Business models CUMA Spring Conference Hodson Bay Hotel 16 April - - PowerPoint PPT Presentation

• PRECISE. PROVEN. PERFORMANCE.

Business models

CUMA Spring Conference Hodson Bay Hotel

16 April 2018

www.moorestephens.ie

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

• PRECISE. PROVEN. PERFORMANCE.
• 1. Strategic planning – the appropriate context

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

• Section 76 defines a strategy as a series of objectives.
• However, objectives are derivatives of visions and

missions, and therefore in reviewing objectives,

• bjectives need to be set in the context of overall

direction (i.e. vision/ mission).

Vision (the dream) Mission (the why) Objectives (the what and when) Implementation Plan (the how)

The Dream The Why The What and When The How

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 A Point 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

?

• PRECISE. PROVEN. PERFORMANCE.
• 2. What is a business model

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,
• Key Resources,
• Key Processes.”

Christensen Johnson Kagermann

CUMA Spring Conference The Harvard Model

• Processes, rules

and metrics, norms

• People, technology

products, equipment, information, channels, partnerships, alliances, brand

• Revenue model, cost

structure, margin model, revenue velocity

• Target Customer, job

to be done, offering

Value Proposition Profit Formula Key Processes Key Resources

Wrapped in the social context of credit unions

CUMA Spring Conference The Harvard Analysis

Value Proposition Profit Formula Key Processes Key Resources

• How do we tackle this

element ?

• Is it fair to say a credit

union is a not for profit ?

• Why does a profit

formula become relevant for a not-for-profit?

• Enter Capital…….

• PRECISE. PROVEN. PERFORMANCE.
• 3. The relevance of capital

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 Loans/ Investments 100("A") Liabilities Members Savings 83.2("B") Reserves/ Capital 16.8("C") Capital Ratio 16.8%("C")/ ("A") “Shock absorber“

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

Capital Adequacy Loan to Asset Ratio Cost Base Governance Capacity Investment Impairment Liquidity Loan 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….

• Capital weakens
• Capital dilutes

Assets €m Capital € Capital Ratio % 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%

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 A Point B

Point B must be capable of retaining sufficient capital.

Capital comprises of reserves. Reserves are profits.

CUMA Spring Conference Profit Formula

Value Proposition Profit Formula Key Processes Key Resources

• So the profit model is

relevant

• What does the current

profit model look like?

• Lets look at some

statistics to inform

this analysis…..

• Factual evidence

based…..

CUMA Spring Conference Profit Formula

Capital levels are growing

14.65 15.26 15.93 16.21 16.48 16.8 44.8 47.6 46.3 41.3 35.8 36.2 5 10 15 20 25 30 35 40 45 50 2012 2013 2014 2015 2016 2017

2012-2017 %

Capital Liquidity

CUMA Spring Conference Profit Formula

Savings are growing…..

14.0 13.7 13.9 14.2 15.0 16.0 16.8

• 5.0

10.0 15.0 20.0 2011 2012 2013 2014 2015 2016 2017

2011-2017 €bn

Loans relative to

assets have fallen but stabilised

40.20% 35.60% 30.80% 27.10% 26% 27% 27% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 2011 2012 2013 2014 2015 2016 2017

2011-2017 %

CUMA Spring Conference Profit Formula

Credit unions have retained their market share

• 2,000

4,000 6,000 8,000 10,000 12,000 14,000 16,000 Sept 12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Loans to Irish Households €bn

Others Credit Unions

34%

CUMA Spring Conference Profit Formula

But the balance sheet structure has changed

51 27 49 73

20 40 60 80 100 120

2008 2017

Asset Profile 2008 - v - 2017

Investments/ Other (Low Yield) Loans (High Yield)

CUMA Spring Conference Profit Formula

Return on assets is falling

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 2012 2013 2014 2015 2016 2017

Return on Assets [Surplus/ Profit As % of Assets]

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 prepared for such new competitors face certain death” Francisco Gonzales CEO, BBVA

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 A Point B

What is Point B ?

• PRECISE. PROVEN. PERFORMANCE.
• 4. Business Model Choices…..

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

Point B

Value Proposition Profit Formula Key Processes Key Resources

Capital

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

Point A Point B Strategy gets us from A to B Risks prevent us getting from A to B The Great Enabler The Great Barrier

Business Models Unlocking the business model

Value Proposition Profit Formula Key Processes Key Resources

Step 1 Improve these Step 2 To unlock this Step 3 And then fix this

Could we simplify the challenge as this?

Risk Sensitive Product Development and/

• r Diversification?

CUMA Spring Conference The Lincoln Question ….

Future State 1 Savings and Loans Future State 3 Cooperative Community Bank Capital Member Value Future State 2 Expanded Savings and Loans

Whither are we tending?

CUMA Business Model Choices….

Thank you Let the debate begin….

Context of Slides and Limitations

Our assessment of strategy is, of necessity, subjective and dependent on the exercise of individual judgement. These slides represent an illustrative account of some relevant issues and considerations, intended for an educational

• context. These slides do not necessarily represent the

considered opinion of Moore Stephens, as they are intended to provide a balanced account of judgemental matters in an educational environment. Moore Stephens shall not be liable to any person relying on

• r using information contained in these slides for any

indirect or consequential loss or damage or any loss of or damage to profit, revenue, savings, goodwill or business, in each case howsoever caused, including without limitation by reason of misrepresentation, negligence, other tort, breach of contract or breach of statutory duty. If you have any questions, please contact Brian Hayes (brian.hayes@moorestephens.ie)