Down For The Count At Hbv Group
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Week #3 Case Analysis
Case #8
Down for the count at HVB Group
Indiana Institute of Technology
MBA7000
Business Policy and Strategy
September 21, 2006
By Bob Locke
Context
In 2003, HBV Group was the second largest bank in Germany, and tenth in the world with assets of more than $730 billion. HBVs core holding is Bayerische Hypo-und Vereinsbank in Germany and Bank Austria, the largest in Austria. HVB has 8.5 million retail customers and is Europes largest mortgage lender. It is the leading lender to the Mittelstand–the small and midsize companies that form the backbone of the German economy.

The problem is that the company is seeing mounting losses, tumbling credit ratings, and a share price less that half of what it was in 2002.
The reason is that HBV group has a massive $460 billion loan portfolio full of bad debts. In the early to mid-1990s one of HBVs banks made real estate loans worth billions of dollars especially in the former East Germany. But with the Eastern Germany economy failing to achieve the expected results, and taking the West Germany with it, the entire German economy went into a recession, and HBV was stuck with billions of dollars in bad debt. Much of that has been paid off, but HBV still carries the rest on its balance sheet.

In addition, HBV also made loans to some large, now bankrupt German companies, as well as many of the Mittelstand companies that ended up filling bankruptcy.

In the end, HBV was forced to make new bad-debt provisions of $1.25 billion in the third quarter of 2002. This is more than double its operating profit of $545 million. Normally HBV would be able to use its investments to help boost its share price, but due to the erosion of the value of those investments, and having to use up capital to pay off the bad debt, it does not look good for HBV. With a market capitalization of only 8.92 billion, this could make HBV an easy takeover target.

Dieter Rampl took over as CEO, the HBV group on Jan. 1, 2003. His job was to turn the bank around, and make it profitable again. With the huge losses, tumbling credit rating, and a share price of half of what it was a year before, he has his work cut out for him.

External Analysis
The main competitor of the HBV Group is Deutsche Bank, the number one bank in Germany. The other competitors in the banking industry within Germany and Austria are the numerous smaller banks within the sector.

The biggest problem HBV group has is that due to their losses, their credit rating has been reduced from an A to an A-. The result of this is that any capital that they may need to borrow will now cost them more than competitors who have a better credit rating. As such, HBV group will need to charge a higher interest rate to maintain the same profit as their competitors, putting them at a disadvantage.

Buyers in this market are their customers, the clients to who they lend money. In any capital market, potential customers will look for the lowest transaction costs they can achieve. With the necessity of the HBV group to charge a higher interest rate due to a lower credit rating, the chance of acquiring new customers is diminished.

Substitute products are again available from a variety of sources, whether it be traditional “brick and mortar” institutions with numerous branches and a large amount of capital to be loaned, and/or internet based banks with lower overhead. Again, the lower credit rating of the HBV group puts them at a competitive disadvantage.

New entrants to the market would probably tend to come from a local level, trying to attract customers they can give a “home town bank” feel to. The competitors rate of interest would be based on the amount of available capital, their credit rating, and the amount of debt they have incurred.

Internal Analysis
There are a number of things that are an advantage and a disadvantage for the HBV Group. They are as follows:
Strengths – The sheer size of the HBV Groups holdings are a major asset. With 8.5 million retail customers alone, this makes them a formidable competitor.

Weaknesses – Bad debt! With the East German market going bust, and taking the rest of Germany with it, this created a huge amount of loan losses that HBV Group must write down and having a lowered credit rating, capital borrowing will become more expensive. With the weakness of the German economy, any local investments that HBV Group has made, will impact negatively on their investment portfolio, and as such, impact the availability of capital from their investments to put back in to the business.

Opportunities – With the major recession that is happening in Germany, there will be smaller banks that are in the same financial position and potential takeover targets.

Threats – With a reduced market capitalization of $8.92 Billion, this puts HBV in a spot of being a victim of a potential takeover bid.
Financial Analysis
2002 net income after taxes: -Ђ638 m
Return on total assets: -1.24%
Return on equity after taxes (excl. amortization of goodwill): -2.3%
Return on equity after taxes: -4.4%
Cost-income ratio (based on operating revenues): 69.1%
Cost-income

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