Business models CUMA Spring Conference Hodson Bay Hotel 16 April 2018 www.moorestephens.ie PRECISE. PROVEN. PERFORMANCE.
General Structure Of Presentation 1. Strategic planning – the appropriate context 2. What is a business model 3. The relevance of capital 4. Business model choices
1. Strategic planning – the appropriate context PRECISE. PROVEN. PERFORMANCE.
CUMA Spring Conference Meaning of Strategy • What is “strategy”? • From Ancient Greek • Military Origins • Stratēgía = “office of general, command, generalship ”
CUMA Spring Conference Definition of a Strategy Section 76: The board of directors of a credit union shall cause to be prepared and shall adopt a plan (in this Act referred to as a ‘strategic plan’) which documents the strategy and objectives of the credit union (in this Act referred to as the ‘strategic objectives’) and indicates how those strategic objectives are to be achieved
CUMA Spring Conference Strategy – a wider view Implementation Vision Mission Objectives Plan (the dream) (the why) (the what and when) (the how) The Why The What and The How The Dream When • Section 76 defines a strategy as a series of objectives. • However, objectives are derivatives of visions and missions, and therefore in reviewing objectives, objectives need to be set in the context of overall direction (i.e. vision/ mission).
CUMA Spring Conference The importance of direction “If we could first know where we are and whither we are tending, we could better judge what to do and how to do it“ Point Point A B
CUMA Spring Conference So whither are we tending ? • So whither are credit unions tending ? ? • What is the desired future state? Enter the business model •
2. What is a business model PRECISE. PROVEN. PERFORMANCE.
CUMA Spring Conference What is a business model? • The term “business model” is difficult to define • But…a good definition “A business model, from our point of view, consists of four interlocking elements that, taken together, create and deliver value: • Customer Value Proposition, • Profit Formula, Christensen Johnson Kagermann • Key Resources, • Key Processes.”
CUMA Spring Conference The Harvard Model • Revenue model, cost • Target Customer, job structure, margin to be done, offering model, revenue velocity Profit Value Proposition Formula Wrapped in the social context of credit unions Key Key Resources Processes • People, technology • Processes, rules products, equipment, and metrics, norms information, channels, partnerships, alliances, brand
CUMA Spring Conference The Harvard Analysis • How do we tackle this element ? • Is it fair to say a credit Profit Value Proposition Formula union is a not for profit ? • Why does a profit formula become relevant Key Key for a not-for-profit? Resources Processes • Enter Capital …….
3. The relevance of capital PRECISE. PROVEN. PERFORMANCE.
CUMA Spring Conference Capital • Capital is the difference between a credit union’s assets and liabilities. • The capital ratio is a simple formula. It is capital divided by assets. It has a numerator (capital) and a denominator (assets). €m Assets “Shock Loans/ Investments 100("A") absorber“ Liabilities Members Savings 83.2("B") Reserves/ Capital 16.8("C") Capital Ratio 16.8%("C")/ ("A")
CUMA Spring Conference Capital Central Bank of Ireland: • “ Adequate reserves are the foundation on which the financial stability of a credit union rests…..Credit unions need to maintain sufficient reserves to ensure continuity and to protect members’ savings. Commission: • “…Capital adequacy, the dominant factor in determining the viability of a credit union…
CUMA Spring Conference Capital Loan to Asset Ratio Loan Cost Base Impairment Capital Adequacy Governance Liquidity Capacity Investment Impairment
CUMA Spring Conference Capital Unlike banks, credit unions cannot raise capital • Credit unions can only create capital • • By retaining reserves • By making surpluses and reserving, over a period of time • Therefore, capital creation is slow • And any signs of a reduction in earnings capacity presents a direct risk to capital, and can be hard to fix Capital is directly linked to stability and viability •
CUMA Spring Conference Capital • Capital can also weaken due to asset growth • See what happens when assets grow at 10% and reserves remain static…. Assets Capital Capital Ratio €m € % Year 1 100.0 14.0 14.0% Year 2 110.0 14.0 12.7% Year 3 121.0 14.0 11.6% Year 4 133.1 14.0 10.5% Year 5 146.4 14.0 9.6% • Capital weakens Capital dilutes •
CUMA Spring Conference Capital • So we may be “not for profit” • Capital is retained earnings [profits] • Capital is important. • It provides the platform to serve our members • Let’s look to the future Point Point B A Point B must be capable of retaining sufficient capital. Capital comprises of reserves. Reserves are profits.
CUMA Spring Conference Profit Formula • So the profit model is relevant Profit Value • What does the current Proposition Formula profit model look like? • Lets look at some Key Key statistics to inform Resources Processes this analysis….. • Factual evidence based…..
CUMA Spring Conference Profit Formula Capital levels are growing 2012-2017 % 50 45 47.6 46.3 44.8 40 41.3 35 36.2 35.8 30 25 20 15 16.8 16.48 16.21 15.93 15.26 14.65 10 5 0 2012 2013 2014 2015 2016 2017 Capital Liquidity
CUMA Spring Conference Profit Formula 2011-2017 €bn Savings are 20.0 16.8 16.0 15.0 14.2 14.0 13.9 13.7 15.0 growing ….. 10.0 5.0 - 2011 2012 2013 2014 2015 2016 2017 2011-2017 % Loans relative to 45.00% 40.20% 40.00% 35.60% 35.00% 30.80% assets have fallen 27.10% 27% 27% 30.00% 26% 25.00% 20.00% but stabilised 15.00% 10.00% 5.00% 0.00% 2011 2012 2013 2014 2015 2016 2017
CUMA Spring Conference Profit Formula Credit unions have retained their market share Loans to Irish Households €bn 16,000 14,000 34% 12,000 10,000 8,000 6,000 4,000 2,000 - Sept 12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Others Credit Unions
CUMA Spring Conference Profit Formula But the balance sheet structure has changed Asset Profile 2008 - v - 2017 120 100 Investments/ 80 49 Other (Low Yield) 73 Loans (High Yield) 60 40 51 20 27 0 2008 2017
CUMA Spring Conference Profit Formula Return on assets is falling Return on Assets [Surplus/ Profit As % of Assets] 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2012 2013 2014 2015 2016 2017
CUMA Spring Conference Profit Formula And are there broader and greater challenges …. “Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking. I disagree. What is more, I think banks that are not Francisco Gonzales prepared for such new competitors CEO, BBVA face certain death”
CUMA Spring Conference Profit Formula • Where does this leave Point B • Remember, capital is important. Crucial. Vital • Return on assets (profits) are falling • At a time when assets are in growth cycle Point Point A B What is Point B ?
4. Business Model Choices….. PRECISE. PROVEN. PERFORMANCE.
CUMA Spring Conference Business Model Choices…. “ People do not choose between things, they choose between the description of things….” Amos Tversky Leading authority on behavioural economics • So how do we describe (“frame”) our business model choices?
CUMA Spring Conference Business Model Choices…. • Lets carefully consider our choice framework We want to consider what Point B might look like • Using the Harvard Framework • Guided by the critical importance of capital • Profit Value Proposition Formula Capital Point B Key Key Resources Processes The “framed” challenge
CUMA Spring Conference Business Model Choices…. While not forgetting what credit unions • are “… Self-help co-operative financial organisation geared to attaining the economic and social goals of its members and wider local communities …”. Or where they have come from •
CUMA Spring Conference Business Model Choices…. While recognising the relevance of risk • And the relationship between strategy and risk • The Great Enabler Strategy gets us from A to B Point Point A B Risks prevent us getting from A to B The Great Barrier
Business Models Unlocking the business model Could we simplify the challenge as this? Step 2 To unlock this Step 3 And then fix this Profit Value Proposition Formula Risk Sensitive Product Development and/ or Diversification? Key Key Resources Processes Step 1 Improve these
CUMA Spring Conference The Lincoln Question …. Whither are we tending? Future State 1 Savings and Loans Future State 2 Expanded Capital Savings and Loans Member Value Future State 3 Cooperative Community Bank
CUMA Business Model Choices…. Thank you Let the debate begin….
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