TRADITIONAL APPRAISAL METHODS IN THE U.K BANKING

Traditional appraisal methods in the U.K Banking Industry

Table of content

INTRODUCTION3

Background4

The Research6

The Banking & Finance industry7

CHAPTER 2: LITERATURE REVIEW8

The changing competitive context9

METHODOLOGY15

RESULT AND DISCUSSION15

Investment appraisal16

Introduction16

The Practice19

CHAPTER 5: CONCLUSION23

Recommendation23

REFERENCES28

Traditional appraisal methods in the U.K Banking Industry

Introduction

The pressure due to increasing domestic and foreign competition that emerged after the 1960s stimulated a radical transformation in the British banking system. The progressive lowering of technological and institutional barriers that for decades sheltered the cartel formed by depository institutions from competition induced a revision of their strategic plans (Channon, 1986 and Llewellyn, 1985). Banks implemented and developed information and communication technologies (ICTs) to enhance their processing capacity, expand the range of services and be able to capture a larger share of customers.

This represented a turning point for the organization of retail banking as the technology in place evolved from being a predominantly back-office device to be used directly by customers (Bàtiz-Lazo and Wood, 2000 and Consoli, 2005). Contrary to expectations, however, the falling costs associated with these technological advances combined with a changing regulatory framework produced the erosion of incumbent banks' dominant position to the advantage of new entrants. The evidence presented later in the paper indicates that this growing variety in the ecology of agents is mirrored by an increasing specialization in both the supply and the demand of retail banking services.

It is argued that this cannot be ascribed simply to the adoption of new communication technologies but that it involves an evolutionary process driven by the growth of technological knowledge underpinning the division of labour, the development of consumption capabilities and the implementation of a new regulatory framework.

Background

Finding a reliable method of investment appraisal is not only a matter of concern for managers of a company. It is also increasingly important to investors and shareholders. As a result, the search for consistent method is always a crucial point in project management. Since many years practitioners and academicians have been crafting various methods of measuring the profitability of a project. Of the most widely used and acclaimed tools, those based on the time value of money, called the discounted cash flow (DCF), techniques are widely used. Under this group, the net present value (NPV) and the internal rate of return (IRR) are commonly known (Akalu, 2001).

Recently, however, some companies are becoming doubtful about the capability of these methods to correctly gauge their project profitability. This gives a green light for researchers to reassess the various issues around the problems of the standard methods of investment appraisal (Beenhakker, 1975; Damodaran, 2000). As these methods are highly confined with financial data, they are unable to capture the other side of information for project management decision. Furthermore, the scope of application of these methods is limited to certain types of projects.

For instance, the DCF method is condemned for its inadequacy to appraise soft projects such as ICT1 and R&D, which leads the management to select projects on intuition, experience and rule of thumb methods ...