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2.6.8 Products Revisited
As it was outlined in the paragraphs above, FIH’s products span over a broad area of different financial tools and solutions.
Figure 7: Net interests and fee income, and net profit for the FIH Group in 2009
Source: Own creation, based on figures from (FIH AR, 2009, p. 70)
As the figure above demonstrates, the Group’s positive earnings in 2009 was in receipt by three segments; Capital Markets, Corporate Finance and Private Equity despite the fact that they did not generate the biggest amount of net interest and fee income. In terms of that, Corporate Banking, Property Finance and Structured Finance were the most important business segments, but they did not generate any profit on the bottom line.
As such, the FIH’s problems are reflected on a broad scale over its product portfolio.
The poor 2009-result indicates that more details regarding the business is needed to find an explanation for the inconsistencies and resulting financial downturn.
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Since I have only access to limited financial information, the following overview will only provide a very brief look upon a few points.
FIH is, due to its long history and its position as a corporate bank, having a financial setup with enclosed strategic implications which to some extent differs to those of other banks’:
Funding channels with very strong emphasis on financing from the money market (FIH AR, 2009)
The weighting with more loans than deposits (Theil, 2010)
Special credit facilities with ATP (FIH AR, 2009)
SEB is in my opinion is a market player with a focus and position close to that of FIH’s;
SEB’s mission is to be “the leading Nordic bank with a strong focus on corporate banking and wealth management”, (SEB AR, 2009) and can thus be utilized as a peer when setting up a picture of the size and returns related to FIH.
In the Danish market, SEB is known for its focus on big customers plus its interests in merchant banking. 25.71 % of the SEB Group’s total investments were related to Denmark whilst merchant banking throughout all markets consisted of 47.82% of the total assets.
(Appendix 3)
The financial comparison between FIH and SEB is done with the aim of supporting the evaluation of the chosen subjects.
2.7.1 Size
The size of FIH is measured in terms of its 2009-balance DKK 130,356 million and it is, as earlier mentioned, among the largest banks in Denmark.
In comparison, SEB had in 2009 a balance of SEK 2,308,227 million which corresponds to DKK 1,668,386 million.
However, SEB has operations in several countries with Sweden as it home market, so only 9.59% of its assets were related to the Danish. (Appendix 3)
In terms of total assets SEB in Denmark is thus 1.2 times the size of FIH which makes them very equal when also taking into consideration that SEB has some business areas that FIH is not engaged within. (Appendix 3)
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2.7.2 Performance
As pointed out in section 1.2.1, FIH’s performance has decreased from its many years of high earnings. Something is causing this, but what – is it internally in the company or is it a general market trend that other players like SEB is also experiencing?
Figure 8: ROE after tax and income/cost ratio for FIH and SEB
Source: Appendix 4
Return on Equity (ROE) is a ratio which describes value creation for the owners’ equity investments in the bank. (Elling & Sørensen, 2005)
From the figure it can be seen that SEB in general has generated a higher ROE than FIH and thus, have performed better in terms of the owner’s return, but also that they both are object to a sharply decreasing returns.
The income/cost ratio measures “operating income, including value adjustments for changes in current prices, as a percentage of operating expenses including credit loss expenses (impairment losses)” (Finanstilsynet.dk, 2010) and here, SEB has generally had a stable level around 1.5 whilst FIH generated a higher one until 2008.
15.8
20.8
19.3
13.1
1.2 13.2
15 15.5
2.4
0.1
1.5 1.7 1.8 1.6 1.6
4.2
3.3 2.8
1.15 0.93
0 5 10 15 20 25
2005 2006 2007 2008 2009
Percentage (ROE), Ratio (income/cost)
Year
ROE after Tax (%) and Income/Cost Ratios for FIH and SEB
SEB - ROE after tax FIH - ROE after tax SEB - Income/cost ratio FIH - Income/cost ratio
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This means that FIH, in terms of the income and cost related to operations has performed better in most years, but has now fallen to a level of 0.93 which infers that it is either very close to relatively seen earning less operating income than it pays in expenses or it has had too large accruals.
FIH and SEB are both experiencing heavily decreasing returns, but FIH is vulnerable as earlier described, due to its funding situation.
3 Strategic Analysis
Strategy and the planning of it is a field of great importance, but also one of complexity with no sudden answers. Strategy lays the foundation for securing that decision-making is based on insightful reflections. Perceiving the best strategy is, for a firm, a way to achieve future success.
The goal of this strategic analysis is to examine the described business model and assess the existing strategic implications hereof. By that said, the turning-point is to obtain a deeper understanding of explicit business aspects and how these are actually reflected in the strategic issues that FIH is facing.
The main issues which have been identified so far are related to:
Internal conditions
Funding
Exposure to environmental changes and uncertainties
Positioning in the market
These are all challenges FIH needs to cope with.
Right now, FIH is balancing on a double-edged sword. Dealing with the problems is completely necessary, but also risky since it is the future which is at stake.
It is therefore of interest to go down to a deeper analysis level to question why these issues have appeared, how they influence the bank and if other issues might show up from underneath the surface so that it can become possible to come up with a recommendation.
The following figure illustrates the approach that will be utilized in order to delineate the issues throughout the chapters 3-5.
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• Internal analysis of FIH
• Section 3.1
Firm-perspective
• Internal and external analysis
• Sections 3.1, 3.2 and 4.1
Micro-perspective
• External analysis
• Section 4.2
Macro-perspective
Three levels of analysis will be centered upon – a firm-specific, a micro-specific and a macro-specific level.
Figure 9: My Approach to the Examination of the Identified Issues
Source: Own creation
The internal part will center on FIH and its resources, whilst the external part will go into depth with competitive and systemic aspects.