Value Creation and Structure of Financial Services Industry

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Value Creation and Structure of Financial
Services Industry

• Week 1

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Target market for this course

• Managers of financial service firms
• Investment bankers doing deals
• Strategic planners and researchers
• Consultants and other business services
• Users of financial services

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Course goals and requirements

• Readings
• Class participation
• Case analysis and discussion
• Group project
• Individual parts of project
• Current periodicals

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Financial service firms

• Mergers and acquisitions
• Banks and thrifts consolidate
• e.g. Citibank and CalFed
• Financial firms form conglomerates
• Citigroup out of Travellers and Citicorp
• Multinational financial firms
• Aegon (Holland) acquires Transamerica
• International events
• Chile, South Korea, Poland

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Driving forces

• Technology
• Cheap telephony/satellites
• Telephone service centers
• Cheap computing
• Internet
• Regulation/taxation
• Roth accounts, 401Ks
• Bank holding company/Glass-Steagall
• Demographics

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Key questions for management

• Where are synergies, revenues or costs?
• Economies of scale
• Economies of scope
• Cross-selling
• Cost of inputs
• More important What are we good at?
• Requires a rigorous framework for analysis

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Approach taken in this course

• Financial economics
• Hands-on applications
• Healthy skepticism
• Examine the basics
• Ask simple questions

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Objective function for financial service firms

• Maximize shareholders wealth
• Stock-owned corporations
• Commercial banks
• Diversified financials
• Mutual organizations
• Thrifts
• Insurance
• Problem with mutuals

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Value Added and Value Creation

• Value added subtracts all costs of inputs from
  all revenues
• Value added must cover any value added by the
  firm from use of labor and capital, and used to
  cover payments to tax authorities
• In many countries, value added used as basis for
  taxes (e.g European Union)

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Value Added in 2004Amex and Lehman Brothers
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Performance Assessments
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Value Creation inFinancial Services

• Financial services
• Activities required to provide services
• Allocate resources to highest returns
• Determinants of returns

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Financial Services

• Credit (lending)
• Securities
• Transaction processing (payments)
• Insurance
• Asset management
• Information

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Activities to Provide Services

• Setting Terms/Pricing
• Communicating/Marketing
• Producing/Delivering
• Controlling/Monitoring
• Funding/Investing
• Risk Bearing/Risk Shifting

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Value Creation Matrix

• Columns Services
• Rows Activities
• Strategies Concentration of activities
• How to choose best strategies?

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Value Matrix (Table 2.5)
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Possible Strategiesto Increase ROI
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Traditional Financial Services

• Result of
• Business specialization
• Taxation
• Regulation
• Main types of firm
• Deposit-taking
• Insurance type
• Investment companies
• Securities firms

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The Financial Services Industry

• Basic types of institutions
• Deposit-taking
• Insurance type
• Asset management
• Securities
• Representation in Flow of Funds
• Institutional investors

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Flow of Funds

• Strategic overview
• Primary sectors
• Total wealth
• Nature of real wealth
• Role of financial intermediation
• Major financial service sectors
• Tracing changes in the Flow of Funds

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Strategic challenges and the Flow of Funds

• Baby boomers
• Third world development
• Differential savings rates
• Trade flows and trading blocs
• Domestic issues
• Low-income customers
• Community redevelopment

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For Next Week

• Review Chapter 2 discussed this week
• Read Chapter 5 and Copeland et al Valuation
  chapters on banks and insurance companies for
  next week
• Review example of FSI valuation
• Choose firms for members of the group
• Obtain basic financial data, Value Line
  Investment Survey, and other analyses