REX-Oliver Wyman
Statement: Our client is a major French bank. One of its subsidiaries, a B2B retail bank, is
facing a profitability problem. In N-1, it recorded EBIT of just 7.5m. Dissatisfied, the client is
considering closing the subsidiary and transferring customers to the parent company. It calls
in Oliver Wyman to assess the consequences of closing the subsidiary.
Clarifying:
• By closing the subsidiary, what is the parent company aiming to achieve in terms of
improved profitability? At the very least, it wants to improve the EBIT of the business
managed by the subsidiary by €500k. To €8m? Yes.
• Do we know what services this bank provides?
I imagine that the bank offers various activities: deposit-taking, lending... are there any
others? No, we'll assume that 2/3 of the subsidiary's sales come from lending and 1/3
from account management fees.
• What are the subsidiary's distribution channels? Physical branches
Plan:
I. Financial impact of the subsidiary's closure on the Group's profitability
a. Cost savings
- Physical branches (APG, building rent or depreciation)
- Salaries
b. Additional costs.
- Social costs (linked to redundancies)
- Loss of earnings due to loss of customers in the transfer.
II. Risks associated with closing the subsidiary
- Impact on customer relations
Question 1:
Candidate: First, I'd like to determine the cost savings that could be achieved by closing the
subsidiary. In my opinion, the main costs of our subsidiary are fixed costs related to physical
branches and personnel. Do you have any information on these two items?
Interviewer: We're going to concentrate on personnel. We have 1000 FTEs today. The
customer wants to lay off 750 FTEs. Their annual salary is €105,000.
Candidate:
Closing the subsidiary would reduce personnel costs by 75% (1000 to 250 FTEs). The payroll
was 105m€; i.e. a cost saving of +79m€.
Question 2:
Candidate:
Now for the additional costs.
- I imagine that these redundancies will have significant social costs. Do we have any
information? Indeed, each redundancy will have a cost of 120k€, which will be amortized
over 3 years. The total cost of redundancies will therefore be 90m€ (750 x 120k€); or
30me/year.
Question 3 :
In addition, I would like to determine the loss of potential customers associated with the
transfer. How many customers do we have? 15,000; the transfer is expected to result in the
loss of 1/3 of our customers. Do we know the average annual revenue per customer? Yes,
it's €9,000. With the closure, we will go from €150m in revenue to €105m, i.e. €45m in MAG.
o Do we have any other costs to consider? No.
According to these estimates, closure could generate a total of €79m in cost savings and
€75m in additional costs, i.e. an additional profit of €4m. (He recognizes that my calculation
is correct; but he had communicated to me 7.5me profit in N-1, - After closure, EBIT is
forecast at 12.5m (7.5+ 4). So from 7.5me profit to 12.5me, an increase of 2/3.
Question 4:
Regarding the risks associated with closing:
Recommendation
- Impact on customer relations: our advisors will be less responsive to customer requests
due to the reduction in staff. Could increase churn rate, upon transfer.
- To improve our client's profitability, I advise him to close his subsidiary in order to generate
5me of additional profit. However, to limit churn, I would gradually close the physical
branches over several years, while developing a digital platform in parallel.
- In the next few weeks, I'd like to schedule a meeting to discuss union negotiations and the
development of online banking.
