The Market of Banking and Progress Efficiently - Essay Example

?International Financial Organisation Table of Contents Introduction 3 Background of HSBC Saudi Arabia Limited 3 SWOT Analysis 4 Strength 4 MarketingTool 5 Customer and Customer Care 6 Control System 6 Weakness 7 Control System 8 Current Issues Faced by the Organisation 9 Opportunity 13 Marketing Tool 15 Threats 16 Current Issues 17 Conclusion 18 References 19 Introduction The study has been prepared for the purpose of operations of an international financial organisation in one of the Middle East nations. For this purpose, Saudi Arabian market has been chosen and the international financial organisation operating in this market, i.e. HSBC Saudi Arabia Limited has been zeroed upon. The study will focus upon SWOT (strengths, weaknesses, opportunities and threats) analysis of HSBC Saudi Arabia Limited in the Saudi Arabian market. This will also include marketing tools used by the organisation, customers of the organisation, issues such as customer care, current issues faced by the organisation and control systems used by the organisation. Background of HSBC Saudi Arabia Limited The financial organisation, HSBC Saudi Arabia Limited was developed through the joint venture of international financial institute HSBC (Hong Kong and Shanghai Banking Corporation Limited) and SABB (Saudi British Bank). The Saudi Arabian Capital Market Authority (CMA), the controller and regulator of the capital market and stock exchange has provided its sanction to SABB and HSBC in order to create the initial full-service autonomous investment bank in the Kingdom of Saudi Arabia that has been certified under the new Capital Market Law of Saudi Arabia (HSBC Saudi Arabia Limited, 2011). SWOT Analysis Strength The financial condition of the economy can be evaluated from the overall economic development and expected growth. For the past few years, the government of Saudi Arabia has planned for the five year plan and invested in social and physical infrastructure for successfully transforming the economy of Saudi Arabia into a modern state with diversified economy (Saudi Arabia Monetary Agency, 2011). The diversified economic condition with government spending in different segments will strengthen the economy and it will be beneficial for the banking sector. The HSBC Saudi Arabia Limited, with the government planning for the economy, can take advantage out of the economic development. The economic progression of Saudi Arabia market has raised the domestic income and has also enhanced the performance of the banking sector (Saudi Arabia Monetary Agency, 2011). Saudi Arabia has an open policy for foreign investment. This policy of the nation will assist in bringing capital in the country through the banking operations. The HSBC Saudi Arabia Limited can attract foreign direct investments (FDIs) through the policies from foreign clients for the Saudi market. The inflow of foreign currency will assist the bank to increase it operations and also benefit from such activities (EDC, 2011). The stock of ‘foreign direct investment’ in Saudi Arabia was US$ 167 billion in 2009 that rose to US$ 204.3 billion in 2010. Within one year, there has been an increase by US$ 37.30 million. This represents the development of the economy in terms of foreign direct investment of the nation. The stock of foreign direct investment from abroad was US$ 11.41 billion in 2009 that rose to US$ 18 billion in 2010. The increase of foreign direct investment enhances the economy. The banking sector will get benefited from such increase in the investments from foreign and home country. This is a positive sign for HSBC Saudi Arabia Limited to operate in such economy where there are possibilities to increase the foreign investment in the future (Index Mundi, 2011). Marketing Tool HSBC Saudi Arabia Limited has used its ‘fund management’ schemes to tap the growing economy market. They have a variety of fund management schemes through which they were able to generate huge capital from the Saudi market. This marketing tool is normally implemented according to the economic and government polices of the country (Trade Arabia, 2011). The government of Saudi Arabia has focused its five year developmental plan towards development of infrastructure and other sectors. Due to this, the asset funds were in demand. HSBC Saudi Arabia Limited was able to develop such funds known as HSBC Amanah Multi Assets Growth Fund (AGP) and HSBC Amanah Saudi Industrial Companies Fund that were accepted by the customers and investors and gained benefit. The bank had won the ‘Fund of Funds’ Award for HSBC Amanah Multi Assets Growth Fund (AGP) and in the ‘Sector Fund’ category, the bank won the award for the HSBC Amanah Saudi Industrial Companies Fund (Trade Arabia, 2011). Customer and Customer Care The bank has been able to deliver superior services to all its national and international clients. It has different segments which offer service to corporate, groups, individuals and other banks. For example, the HSBC Global Asset Management service is offered to clients who are interested to invest in the assets (HSBC Saudi Arabia Limited, 2011). In order to assist the customers, the bank offers online services through call centres and direct walk in bank solutions. There are Customer Relationship Managers who operate in the management of customers with various issues and any kind of problems faced by them. These managers build positive relationship between the bank and customers. Control System For the purpose of control system in Saudi market by HSBC Saudi Arabia Limited, “HSBC through a wholly-owned subsidiary holds 60 per cent of the equity in the new company and SABB in which HSBC has a 40 per cent shareholding, will hold the remaining 40 per cent” (HSBC Saudi Arabia Limited, 2011). This control mechanism provides the management of HSBC Saudi Arabia Limited to operate independently and control the operations of Saudi Arabia. The system has been systematic and there is hierarchy that enhances the control mechanism. Weakness The weakness of the financial banking institutes are related to merchant banking services. The payment system has become one of the weaknesses of the banking industry that forces the banks to go beyond the business practices. HSBC Saudi Arabia Limited also offers merchant banking services and there are possibilities that the bank might face similar kind of situation (Leviti, 2006). In the year 2009, there was slowdown in the economy of Saudi Arabia. The slowdown was due to the financial crisis that was global in nature and it had also affected the economy of Saudi Arabia. This effect was for longer period and it had hit hard the banking sector especially the financial services and products. HSBC Saudi Arabia Limited also has been affected due to the financial recession. There had been reduction in the revenues in 2009. The growth of the bank has been slowed down due to decrease in the net income and this is presented in figure 1 below: Figure 1: Net Income (Saudi British Bank, 2009). The effects have developed difficulties for future operations in the Saudi market. The bank’s strategy did not work and there were decrease in net income. Control System HSBC Saudi Arabia Limited has not been able to control the payment system due to the merchant banking services. The importance of merchant banking dispute is not only related to the control of the payments but it is also related to the costs. The different payment systems possess dissimilar acceptance costs for the merchant. The control of payments and the cost associated with it has not been controlled appropriately. This problem is not only faced by HSBC Saudi Arabia Limited but there are also other international banks facing the similar problem (Leviti, 2006). Current Issues Faced by the Organisation The performance of the market and the funds that are operating in the equity market are unable to render the expected return. There has been volatility in the market due to political instability that caused the funds of the bank to perform in diversified manner from the expected outcome. The petrochemical equity funds are not performing well even though the industry of oil in Saudi Arabia is booming. The trends of the equity opportunity fund are illustrated below in figure 2: Figure 2: Performance (HSBC Saudi Arabia Limited, 2011). The performance of funds has shown negative trend since inception of the funds but the performance depicted positive effect in the fourth quarter of 2010. The performance of these funds will affect the image of other products of the bank. Investors perceive that the management is unable to efficiently manage the funds of these categories and they might also show their inefficiency in other funds. The investment opportunity is lost and the bank looses its customers. The competition in the Saudi market is present not only between the international banks but also with the local banks. In this highly competitive environment, the non-performing funds will affect the performing funds and there are possibilities of switching costs for the fund management. The local banks have two-third of the market share and have greater advantage over the foreign financial institutes. This is represented below in the following figure 3 in terms of ‘market share in advances’ and in figure 4 in terms of ‘market share in deposits’. Figure 3: Market Share in Advance (HSBC, 2010). Figure 4: Market Share in Deposits (HSBC, 2010). With the market share in terms of deposits and advances, the performance of such funds affects the banking performance and consequently affects the customers. This might lead the customers of fund management to switch to local banks and thus the market share of the local banks will get increased. Opportunity The opportunity tends to increase with the increase in the GDP growth rate. Due to the financial crisis in the year 2009, the GDP growth rate did not show potential, but in 2010 there had been increase in the GDP growth rate, thereby creating potential for all sectors especially for the banking sector. This is illustrated below in figure 5 through graphical representation. Figure 5: GDP & GDP Growth rate (HSBC, 2010). It is anticipated that there will be further growth in the GDP which is a positive sign for HSBC Saudi Arabia Limited. This will generate potential market for the bank to expand and grow in this market. Saudi Arabia’s economy is highly driven by international trade and its effects are witnessed in the economy. There are significant foreign direct investment inflows that are within the Middle East region and there lies a huge intraregional opportunity that can be tapped by HSBC Saudi Arabia Limited. The trade flow is represented below in figure 6 and the foreign direct investment is represented below in figure 7: Figure 6: Trade Flows (HSBC, 2010). Figure 7: Foreign Direct Investment (HSBC, 2010). There are increasing trends in the trade flow and foreign direct investment. The trade flow and FDI were lower in 2009 due to financial crisis. But as the economy is recovering, there are more opportunities with the growth of economy. The gap needs to be identified by the bank and then appropriate marketing strategy should be applied to tap the market and gain competitive advantage. The market is highly capitalised and well regulated that will provide scope for the bank to play a fair game in the development phase. Among approximately 26 million people in Saudi Arabia, over 3 million people use credit facility. Therefore, there is large uncovered market to be tapped by HSBC Saudi Arabia Limited (HSBC, 2010). Marketing Tool HSBC Saudi Arabia Limited applies its schemes and options for investment that are to lure the untapped market. The special focus is upon the credit facility to this market. The opportunity is huge and through the credit policy scheme the bank is trying to convert the untapped market into potential customers. The potential customers for the credit facility are higher in Saudi Arabia (HSBC, 2010). Saudi Arabia’s mortgage market has greater potential. The value of mortgage was estimated to be 1.30% of the GDP. This indicates that there are potential for the mortgage market in Saudi Arabia. The HSBC Saudi Arabia Limited applies the mortgage marketing tool to attract more customers towards the policy and schemes of the mortgage facility. The potential for this market will tend to be present for long run as it will be a slow process in Saudi Arabia market (HSBC, 2010). According to the research of HSBC, estimation is made that there are strong capital ratios that will assist in sustaining asset growth of 17% in Saudi Arabia market. They have 80 Amanah branches and 16 conventional branches with other facilities. The bank has established 17 branches and lounges that are fully operated by female employees (HSBC, 2010). In the Saudi Arabian market, banks are core intermediaries because the domestic capital market of Saudi Arabia is in the phase of development. This phase offers opportunity for every bank to lure customers through different marketing strategies. HSBC Saudi Arabia Limited with different marketing strategies such as credit offerings and mortgage facilities are trying to attract more customers of this market (HSBC, 2010). Threats There is huge inflow of funds in the Saudi Arabian market but the private bank’s foreign funds cannot directly invest in the Saudi stock market. After the World Trade Agreement, there has been enactment of policies to the increase FDI, but restrictions still prevail in foreign investment. The restrictions in different forms develop a barrier of capital flow for HSBC Saudi Arabia Limited (Al-Jasser, & Banafe, n.d.). The government of Saudi Arabia has always been encouraging foreign investments in the economy. The policy of the open investment system of the foreign direct investment made the economy grow and due to such initiatives, the government has decided to offer branch banking licences to international banks for operations in the Saudi market. This is a threat to the HSBC Saudi Arabia Limited. International banks such as Deutsche Bank, BNP Paribas and JPMorgan Chase have entered in the market. This increases the level of competition along with the market share in the Saudi economy (Al-Hamidy, n.d.). Current Issues The economy of Saudi Arabia is highly dependent upon the oil prices and its export. There is volatility in this industry. Due to this there might be macroeconomic imbalances in the Saudi Arabian market. This will result in steep decline in the economy and ultimately it will affect the industries especially the banking sectors. HSBC Saudi Arabia Limited will also be affected. There will be problem of liquidity and credit crunch. The bank will face the problem of recovery of their loans and the collateral in several cases will be difficult for the bank to realise (Al-Hamidy, n.d.). The low interest rates have negatively impacted the returns of liquidity during the period of 2009 and 2010. The negative effects of low interest rates have become the recent challenges in terms of liquidity and cash inflow for HSBC Saudi Arabia Limited. The effects might continue in the third quarter of 2011. This decreases the level of performance of the bank even with better marketing strategies (HSBC, 2011). The credit growth has not shown potential in performing as a better marketing tool. In 2009 and 2010, the rate of credit growth was slow that has been affecting the current credit policy that are developed to lure customers. The loan market has been mostly concentrated with the local banks along with the customers’ deposit market. With such market and the credit policy, it will become difficult for HSBC Saudi Arabia Limited to achieve its objectives (HSBC, 2011). Conclusion HSBC Saudi Arabia Limited has been operating in the Saudi market for long time and has gained advantages as well. The entry of new international banks will increase competition for this bank, but they have already developed their market that will aid them to minimise the risk. The bank has more opportunities than threats in order to develop and grow with their strengths. There are greater opportunities for HSBC Saudi Arabia Limited in the Saudi economy as it is booming. The market of banking is highly regulated and controlled that offers the bank to develop and progress efficiently within the framework of the Saudi economy. References Al-Jasser, M & Banafe, A., No Date. Capital Flows and Financial Assets in Emerging Markets: Determinants, Consequences and Challenges for Central Banks. Bank for International Settlements. [Online] Available at: http://www.bis.org/publ/bppdf/bispap44v.pdf [Accessed March 24, 2011]. Al-Hamidy, A., No Date. Banking Sector Issues in Saudi Arabia. Bank for International Settlements. [Online] Available at: http://www.bis.org/publ/bppdf/bispap28v.pdf [Accessed March 24, 2011]. EDC, 2011. Saudi Arabia. Economics. [Online] Available at: http://www.edc.ca/english/docs/gsaudiarabia_e.pdf [Accessed March 23, 2011]. HSBC Saudi Arabia Limited, 2011. About Us. Who We Are. [Online] Available at: http://www.hsbcsaudi.com/About_Us/about_us_en.shtml [Accessed March 24, 2011]. HSBC Saudi Arabia Limited, 2011. Product & Services. Asset Management. [Online] Available at: http://www.hsbcsaudi.com/Prod_Services/Asset_Mgt/asset_mgt_en.shtml [Accessed March 24, 2011]. HSBC Saudi Arabia Limited, 2011. Performance. Fact Sheet. [Online] Available at: http://www.hsbcsaudi.com/Attachments/Fund%20Factsheets/POF.pdf [Accessed March 24, 2011]. HSBC, 2010. HSBC Holdings plc the Saudi British Bank. Investors Relationship. [Online] Available at: http://www.hsbc.com/1/PA_1_1_S5/content/assets/investor_relations/101025_day1_sabb.pdf [Accessed March 24, 2011]. Index Mundi, 2011. Saudi Arabia Economy Profile 2011. Economy Overview. [Online] Available at: http://www.indexmundi.com/saudi_arabia/economy_profile.html [Accessed March 24, 2011]. Leviti, A. J., 2006. The Merchant-Bank Struggle for Control of Payment Systems. Journal of Financial Transformation. [Online] Available at: http://bdp.law.harvard.edu/pdfs/papers/Levitin/Merchant-Bank.pdf [Accessed March 24, 2011]. Saudi Arabia Monetary Agency, 2011. Investment and Trade Opportunities in Saudi Arabia. Saudi Arabia. [Online] Available at: http://www.sama.gov.sa/sites/samaen/News/Pages/News2003100601.aspx [Accessed March 24, 2011]. Saudi British Bank, 2009. Annual Report. Finance. [Online] Available at: http://www.sabb.com/1/PA_1_083Q9FJ08A002FBP5S00000000/content/SABB/en/about_us/attachments/annual_reports/sabb_annual_report_2009_en.pdf [Accessed March 24, 2011]. Trade Arabia, 2011. HSBC Saudi Arabia Won Top Honors. News. [Online] Available at: http://www.tradearabia.com/news/bank_193820.html [Accessed March 24, 2011]. Read More