services firm based in

Utah.

In February 2003, the company acquired Framework, a privately held technology

company that provides financial institutions with a flexible multi-product platform to

create, fulfill and distribute the right financial products and services to any consumer.

In October 2003, Bank of America reached an agreement for a $47 billion take-over of

FleetBoston Financial Corporation, to create the United States' second-biggest bank by

assets.

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After Bank of America Corporation's merger with FleetBoston it became the second

largest bank in the United States, with full-service operations in more than 20 states

and the District of Columbia. It provides financial products and services to around 35

million households and two million businesses. It also provides international corporate

financial services for business transactions.

Financial analysis of Bank of America

Bank of America Corporation generated revenues of $38,529 million in 2003, up 9.8%

on the previous year. The company also recorded high net earnings of $10,810 million,

up 17% on 2002. The Consumer & Commercial banking segment generated revenues

of $26,303 million in 2003 accounting for 68% of total revenues in 2003, and the

Global Corporate & Investment banking segment generated revenues of $8,933 million

accounting for 23% of total revenues in 2003. The Asset management segment

generated revenues of $2,634 million in 2003 accounting for 6.8% of total revenues.

Financial ratios for Bank of America

Table 12.13: Financial ratios for Bank of America

1999 2000 2001 2002 2003




average of 2.7, indicating that the bank is achieving high profitability levels.

� Cost to income, the key ratio for the operative expenditure-profitability has been

relatively low for the bank, in line with the U.S. average, (however much lower

than most European banks) indicating a higher efficiency level.

133

� Return on equity ratio has been positive and high if compared with other U.S.

banks, where the average was approximately 15.

SWOT analysis

Figure 12.12: SWOT analysis of Bank of America

•Strong financial results in 2003 with 9.8%rise in revenues

•Increased size after the merger with

Fleet Boston•Nationwide banking centre with a coast tocoast banking distribution

•Restructuring programme

•Expansion in Commercial Banking& Business Credit business

•Fleet Boston merger created a stronger

•presence in US cities and abroad

•Bankrupty of United Airlines, wherethe bank had to cover airline’s bad loans

•Competitors seek to expand their market

share•Foreign exchange rate fluctuations

•Risks in merger integration due toincreased costs



•Strong financial results in 2003 with 9.8%rise in revenues

•Increased size after the merger with

Fleet Boston•Nationwide banking centre with a coast tocoast banking distribution

•Restructuring programme

•Expansion in Commercial Banking& Business Credit business

•Fleet Boston merger created a stronger

presence in US cities and abroad

•Bankrupty of United Airlines, wherethe bank had to cover airline’s bad loans

•Competitors seek to expand their market

share•Foreign exchange rate fluctuations

•Risks in merger integration due toincreased costs




Strengths

Strong financial results in 2003: Bank of America reported strong results in 2003 with

a 9.8% rise in revenues to $38.5 billion and a 17% rise in net income to $10.8 billion.

Increased size after the merger with Fleet Boston: in April 2004 Bank of America

completed its acquisition of Fleet Boston and this merger created the fourth most

profitable company in the world. The new Bank of America has approximately $96.5

billion in equity and a $166 billion market cap. It will provide extensive retail

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distribution in 29 states and be the largest small business and middle market lender in

the country. The acquisition of Fleet further diversifies the company's revenue mix,

both across business lines and geography.

Nationwide banking center: Bank of America has an extensive banking branch and

ATM network, from coast to coast. In terms of coverage, Bank of America is now the

largest in the United States, and its online banking facility is now one of the most

popular in the United States. The company is also rapidly expanding teams of personal

bankers and investment advisors and these improvements make the company more

accessible to new and existing customers.

Weaknesses

Bankruptcy of United Airlines: In late fiscal 2002, the bank was forced to put aside

$1.2 billion to cover bad loans to United Airlines, the bankrupt U.S. airline, which filed

the largest ever airline bankruptcy in December of that year. This was yet another

example of a major player in the U.S. banking industry suffering due to bad loans to a

high profile bankruptcy victim and poses yet another impediment to the rebuilding of

general market confidence.

Opportunities

Restructuring program: Bank of America has initiated a restructuring program and is

implementing new business processes. In the past, the company organized its activities

largely by geography and by line of business i.e. product or service. It is now changing

its reporting structures, compensation and incentive plans, and business processes

throughout the company to reflect the customer's view. For example, associate teams

are not focused just on products like mortgages or cards or on a specific region or city,

but on expanding relationships in a customer group, such as "Consumer," "Small

Business" or "Premier". This process is making the company more customer-centered

and reactive. The company is also implementing an integrated business planning

process that brings together four key elements of corporate planning: strategic

planning, financial planning, risk planning and associate planning. Each of these

135

processes is now designed to take into account the outcomes of the others. One

outcome of these changes will be improved risk planning processes, which will

improve the consistency of the company's earnings.

Expansion in Commercial Banking & Business Credit business: Bank of America is

planning to increase its market share in Commercial Banking and Business Credit,

developing targeted client acquisition criteria and focusing on industries in which it has

built specialty practices and expertise, including health care, education, not-for-profits

and the beverage industry. The company is also continuing to invest in developing and

delivering innovative products and solutions, such as enhancements to its treasury

services that will differentiate it from its competitors.

Fleet Boston merger: this merger creates many new opportunities for the company by

developing a stronger presence in U.S. cities such as New York and also in foreign

markets such as Latin America.

Threats

Competitors seek to expand their market share: the activities in which the company and

its four business segments engage are highly competitive, and due to the high

concentration of banks in the United States, this market is becoming saturated. The

methods of competition center around various factors, such as customer services,

interest rates on loans and deposits, lending limits and customer convenience, such as

location of offices. Bank of America currently has a market leading coverage across the

United States, but faces increased competition as its rivals seek to expand their banking

center and ATM coverage. This could result in a loss of customers and subsequent

decline in revenues.

Foreign exchange rate fluctuations: Bank of America, due to its geographical spread, is

vulnerable to foreign exchange fluctuations and also recessions in some markets. For

instance in Argentina and Brazil, Bank of America incurred substantial losses and

136

increased provisions. In addition, exposure to high-risk sectors, including telecom and

tech stocks, has led the bank to suffer sizeable losses on its equity portfolios.

Risks in merger integration: the merger with Fleet Boston remains a challenge for Bank

of America, and if the two businesses are not integrated successfully, the company

could potentially face the risk of significant customer loss and incur operational losses.

Delays in the integration through poor planning or culture clashes could prove costly to

the company.

Analysis of Bank of America in 2004

� In September 2004 Bank of America celebrated the conversion of its Fleet retail

branches in New York City to Bank of America banking centers with ribbon-

cutting ceremonies. In addition to converting pre-existing Fleet branches, Bank of

America also opened the doors on six new banking centers, and now has a total of

30 banking centers and 216 ATMs throughout Manhattan.

� Also in September 2004, influenced by consumer demand to eliminate all fees

traditionally associated with a home equity line of credit, Bank of America

introduced its no-fee home equity line of credit. Home equity is one of the most

affordable borrowing options available to customers in the United States, given the

low rates and no fees. While borrowers are usually aware of closing costs and

application fees when applying for a line of credit, they often do not realize that

there may be other fees and requirements attached to their lines of credit. Bank of

America's new no-fee home equity line of credit eliminates all costs. Customers

that meet the terms of their agreements avoid late charges and fees for returned

payments or returned convenience checks. The no-fee home equity line of credit

contributed to a sizeable overall spike in home equity volume for Bank of America.

In the first six months of 2004, Bank of America reported record home equity

volume of $28 billion, compared to $38 billion in combined volume for all of 2003.

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� In December 2004, Bank of America announced that its customers spent a record

$100 billion on their debit cards for goods and services during 2004, making the

bank the first financial institution to pass the milestone within any year.

� Also in December 2004, Bank of America announced that it had agreed to sell its

BankBoston operations in Panama to Panama City-based Banco General. The

company also announced that it had made a decision to sell its BankBoston

operations in Colombia and Peru, which indicates that the company decided to

divest from these countries, and focus on more profitable areas in Latin America.

� In January 2005, Bank of America and the San Francisco Giants announced that

they would continue their nearly 30-year partnership with a significantly expanded

sponsorship agreement. The new six-year agreement ensures that Bank of America

will remain the Official Bank of the San Francisco Giants and SBC Park through to

2010.

139

Chapter 13

Appendix

140

Chapter 13 Appendix

Definitions

The following section provides a full list of definitions of terms and abbreviations used

throughout this report.

A guide to financial ratios used in this report:

� Net interest margin is a guide to the profitability of a company's investments - the

higher it is (net interest margin is interest earned minus interest paid divided by

total earning assets) the better it is for the bank;

� Cost to income is a key ratio for the operative expenditure-profitability ratio for

banks and the lower the cost to income ratio, the more efficiently the bank is

managed;

� Return on assets ratio and return on equity ratio give an indication of how effective

the business is in generating profit. The higher the ratio the greater the return on

assets or equity, respectively.

Acquisition - a company buys shares in another company in order to gain control.

Asset management - the structuring, monitoring, and management of a portfolio of

financial assets for an individual, corporate or institutional client.

Bancassurance - a combination of banking and insurance business. A high street bank,

for example, might sell both mortgages and life insurance policies, a business activity

in which banks sell services and products usually sold by insurance companies. In

bancassurance (by the ECB), four different sequences of increasing integration can be

distinguished. First, banks may provide insurance products simply through co-

141

operation agreements with existing insurance companies. The bank will typically

distribute insurance products labeled with the name of the insurance company. Second,

banks and insurance companies may decide to establish joint ventures to provide

insurance products through the distribution network of the bank and, most commonly,

under a name associated with the bank. Third, banks may decide to establish

subsidiaries to develop the insurance business area and the products to be distributed

through the banks network(s). Fourth, banks and insurance companies can merge on a

holding level or a bank can acquire an insurance company to become a subsidiary of

the bank. The latter two sequences would constitute conglomerates.

Credit card - a revolving credit card provides consumers with access to a line of credit.

Consumers make payments using their card and receive a bill at the end of the billing

cycle. The card issuer usually demands a minimum payment against the outstanding

balance, but beyond this the customer can choose how much of the bill he wishes to

repay, up to and including 100% of the balance outstanding. Any balances, which are

not repaid within the interest free period offered by the card, incur interest at the rate

advertised by the card issuer. A revolving credit card may or may not be linked to a

customer’s bank account.

Deposits - this includes monetary funds held at all forms of deposit-taking institutions,

and taken from non-bank depositors (retail, corporate and public-sector). Therefore,

inter-bank deposits are not included in the market figures. However, the data used in

this report is almost always retail deposits. Data for retail deposits only includes

domestic deposits taken from individuals.

Equity fund - invest the majority of their assets in the shares of companies on the stock

exchange. These are referred to as listed equity, and the regulations stipulate what

percentage of the assets may be invested in assets of unlisted equity. Equity funds may

consist of foreign or domestic equity.

142

Hedge funds - despite the name, hedging transactions are not the primary purpose of

such funds. Since these funds are aimed at generating absolute income, they make

investments which conventional funds are not allowed to make (speculation on market

declines, short sales, use of derivatives, financing investments by borrowing). This

enables hedge funds to record positive returns irrespective of the market situation.

Merger - two or more companies joining together.

OFT – the Office of Fair Trading is an independent organization that plays a leading

role in promoting and protecting consumer interests throughout the UK, while ensuring

that businesses are fair and competitive.

Private banks - banks that provide banking and investment services, including

independent and confidential advice and individually tailored financial planning

services, to both individual and institutional clients with a certain amount of investable

assets. Minimum levels of investment are determined by individual banks and vary

significantly between companies.

143

Index

advice, 57, 105, 109, 142

Asia, 36

asset management, 14, 15, 18, 52, 53, 60, 61, 63, 65, 78, 79, 80, 83, 89, 91, 95, 110, 118, 119, 124, 129, 130

Bank of Scotland, 45, 55, 63, 71, 81, 92, 102, 112, 121, 132

banking, 32, 33, 34, 36, 53, 62

banks, 1, 12, 13, 14, 15, 16, 17, 19, 22, 23, 26, 27, 28, 29, 30, 31, 32, 33, 35, 36, 37, 38, 39, 42, 44, 45, 47, 55, 58, 60, 63, 70, 74, 78, 80, 81, 84, 88, 92, 94, 95, 96, 100, 102, 108, 109, 111, 112, 113, 115, 123, 124, 128, 130, 132, 135, 140, 142

Barclays, 36

Belgium, 53, 54

Benelux, 54

capital, 12, 14, 26, 32, 33, 37, 38, 39, 60, 61, 66, 79, 91, 93, 94, 96, 101, 111, 119, 120, 123, 124, 129

Citigroup, 33, 35

consumer, 29, 31, 38, 39, 43, 44, 61, 65, 66, 70, 96, 109, 129, 131, 136, 142

credit, 54

cross-border, 34, 35, 36, 53

customers, 13, 14, 15, 16, 18, 46, 47, 52, 57, 60, 61, 64, 66, 70, 78, 79, 88, 89, 90, 91, 95, 98, 99, 105, 109, 110, 115, 116, 128, 130, 134, 135, 136

deposits, 29, 33, 135, 141

Deutsche Bank, 36

distribution, 13, 16, 33, 34, 52, 53, 63, 64, 76, 88, 89, 96, 104, 114, 119, 122, 133, 141

domestic, 15, 33, 34, 35, 36, 63, 70, 78, 79, 83, 85, 94, 109, 125, 141

equities, 31

equity, 14, 15, 17, 31, 32, 45, 48, 52, 54, 55, 63, 65, 71, 73, 78, 79, 81, 89, 92, 98, 103, 113, 121, 129, 130, 132, 133, 135, 136, 140, 141

Europe, 33, 35, 36, 37, 60, 62

expansion, 32, 33, 34, 36, 37, 54

foreign, 27, 28, 29, 32, 48, 58, 66, 69, 71, 74, 79, 80, 83, 111, 125, 130, 135, 141

France, 63, 65

Germany, 36

global, 33, 34, 35

growth, 12, 22, 23, 26, 27, 28, 30, 31, 38, 46, 47, 48, 49, 57, 58, 65, 70, 72, 74, 80, 82, 84, 85, 94, 100, 103, 104, 105, 116, 119, 123, 124

hedge funds, 73, 142

insurance, 13, 14, 16, 18, 23, 30, 32, 42, 43, 44, 52, 53, 54, 57, 60, 61, 63, 65, 66, 69, 70, 73, 89, 91, 98, 99, 101, 104, 109, 118, 119, 122, 123, 124, 129, 140

investment, 13, 14, 15, 17, 30, 36, 39, 42, 43, 52, 53, 61, 62, 68, 69, 71, 78, 79, 80, 83, 85, 89, 91, 94, 95, 100, 104, 105, 108, 109, 110, 111, 115, 119, 120, 123, 124, 129, 130, 134, 142

Italy, 54

loans, 12, 26, 28, 29, 31, 37, 47, 61, 69, 75, 79, 96, 105, 109, 123, 129, 134, 135

merger, 12, 16, 17, 26, 33, 38, 53, 54, 58, 63, 65, 74, 88, 90, 94, 98, 100, 124, 130, 131, 133, 135

144

mortgage, 37, 38, 49, 75, 105, 111, 115, 129

Netherlands, 54

planning, 27, 57, 134, 135, 136, 142

private banking, 13, 14, 15, 16, 36, 38, 42, 43, 52, 53, 56, 60, 61, 63, 65, 68, 69, 72, 89, 91, 94, 98, 99, 101, 114, 118, 119, 120, 122, 123, 124, 131

products, 13, 15, 16, 18, 29, 34, 39, 42, 43, 46, 49, 52, 53, 61, 65, 66, 69, 76, 78, 79, 88, 89, 94, 98, 99, 104, 105, 109, 110, 115, 119, 125, 128, 129, 130, 131, 134, 135, 140

recession, 31, 33, 35

retail, 1, 12, 13, 14, 16, 17, 22, 27, 29, 31, 37, 38, 39, 42, 43, 44, 46, 47, 49, 52, 53, 56, 57, 58, 60, 61, 62, 63, 64, 65, 73, 75, 78, 79, 83, 88, 89, 91, 93, 94, 95, 96, 98, 99, 100, 104, 105, 108, 109, 112, 118, 119, 124, 129, 133, 136, 141

revenues, 13, 14, 15, 16, 17, 18, 23, 42, 44, 52, 54, 58, 78, 81, 82, 83, 84, 88, 91, 94, 95, 98,

102, 112, 118, 120, 123, 128, 129, 131, 133, 135

securities, 49, 69, 81, 89, 90, 91, 119, 120, 129, 130

services, 13, 14, 15, 16, 18, 23, 27, 28, 29, 34, 36, 42, 43, 44, 46, 48, 49, 52, 53, 54, 56, 57, 58, 60, 61, 62, 64, 65, 66, 68, 69, 70, 72, 73, 74, 76, 78, 79, 83, 85, 88, 89, 91, 94, 95, 96, 98, 99, 101, 109, 110, 114, 118, 119, 120, 124, 125, 128, 129, 130, 131, 135, 136, 140, 142

shareholder, 62

Spain, 54, 63

stock market, 31, 32

strategy, 32, 34, 47, 48, 73, 85, 90, 94, 95, 96, 100, 104, 105, 114, 119, 123, 131

UK, 36, 54, 63

United States, 34, 35, 36, 54

the top 10 global retail banks report -...

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