Case Synthesis: In a stockholders’ meeting of the Rural Bank of Suares (RBS), Peter Arguelles, the bank general manager, proposed that the bank should open another branch in the capital city. However, the stockholders are reluctant with this motion, given that there are branches of the big banks of Manila and already two rural banks in the city. For more than 20 years, the Rural Bank of Suares struggled financially because of the government’s lending program. Point-of-View: For this case, the point-of-view of the stockholders will be used Statement of the Problem:
Should the stockholders follow Peter Arguelles and expand to the capital city or should they not? Areas of consideration: First, the banking industry in the late 1990s can be categorized by three major trends: Deregulation, Technological innovation, and Globalization. These trends combined to induce a consolidation in the industry that knew no borders. The mantra heard in corporate boardrooms and analyst conference calls was “bigger is better. ” The rationales for this were largely two-fold.
On the operational side, banks believed that only by being larger than the competition could they take full advantage of the economies of scale and economies of scope that the technology revolution was offering. Thus, by getting larger banks could reduce their expense ratios and earn a higher net interest margin. On the marketing side of the business, banks also felt that bigger was better. Deregulation in the US and elsewhere had made the buzzwords of relationship banking and cross-selling more than academic musings.
To bank executives everywhere, these words represented the keys to winning back some of market share banks had been losing to equity markets and other financial intermediaries. Moreover, buying land and constructing a building for the new branch in the city would be too risky for the company since they are not assured of the success of the said expansion. Furthermore, if the expansion failed, it would be easier for the company to retract since they have no properties to consider.
Also the company is not yet financially stable and capable enough to be granted the loan to invest for the properties. The cost of land acquisition, building construction, equipment, and fixtures, which is 10. 5 million Php, is very large compared to its annual net income of only two million Php. Another major point in the analysis of this case is the competition of Rural Bank of Suares which are Manila-based banks the two other rural banks in the capital city. Manila bank branches don’t offer small loans.
In that sense, RBS can use this to their advantage and cater to specific the loan market. However, the more pressing problem is that RBS shares this specific target market with other rural banks in the capital city. RBS aims to distinguish itself from competition through better service. On another note, the presence of rural banks in the city signifies that they have a profitable business, which bodes well for RBS planning an expansion. An additional point of consideration is the various types of loans that the Bank of Suares had to offer at the time.
We see in Exhibit One that most of their revenue came from agricultural loans, comprising approximately 52% of their total income in 1994, as compared to the 7. 6% and 3% from commercial and industrial loans, respectively. Also from 1994 to 1995, revenue from agricultural loans increased by 4,391,810. 96 Php; it is the one that experienced the highest gain out of all the income generating items, and the only one that actually gained income compared to the other two loans. Revenue from commercial and agricultural loans decreased by 69,026. 10 Php and 50,099.
30 Php respectively during the same time period. Alternative courses of action: One option is to expand the bank within the business centre of the city, but to rent instead, therefore without land acquisition and building construction. This provides the flexibility of exit if the expansion fails. RBS could rent until the stockholders feel that their position in the market is already stable. Another option is to expand the bank within the city, but to wait until the bank is already financially stable. This is also a safe plan, because the bank has just had its first taste of a good year’s profit.
They could wait until they’ve gained more capital. While waiting, they can start devising a plan of expansion. Lastly, there is an option not to expand in the urban areas, but focus on the market in Suares. However, according to Peter Arguelles, the market limit in Suares has been reached already. Decision: We recommend that the stockholders postpone their expansion until the bank becomes more financially stable. In the time they use while waiting, RBS should start drafting their plans of expansion to the capital city. This is considerably safe to business and yet, also progressive.