Copenhagen Business School
October 11, 2010
A Strategic Analysis of FIH Erhvervsbank
Name: Pernille Orthmann
Program: Cand.Merc(fsm)
Counselor: Carsten Kyhnauv
178.649 STUs corresponding to 79 pages
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Executive Summary
The purpose of this Master’s Thesis is to evaluate the challenges that FIH Erhvervsbank is facing and to find out how FIH’s business model can be improved by dealing with these issues.
The challenges are identified to be internal problems, a ownership issue and a general business model setup which does not take the environmental influences into account.
The project examines the subject by incurring an extensive evaluation of the links between the business model and the stated strategic challenges by approaching it from an internal, an external and a systemic point of view.
The main findings in the internal analysis are that FIH is losing its profit foundation because it is failing in managing the business elements that makes it special.
From the external point of view, FIH’s problems are related to the competitive changes which have evolved during the past years and have been accelerated due to the Financial Crisis.
The conclusion is that FIH’s niche position in the market is diminishing – it is no longer a unique market player and is therefore, in the range of being weakened by further losses of market shares.
Also, the impacts from the surrounding systemic environment – that being both in economical, political and technological terms – are significant because they are determining for how FIH can exist in the market.
The solution which is being proposed is that FIH should redefine its business strategy. Basically, it should develop its brand, expand its position in terms of products and markets and last, but not least, it should develop a sustainable funding model based on an expansion of its current e-bank platform.
In conclusion, what FIH needs to do is to initiate a new offensive strategy which gives potential for cost advantages and increases its earnings.
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Table of Contents
1 Introduction ...... 5
1.1 Problem Diagnosis ...... 5
1.2 Problem Statement ...... 6
1.3 Choice of Model and Method ...... 12
1.4 Delimitations ...... 18
1.5 Structure ...... 19
2 Presentation of FIH Erhvervsbank A/S ...... 20
2.1 The History of FIH ...... 20
2.2 Ownership Structure ...... 25
2.3 The Management ...... 28
2.4 The Organization ...... 29
2.5 Markets ...... 30
2.6 Products ...... 31
2.7 Financials ...... 34
3 Strategic Analysis ...... 37
3.1 Internal Analysis ...... 38
3.2 External analysis ...... 52
3.3 Sub-conclusion ...... 66
4 Empiricism for Micro- and Macro-Economic Relations ...... 67
4.1 The PEST framework ...... 68
4.2 Political and Legal Factors ...... 68
4.3 Economic Factors ...... 69
4.4 Social Factors ...... 71
4.5 Technological Factors ...... 71
4.6 Sub-conclusion ...... 72
5 Empiricism to forward-pointing Short and Long Term ...... 73
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5.1 Strategy Choices ...... 73
5.2 FIH’s Strategic Options in the Short- and Long-Run ...... 77
5.3 The New Strategy ...... 78
5.4 A Reflection on the Analysis and on the Results ...... 81
5.5 Sub-conclusion ...... 82
6 Source Criticism ...... 83
7 Main Conclusion ...... 84
8 Outlook ...... 86
9 Bibliography ...... 87
9.1 Books ...... 87
9.2 Scientific Journals ...... 88
9.3 Articles ...... 88
9.4 Reports and Publications ...... 90
9.5 Web Sites (www) ...... 91
9.6 Other Sources ...... 91
10 Appendix ...... 92
10.1 Organization Structure ...... 92
10.2 Geographical Markets ...... 93
10.3 Financial Information for the FIH and SEB Group’s Business Segments ...... 94
10.4 ROE after tax and income/cost ratios ...... 96
10.5 FIH’s ROE after tax for the years 2000-2009 ...... 96
10.6 Debt ...... 97
10.7 The Financial Industry in Numbers ...... 98
10.8 Overview of Utilized Materials’ Authors ...... 104
10.9 The Sale of FIH ...... 105
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1 Introduction
1.1 Problem Diagnosis The Danish FIH Erhvervsbank A/S (FIH) is currently floating in a grey area. Its focus on lending activities and other services for Danish companies has throughout the years manifested FIH’s position in the market as “a well-driven and healthy bank with a solid and diversified loan portfolio”1 (Nielsen, 2008, p. 29).
As of the year 2009, FIH was the 6th largest bank in Denmark (Sørensen, 2009a) and is as such one of the big players in the financial industry. However, the past two years have made FIH fragile – not only because of the Financial Crisis, but also due to other upcoming issues.
I find that FIH is fascinating - not only because of its size, but also because it is facing many interesting challenges.
Over the past decade, the bank has gone through some rapid internal modifications as well as external impacts in its field of operations. In relation to this, the strategic perspectives have also changed, and today, several matters are of great concern regarding FIH’s ongoing activities.
The issues are not something to easily pass by because they relate to several hugely important problems regarding FIH’s business model and strategic decisions. These are crucial to cope with in order for FIH to protect its competitiveness.
The origin of the concerns stems from FIH’s relations to its owner, the Icelandic Kaupthing Bank, which has brought an unclear picture upon the future control of FIH.
Moreover, it has put pressure on the stability of FIH’s business model together with a questionable independency towards environmental factors.
In addition, the impacts of the Financial Crisis and the problems in the banking industry have further stressed the business as outside interests are hugely influencing the bank’s position in the Danish market.
Consequently, the future of the banking sector is currently being discussed and, over time, this can constitute structural changes directly influencing the market players.
1 Own translation of ”en veldrevet og sund bank med en solid og diversificeret udlånsportefølje”
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FIH is, like so many others, exposed to the current Economic downturn, but the basic concern is the fact that FIH is experiencing problems related to its current business model and strategic decisions; downgrading by rating agencies, closure of newly opened activities incurring big losses, problems with obtaining access to capital, exposure to the property market and a net profit below those of the past decade’s.
Alongside the mentioned difficulties comes the uncertainty about the future business platforms and how to secure the market position.
The question is if FIH’s financial downturn is only stemming from the past and current financial turmoil in the global and national economy, or if it is in fact a sign of a failing business model?
What one may ask is what the future of FIH really is? – Yet another decade being a successful market player or a struggle for survival?
1.2 Problem Statement In this thesis, FIH Erhvervsbank A/S is the pivot and the related issues will be evaluated throughout an extensive analysis and discussion.
It is the aim to obtain an understanding of the business model and the influencing factors in order to be able to perceive the bank in a greater perspective with the future strategic decision-making in mind.
As already explained, FIH is under a considerable pressure – not only from the outside world, but also from the inside of the bank itself, and the problems that can be observed are likely to only be the top of the iceberg.
1.2.1 FIH’s Internal Problems The affairs of FIH are targeted at a pool of different interests; the bank is involved in several areas - some of which are market of lending, advisory services, and banking. (FIH.dk)
The business concept is fixed on “solid banking combined with a strong customer focus”, (FIH.com) but, this concept does not seem to be the whole truth; the last two annual reports and recent events indicate that the bank might not be as solid as aspired to be.
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Figure 1: The FIH Group’s Net Profit after Tax for 2000-2009
FIH Group Net Profit for 2000 - 2009 DKK Millions
1,200
1,000
800
600
400
200
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year
Profit after tax
Source: Own creation based on figures from (FIH AR 2010)
The FIH Group’s net profits after tax for the years 2000 to 2007 can be seen on figure 1 which clearly illustrates that these were all at a fairly high level with a seemingly upward trend whilst the past two years have dramatically went down to DKK 184 million in 2008 and only 12 DKK million in 2009.
The first quarterly report of 2010 shows that the FIH Group has earned DKK 200.5 million in the first quarter and expects the 2010-result to be DKK 400 million (FIH Q1, 2010) which is a step up compared to 2008 and 2009, but still not at the level of that of the previous years’. Despite the improvement, it seems reasonable to ask if FIH is loosing its footing.
The bank itself has a strong base – it is as earlier mentioned, the 6th largest in Denmark, and has for many years provided a net interest and fee income of around a billion DKK. (FIH AR, 2009)
The business segments spans over a fairly broad palette of services that has also been modified during the years. Unfortunately, costs have gone up (FIH AR, 2009) and, needless to say, they must be kept in check in order to secure the future profitability.
In general, it is by Brealy, Myers & Allen stated, that the goal of a company is “maximization of shareholder value” (2008, p. 30) and figure 1 supports that the FIH group has created value for the owners for quite a long time by generating positive earnings, but it has come to slip back without making the same levels of profit.
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According to Barney, a competitive advantage exists “when it [the firm] is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors”. (1991, p. 102) The maximization of shareholder value is in this way related to the sustainability of competitive advantages.
In relation to FIH, these statements make it interesting to investigate if the bottom line results are really a sign of weakening competitive advantages. Conversely, it could also, in fact, be something else that is influencing FIH’s performance.
Consequently, it must be wondered if the poor results are really a sign of failing strategic decisions or if it is stemming from outside factors which do not lead towards sustainability of competitive advantages and thus, increased value to its owners.
1.2.2 The Problematic Ownership Structure A big issue to FIH was and still is its relations to Kaupthing Bank, which were one of the main players in the Icelandic Crisis. (Theil, 2010) Ever since Kaupthing Bank was set under the supervision of the Icelandic Government back in 2008, the relationship to FIH has stayed unresolved – FIH is due to its status as a Danish bank separated from Kaupthing’s situation, but is also trapped in its current ownership structure. (FIH Q1, 2010)
As long as the ownership stays unresolved FIH will not be able to get a new owner, but this is the contrary to the interests of FIH; recently it was emphasized by CEO, Henrik Sjøgren, who stated that he believes it is very attractive for the FIH to get another owner. (Theil, 2010)
Accordingly, the contradiction is clearly pointing out an issue of importance, because even though, FIH should be sold, is it then enough with a new owner or will the current pressure on the business still exist?
What is known, however, is that the ownership has made it very difficult for FIH to obtain funding on the international lending markets, because everything related to the Icelandic crisis have been black listed. (Theil, 2010)
As stated above, it is crucial to maintain competitive advantages in order to create value. Thus, FIH needs to make sure that competitive advantages can be sustained or that new ones are created in order to secure the future of its business activities. However, what must also be emphasized is that it is questionable if FIH can solve all of its problems from the inside – the reason being that the implications of the environment are closely connected to the competitive
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1.2.3 Market Implications As earlier stated, it is unknown whether FIH’s financial downturn is actually based on internal or external concerns. As FIH states in its annual report, the bank is suffering from the financial crisis which has affected the business portfolio in several different ways. (FIH AR, 2009)
However, the rest of the economic environment has also been affected and as such the concern points to if FIH due to its market position and business structure is more sensitive toward the macro-economic changes that have occurred. Said in another way, it is of interest to discuss how the competition within the banking industry is influenced and what the future prospects are.
Moreover, structural changes have flooded the financial industry from the regulating authorities – both as control mechanisms as well as attempts to influence the economic climate.
The Danish Government has initiated two guarantee schemes in order to “secure access to liquidity and maintaining an adequate solvency ratio” (FIH.com, 2010).
Bank package I meant that the banks’ debt is covered by the Government and most of the Danish banks entered the agreement. (Danmarks Nationalbank, 2009, p. 13)
In 2009, Bank Package II was initiated which made it possible for credit institutions to receive capital from the Danish Government if certain requirements are fulfilled. (Danmarks Nationalbank, 2009)
The two initiatives were originally intended to make sure that the financial stability in the Economy weren’t destroyed and that the institutions would not end up having credit problems (Danmarks Nationalbank, 2009), but it also proved to be a profitable solution to the Government whilst being expensive for the banks to participate within.
As such, it is by the Danish Ministry of Economic and Business Affairs estimated that the State earns almost DKK 14 billion on Bank Package 1 and 2. Moreover, Bank Package 2 involves an average interest rate of 10.5 % on loans to the banks. (Aagaard, Iversen, &
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Skovgaard, 2010) The government support is therefore quite expensive for the banks that have chosen to redeem the guarantees.
FIH states that it has realized costs of DKK 131.4 million due to Bank Package I. (FIH Q1, 2010) In addition, FIH has also utilized the second one and according to Moody’s, FIH got DKK 1.9 billion in capital from Bank Package II. (Moody's Global, 2009, p. 1) Both of these facts clearly question the sustainability of FIH’s business model.
1.2.4 Funding Issues Yet another factor which is also threatening is the fact that the rating agencies have placed FIH’s debt to be a possible downgrade from its already not too good category placement.
Moreover, since FIH, in contradiction to other market players, has more loans than deposits, it is crucial for it to have access to the needed funding in the lending markets. (Theil, 2010)
As already mentioned, the business model of FIH presupposes lending in the market as a debtor, but when that capital source is not attainable what are the possibilities then? Changes in the business model or strategy easily come into mind, but how can that be enough?
FIH does have initiated an overall funding strategy with the goal of ensuring funding diversification, extend credit facilities and to “focus on investor relations and other external stakeholders, including rating agencies”. (FIH AR, 2009, p. 34)
What FIH seems to have acknowledged is, that it must take in a broader approach onto its strategic considerations.
More interestingly, though, is it to ask what exactly it is that will make FIH successful in the future, because surely, the mentioned strategic objectives are the problems of today, but are they also the solution of tomorrow?
Furthermore, Moody’s has expressed fear regarding FIH’s future when the support from the Danish Government is to fade away. (Moody's Investors Service, 2010) The strategic decisions will thus be vital because FIH has to protect itself when the government interventions come to an end.
To FIH, who has utilized the schemes to support its business, the question is, if it will be strong enough to maintain its competitiveness on the Danish market. The going-concern and potential of the future is unknown, but it can be worth a lot to the strategic decision-making to
~ 10 ~ consider what is thought to become key factors for obtaining and sustaining a good market positioning in the future.
1.2.5 Narrowing Down the Problem Area The purpose of this master’s thesis is to:
evaluate FIH’s strategic options on the basis of a theoretical and an empirical framework and thus, creating knowledge which is to be founded on a visible awareness of the selection and rejection of the different components in the project.
The issues discussed above will be carefully evaluated in order to reach an understanding of FIH as a business.
A reflection upon FIH’s strategic direction should, therefore, as FIH has learned the hard way, not be taken lightly – it is critical to include influencing macro- and micro-economical factors when taking decisions due to the possible effects on the business prospects.
Subsequently, what is central to consider is how FIH controls its business and thus, how it can successfully manage to handle its interests and resources in the ever-changing world of today.
All in all, this leads down to the following sub questions:
. How can FIH’s business model be described and what are the key elements? . What are the strategic implications of FIH’s business model from an internal as well as an external perspective? . How do the micro and macro economical development influence FIH’s activities and future business options?
Next, the problem areas discussed above are pinned down to the following problem statement:
What are the strategic implications of the business challenges FIH is currently facing and how can FIH deal with them in order to strengthen its business model?
The problem statement will be the turning point of this thesis, and the main chapters will build upon an analysis and discussion of the three sub questions which in the end will lead to a discussion and evaluation of ex post and ex ante strategic considerations.
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Afterwards, a strategic recommendation will be set on the basis of the past analysis components.
1.3 Choice of Model and Method Science consists of two elements; empiricism and theory (Collin & Køppe, 1995) and thus, it is of great purpose to consider and discuss what the foundation of this project is built upon so that a coherent and logical analysis can be set up under the awareness of the conditions under which results are derived.
Consequently, dealing with the theoretical applications of the method and model makes it a logical step to also consider the limitations stemming from the scientific choices on the scope and quality of the project.
It is my aim to provide a thoroughly and clear scientific analysis so that the subject is covered in the best possible way.
1.3.1 Research Design Research design can be defined as “the way we explore the phenomena which is the subject of the investigation” 2 and the choice of design is highly relevant, because it makes it possible to ensure that the defined problem areas can be handled with the appropriate documentation. (Andersen I. , 2005, p. 103)
The method approach can be divided into four research types3: the descriptive, the explaining, the critical-diagnosing and the change-related type. (Andersen (red.), et al., 1994, pp. 36-41)
The relevant one here is the critical-diagnosing research type. The reason is that, the project will embrace both a description and an explanation of the subject. Thereby not said, that the explaining research type is not suitable to ensure that solutions or alternatives are set up at some point, because it is strongly emphasized that the word “explain” can also mean “to predict” and thus, it does take a much broader approach than the descriptive one. (Andersen (red.), et al., 1994, p. 37)
However, since the focus in this thesis is also appointed on taking a more specific look at the problem area and thus, to “unveil the reasons, and also the possibilities for changing and
2 My translation of: ”.. den måde, hvorpå vi udforsker det fænomen, der er genstand for undersøgelsen” 3 My translation of: 1) Beskrivende undersøgelser 2) Forklarende undersøgelser 3)Kritisk-diagnosticerende undersøgelser 4) Ændringsorienterede undersøgelser
~ 12 ~ improving the circumstances”4 (Andersen (red.), et al., 1994, p. 39), the third research type is the one that is identified to be utilized.
The change-related type, on the other hand, involves the researcher’s own physical participation in influencing and implementing changes in the company and it is as such beyond the scope of this project because I do not have the access to do just that. (Andersen (red.), et al., 1994)
Consequently, the link between the analysis and the resulting recommendation is well founded under the conditions of the critical-diagnosing research type.
1.3.2 Choice of Method Perspective The methodological outset is essential to consider since it contains the view from which the project will be seen. The starting premise for the philosophical point of view in this thesis is critical hermeneutics.
In general, Hermeneutics is as a philosophical direction aimed at comprehension and interpretation. (Collin & Køppe, 1995, p. 110)
Originally, the term was first applied in the 1600th Century, but, according to Collin & Køppe, Hermeneutics was first really considered being a philosophical direction after Friedrich Schleirmacher lay the foundation by stating it should be applied to:
“not only texts, but also their originators and their opinion, volition and feeling”.
Wilhelm Dilthey further expanded this view so that it came to “embrace all forms of human activity and the products of it” 5 and he also applied the hermeneutic concept of interpretation. (1995, p. 112)
Overall, Hermeneutics has evolved during the centuries and it exists in several variations. The following three hermeneutic movements are considered to be the major directions (Collin & Køppe, 1995):
1. Historical Hermeneutics 2. Existential Hermeneutics 3. Critical Hermeneutics
4 My translation of ”… at afdække hvad årsagerne er, samt mulighederne for at ændre og forbedre forholdene” 5 My translation of “… at omfatte ikke blot tekster og deres ophavsmænd og disses menen, villen og følen” and ”… at omfatte alle former for menneskelig aktivitet og produkterne af denne”
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The focus on comprehension and interpretation is by hermeneutics, in general, aimed at a certain apprehension of the relation between subjectivity and objectivity. The way to reach objectivity is described by the hermeneutic circle which is a central element in all variations of hermeneutics. (Jacobsen, Schack, Wahlgren, & Madsen, 2006, p. 167)
The Hermeneutic Circle is based on existing knowledge. The circle itself is never ending – when something is interpreted and comprehended, it happens based on the pre-understanding, and the analysis is carried out through a dialogue. When the resulting interpretation is reached, a new understanding is obtained which means that it is possible to go further into depth and thus, to go through the circle again due to the modification of the pre- understanding. (Andersen I. , 2005)
Thereby, the Hermeneutic Circle states that the shifts between dealing with the parts and the totality is a way to seek truth – and in the end to approximate objectivity.
Figure 2: The Hermeneutic Circle
Understanding (Pre) of the Totality understanding
Understanding of the Parts
Source: Own creation, based on (Andersen I. , 2005) , (Collin & Køppe, 1995) and (Andersen (red.), et al., 1994)
The Modern Criticism, with Habermas as one of its most central proponents, goes a step further. An essential point which is conveyed is that Hermeneutics should take the societal aspects into account and as such, provide the apprehension that the world view can be split into two; a system and a life world. (Andersen (red.), et al., 1994)
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Andersen explains that the relation between the two ensures that empirical- and hermeneutical aspects are combined – the empirical being the fact that the system is something that is objective where different mechanisms will be in focus whilst the life world is something the individual perceives by itself and therefore subjective. (1994)
Andersen proclaims that the critical perspective underpins the importance of being critical towards the society, but also towards the subjectivity contained by Hermeneutics. (1994)
The reason why I find the above method useful is because it allows for relating the economic mechanisms to that of the perceived, interpreted and comprehended view on FIH.
What is assumed, though, is that I, as the researcher, have a certain pre-understanding. Therefore, my angle of approach is based upon what I have experienced and understood. This pre-understanding will be challenged by the analysis – both from a systemic and a fraction- oriented point of view.
Another implication is that the analysis will be unique due to the fact that results are deduced based on my pre-understanding.
All in all, the method choice is the one that sets the basis for the scientific procedures that will be carried out in this project.
1.3.3 Theoretical Perspectives and Models A theory is, by Collin & Køppe, defined as “an overall, abstract conceptual framework, which serves as a way to organize and systematize the concrete data”6 (1995, p. 29) whilst Andersen states that “a model is a system of terminologies where the relations between individual concepts are clearly stated”7 (2005, p. 82).
Theoretical perspectives and models are the tools of an analysis – they provide an approach to perceive the point of interest from different angles.The perspectives do not necessarily provide differences in the result but can also be appointed and utilized with similarities in mind. (2005, pp. 73-75)
6 My translation of “…hermed blot menes en overordnet, abstrakt begrebsramme, som tjener til at organisere og systematisere de konkrete data” 7 My translation of ”En model er et begrebsapparat, hvor relationerne imellem de enkelte begreber er klart angivet”
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In this project, the theories of the Resourced-Based Perspective (RBV) and Industrial Economics together with aspects from general economic theory will be utilized along with related models.
The following figure lists the choices and puts up a few key words on each perspective.
Figure 3: Table of the Choice of Theoretical Perspectives and Models
Perspectives Resourced-Based Industrial Economics General Economics View Internal External Systemic Key words Resource Competition Maximization of Shareholder Core Competence Entry/Exit barrier Value Key Success Factors Over normal profit Macro- and microeconomic Competitive Advantage Competitive Advantage factors Models Barney’s model of Porter’s Five Forces PEST Sustained Competitive SWOT Ansoffs Model Advantages Some of the Barney Porter The Danish Central Bank main Prahalad & Hamel D’Aveni Ansoff proponents Wernerfelt The Danish Bankers Association and sources The Danish FSA Source: Own creation
The choices will be briefly touched upon in the following, whilst a more in-depth description and discussion will be encircled during the analysis:
RBV and Industrial Economics will both be utilized in chapter 3 in order to make it possible to approach FIH’s firm- and competitive specific issues from different angles.
RBV is chosen because it provides a strong focus on taking a deeper look into FIH’s internal affairs and how the company is dependent on resources from the environment.
Industrial Economics is mainly represented by Michael Porter who put up a framework based on a research of competitive aspects. Today, the framework is widely utilized and the choice of this framework gives an external angle upon FIH.
The focus is based on industrial elements and competitive forces. The models that will be utilized are Porter’s Five Forces which provide an approach to consider the market conditions.
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Moreover, the SWOT-analysis will be utilized as a tool for summing up the vital points derived during the strategic analysis.
General Economic theory will be utilized in the micro- and macro-economic parts of the analysis. The components in this view will be taken mainly from the Danish Central Bank.
In Chapter 4, the general economic theory angle is approached by utilization of the PEST framework in order to obtain a broader perspective on the societal influences from a systemic point of view.
When finally setting up the strategic recommendation in chapter 5, Ansoff’s model will be utilized.
All in all, the theoretical perspectives are chosen in order to obtain an analysis of the subject that is touched upon from different angles with the desire of achieving a broad range of insights and conclusions on the topics – supplementing as well as contradicting ones.
1.3.4 Data Collection The empirical framework consists of different types of data which have been collected with the aim of obtaining a broad span of opinions, facts, statements and approaches regarding the subject.
In general, data can be described as either quantitative or qualitative. The two types contain very different perspectives on how to approach and accept the data.
The qualitative method is based upon the elements that are not measurable whilst quantitative method takes outset in the opposite because it is believed that only these are objective enough to reach a certain truth. (Andersen (red.), et al., 1994)
In this project, both data types have been collected. Approaching the subject from different empirical angles makes it possible to set up a discussion of whether or not the collected data types support each other or not.
Moreover, the usability of both quantitative and qualitative data is substantiated by the former method choice.
In general, the main empirical basis is FIH. My collection of data is based on external information, because it has not been possible to get access to and gather information from the inside of FIH.
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All information is therefore based on materials that FIH has chosen to release to the public – e.g. annual reports, website information and press releases. Additionally, data from the outside world have been collected in the form of newspaper articles, information from government institutions, scientific journals, books and more.
Consequently, the available data can be characterized as secondary data because they are defined by others. (Andersen I. , 2005, p. 151)
The main point that can be criticized on the sources is measurement problems; only FIH’s public accounting numbers are known, the precise impacts of environmental factors are not clear due to incomplete data and the outcome of strategic decisions can only be observed which means that it is hard to be completely sure that they are the full reason behind detected changes.
The strategic reflections on the subject in the sources must also be considered as being only partly fulfilled. The reason is that the subject covers a very complex area where in-depth knowledge and pre-understanding is a prerequisite for meaningful results.
Nevertheless, the point of view is that although reflections are partly subjective they will, when they are analyzed, approximate the true reality due to the hermeneutical circle.
1.4 Delimitations The delimitations of this project will, in the following, be set forth to make it clear under which conditions the analysis is carried out.
Firstly, since FIH Erhvervsbank A/S is the center of attention, the business units which relate to it are also of interest8. These are narrowed down to the fully-owned subsidiaries of FIH Erhvervsbank A/S and hence, the analysis will not include other ownership interests and investments in other companies.However, the three subsidiaries; FIH Realkredit A/S, FIH Kapital Bank A/S and FIH Partners A/S will not be analyzed in detail due to very limited availability of information regarding their businesses. The owner of FIH, Kaupthing Bank will only be centered upon in places where it contributes to the analysis.
Secondly, the geographical area of interest will be limited to Denmark. Despite FIH’s relations to Iceland, this country’s influence will not be touched. Moreover, even though macroeconomic events in the Danish Economy are interconnected to other countries’
8 See section 2.2 for further details on the ownership structure
~ 18 ~ economies, the analysis will only be seen from the Danish point of view as FIH is a Danish company and have most of its business operations placed and related to that country.
Thirdly, the financial aspects of FIH and its competitors cannot be analyzed in great detail due to the fact that only annual reports and company releases are available.
The figures that are available can be compared to other industry players as they all adhere to the same rules of accounting. All financial company information will be based on book-values from the consolidated financial statements.
Fourthly, in September 2010, FIH was sold to a group of investors with ATP acquiring the most shares. (Appendix 9) Due to the fact that there has not yet been released much information regarding the implications of the sale and since it has happened so close to the deadline of this project, I will not take the sale and the new owners into account in the analysis. Thus, Kaupthing Bank will be treated as FIH’s owner.
Last, but not least, limits are set upon the use of data and materials. New data will not be included in the project after July 2010 due to the short time period left to process the details.
1.5 Structure The project structure of this thesis is illustrated on the next page.
This project consists of three main parts; introduction, analysis and discussion and conclusion.
The first two introducing chapters set the frame for the area of investigation and provide a basic overview of the bank.
Firstly, chapter 3 contains the main analysis where the internal and external elements are discussed and combined. In the systemic analysis in chapter 4, FIH will be related to the micro- and macro-economic factors with the aim of obtaining an idea of the influences from the environment. Next, chapter 5 will put up analysis components in the perspective of FIH’s future strategic decision-making.
In addition, a brief source criticism is provided in chapter 6.
At last, chapter 7 will outline the results of the analysis and thus, answering the problem statement.
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Figure 4: Project structure
Source: Own creation
2 Presentation of FIH Erhvervsbank A/S The following sections contain a description of FIH in order to give an overview of the bank’s historical background and current business model. The aim is to lay a solid foundation for the next chapters.
2.1 The History of FIH FIH is a rather old company and it has gone through many different interesting stages in its life cycle. Its business has evolved throughout its history whilst its profile has been altered as a result of changing circumstances internally in the company as well as environmental influences.
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A historical focus is of interest because it provides an understanding of what FIH was and to some extent, what has made it the company it is today.
2.1.1 The Early Years In 1958, the company Finance for Danish Industry was established by the Danish Central Bank, Danmarks Sparekasseforening, Assurandør-Societetet and Industrirådet9. The company was set up as a limited joint-stock company. (Jessen C. , 2004)
Originally, it was focused on medium-term lending activities for Danish companies. (FIH.dk)
FIH was a unique market player – the initiation of the company was on behalf of market interest parties and FIH was servicing the financing needs that were not fulfilled by other financial institutions.
Furthermore, FIH had a very privileged position in the market – a special law was made which meant that FIH was not alleged to pay corporation tax10 and it did not adhere to the same strict rules as other financial institutions. This meant that FIH was able to raise capital from the foreign exchange market and on the Danish bond market. (Bøggild, 1999)
According to Bøggild, “both elements meant that FIH’s funding costs in comparison were reduced to those of the mortgage credit institutions “11, and as such FIH had a clear competitive advantage in contrast to other market players. (1999, p. 24)
In 1973, FIH got another competitive advantage served on a silver platter; the State subsidized the company which made it able to issue loans with an interest rate below that of the market.
Due to these advantages, another company called Dansk Håndværks Finansieringsselskab was founded with the purpose of providing loans to small corporations and competing with FIH, which only favored big corporations, but the two merged in 1983. (Bøggild, 1999)
In 1988, the FIH became listed on the Copenhagen Stock Exchange and was a publicly traded company until the year of 2000. (Moody's Global, 2009)
9 Industrirådet is today known as Dansk Industri which is an industry- and employer-organization. 10 This tax advantage was kept until 1987 (Bøggild, 1999, p. 25) 11 My translation of: “Begge dele var med til at reducere FIH’s fundingomkostninger sammenlignet med realkreditinstitutterne”
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FIH kept is special market position as the lender to the business environment, but during the years, many aspects of FIH’s business model were changed. Most of the original benefits were eliminated again, but it kept its focus on corporate lending.
All in all, the beginning years of FIH was highly supported by the outside world and in 1998, it had 6.000 customers, low write-offs and competitive advantages. (Bøggild, 1999)
2.1.2 The Acquisition In August, 1999, Kapital Holding, which was owned by BG Bank and Realkredit Danmark, made an acquisition offer to FIH at a bid price of DKK 222 per share. However, FIH’s CEO “wanted to keep the corporation as an independent alternative to the banks”.12 (Gardel, 1999, p. 2) Kapital Holding was thus, not of interest to FIH, but yet another reason was the bad reputation BG Bank had – FIH did not want to risk losing its legitimacy among its corporate customers. (Andersen L. , 1999)
Luckily, the takeover was avoided by a quick action from Swedbank and ATP, Danish Industry, Dansk Arbejdsgiverforening, LD and Den Nationale Investeringsbank. Together, they owned FöreningsSparbanken which made a bid of DKK 255 per share through the company FI-Holding A/S. (Ritzaus Bureau, 1999)
The purchase argument was based on the easy access to corporate customers through FIH’s market shares. Moreover, expansion into an internet banking platform for private customers was also in sight. (Rosenbak, 1999)
FöreningsSparbanken’s acquisition was approved by the authorities in November 1999, (Ritzaus Bureau, 1999) and it acquired the necessary shares at a total price of DKK 6.5 billion. (Hansen & Mikkelsen, 2004)
The mentioned coalition of other interest parties remained owners of 23% of the company shares. A special option agreement was set up so that the shareholders could sell their shares at a specified price in the future. (Hansen & Mikkelsen, 2004)
Under the management of Swedbank, FIH kept a strong market position. FIH was delisted, as also earlier mentioned and on July 1st 2001 “FIH got the legal status of a bank”, but it did not result in corporate changes. (FIH AR, 2001, s. 19) It was not until 2003 that FIH took changed its name to FIH Erhvervsbank. (Jessen C. , 2003)
12 My translation of “…gerne vil bevare selskabet som et uafhængigt alternativ til bankerne”
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During 2004, FIH set a new strategy alongside a three year plan; the aim was “to develop a healthy strategic Nordic market platform”. This goal was to be reached by setting up three new business areas: investment banking, markets and private banking together with the establishment of offices in Sweden and Norway. (FIH AR, 2004, s. 24-25)
In 2004, Swedbank also took full control of all shares in the bank and hereafter, sold FIH on the 29th of September. The new owner was the Icelandic Kaupthing Bank which acquisitioned FIH for a price of DKK 7.1 billion. (FIH AR, 2004)
2.1.3 In Icelandic Hands The new Icelandic ownership incurred changes for FIH, but the bank still sought to follow its defined 2004-strategy just slightly modified to the aspirations and characteristics of the new owners. (FIH AR, 2004) FIH took over Kaupthing Bank’s investment banking unit in the beginning of 2005 and it launched new business areas in the coming years. (FIH AR, 2008)
Kaupthing Bank was head quartered in Iceland where the financial industry expanded quickly in size and in geographic location. The influence from Iceland on Denmark was a fact rather than a question. However, Icelandic companies made their purchases of Danish companies with high leverage and risks – a strategy that eventually backfired and caused an economic crisis in the whole country. (Friis, Olsen, & Zigler, 2008)
On October 9th 2008, Kaupthing Bank was nationalized. It had collectively, together with two other Icelandic banks, Landsbanki and Glitnir, so much debt that the amount of it “corresponded to 12 times the Icelandic Economy”.13 The Icelandic exchange closed down untimely, the currency was not traded due to absence of banks and the prime minister was telling the Icelandic population not to collect their money from the banks because it would further depress the situation and possibly result in bank runs. (Rosendahl, 2008, p. 29)
The fact that Kaupthing Bank was set under administration by the Icelandic authorities also entailed that Kaupthing’s operations in other countries were closed down – this was the case in Britain as well as in Sweden. It also resulted in the decision to put FIH up for sale at a price of DKK 7 billion in order to try to redeem assets to raise money for the creditors. (Rechnagel, 2008) As of today, the creditors’ claims remain unresolved. (Kaupthing.com, 2010)
The sales process of FIH was initiated in 2008, but no purchase went through. Competitive and company-specific aspects made the purchase interest decline – in reality it was impossible
13 My translation of “…svarende til 12 gange Islands økonomi”
~ 23 ~ for other big Danish banks to take control due to legislation regarding competition and no international banks have come forward despite the fact that FIH provides an entry to the Danish market. (Sørensen, 2009b)
The implications of the Icelandic ownership have remained to be an issue of concern to the consistency of FIH’s business. The consequences of the ownership have so far been that FIH has lost market shares and opportunities. (Sørensen, 2009b)
Also, the international funding market has come to be almost closed land for the bank and the bank’s usual funding sources has dried out. The Financial Crisis in the world economy and its implications on the Danish society did not make it any easier. (Theil, 2010)
2.1.4 The Financial Crisis and the Support Packages In addition to the many challenges stemming from the Icelandic ownership, FIH was like the rest of the financial industry impacted by the Financial Crisis and several banks experienced bailouts.
FIH also found itself to be impacted by the crisis from several angles; many of its customers were facing decreasing sales and FIH was vulnerable because of its funding problems, the size and importance of the individual customer, and the exposure to the property market. (Sørensen, 2009b)
To keep things in check, the Danish government decided to intervene in the financial industry.
In October 2008, the first support package was unveiled; Bank Package I meant that the government made guarantees for deposits in financial institutions. (Danmarks Nationalbank, 2010)
In February 2009, Bank Package II was initiated. In effect, the result was that it made it possible to FIH to obtain funding in the market because the Danish State was guaranteeing for its out-standings.
FIHs bonds were upgraded by Moody’s due to the special circumstances of the participation in the Bank Packages. As of April 14th 2010, FIH had utilized the guarantee to obtain DKK 25 billion in loans. (Theil, 2010)
Furthermore, FIH has received hybrid capital for DKK 1.9bn from Bank Package II. (Moody's Global, 2009)
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Nevertheless, Moody’s has expressed worries regarding FIH in the long-term and states that FIH’s financial strength rating has a “negative outlook”. (Moody's Investors Service, 2010)
What is of great concern is the time to come when the government guarantees expire, and FIH is, therefore, preparing for the worst possible situation. (Sehested, 2010)
2.1.5 A Look Ahead The many aspects of the experiences and situations FIH has faced during its long history is by no doubt what has led the business to what it is today; the special market position has been nursed and its business has evolved from offering basic loan products into also having commercial banking, other financial and advisory services.
Today, FIH reaches ”corporate customers, property investors and institutional investors”. (fih.com, 2010) and its many relationships to the Danish business environment makes it an important market player in its field.
What is very interesting is, thus, to take a much deeper look into the current business model with the aim of characterizing the bank.
This will allow for a more in-depth analysis of the strategic issues and implications which are of concern in relation to FIH’s future existence and way of making business in the days of tomorrow.
2.2 Ownership Structure The relationship between FIH and its current owner is central to understand, because it contains some vital insights as to the implications it has on FIH’s business.
As earlier explained, FIH has had different ownership structures; it has been a joint-limited stock company, a listed company and now, as a private company.
The following diagram shows the ownership structure; the FIH Group consists of FIH Erhvervsbank A/S and its subsidiaries.
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Figure 5: Diagram of the Ownership Structure.
Company Ownership Structure
The Icelandic Kaupthing Bank Authorities (Moratorium)
FIH Erhvervsbank A/S (100%)
FIH FIH FIH Leasing FIH Kapital FIH Finance Other Realkredit Partners A/S og Finans Bank A/S A/S (100%) Associated A/S (100%) (100%) A/S (100%) (100%) Companies
FIH Aztec Holding ApS (100%)
Source: Own creation, based on information from (FIH AR, 2009) & (Moody's Global, 2009)
The FIH Group’s structure is based on the different business areas it is involved in – FIH Partners A/S is focused on investment banking, FIH Leasing og Finans A/S is aimed at issuing loan guarantees and leasing, FIH Finance A/S makes different investments in equities and FIH Kapital Bank A/S is a subsidiary bank in cooperation with ATP. (FIH.dk, 2010) FIH Realkredit A/S has the sole purpose of winding up all existing mortgage credit activities. (FIH AR, 2009)
Besides the subsidiaries, the FIH Group has also made investments in some other companies; for example Axcel, Fondsmæglerselskabet LD Invest A/S and LD Equity 1,2 and 3. (FIH AR, 2009)
In addition, FIH also holds a 17% share in LRA 1 ApS, a 30% share in DDD Holding A/S and a 30% share in Ejendomsselskabet Borgergade Parkering A/S. (FIH AR, 2009)
Since Kaupthing Bank lost its independence to the Icelandic Authorities, FIH is on its own. Kaupthing Bank has nothing left to do but to pay its creditors, but it will not take the Danish Bank down too – FIH is “ring-fenced from Kaupthing with no cross default”. (FIH.com,
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2010) Currently, the business of Kaupthing is still unresolved as the creditor claims has not been cleared out and therefore, the Bank is still in moratorium status. (Kaupthing.com, 2010)
However, FIH does not incur any risk or changes on the books as a result of Kaupthing’s problems due to the fact that FIH is an independent entity. (FIH Q1, 2010) Despite this, “Kaupthing’s shares in FIH have been pledged as collateral with the Icelandic central bank”. (Moody's Global, 2009, p. 5)
Luckily for FIH’s business activities, it is not possible for the Icelanders to drain money from FIH due to Danish Banking legislation. FSA14 has to permit the up streaming of funds, (FIH.com, 2010) and moreover, the fact that FIH is a Danish bank means that Kaupthing’s creditors cannot get access to FIH’s capital - FIH is protected against it. (Rechnagel, 2009) Therefore, FIH has been offered for sale, and it is not only in the interests of the FIH-owners, but also in the interest of FIH, to obtain a change in the ownership. (Theil, 2010)
The current ownership structure is tantamount to the occurrence of problems, because FIH is trapped.
FIH’s goal is, as earlier explained, to create value to its owners, but the profits cannot be drained to Kaupthing Bank’s estate of bankruptcy – and indirectly to pay out on the debt to the creditors. It seems that the only resolution is a sale of FIH, but the question is just if anyone will to buy it?
A change in ownership is preferable, and at the end of 2009, Moody’s expressed that “a change in FIH’s ownership is likely in the short-to-medium term”. (Moody's Global, 2009)
In consequence, despite FIH’s own conviction about risk, it does realize that it is not a good thing to be trapped in the way it is for now – the reason being that both the employees and customers are uncertain of the effects of a shift in the ownership structure. (Sørensen, 2009b).
So, it seems that the outside world is in some ways taking on a different point of view than just accepting the uncertainty of the relationship – especially regarding funding. Perhaps the reason is that other un-definable points also exist?
The question is then, why this is so and if FIH can circumvent it in any way?
14 In Danish FSA is called ”Finanstilsynet”
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2.3 The Management The management of FIH is a matter which will be shortly addressed in order to provide a perspective on interest parties in FIH’s management.
2.3.1 The Board of Directors It is the responsibility of the Board of Directors to “sanction major decisions and to monitor that managers are doing well” and, it is the task of the board to represent the owner’s interests. (Thomsen, 2008, p. 18)
In FIH, the Board of Directors consists of 9 members.
The employees of FIH are represented with 3 members. Another 3 persons who all have interests and board positions in other Danish companies are members– two of which are related to ATP; H. E. Hansen as the Chairman of ATP invest and J. Vorsholt as a member in the board of ATP.
The Chairman of FIH’s Board of Directors, H. S. Christensen, is also the CEO of the Confederation of Danish Industries. (FIH AR, 2009)
The last two members are from Iceland; S. Þór Guðgeirsson is the Deputy Chairman and R. Árnason who is also in the Resolution Committee of Kaupthing Bank. (fih.dk, 2010)
In brief, the interests of the owner (Kaupthing Bank) is of course represented in the board, but links to other market players in the Danish economy also exist.
2.3.2 The Chief Executive Officer FIH’s current CEO and Managing Director is Henrik Sjøgren who has only held that position since 2009. He holds a position as the Chairman of the Board of Directors in each of the fully- owned subsidiaries including a position in the Board of Directors in Axcel IndustriInvestor Invest A/S. (FIH AR, 2009)
The former CEO, Lars Johansen, was first a member of the board, and got appointed as the CEO and managing director of FIH in the 1990ies. Lars Johansen came to FIH after pursuing a career in the financial sector ending out as the CEO of Copenhagen Stock Exchange in 1996. He became employed in FIH in 1998. It was his policy to keep FIH as an independent competitor to other Danish banks. (Gardel, 1999)
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In June 2009, Sjøgren was promoted to CEO whilst Johansen left for retirement. (FIH AR, 2009) It is unclear if the shift was a wish from Johansen to retire, the poor bottom line results, a strategic decision, or if it perhaps was a combination of several reasons.
2.4 The Organization The organization of the bank will be shortly addressed in the following, but it must be underlined that all utilized information is external, which means that the organization only can be understood from an external point of view.
2.4.1 Strategic Direction The basis for the business of FIH is reflected by the identification of what FIH is, what it wants to be and where it wants to end up.
Its overall business idea is the “ambition [is] to be known as an honest, competent and dynamic financial partner for the Danish business environment”15and it is further outlined by its vision which is “to be Danish industry’s preferred financial partner”. (FIH AR, 2009, p. 19)
The mission of FIH is to “make basis for healthy growth in the business life by having the strongest competence, offering the best financial solutions and providing the best advising”16 (FIH.dk, 2010)
The values of the organization is branded as FIHlosophy where the key words are help, think different, clear communication and having a good relationship to the customers. (FIH.dk, 2010)
In 2009, FIH changed its strategic direction. The new strategy was introduced with FIH’s new slogan as “The Focused Corporate Bank” and a strategic focus on “loans combined with related advisory services are the core of FIH’s business.” (FIH AR, 2009, pp. 8, 27)
The strategic direction is important to take into mind because it gives an insight FIH’s beliefs about its business prospects in the long-term.
15 My own translation of: ” … ambition er at være kendt som en hæderlig, kompetent og handlekraftig finansiel partner for dansk erhvervsliv” 16 My own translation of: ”..danner basis for sund vækst i erhvervslivet ved at have den største kompetence, tilbyde de bedste finansielle løsninger og give den bedste rådgivning”
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2.4.2 Organization Elements FIH itself states that the fact that it has expertise knowledge, experience and a flexible organization are the things that make the bank special. (FIH.dk, 2010)
The organization is characterized by limited bureaucracy, and a strong focus on professionalism together with a high performing environment. (fih.dk)
During 2009, the group had an average of 378.8 full-time employed workers across the different business entities. (FIH AR, 2009)
The organization structure is depicted in appendix 1. What is notable about the chart is that the management has direct contact to all business divisions and that two divisions are targeted at control functions; the Risk & Legal division and the Internal Audit Committee which must be seen as a way to deal with the many legal aspects of the banking business.
The division, Corporate Affairs, takes care of strategic issues, which indicates that the organization at least on a formal level has a focus on strategic decision-making.
Moreover, there is a focus on project management (the Projects & System division) and on IT. It also seems like FIH is trying to take workforce into account from a longer-term perspective due to the fact that it has a division called Strategic HR.
In short, the organization of FIH is focusing on being flexible which very well supports its business profile about targeting its products and services to the individual customers.
2.5 Markets The markets FIH is engaged within seen from a competitive perspective will be described in the following.
2.5.1 Geographical Markets FIH’s principal market is the Danish market which, in 2009, consisted of 66 % and in 2008 of 74.5% of the total income from net interest and fee income. (Appendix 2.1)
FIH is also operating in Germany, Sweden and Finland, but only within the business area of property finance. (FIH AR, 2009) Other foreign activities are not reported in detail. However, as the Property Finance’s income from net interest and fee income only accounts for 16.1% of the group total’s, it must be concluded that FIH is engaged in foreign activities with either other business segments or as the bank’s own investments. (Appendix 2.2)
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Consequently, the main geographical market is still the Danish one which is also further supported by the fact that it is the Danish companies that FIH is targeting its business operations at. As stated in section 1.4, the focus of this project is only targeted at the domestic market and hence, other geographical markets will not be analyzed.
Physically, FIH is locally represented in Denmark by 5 offices. The headquarters is located in Copenhagen on the fashionable address of Langelinie Allé. The rest of the offices are located in Århus, Fredericia, Herning and Ålborg. (fih.dk)
2.5.2 Competitive Arena In general, FIH is operating within the borders of the Financial Industry which consists of banks, pension funds, insurance companies and mortgage-credit institutes. (Finansrådet, 2007) The industry provides financial products and services to different customer profiles and for different purposes.
FIH’s business activities can be further limited down to mainly relating to a part of the Financial Industry – that being the Banking Industry which consists of banks, cooperative savings banks and savings banks. (Finansrådet, 2007)
What is important, though, is to understand, that despite the fact that FIH does not provide the exact same products, as for example compared to those of mortgage-credit institutes’, FIH is still competing against them in the market place, because they provide alternative products to FIH’s customers.
Despite the differences, I will in the analysis in chapter 3 examine the Financial Industry as a whole. Thereby, the analysis of each individual business segment is opted out of because a detailed treatment would be far too comprehensive.
2.6 Products FIH is as a bank offering a range of money related products. The business operations that are carried out are built upon a broad, but specialized, and complex portfolio of financial products and services.
In general, FIH can be characterized as mainly being involved in commercial and investment banking. The product type FIH historically has been renowned for is its loans to the corporate sector. Today, these are supplemented with deposit accounts and other financial services. (FIH.dk, 2010)
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2.6.1 Division of Products within the Different Business Segments The composition of FIH’s business activities is illustrated in the following figure.
Figure 6: The Relation between the Three Business Units and their Product Segmentation.
FIH FIH Erhvervsbank Partners
Business Capital Banking Units: Markets Corporate Finance FIH Business Corporate Property Structured Capital Netbank Segments: Banking Finance Finance Markets Pro
Source: Own creation, inspired by information from (FIH.com, 2010) and (FIH.dk, 2010)
Figure 6 looks different than the organizational structure shown in appendix 1. The reason why the above categorization is illustrated is because it more distinctly illustrates the span of the business portfolio. It is the above segmentation that is utilized in FIH’s marketing efforts– this division of the business is the one that is clear to the customers and other visitors on FIH’s website. In addition, these segments are also the ones that FIH publishes financial information on in its reporting.
FIH’s products are grouped within the different business units and segments. The three business units; banking, capital markets and corporate finance will be shortly described for each individual segment in the following sections.
2.6.2 Corporate Banking Corporate Banking has the objective of becoming “the preferred bank of the corporate sector in Denmark”. (FIH.com, 2010) and is focused on advising and financial services to the corporate sector - for example, corporate loans and advising on for example foreign exchange, interest rates, derivatives, loans and leasing etc. (FIH.dk, 2010).
2.6.3 Property Finance The Property Finance segment is aimed at “professional Danish property investors investing in commercial and rental properties” (FIH AR, 2009, p. 22) - per se, the field is taking care
~ 32 ~ of both advising and lending to property investors which are involved in rental and commercial property investments. (FIH.com)
2.6.4 Structured Finance Structured Finance provides loans for big Nordic corporations’ and private equity funds’ takeovers and buy-outs of companies - the products are offered to assist the customers in ownership changes. (FIH AR, 2009, p. 24)
The high risk related to this type of financing is handled by requiring detailed documentation and carrying out analysis before the providing loans. FIH is the “arranging bank” and considers itself being a “strategic business partner”. In problematic cases for existing customers, FIH has acquired shareholdings in the companies. (FIH AR, 2009, pp. 24-25)
2.6.5 FIH Netbank Pro In 2008, FIH established an internet bank offering deposit agreements as its only product. First, it was only available to private customers in Denmark, but due to its success FIH soon expanded into opened up for corporations and non-Danish citizens. (fih.com, 2010)
The deposit account has a variable interest rate, no requirement of a minimum amount and no BPS other types of payments. (fih.dk) Money can also be tied up for a specific period of time – either 3, 6, 12, 24 or 36 months. The minimum deposit for receiving a high interest rate is DKK 50,000. (fih.dk)
2.6.6 Capital Markets Capital Markets is engaged within trading in the financial markets and finding financial solutions for its customers – it offers different types of options, investment funds, bonds, and swaps. (FIH.com)
2.6.7 Corporate Finance Corporate Finance offers investment banking services and it is gathered in the subsidiary, FIH Partners A/S. The unit was founded in 2006 by FIH Erhvervsbank and some partners. Two years later, FIH became the full owner of the unit. (fih.com, 2010)
Corporate Finance works with mergers, acquisitions and other financial services like divestments etc. and has been involved in many big business deals. (fihpartners.dk)
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2.6.8 Products Revisited As it was outlined in the paragraphs above, FIH’s products span over a broad area of different financial tools and solutions.
Figure 7: Net interests and fee income, and net profit for the FIH Group in 2009
FIH Group Net Interest and Fee Income DKK Millions and Net profit for the Year 2009 1500 1435.6
1300
1100
900
700
500 424.30 367.00
300 231.20 194.60 240.90 163.00 169.20
100 81.20 19.40 17.00 11.5
-31.90 -100 -63.20 -140.30
-300 -225.30 Corporate Property Finance Structured Capital Markets Corporate Private Equity Other Activities Group Total Banking Finance Finance Net Interest and Fee Income Net Profit for the Year (after Tax)
Source: Own creation, based on figures from (FIH AR, 2009, p. 70)
As the figure above demonstrates, the Group’s positive earnings in 2009 was in receipt by three segments; Capital Markets, Corporate Finance and Private Equity despite the fact that they did not generate the biggest amount of net interest and fee income. In terms of that, Corporate Banking, Property Finance and Structured Finance were the most important business segments, but they did not generate any profit on the bottom line.
As such, the FIH’s problems are reflected on a broad scale over its product portfolio.
The poor 2009-result indicates that more details regarding the business is needed to find an explanation for the inconsistencies and resulting financial downturn.
2.7 Financials The financial setup of FIH is an element in the business model which provides an extended angle upon the strategic challenges.
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Since I have only access to limited financial information, the following overview will only provide a very brief look upon a few points.
FIH is, due to its long history and its position as a corporate bank, having a financial setup with enclosed strategic implications which to some extent differs to those of other banks’:
. Funding channels with very strong emphasis on financing from the money market (FIH AR, 2009) . The weighting with more loans than deposits (Theil, 2010) . Special credit facilities with ATP (FIH AR, 2009)
SEB is in my opinion is a market player with a focus and position close to that of FIH’s; SEB’s mission is to be “the leading Nordic bank with a strong focus on corporate banking and wealth management”, (SEB AR, 2009) and can thus be utilized as a peer when setting up a picture of the size and returns related to FIH.
In the Danish market, SEB is known for its focus on big customers plus its interests in merchant banking. 25.71 % of the SEB Group’s total investments were related to Denmark whilst merchant banking throughout all markets consisted of 47.82% of the total assets. (Appendix 3)
The financial comparison between FIH and SEB is done with the aim of supporting the evaluation of the chosen subjects.
2.7.1 Size The size of FIH is measured in terms of its 2009-balance DKK 130,356 million and it is, as earlier mentioned, among the largest banks in Denmark.
In comparison, SEB had in 2009 a balance of SEK 2,308,227 million which corresponds to DKK 1,668,386 million.
However, SEB has operations in several countries with Sweden as it home market, so only 9.59% of its assets were related to the Danish. (Appendix 3)
In terms of total assets SEB in Denmark is thus 1.2 times the size of FIH which makes them very equal when also taking into consideration that SEB has some business areas that FIH is not engaged within. (Appendix 3)
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2.7.2 Performance As pointed out in section 1.2.1, FIH’s performance has decreased from its many years of high earnings. Something is causing this, but what – is it internally in the company or is it a general market trend that other players like SEB is also experiencing?
Figure 8: ROE after tax and income/cost ratio for FIH and SEB
Percentage (ROE), Ratio (income/cost) ROE after Tax (%) and Income/Cost Ratios for FIH and SEB
25
20.8 20 19.3
15.8 15.5 15 15
13.2 13.1
10
5 4.2 3.3 2.8 2.4 1.5 1.7 1.8 1.6 1.6 1.2 1.15 0.93 0 0.1 2005 2006 2007 2008 2009
Year SEB - ROE after tax FIH - ROE after tax SEB - Income/cost ratio FIH - Income/cost ratio
Source: Appendix 4
Return on Equity (ROE) is a ratio which describes value creation for the owners’ equity investments in the bank. (Elling & Sørensen, 2005)
From the figure it can be seen that SEB in general has generated a higher ROE than FIH and thus, have performed better in terms of the owner’s return, but also that they both are object to a sharply decreasing returns.
The income/cost ratio measures “operating income, including value adjustments for changes in current prices, as a percentage of operating expenses including credit loss expenses (impairment losses)” (Finanstilsynet.dk, 2010) and here, SEB has generally had a stable level around 1.5 whilst FIH generated a higher one until 2008.
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This means that FIH, in terms of the income and cost related to operations has performed better in most years, but has now fallen to a level of 0.93 which infers that it is either very close to relatively seen earning less operating income than it pays in expenses or it has had too large accruals.
FIH and SEB are both experiencing heavily decreasing returns, but FIH is vulnerable as earlier described, due to its funding situation.
3 Strategic Analysis Strategy and the planning of it is a field of great importance, but also one of complexity with no sudden answers. Strategy lays the foundation for securing that decision-making is based on insightful reflections. Perceiving the best strategy is, for a firm, a way to achieve future success.
The goal of this strategic analysis is to examine the described business model and assess the existing strategic implications hereof. By that said, the turning-point is to obtain a deeper understanding of explicit business aspects and how these are actually reflected in the strategic issues that FIH is facing.
The main issues which have been identified so far are related to:
. Internal conditions . Funding . Exposure to environmental changes and uncertainties . Positioning in the market
These are all challenges FIH needs to cope with.
Right now, FIH is balancing on a double-edged sword. Dealing with the problems is completely necessary, but also risky since it is the future which is at stake.
It is therefore of interest to go down to a deeper analysis level to question why these issues have appeared, how they influence the bank and if other issues might show up from underneath the surface so that it can become possible to come up with a recommendation.
The following figure illustrates the approach that will be utilized in order to delineate the issues throughout the chapters 3-5.
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Three levels of analysis will be centered upon – a firm-specific, a micro-specific and a macro- specific level.
Figure 9: My Approach to the Examination of the Identified Issues
• Internal analysis of FIH Firm- • Section 3.1 perspective
Micro- • Internal and external analysis • Sections 3.1, 3.2 and 4.1 perspective
• External analysis Macro-perspective • Section 4.2
Source: Own creation
The internal part will center on FIH and its resources, whilst the external part will go into depth with competitive and systemic aspects.
3.1 Internal Analysis The aim of this part of the strategic analysis is to identify and encircle the different aspects which are of relevance for the understanding of FIH’s business seen from an internal perspective. By internal, it is meant that it is the organization which is in focus together with all the elements that are closely connected hereto.
The analysis will, as stated in section 1.3, be carried out by the utilization of the Resource- based View (RBV).
What the internal analysis is strongly focused on is achieving an understanding of FIH’s internal strengths and weakness and their relation to FIH’s market position.
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3.1.1 Application of the Resource-based View The approach of RBV is of great use, because it allows for a deeper understanding of inside factors and thus, gives an idea of how they can be taken into account when dealing with FIH’s strategic aspects.
RBV is a theoretical perspective which puts emphasis on the access to and utilization of resources.
Organizations are seen as “coalitions of interests” and “markets in which influence and control are transacted”. Furthermore, it is emphasized that “to survive, organizations require resources”. (Pfeffer & Salancik, 1979)
Resources are defined as “tangible and intangible assets that a firm controls that it can use to conceive of and implement its strategies”. (Barney & Hesterly, 2008, p. 74) It is the belief, hereof, that all corporations is in need for resources to operate in a market.
The access to resources is crucial because it is what makes it possible to carry out the business activities, and if the required resources are not in place, what then can the firm really do?
Firms can, in particular, utilize integration as a way to limit the need for externally controlled resources, but, as Pfeffer & Salancik emphasize, it is not the case that firms are completely self-sufficient – a firm will never be in full control because others will try to acquire the control of the resources as well and thus, competition is laid out. (1979) This means that there is a dependency on external parties who control the required resources.
In relation to FIH, the control of resources is a vital point of reflection since these are really the basis for being able to implement strategic decisions. (Barney J. , 1991)
But what one might wonder is why and how resources – the ones of scarcity and the ones of excess – are important? Is it really the resources in themselves which are the recipe for success or is it something else? – And what about FIH? Do the right resources make it a insurmountable success?
Not necessarily. The reason is that it is not resources, but competitive advantages which create and increase firm value. However, utilization of resources is a prerequisite to be able to do just that.
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According to Barney, a competitive advantage is “implementing a value creating strategy not simultaneously being implemented by any current or potential competitor” and to be able to upkeep the competitive advantage – that is to make it sustained –it must to be the case that “other firms are unable to duplicate the benefits of this strategy” (1991, p. 102)
The figure below shows a model which describes the conditions for obtaining, holding and sustaining a competitive advantage.
Figure 10: Barney’s model of “The Relationship between Resource Heterogeneity and Immobility, Value, Rareness, Imperfect Imitability, and Substitutability, and Sustained Competitive Advantage”
Source: (Barney J. , 1991)
The model assumes that some resources are immobile and firms should not be completely similar to competitors. Then, four resource characteristics must all be present for a competitive advantage to exist. These are illustrated in the middle box and they are essential to the further analysis because it is the ones determining the degree of the resource strength. (Barney J. , 1991)
Lacks in resource quantities or in the extent to which given resources can be utilized is a factor of consideration when examining the already described business challenges because this relates to weaknesses due to the exposure it entails.
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In general, resources are not easily analyzed – they can exist in many different ways and the presence of resources does not necessarily equal a satisfied resource need. A full overview would demand an internal investigation of the whole company, which is outside the scope of this project, but a focus on some factors can prove to hold valuable strategic points.
The examination of existing strengths and weaknesses are essential elements for awareness of the striving for superior profits meaning that the knowledge obtained in the analysis can be utilized to leverage the strengths or limit the weaknesses in the best possible way.
3.1.2 Legitimacy To interact in the market, FIH needs to be a legitimate player – this requires fulfillment of several things.
A Key Success Factor (KSF) is “an asset or competency that is needed to play the game”, (Aaker, 2008, pp. 58-59) but since they are embedded in the context they are not necessarily clearly visible. (Schoemaker & Amit, 1993)
What must also be emphasized is that “the resource view holds that the type, magnitude, and nature of a firm’s resources and capabilities are important determinants of its profitability”. (Schoemaker & Amit, 1993, p. 35)
Hence, even though KSFs are something that a firm needs to have – the fulfillment is only legitimizing the firm’s existence. It is the transformation of KSFs or other resources into becoming competitive advantages which gives success in the longer term. (Aaker, 2008)
3.1.3 The Long Survival in the Industry What FIH is known for is its special position as a corporate partner and it is stemming from FIH’s long history all the way back to the creation of the bank and the bestowed industry advantages.
Some elements from the past has survived until today, but the question is if these will survive in the future and thus, entail a sustainment of FIH’s business profile.
In the beginning, the internal aspects were mainly focused upon FIH obtaining a unique position due to access to special resources. Tax advantages and more were, as outlined in section 2.1, the conspicuous outcome.
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The environment was heavily supporting FIH’s operations which meant that FIH, seen from the perspective of RBV, got time to internally develop and collect resources, competencies and capabilities resulting in the formation of competitive advantages, which then laid the foundation for years of success; that is it has become advantageous due to path-dependency. (Barney J. , 1991)
Over the years, FIH has expanded its business segments which also indicate that FIH has had the required resources to develop its position in the market through an evolving business model – thus, generating profits over time.
3.1.4 Sustainability of Competitive Advantages Competitive advantages are not to be let alone – if the sources providing the advantage are not cared for, the advantage can be lost. (Prahalad & Hamel, 1990)
Prahalad & Hamel sets up a very illustrative view upon corporations’ strengths; they describe a firm as a tree where the core products are the limbs upon where the business units grow as smaller branches.
These hold the products – essentially the fruit. However, the roots to the tree are core competencies which are “the wellspring of new business development” a corporation needs to take great care of them if they are to exist in the long term. (1990)
The figure below illustrates how resources, competencies and capabilities are mixed together resulting in the development and sustainability of competitive advantages.
Even though a company like FIH has a wide resource-base only few parts goes through the stagesand down the funnel to actually end up being or contributing to a competitive advantage.
The fact that FIH has survived for so many years and had an average ROE of 12% during the years 2000 – 2007 (appendix 5) indicates that FIH has either had competitive advantages, has been exposed to continuous beneficial conditions in the external environment or perhaps both. (Barney J. , 1991)
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Figure 11: Developing and Sustaining Competitive Advantages
1. Resources 2. Competencies
3. Capabilities
(Sustained) Competitive Advantages
Source: Own creation
The decrease in ROE in the past two years signifies that a loss or weakening of competitive advantages has occurred.
3.1.5 The Corporate Brand The FIH Erhvervsbank brand is a resource which incurs both position of strength and of weakness.
The brand stems from FIH’s long historical presence in the Danish market and thus, can be seen as a strength due to its strong connection with FIH’s focus on corporations.
The weakness stems from the future options; because FIH’s brand is targeted at a specific customer group, it can be limiting FIH’s strategic choices; if for example, FIH decides to diversify its business and go into retail banking.
The English name “Finance for Danish Industry” will clearly be contradicting if FIH’s geographical presence should be expanded.
At the current stage, however, I will consider the brand being an advantage, but only with the reservation for future strategic moves.
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3.1.6 Strategic Understanding of Human Capital Aspects As concluded in the preceding section, FIH’s core competencies has been, and is, to some extent still, based upon its acquired knowledge within the field of financial products and services. As many of FIH’s products are based on advisory service and financial knowledge it is really the employees that are essential. Effectively, they are the link between FIH and its customers.
In 2009, FIH’s staff costs were DKK 425.5 million. When taking into account that the profit on net financials was DKK 2,055 million, this is a large cost. If divided by employees, the average cost per employee was DKK 1.1 million per employee. If other administrative expenses are added, then the average cost per employee was DKK 1.8 million. (FIH AR, 2009)
Accordingly, employees are very valuable factors also seen from a financial point of view.
Thus, it raises the question if it is really the employees that are the true source to competitive advantages or if they are only a strategic strength?
A recent practical example provides a valuable insight regarding that question.
In 2006, FIH founded an equity department with the idea of becoming a successful investment bank by cooperating with Kaupthing Bank. (FIH AR, 2006)
In order to set up the department, FIH headhunted people from Carnegie and almost all Alm. Brand’s stock market analysts. (business.dk, 2007)
Headhunting is essentially buying resources and a quick way to gain control. However, the net profit after tax from the Capital Markets business segment incurred losses of DKK 67 millions in 2006, DKK 109.3 millions in 2007 and DKK 2.6 millions in 2008. In all these years, operating costs accounted for around two thirds of the total expenses related to the business segment. (FIH AR, 2007)
Apparently, something was completely wrong – the entry costs could be high, but shouldn’t FIH start to gain from its investments sooner?
Perhaps, FIH depended too much on being a new top-player in the field, but the question is if the new employees were really that special and worth the high pays? If it was so, wouldn’t FIH have had complete success immediately?
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Not necessarily. The reason is that it is not so much the employees in themselves but the way they are utilized that are important. In this way, the acquisition of the employees’ competencies was not determined to lead to success.
Rather, the decision to headhunt should have been based upon the composition of the employees’ competencies in relation to FIH’s other organizational factors. If FIH really had believed in its ability to obtain a successful division it would have acknowledged that it needed time to build it up.
The true issue is, seen from the perspective of RBV, that of imitation. The point is that sustainable competitive advantages cannot be bought. (Barney J. , 1991)
FIH apparently thought that a transfer of competitive advantages from one firm to another could be done.
The limited standardization of FIH’s products and services (with the exception of the e-bank) implies that it is specialist knowledge of complex financial frameworks which are a main prerequisite for creating value – without highly-skilled employees, there would be no one to advise and build the relations to the customers.
Consequently, it is the employees who are really strengthening and preserving the decisive capabilities by the application of their competencies in the organizational context.
To put it briefly, human capital is the basis for FIH’s core competencies – the people are not the competitive advantage in themselves, but they are in the way they interacts with the given context.
Returning to figure 10, sustainable competitive advantages stem from the fact that they are rare, imperfectly imitable, non-substitutable and valuable. As also earlier argued, the exact precise outline of the source to competitive advantages is embedded in the context and thus, not easily identified.
Causal ambiguity which "exists when the link between the resources controlled by a firm and a firm's sustained competitive advantage is not understood or understood only very imperfectly" is essential because it implies that if competitive advantages are not possible to understand then they cannot be copied. (Barney J. , 1991)
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It is exemplified that FIH, at least at the time, did not understand the sources to competitive advantages and their relation to value creation. Surely, this illustrates a weakness within the understanding of strategic aspects and raises the question if the management was in fact incompetent.
In summary, employees can be a strategic strength, but not a competitive advantage since it is only in connection with the specific resources and capabilities in the bank that competitive advantages can appear.
3.1.7 Customer Relationships Another place where FIH has a considerable strength is regarding relationship building to its customer. This advantage stems from some degree to its path-dependency – the many years of experience means that FIH has developed an insight into the customers’ preferences.
3.1.8 The Implications of the Business Segmentation FIH holds a strong position within the field of corporate lending and related advisory services – this is FIH’s core product and thus, its “physical embodiments of one or more core competencies”. (Prahalad & Hamel, 1990)
Seen in the light of the low bottom line of the past two years, it is reasonable to look deeper into the internal conditions.
When looking at the financial statements for the business segments, Structured Finance is together with Corporate Banking incurring huge losses. (see section 2.6) These are both fields that are heavily dependent on the market trend.
Writedowns and losses on loans and other receivables, etc. is a huge factor – in 2009, this incurred DKK 1,177 millions. Since the Group’s total income was only DKK 2,054.9 million, writedowns cut down the income with 57 %, whilst operating costs accounted for 49%. (FIH AR, 2009)
Other Activities are the place where FIH has the worst result. In 2009, the loss was DKK 225.3 million whilst the loss was DKK 357.3 million in 2008. What have heavily impacted this area are Bank Package I and the refocusing of the bank. (FIH AR, 2009)
Based on these conditions it seems that FIH’s business model is exposed because it is so specialized to only corporate, institutional and property investors. Even though FIH has build up competencies for each customer-segment it must be questioned if the huge losses aren’t
~ 46 ~ really a sign of a weak company in the way that FIH is too narrowly focused – especially in terms of the risk and the already realized losses – or if it the business segments do not rely on FIH’s core competencies?
Corporate customers are now demanding a broader palette of products and services from its business partner – they want the “whole package”. (Alsmann, 2009) This means that FIH’s strategic advantages that are stemming from the segmentation are cushioned.
The outcome is that competitors are required to acquire skills and resources in several business areas in order to exist – but as they do so, the profit from this factor will fade away.
SEB is perhaps the current best example – it has some many of the same business segments as FIH; e.g. capital markets, corporate finance and leasing. (seb.dk, 2010) However, SEB’s has a broader customer base and actually also focuses on being an investment bank e.g. in terms of wealth management and equity trading, which is what FIH has gone away from.
Diversification becomes key, but, just because the business portfolio is evolving, it does not mean that the new competencies and capabilities are turning into strengths.
3.1.9 Access to Capital The funding setup of FIH means that FIH is exposed – not only to itself but also in relation to the general market conditions.
FIH debt profile is characterized by a shift from having more short-term debt than long-term. (FIH AR, 2009)
The latest report shows that on June 30th 2010, FIH’s short-term funding accounted for 28% of the funding, whilst it the year before was 46%. What is notable is that the deposits only account for 7% and has actually declined. (Appendix 6) Also, it must be wondered why FIH did not perceive its original strategy of initiating pensions (Rechnagel U. , 2008) since pension deposits can be large and “safe” financing.
If looked at its debt maturity profile it appears that the need for refinancing is great in the coming years. Especially in 2012 and 2013, the need is very big with more than DKK 20 billion of long-term debt maturing each year. (Appendix 6)
The Danish Central Bank stats that “ capital has the characteristic that it is the most difficult to get when needed the most” and this is essentially a good point regarding FIH. Beforehand,
~ 47 ~ its market funding was not such a great concern, but when it experienced problems in the form of downgrading, decreasing bottom line results and a crisis, it was very dependent on the external environment.
The credit facilities in agreement with ATP and the bank packages have implied that FIH got access to the resources it could not get from the market.
Originally, though, the credit facilities were agreed upon back in 2007 before the market dipped. It gave FIH the opportunity to get funding elsewhere when the fact was that it did not have comprehensive deposits, (Houmann, 2008) and The credit facility is definitely a great strength because it gives FIH the freedom to obtain immediate funding when needed.
The degree of the strength must be considered to be pretty high due to the size of the credit amount, when also taking into account that FIH’s 2007-balance was DKK 113,357 million. (FIH AR, 2009)
However, despite the fact that FIH utilized the credit in 2009, but not in 2010 yet so far, the expiration of the agreement is in September 2010 which puts additional pressure upon FIH to secure its future funding sources. (FIH AR, 2009) (FIH H1, 2010)
Furthermore, FIH entered into agreement regarding the individual state guarantee scheme in 2009. (fih.com, 2010) The guarantee has implied that banks could issue debt guaranteed by the government. (finansielstabilitet.dk, 2010) In June 2010, FIH had fully exploited the guarantee. (fih.com, 2010)
The costs of Bank Package I totaled commissions of DKK 82.3 million in 2008, DKK 529.7 million in 2009 and up to Q2 2010 DKK 2010 81.4 millions. Also, in 2009, FIH experienced loss provisions of 208.1 million. (FIH AR, 2009) (FIH H1, 2010) In total, the summarized costs are DKK 901.5 million.
Bank Package II implied that credit institutes could receive a capital injection from the state. FIH utilized this, as mentioned earlier, to get DKK 1.9 billion.
The costs of the bank packages were high, but seen from an internal perspective they proved to be necessary for FIH because of its limited access to market funding.
FIH’s funding issue is still prevailing – the bank packages limited the effects of the funding problems to some extent, but it must be strongly emphasized that the funding issues are really
~ 48 ~ stemming from the business model where FIH has not been protected properly from the environmental risk occurring.
Thus, FIH is in great need for finding a good solution. Due to its rating situation it can prove to be very expensive to issue new debt in the future.
Hence, the funding channels that were earlier strength for FIH by giving it flexibility has now turned into a considerable weakness.
Another point incurring a weakness is a new strategic objective is to “focus on investor relations and other external stakeholders, including rating agencies”. (FIH AR, 2009) Only through the problems faced, FIH has found out that environmental players actually play a rule.
A point of reflection is that FIH despite its competencies within financial knowledge has not been able to utilize its competencies for its own sake. Simply said, it has not been able to take good care of its own capital structure and has essentially failed to be foreseeing and act strategically right.
It seems like the only possibility is for FIH to take better control of its funding or to make great changes in its business model in order to hedge itself better from uncertainties.
3.1.10 The Curse of the Owner Kaupthing Bank’s and later on, the Icelandic authorities’ status as the owner of FIH have proven problematic from several angles.
Kaupthing’s seats in the Board of Directors imply that it are able to influence decision- making on that level.
In the beginning, the ownership resulted in an expansion of FIH’s business. The new aim was to also turn into an investment bank – basically, this implied that new business areas like wealth management, equity trading and more was initiated. (FIH AR, 2007)
The expansion was visible on the balance sheet; during the years under the Icelandic ownership, FIH’s balance grew from DKK 65,910 millions in 2004 to DKK 130,356 millions in 2009. Also, earnings increased steadily. (FIH AR, 2009)
The Financial Crisis and the default of Kaupthing changed the picture completely.
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Despite Kaupthing’s influences upon FIH in the money market, it must be criticized that FIH’s capital structure setup were too dependent of the market – especially in times of crisis together with the negative surprise realized by the collapse of FIH’s owner.
But, more interestingly, FIH also changed its strategy. In January 2009, FIH decided upon refocusing. This involved employee cutoffs and reductions in operations with “the objective being to adapt the activities to the current market climate”. (FIH AR, 2008)
The high-profiled equity department was shut down completely, and excused by Kaupthing’s default; “a profitable Equity Department is based not only on top research in the local market, but also on factors such as international flow and ECM [Equity Capital Market] transactions”. (FIH AR, 2008)
This gives an indication of a direct effect of the owner’s default. FIH had apparently lost KSF’s within that business area, but what one might wonder is why it didn’t chose to build it up on its own now that so many resources had been given to the purpose?
Clearly, the former strategy aimed at synergy effects between Kaupthing and FIH, but trading equities must also be seen as a complementary to FIH’s business areas which would mean that customers got more services.
The firing of 20% of FIH’s workforce (Nielsen H. B., 2009) together with the “going-back-to- the-old-business-segmentation” is clearly a sign of weakness.
Kaupthing’s down turn and collapse pressured FIH into changing its business, the expansion strategy did not survive and business activities were heavily impacted due to integration of the two banks.
The strength of FIH’s business model has thus proved to be poor – it could not withstand a market downturn and the default of an owner placed in another country.
The government support packages were FIH’s savior in several ways; ratings were secured, access to and utilization of liquidity were given by the State and thus, the short-term survival was secured, but the ownership entails entrapment.
The question is if a new owner will change FIH’s challenges? For sure, a new owner with capital strength can make sure that FIH can receive capital injections if needed, but essentially, FIH’s strength comes down to the strength of its own business model – not its
~ 50 ~ owner’s, because it is the focusing on core competencies and business model development that will provide the revenue basis.
3.1.11 Coping with Uncertainty The problems FIH is currently facing are controversial because they are to some extent a product of environmental challenges that are weakening FIH’s business model including the creation and sustainability of competitive advantages.
Wernerfelt & Karnani sets the uncertainty into perspective by stating that “since strategy is concerned with the future, the strategic context of a firm is always uncertain, although different firms face differing degrees of uncertainty”. (1987, p. 189)
To FIH, this has proven truly right – changing conditions makes it of utmost importance to continuously assess the implications uncertainty has on the business model.
Now, it seems, the changes FIH are initiating and already has initiated are only responses to the implications incurred by the externalities.
Eisenhardt & Brown puts up a framework of this exact situation; they put emphasis on that corporate strategists should “map and remap their business units swiftly against shifting market opportunities” which essentially means that a “Patching” strategy should be utilized. (1999, p. 72)
FIH has instead utilized “Reorganization” as the solution which is “a defensive reaction” whilst patching is “a proactive weapon”. (Eisenhardt & Brown, 1999, p. 74)
By not recognizing the influences stemming from outside factors, FIH has essentially failed in taking control of its own future.
What I can deduce from this is that FIH needs to act – and that is on a continuing basis, because it needs to make changes to its strategy along the way as it becomes aware of threats and opportunities.
When taking a look upon FIH’s current challenges as regard to funding, ownership and the other internal issues, it becomes clear that the environment is not supporting FIH’s business model the same way it originally did.
This has switched the clear advantage founded upon uniqueness into disadvantages because the places where FIH has had its greatest strengths are running to the sand.
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Furthermore, the contextual changes that is happening is places were FIH should be concerned, because it should nurture and protect its sources to competitive advantages – as soon as others obtain them, they are lost. (Prahalad & Hamel, 1990)
Coping with uncertainty are thus vital to FIH’s survival and future performance as the current circumstances has so clearly demonstrated.
What RBV fails to consider is the strategic implications of the exact conditions and changes within the micro- and macro-economic level. Therefore, the following will provide an analysis where it is the outside world that is in focus.
3.2 External analysis The analysis of the environmental situation contributes to an understanding of the conditions under which FIH can implement its strategic decisions.
The utilization of Industrial Economics as the approach means that a special focus is put on competition which, means that the positioning for a company is vital for its profit possibilities and according to Porter, “the key to growth – even survival – is to stake out a position that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of the buyers, suppliers and substitute goods”. (Porter, 1980, s. 50)
The following sections represent the part of the analysis where the market arena and forces are in focus. The analysis is carried out by utilizing the framework of Industrial Economics.
The analysis will consist of three main components:
. Definition of the market arena . Utilization of Porter’s Five Forces in order to analyze the competitive situation . Discussion of FIH’s positioning
The aim of the external analysis is to obtain an insight into what conditions FIH is operating under in the market place and to define FIH’s position is in the market.
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3.2.1 Market Arena The Financial Sector (MFI17) consists, as stated in section 2.5, of banks, pension funds, insurance companies and mortgage-credit institutes.
The industry has a significant value in the Danish Society because it links together the different monetary parts in the economy. In 2009, the Financial Industry had a total balance of DKK 10,611.74 billions. (Appendix 7)
Figure 12: The Division of the Financial Industry Measured in Terms of Total Balance
Percentage of the Total The Division of the Financial Industry Balance 50
45 44.22 42.61 40.75 40 39.37 37.90 35
30 29.23 26.28 26.20 26.05 26.34 25
20
15
12.00 11.42 11.42 10 10.48 10.45
5
Year 0 2005 2006 2007 2008 2009
Banks Mortgage-credit institutes Danmarks Skibskreditfond Investment companies Investment funds Non-life insurance companies Life insurance companies Transverse pension funds Firm pension funds ATP LD AES SP DMP
Source: Appendix 7
As it can be seen on the chart, the banks sit on 41% of the total industry balance. The mortgage-credit institutes comes next with 29% and then the life insurance companies comes with 11%. The rest of the players are rather small, but ATP, which is only one individual player, actually holds 5.7% which is a lot for only one player to keep.
17The Danish Central Bank utilizes the term “Monetary Financial Sector” in its statistics – in everyday usage it is just called ”the Financial Sector”
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The composition of market players in the Financial Sector means that the market arena is broad with lots of different financial products and services targeted at different customer types and needs.
Due to the focus of this project, examples will be based on aspects that are closely linked to FIH.
3.2.2 Products In MFI, there exists a variety of many differentiated products. Loans, derivatives, deposits and advisory are only some of the products offered. In general, the similarity among the products and services in the industry is hard to measure, because many to a great extent are flexible regarding amounts, interest rates and terms.
When seen this way, the products and services are therefore heterogeneous, but if looked upon the individual product categories and product types, it appears that they might not be as different as first assumed.
For example, if a corporate customer wants a special term deposit agreement, these are essentially quite alike – the difference lies between interest rates, costs, loan size, maturity etc.
Furthermore, services like equity trading can be argued to be similar in the way that the purchase of a wished product can be reached from a number of different providers.
In short, there exists a very high number of complex products in MFI, but within the same categories, the products are close to homogenous. The overall perspective upon MFI, however, indicates that products are in fact heterogeneous because they are so different in their setup and in targeting different customer needs.
3.2.3 Evaluating Competition As explained above, competition is the essential analysis component which is also emphasized by Porter:”the essence of strategy formulation is coping with competition”, who also puts forth the Five Forces model as a way to illustrate the state of an industry’s competition aspects. (Porter, 1980)
Porter’s view upon Industrial economics is strongly represented in the above quotation – the focus is on strategy and competition. The famous framework known as Porter’s Five Forces which will be utilized for identifying and analyzing the competition is shown in the following.
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Figure 13: Porter’s Five Forces – “Forces governing competition in an industry”
Source: (Porter, 1980)
The Five Forces provides a framework for evaluating factors which define the competition in an industry. In this way, the competition in the Financial Industry can be characterized by the utilization of the model and thus, result in an idea of what competitive aspects that are present and how these influences the profit opportunities for FIH.
3.2.4 Competitive Rivalry The competitive rivalry is “the intensity of competition among a firm’s direct competitors”. (Barney & Hesterly, 2008)
As it is the whole MFI which is analyzed, all competitors within this are of concern in relation to competitive aspects.
Recent numbers from The Danish FSA and the Danish Bankers Association, states that there were 347 market participants in the beginning of 2010 in MFI; in total, 46 stock broker companies, 100 non-life insurance businesses, 60 life insurance businesses and lateral pension funds, 8 mortgage-credit institutions and 133 Banks were present. (Appendix 7)
~ 55 ~
Consequently, the large number of market participants infers that the MFI seen from an overall perspective is highly competitive.
Also, high exit barriers support this view; locking down business operations must be seen as costly because many products and services, especially those related to the banks, pension funds and mortgage-credit-institutes, are based on long-term business relations.
However, if taking a closer look at the market participants it becomes clear that the market is dominated by a group of very big institutions and a large number of smaller competitors; in terms of the 2009 total balance, the 6 largest banks account for 34.6%, ATP for 5.7% and a the 8 mortgage-credit institutes for 29.2% whilst the 2 largest18 pension and insurance related institutions PFA Pension an Danica Pension accounts for 4.9 %. (Appendix 7)
Seen this way, the market has a high concentration because the 17 institutions accounts for approximately 75% of MFI’s total balance.
If looked upon the players from an even wider level, the big ones are spread all over the parts of the industry; e.g. the Nordea Group has both banking, mortgage-credit products and pensions etc, and that is also the case with Nykredit, Danske Bank and more.
Thus, the market seems to be controlled by a little group of dominating players and a large group of smaller competitors.
The division between the different types of market participants which are not all competing within the same product and service categories, and the heterogeneous products offered by the industry in general, questions the aspect of a highly competitive industry.
Instead, it seems that the industry is divided so that a group of leaders controls a large part of the market whilst smaller followers in large numbers fight for the remaining 25 % of the total industry balance.
3.2.5 Threat of New Entrants Porter states that “the seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors that the entrant can expect” and further outlines that barriers to entry can exist in a number of ways which will be discussed in the following paragraphs. (1980, s. 36)
18 When excluding the already mentioned institutions
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Economies of scale is “when a firm’s costs fall as a function of its volume of production” which means that the greater the output the smaller the costs of the individual product or service. (Barney & Hesterly, 2008, p. 41)
The following table shows the income/cost ratio for the parts of the industry where these statistics were available.
Figure 14: Income/cost ratios for bank groups and mortgage-credit institutions
Income/cost ratio 2005 2006 2007 2008 2009 2010 H1 Mortgage credit institutions, consolidated level 2.84 2.82 2.29 0.94 1.17 1.41 Commercial banks and savings banks, group level 1-4 1.86 1.96 1.73 1.01 0.94 1.04 Commercial banks and savings banks, group level 1 1.89 2.01 1.79 1.10 1.07 1.15 Commercial banks and savings banks, group level 2 1.72 1.93 1.67 0.71 0.75 0.76 Commercial banks and savings banks, group level 3 1.56 1.67 1.48 0.78 0.52 -
Source: Appendix 7
At first notice, the income/cost ratios are having a decreasing trend, but this can be due to the Financial Crisis.
What is interesting, however, is to realize that for the banks, the ones in group level 1 have a higher income/cost ratio than the ones in group level 2 and 3 – and that is the case for all years.
This implies that the big sized banks have an advantage compared to smaller banks which means that economies of scale exists. This is also supported by the fact that the mortgage- credit institutions have a higher income/cost ratio than the banks in general, but closer to the banks in group level 1.
The future, however, might infer even bigger advantages in terms of scale; in relation to funding, big-sized banks will possibly be better off. Also, new regulations can imply that the administrative costs will increase, thus, providing even greater economies of scale. (Sørensen, 2009c)
“Product differentiation” as a barrier (Porter, 1980) must be considered to be of diminishing importance since the increasing diversification of the business areas makes everyone “the same”.However, branding and reputation is a barrier which can only be built up over time, but due to the standardization within many product and service categories it is difficult to be different.
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Also, for new entrants “capital requirements” (Porter, 1980) is a barrier that is very consistent; the business is very dependent on having access to cheap financing and to fulfill the legal regulations to obtain and sustain the needed licenses.
“Cost disadvantages independent of size” (Porter, 1980) is not perceived to be a considerable barrier. The reason is that experience curve is partly diminishing due to the visibility in the market – for example, the Internet allows entrants to collect knowledge from others’ experiences as well as general financial knowledge.
In some areas, like advisory services, the learning curve might provide a barrier, but in general this is not perceived to be the case in the industry.
Last, but not least, “potential rival’s expectations about the reaction of existing competitors” (Porter, 1980) are not considered to be a high barrier because of the composition of the market. The fact that the market are quite centralized and that there are great economies of scale entails that existing competitors will not be highly threatened by a newcomer and therefore, not pushed to act defensively.
However, if the entrant is, for example, a very large international institution it can put pressure on the market, but the regulative intervention in the industry and political factors can impact barriers.
Within the banking sector, for example, more competition from internationals has come over the years; in 2007 the total number was 25 and it must be expected to be must be expected to raise from the current level of 12 when the economic climate changes. (Appendix 7)
The investment service companies already have a several international competitors. (Appendix 7)
In brief, the threat of entry is limited by great economies of scale and the high capital requirements.
What makes the threat more extensive is when taking an international perspective on the matter; huge international institutions already have access to economies of scale and to capital and can thus, be a greater threat from the beginning of their entrance on the Danish market.
Also, the diminishing differentiation in the competitors’ business profiles together with the relatively standardized products within the categories means that internationals will also be
~ 58 ~ highly competitive on this area if they already operate within the Financial Industry in other countries.
3.2.6 Bargaining Power of Suppliers It is essential to consider the bargaining power of suppliers as a high level of power means that they can change the prices, (Aaker, 2008) and thus cut down earnings.
The MFI is in many ways different from other industries. It is an industry where capital is the core – in terms of input as well as output.
Liquidity can be obtained in the money market. In Denmark, this is the interbank market and to a less extent the agreement market. (Danmarks Nationalbank, 2009)
The Danish Central Bank intervenes by setting the money supply once every week to the credit institutes. But, during the week, individual market participants trade liquidity with each other. (Danmarks Nationalbank, 2009) As such, they are suppliers for each other despite the fact that they compete in other areas.
However, the Danish Central Bank essentially makes sure that the money market is “well- functioning” (Danmarks Nationalbank, 2009) and the power of suppliers must be assumed not to be a great threat to the individual MFI players; the reason is that they can collect liquidity from a high number of money market participants and that there is a great visibility of changing prices (interest rate movements).
On the other hand, big positions could alter the price level, but regulations make sure that individual positions and risks do not become too big – thus, the bargaining power in the interbank market can be determined to be small.
What must be emphasized it that the bargaining power of the Danish Central Bank is huge, because it has legal powers and rights to intervene the market, but due the fact that its mains tasks are to secure price stability, secure that payments are safe and that the financial system is stable (Danmarks Nationalbank, 2009), it really cannot be perceived as a supplier which poses a threat for the MFI players. Consequently, the Central Bank is rather supporting MFI rather than putting pressure upon the players.
In brief, it can be concluded that the bargaining power of suppliers are very limited.
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3.2.7 Bargaining Power of Customers Customers “can force down prices, demand higher quality or more service, and play competitors off against each other – all at the expense of industry profits”. (Porter, 1980, s. 40)
In the MFI, there exists many different types of customers; corporations, consumers and professional investors etc.
Several things play a role for whether or not these customers can be perceived to have bargaining power.
The number of buyers in the industry is very high. As already argued, the MFI services everyone’s need for financial solutions in different areas. This indicates that buyers do not have much bargaining power. (Barney & Hesterly, 2008)
The fact that the products are quite homogenous and standardized within the categories means that buyers “can always find alternative suppliers”, (Porter, 1980) meaning that a provider can easily lose its customers to competitors.
This however can incur switching costs which means that the customers’ bargaining power decreases. (Brealy, Myers, & Allen, 2008)
The size of the individual customer is also of concern because a customer will have more power if “its purchase size is a large proportion of the seller’s business”. (Aaker, 2008)
For some customer groups like huge institutional investors and big corporations it can be the case that they hold more bargaining power than smaller customers.
This is especially an aspect which is supported by the fact that for example corporate customers, as earlier mentioned, are demanding a wide palette of products and consequently, their demand entails that they will become even more important because their purchase is linked to several products and services.
This aspect assumes that the seller (MFI) is dependent on a particular customer group which cannot be argued to always be the case. But, it must be emphasized that there is a possibility that big customers could have better terms for negotiation.
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In general, the customers cannot be seen as having a great bargaining power based on the fact that the survival of individual market players does not depend on only a few customers. FIH for example, has thousands of corporate customers.
In brief, the bargaining power of the customers depends on their relative size and impact on the seller. The decreasing number of banks players, cf. Appendix 7, however, infers that competition is centralized to a few places, thus limiting the customers’ bargaining power.
3.2.8 Threat of Substitute Products or Services Porter states that “substitution is the process which one product or service supplants another in performing a particular function or functions for a buyer”. (2004)
Hereby said, the threat stems from the fact that current products or services within the industry either is subject to competition or substitution.
The problem is that substitution can “limit the potential in an industry” due to the fact that it influences the price level. (Porter, 1980)
For example, corporate loans are not only offered by the banks – in 2009, the mortgage-credit institutes collectively had DKK 102.8 billion of loans given to corporate properties which corresponded to 21.59% of the total advances. (Realkreditrådet, 2010)
Also, the development of new combinations of financial products, resulting in new ones, is a threat, but still, one that is essentially stemming from the industry itself – however, new combinations do not have to out-compete existing ones; it can also be complementary.
In general, Porter mentions that basic threats are that a “buyer does not purchase anything at all” or “lower the usage rate of the product required”. (2004) These are, of course, also threats for MFI, but as the industry competitors have licenses to be e.g. stock brokers, this means that the customer will not be able to fully trade on his own.
Developments of technical solutions or superior products which substitute the expertise of the MFI players are considerable threats, because they have the potential to make existing products obsolete.
Threats related to corporate products and services are that firms become self-financing. However, it seems unlikely that the majority of companies will be 100% equity-financed, as there are advantages of having debt due to tax advantages and the fact that a company can
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Other threats could be that the buyers found a solution between themselves; e.g. if firms, instead of lending from MFI, decided to go together in a group and make a pool of funds which could then be lent out to the ones that needed it.
In general, I can outline that prevailing threats are:
. Development of new superior products with the result of complementing or substituting existing products . Changes in customers’ needs and preferences . Replacement of products so already existing products can be utilized in other ways . Alternative ways for customers to satisfy their need for products
However, due to the many regulations existing in the area, it must be strongly emphasized that the threat of substitute products or services from the outside of the industry is not very big.
Rather, it is the internal competition and development among products which are the main threat.
3.2.9 Reflections on the Competition in the Financial Industry As the evaluation above demonstrated, the competition in the financial industry is moderate; there are many competitors, but industry elements make the biggest most powerful. Suppliers have essentially no bargaining power whilst the customers’ bargaining powers relates to their relative purchase size.
In general, transparency in the market is high, because it is easy to observe what is happening in the market – mainly, due to information technology solutions. Interest rates, economic data and stock prices etc. are all available for the interested party.
However, if the large players in the industry make strategic changes – for example decreases the interest rate margin to its customers thus being able to offer better prices, but earning smaller profits, the visibility in the market implies that competing firms need to follow the new price setting under the assumption that the customer loyalty is low.
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The threats are mainly stemming from a globalization of the Financial Industry – that is, the players face an industry across country borders driven by the “desire to exploit new markets”. (Porter, 1980, s. 50)
First-mover advantages which “are advantages that come to firms that make important strategic and technological decisions early in the development of an industry” (Barney & Hesterly, 2008), now seem to be of diminishing importance – players like FIH, Nordea and Danske Bank have achieved a strong position, but since the competitive arena is evolving to include a much wider geographical market, these advantages can soon run out.
The future profit potential is therefore, to be fought for in a much greater market place where economies of scale, branding and well-capitalized institutions are important factors for success.
Right now, the profit potential in MFI must be considered to be exploited to a high degree due to the moderate competition, but the question is what will happen when the economic climate and the market opportunities changes?
Based on the preceding analysis, the competition in MFI can be characterized as oligopoly because a small number of firms control most of the industry, and because there are both high entry and exit costs. (Barney & Hesterly, 2008) The heterogeneous products entails that it is a differentiated oligopoly.
Oppositely, the competition could also be argued to being close to perfect competition because the total number of firms in the industry is high, (Barney & Hesterly, 2008) but due to the progressing consolidation of the banking sector (Appendix 7), the regulative intervention and the fact that not all firms are complete direct competitors across the borders within the industry, I find that the prevailing competition is closer to oligopoly.
Another fact that supports this is that the total number, as explained, is artificially high due to the fact that it is based on licenses and a number of members across the sectors are owned by the same group. Thus, the actual number of competitive players is smaller in reality.
The definition of oligopoly as the state of competition entails that competitors can gain competitive advantages. (Barney & Hesterly, 2008) These are the foundation for profit creation.
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3.2.10 FIH’s Position in the Industry FIH’s role in the MFI is closely connected to its historical profile. First-mover advantages are essentially what have made FIH’s success; among corporate customers it has built up strengths within its own market niche.
Today, other large banks have reached FIH’s core customers, but their strategies are not quite the same. Nykredit focuses on a low price (Øk.ugebrev, 2008) – that is, from the view of Porter, essentially the generic strategy of getting a cost leadership. (2004)
Danske Bank and Nordea can also be perceived to follow that strategy; their size and wide business profile makes it likely that their strategies are really depending on cost leadership through economies of scale.
The progressing consolidation of the banking sector (Appendix 7) implies that size and diversification are crucial and I believe that this aspect will be of even greater importance in the future competitive arena.
FIH, on the other hand, does, as discussed in the internal analysis, hold a strong focus upon developing the product for the individual customer and building up a valuable relationship which means that it aims at a differentiated focus strategy. Thereby, it aims at the niche position in the market which is also emphasized by the new strategy of targeting a narrow segmentation – that being to serve corporations. (Porter, 2004)
In contradiction to this, the reality is that FIH does not have such a narrow target segment – even though the bank closed down business parts it is still reaching several different customers which means that the realized strategy is instead an attempt to carry out a differentiation strategy where the aim is “to be unique [… and] is rewarded with a premium price”. (Porter, 2004, p. 14)
Differentiating itself in terms of branding, products and relationship building implies that FIH aims at earning the premium price, and this is perhaps the only thing that has kept FIH from being completely overtaken by entering companies.
Consequently, the niche that once existed has changed – FIH’s broad focus does not ensure that it can upkeep a niche position in the dynamic market. What must thus be highly questioned is the durability of FIH’s current strategy.
The problem, seen from a competitive aspect, is two things.
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Firstly, FIH’s first mover advantages are becoming outcompeted as other market participants gain experience and knowledge within the area of FIH’s core customers.
Secondly, a wider potential market and number of competitors due to globalization is another matter which is a threat with the possibility of becoming even greater in the future.
International entrants in the market pose a very great threat; an example which is already realized is SEB which has succeeded in founding a solid position in the Danish market with a stronger focus on corporate and institutional investors than that of other Danish banks.
However, SEB’s position is broader than FIH’s because it has areas like wealth management and equity trading (SEB AR, 2009) – actually the areas that FIH closed down.
As globalization makes firms cross borders, the number of product providers does so too. Already, FIH’s engagements in Germany and Sweden within the property segment can very well be a consequence of the customers’ investment interests which has increased to involve new geographical markets.
But, essentially, Danish customers are not prohibited from seeking assistance from elsewhere in the world and if FIH does not either protect its niche or diversifies then the customers can easily be gone forever.
In brief, it must be emphasized that FIH can still be argued to hold a part of a niche position due to its strong customer portfolio and specialist skills, but that the position is falling apart; in the market for corporate loans, which has been FIH core domain, FIH has lost market shares – in 2009 only 10% of that market was FIH’s. In 2004, the market share was 16%. (Sørensen, 2009b)
In comparison, Nordea had in 2008 achieved a market share on corporate loans of 20%. (Rechnagel & Olsen, 2008) Also, SEB must be assumed to sit on a considerable amount of the market.
In absolute terms, Henrik Sjøgren, the CEO, states that a market share of 3% is equal to a value of DKK 18 billion. (Sørensen, 2009b) This makes the total market of corporate loans approximate DKK 600 billion out of which FIH therefore only owns approximately DKK 60 billion.
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That infers that FIH is in a position where its niche is being overthrown by offensive strategies from other players.
D’Aveni argues that “whereas niche players do not force others to play by their rules, the player with strategic supremacy shapes the field and basis of competition for its rivals”. (1999) In relation to FIH, the niche has implied that it could carry out its activities without interference from others, but that the problem now is that the market rules seem to be changing and actually affecting FIH’s niche.
D’Aveni explains that economic instability can change the rules because some can take advantage of the opportunities arising (1999); this is supported by the shift in market due to the Financial Crisis and to the increasing level of competition FIH is facing.
FIH’s niche must therefore be looked upon as a place where outside players already have crossed some borders and are trying to take over the field.
FIH’s strengths are protecting its position – what it is especially focusing its niche position on is the differentiated products it offers in comparison to others’. However, it is highly questionable if FIH can upkeep that image.
FIH’s very narrow focus on the Danish market is problematic because it does not allow the bank to expand and gain on its competitive advantage.
Competitive advantages should, as earlier noted, not be taken for granted – there is simply no assurance that the current ones will be sustainable in the longer run, so FIH has to fight and consistently redefine its position in the market.
Consequently, it is strongly questionable if FIH can upkeep its focus on the special niche position in a market much longer when there are currently so many competitive changes that are happening rapidly?
3.3 Sub-conclusion During the analysis, the strategic aspects and implications of FIH’s current situation was analyzed throughout an extensive analysis of internal and external elements.
The following SWOT model illustrates the key points derived from the analysis. It sums up the strengths, weakness, opportunities and threats which have all emerged in the preceding examination of FIH and MFI.
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Figure 15: Application of Porter’s SWOT model to sum up points from the strategic analysis
Strengths Weaknesses . Customer knowledge and relationship . Missing understanding of the value of building skills strategic aspects . The “FIH Erhvervsbank” brand . Exposure to environmental changes and . Core competencies within the area of uncertainties corporate lending and related advisory . Poor Credit Ratings services . Stakeholder relations and management . Organizational attributes concerning the . No opportunity for capital injection from business operations the owner Opportunities Threats . Government support to the industry . Globalization . Re-expansion into supporting business . Consolidation of the banking sector areas making some winners and others losers . Expansion of the e-bank – more . Unification of each players business customers and initiating pension model in the industry products . More strict legislation Source: Utilization of Porter’s general SWOT model (Elling & Sørensen, 2005), own creation
In brief, the most important point from the strategic analysis is that FIH needs to adapt its business model to changing market conditions and also, to protect its positioning so the future existence can be secured.
The SWOT model provides a good overview which makes it possible to obtain a wide, but discrete, perspective upon which essentials that are of interest to put into a deeper perspective in a broader-looking view – that being a macro-economic perspective upon the formulated problem area.
4 Empiricism for Micro- and Macro-Economic Relations Micro- and Macro-economic relations pose valuable insights into the economic climate that FIH work within.
The relations between them are important to assess because they can help providing explanations for different environmental changes.
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More importantly though, is it to try to obtain an idea of how changes in the systemic context influences FIH’s position and strategic prospects in the market.
4.1 The PEST framework The PEST19 constitutes a framework for analyzing the systemic effects and influences on a company and on an industry. (Elling & Sørensen, 2005)
Some utilizes an extended version, PESTLE, where Legal and Environmental factors are also taken into the analysis, but due to the limited effect of environmental issues regarding MFI which FIH operates within, I will not utilize that extension.
Nevertheless, I will include legal aspects under political factors since they are closely related.
Consequently, the following analysis will be based on P(L)EST.
4.2 Political and Legal Factors Political interference in the Danish Economy means that the general market conditions and possibilities for earning profit get challenged. (Elling & Sørensen, 2005)
The regulations stemming from the political environment puts forth the conditions under which firms can operate; to FIH, changes in the political climate influences not only, FIH, but also its customers and other stakeholders.
The players within MFI are obliged to follow rules and regulations, where the main ones to adhere are; the law regarding financial companies20 (FIL) and accounting standards (IFRS).
New initiatives, such as Basel III, also sets up the line for political control with the industry, which is also under political discussion for future intervention.
Taxes is in relation to that also a point; in the MFI, everyone is obligated to pay payroll levy together with other taxes. (Finansrådet, 2007) Apart from this, there are a number of duties that the different MFI companies have to pay. (FIL)
But not only, are the factors only coming from the domestic level - Denmark’s international cooperation is also something that can influence MFI; e.g. the participation in the European Union means that political decisions and new regulative in for example the monetary policy and the fixed currency policy can be introduced from there. (Danmarks Nationalbank, 2009)
19 Abbrevation of Political, Economic, Social and Technological 20 In Danish: ”Lov om finansiel virksomhed”
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In general, the political environment and legal aspects are imperative for FIH as they set the borders for its presence.
4.3 Economic Factors When looking at economic factors, it is possible to achieve an insight to the economic climate.
As MFI, in general, is very sensitive to economic fluctuations. (Danmarks Nationalbank, 2009) This means that MFI’s profit creation and growth opportunities are influenced by the economic climate.
The figure below illustrates the development in GDP, inflation and unemployment.
As it can be seen in the figure, the different variables fluctuates which is indicating switches in the economy. As it appears on the figure, the Financial Crisis was much worse in terms of GDP than the last recession in 2001-2003.
Figure 16: Denmark’s GDP, Inflation and Unemployment Rate for 2000-2010
Percentage (%) Development in GDP, Inflation and the Unemployment Rate 6 5.8 5.8 5.4 5.1 4.7 4.8 4.2 4 3.9 3.5 3.3 3.4 3.4 3.3
2.7 2.4 2.4 2.3 2.1 2 2.0 1.9 2.0 1.8 1.7 1.7 1.3 1.2 1.2 0.7 0.5 0.4 Year 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -0.9
-2
-4
-5.1 Please note: Numbers for 2010 are IMF's estimates -6 Gross domestic product, constant prices Inflation, average consumer prices Unemployment rate
Source: Own creation based on numbers from (imf.org, 2010)
A financial downturn escalated on a global plan with a heavy impact in the years 2008-2009 and the Financial Crisis became a reality. (Danmarks Nationalbank, 2009)
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In the autumn 2008, Lehman Brothers went bankrupt and trust towards the global financial system was lost. The economic problems spread through the money market and had knock-on effects on other markets and countries. (Danmarks Nationalbank, 2009)
In Denmark, the crisis incurred that the affected money market made it difficult for the financial institutions to obtain lending. This was also reflected in the interest rates by the increasing interest rate differential which is also showed in the following figure. (Danmarks Nationalbank, 2010)
Figure 17: Fluctuations in CIBOR and T/N for 2000-2010
Development in Leading Interest Rates 2000-2010 Percentage CIBOR and T/N, Monthly Average 7
6
5
4
3
2
1
0
2000M01 2000M07 2001M01 2001M07 2002M01 2002M07 2003M01 2003M07 2004M01 2004M07 2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 Interest Rate - Tomorrow/next Interest Rate - CIBOR, 3 month maturity Year and Month
Source: Own creation based on numbers from (nationalbanken.statistikbank.dk, 2010)
Under the crisis, CIBOR which is the price for unsecured loans to credit institutes increased its distance from T/N which is the daily interest rate for secured loans. This reflects a higher credit risk for unsecured loans. (Danmarks Nationalbank, 2009) Moreover, the funding in Denmark is more expensive than the EU. (Finansrådet, 2009)
Due to the fact that the interest rates are directly reflected in and linked to many of the MFI’s products and because especially corporate loans are very sensible to interest rate movements, (Danmarks Nationalbank, 2009) changing market conditions also means direct changes for MFI.
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FIH however, was also impacted by the Icelandic Crisis, as earlier explained, and thus, got locked out from obtaining liquidity from the money market.
Whilst the number of bankruptcies increased drastically to a very high level in comparison to earlier years, the write-downs on loans also increased. (Danmarks Nationalbank, 2010)
The downturn in the property market implied that especially mortgage-credit institutes incurred higher credit risk increased, (Danmarks Nationalbank, 2009) thus putting additional pressure on the economic climate.
In the general corporate industry there has, during the crisis, become a smaller demand for loans mainly because of the difficulties for selling their products and decreasing investment propensity (Finansrådet, 2009) – something that also FIH recognizes with a 12% decrease in the activity in 2009. (FIH AR, 2009)
Write-downs also hit FIH very hard. In 2008 it amounted to DKK 494 million whilst it in 2009 was DKK 1,177 million (FIH AR, 2009) and the Q1 report for 2010 showed write- downs of DKK 161 million. (FIH Q1, 2010)
Overall, the development in the Economy, not only on the domestic level but also on the global level, influences the state of the MFI.
The economic downturn has proved to be very challenging for FIH – not only in terms of decreasing demand, but also in terms of accessing the much needed liquidity from the market. Its dependence on the market thus contributes to an understanding of why FIH has been hit so hard and gives some indications as to the importance of making sure that FIH in the future can get access to capital, that being in the market or from other funding sources.
4.4 Social Factors Social factors relates to trends in the environment such as education level, consumer patterns and cultural roles. (Elling & Sørensen, 2005) This will not be elaborated any further as I do not find it relevant in relation to the issues regarding MFI and FIH.
4.5 Technological Factors The technological development is a factor which has changed the world; especially the introduction of computer technology and the Internet have made the world smaller. In general, the profit potential has risen sharply, due to the ease at which firms today can expand its business across borders. (Elling & Sørensen, 2005)
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For the Financial Industry, the new technology has become a condition for competition rather than just an asset; financial derivatives and economic information are exchanged and shared by market participants all over the world. In addition, advanced software programs are in many aspects central tools for carrying out business activities and the development has created opportunities for market growth, product development and customer awareness etc.
In contradiction, technology also poses a threat, as continuous product and market development forces the participants consistently upgrade their business in order to upkeep the competitiveness.
To FIH, technology also has created opportunities for developing its business, but the threat is that its competitive advantages within financial knowledge etc. can decrease as globalization becomes more and more integrated in the industry and as software innovations limits the need for special competencies.
4.6 Sub-conclusion In summary, the PEST framework showed that FIH is influenced by different factors in the environment.
Political and legislative factors influence the present and future conditions for MFI and thus, influence FIH’s lines of actions.
The development in the economic factors and general climate also impacts MFI’s prospects, and the Financial Crisis hit it hard due to its sensitivity to the economic trend – to FIH this means that its presence in the market has been strongly affected by the crisis and is likely to be impacted by future changes in the economic variables.
Technology is a factor which has impacted the market conditions heavily and it is an incredulously significant factor; it has completely changed MFI and a key factor for the future development within the industry.
Consequently, the things that happen in the micro- and macro-environment determines some vital conditions that MFI and FIH have to operate under – now as well as in the future.
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5 Empiricism to forward-pointing Short and Long Term In the preceding chapters, FIH’s business model and challenges were evaluated and it was concluded that its current strategy and position is highly challenged. Thus, it has to strengthen its stand point in order to deal with the existing and emerging issues, which basically will be determining for its future profit potentials.
Subsequently, the focus must be put on the link to the future; FIH’s survival and future success depends on the management of its strategic choices.
When taking decisions, the time factor must be taken into account since the earlier analysis results suggest that drastic environmental changes can happen – if not within a few years, then in the longer run.
Consequently, the short-run will be assumed to be 3 years whilst the longer-term goes beyond 3 years. This choice is based on the perception that 3 years is the longest period of time one can expect to be within reasonable limits regarding the future uncertainties.
This chapter will go into depth with the examining FIH’s strategic choices in order to find out how its business model can be strengthened.
5.1 Strategy Choices FIH’s choice can be examined by looking at growth-strategies due to the fact that it was concluded that FIH has to act – it needs to fight for its growth or it will just die out.
Ansoff puts up a model for the ”profit potential of alternative product-market strategies”, (Ansoff, 1957) and this will be utilized as the tool for strategy creation.
Figure 18: Ansoff’s “Product-Market Strategies for Business Growth Alternatives”
Products Markets Present New
Present Market Penetration Market Development
New Product Development Diversification
Source: (Ansoff, 1957)
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The main thought behind Ansoff’s framework is that companies continuously have to develop their position in the market if they want to stay there – and thus, growth is a very important factor in obtaining that goal. (Ansoff, 1957)
With relation to FIH, this view implies that FIH in order to survive in the long-run has to take strategic decisions which can develop its position.
As it can be deduced from the matrix there are four different strategies which can be perceived, but actually Ansoff states that several strategies can be pursued at the same time. (1957)
5.1.1 Market Penetration Market penetration infers that a company stays in the same market with its current product portfolio; growth can be achieved by gaining market shares in the form of more volume or more customers. (Ansoff, 1957)
In relation to FIH, market penetration would infer that it should aim at keeping its niche position in the short-term; it would mean taking over the part of the market that SEB and others own and is thus a rather offensive strategy since it involves protecting and strengthening the current position by taking back what’s lost.
This could be achieved by increased marketing efforts or price changes etc., but the disadvantage is that it takes resources and can be costly to do for a fight for increased market shares (Proctor, 2000). A prioritization of resources and the expected benefits are therefore necessary.
The problem with this strategy, though, is the competitive state; in a differentiated oligopoly, changing can spur a price war. (Barney & Hesterly, 2008)
What is further problematic is that FIH’s core competencies to a great extent are being imitated by for example SEB, and also that investment in increased competition is not necessarily a good idea, as the well-founded banks like SEB and Nordea would also be able to perceive the same strategy.
Porter has a contradicting strategy – he states that the firm does not have to be offensive; it can also be defensive by increasing the barriers for others and thus, invest to make the “competitive advantage more sustainable”, (Porter, 2004, p. 482) but this is neither a good solution as the competitors have a strong resource base and cost advantages.
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In addition, setting up barriers is, as mentioned, demanding investments – and since FIH’s funding is so problematic, this clearly is a bad idea.
In brief, market penetration is my opinion not a successful choice, as I, based on the preceding analysis, believe that FIH needs to develop a more dynamic business model with fewer limitations.
5.1.2 Product Development Product development entails that the strategy is still targeted at the current market, but with a focus on developing new products. (Ansoff, 1957)
In MFI, the technical development is crucial, but the ease at which financial knowledge can be shared over the internet, the fast-paced technological development and the fact that new products are not protected by patents means that the invention of new products can change the market, but not protect the inventor.
I will therefore argue that FIH does not stand a chance for successfully implementing the product development strategy.
5.1.3 Market Development Another possibility is market development which basically means that FIH will go into a new market with its existing products which can be more or less modified. (Ansoff, 1957)
The strategy can be pursued through different channels; new geographical locations, new customer groups or distribution channels. (Proctor, 2000)
By expanding to another country or to several other countries, FIH could increase its customer base and profit potential considerably, but it is costly, because it would require development of distribution channels, marketing efforts and other related efforts.
FIH’s funding issues do not really make such a move easy. Heavy investments are needed. However, FIH could form a strategic alliance with an already existing operator to lower the entry barriers. This could both be done so FIH could pay for the operator’s services or they could go together and help each other in each market.
Existing distribution channels could also be widened by creation of new branch offices, but due to the current customer groups, I do not think that such an option is helpful for reaching
~ 75 ~ out to more customers. The existing 5 branch offices spread over Denmark are in my opnion good enough for the current customer type.
A place where FIH could put more effort into is its e-bank where the current customer segment could be expanded to other groups like for example consumers; small scale deposits at a favorable interest rate, but in great volume, could ease FIH’s funding issue. The problem though is the corporate brand which is limiting for the ability to reach new customer groups.
The main problem with market development is that it requires investments - especially if moving into completely new geographical locations, but it is also a very reasonable alternative as it provides scope and increased profit potential from the volume.
The e-bank solution, on the other hand is less costly, because FIH could just utilize its current resource base and make small adjustments to its product.
In brief, market development is thus, definitely a strategy for more thought.
5.1.4 Diversification The diversification strategy is different from the other three because it puts focus on ”simultaneous departure from the present product line and the present market structure”. (Ansoff, 1957, p. 114)
The drawback of this strategy is that it is very risky (Proctor, 2000). If linked to RBV, the problem with diversification is that the company will not have built up core competencies – and it takes time to just do that.
Diversification can also be done quickly by acquisitioning a foreign company, but the risk that such an action incurs and FIH’s financial difficulties means FIH does not have the space to make a takeover.
As earlier concluded, FIH does not necessarily have a choice of whether or not to extend its product line and market, because customers demand a product package. Also, globalization supports a move into new markets.
Consequently, diversification can very well be something that FIH can be forced into doing, and as such, not really be a choice – but this do not make it a bad strategy.
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5.2 FIH’s Strategic Options in the Short- and Long-Run In conclusion to the discussion above, FIH’s choices can be limited down to two strategies - market development and diversification – the reason simply being that FIH will not be able to perceive the market penetration strategy of out-competing the entering companies from its niche or to develop products that can span growth.
5.2.1 The Short-Term Decision Based on the above it is now possible to outline 3 strategy choices:
1. Market development 2. Diversification 3. A combination of market development and diversification
Before these can be lined up against each other, the parameters for the choice needs to be put forth – that is under which conditions the choice should be made.
From Ansoff’s point of view, the choice should be based upon two questions; “how well will a particular move, if it is successful, meet the company’s objectives?” and next, “what are the company’s chances of making it a success?” (Ansoff, 1957, p. 124)
A parameter for setting the new strategy is the time frame. As stated, the short-term is up till 3 years and it is essentially this period which must be considered the most important, firstly because FIH’s needs to survive the great threats it faces in terms of its business model and market, and secondly, because the long-term conditions are so unclear that it would incur too much guessing to be really valuable for the present survival issue.
The biggest problem for growth is the prevailing funding issue – as long as capital is so expensive for FIH, it is very difficult to make investments in growth.
Therefore, the strategic choice should involve at least a partly solution to the funding problem. As I see it, it can only be solved in three ways; either by improving the international ratings, getting support from a new owner with a strong capital base, or making a change in the current funding setup with the balance between loans and deposits.
The current competitive situation, however, demands for a quick choice – FIH needs to take action now in order to secure its long-run existence.
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5.2.2 Strategic Adaptability in the Long-Term The long-term strategic goal for FIH, can be defined as on the basic level to up-keep its existence, and next to profit from sustainable competitive advantages.
However, the strategy on the long-run is not something that can easily be evaluated – FIH can set its strategic goal, but as time goes and circumstances changes, it needs to readjust its business model.
Aaker emphasizes that strategic adaptability is crucial in a dynamic world for future success. (Aaker, 2008) D’Aveni, on the other hand, states that it is in fact strategic supremacy, that is when a company “shapes the field and basis of competition for its rivals” which is the opposite of having a niche position. (1999, p. 128)
The fact that the market is changing fast and that very heavy competitors fights for the market shares, means that FIH is in no position to obtain strategic supremacy – it is simply not a strong enough competitor and it is questionable if that is even a possible future due to the fact that the market is opening up for more competition through globalization.
In order to be foreseeing as regards to the long run, FIH should take decisions based upon consistently evaluating and holding an eye upon the micro- and macro-economic development, because they are contributory determinants for success.
Currently, it is the next few years which are crucial because they are the basis for continued activities in the long-term. Thus, it is imperative that the strategy is consolidated in the short- term.
5.3 The New Strategy Based on the above, it is my recommendation that FIH should make a strategy shift.
In relation to the three defined possible strategies, it is my suggestion that FIH should aim at a growth-strategy where both diversification and market development are the basis.
The reason is that the analysis showed that diversification is becoming unavoidable whilst market development is really where FIH can increase its potential – thus, it is beneficial to adapt a strategy which takes both aspect into account.
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A very vital point of reflection is the customer segmentation. Currently, the customers are corporations, property investors and so on. If looked through the glasses of both strategies, FIH should renew its market position – that being with or without the existing products.
In relation to market growth, one weakness is persisting - the brand. FIH’s image – both in name as well as in reputation belongs to Denmark and companies and it is very limiting for strategy development because it limits both the customer profile and market existence.
Consequently, a main objective is to develop the bank’s image – it has already successfully been done with FIH Partners, but in order to grow new markets, new sub-brands should be created.
This move is supported by Aaker, who points out that “brands are the face of a business strategy”. (Aaker, 2008, p. 251)
Overall, it is my recommendation, that FIH should not imitate banks like Nordea and Danske Bank with the whole wide product portfolios – instead, it should focus on its core competencies and chose its strategic platforms with great care. Diversification is necessary due to the competitive state, but it does not mean going all the way.
Firstly, FIH’s business segmentation has shown to be problematic – a way to attack this problem is to improve them through the chosen strategy alternative.
Secondly, increasing volume in deposits - based on a wider customer foundation - meets the decision criteria of partly solving the funding issue.
Thirdly, the e-bank should be set up so customers get linked to capital markets –this move would aim for coherence between wealthy customers, increased trading and new product extensions.
Due to the fact that FIH has advisory competencies, it should also re-enter wealth management in order to set up the foundation for future competitive advantages.
This further puts up the suggestion for expanding the capital market division geographically as well as in the product line. Setting up branch offices in world-wide financial centers would infer that FIH’s trading services could be offered all over the day and re-entry into equity- trading could strengthen the image of the bank in the way that it would contribute to a more differentiated investment product portfolio.
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Further market development by entering new markets should be done by strategic alliances or acquisitions. However, due to the capital factor, a strategic alliance is the best alternative in the very short period – later on, FIH can take full control of foreign companies if it has enough cash. Right now, when the market is down, it could be a perfect opportunity to buy another company, but it would require a change in the funding situation.
Based on the strategic analysis, I do not think FIH should go out of any areas, except the one it is already closing down (mortgage-credit). The reason is that FIH still has valuable competencies within the different business fields, but that it has been hit so hard by the many challenges that its market position has become so heavily impacted and resulted in the very poor bottom line.
FIH should not enter completely new products and markets like for example insurances or retail banking in its broad sense, because they are very different areas than the ones FIH are currently involved in and thus, longer from the competencies FIH has developed.
Instead, pensions could be an opportunity – it was earlier a strategic goal to obtain this segment, and with the e-bank it makes good sense. It would be wise to try to make the different business areas span on each other; for example, special pensions could be offered to the corporate customers’ employees and so on.
In relation to the micro- and macro-economic development it must be emphasized that an economic upturn can improve the speed at which FIH can pursue its new strategic objectives – especially in terms of obtaining cheaper funding at the money market.
The ownership problem on the other hand can only be solved through a sale of FIH.
In summary, what FIH’s new strategy should be aimed at is on setting up the image of being a professional bank within the very special areas of MFI; as such, it is not suggested that FIH gets completely diversified – rather it should keep its competitive edge, but widen up its scope and profit potential.
However, all the suggested strategic moves are of course not possible to implement at once. Therefore, I have in the figure below depicted the strategic plan that I suggest that FIH should follow in order to obtain the defined long-term goals.
The idea is that FIH should take one step at a time, but doing it quickly – and based on the discussion above.
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Figure 19: Strategy plan
• Step 1 • Development of e-bank: focus on improvements, a wider customer base and new products Short-term • Brand and image development through subbrands and marketing efforts • Wider net of distribution channels in the form of branch offices
• Step 2 • Strenghten and expand Capital Markets and link it to the e-bank • Enter new markets: wealth management and pensions
• Step 3 • Existing products offered in other geographical markets in strategic cooperation with existing market players • Offices in the world-wide financial centers • Acquisitions to get access to new markets and products
• Main goal: Survival and profiting on competitive advantages • Continous focus on strategic adaptability Long-term
Source: Own creation
In conclusion, FIH does not have the time to wait – if it does not act quickly, it is in the danger zone for being outcompeted within a short period of time.
5.4 A Reflection on the Analysis and on the Results In this project, an extensive analysis and examination of FIH and its challenges have been undertaken.
What must be emphasized, though, is that the results and conclusions are based on the accessible knowledge and gathered information which have been comprehended, analyzed and guided by the theoretical frameworks. This entails that the choices are also based on
~ 81 ~ choice-by-rejections meaning that other theories have been left out, but it does not mean that the analysis has not been fruitful.
The fact that the results only stems from external information means that a full complete picture of the issues cannot be reached, but it is by the method choice made clear that the analysis in itself create valuable knowledge because of the hermeneutic circle which ensures that new insights are achieved in the process.
The complete truth has not yet been reached, because I find, that even though the issues have been discussed in depth, the results have raised new research areas outside the scope of this project; e.g. the structure and development in the global financial industry.
Moreover, the outcome of the analysis – the strategy choice – is also just based on external information which raises the question about if there in FIH is inside-information which can influence the strategy choice in another direction.
Consequently, I find that the analysis results have been reached in accordance with the method outset; but that the strategic aspects can now be looked upon in another way, which basically emphasizes that new perspectives can be investigated.
5.5 Sub-conclusion From this chapter, I can conclude that among the strategies put forth by Ansoff, market penetration and product development are not reasonable choices to pursue for FIH because of the competitive challenges it is facing – in terms of competition, but also in terms of technology.
Instead, I have found that FIH should pursue a strategy in combination of diversification and market development. This choice is based upon the need for repositioning the bank due to competition and a failing strategy.
The new strategy that was determined emphasizes the need for an image update and development of the market and customer base in order to strengthen the business model in the short-term and also, that FIH needs to focus on being strategically adaptable in the longer- term as this is the way to consistently ensure that the business model is pointing in the right direction.
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6 Source Criticism I have utilized a variety of sources in this project which give different angles on the subject.
The main point of critique is the exclusion of inside-information from FIH and from other outside contributors, like competitors, which could have given valuable information regarding the problem area.
Due to the method choice, the criticism of the sources is not aimed at their strict objectivity; the hermeneutic circle ensures that full objectivity is only reached by indefinite analysis.
In general, the sources view upon the world is based on their pre-understanding and as time goes new processed information will influence the insight21 – this indicates, that time sets a standard for the level of validity.
Individual authors’ background matters for how deep they are able to go into depth – appendix 8 provides an overview.
I have throughout this project selected the sources with great care because if they don’t have a satisfying degree of validity and reliability then they will limit the understanding.
Some sources, like statistics and accounting numbers, are in nature very high at both factors, whilst newspaper articles and websites to a greater extent must be seen as based on the authors understanding rather than very clear black-on white facts.
Journals, reports and textbooks are very good starting points for the hermeneutic circle, but as all the other sources they only contribute to explaining the issues – and thus, letting it be up to the analysis to find the underlying reasoning.
In general, the validity and reliability of the sources are concluded to be satisfying, but limited by the source base.
21 See section 1.3
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7 Main Conclusion In this project, a strategic view was placed on FIH with the aim of investigating how FIH can improve its business model to withstand the current strategic challenges; the funding difficulties, the weakening competitive advantages, increasing competitive attacks upon FIH’s niche position and the dependency on environmental uncertainties and trends.
The business model is characterized by flexibility, a narrow customer segment, a problematic ownership structure and a huge dependence on external funding sources. Also, the special market position was based on FIH’s historical aspects where environmental support had played an important role.
RBV was utilized to analyze the internal aspects of FIH which gave a deeper understanding of the problems.
FIH’s core strengths were defined to be its customer relationships, its brand and competencies related to its historical presence in the market. The main weaknesses, on the other hand, were found to be its strategic management, its locked position regarding its owner and its dependency on external interest groups.
The composition of the business model with the funding setup, the ownership and the strategic commitments have all implied that FIH’s situation is critical as it is on the edge of losing its competitive advantages.
The external part of the strategic analysis was carried out through an assessment of the Financial Industry and FIH’s position herein.
The industry analysis showed that the competition in the Financial Industry can be defined as differentiated oligopoly, where a small number of large participants control the market and where both the customers and suppliers bargaining powers are limited.
Moreover, the industry products were concluded to be heterogeneous from an overall perspective, but much more alike within the different market segments.
In brief, FIH’s niche position in the market is diminishing; increasing competition from the large banks and the beginning presence of global market players imply that FIH’s strategic focus on Danish corporations are in fact a strategic failure.
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The ownership issue has worsened FIH’s conditions for making strategic changes, but the current business model setup also implies that FIH has not fully understood its future threats and opportunities, and this has now put it in a vulnerable position from which is not easy to escape.
The analysis of the micro- and macro-economic relations underpinned that FIH is influenced from different sides; political decisions, legislation, the economic climate and technology are all significant factors for the market conditions and thus, profit potential.
In brief, the analysis resulted in the understanding that FIH strongly needs to redefine its business model to ensure that it does not lose its future profit potential, and on the basis of Ansoff’s growth matrix, different strategies was outlined; market penetration, product development, market development and diversification.
In the end, the best strategic choice was found to be a combination of the market development and the diversification strategy.
Subsequently, I can conclude that FIH needs to pursue that strategy in order to strengthen its business model. That is founding a strong platform for future funding options through a development of its e-bank and brand, together with an introduction of new business areas as well as increasing the physical presence in the market.
When these are established, FIH should also achieve to quickly expand globally in order to get the strength to fight its competitors from an international position where diversification, scope and a stream-lined business model is the foundation.
Moreover, FIH should also consistently question its business model and make the necessary strategic changes so that its survival and competitive advantages can be secured in the long- run.
In conclusion, FIH’s current strategic challenges are not only a product of the circumstances – rather, they are stemming from strategic decisions which have not contributed to strengthen the market position.
Thus, the vital point for the future of FIH is to ensure that its business model gets closely linked to the aspect of strategic management, because if the business groundwork has not been laid well, the future will teeter on a knife’s edge.
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8 Outlook On the 19th of September 2010, it was announced that FIH had been sold to PFA Pension, ATP and two Swedish companies.
The two Danish buyers acquired 69.93 % of the shares whilst the Swedish companies got the rest with the exclusion of 0.11 % owned by employees. (Appendix 9)
The price was DKK 5 billion, and ATP, the dominating owner, stated that it believes in FIH’s current market, but that the funding is still an issue. (business.dk (Ritzau), 2010)
In relation to the turning point of this thesis, the sale is highly interesting because it puts the ownership issue into a completely different picture; now FIH is no more limited by an owner in moratorium, however, the question is if the new financially strong owners really intend to pursue FIH’s current strategic focus?
The sale must be seen as breaking the funding problem into much smaller parts; capital injections can now be done and it would be notable if the rating situation was not improved too.
The fact that the two buyers, ATP and PFA, are the heavy market participants is interesting, because it raises the question if their purchase of FIH was more based on their individual interests, or if they truly intend to strengthen FIH’s position on an broader scale than just the Danish market?
However, from the sight of this project’s conclusions, I will once again accentuate the importance of a general remodeling of FIH’s business, because the current competitive situation infers that FIH should make some wise strategic choices rather than playing Russian roulette with the current, but diminishing, niche position.
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9 Bibliography
9.1 Books Aaker, D. A. (2008). Strategic Market Management. USA: John Wiley & Sons, Inc.
Andersen (red.), H., Andersen, V., Fivelsdal, E., Gamdrup, P., Jensen, H. S., Kirkeby, O. F., et al. (1994). Introduktion - Videnskabsteori og metodelære (4 ed.). Frederiksberg: Samfundslitteratur.
Andersen, I. (2005). Den Skinbarlige Virkelighed (3 ed.). Frederiksberg: Forlaget Samfundslitteratur.
Barney, J. B., & Hesterly, W. S. (2008). Strategic Management and Competitive Advantage - Concepts and Cases (2 ed.). Upper Saddle River: Pearson - Prentice Hall.
Brealy, R. A., Myers, S. C., & Allen, F. (2008). Principles of Corporate Finance (9 ed.). New York: McGraw-Hill.
Collin, F., & Køppe, S. (Eds.). (1995). Humanistisk Videnskabsteori. Danmarks Radio Forlaget.
Elling, J. O., & Sørensen, O. (2005). Regnskabsanalyse og værdiansættelse - en praktisk tilgang (2. ed.). Copenhagen: Gjellerup.
Jacobsen, B., Schack, K., Wahlgren, B., & Madsen, M. B. (2006). Videnskabsteori (2 ed.). Copenhagen: Gyldendal.
Kvale, S. (1997). InterView - En introduktion til det kvalitative forskningsinterview. Copenhagen: Hans Reitzels Forlag.
Porter, M. E. (2004). Competitive Advantage - Creating and Sustaining Superior Performance. New York: Free Press.
Proctor, T. (2000). Growth Strategies - Product-Market Expansion. In Strategic Marketing (pp. p238-263).
Thomsen, S. (2008). An Introduction to Corporate Governance. Copenhagen: DJØF Publishing.
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9.2 Scientific Journals Ansoff, I. H. (1957, Sept-Oct). Strategies for Diversification. Harvard Business Review , pp. 113-124.
Barney, J. (1991). Firm Resources and Sustained. Journal of Management , 17 (1), pp. 99- 120.
Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management , 17 (1), pp. 99-120.
D'Aveni, R. A. (1999, Spring). Strategic Supremacy through Disruption and Dominance. Sloan Management Review , pp. 127-135.
Eisenhardt, K. M., & Brown, S. L. (1999, May-June). Patching - Restitching Business Portfolios in Dynamic Markets. Harvard Business Review , pp. 72-82.
Prahalad, C. K. & Hamel, G. (May-June 1990). The Core Competence of the Corporation. Harvard Business Review , pp. 79-91
Pfeffer, J., & Salancik, G. R. (1979). The External Control of Organizations. A Resource Dependence Perspective. Harper & Row Publishers.
Porter, M. E. (Spring 1980). How Competitive Forces Shape Strategy. The McKinsey Quarterly, pp. 34-50
Schoemaker, P. J., & Amit, R. (1993). Stragtegic Assets and Organizational Rent. Strategic Managment Journal (14), pp. 33-46.
Wernerfelt, B., & Karnani, A. (1987). Competitive Strategy under Uncertainty. Strategic Management Joumal (8), pp. 187-194
9.3 Articles Aagaard, J., Iversen, C., & Skovgaard, L. E. (2010, June 24). Staten tjener milliarder på bankpakker. Berlingske Tidende , p. 6.
Alsmann, S. (2009, December 14). Skandinaviske storbanker lukrerer på loyalitet. Økonomisk Ugebrev , p. 5.
Andersen, L. (1999, October 1). Skæbnedag for FIH. Berlingske Tidende , p. 2.
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Bøggild, P. A. (1999). Lækkerbisken til svenskerne. Finansfokus (4), pp. 23-25.
Friis, L., Olsen, J. K., & Zigler, T. (2008, October 7). Island må ud i tvangsudsalg. Dagbladet Børsen , pp. 4-5.
Gardel, U. (1999, September 14). Han har valgt side. Berlingske Tidende, page 2.
Jessen, C. (2004, May 10). DA og DI støtter FIH-bud. Børsen - Investor .
Jessen, C. (2003, September 30). FIH Erhvervsbank fjerdestørst i Danmark. Dagbladet Børsen , p. 18.
Nielsen, H. B. (2009, January 9). Dagbladet Børsen , pp. 28-29.
Nielsen, S. R. (2008, October 30). Prisen på FIH styrtdykker. Dagbladet Børsen - Finans , p. 29.
Øk.Ugebrev. (2008, March 17). Danske Bank har det bedst image hos erhvervskunderne. Økonomisk Ugebrev (11), pp. 6-7.
Rechnagel, U. (2009, January 9). FIH fyrer hver fjerde. Dagbladet Børsen .
Rechnagel, U. (2008, October 10). Kaupthing Bank nationaliseret. Dagbladet Børsen .
Rechnagel, U., & Olsen, J. K. (2008, October 27). Lynsalg af FIH sat i gang. Dagbladet Børsen , p. 7.
Rosenbak, S. (1999, September 14). Svensk stormløb på FIH. Jyllandsposten , Erhverv og Økonomi, p. 1.
Rosendahl, P. (2008, October 10). Krise slår Island tilbage til rødderne. Dagbladet Børsen , p. 29.
Sehested, C. (2010, June 3). Moody's bekymret for fremtiden i to danske banker. Dagbladet Børsen , p. 28.
Sørensen, M. (2009c, September 7). 50 banker mister selvstændighed før 2012. Økonomisk Ugebrev (27), p. 5.
Sørensen, M. (2009b, August 24). FIH: Uklare ejerforhold koster milliarder i udlån. Økonomisk Ugebrev (25).
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Sørensen, M. (2009a). FIH-chef forudser massive fyringsrunder i efteråret. Økonomisk Ugebrev (25).
Theil, J. (2010, April 14). FIH henter 25 mia med statsgaranti. (J. Theil, Ed.) Børsen, Finans , p. 24.
Ritzaus Bureau. (1999, October 12). FIH overtages af svensk domineret selskab.
9.4 Reports and Publications Annual Reports (2009) PFA Pension; Industriens Pension; Danica Pension; TopDanmark; AP Pension
Danmarks Nationalbank. (2009). Finansiel Stabilitet 1.halvår 2009. Kbh. K.
Danmarks Nationalbank. (2010). Finansiel Stabilitet 2010. Kbh. K.
Danmarks Nationalbank. (2009). Pengepolitik i Danmark. Kbh. K.
FIH AR. (2006). Annual Report.
FIH AR. (2007). FIH Annual Report.
FIH AR. (2008). FIH Annual Report.
FIH AR. (2009). FIH Annual Report 2009.
FIH H1. (2010). FIH Half-Year Report.
FIH Q1. (2010, May 4). Company Release 5/2010 - FIH Interim Report Q1 2010. Retrieved 2010, from FIH's website: http://www.fih.dk/press/index.jsp
Finansrådet. (2007). Banksektoren i samfundet - Finansanalyse 2007. København: Finansrådet.
Finansrådet. (2009). Kreditsituationen 2009. Cph.
Finansrådet. (2010). Sektoren i tal.
Moody's Global. (2009, December). FIH Erhvervsbank A/S - Company Profile.
SEB AR. (2004). Annual Report.
SEB AR. (2009). Annual Report
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9.5 Web Sites (www) Axcel.dk
Ritzaus Bureau. (1999, September 13). Nyt bud på FIH. Retrieved July 23, 2010, from Infomedia: www.infomedia.dk business.dk. (2007, January 23). Ikke nok at hyre stjernemedarbejderen. (S. Haugaard, Editor) Retrieved from http://www.business.dk/karriere/ikke-nok-hyre-stjernemedarbejderen business.dk (Ritzau). (2010, September 20). ATP: FIH bliver en god forretning. fih.com fih.dk fihpartners.dk
Hansen, J. C., & Mikkelsen, O. (2004, March 22). FIH-banken er sat til salg igen. Retrieved July 23, 2010, from business.dk: http://www.business.dk/diverse/fih-banken-er-sat-til-salg- igen
Kaupthing.com. (2010, July 5). Current Legal Status. Retrieved July 5, 2010, from Kaupthing Bank's Website: http://www.kaupthing.com/pages/4060
LD Invest. (2010, July 6). Ejerkreds. Retrieved July 6, 2010, from LD Invest's Website: http://www.ld-invest.dk/Om%20LD%20Invest/Ejerkreds.aspxMoody's Investors Service. (2010). FIH.com. Retrieved June 19, 2010, from FIH's website: http://www.fih.com/fih_funding/creditsrating/
Nationalbanken.statistikbank.dk
Seb.dk
9.6 Other Sources FIL. (n.d.). Lov om finansiel virksomhed.
Finanstilsynet.dk. (2010). Database with Excel-sheets containing information on the individual sectors in the Financial Industry. Finanstilsynet.
Front page: Picture of FIH’s head quarters at Langelinje, Copenhagen.
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From FIH’s website: (October 9, 2010) http://www.fih.dk/press/pictures/ imf.org. (2010). IMF's Statistical Database. Retrieved from http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weorept.aspx?sy=2000&ey=2010 &scsm=1&ssd=1&sort=country&ds=.&br=1&c=128&s=NGDP_R%2CNGDP_RPCH%2CN GDP_D%2CPCPI%2CPCPIPCH%2CPCPIE%2CPCPIEPCH%2CLUR&grp=0&a=&pr1.x=1 07&pr1.y=11#download
10 Appendix
10.1 Organization Structure The Organization Structure of FIH Erhvervsbank
Source: (FIH.dk, 2010)
As it appears on the organization chart, FIH Partners, FIH Realkredit and FIH Kapital Bank are not included in the organizational structure. These three do not have much publicly information available – however, FIH Partners states that it consists of a team of more than 20 employees. (fihpartners.dk)There is no information regarding the organizational aspects of FIH Kapital Bank and FIH Realkredit.
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10.2 Geographical Markets
10.2.1 Geographical distribution of net interests and fee income Net interest and fee income DKK The Rest Denmark Other Total million of Europe 2009 948.50 481.00 6.10 1,435.60 2008 1,124.60 379.90 5.50 1,510.00
Source: (FIH AR, 2009, pp. 70-71)
FIH Group FIH Group Net Interest and Fee Income 2008 Net Interest and Fee Income 2009 0.36% 0.42%
25.16% 33.51%
66.07% 74.48%
Denmark The Rest of Europe Other Denmark The Rest of Europe Other
Source: Own creation based on the numbers from above
Calculations: Denmark 2009: 948.5/1,435.6 = 66.07 %
Denmark 2008: 1,124.6/1,510.0 = 74.48 %
10.2.2 Segments
Source: (FIH AR, 2009)
Calculation: Property Finance’s share: 231.2/1,435.6 =16.10 %
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10.3 Financial Information for the FIH and SEB Group’s Business Segments FIH
Financial information for 2009:
Source: (FIH AR, 2009, p. 70)
Calculation of the division of net interest and fee income for the individual business segments:
DKK million / Corporate Property Structured Capital Corporate Private Other Group percentage Banking Finance Finance Market Finance Equity activities Total Net interest and 424.30 231.20 367.00 194.60 81.20 -31.90 169.20 1,435.60 fee income 29.56% 16.10% 25.56% 13.56% 5.66% -2.22% 11.79% 100.00%
Source: Own creation based on the figures above
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SEB
Source: (SEB AR, 2009, p. 82)
Calculation of the Danish share of the total investments:
1,092 / 4,247 = 25.71 %
Calculation of the Danish share of the total assets:
221,272 / 2,308,227 = 9.59 %
SEB’s Segment information
Source: (SEB AR, 2009, p. 81)
Calculation of the Merchant Banking’s share of the total assets:
1,103,688 / 2,308,227 = 47.82 %
~ 95 ~
Calculation of FIH’s size in comparison to SEB’s Danish size in terms of assets
SEB’s size: SEK 2,308,227 million = DKK 1,668,386 million* FIH’s size: DKK 130,356 million Calculation: 9.59 % * DKK 1,668,386 / DKK 130,356 = 1.2274
*Based on calculating the amount into DKK by utilizing the exchange rate (spot): SEK 72.28 on 12/31-2009 (Nationalbanken.dk)
10.4 ROE after tax and income/cost ratios
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 SEB - ROE after tax 13.8 13.7 14.2 14.7 15.8 20.8 19.3 13.1 1.2 FIH - ROE after tax 11.7 11.6 9.7 10.1 13.2 15 15.5 2.4 0.1 SEB - Income/cost ratio 1.4 1.4 1.5 1.5 1.5 1.7 1.8 1.6 1.6 FIH - Income/cost ratio 4.2 4 3.8 5.3 4.2 3.3 2.8 1.15 0.93
Source: Own creation of table, figures obtained from (FIH AR, 2009), (FIH AR, 2004), (SEB AR, 2009) and (SEB AR, 2004)
10.5 FIH’s ROE after tax for the years 2000-2009
ROE after tax 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 FIH 10.9 11.7 11.6 9.7 10.1 13.2 15 15.5 2.4 0.1
Average ROE (2000-2007) 12.2125
Source: (FIH AR, 2009), (FIH AR, 2004) and own calculation of the average
~ 96 ~
10.6 Debt FIH’s short-and long-term funding:
Source: (FIH H1, 2010)
Long-term* Debt Maturity Profile:
Source: (FIH H1, 2010)
*By long-term debt FIH states that it is debt which has a maturity longer than 1 year.
~ 97 ~
10.7 The Financial Industry in Numbers
10.7.1 The Balance of the Financial Industry
0.00
0.04
0.06
0.56
5.74
0.43
4.11
1.51
5.34
0.02
0.80
0.00
3.91
5.84
2.60
11.42
29.23
40.75
2009
59.50
45.33
84.95
2009
100.00
609.32
436.00
159.93
566.64
1211.96
3101.74
4324.02 10611.74
0.00
0.42
0.05
0.55
6.33
0.41
3.70
1.43
5.31
0.02
0.76
0.00
5.80
2.20
10.45
26.34
44.22
2008
45.00
58.90
43.90
81.60
2008
100.00
677.50
396.00
152.90
568.70
1119.10
2819.00
4733.40 10704.00
0.00
0.54
0.06
0.63
3.86
0.43
4.10
1.61
8.86
0.02
0.76
0.00
6.30
2.40
10.48
26.05
42.61
2007
54.10
62.90
43.00
76.70
2007
100.00
388.90
412.30
161.60
891.50
1054.20
2620.70 4287.60
10062.20
0.00
0.61
0.06
0.73
4.20
0.48
4.55
1.68
9.96
0.03
0.71
0.00
5.20
2.70
11.42
26.20
39.37
2006
53.60
64.20
42.90
62.50
2006
100.00
371.70
402.40
148.90
881.40
8848.50
1010.40
2318.70 3483.90
0
100
0.64
0.05
0.80
4.60
0.54
4.80
1.75
9.84
0.02
0.79
0.00
4.20
1.90
12.00
26.28
37.90
2005
50.70
63.60
42.50
62.50
2005
365.10
381.00
953.20
139.10
781.80
7943.90
2087.80 3010.50
0.00
0.66
0.05
0.83
4.38
0.56
4.84
1.78
8.17
0.02
0.85
0.00
3.30
1.30
11.55
30.24
36.09
2004
46.50
58.00
39.20
59.90
2004
100.00
307.20
339.20
809.90
124.60
572.80
7014.60
2120.90 2531.80
0.00
0.69
0.04
0.87
4.23
0.61
4.85
1.90
5.88
0.02
1.04
0.00
2.40
1.00
11.76
30.59
37.50
2003
43.20
54.17
38.20
64.80
2003
100.00
263.30
301.80
731.60
118.40
365.80
6219.77
1902.90 2332.20
0.11
0.44
0.03
0.88
4.21
0.64
4.79
1.90
5.01
0.02
1.04
6.10
2.00
0.90
11.56
30.33
39.04
2002
25.70
50.80
37.00
60.00
2002
100.00
243.40
277.00
668.50
110.00
289.80
5781.20
1753.30 2256.70
0.13
0.39
0.03
1.09
4.61
0.75
5.09
2.00
5.28
0.02
1.08
6.80
1.50
0.90
12.14
30.23
37.17
2001
20.80
58.20
39.90
57.90
2001
100.00
246.60
272.10
649.60
106.80
282.70
5349.30
1616.90 1988.60
0.14
0.29
0.03
1.26
5.03
0.88
5.50
2.14
5.24
0.03
1.08
7.00
1.50
1.30
13.25
28.11
37.03
2000
14.20
61.70
43.30
52.80
2000
100.00
246.70
269.50
649.40
104.80
256.70
4902.10
1378.10 1815.10
0.15
0.15
0.03
1.17
5.07
0.96
5.59
2.28
4.34
0.02
1.24
6.60
6.80
1.30
0.80
13.51
29.48
36.00
1999
53.00
43.50
55.90
1999
100.00
229.30
252.60
610.30
103.20
196.20
4518.30
1332.00
1626.80
- -
-
1.20
4.88
0.94
5.22
2.67
3.09
0.04
1.28
0.00
0.00
0.00
1.50
12.52
31.40
36.77
1998
48.80
38.20
52.20
1998
100.00
199.20
213.20
511.20
108.80
126.00
4082.50
1282.10
1501.30
- -
-
1.30
5.11
1.02
4.96
2.75
2.44
0.04
1.36
0.00
0.00
0.00
1.40
12.62
31.85
36.53
1997
47.80
37.50
89.30
49.80
1997
100.00
187.20
181.80
462.50
100.80
3663.50
1167.00
1338.40
- -
-
1.30
4.84
1.06
4.90
3.04
1.70
0.02
1.43
0.00
0.00
0.00
0.60
12.24
32.89
36.59
1996
42.60
34.90
56.00
46.90
1996
100.00
159.00
161.10
402.50
100.00
3288.20
1081.50
1203.10
- -
-
1.29
4.68
1.13
4.91
3.12
1.21
0.03
1.62
0.00
0.00
0.00
0.90
11.94
34.67
35.40
1995
38.40
33.50
92.70
35.90
48.00
1995
100.00
138.80
145.80
354.40
2968.30
1029.00
1050.90 -
-
0.00
1.33
4.59
1.21
4.82
3.18
1.21
0.03
1.72
0.00
0.00
0.00
0.80
11.78
34.91
35.22
1994
37.00
33.80
88.50
33.70
47.90
1994
100.00
127.80
134.20
328.20
972.50
981.00 2785.40
(Arbejdsmarkedets Tillægspension).
ATP
(Den Midlertidige Pensionsopsparing) oprettedes i 1997. Der var kun indbetalinger i 1998 og blev erstattet med SP samme år.
(Arbejdsmarkedets Erhvervssygdomssikring) blev oprettet i 1999 med det formål at udbetale erstatninger for anerkendte erhvervssygdomme. Ordningen er
(Den Særlige Pensionsopsparing) blev oprettet i 1998 som en individuel pensionsopsparing, men nogen til grad med kollektiv udbetaling 2003, indtil hvor ens
(Lønmodtagernes Dyrtidsfond) blev skabt i slutningen 1970'erne med det formål at administrere de indefrosne dyrtidsportioner som ikke blev udbetalt i
Den finansielle sektors balancesektors finansielle Den
DMP
obligatorisk for alle private og offentlige arbejdsgivere.
AES
indestående kan administreres af den enkelte.
SP
perioden 1977-79 som kompensation for inflationsstiningerne.
LD
Note:
I alt
DMP
SP
AES
LD
ATP
Firm pension funds
Transverse pension funds
Life insurance companies
Non-life insurance companies
Investment funds
Investment companies
Danmarks Skibskreditfond
Mortgage-credit institutes
Banks
Procentvis andel
I alt
DMP
SP
AES
LD
ATP
Firmapensionskasser
Tværgående pensionskasser
Livsforsikringsselskaber
Skadesforsikringsselskaber
Investerings- og specialforeninger
Fondsmæglerselskaber
Danmarks Skibskreditfond
Realkreditinstitutter
Pengeinstitutter Mia. kr. Source: (Finanstilsynet.dk, 2010)
~ 98 ~
Total Assets for selected pension funds:
Own Calculations
DKK Million DKK billion Share of total assets
PFA Pension 252905 252.905 2.38%
Danica Pension 264085 264.085 2.49%
Industriens Pension 75,452 75.452 0.71%
TopDanmark 56554 56.554 0.53%
AP Pension 34238 34.24 0.32%
Total 683.234 6.44%
PFA Pension + Danica Pension 4.87% Source: The 2009 annual report for each of the pension funds; own calculation of the total share of the MFI’s balance
Total Assets for the 6 largest banks:
De største pengeinstitutter ultimo 2009
Mio. kr. Balance Own calculations DKK billion Total share of MFI balance Gruppe 1 Danske Bank 2,188,761 2188.761 20.63% Nordea Bank Danmark 776,555 776.555 7.32% Jyske Bank 224,106 224.106 2.11% Sydbank 157,560 157.56 1.48% Nykredit Bank 187,471 187.471 1.77% FIH Erhvervsbank 131,547 131.547 1.24% 34.55%
Source: (Finansrådet, 2010) and own calculations
~ 99 ~
10.7.2 The Number of MFI Players Banks: – source: (Finanstilsynet.dk, 2010)
FT.nr. Navn (Company Name) FT.nr. Navn (Company Name) FT.nr. Navn (Company Name)
Gruppe 1 (Group 1) - Arb. Kapital (Working Capital) > 50 mia. kr. Gruppe 3 (Group 3) (fortsat/continued) Gruppe 3 (Group 3) (fortsat/continued) 2222 Nordea Bank Danmark A/S 6610 EIK Bank Danmark A/S 9686 Den Jyske Sparekasse 3000 Danske Bank A/S 6771 Lægernes Pensionsbank A/S 9690 Vorbasse-Hejnsvig Sparekasse 7858 Jyske Bank A/S 6850 Vestfyns Bank A/S 9695 Brørup Sparekasse 8079 Sydbank A/S 6860 Nordfyns Bank, Aktieselskabet 9740 Frøs Herreds Sparekasse 8117 Nykredit Bank A/S 6880 Totalbanken A/S 9797 Broager Sparekasse 10001 FIH Erhvervsbank A/S 7230 Østjydsk Bank A/S 9827 Bredebro, Sparekassen 6 7270 Aarhus Lokalbank Aktieselskab 9860 Folkesparekassen 7320 Djurslands Bank A/S 13080 Frørup Andelskasse Gruppe 2 (Group 2) - Arb. Kapital (Working Capital) > 10 mia. kr. 7380 Morsø Bank, Aktieselskabet 13290 Andelskassen Fælleskassen 522 Sjælland, Sparekassen 7440 Nørresundby Bank A/S 13330 Slagelse, Andelskassen J.A.K 725 Fionia Bank A/S 7460 Løkken Sparekasse 13460 Merkur, Den Almennyttige Andelskasse 824 Nova Bank Fyn A/S 7500 Hvidbjerg Bank Aktieselskab 81 5201 Amagerbanken Aktieselskab 7570 Pen-Sam Bank A/S 5301 Arbejdernes Landsbank, Aktieselskab 7780 Skjern Bank, Aktieselskabet Gruppe 4 (Group 4) - Arb. Kapital (Working Capital) < 250 mio. kr. 5470 Forstædernes Bank A/S 7790 Vinderup Bank, A/S 544 Refsnæs Sparekasse 7670 Ringkjøbing Landbobank, Aktieselskab 7890 Salling Bank A/S 547 Arts Herred, Sparekassen for 7681 Alm. Brand Bank A/S 7930 Kreditbanken A/S 579 Sparekassen 'Den lille Bikube' 7730 Vestjysk Bank A/S 7990 Tønder Bank A/S 631 Kongsted Sparekasse 8231 FIH Kapital Bank A/S 8099 Nordjyske Bank A/S 800 Flemløse Sparekasse 9260 Sparbank A/S 8222 Dexia Bank Denmark A/S 847 Rise Spare- og Lånekasse 9380 Spar Nord Bank A/S 8229 Capinordic Bank A/S 5125 Leasing Fyn og Factoring Bankaktieselskab 12000 Sammenslutningen Danske Andelskasser 8269 Carnegie Bank A/S 9121 Boddum-Ydby Sparekasse 13 9020 Sparekassen Hvetbo A/S 9124 Sønderhå-Hørsted Sparekasse 9024 Ø. Brønderslev Sparekasse 9135 Klim Sparekasse Gruppe 3 (Group 3) - Arb. Kapital (Working Capital) > 250 mio. kr. 9044 Dronninglund Sparekasse 9143 Hunstrup-Østerild Sparekasse 400 Lån og Spar Bank A/S 9070 Sparekassen Vendsyssel 9228 Vokslev Sogns Spare- og Laanekasse 537 Dragsholm Sparekasse 9080 ebh bank a/s 9354 Rønde og Omegns Sparekasse 644 Fanefjord Sparekasse 9090 Thy, Sparekassen 9356 Agri-Egens Sparekasse 681 Lolland A/S, Sparekassen 9100 Morsø Sparekasse A/S 9357 Helgenæs Sparekasse 755 Middelfart Sparekasse 9116 Sparekassen Limfjorden 9358 Vistoft Sparekasse 828 Sparekassen Faaborg A/S 9133 Frøslev-Mollerup Sparekasse 9361 Tved Sparekasse 844 Svendborg Sparekasse 9137 Ekspres Bank A/S 9369 Søby-Skader-Halling Spare- og Laanekasse 1149 Saxo Bank A/S 9144 Bank DnB Nord A/S 9377 Sparekassen Midtdjurs 1187 E*TRADE Bank A/S 9174 Farsø, Sparekassen 9501 Fruering-Vitved Sparekasse 1671 Basisbank A/S 9201 Midtfjord, Sparekassen 9627 Ulfborg Sparekasse 1693 Cantobank A/S 9212 Hals Sparekasse 9629 Stadil Sparekasse 5140 Finansbanken A/S 9217 Himmerland A/S, Sparekassen 9634 Borbjerg Sparekasse 5999 Danske Andelskassers Bank A/S 9261 Skals, Sparekassen i 9639 Fjaltring-Trans Sparekasse 6060 DiBa Bank A/S 9283 Langå Sparekasse 13000 Lunde-Kvong Andelskasse 6070 Max Bank A/S 9307 Spar Salling Sparekasse 13020 Ryslinge Andelskasse 6100 Skandinaviska Enskilda Banken A/S 9312 Sparekassen Balling 13070 Faster Andelskasse 6140 Møns Bank, A/S 9335 Kronjylland, Sparekassen 13100 Københavns Andelskasse 6150 Skælskør Bank Aktieselskab 9351 Hobro, Sparekassen 13220 Andelskassen OIKOS 6160 Roskilde Bank, Aktieselskab Roskilde Bank A/S 9388 Sparekassen Djursland 13240 Ebeltoft, Andelskassen J.A.K 6220 Vordingborg Bank A/S 9486 Sparekassen Østjylland 13350 Østervraa, J.A.K. Andelskassen 6471 Grønlandsbanken, Aktieselskab 9682 Nr. Nebel og Omegn, Sparekassen for 13370 J.A.K. Andelskassen Varde 6482 BRFbank A/S 9684 Fanø Sparekasse 13450 Funder Fælleskasse Andelskasse 6520 Lollands Bank, Aktieselskab 33
Banks in numbers over the years: - source: (Finansrådet, 2010)
Pengeinstitutter, filialer og ansatte i tal
Strukturtal 1991 1992 1993 1994 1995 1996 1997 1998 1999
Danske pengeinstitutter 1 219 210 207 202 198 197 191 187 186 Færøske pengeinstitutter 6 6 5 4 4 4 4 4 4 Filialer af udenlandske pengeinstitutter 6 6 8 7 11 13 15 15 20 -heraf filialer af udenlandske pengeinstitutter der ikke modtager indlån ------Pengeinstitutter i alt 231 222 220 213 213 214 210 206 210 Filialer af danske pengeinstitutter 2 2,652 2,467 2,340 2,245 2,215 2,203 2,178 2,185 2,188 Ansatte 2 56,472 52,161 49,669 48,616 46,563 43,629 42,483 43,081 42,658 Ansatte omregnet til heltidsansatte 2 51,014 47,560 45,465 44,685 43,010 40,496 39,102 40,288 40,018
~ 100 ~
Strukturtal 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Danske pengeinstitutter 1 185 186 181 176 175 161 152 146 138 132 Færøske pengeinstitutter 4 4 4 4 4 4 4 4 4 4 Filialer af udenlandske pengeinstitutter 19 21 17 18 17 22 25 25 12 12 -heraf filialer af udenlandske pengeinstitutter der ikke modtager indlån - - - - 10 12 15 12 - - Pengeinstitutter i alt 208 211 202 198 196 187 181 175 154 148 Filialer af danske pengeinstitutter 2 2,159 2,099 2,067 2,013 2,025 1,975 2,000 1,962 1,879 1,760 Ansatte 2 43,431 43,499 42,634 41,251 41,180 42,274 41,579 45,042 47,599 - Ansatte omregnet til heltidsansatte 2 40,907 40,933 39,957 38,740 38,685 39,714 41,294 44,244 46,844 46,124
1 Dækker pengeinstitutter i gruppe 1-4 inkl. andelskasser, samt Grønland 2 Dækker pengeinstitutter i gruppe 1-3 inkl. andelskasser, samt Grønland Anm.: Størrelseskriteriet mellem gruppe 3 og 4 fra og med 1997 er 250 mio. kr. i arbejdende kapital mod tidligere 100 mio. kr.
Kilde: Finanstilsynet
Mortgage-credit institutes – source: (Finanstilsynet.dk, 2010)
REGNR (Reg. number) NAVN (Name) 20001 Nykredit Realkredit A/S 20002 Realkredit DK 20003 BRF Kredit A/S 20004 Totalkredit A/S 20007 DLR Kredit A/S 20008 LR Realkredit A/S 20009 Nordea Kredit Realkredit A/S 20010 FIH Realkredit A/S 8
~ 101 ~
Investment companies – source: (Finanstilsynet.dk, 2010)
Virksomhedsnavn (Company Name) Absolut Invest Fondsmæglerselskab Accunia Fondsmæglerselskab A/S Alfred Berg Fondsmæglerselskab A/S Amber Fondsmæglerselskab A/S Artha Kapitalforvaltning Fondsmæglerselskab A/S ATP Alpha Fondsmæglerselskab A/S ATRIUM Fondsmæglerselskab A/S BI Asset Management Fondsmæglerselskab A/S Bundgaard, Lund & Simoni Capital Management Fondsmæglerselskab A/S Capinordic Capital Fondsmæglerselskab A/S Capital Four Management Fondsmæglerselskab A/S Carnegie Asset Management Fondsmæglerselskab A/S Coin Fondsmæglerselskab A/S Dana Invest Fondsmæglerselskab A/S Dannebrog Invest Fondsmæglerselskab A/S Dansk Formue- og Investeringspleje A/S, Fms Dansk O.T.C. Fondsmæglerselskab A/S Difko Børs A/S, Fondsmæglerselskab EGNS-INVEST Capital Fondsmæglerselskab A/S Fondsmæglerselskab InvesteringsRådgivning A/S Fondsmæglerselskabet Investering & Tryghed A/S Fondsmæglerselskabet LD Invest A/S * Fondsmæglerselskabet Sampension Alternative Asset Management A/S Fondsmæglerselskabet Sirius Kapitalforvaltning A/S Fondsmæglerselskabet Stockrate Asset Management A/S Formuepleje A/S, Fondsmæglerselskab Fundamental Fondsmæglerselskab A/S Global Evolution Fondsmæglerselskab A/S Habro Fondsmæglerselskab A/S HAUSER SECURITIES Fondsmæglerselskab A/S HP Fondsmæglerselskab A/S ICAP Scandinavia Fondsmæglerselskab A/S ID Fondsmæglerselskab A/S Jyske Global Asset Management Fondsmæglerselskab A/S Mermaid Asset Management Fondsmæglerselskab A/S NE Fondsmæglerselskab A/S Nielsen Capital Management Fondsmæglerselskab A/S Omni Fondsmæglerselskab A/S PFA Kapitalforvaltning, fondsmæglerselskab A/S * Scandium Fondsmæglerselskab A/S Schroder Investment Management Fondsmæglerselskab A/S Secure Fondsmæglerselskab A/S Skandia Asset Management Fondsmæglerselskab A/S Sparinvest Fondsmæglerselskab A/S Stonehenge Fondsmæglerselskab A/S Wealth Management Fondsmæglerselskab A/S
~ 102 ~
Pensions and insurance: Overview can be obtained from: (Finanstilsynet.dk, 2010)
Investment associations: Overview can be obtained from: (Finanstilsynet.dk, 2010)
10.7.3 Key Ratios for Banks and Mortgage-Credit Institutes Source: (Finanstilsynet.dk, 2010)
XX - Realkreditselskab, koncernniveau (Mortgage credit institutions, consolidated2005 level) 2006 2007 2008 2009 Egenkapitalforrentning efter skat (Return on equity after tax) 8.67 8.27 6.20 -1.25 2.74 Indtjening pr. omkostningskrone (Income/cost ratio) 2.84 2.82 2.29 0.94 1.17 Solvensprocent (Solvency ratio) 11.64 11.30 10.59 19.95 22.03 Udlån i forhold til egenkapital (Gearing) 16.38 16.54 16.70 18.96 19.34
Egenkapitalforrentning efter skat (Return on equity after tax) 2005 2006 2007 2008 2009 XX - Pengeinstitutter, koncernniveau, gruppe 1 (Commercial banks and savings banks, group level 1)17.07 17.14 15.15 2.49 2.14 XX - Pengeinstitutter, koncernniveau, gruppe 1-4 (Commercial banks and savings banks, group level 16.701-4) 16.92 14.43 -0.34 -3.79 XX - Pengeinstitutter, koncernniveau, gruppe 2 (Commercial banks and savings banks, group level 2)14.18 18.23 13.56 -12.66 -13.83 XX - Pengeinstitutter, koncernniveau, gruppe 3 (Commercial banks and savings banks, group level 3)14.82 14.24 10.43 -8.09 -39.43 XX - Pengeinstitutter, koncernniveau, gruppe 4 (Commercial banks and savings banks, group level 4)30.70 28.60
Indtjening pr. omkostningskrone (Income/cost ratio) 2005 2006 2007 2008 2009 XX - Pengeinstitutter, koncernniveau, gruppe 1 (Commercial banks and savings banks, group level 1) 1.89 2.01 1.79 1.10 1.07 XX - Pengeinstitutter, koncernniveau, gruppe 1-4 (Commercial banks and savings banks, group level 1-4)1.86 1.96 1.73 1.01 0.94 XX - Pengeinstitutter, koncernniveau, gruppe 2 (Commercial banks and savings banks, group level 2) 1.72 1.93 1.67 0.71 0.75 XX - Pengeinstitutter, koncernniveau, gruppe 3 (Commercial banks and savings banks, group level 3) 1.56 1.67 1.48 0.78 0.52 XX - Pengeinstitutter, koncernniveau, gruppe 4 (Commercial banks and savings banks, group level 4) 1.60 1.61
Solvensprocent (Solvency ratio) 2005 2006 2007 2008 2009 XX - Pengeinstitutter, koncernniveau, gruppe 1 (Commercial banks and savings banks, group level 1)10.33 10.99 9.82 12.88 15.77 XX - Pengeinstitutter, koncernniveau, gruppe 1-4 (Commercial banks and savings banks, group level 10.531-4) 11.22 10.19 12.64 15.72 XX - Pengeinstitutter, koncernniveau, gruppe 2 (Commercial banks and savings banks, group level 2)11.67 11.36 11.57 10.60 15.05 XX - Pengeinstitutter, koncernniveau, gruppe 3 (Commercial banks and savings banks, group level 3)14.75 13.49 12.31 13.14 15.88 XX - Pengeinstitutter, koncernniveau, gruppe 4 (Commercial banks and savings banks, group level 4)180.50 276.00
Udlån i forhold til egenkapital (Gearing) 2005 2006 2007 2008 2009 XX - Pengeinstitutter, koncernniveau, gruppe 1 (Commercial banks and savings banks, group level 1)16.52 15.89 17.19 18.50 16.30 XX - Pengeinstitutter, koncernniveau, gruppe 1-4 (Commercial banks and savings banks, group level 15.001-4) 13.93 14.97 16.20 14.56 XX - Pengeinstitutter, koncernniveau, gruppe 2 (Commercial banks and savings banks, group level 2) 5.89 7.63 8.30 11.18 7.74 XX - Pengeinstitutter, koncernniveau, gruppe 3 (Commercial banks and savings banks, group level 3) 3.79 5.04 5.69 6.04 6.32 XX - Pengeinstitutter, koncernniveau, gruppe 4 (Commercial banks and savings banks, group level 4) 0.00 0.00
Division in groups is done by Finanstilsynet by the use of working capital
See the division of the groups in Appendix 12.7.2
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10.8 Overview of Utilized Materials’ Authors The following table lists a selected area of utilized materials and gives a brief overview of the authors’ background for writing the materials.
Authors Authors’ Background Newspapers As journalists at Daglbladet Børsen, Berlingske Tidende etc. a well- renowned Danish newspaper, all articles must be concluded to be both reliable and containing a high validity. Aaker, D. A Professor of Marketing, University of California Andersen, Heine Employees at Copenhagen Business School. Therefore, they must be (red.) et al. assumed to know about their subject. Andersen, I. Copenhagen Business School, CBS Learning Lab Ansoff, I. H. Consultant, received rewards Barney, J. B., & Barney: has published more than 80 articles, work at many universities, Hesterly, W. S. received awards Hesterley: University of Utah Brealy, R. A., Brealy: Professor of Finance, London Business School Myers, S. C., & Myers: Sloan School of Management, MIT Allen, F. Allen: Professor of Finance, University of Pensylvania Collin, F., & Collin: dr.phil. i filosofi Kbh. Universitet 1985 Køppe, S. Køppe: underviser i videnskabsteori, videnskabshistorie og psykologi D'Aveni, R. A. Professor of strategic management, Dartmouth College Elling, J. O., & Elling: Professor CBS Sørensen, O. Sørensen: Lektor CB Kvale, S. Århus Universitet
Porter, M. E.
Schoemaker, P. J., University of Chicago & Amit, R. University of British Columbia, Vancouver Thomsen, S. CBS
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10.9 The Sale of FIH
Source: (FIH.dk, 2010)
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