Shenzhen Development Bank Case Solution & Answer

Shenzhen Development Bank Case Solution

SDB has increased its actual LLR from 2000 to 2002 as illustrated in the table above. The LLR per loan of SDB is relatively higher than most of the other banks in China meaning the bank keep high loan loss reserves to off-set the potential loses of those loans but its LLR per NPL is lower than other banks meaning the bank does not keep sufficient loss reserves to off-set the loses on its NPL where other banks are better to equip to offset the potential loses on their NPL putting SDB in a Strategic disadvantage where in some cases it would not be able to off-set its losses compromising its ability to extend credit facility to its clients in the future. Exposing SDB to Credit Risk & potentially not being able to invest in a future investment opportunity.

As illustrated in the table above, the key earning measures of SDP in its time trend are its operating income & expenses, return on equity & return on asset. As the ROE & ROA are profitability indicating Ratios, the table shows a decreased in return on assets & return on equity of SDB from 2000 to 2002 as compared to some of the other bank in China.

One of the reasons for its decrease in ROA & ROE could be due to the ineffective operation in the bank ability to provide potential benefit to its shareholders or due to the liquidation of its asset to improve cash flow situation in the bank resulting in a decrease in earning. This decrease effects the ROE adversely.

Affecting the profitability of SBP due to which SBP would compromise its ability to provide its clients with Credit in the future. Also affecting its ability to invest in its future financing activities. It also shows increase in its non-interest income/operating income. One of the reasons for its increased operational income can be attributed to the decrease in the operating expenses from 65.6% in 2001 to 58.3% in 2002.

By lowering its expenses, the bank increased its income. Comparing SDB with some of the other banks, SDB had lower total assets as compared to its peers. SDB market share was also lower then it peers where SDP have only 0.5% of total loans & 0.6% of the total deposits. Putting the bank in a position, where its profitability is less as compared to its peers. Exposing SDP to more risk in the banking sector.

SDP & other banks play a vital role in the economic resource allocation of China. Channeling funds from investors to depositors continuously. By generating the income necessary to cover the cost of operations that the bank incurs with the course of its business. To sustain competitive advantage banks, need to be profitable.

The bank’s financial performance has critical implications for the economic growth of China.  Shareholders are rewarded for their investment if a bank performs well financially. This, in turn, encourages additional investment by the shareholder or investors and encourages economic growth. Whereas poor financial performance by banks can lead to banking failure and have negative repercussions on the economic growth of China. The financial performance of SDB, if compared to some of the other banks, SDB’s ROE & ROA is comparatively lowers then the industrial average whereas others banks in China have higher ROE & ROA………………..

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