Caja Espana Essay

985 Words Jun 29th, 2013 4 Pages
The case describes the transfer pricing (“adjustment rate”) system at Caja Espana.

a) Use the adjustment rates in Exhibit 6 to calculate the profit of the Gradefes and Madrid-Barrio de Salamanca branches, according to the procedure described in the profitability analysis section of the case.
INCOME SHEET Amount Rate Financial Acc.
Interest Revenue 270,000
Interest Charged to Treasury on Checking Account 10,000,000 4.01% 401,000
Interest Charged to Treasury on Term Deposits 15,000,000 2.11% 316,500
Interest Charged on Mortgages to Customers 6,000,000 4.06% 243,600
Interest Charged on Credit Lines to Customers 1,000,000 2.64% 26,400
Total Interest Revenue 987,500 270,000
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This geographical difference, lends itself to different market segments for each branch. Madrid-Barrio which is located a more commercially urban location thus explains the high rate of mortgages and credit lines in their balance sheets which totaled 15,000,000 and 10,000,000 respectively. On the other hand, Gradefes Branch is located in a rural area which resulted in a high checking account and term deposits on their balance sheet in comparison to the low mortgages and credit lines the bank has on the balance sheet.
Another aspect of these differences is the number of clients each branch has, with 1621 clients at the Gradefes branch earned 17,000 in fees in comparison with 513 clients at Madrid-Barrio with 54,000 of revenue from fees.

What can you tell from your response to question 1a? Which one is a better measure of value creation for Caja España? Why?

Clearly, by using the adjustment rate method and using the treasury as a bank for the branch, we can have a better measurement of performance and value creation. As the bank’s operations include not just lending money and selling mortgages and providing lines of credit, also opening checking accounts and term deposits. Each of these operations should be rewarded and valued as part of the value creation component. By using the traditional accounting to measure the performance for each branch in terms of interests revenue and interest expenses paid to customer, our

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