Shareholder Value Management in Banks by Leo Schuster (eds.)

By Leo Schuster (eds.)

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The latter reflects the risk aversion of top management, which can be derived from a desired target rating of the financial firm. 8 illustrates the link between a financial firm's target on an SBU-Ievel and the overall return on equity (ROE) target. In order to increase shareholder value the financial firm has to achieve at least a positive equity spread (1) which then can be converted into some type of shareholder value added (2): (1) equity spread = ROE - [ke x MjB] (2) shareholder value added = [ROE - ke x MjB]* total net wealth Steffen Horter 29 Financial Firm's Target RORAC Financial Firm's Target ROE After taxes Shareholder Value Added o Risk Capital • • Net Asset Value Risk-free return on Book Capital Target RORAC SBUn o Average Use of Risk Capital Allocated • RORAC enables a level playing field between SBUs • Internal capital markets accelerate competition between SBUs Fig.

Perdue Farms to demonstrate this concept. This company had become the dominant brand of uncooked chickens on the eastern seaboard of the USA. Perdue had achieved its top position through careful market research to establish what were the quality criteria that influenced the purchase of chickens. 3 above show the market position before and after the research being carried out. They show that Perdue is 23 per cent ahead in the meat-to-bone ratio and 47 per cent ahead on brand image. 26, representing a strongly superior position.

To be successful one has to consider the specific functions and business and regulatory constraints which are related to the financial services industry. ) - can be applied to different types of financial institutions. Given the fact that financial institutions are different, one has to think of an adaptation of the shareholder value concept. This paper tries to give an insight into the state-of-the-art approaches developed for and already applied within a few top financial institutions in Europe.

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