Bank Share Price and Customer Drop Paradox
XAT 2013 · Decision Making · Medium · Business Decision Making
Over the last five years, Bank of Bharat has seen the number of its retail customer accounts drop by over 40 percent. Over the same period, the share price of Bank of Bharat has increased by more than 80 percent. This amazed a few investors, who believe that a bank's share price should drop if its number of customers drops. Which of the following, if true over the last five years, best accounts for the observed movement in the price of Bank of Bharat's equity shares?
- A.
Two years ago Securities and Exchange Board started an investigation on the bank for accounting irregularities, but last year the company was cleared of all charges.
- B.
The bank recently implemented a highly publicized program for free home loans.
- C.
The bank has been switching its customer base from retail customers to commercial customers, which now accounts for over 75 percent of the bank's revenues.
- D.
There have been many new banks, which have entered retail banking business over the last five years.
- E.
The bank is known to be the best paymaster in the industry.
C
Explanation
Switching focus to commercial customers who generate 75% of revenues explains why dropping retail customer count didn't hinder profitability and share price growth.
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