With so many outlets throughout Saudi Arabia, Samba bank has used its chain to branch out into other retail segments. The bank also has big plans for the future, setting the goal of expanding its chain to other parts of the world. Samba bank also continues to invest in service development to expand its brand into new customer segments. At the local branch, Samba bank is starting to expand its services to increase its revenue from banking services and to encourage customers to bank with them.
After doing extensive financial research on Samba bank and the Saudi banking industry, I have gathered important information and recommendations for current shareholders and potential investors. This paper begins with an overview of the bank followed by a SWOT and financial statement analysis. Through analysis, I was able to conclude different financial ratios that helped me see how bank Samba’s stock was doing compared to other companies in its industry. I was able to determine its liquidity, debt, asset management/efficiency, profitability, and market-based ratios to help me decide whether Samba bank shares are worth investing in or not. This paper concludes with my recommendation, based on my findings, as to whether or not potential investors have a look into investing in Samba bank shares and if current shareholders have held onto their shares or decided to sell them. Samba bank also continues to invest in product development to expand its brand into new customer segments.
Analysis Saudi banking industry key variables
Banks in Saudi Arabia have also embarked on segmentation of their customers into different value propositions according to the profitability of customers. This is when the 80-20% profit generation against customers arises from. Banks customer segments have people with similar needs and worth broadly in the same economic value, earn almost similar income, etc. They are given a combination of services, products, prices, and branding which fit them. This is called managing customers according to segments. Banks also compute the lifetime value or profitability of customers through forecasting and the use of strategies like introducing new products that will fit the customers in the future. They have also modified existing products to fit customers in a particular way hence making them satisfied, and this has led to increased revenue.
Banks have also tried to come up with strategies that are directly related to how customers know their products and how the products solve their needs. Customer understanding is vital because a good strategy is that which is related to the improvement of bank products, whether asset products like loans or liability products where customers entrust their money to the banks. This means banks have come up with strategies aimed at particular target customers. This type of strategy is persuasive in that it explains to customers why they have to take particular products.
Banks can also pick on the behavior-based segmentation strategy, and this involves looking at the past and present relationships of the customer and the bank. Banks have a look at how long a client has been in the bank. Has the client been on and off-has he ever left the bank for another bank and back? They have also looked at the value of customers in terms of how much money the customer has in the bank or how much he has borrowed, or he is willing to borrow. Segmentation of clients is important in banks because customers are given a bundle of benefits that have been used. Geographic-where the banks take into account the geographical boundaries, and this majorly assists the bank in staffing and opening of new branches and also to assess market potential. They have also been using psychographic segmentation that deals with customer lifestyle, tastes, and preferences, why customers want a particular product instead of the other.
The demographic segmentation deals with dividing customers according to age, stage in the life cycle, etc., and it helps banks to design products for all types of people depending on their age, income, etc.
Apart from the behavior-based segments, the bank can also adopt segmentation, depending on what the bank wants and not what customers want. Banks have different value propositions that it wishes to give customers. Hence it will segment its products according to its value propositions, and as customers take them, they automatically fall to segments. The banks have three major objectives, and these are to get deposits and minimize the cost of funds producing quality credit balances at maximum spread income and to generate free income, and reduce services expenses. This leads to the following four segments. There are those people who want to invest, others want to borrow, others want convenience and others are fast limited customers. These segments can be used as a basis for the bank to develop long-term strategies to attract customers to the different segments.
As much as strategies are good, banks have to avoid using one strategy for all products or marketing applications effective segments or marketing applications effective segments. A strategy will vary according to what are the marketing objectives. In the case of attracting new customers who have no history with the bank. The bank will come up with a wedge product strategy where they give customers of other banks a chance to sample some of its products or services for the time being, and this will enable them to cross-sell more profitable products to them and create a long-lasting relationship with them. This is done by direct marketing, for example, they can send letters to customers requesting them to try products or phone calls.
In making existing customers be more profitable, the banks have to study their behavior carefully and give them the most appropriate product or service that can turn marginal customers, their lifestyle, and the amounts of cash they handle, and the needs come from good data management. When the bank can use the data, it has to identify the best ways in available banks. The database can enable them to know which customers are profitable, marginally profitable, and unprofitable.
Apart from keeping existing customers, banks also need to get more and more customers by prospecting well and turning these prospects into potential customers. The methods we have seen that are employed here are the direct mail methods and telephone calls. Geographical prospects can also be employed by use of strategic positioning of new branches at areas where trade is high and directing advertisements to such areas to lure more customers into the bank’s customer base, whichever the method, banks have realized that CRM is very important because it concerns more on customer satisfaction rather than products. Most banks then have realized that in order to understand customers well and this information is in the bank’s database. There has been, therefore, good management of data that gives information about the customers and whether they are profitable or not. For good data management, banks have to ensure that:
- They have relevant and accurate data(information) about the customers,
- Develop daily, weekly, yearly, etc. analysis of customers’ profitability and
- Develop tactics on these segments that modify behaviors of both customers and employees to increase sales and revenue while lowering costs.
Banks have ensured good data management by the careful collection of customer data, turning this data into knowledge, and then using this knowledge to develop strategies and tactics to modify the behavior of both employees and customers, and prospects to improve long-term profits.
Banks have realized that just aiming at having a large market share is not enough to generate profits. They have also ensured that they do good customer relations management in order to achieve good results. This is by understanding their customer needs well, and then the bank will match the customers with available products to ensure maximum customer satisfaction. They have also managed customers well by segmenting them into useful segments based on profitability so as to give them beneficial value prepositions that will make them have a good long-term relationship with the bank and hence increase the profitability.
Samba bank’s top competitors include Riyadbank and Fransi bank. Still, Samba bank is the leader in its market. Samba bank’s current marketing policy is to market to both the private sector and public sector. Samba bank is a gathering place for the entire community. They are focusing on giving customers a personal and enjoyable experience in an environment where the customer can put his money safely. As Samba bank continues to grow, its customer base expands and diversifies to include individuals, businesses, other banks, and many other organizations. Samba bank’s goal is to offer a variety of high-quality products that appeal, and are appropriate for all their customers. Their marketing practices all endure careful analysis to ensure that they are appropriate for the community and customers.
Samba bank has been outperforming its rivals at the end of the case study, and its strategic position is well stabilized. Their debts level has started to fall, and their revenue and profits are going up. The key reason for success is that they are focusing on their weaknesses and threats and trying to minimize them. However, threats related to the economy and competition still remain a major factor in Samba bank. Therefore, it is continuing to offer products and services to consumers at competitive prices and also signing up a new customer to gain market share. Horizontal integration between department and managers such as moving experts to its underperforming operations to turn it into profitable business unit.
Samba bank’s strong brand reduces the barriers of entry and helps them to enter foreign markets such as India, China, etc., to achieve the organization’s international strategic objectives. However, it has been very difficult to operate at first because of competition from local small companies. It’s proved difficult to operate in India. They are diversifying their range of products to meet the user’s needs across the world using their key success factors.
|Total deposit: total capital||Average total deposits||60410796||67044689||72825514||90048042|
|Average total capital||79037636||94938680||101622503||116160580|
|Loans: total deposits||Average loans||34918303||48177688||62385587||67027647|
|Average total deposits||60410796||67044689||72825514||90048042|
|Capital funds to total assets||Capital funds||79037636||94938660||124014813||108715195|
|Average total deposits||60410796||67044669||72825514||90048042|
|Interest margin to average total assets||Interest margin||2455684||2953520||3507914||4300962|
|Average total deposits||60410796||67044669||72825514||90048042|
|Earnings assets to total assets||Average earnings assets||1436550||1971142||2727401||4614311|
|Average total assets||79037636||86988149||101622503||116160580|
|Interest margin to average earnings||Interest margin||2455684||2953520||3507914||4300962|
|Average earnings assets.||1436550||1971143||2727401||4614311|
|Loans loss coverage ratio||Pre-tax income + provision of losses||1436550||2505735||4018251||5210370|
|Equity to total assets||Average equity||8878133||9178494||12906166||15299618|
|Average total assets||79037636||86988148||101622503||124014813|
|Deposits x capital||Average deposits||60410796||67044689||72825514||90048042|
|Loans to capital||Average net loans||34918303||48177688||62385587||67027647|
|Operating ratio||Operating expenses||1900422||1503722||1809308||2062352|
|Long term debt to operating property||Long term debt||0||2250000||2250000||2250000|
|Operating revenue to operating property||Revenue||3336972||4009457||5827559||7272722|
On profitability, it can be noted that the profitability of Samba bank is improving over time. This is shown by the Earnings assets to total assets ratio. In 2005, the ratio increased to 4% from 2% in 2004 before going up further to 5% in 2006. Even though the profitability of the bank has been improving, it is slightly above the industrial average that stands at 8% Earnings to total assets. Earnings to total assets increased, indicating that the management was using the assets of the banks efficiently to generate profit. At the same time, the interest in earnings increased. The return on owner’s equity also shows an upward trend through the periods 2003 to 2006. The return on Assets has also shown an improving trend from 2% to 5%. However, there exists no record of the industrial average to compare with. Equity to total assets went up, which is an increased guard against risk which will be brought by debts. The loan loss coverage ratio increased in the two years, meaning that it increased the level of protection of loans. Loan to debt deposit also went up, which shows that the risk for the business increased. Lastly, deposit times capital also increased for the three years, which shows that the return to the shareholders may be improving.
On financial stability, the Loans: total deposits ratio indicates that the firm was financially stable and improving except only in 2006. This ratio was 0.744:1. This means that for every $1 of loans, there are only $0.19 of deposits. The recommended ratio is 1:1, i.e., but in this case, they are less than 1. Compared to the average industrial ratio of 0.95:1, the samba bank is better. Through the years 2003, 2004, and 2005, its financial stability is improved, as shown by the ratios.
However, there is an improvement in the debt ratio from 2.4% to 1.8% from 2003 to 2006, respectively. The debt ratio is an indicator of the percentage of assets that have been financed through borrowed capital. It means that in 2003 0% of the total assets were financed through debt. In 2004, 2005 and 2006 they were 2.4%, 2.1% and 1.8% respectively. It means the firm might be financing its assets using internal means like retained earnings that are less costly to the organization. Based on the debt ratio, and if the bank is to finance any investment through external borrowings (debt), then it would be advisable to do so. This is because bank debt management is efficient, as shown by the declining trends of debt. However, the management of the bank is not efficiently utilizing the current equity, as shown by a decline in the return to equity over time. If additional borrowings would, however, adversely affect the banks’ balance sheet position, they should withdraw the expansion plan. Additional borrowings can increase the restaurant’s gearing hence subjecting it to financial risk.
On operational analysis, despite the increased net income and net interest figures reported by the bank. The bank showed a reduction of Interest margin to average earnings from 1.71 times to 1.5 times to 1.29 times and 0.9 times for the fiscal years ending 2003, 2004, 2005, and 2007, respectively. The bank took the following trend in its ratios.
From the chart above, it can be noted that the a similar bank trend for the ratios except interest margin to average earnings. This means the interest margin ratio was declining.
The other ratios had the following trend.
Samba risk analysis and Saudi banking industry
To begin with, I will analyze the SWOT analysis of Samba bank.
- Offering a wide variety of products, therefore, customer confidence high
- Leading mortgage lender in the market
- Low product costs – integration between subsidiaries
- Highly experienced management and staff
- Growth by increasing market share through acquisitions
- Able to promote several products in one place online banking
- High operation margin, less risk relating to profitability and relates
- Barriers to entering Foreign Markets
- Licensing problems
- Highly competitive market
- Declining ROCE and Revenue Growth due to subprime crisis and now oil prices.
- Raising money bonds and customer deposits.
Samba bank has become a global brand by investing in diversified products and services, winning consumer confidence, and providing their exclusive products at a lower charge.
- Growth by increasing market share through mergers and acquisitions
- Develop new products which link to changing people’s lifestyles, such as online banking and standardized money exchange mode.
- Enter and expand overseas markets such as China, India.
- Launch other products
- Debts going above due subprime crisis
- Economy – Expensive to lend to some people
- Expansion, Mergers, and Acquisitions – could lead to failure
- Competition – other major companies entering the market could affect their revenue
- Rules and Regulations of different countries
The biggest threat Samba bank is facing at present is from rival Riyadbank and Fransi bank, which is offering its products and services cheaper and could lead to their market share dropping as well as revenue.
With so many parameters in mind, these banks were visibly confused about the decision of cutting down on costs and generating extra revenue. It was evident from the studies that this bank has a concrete plan to cope up with the sudden drastic changes in the macro-environment. The industry players like Samba bank, whose main focus was on creating brand recognition and delivering quality customer service, are likely to suffer more due to the revenue crunch. They are somehow failing to identify key cost-cutting measures and strategies to come out of the downfall. But it is about time that they should change their course. If they are able to achieve a lower cost structure, the industry would be far better of than the banks that are considered as low-cost banks. So if the bank is strong enough in the operational aspects, it can quite well be a market leader even in the falling economy. By concentrating more on the cost part, the bank can focus on being the cost leader and thereby generating more returns for the shareholders, which is the main focus for any economic value-driven process.
Analysis of the risk to shareholders
A bank’s shareholders risk can be measured by the changes in its assets and equity in comparison to its debts. According to Brealey et al. (2007), beta is the measurement of fluctuation of a stock return for a particular period of time. One of the major risks concerned for Samba bank would be foreign exchange risk due to its major project in other countries. Due to a lot of fluctuation in the foreign exchange market and the fluctuations in the interest rates, investors are exposed to a lot of risks since the fluctuations affect their investment directly.
If we look at the individual values of these components for the banking industry in Saudi Arabia, I shall be able to find the origin of the rise in returns on equity. The rise in the value of shares value is due to the banking system adopted by the banks. Therefore the use of assets has been efficient, and I may say that operating efficiency and financial leverage are responsible for this high return. In the case of Samba bank, all three components have been showing steady improvement, and so the values of ROE over time are. Therefore the position of the firm with respect to financial leverage, operating efficiency, and asset utility has improved over time.
Samba bank is performing well in the market. The bank’s capital structure shows great reliance on equity capital, making it a less risky investment for any investor. The bank is performing very well in all aspects as compared to the industrial average; therefore, it is a favorable investment for any potential investor in the year 2007/2008. I recommend to potential investors to purchase stocks of this bank this year. I will advise the investors to invest in this bank because it has favorable results; however, they should be monitoring the performance of this bank since the looming bank crisis. For those shareholders who have already invested in the bank, they should hold their shares and push for implementation of the project, which is favorable to the growth and improvement of the bank value.
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