[ 563 ] C ASE S TUDIES as American Express; (c) banks in relation to their customers; (d) bank management and employees. 5. Using the case, explain why reputation is important to the success of an invest- ment bank. 6. Use the case to explain how volatile interest rates can affect the banks’ trading income. What action did the firm undertake to minimise the chance of a similar event occurring in the future? 7. Goldman Sachs took a relatively long period of time to seek a public listing. Based on the GS experience, identify the conditions needed for a successful IPO (initial public listing). 8. What is corporate governance and how did it change over time at Goldman Sachs? How has going public affected corporate governance? 9. The current organisational structure at GS consists of three segments: investment banking, trading and principal investments, asset management and securities. The operating results for GS appear in Table 10.2. Work out the percentage contribution to pre-tax earnings for each of the three segments over 2000, 2001 and 2002. Which segments have increased their pre-tax earnings since 2000; which have decreased? Why? 10. (a) In 2002/3, Goldman Sachs was one of 10 investment banks to pay a total $110 million in fines and related payments to US regulatory authorities. Why? What implications, if any, does this incident have for the future of Goldman Sachs? (b) How will the Sarbanes–Oxley Act (July 2002) affect Goldman Sachs? 19 11. Choose two other banks* which you consider to be major rivals to Goldman Sachs. Using their respective annual reports and sources such as Bankscope and The Banker, prepare a table comparing Goldman Sachs with the other firms for the most recent three years. Rank Goldman Sachs in terms of: total assets, net interest margin, return on average assets, return on average equity, and the ratio of operating expenses to net revenue (a measure of efficiency, sometimes called the ratio of cost to income). (a) Are these major rivals strictly comparable, and if not, why not? What problems, if any, did you encounter with some of these banks when compiling the data? (b) In recent annual reports (e.g. 2002), the banks report VaR figures for recent years. Briefly explain the meaning of value of risk, its advantages and limitations. Can the VaR figures reported by one bank be compared with those reported by the other two banks? If not, what are the differences? *For example: Barclays Capital, Credit Suisse/Credit Suisse First Boston, Deutsche Bank, Dresdner Kleinwort Benson Wasserstein, HSBC, JP Morgan Chase, Lehman Broth- ers, Merrill Lynch, Morgan Stanley (Dean Witter), Schroder, Salomon Smith Barney, UBS Warburg. 19 See Chapter 5. For more background reading see a brief symposium paper, ‘‘Can Regulation Prevent Corporate Wrong-Doing?’’ (pp. 27–42), ‘‘Rush to Legislate’’ (pp. 43–47) and ‘‘Sarbanes–Oxley in Brief ’’ (pp. 48–50). These papers appear in The Financial Regulator, 7(2), September, 2002. [ 564 ] M ODERN B ANKING 10.3. Kidder Peabody Group 20 Relevant Parts of The Text: Chapters 1 (investment banks, financial conglomerates) 2 and 9 (synergy, strategy). ‘‘But Leo’’, said Alan Horrvich, a third-year financial analyst at General Electric Capital Corporation (GECC) in September 1987: ‘‘I don’t know anything about investment banking. If I walk in there with a lot of amateurish ideas for what he ought to do with Kidder, Cathart will rip me apart. OK, you’re the boss, but why me?’’ ‘‘Look Alan’’, replied Mr Leo Halaran, Senior Vice-President, Finance of GECC: ‘‘we’ve got ten thousand things going on here right now and Cathart calls up and says, very politely, that he wants somebody very bright to work with him on a strategic review of Kidder Peabody. You’re bright, you spent a semester in the specialised finance MBA programme at City University Business School in London, you earned that fancy MBA from New York University down there in Wall Street, and you are available right now, so you’re our man. Relax, Si isn’t all that tough. If you make it through the first few weeks without getting sent back, you’ve got a friend for life ’’, he ended with a grin. ‘‘Me.’’ Mr Silas S. Cathart, 61, had retired as Chairman and CEO of Illinois Tool Works in 1986. He had been a director of the General Electric Company for many years and was much admired as a first-rate, tough though diplomatic results-oriented man- ager. After the resignation of Mr Ralph DeNunzio as Chairman and CEO of Kidder Peabody following the management shake-up in May 1987, Mr Cathart had been asked by Mr Jack Welch, GE’s hard-driving, young CEO, to set aside his retirement for a while and take over as CEO of Kidder Peabody, to give it the firm leadership it needed, particularly now. Cathart had not been able to say no. His first few months were spent trying to get a grip on the situation at Kidder, which had been trauma- tised by the insider trading problems, and by management uncertainty as to what GE and its outside CEO were going to do to Kidder next. After reporting substantial earn- ings of nearly $100 million in 1986, Kidder was expected to incur a significant loss in 1987. Technically, Cathart and Kidder reported to Mr Gary Wendt, President and Chief Operating Officer of General Electric Financial Services (GEFC) and CEO of GECC, but Alan understood everyone believed that old Si reported only to himself and Mr Welch. Mr Cathart wasn’t going to be in the job for that long and could not care less about company politics. All he had to do was return Kidder to profitability, and set it on the right strategic course – one that made sense to both the Kidder shareholders and the GE crowd. After that, he could go back to his retirement and let someone else take over. 20 This case first appeared in the New York University Salomon Center Case Series on Banking and Finance (Case 26). Written by Roy Smith (1988). The case was edited and updated by Shelagh Heffernan; questions set by Shelagh Heffernan. [ 565 ] C ASE S TUDIES Everyone Alan had talked to at GECC felt that the job would be very tough, and that Cathart might be at a big disadvantage because he did not have prior experience in the securities industry. Alan’s plan was to play it dead straight with Mr Cathart, to work most of the night getting the basics under his belt, and to consider Kidder’s strategic position, and how to implement any proposed changes. If asked something he did not know, he would simply say he did not know but would try to find out. A chronology of significant events is summarised below. 10.3.1. Chronology of Significant Events, 1986–87 April 1986 General Electric Financial Services agreed to pay $600 million for an 80% interest in Kidder Peabody and Company, leaving the remaining 20% in the hands of the firm’s management. GEFS is a wholly owned subsidiary of General Electric Company. The price paid was about three times the book value – each shareholder was to receive a cash payment equal to 50% of the shares being sold, the remainder being paid out over three years. GEFS was to replace the shareholder capital with an initial infusion of $300 million, with more to follow. When the transaction closed in June 1986, GE and Kidder shareholders had invested more equity in the firm than previously announced – Kidder’s total capital was boosted to $700 million. Mr Robert C. Wright, head of GEFS, claimed the expansion of investment banking activities would mean GEFS’s sophisticated financial products in leasing and lending could be combined with corporate financing, advisory services and trading capability at Kidders. There was no plan to institute any management changes. Kidder ranked 15th among investment banks in terms of capital, and had 2000 retail brokers in 68 offices. The view was that it was too small to compete with the giants, but too large to be a niche player, making it an awkward size. Among analysts, it was generally accepted that Kidder had not been purchased for its retail network, but rather, for its institutional and investment banking capabilities. Kidder initiated the talks with GE. It was believed the firm agreed to give up its independence as a means of using a more aggressive strategy to achieve a better image – there was a general perception that it was being left behind. October 1986 Mr Ivan Boesky was arrested for insider trading. He implicated Mr Martin A. Siegel, a managing director of Drexel Burnham Lambert, who had been head of Kidder Peabody’s merger and acquisition department until his departure in February 1986 to join Drexel. December 1986 Kidder reorganised its investment banking division. Eighty-five professionals were trans- ferred to the merchant banking division, 45 of whom were placed in acquisition advisory, [ 566 ] M ODERN B ANKING and another 40 in the high-yield junk bond department. The group was headed by Mr Peter Goodson, a Kidder managing director, who at the time noted the move was a fundamental change in management structure. Mr Goodson did not anticipate any long-term effects from the insider trading scandal. February 1987 The 1986 Kidder Annual Report emphasised the importance of synergies apparent in the combination of Kidder Peabody and GEFS – it was believed the synergies far exceeded the firm’s expectations. A source of new business at Kidder was existing customer rela- tionships with hundreds of middle-sized American firms at GEF. Additional capital from GEFC allowed Kidder to provide direct financing, picking up a sizeable number of new clients. The Kidder Annual Report also revealed Kidder’s core business had been reorganised to reinforce competitive strengths and facilitate future growth. A global capital markets group was formed under Mr Max C. Chapman Jr (President of Kidder, Peabody and Co., Incorporated), to direct the investment banking, merchant banking, asset finance, fixed income and financial futures operations on a world-wide basis. Mr John T. Roche, President and Chief Operating Officer, Kidder Peabody Group Inc., established an equity group. Mr William Ferrell headed up a municipal securities group, formed from the merger of the public finance and municipal securities groups. The CEO, Mr Ralph DeNunzio, claimed these changes were made to ensure the firm was in a position to compete effectively in the global market place. February 1987 Mr Richard B. Wigton, Managing Director, was arrested in his office by federal marshalls on charges of insider trading. A former employee, Mr Timothy Tabor, was also arrested. Both arrests were the result of allegations made against them and Mr Robert Freedman of Goldman Sachs and Company by Martin Siegel, who, next day, pleaded guilty to insider trading and other charges brought against him. Kidder’s accountants, Deloitte, Haskin and Sells, qualified Kidder’s 1986 financial statements because they were unable to evaluate the impact of insider trading charges. Kidder reported earnings of $90 million (compared to $47 million earned in 1985); ROE was 27%. The New York Stock Exchange fined Kidder Peabody $300 000 for alleged violations of capital and other rules. Two senior officials, including the President, Mr Roche, were fined $25 000 each for their role in these violations. The Wall Street Journal reported that Mr DeNunzio had instructed Martin Siegel to help start a takeover arbitrage department in March 1984; Mr DeNunzio had indicated that the role played by Mr Siegel should not be disclosed publicly – there were inherent conflicts in having the head of mergers and acquisitions directly involved in trading on takeover rumours. A Kidder spokesman said the report was a ‘‘misstatement’’, and denied that Mr DeNunzio had ordered the formation of such a unit. [ 567 ] C ASE S TUDIES May 1987 Mr Lawrence Bossidy, Vice-Chairman of GE and head of all financial services, announced a management shake-up at Kidder Peabody: Mr DeNunzio, Mr Roche and Kidder’s General Counsel, Mr Krantz, would be replaced. Following the arrests, GE sent in a team to assess Kidder. The internal investigation revealed the need for improved procedures and controls. Mr Cathart was to take over as Kidder’s CEO. GE men were also brought in to fill the positions of chief financial and chief operating officers, and a senior vice-president’s position for business development. The board of directors was also restructured, to ensure GE had a majority of seats on the Kidder board. In the same month, charges against Messrs Wigton, Tabor and Freedman were dismissed without prejudice, though it was expected they would be charged at some future date. June 1987 GE required Kidder to settle matters with the Federal Prosecutor and the SEC. In exchange for a $25 million payment and other concessions, including giving up the takeover arbitrage business, the US Attorney agreed not to indict Kidder Peabody on criminal charges related to insider trading. Civil litigation against Kidder was still possible, though it would not have the same stigma as criminal charges and conviction. GEFS also agreed to provide an additional $100 million of subordinated debt capital to Kidder Peabody. July 1987 GE announced its first half results. At the time, GE said its financial services were ahead of a year ago because of the strong performance at GECC (GE Capital Corporation) and ERC (Employers Reinsurance Corporation), which more than offset the effects of special provisions at Kidder Peabody for settlements reached with the government. It was estimated that Kidder had lost about $18 million in the second quarter. September 1987 Mr DeNunzio retired from Kidder Peabody after 34 years of service. For 20 of these years, he had been Kidder’s principal executive officer. The Wall Street Journal reported that morale at Kidder Peabody was improving, with GE and Kidder officials conducting a full strategic review of the firm. It was also announced that Kidder planned to establish a full service foreign exchange operation and would operate trading desks in London and the Far East. 1989–94 Mr Michael Carpenter joined Kidder as ‘‘head’’ in 1989, just as the bank was reeling from the insider trading scandal. In a deal negotiated with the SEC, Kidder was required to close down its successful risk arbitrage department. This was quite a blow to Kidder because its other businesses were only mediocre. [ 568 ] M ODERN B ANKING Kidder had an excellent reputation, but was saddled with high expenses and many unproductive brokers. Half of the firm’s retail offices produced no profit at all. In 1989, a number of the productive brokers left Kidder because of dissatisfaction with the level of bonuses. These departures, together with the closure of the risk arbitrage department, resulted in a net $53 million loss in 1989, and a loss of $54 million in 1990. Mr Carpenter’s arrival resulted in millions of dollars and a great deal of management time had been spent nursing Kidder back to health. The bank was also building up its investment banking operations. Profits rose in 1991; in 1992 they peaked at $258 million. Most of Kidder’s profits came from its fixed income securities operations, the one area where it had managed to establish a lead over other investment houses. Underwriting and trading mortgage backed securities (MBSs) pushed Kidder up the underwriting league tables. During this time, the profits from mortgage backed securities were said to have accounted for about 70% of total profits. Unfortunately, the sharp rise in interest rates at the start of 1994 hurt the mortgage backed business. The consequences of the ‘‘go for it strategy’’ with MBSs was seen in the first quarter of 1994 – Kidder lost more than $25 million. The same year, Kidder took a loss of around $25 million on margin trades entered into with Askin Capital Management, a hedge fund group which had to seek protection from its creditors, because of trading losses. Mr Carpenter’s attempts to build Kidder’s other businesses produced mixed results. By reducing costs and firing unproductive brokers, Carpenter succeeded in turning round the retail brokerage business – it was the most profitable business, after the fixed income department. But Carpenter’s objective of achieving synergy between GE Capital and Kidder Peabody had been far from successful. There was a great degree of animosity between Mr Carpenter and Mr Gary Wendt, the CEO of GE Capital. It was reported that when clients wanted GE Capital to put up money for a deal, they would avoid using Kidder as their investment banker. Mr Welch was reported as saying, ‘‘The only synergies that exist between Kidder and GE Capital are Capital’s AAA credit rating’’. In April 1994 it was revealed that Kidder had reported $350 million in fictitious profits because of an alleged phantom trading scheme. Kidder blamed Mr Joseph Jett, who had been accused of creating the fictitious profits between November 1991 and March 1994. Kidder had to take a $210 million charge against its first quarter earn- ings in 1994. There was also the question of how a person with so little experience could have been appointed to a position bearing so much responsibility. This fiasco was reminiscent of a deal that went sour for Kidder in autumn 1993, which cost Kidder $1.7 million. The deal was headed by Mr Kaplan, who like Mr Jett, had insuf- ficient experience. Both the SEC and the New York Stock Exchange (NYSE) launched enquiries into the Jett affair. In a report prepared by Gary Lynch (who is a lawyer with the law firm that [ 569 ] C ASE S TUDIES represented Kidder in an arbitration case against Joseph Jett), it was concluded that there was lax oversight and poor judgement by Mr Jett’s superiors, including Mr Cerrullo (former fixed income head) and Mr Mullin (former derivatives boss). The report suspiciously supports Kidder’s claim that no other person knowingly acted with Mr Jett. Kidder’s top managers should have been suspicious because Mr Jett was producing high profits in government bond trading – never a Kidder strength. Some of the blame can be attributed to the aggressive corporate culture of Kidder. At an internal Kidder conference, Jett was reported to have told 130 of the firm’s senior executives ‘‘you make money at all costs’’. However, from details that have been revealed in the prepared reports, it is evident that there were problems at Kidder long before the Jett affair, indeed, even before Jett arrived. For example, in December 1993 Kidder had the highest gearing ratio of any bank on Wall Street, at 100 to 1. Mr Jack Welch of GE attempted to restore the reputation of GE by disciplining or dismissing those responsible. Mr Michael Carpenter was pressurised into resigning; both Mr Mullin and Mr Cerrullo were fired. On 17 October 1994, GE announced GE Capital was to sell Kidder Peabody to Paine Webber, another investment bank. The sale included the parts of Kidder that Paine Webber wished to purchase. GE Capital also transferred $580 million in liquid securities to Paine Webber, part of Kidder’s inventory. In return GE Capital received shares in Paine Webber worth $670 million. Thus GE received a net of $90 million for a firm that it had purchased for $600 million in 1986, though GE also obtained a 25% stake in Paine Webber. Questions 1. How might a conglomerate go about assessing the real worth of an investment bank when so many of the assets are intangible? 2. Identify the areas of potential ‘‘synergy’’ for Kidder and GEFS. In this context, explain the differences between synergy and economies of scale/scope. 3. Was the emphasis on developing investment banking and corporate finance rather than the use of Kidder’s retail outlets a wise decision? 4. Given Mr Cathart’s mission of restoring Kidder to profitability, what advice might Alan Horrvich give? What are the implications for each strategic alternative? 5. What in fact happened after 1987? 6. Summarise the various scandals associated with Kidder Peabody. What factors made this firm prone to scandals? 7. In 1994, GE divested itself of Kidder Peabody. The extent of the failure of this ‘‘match’’ is illustrated by the sale of Kidder to Paine Webber for a net of $90 million, compared to the $600 million price tag for Kidder in 1986. (a) Did GE pay too much for Kidder in 1986? Why? (b) How much is GE to blame for the subsequent problems at Kidder? Could these problems have been avoided? 8. Was GE wise to take a 25% stake in Paine Webber? [ 570 ] M ODERN B ANKING 10.4. From Sakura to Sumitomo Mitsui Financial Group 21 In 1991–2 Sakura Bank, the product of a merger between two other banks, was Japan’s and the world’s second largest bank in terms of assets, valued at $438 billion. It was also one of the largest measured by capitalisation of common stock ($41.4 billion). Roughly a decade later, it merged again to form Sumitomo Matsui Financial Group (SMFG), and while the new bank remains in the top 10 by tier 1 capital, it has dropped out of the top 25 in terms of market capitalisation. Sakura Bank was formed through the merger of the Mitsui Bank, a distinguished Tokyo bank which dated back to 1683, with the Taiyo Kobe Bank, a regional, largely retail bank covering the region of Kansai, including Osaka, Kobe and Kyoto. The Taiyo Kobe Bank was itself the result of an earlier merger between the Taiyo Bank and the Bank of Kobe. The merger took place in April 1990 – the new bank was to be called the Mitsui Taiyo Kobe Bank until the banks were properly integrated. At that time, it would be renamed the Sakura Bank, after ‘‘cherry blossom’’, a symbol of unity and grace in the Japanese culture. In April 1992, the merged bank became the Sakura Bank. Japan’s Ministry of Finance (MoF) is thought to have strongly encouraged the merger because, at the time, bank mergers in Japan were rare, and usually occurred between a healthy institution and an unhealthy one. These two banks were both financially sound, but when the MOF ‘‘encouraged’’, banks obliged. At the time, the MoF was a regulatory power house and had been since the end of the war. With its five bureaux (Banking, Securities, International Finance, Tax and Budget), it was the key financial regulator, engaged in all aspects of supervision: examination of financial firms, control of interest rates and products, supervision of deposit protection, and setting rules on the activities of financial firms. The newly merged bank had the most extensive retail branch network of any bank in Japan, with 612 branches and 108 international offices. The merger took place for several reasons: ž To improve consolidation of the banking sector, so it is better able to compete in a deregulated market. ž To create a ‘‘universal’’ bank, providing high-quality management and information systems. ž To achieve greater economies of scale. ž To achieve a greater diversification of credit risk. ž To use the bank’s increased size and lending power to increase market share. Past experience had shown that Japanese bank mergers were rarely successful, because strong cultural links in each bank made it difficult to combine staff, clients and facilities. Furthermore, until the mid-1990s there was a reluctance to make anyone redundant from a 21 This case first appeared as Case 25 of the New York Salomon Center Case Series in Banking and Finance, written by Roy C. Smith (1992). The case was subsequently edited and updated by Heffernan (1994). This version is a major revision and update of the 1994 case. [ 571 ] C ASE S TUDIES Japanese firm or to change those in authority. But the announcement, in April 1992, that the merged bank was ready to use its new name, Sakura, suggested these difficulties had been overcome, and well inside the 3 years management originally announced it would take. 10.4.1. Background on the Japanese Banking System The Japanese banking system is described in Chapter 5 of this book. For many years it was characterised by functional segmentation and close regulation by the Ministry of Finance and the Bank of Japan. During the 1970s Japanese banks experienced a period of steady growth and profitability. The Japanese are known for their high propensity to save, so banks could rely on households and corporations (earning revenues from export booms) for a steady supply of relatively cheap funds. The reputation that the Ministry of Finance and Bank of Japan had for casting a 100% safety net around the banking system meant, ceteris paribus, the cost of capital for Japanese banks was lower than for major banks headquartered in other industrialised countries. The global presence of Japanese banks was noticeable by the late 1970s, but in the 1980s their international profile became even more pronounced because of the relatively low cost of deposits, surplus corporate funds, and the increased use of global capital markets. Lending activities increasingly took on a global profile. Japanese banks were sought out for virtually every major international financing deal. For example, in the RJR Nabisco takeover involving a leveraged buyout of $25 billion, Japanese participation was considered a crucial part of the financing. The combination of rapid asset growth and an appreciating yen meant that by 1994, six of the top 10 banks, ranked by asset size, were Japanese. By the late 1980s, Japanese banks had a reputation for being safe and relationship-oriented, but nothing special if measured by profit or innovations. The reputation for ‘‘being safe’’ was partly due to the MoF’s determination not to allow any banking failures in Japan – there had been no bank failures in the post-war period. It was also known that Japanese banks had substantial hidden reserves. Furthermore, banks held between 1% and 5% of the common stock of many of their corporate customers; these corporates, in turn, owned shares in the bank. The cross-shareholding positions had been built up in the early post-war period, before the Japanese stock market had commenced its 30-year rise. These shareholdings and urban branch real estate were recorded on the books at historic cost, and until the 1990s, the market value was far in excess of the book value. The Japanese banks’ ratio of capital to assets in the late 1980s appeared to be low compared to their US or European counterparts, but such ratios ignored the market value of their stockholdings and real estate. Also, Japanese banks were less profitable than banks in other countries for three reasons: 1. The emphasis on ‘‘relationship banking’’ obliged these banks to offer very low lending rates to their key corporate borrowers, especially the corporates which were part of the same keiretsu. 2. Operating costs are relatively high. 3. The Ministry of Finance discouraged financial innovation because of the concern that it might upset the established financial system. [ 572 ] M ODERN B ANKING Japanese banks appeared prepared to accept the relatively low profitability, in exchange for the protective nature of the system. As Japanese banks became more involved in global activities, either through international lending, through the acquisition of foreign banks, or by multinational branching, they began to learn about the financial innovations available by the early 1980s. At the same time, the MoF accepted the reality of imported deregulation, that is, the financial sector would have to be deregulated to allow foreign financial firms to enter the Japanese market. The pressure for this change came from the mounting trade surplus Japan had with other countries and a new financial services regime in Europe that would penalise countries that did not offer EU banks ‘‘equal treatment’’. The MoF agreed to the gradual deregulation of domestic financial firms, and to lower entry barriers for foreign banks and securities houses. The MoF lifted some of the barriers separating different types of Japanese banks and between banks and securities firms, and began to allow market access to all qualified issuers or investors. The tight regulation of interest rates was relaxed. Though the full effects of the reforms were not expected to be felt until after 1994, Japanese banks and securities firms realised they would have to adjust to the inevitable effects of deregulation. However, these reforms were relatively minor compared to what was coming (Big Bang in 1996) and, as can be seen in Table 5.8 (Chapter 5), the big changes in the structure of the Japanese financial system did not occur until close to the turn of the century. 10.4.2. Zaitech and the Bubble Economy As was the case in the west, by the mid-1980s, large Japanese corporations realised that issuing their own bonds could be a cheaper alternative to borrowing from Japanese banks. Also, an investment strategy known as zaitech was increasing in popularity: it was more profitable for a Japanese corporation to invest in financial assets rather than Japanese manufacturing businesses. Early on, these firms borrowed money for simple financial speculation, but over time the process became more sophisticated. Non-financial firms would issue securities with a low cash payout and use the money raised to invest in securities that were appreciating in value, such as real estate or a portfolio of stocks, warrants or options. The heyday of zaitech was between 1984 and 1989 – Japanese firms issued a total of about $720 million in securities. More than 80% of these were equity securities. Japan’s total new equity financing in this period was three times that of the USA, even though the US economy was twice the size of Japan’s and it too was experiencing a boom. Just under half of these securities were sold in domestic markets, mainly in the form of convertible debentures (a bond issue where the investor has the option of converting the bond into a fixed number of common shares) and new share issues. The rest were sold in the euromarkets, usually as low coupon bonds with stock purchase warrants attached (a security similar to a convertible debenture but the conversion feature, as a warrant, can be detached and sold separately). The implication of a convertible debenture issue is that one day, new shares will be outstanding, thereby reducing earnings per share. But shareholders did not appear concerned, and share prices rarely declined following an issue. [...]... 33 7 89 28 466 19 8 49 203 171 49 − 69. 3 −65.3 − 79. 7 0.6 0.6 0.25 NA NA NA 10.15 9. 11 NA 1 174 1 222 594 25 882 23 174 19 525 240 80 35 26.1 −50.3 − 79. 7 0 .93 0.34 0.18 NA NA NA 11.7 11.51 5.1 Dec 199 0 Banamex Bancomer Banca Serfin Dec 199 1 Banamex Bancomer Banca Serfin Dec 199 2 Banamex Bancomer Banca Serfin Dec 199 3 Banamex Bancomer Banca Serfin Dec 199 4 Banamex Bancomer Banca Serfin Dec 199 5 Banamex Bancomer... 18.5 14.08 NA 29 844 25 836 16 90 4 201 93 −34 − 39. 6 −66.5 NA 0.67 0.36 −0.2 56.6 74. 39 105.3 18.8 16.43 NA 3 431 1 564 856 26 724 22 490 15 803 726 334 NA 265 260.7 NA 2.72 1.48 NA 51.26 62. 29 NA 21.6 18.7 16.7 2 4 69 1 98 5 1 018 34 90 2 41 151 40 186 1 0 09 398 261 4.8 NA 92 .1 2. 89 0 .97 1.13 54. 19 68.13 78.32 12.3 7.83 16 3 096 1 98 6 1 018 40 186 41 151 23 154 468 398 261 −58.3 NA 92 .1 1.17 0 .97 1.13 NA... 803 6 79 254 22 416 18 812 8 591 536 341 131 190 .5 −22 −21.1 0.72 1.84 1.53 NA NA NA NA 1 181 95 2 347 30 788 30 067 22 191 662 664 122 4 .9 65.6 −46.3 2.15 2.21 0.55 NA NA NA NA 97 4 1 285 854 37 8 29 33 161 20 99 3 104 .9 1 054 152 39. 2 39. 4 9. 4 2.77 3.18 0.72 NA NA NA NA NA NA 2 4 29 1 515 862 43 012 36 134 21 390 1 058 843 376 −8.4 −27.4 94 .8 2.46 2.33 1.76 NA NA NA 11. 69 14.84 NA 1 405 1 232 742 33 7 89 28... 68.13 78.32 NA 12.18 16 3 4 69 3 1 79 1 527 36 374 46 546 21 583 1 335 1 067 595 60.8 136 .9 −4 3.67 2. 29 2.76 55.02 60.25 55.13 20.10 15.66 NA 3 4 69 3 206 1 93 4 36 374 44 475 21 870 1 335 97 4 612 60.8 2.7 7.3 3.67 2. 19 2.8 55.02 54.45 60.71 20.10 16.36 11.6 Dec 199 6 Banamex Bancomer Banca Serfin Dec 199 7 Banamex Bancomer Banca Serfin Dec 199 8 Banamex Bancomer Banca Serfin Dec 199 9 Banamex Bancomer Banca Serfin... overleaf) [ 588 ] MODERN BANKING Table 10.3 (continued) Tier 1 capital ($m) Assets ($m) Pre-tax profits ($m) 1 207 1 1 39 494 30 892 26 396 19 882 NA 346 98 4 1 790 1 6 59 912 30 844 26 95 6 18 115 1 90 8 1 461 685 Real profits growth (%) ROA (%) Cost to income ratio (%) Basel risk assets ratio (%) NA 232.1 −2234 NA 1.31 −4 .95 NA 56.68 NA 12.6 12.18 NA 348 291 −203 NA −27.8 NA 1.13 1.08 −1.12 58.4 69. 7 106.35 18.5... Bancomer’s profits fell in 199 4 and 199 5, they recovered dramatically in 199 6, only to decline again in 199 7 (see Table 10.1) Bancomer’s return on assets rose from 0.34% in 199 5 to 1.31% in 199 6 Compare these results with Banca Serfin, the country’s third largest bank by tier 1 capital In 199 5, pre-tax profits stood at $35 million, and its ROA was 0.18%, with a Basel ratio of just 5% By 199 6, Serfin was reporting... shows, the cost to income ratio, a measure of efficiency, was not reported until 199 6 Bancomer’s rose from 199 6 onwards, reaching a high of 74.4% in 199 8 – a period during which it was trying to cut costs Between 199 8 and 199 9, this ratio was reduced by 12%, only to rise again in 2000, the year it was taken over From 199 3 onwards, the Basel risk assets ratios for both Banamex and Bancomer were quite... 10.1, the Basel ratio rose steadily throughout the 199 0s In 199 1, Bancomer’s net income was forecast to grow to about $400 million, an increase of over 50% in real terms compared to 199 0 Its return on average assets was 2.21%, up from 1.84% in 199 0; return on average equity was 24% The net interest margin increased from 7.22% in 199 0 to 7.4% in 199 1, reflecting a shift from loweryielding government... between 19% and 29% in regional centres.32 ž In 198 9, Bancomer adopted a strategy of segmenting its markets within a branch: VIP banking (high net worth), personal banking (affluent customers but not VIP), retail banking (for 90 % of the customers) and middle market corporate banking ž Lending was concentrated among middle market firms (companies with annual sales between $0.7 million and $ 39. 7 million)... rate fell from 30% in 199 0 to 7% in 199 3–4, with a reasonable annual GDP growth rate of 3–4% Exchange rate policy was moving in the direction of a more liberal managed floating regime, beginning with a fixed peg in 198 8 to a crawling peg, and in 199 1, a crawling trading band.30 Net capital inflows in the early 199 0s financed a current account deficit President Carlos Salinas, elected in 198 8 for a fixed 6-year . Finance, written by Roy C. Smith ( 199 2). The case was subsequently edited and updated by Heffernan ( 199 4). This version is a major revision and update of the 199 4 case. [ 571 ] C ASE S TUDIES Japanese. announced that 90 00 employees (one-third of its workforce) would be cut from the payroll. Branches No. of employees 2003 SMFG 403 30 94 4 199 9 Sumitomo 284 16 330 Sakura 462 14 99 5 Source: The. Salomon Center Case Series on Banking and Finance (Case 26). Written by Roy Smith ( 198 8). The case was edited and updated by Shelagh Heffernan; questions set by Shelagh Heffernan. [ 565 ] C ASE S