The Co-Operative Bank in the UK Market and the Decision of Expanding in the Market - Research Paper Example

 Introduction Co-operative Bank has been a diversified form of Co-operative Insurance Company which was established in 1971. In its initial stage, the company was named as the CWS Loan and Deposit Department and was operating as a subsidiary of the Co-operative Wholesale Society (The Co-operative Group, n.d.). Later in 1972, the bank developed 32 branches all around the UK and fortunately as the first bank in 40 years, registered its name in the Committee of London Clearing Banks. The next turn came into the history of the bank, during 2002, when its operations were merged with that of the Co-operative Insurance Society with the name Co-operative Financial Services Ltd (Co-operative Investments, n.d.). Presently, the bank has been recorded to be one of the leaders in the UK banking sectors with the profit amounting to £307 million by the end of the fiscal year 2009-2010 (Co-operative, 2010). Presently, the banking sector of the economy is facing a volatile situation which is basically due to the recent economic downturn (Bruce, 2010). It is mainly due to this reason that the bank is deciding to expand in other markets in the international banking industry. To be expanded is a complex process it involves a lot of factors which influence the expansion directly or indirectly. The paper therefore, shall analyse both the external and the internal environment in order to suggest an appropriate market in the global banking industry. External Environment The external environment of any industry or a company depends on numerous factors, such as the interest rates, the FOREX regulations, the credit ratios and the GDP rates, etc. The Co-operative Bank, being a leader in the UK banking industry is also not excluded from the effects of these factors. To understand the current external environment in depth, the PESTLE analysis and the Porter’s Five Forces Model is used in this paper. This shall in turn be useful to understand the opportunities in the external environment. PESTLE Analysis Political Influences Banking sector is definitely one of the important industries of any economy. It is further more considered to be quite sensitive to the political stability. The UK economy, after the recent conclusion of the global economic downturn, is recorded to face instability in its political environment. Some major conflicts arising in the economy, like the coalition between the Conservatives and the Liberal Democrats is based on the issue of budget. The budget, according to the economists’ point of view is certainly going to lead to an imbalance in the financial sector, affecting the banking sector of the economy. For instance, the budget forecast of 2010 is aiming to reduce its government borrowing in turn cutting off the public spending which shall have a direct impact on the banking sector (Lane, 2010). Government Borrowing Forecast Source: (BBC News, 2010). The image presented above is the graphical representation of the government borrowings since 1980 and the future forecast till 2015. Economical Influences From a wider perspective the economical factors that influence the banking industry are the debt ratio, the interest rates, the GDP growth rate, the inflation rates, etc. However, the GDP rate of the economy was recorded to grow with the rate of 0.8% until the third quarter of the current fiscal year as depicted in the image below (Statistics, 2010). GDP Growth of UK Source: (Statistics, 2010). Moreover, as the data states, the inflationary rate in terms of RPI is also at a growing rate of 4.7%, which is again a matter of concern for the economy though excluding the mortgage interest payments. This is due to the growth of CPI inflation by 3.3% (Statistics, 2010). Apart from the inflationary rates and the GDP growth, the economy is also suffering from the lower level of earnings in the current year. Statistically, representing the fact, the earnings of the economy has decreased from the last year but has shown a positive growth of 2.2% in the third quarter compared to 1.7% earnings in first quarter (Statistics, 2010). As represented graphically, Earnings of the Economy 2009-2010 Source: (Statistics, 2010) Furthermore, the interest rates which have a direct impact on the investment and the banking sector, has been recorded to be lower than the previous fiscal year. The figure was in a position of 0.5% in the first quarter of 2010 and depicts that the banking sector of the economy is under severe uncertainty (Barclay’s Corporate, 2010). Interest Rates Source: (Statistics, 2010). As depicted by the graph above the economy has witnessed a steep fall in its interest rates which has its strong impulse on the banking sector. Social Influences Though the social aspect of the economy does not have a direct impact on the banking sector, it sets the economy’s impulse on the political and the economical issues. For instance, the migration rate as calculated states the fact that international long-term immigration is at a stable figure with 580,000 in March 2010 (Statistics, 2010). The data reveal that the economy had a slow rise or rather a steady income generated from the immigration rate that is again a sign of economic instability. Technological Influences In the modern era, the importance of technology is not negotiable even in case of the banking sector. The basic reason is the trend to serve customers online and through ATMs. According to the participants in the industry, the sector is likely to witness a healthy growth in its near future with favourable reforms (Frith, 2010). Environmental Influences Similar to the social aspects, the environmental influences also do not affect the banking industry directly. However, the impact arises in an indirect manner affecting the social environment which in turn affects the finance sector. For Co-operative Bank, the environmental factors gain a significant position as it provides a remarkable consideration to the part of its sustainability (Co-operative Investments, 2010). To be included, the increase in the electricity consumption by 1.1% until 2008 and the decrease in energy production on the contrary, are likely to have its affect on the technology sector with a rise in costs. This in turn shall affect the technology consumption of the industry (Statistics, 2010). Legal Influences Legal factors in the banking industry have a strong influence. The legal dimensions not only suggest the regulatory framework for the operation but also help to control and justify its ethical mission and vision. Legal factors such as taxation, investment regulations, credit finances, labour welfare decision, etc. have a direct impulse on the bank. Notably, the introduced rules in the current year have very strict regulations mentioned for the banking sector in the UK. The economists’ states that, this kind of norms are going to affect the finance industry in whole and that shall make the banking scenario more volatile in the economy (Treanor, 2010). Opportunities and Threats in the Market Considering the external environmental scenario, there are some major opportunities that the economy is rendering to the banking sector, but along with a number of threats too. The opportunity in the current perspective is that the economy has started recovering at a healthy rate. Since the UK economy has been one of the significant markets for the banking industry, with such growth the economists expect it to grow further in its future. However, the present scenario is certainly volatile for a banking institution. It can be clearly understood from the above discussion that the threats to the bank are the high inflationary rates, the strict regulatory reforms, the budget deficits, and many more. In this kind of volatile scenario, the decision to expand into a new market shall certainly be beneficial with considering the present scenario (Statistics, 2010). Internal Analysis Apart form the external environment, the internal environment of an organization also has an immense value in finalizing a marketing strategy. These can be analysed in terms of market coverage, competency, governance and financial outcomes. Market Coverage The bank has a wide coverage in the UK banking industry with an increased profit of 17%. The bank is ranked in the fifth position after its last acquisition i.e. of Somerfield. The bank in its strategic design tends to be highly focused on the ethical part rather being concentric on its price value (Murchie, 2009). Governance The governance of Co-operative bank is presently designed in a manner to justify its ethical issues and its marketing mission and vision as well. The bank is operating in the retail banking sector, and even in the corporate banking sector. Furthermore, it has a widely diversified product line based on these particular sectors, i.e. in retail the bank offers its services to individuals, households and small businesses. Its corporate trading comprises of corporate banking, treasury, and other business services. The marketing units of the bank are, Unity Trust Bank, Britannia, and Smile (Co-operative Bank, 2009). Financial Status For a bank its financial status is undoubtedly its strongest and most influencing sector. The Co-operative bank in this regard poses a customer deposit amounting to £1.4bn till the first quarter of 2010. To state the income, it increased by 36.4% from the last fiscal year. On the contrary, the operating costs are stable and the loss incurring risk is nil pertaining to the data calculated. It is in this order that the company has been already referred to be one of the most sustainable banks in the UK retail banking industry. The fact is again highlighted in the diagram below (Co-operative Bank, 2010). The Co-operative Bank Source: (Co-operative Bank, 2010) Competency The company despite having a strong sustainability figure has a lot of risk factors to influence its competency level. It is the credit risk that stands to the figure of $48,573.8 in 2010; the market risk which was raised due to the change in net interest income; the currency risk due to the recession affect; and the liquidity risks, i.e. the difference between the bank’s net asset and its net liabilities (Co-operative Bank, 2010). Strengths and Weaknesses To sum up, the major strengths of the bank can be mentioned in terms of its high growth and market share. This rewards the bank with stronger bargaining power compared to its competitors in the mutual banking sector. Precisely, its coverage in the retail banking is worth mentioning. But on the other hand, the company is undergoing major weaknesses in terms of credit and liquidity risks that are generally due to the unstable macro-environment (Co-operative Bank, 2010). Corporate Social Responsibility in Cooperative Bank The ethical policies of the bank are formulated after consultation with customers of the bank. They believe that the customers have an ethical concern about how the bank should invest their money. The bank’s concern towards social responsibility is reflected by the fact that they did not indulge in business with 30 organizations whose functioning was not ethical (The Co-operative Financial Services, n.d.). The Cooperative Bank abides by certain ethical policies. Cooperative Bank tries to support Universal Declaration of human rights in their investments. They do not invest in any business that infringes on human rights or businesses that are associated with oppressive regime. They do not invest in businesses that manufacture arms for oppressive regimes or torture equipments. They support businesses that are responsive towards fair trade and labour rights in their supply chain activities and operations in the developing countries. They do not support tobacco manufacturers, currency speculations and inappropriate marketing practices in the developing countries. Businesses that are involved in producing GMO (Genetically Modified Organisms) are not supported by the bank. Cloning, that is not for medical purposes, is also not supported by them. They do not provide support to the organizations that can adversely affect the climate and lead to changes in the global temperature. Rather they help businesses that are environmentally responsible and carry out waste management, recycling and use renewable sources of energy. They provide funds to various social organizations like the credit unions and cooperatives. They do not invest in businesses that indulge in cruelty to animals (Campaign News, n.d.). CSR Strategy at the Bank The Cooperative Bank regularly updates its ethical policies on the basis of customers’ viewpoint. Customers have a right to know that in what kind of business their money is being invested. The customers provide feedback and appreciate the bank’s ethical approach (The Co-operative Bank, n.d.). Some of the CSR strategies of the bank are the following: They aim to provide employment to 3000 people from less privileged communities as Street Games Young Volunteers A strategy known as ‘inspiring young people’ will be implemented They launched a new microfinance scheme in 2000 The Cooperative Pharmacy Weight Management Service was stretched to include 240 branches A social banking unit will be launched in order to integrate banking services for social, charity and environmental sectors (The Co-operative Group, 2009). They offer credit cards which contribute to some social cause for each and every purchase made from the card. An example of such a credit card is the ‘Think Credit Card’ which enables the holders of the card to protect the Indonesian forest. A certain portion of the amount spend on the card goes for the Indonesian Rainforest Project (Jenkins, n.d.). Success Rate of Cooperative Bank in Meeting Social Issues The Co-operative bank’s success in handling ethical issues is demonstrated by the bank’s enormous success. The UK ethical market has grown enormously and subsequently it has impelled the bank to adhere to ethical standards. Unlike other banks where the customers are not aware about where their money is being invested, Co-operative Bank informs their customers about their investment. This policy encourages the customers to choose Cooperative Bank amongst other banks (The Co-operative Bank, n.d.). Overseas Expansion With regards to the problems in the macro-economic environment of the UK and the strengths of the bank in its internal environment, the strategy to expand its operations in the overseas is of great importance. Keeping in mind the global scenario, the proposed market can be the Saudi Arabian market. Hence the influencing attributes in the macro-environment of the targeted market are discussed below: Monetary policy of Saudi Arabia The Saudi-Arabian monetary policy in 2010 is designed with a focus on its exchange rate in terms of dollar-riyal. The policy forecast explains that it is likely to have a flexible capital account changes with a comparative lower interest rates. On the other hand, the inflation rate is on a decreasing mode, i.e. the inflation rate dropped from approximately 12% in 2008 to 10% in the last fiscal (BTI, 2010). Fiscal policy The Saudi Arabian government has increased the government expenditure in spite of decline in oil revenues in 2009. The enormous government spending had created fiscal deficit in the 1980s. The government has increased its spending on projects related to infrastructure. The revenue from oil export has been consistently increasing and it gives a boost to government spending. The tax regime in Saudi Arabia is limited. The population pays ‘Zakat’ instead of income tax. Licensing fees; custom duties and receipts from oil contribute to the government revenue (Encyclopedia of The Nations, n.d.). The banking industry in Saudi Arabia is regulated by SAMA (Saudi Arabia Monetary Fund). The banking industry is strong in Saudi Arabia and non performing assets are only 9%. Saudi Arabia is now allowing foreign banks to operate. These factors and the fiscal policy will facilitate the entry of co-operative bank into Saudi Arabia (Library of Congress – Federal Research Division, 2006). SWOT Analysis Strengths Weaknesses The banking industry of the economy is referred to be the fastest growing in the international perspective Monetary policies are in favour of the sector The lending and credit exposures are on a rise in the commercial banking market (Market Wire, 2010) The overall economic indicators are not favourable It is still at recovery stage The rising deficit is due to the increase in overall expenditure (Susris, 2010) Opportunities Threats The GDP rate is likely to rise at a faster rate The economy is least affected by the recession unlike any other developed economy Banking sector activities such as loans and deposits are increasing (Market Wire, 2010) The inflationary rates are on a rise without a certain fixing point The rising tendency of over expenditure The budget depicts a high increase in the key spending allocations (Susris, 2010) Conclusion & Recommendations The Co-operative Bank in the UK market is facing more challenges than it shall face in the Saudi-Arabian Market. This is due to the fact that the market is comparatively stable and favourable conditions are stronger for the banking sector. Moreover, it is likely that the private banking sector of the economy is at its growth stage and can earn a benefit for the UK Co-operative Bank. For instance, the rise in loan and deposit accounts are a positive sign for the banking sector in order to grow in the near future. However, the inflationary rates and the threat to face a budget deficit are of worthy concern (Market Wire, 2010). Conclusively, keeping in mind the strengths, weaknesses, opportunities and threats of the company in the UK market and the attributes of the Saudi-Arabian market, the decision of expanding in the market shall be prudent. References Barclay’s Corporate, 2010. Interest & Exchange Rate Outlook. Interest Rates. [Online] Available at: http://www.business.barclays.co.uk/BBB/A/Content/Files/Interest_and_Exchange_Rate_Outlook.pdf [Accessed December 14, 2010]. BBC News, 2010. 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