Case report Essay Example

HBS case “Shenzhen Development Bank

Table of Contents

2Executive Summary

2Asset quality

3A Closer Look into Shenzhen Development Bank’s Earnings Capability

3Comparison with peer industries

4Factors that mainly drive these differences

4An Analysis on Shenzhen Development Bank’s Capital Adequacy

5Evaluation of New Bridge’s Investment

5Conclusion

6Works Cited

Executive Summary

The report provides an assessment as well as appraisal of newsbrige proposed venture in Shenzhen development bank. The approach of assessment entails evaluation the banks financial performance, ascertaining the factors like the asset quality, earning capacity as well as adequacy of capital. It as provides the comprehensive assessment of the relevance of the price that newsbrige need to pay for the share, proved some situations. Every graph as well as exhibit for the assessment might be found in the appendixes of the report. The analyses of these factors depict that newsbrige proposed venture into SDB bank is advice in spite of specific negative aspect of the bank. It must be taken consideration that there is some restriction to the assessment in the report as a result of small scope of data that was provided for the assessment. In spite of banks decline tend in financial performance, news bridge venture of 18% into SDB for the worth is 1.6 times the book value is relevant. Provided that the news bridge will be substantial impact on the bank’s verdict, it might be worth their whilst to venture into it. Given the situation of more indivisibly that demands the banks shares also, their performance might be enhancements. As long as newsbrige might make the right verdict concerning the venture permitting high standards assets and less NPL, the venture is worth.

Asset quality

The quality of asset that the bank is ventured in must be considered. Exhibit 10 points out the NPL for the bank to be 11.6% which is quite high unlike to NPL of other industry with exception of Bocom which 16.7%. The SDB depict a high NPL ratio unlike the average industrial trend of 7.3%.

NFP loan is worked out as follows

  • Sum the net NPL for SDB which $10,159

  • Determination of bank allowances for loan loans which is arrived at by estimating the values of current loan debt which $74160.7for SDB bank

NPL for SDB bank will hence be {=74160.7/10159)=7.3%

This depicts the high proportion of SDB asset is of low quality, provided that the high credit risks for the loan. It must be considered that the bank’s NPL ratio might be high since there is probably low NPl number. This is due to the fact that they are the company’s book value and thus the value arte subject to the bank’s judgment where they are less likely to realize any negative aspect of their activities to proceed on investor confidence. Furthermore, as pointed out in exhibit 8, the bank has a loan reserve worth $391 million. This is leas unlike its own reserve ratio standards as depicted in table 1. This would mean that in the event that the bank rune or mass withdrawal, the bank will have less capital to sustain the business and risk being insolvent. Proved that the bank capital sufficiency needs might As well be affected in that a growth in the amount of capital to satisfies the standards to be sufficiently capitalized. This has further ramification, explained in the capital sufficiency assessment of the report. The industry average LLR is as well low at $386.04 as depicted in the table 1 as the average of LLR to be 1.44% arrived by working as follows LLR=(184-116)=$68/47=1.44% of gross loan. The would mean that with exception of Bocom, other financial institution in the industry ventured in a Safe loan, furthermore, placing more emphasis on a volatile loans unlike other financial institution proved poor risk control[ CITATION Bou98 l 1033 ]. The Workings for the Bank’s implied LLR level by the reserve ratios provides the following outcome

LLR= {Pretax income + loan loss provision) / net charge-offs}

LLR= (184-116) =$68

NPL/ LOANS

LLR/ LOANS

Tier 1 Car

Total Car

Equity/ Loans

Equity/ Assets

Minsheng

A Closer Look into Shenzhen Development Bank’s Earnings Capability

In providing an extra assessment of new bridge venture in SDB, the banks enabling capacity requires to be examined, as observed in exhibit 9, the bank had a declining level in the net interest margin from 3.5% to 2.4% for the last three financial period. Furthermore, the return on average asset and return on average equity depict same trend both decline from 0.9% to 0.3% and 22.5% to 9.2% correspondingly. As pointed out in figure 1, the bank’s poor financial performance might as well be as a result of decline in net profit from 56 million dollars to 45 million dollars from the year 200 to 2001. In the year 2002, whilst the net profits increased by 1.79%, this is substantially least amount unlike profits for the year 2000.

Comparison with peer industries

As compared to other peer industries with the exception of Bocom, it is evident that SDB bank is performing above the industrial average since, the bank’s earning capacity in terms of ROA and ROE is declining while the industry peer financial performance depict a an increasing trend in ROA and ROE depicting a 7.2% average in asset capacity. Since the average of LLR is 3.8% for gross loan, it would mean that with exception of BoCom, other financial institution in the industry ventured into a safe loan, furthermore, placing more emphasis on SDB bank takes more volatile loans unlike other financial institution proved the banks poor risk control.

Factors that mainly drive these differences

.[ CITATION Asw10 l 1033 ]These factors are the main drivers of diverse between the SDB financial situations as compared to other financial institution. It points out that poor financial performance by SDB. Whilst the net return ion earning asset is least is same as compared to other banks, it depicts a least ROA and ROE unlike other banks as depicted in exhibit 10. This would be as a result of poor credit risk controls that lead to growth in operating expense and decline in ROE. Poor venture options also lead to decline in ROA for SBD

An Analysis on Shenzhen Development Bank’s Capital Adequacy

In examining the newsbrige venture, the implication of SDB capital sufficiency requires an examinations. The net capital adequacy ratio reduces from 10.6% to 9.5% in the year 2002 to 2003 as depicted in exhibit 9. This might be inferred from the standard of assets that the bank ventures in since, the quality of assets is low as depicted in exhibit 8, and there is a growth in NPL implying that the Bank’s credit risk weighted asset declines also. The low capital ratio implies that the bank will capitalized but it is sufficiently capitalized as per the Basel one guidelines, a sufficiently capitalized company is defined as having a net capital adequacy ratio of 8% , exhibit 9 depict that SDB has a net capital adequacy ratio of 9.6% whilst the is sufficiency, this would mean that if there is sudden change in standards with regards to holding more capital, the bank will be required to increase the capital provided that there is least capital sufficiency.

Evaluation of New Bridge’s Investment

.[ CITATION Ümi13 l 1033 ]Provided that the poor financial performance of SDB bank, it would mean that the news bridge venture is entirely unjusfiable. Nevertheless, another factor requires considerations. The multiplies prior to conclusion might be reached, the appraisal of 1.6 times book value for the share. The worth might be depicted as less appropriate since the multiplier is 5.49 times as depicted in exhibit q, it is the multiplier that might be deem as less appropriate since, it is the only high since, the bank is overvalued in terms of shares due to supposed growth in investors who wants to purchase portion in the news bridge and are willing to pay more. Proved that this is 1.6 times the book value price which deem as les appropriate appraisal

Conclusion

In spite of banks decline tend in financial performance, news bridge venture of 18% into SDB for the worth is 1.6 times the book value is relevant. Provided that the news bridge will be substantial impact on the bank’s verdict, it might be worth their whilst to venture into it. Given the situation of more indivisibly that demands the banks shares also, their performance might be enhancements. As long as newsbrige might make the right verdict concerning the venture permitting high standards assets and less NPL, the venture is worth[ CITATION Bob07 l 1033 ].

Works Cited

Bourke, P. (1998) ‘ Concentration and other determinants of bank profitability ‘, Journal of Banking and Finance, vol. 13, pp. 65-79.

Damodaran, A. (2010) Applied Corporate Finance — Page 552, New York: Cingage Learning.

Ehrhardt, M. (2008) Corporate Finance: A Focused Approach — Page 554, london: Cingage Learning.

Hacioglu, Ü. (2013) Managerial Issues in Finance and Banking: A Strategic Approach, London: Cingage Learning.

Stewart, B. (2007) Sport Funding and Finance, New york: John Wiley & Son’s.

Appendices

Workings

SDB’s implied LLR level by Reserve Ratios

LLR level implied by Industry Average

Appendix B – Exhibits from HBS Case Study: Shenzhen Development Bank Exhibit 6 SDB Historical Financial Information (Figures in US$ MM)

Income Statement

Total Operating Income

Net Interest Income

SDB’s implied LLR level by Reserve Ratios

Fee Income

Other Income

Operating Expense

Pre-Provision Profit

Provisions

Net Profit

Balance Sheet

Gross Loans

Reserves

Net Loans

Other Interest-earning Assets

Total Interest-earning Assets

Total Assets

Customer Deposits

Other Interest-earning Liabilities

0

Total Interest-earning Liabilities

Total Liabilities

Exhibit 8

HBS Case Assignment Exhibit 8 SDB Historical Loan Breakdown and Reserves

Gross Loans (US$ MM)

Special Mention

Substandard

Doubtful

Reserve Ratio Guideline

Special Mention

Substandard

Doubtful

Actual LLRs (US$ MM)

Exhibit 9

Selected SDB Historical Financial Ratios

Asset Quality

NPL/Gross Loans

LLR/Gross Loans

Capital Adequacy

Tier 1 CAR

Total CAR

Equity/Gross Loans

Equity/Total Assets

Earning Capability

Net Interest Marginal

Non-Interest Income/Operating Income

Operating Expense/Operating Income

Liquidity

Gross Loans/Deposits

Avg. Gross Loans/Avg. Interest-Earning Assets

Exhibit 10 Benchmarking SDB Against Other Joint-Stock Banks (2002)

NPL/ Loans

LLR/ Loans

Tier 1 CAR

Total CAR

Equity/loan

Equity/Asset

Minsheng

Net Int. Margin

Non-Int. Inc. / Op. Inc.

Op. Exp./ Op. Inc.

Loans/ Deposits

Loans/ Earning Assets

Minsheng

Exhibit 13; Comparable Company Valuation

Market Cap.a

Book Value Per Share (RMB)

Earnings Per Share (EPS) (RMB)

Pre-Provision Profit (PPP) (US$ MM)

Price to Book (P/B)

Price to Earnings (P/E)

Price to PPP (P/PPP)

Minsheng