Blog 8: CheBanca! Has made a excellent business

We have learnt from our business books that when companies want to choose projects to invest, they can use the analysis tools such as NPV (net present value), IRR (internal rate of return), ARR (Accounting rate of return), and payback figure. NPV can tell us what our cash flow is like in the future, and payback figure can let us know when we can get all our money back, etc. But these figures are just estimate. No one absolutely knows whether our money can get back, or what exactly of the cost of capital is in each year. So that needs us to consider more instead of just looking at the figures. We should know what the business environment is like, what kind of risks we have, what is our costs range, etc.

CheBanca!, a subcompany of Mediobanca (a banking group of Italian), has successfully developed its online business which separately from its parent company. According to The Wall Street Journal, CheBancal! has launched its business in 2008. It makes almost 90% of its business transaction via the Web. And its clients doubled to 400,000 last year.

Why CheBancal! began its business in 2008? There were still credit crunch in 2008. And at that time, bank Lehman Brothers files for bankruptcy protection, and many banks were badly affected. Although CheBancal! is a commercial bank, there was still a high risk for CheBancal! to begin business at that time because people were lost their confidence towards banks. Also, CheBancal! has made pays 2.5% on deposits which are 0.5% higher than the standard accounts at other Italian retail banks. If we use the analysis tools to appraise CheBancal!’s project, we may find it will last a long time to break even because of the bad economy; the ARR of the online business may lower than the traditional banking business; and the NPV of the online business my lower than the traditional one. Then in the end, we may not invest this project.

However, CheBancal!’s business is excellent. People in Mediobanca made manly decision to begin business in 2008. The online transactions have reduced lots of costs, and make them lower costs compare with the traditional banks. This let them have the ability to pay higher deposits interest than other banks. Most of its employees are hired from the retailers such as IKEA, Inditex’s Zara. So it has good salespeople to promote bank’s products. It tries to make everything simple and let customers look at the same computer screen as its employees’ (try to make everything transparent). These indeed attract many customers and make its deposits of €10 billion. Christian Miccoli, the chief executive of CheBanca!, says that he is sure this year the unit will break even.

All in all, when we appraise projects, we can’t just look at analysis figures. We need to analyze the environment risk, and if possible, we would try our best to control our costs within a narrow range.