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Value Creation and Structure of Financial Services Industry. Week 1. 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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Value Creation and Structure of Financial Services Industry

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Value creation and structure of financial services industry

Value Creation and Structure of Financial Services Industry

Week 1


Target market for this course

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


Course goals and requirements

Course goals and requirements

  • Readings

  • Class participation

  • Case analysis and discussion

  • Group project

  • Individual parts of project

  • Current periodicals


Financial service firms

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


Driving forces

Driving forces

  • Technology

    • Cheap telephony/satellites

      • Telephone service centers

    • Cheap computing

      • Internet

  • Regulation/taxation

    • Roth accounts, 401Ks

    • Bank holding company/Glass-Steagall

  • Demographics


Key questions for management

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


Approach taken in this course

Approach taken in this course

  • Financial economics

  • Hands-on applications

  • Healthy skepticism

  • Examine the basics

  • Ask simple questions


Objective function for financial service firms

Objective function for financial service firms

  • Maximize shareholders’ wealth

  • Stock-owned corporations

    • Commercial banks

    • Diversified financials

  • Mutual organizations

    • Thrifts

    • Insurance

  • Problem with mutuals


Value added and value creation

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)


Value added in 2004 amex and lehman brothers

Value Added in 2004:Amex and Lehman Brothers


Performance assessments

Performance Assessments


Value creation in financial services

Value Creation inFinancial Services

  • Financial services

  • Activities required to provide services

  • Allocate resources to highest returns

  • Determinants of returns:


Financial services

Financial Services

  • Credit (lending)

  • Securities

  • Transaction processing (payments)

  • Insurance

  • Asset management

  • Information


Activities to provide services

Activities to Provide Services

  • Setting Terms/Pricing

  • Communicating/Marketing

  • Producing/Delivering

  • Controlling/Monitoring

  • Funding/Investing

  • Risk Bearing/Risk Shifting


Value creation matrix

Value Creation Matrix

  • Columns = Services

  • Rows = Activities

  • Strategies = Concentration of activities

  • How to choose best strategies?


Value matrix table 2 5

Value Matrix (Table 2.5)


Possible strategies to increase roi

Possible Strategiesto Increase ROI


Traditional financial services

Traditional Financial Services

  • Result of

    • Business specialization

    • Taxation

    • Regulation

  • Main types of firm

    • Deposit-taking

    • Insurance type

    • Investment companies

    • Securities firms


The financial services industry

The Financial Services Industry

  • Basic types of institutions

    • Deposit-taking

    • Insurance type

    • Asset management

    • Securities

  • Representation in Flow of Funds

  • Institutional investors


Flow of funds

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


Strategic challenges and the flow of funds

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


For next week

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


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