OLIVER WYMAN-Iberia Case Competition

Review on Hybrid Banks Situation

Team ICAI MASTERS

1. Benchmarking of Hybrid Bank and its competitors based in ratio analysis

In order to get a general idea of what our client, Hybrid Bank is performing like, and
what the situation of its main rivals in the European banking sector is, we have agreed
to pay attention to the accounts, and by previously selecting some Key ratios of our
choice, get an impression of how well each bank is functioning.
These Key ratios we consider of capital importance are based on what we have
called The 5 Strong Features (5F), which are, as follows:

Profitability: will allow us how much returns the bank is generating, referred to
what it poses. The larger profitability ratios, the better the bank is performing in its
already-functioning business areas.
Operation efficiency: European banking sector will be shaped in the future by
channelled investments aiming to reduce operating costs and offer a better
costumer experience.
Liquidity: it is to be expected, that those banks that have landed in new markets or
are exploring emerging opportunities outdoors have lower liquidity and a higher
part of its assets come from leveraged debt.
Growth prospects: either at home having a Bond-like strategy, in new locations
or markets defining Equity-like objectives or somewhere in between, reinvestment of earnings stated in balance sheets will let us estimate the pace of
growth.
Risk: risk of operation can be portrayed by the associated risk coming from the
assets related to such operations.

Next table shows which Key Ratios did we finally choose, and its value calculated
from the banks financial statements (Data from 2013):

Profitability
Return on equity
Operations efficiency
Net Interest Margin
Cost to income
Liquidity
Loans to assets
Growth
Plowback ratio(1-Payout)
Risk
Tier-1 Ratio

Hybrid Bank

0,0312

0,0795

0,214

0,0986

0,0948

0,023
4,053

0,0268
2,222

0,0671
1,007

0,0354
1,984

0,0214
4,054

0,439

0,2978

0,695

0,3294

0,222

0,925

0,718

0,871

0,804

0,7573

0,107

0,136

0,104

0,097

0,213

OLIVER WYMAN-Iberia Case Competition

Review on Hybrid Banks Situation
Team ICAI MASTERS

2. Strategies: Bond-like Banks, Equity-like Banks and The inbetweeners

What is exactly expected from each bank according to strategy? The table below tries
to shed some light onto this matter:
BOND LIKE BANKS

EQUITY LIKE BANKS

INBETWEENERS

Operating efficiency

Growth in new markets

Returns from safe markets

Investments based on
new products and
segments

More or less operating efficiency depending on how

long they have been working in new markets and
how well investments in cost cutting were
channelled.

Dividends policy and low

investments

Fluctuating dividend policy from one bank to

another

Exportable
competencies

Low risk
Domestic champions in lowgrowth markets with limited
to access to emerging markets
Dividends could possibly
impact on share price

Higher risk exposure

Often performing as a Bond indoors, and as Equity

outdoors

Significant access to
emerging markets

Under inappropriate management: waste of

resources and high operating expenses

Greater dispersion in
performance

Expansion investments abroad and investments

aiming to increase efficiency inland.

Market skepticism in
short term
Where and how gain
access to growth and
high returns

So we know, having checked the ratios and the strategies of each bank, feel in the
position to try to stick each Bank to one of the above categories, in order to try to pin
down Hybrids relative position (Functioning better or worse than them) later on.

Bonds

Bank A

Bank D

Somewhere
in between

Equity-like

HYBRID
BANK

Bank B
Bank C

OLIVER WYMAN-Iberia Case Competition

Review on Hybrid Banks Situation
Team ICAI MASTERS
Just to dig a bit deeper into this issue, we offer some brief notes on each competitor of
Hybrid Bank, to give or client representative benchmarks on different key issues of its
strategy:

BANK A: this bank has chosen a rather risk adverse policy (Aim to low RWAs and
reduce activities in risky areas), get new clients and look for new products in its
strongest areas, and leave unprofitable international ventures. For all this reasons
we qualify Bank A as a BOND. Lower-than-the-average ROE, operating margins
and liquidity make us think this Bank is not an European champion, and that due
to its relatively-small scale it still has work to do to increase operating margins
(Which precisely fits with its strategy).

BANK B: this bank is the largest of all analysed (when considering fixed assets)
and has a ROE that almost doubles the average of all others. Its large scale enables
it to have the best operating margins. From its strategy, we would underline: quite
ambitious international expansion plans, a general need for great investments
(Costumer oriented in the domestic sector, and for expansion outdoors) which is
not surprising when we remark its low liquidity and plowback ratio (Leveraged and
re-investing retained earnings) We gave this bank an EQUITY rank.

BANK C: although smaller than Bank B, this bank has still a large scale compared
to our client. Showing the second best ROE and good operation margins and belothe-average liquidity and average plowback ratio. This bank has the most risky
assets. Its lack of risk aversion, prospects of growth in Asia and a stream of
investments in new products and customers which are based in innovation, highindividualisation and technology made us think this bank is closer to the EQUITY
type.

BANK D: Aiming to increase operating efficiency, strengthening returns from

safe and profitable markets, and reduction of risk exposure are key goals for Bank
Ds strategy. This made us classify it a BOND according to the criteria set in the
table of features for each type. Additionally, this bank also pays higher dividends
(In total amount, not per share) than its competitors. We didnt find surprising
bank D aims to increase operating efficiency, as its operating ratios (Both cost- and
earnings-related) are the worst of all banks analysed.
3

OLIVER WYMAN-Iberia Case Competition

Review on Hybrid Banks Situation
Team ICAI MASTERS

Bank B:
"The big
boy"

Full of resources and great future ideas.

Gets on well with technology, this is the
kid who would rather play with his LEGOs

He is tall, older, and

adventurous and
everybody loves him. No
doubt about who the
popular guy in school is.

Who
should our
client look
up to ?

Banks A and D:
"The caoutious
kids"

Bank C: "The
daydreamer"

They didnt talk much in the yard,

but truth be told, they would always
have money for their lunch and
barely got their knees soared.

3. Redefining Strategy 2017, Oliver Wymans point of view

3.1 Hybrid banks performance per business line

Business Areas

Profit share
(%) of total
profits

Cost-toincome of
operations
(Operating
income
/overhead)

Private customers

14.91

0,899

Corporate
banking

84.20

Corporates &
markets
Eastern Europe
Commercial Real
Estate (CRE)

0,443

ROA (%)

Employees
share (%)

Loan-loss
provision
(total in MM)

0.373

43.97

63

1.710

14.58

20

11.99

0,844

0.092

5.04

35

14.63

0,578

0.966

21.09

70

-25.89

0,713

-0.231

15.30

412

The table above shows some key figures to understand what every business area
of Hybrid Bank has been performing like.

OLIVER WYMAN-Iberia Case Competition

Review on Hybrid Banks Situation
Team ICAI MASTERS
It can be seen from the table that Commercial Banking is by far the most profitable
sector, accounting for above 84% of the Hybrids profits. Private customers,
Corporates & Markets and Eastern Europe are way below, with an average of 13%
(for the three areas) of earnings and at have a relatively similar profit share.
Commercial Real Estate, is nevertheless facing losses, which go up to almost a
good 26% of the firms profits, which is very significant.
With over 43% of the total banks workforce, the PC division has low operation
margins, and we believe profits could soar dramatically by applying the
appropriate cost cuts. Something similar happens with C&M, although this division
employees very few personnel.
Special words have to be dedicated to CRE. It blocks huge amounts of capital as
default-debt provision, and has considerable loses. This is not surprising,
considering most of Hybrid Banks operations are carried out in the Iberia Region,
whose Real Estate Sector faces a frictional evolution. Much debt goes unpaid and
market movements are limited. This after-bubble-burst scenario disables Hybrid
Bank to get rid of assets or bring the division back to green numbers.

3.2 Should our client go quiet for a Bond strategy, get Equitized or simply
remain Hybrid Bank?

With brief words, our opinion towards our clients current situation is as follows:

1.

CRE situation requires for distancing of its illiquid or high risk assets (Bondlike measure)

2.

Private Customers could increase profits by applying the right cut-offs

towards increasing operating efficiency or gaining new clients (Market
research and seeking for operating efficiency call for a blending of Equity
and Bond behaviour)

3.

With limited resources playing a role, C&M division should be able to gain
new clients and rocket profits if the right new markets are explored, and it
manages to find the right new products to offer and target clients. (Behave
like equity in this sector)

4.

Eastern Europe is a saturated market with way bigger competitors we

cannot forecast growth prospects here.

Bond-like
measures

Equity-like
meassures

HYBRID BANK
SHALL REMAIN
"HYBRID" BANK

OLIVER WYMAN-Iberia Case Competition

Review on Hybrid Banks Situation
Team ICAI MASTERS

3.3 So what now?: Sharpening up Strategy 2017

In general terms, the strategy policy we believe is the most appropriate for our
client, is not too far from what Bank C is intending to do. Growth in emerging
markets (in our cased, we propose to only the C&M services to explore new
possibilities in such ventures) by exploring this new markets and setting up new
appealing products, but we further encourage Private Banking division and the
European Banking to be conservative and re-ensure their already achieved
positions by efficiency-driven investments.
With regards to CRE, our team proposes the creation of a Bad Bank to get
distance from the high-risk Real Estate assets, and ensure more. Our client may
wish to segregate its "good" assets from its "bad" assets through the creation of a
bad bank. The goal of the segregation is to allow investors to assess the bank's
financial health with greater certainty. In addition to segregating or removing the
bad assets from the parent bank's balance sheet, a bad bank structure permits
more specialized management. The good bank can focus on its core business of
lending, and the bad bank can specialize in maximizing value from the high risk
assets.
Corporate Banking works wonders so far, but if Hybrid Banks managements
considers improvement that bears not elevated risk, all we can do is tell them to
go ahead, and keep up the good work.
The redefined Strategy 2017 we propose looks more like this:

STRATEGY 2017
CRE

C&M

P. Costumers

E. Europe

C. Banking

Creation of a Bad Bank that

allows to get distanced from
the risk assets unpaid debt and
retained capital for default.
Aim to more specialized
management in this Bad Bank

Seek for new growth

market opportunities,
which involve no
major capital
investment and are
rewarding. Using the
liquidity available to
enter profitable
markets, carry out
strategic acquisitions
and focus on new
products.

Improve profitability
and above all shrink
operation costs by
creation of a more
efficient branch
model.

We advice to
reinforce
current position
but not to aim
for growth in
this area and
save those
resources for
the CRE and
C&M potential
changes

Similar thoughts to
Eastern Europe. We
dont see the point of
that expansionist
aims. We believe
Hybrid bank can
create more value by
shifting those
resources to CRE and
C&M change plans.

OLIVER WYMAN-Iberia Case Competition

Review on Hybrid Banks Situation
Team ICAI MASTERS

3.4 Which investments lead to efficiency improvements and strengthen

Hybrid Bank competitive advantage?
Operating
Efficiency

Risk
Exposure

Bad Bank
creation

Growth

Decoupling

New markets
Entry

Offer new
products

Strategic
Acquisitions

Reduce costs (i.e.

Personnel)

Better customer
service
Rented offices,
new ATMs
Outsourcing
services

Strengthen
the Core

Carrying out these strategies will end up making a shift in the ratio values. We have estimated
this for the following five years from 2017. The results are based on the current ratio values
and target values that we have taken from some competitors as a reference:

Current Ratio Value

Target Ratio Value

CAGR (5 years)

ROE
Net interest margin

0,0312

0,0985

25,87%

0,023

0,035

8,76%

Cost to income
Loans to assets
Plowback
Tier-1

4,053

2,2

-11,50%

0,439

0,044

-36,88%

0,925

0,8

-2,86%

0,107

0,095

-2,35%