Shenzhen Development Bank Harvard Case Solution & Analysis

Shenzhen Development Bank Case Solution

Introduction

Shenzhen development bank is the 15th largest commercial bank established in 1987 operating in the southern province of Guangdong, China. It is the first publicly listed bank on Shenzhen stock exchange with 225 branches nationwide. Engaged in commercial & retailing banking business competing in Chinese banking industry with other banks in the region. Facing challenges, the lack of structure in the banking sector & various other political issues in the country.

In 2002 SDB announced its selling its 18% stake to New bridge founded in 1994 by Texas Pacific group & Blum Capital. For which New bridge forms a transitional committee of 8 members to manage the operation of SDB during the transition period. After New bridge, potential investment in SDB failed in 2003 announced to dissolve the transitional committee which send shock waves through the Chinese banking industry. As China in one of the biggest emerging Economies in the world.

The banking sector in China has shown enormous growth with Average annual GDP growth Rate of 8.1%. The Chinese banks as compared to Asian banks have CAGR of 14.9% where the Asian banks CAGR is 9.6%. Furthermore, total loans & deposits have grown 13.6% & 16.4% per annum. Banks are the primary source of finance to most of the companies in China. The quick growth of the Chinese economy owned its success to the exploding consumer credit market in which mortgage Loan amounted to almost 80% of the CCM in China from 1997 to 2002 where the retail banking sector is driven by growth in disposal personal income in 1990 had a CAGR 129%.

Asset Quality

BankNPL/
Loans
BoCom16.7%
CMB6.0%
Huaxia6.0%
Minsheng3.4%
SPDB4.4%
Average7.3%
SDB11.6%

As Shenzhen development, Bank's has more non-performing loans then most of the domestic banks of China in 2002 as illustrated above in the table. In 2002 the government reported 24% NPL of the Chinese banking system, which was 50% more than double.

The main reason for this tremendous increase was, lending to a non-qualified borrower with poor creditworthiness. Currently, SDB is suffering from higher NPL Ratios resulting in the increase of credit risk & also compromising the banks' ability to supply credit to its client in the future. In 2008 due to large write- off & making special provisions, the total non-performing loan of the bank dropped from 11.1 billion Yuan to about 1.9 billion Yuan decreasing its NPL ratio from 4.3 % to less than 1%. This initiative would change the legacy of having huge NPL ratios.

Shenzhen Development Bank Case Solution

BankEquity/
Loans
Equity/
Assets
LLR/
NPL
LLR/
Loans
BoCom2.2%2.0%44.5%7.4%
CMB8.1%3.7%55.0%3.3%
Huaxia4.1%2.1%56.0%3.3%
Minsheng5.4%2.9%56.8%1.9%
SPDB4.8%3.0%64.0%2.8%
Average4.9%2.7%55.3%3.8%
SDB5.1%2.6%33.2%3.9%
Actual LLRs (US$ MM)(2000)       305(2001)    306(2002)    391

As the Loan Loss Reserve (LLR) is the reserve that a bank creates to off-set its losses on its non-performing loans. By minimizing the NPL ratios bank can decrease the provision its takes to off-set those loses in the form of LLR. As having very, High LLR means that a bank has a lot of Fund tied-up which it cannot use for its business growth & future investments..........................

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