Case Study Related to the Bank
The current ratio for the Southwest Bank in 1998 is approximately 1.08 as compared to 1.10 in 1996. This means liquidity position of the bank has almost remained constant over the years. This ratio is somewhat good because the bank for every dollar claim by short term depositors has more than a dollar in its hand. Alternately, too much of the current assets is tied up in the same place i.e. Fed Funds which could have been better distributed to earn a higher profit.
The Southwest holds a large amount of the Fed Funds sold in its accounts because of being heavily dependant on seasonal loan needs, lack of a good demand from the non-agricultural consumers and lack of diversity in its portfolio. This position is not appropriate for the bank because these funds earn a low return on them and hence affect the banks returns overall profitability. Alternately, these funds could have been better utilized in other areas of consumer banking other than agriculture to earn a higher return on the opportunities available in the market.
The bank needs to be more aggressive in its lending efforts to the non agricultural markets especially the growing areas of the consumer finance. Even though the bank would have less experience in this new area and will face more risk for some losses but at the same time, this diversification will hold a greater return and an increasing market share if successful. The most lucrative markets appear to be consumer markets including the retail and the service providers, venture capital firms and real estate and construction.
The risk associated with this strategy is that the Southwest Bank is inexperienced in the non-agricultural market and therefore will face some chance of possible losses and failures. Basically, this will have a negative impact on the already established agricultural lending and will risk the banks entire capital in hand.
The foremost risk to the Southwest Bank is the threat of new entrants to the existing market of Lemars which will offer a great competition to the Bank in the agricultural market and eat away its market share. Also, at the year-end 1998, the conditions of the agricultural sector are weaker in comparison to its past. This is because of the fact that there was a weak existent local as well as export demand and very low selling prices for the agricultural products. Therefore to deal with this problem, the Bank needs to diversify its asset base and provide a wider range of products to the consumers.
The consumer activity such as retail and service providers, real estate and construction and the new venture capital firms provide for excellent opportunities to the Souhwest Bank to expand its customer and the product base. The internet banking holds a promising growth opportunity in near future. The consumers are beginning to understand the importance of the internet cash management. Therefore, the bank needs to invest to retain its existing customers and to earn some new ones.
A list of strategic recommendations for the bank’s board of directors is:
- Expanding the existing customer and the product base: Currently the bank’s loan portfolio is concentrated in the agricultural sector which poses a threat to the bank in case the agricultural sector performs bad and the loans default. Therefore, this strategic move by the board of directors is important because with more diversification, there will less dependency on one type of loans and the bank will have a greater chance to earn a higher return on its assets.
- Buying another bank in the same community or neighboring communities: A strategic decision to be made by the board to enter the new geographical areas or to purchase an existing community bank. This proposed strategy would allow the bank to diversify its portfolio by acquiring a non-agricultural bank. It would enable the bank to reduce its overall risk and to earn a higher return in the future.
- Offering the Internet Banking services: The Internet Banking services are the future of the consumer banking. Once the consumers of the banking industry understand the importance of the internet banking, most of the clients will move towards it. Therefore, in order to retain the loyal clients of the bank, this innovation is needed to be implemented in the bank’s working style.
I would recommend expanding the bank’s existing loan portfolio internally as the best strategic move by the board of directors. This is because diversification would allow the bank to reduce its overall risk and to increase the net return on the total assets. This policy would allow the bank to invest in the growing markets of construction and capital venture firms. Alternately, all the other policies such as the purchasing of a new bank or to move in a new geographical area is to diversify the products as well. Therefore, diversification is the core of profitability and the viable option.
I would recommend the Southwest Bank to begin offering the Internet Banking services as soon as possible because the customers are beginning to understand the importance of the internet cash management. The trend towards this type of banking is fast approaching and would take cater to a greater share of the banks services. The cost associated with this system is really high but this is the right time to implement this system and maintain the best customers rather than losing to some new entrant from outside.
The bank needs to maintain its existing agricultural clients and the way they approach them and the capital that is tied up with these agricultural loans in not to be used for new venture capital investments. The bank must take out money from the Fed Funds sold to invest in the new ventures. This way they will earn a higher return than the interest being paid on the Fed Funds. Therefore, this is how the bank will continue to profit even while investing in the new ventures. Soon most of the big clients will be using the internet banking services for their transactions. This is because they are beginning to understand the importance of the internet cash management.
The new smaller community banks could concentrate on the other growing areas of business and provide loans to these investors such as providing loans to new venture firms, construction companies, consumer markets, etc. at the same time, the banks could offer the internet services, more flexibility in loan terms and better interest rates to successfully compete in the new banking era.
Referencing
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- Libman, A 2007, Crash course in accounting and financial statement analysis, 2, John Wiley and Sons
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- MsLaney, EJ & Atrill P, Accounting: An Introduction, 3, Financial Times Prentice Hall
- Southwest Bank 2009, viewed 5 April 2009, www.southwestbank.com
- Banking: building Innovation in Banking, Microsoft, 5 April 2009, http://www.microsoft.com/industry/financialservices/banking/businessvalue/toabstract.mspx
- Lisa, V 2004, ‘Facing Challenges: Southwest Bank’s CTO, Buddy Cox, speaks about technology relationships and methodologies, ABA Banking Journal, 5 April 2009
- Allman, B 2005, Banking, Lerner Publication
- Mullinuex, AW & Murinde V 2003, Handbook of International banking, Edward Elgar Publishing
- Gup, BE 1999, International Banking Crises, Greenwood Publishing Group
