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Friday, June 24, 2011

Banks DO have a strategy beyond 'make money in all ways possible'

IN Bschool, strategy is seen as this vague and ‘cover all’ term while banks are seen as this specific, numbers driven,  ‘business as any cost entity’. While perusing bank annual reports, I noticed that they did outline their strategy clearly. I put that down to 'boilerplate' and 'globe'. So after interactions with those in industry, and a few books,  it did surprise me that banks are selective about what they do, and whom they transact with(this is beyond the normal business controls like credit checks, RORWA cutoff etc). 
When one thinks deeper, the reasons are not far to seek. There are so many oppurtunities out there that a bank has to bind itself to atleast which client profile/geography it will chase. No balance sheet is big enough for taking all opportunities out there, and this would lead to intra firm tussle about who should hog the maximum share of the balance sheet. That is why a bank needs a strategy, to pre-empt this zero sum game, which destroys value, and takes away precious time from the rainmakers. 

So how are the target business segments chosen? The dream transaction is a riskless highly profitable product, transacted with a reputed clueless client. The highlighted words are explained below
  1. Riskless- transaction banking(trade services), broking etc has just operational risk, with lower funding requirement. In this capital starved world, with more stringent capital calculation norms on the anvil, banks are preferring business which uses up less capital. For example, secured loans, Islamic finance. 
  2. Highly profitable: This needs no explanation. But the word 'highly' is because with deals becoming rarer and more difficult to get approval(both for client and bank), one should focus on high profit deals. 
  3. Reputed client: Marquee names count, so do leagure table points. Also, some anchor clients give industry expertise(like IPOs for State owned enterprises open up the chance for private sector business) or market access(like Glencore). 
  4. Clueless:- As I blogged earlier, everyone likes an ignorant client, to use that information asymmetry.
Doing just any positive NPV deal is no longer the 'in thing'. With increasing scrutiny from NGOs and investors, deviations from strategy can cost the bank heavily in terms of shareholder value. Think of the banks involved in funding the Libyan dictator Gadaffi, or those who helped people launder money in offshore locales. Noone would welcome the media exposes and leaks.

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