IsThisRight

Big Blue's Stock May Be Affected by IBM's 'Bank'

The 'financial engeneers (FEs)' talk about financial revenues as if all businesses operate on the same basis ( i.e you borrow money or get deposit, and then lend it out). Then they compare one company to the other. These FEs, without trying to understand any deeper how 'business' is done, do their utmost to be visible in the press by making predictions based on their own observations of past events.

In the case of 'IBM Banks', let's ask a few questions.
- Do they take get their high margins by borrowing and lend it out at a interest rates? From this they get 46% on the money? In my world, this is a corner loan - called loan shark! Since the company has best high-grade customers, I doubt that these customers are dummies. So my deduction is that this not how 'IBM Bank' earns this High money.

- What else does the 'IBM Bank' do as a business that could account for the high margin? OH, they lend money to customers doing mission-critical services... And that part of the business is growing ( like relieving traffic jam, or placing 100's of operating banks in China...). So by financing the customer's expense for these services, the bank earns more.
Yeah, this is good but still does not account for 46% margin.

-What else do they do to be so good? Ah, the 'IBM Banks' are "USED CAR SALESMEN" ( oops used computer salesmen) around the world.
Imagine being IBM Banks as owner of oops 3-4-5 year big and mid-size computers, kept in a pristine corporate computer centers. Due to efficiency or growth, the first user of these computers want to upgrade. Then the 'owner' of the computer has to take back the 'used computer' still in great operating conditions. By reselling the same computer to someone else who is in dire need for that size computer and making a profit. It is like leasing the best Benz, take it back and resell it at high-value! Ah, that part of the used car ( oops used computer) can have a high margin since the profit on the sale when added to the fact that two sales are made (1 sale to the 1st customer for a newer model and a sale to a 2nd buyer).

Ok, now we can understand that a bank is a bank and a 'used car' sales operation( oops IBM Bank is a bank and 'used computer' sales operation). As a seperate financial unit, due to accounting law, these used-computer sales are not reported in brand sales, but are reported as income in the finance unit. Oops, the cost of the used-computer is the trade-in cost which was established 3-4 years ago! In a conservative bank, Interest money was earned on the original equipment and part of that earning in the past 3-4 years was set aside as a risk mitigation ( in case the trade-in value is less than the resell price). But if the used-equipment sales keep rolling forward, the abl keeps making profits.

Now does the fear about the sub-prime sludge the same as the IBM Bank prospects? You tell me. Oh by the way, in an economic slowdown but a lot more companies might consider used equipments rather than buying new, the margins on the used computers go higher!
The trick is to slow down the expenses on new mnfg to match demand... not to slow the bank who has equipment with higher margin for sale!

This is why a high-level GRADE is assigned to the IBM Bank bonds.