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

  2. 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

  3. Course goals and requirements • Readings • Class participation • Case analysis and discussion • Group project • Individual parts of project • Current periodicals

  4. 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

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

  6. 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

  7. Approach taken in this course • Financial economics • Hands-on applications • Healthy skepticism • Examine the basics • Ask simple questions

  8. Objective function for financial service firms • Maximize shareholders’ wealth • Stock-owned corporations • Commercial banks • Diversified financials • Mutual organizations • Thrifts • Insurance • Problem with mutuals

  9. 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)

  10. Value Added in 2004:Amex and Lehman Brothers

  11. Performance Assessments

  12. Value Creation inFinancial Services • Financial services • Activities required to provide services • Allocate resources to highest returns • Determinants of returns:

  13. Financial Services • Credit (lending) • Securities • Transaction processing (payments) • Insurance • Asset management • Information

  14. Activities to Provide Services • Setting Terms/Pricing • Communicating/Marketing • Producing/Delivering • Controlling/Monitoring • Funding/Investing • Risk Bearing/Risk Shifting

  15. Value Creation Matrix • Columns = Services • Rows = Activities • Strategies = Concentration of activities • How to choose best strategies?

  16. Value Matrix (Table 2.5)

  17. Possible Strategiesto Increase ROI

  18. Traditional Financial Services • Result of • Business specialization • Taxation • Regulation • Main types of firm • Deposit-taking • Insurance type • Investment companies • Securities firms

  19. The Financial Services Industry • Basic types of institutions • Deposit-taking • Insurance type • Asset management • Securities • Representation in Flow of Funds • Institutional investors

  20. 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

  21. 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

  22. 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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