The Branch Expansion Decision
Ushindi Bank is deciding whether to open a branch in a county town. The business case assumes 1,200 new accounts in year 1, growing 20% a year, with average balances of KES 45,000 and a net interest margin of 4.5%. Fit-out and systems cost KES 28m upfront, annual operating cost is KES 14m, and the branch is expected to break even in year 3. The finance team's model uses a 14% discount rate and shows a positive NPV of KES 6.2m over 5 years. The operations director notes that a competitor opened a branch 8km away six months ago and is offering a mobile-led account with no minimum balance. The bank's own digital channel has grown 35% year-on-year, and 60% of the target segment already uses mobile banking. The board must decide within four weeks, and the capital expenditure would use most of the remaining annual branch budget.
1. Critique the business case assumptions and identify the key risks that could invalidate the NPV.
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The NPV of KES 6.2m is thin relative to KES 28m of upfront capital, so the decision turns on the robustness of assumptions:
- Customer acquisition. 1,200 accounts in year 1 in a town with a new competitor 8km away is optimistic. If acquisition is 30% lower, revenue falls proportionally and the NPV likely turns negative. The 20% annual growth compounds the optimism.
- Balance assumptions. KES 45,000 average balance may be high for a mass-market segment that the competitor is targeting with a no-minimum mobile account. Balances, not account numbers, drive revenue.
- Channel substitution. With digital growth at 35% and 60% of the target segment already on mobile, a physical branch may be solving a declining problem. The case should compare a branch against a lower-cost agency, mobile or partnership model.
- Competitive response. The competitor is mobile-led and has a six-month head start; price and convenience competition will compress the 4.5% margin.
- Cost realism. KES 14m annual operating cost may omit staff growth, marketing and technology refresh; fit-out overruns are common.
- Discount rate. 14% may understate the risk of a new-market entry; a risk-adjusted rate or scenario analysis is needed.
- Opportunity cost. Using most of the branch budget forecloses alternative uses with better risk-adjusted returns.
A sensitivity and scenario analysis (base, downside, severe) should be presented before approval.
2. Recommend how the board should structure its decision, including what analysis it should demand and what alternatives it should consider.
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The board should not approve on the current case. It should:
- Demand a revised case with scenario analysis. Present base, downside (e.g. 30% lower acquisition, 20% lower balances) and severe cases, with NPV, payback and break-even volumes for each. State the assumptions explicitly and test the break-even account number.
- Compare channel alternatives. Require a cost-benefit comparison of: (a) a full branch; (b) a lightweight outlet or agency banking model with lower capex; (c) enhanced mobile onboarding with a local agent network; (d) a partnership with an existing retailer. The branch should win on risk-adjusted return, not by default.
- Stage the investment. Approve a pilot - a smaller outlet or a 12-month digital-plus-agent model - with defined success metrics (accounts, balances, cost per acquisition, digital activation) and a gate for further spend.
- Set decision criteria in advance. Minimum NPV under the downside case, payback within an agreed period, and a cap on capital at risk. If the downside case is negative, decline or restage.
- Address competitive and execution risk. Include a competitor response plan and confirm the branch budget impact on other commitments.
- Record the decision. Minute the assumptions, the dissent and the review date so accountability is clear.
Given the thin NPV and channel trends, a staged or alternative model is the more defensible recommendation.