Risk Management and Investment - Essay Example

Table of content Executive summary …………………………………………………….. 3 Introduction …………………………………………………………….. 4 Market capitalization, dividends and EPS ……………………………… 5 Revenue and pretax ……………………………………………………. 7 Risk management ……………………………………………………… 8 Return on investment …………………………………………. 9 Mergers and Acquisitions …………………………………….. 9 Customer satisfaction ………………………………………… 10 Cost reduction ………………………………………………… 11 Leadership strategies …………………………………………. 11 Conclusion ……………………………………………………………. 12 Bibliography ………………………………………………………….. 16 Appendix …………………………………………………………….. 18 Executive summary The economic crisis of 2007/2008 has played a major role in the operation Barclays bank, Old Mutual, and Standard bank. It has affected their operations calling for objective strategies to be taken to save the banks. With the reported asset base of about $2.33 trillion in 2010, the Barclays Bank management has taken drastic measures to ensure that the company grows even bigger (Marie 2012, p.12). This is similar to both the Old Mutual and Standard banks. Mergers and acquisition has been some of the strategies used by the banks to increase its influence as a financial institution. For instance, Barclays has been able to acquire assets of the most competitive banks such as the Absa Group Limited in South Africa and bought about 54% of Juniper Bank (Davidoff 2012, p.42). On the other hand, Standard bank acquired Union Bank of Pakistan taking more than 81% of its assets. This strategy is not only aimed at perpetuating return on investment but also increasing the competitive advantage of the bank. Barclays bank has however been through some of the most difficult moments since its inception. In 2011, the bank suffered a loss of about 1.04 billion pounds (Treanor 2012, p. 4). This loss prompted the company to take objective measures aimed at minimizing the cost of operation. Between 2011 to-date, the bank cut more than 6,700 jobs as a way of addressing its challenges. Currently, market capitalization stands at about 54.75 billion. The dividends and earning per share have been dwindling since 2007 (Shankleman 2009, p.78). The management understands the role played by such factors as far as attracting investors and customers is concerned. This explains why the management has maintained its dividends at 6.50p and EPS at 34.50p despite the financial challenges. Risk management factors such as focus on return on investment, customer satisfaction, leadership, and cutting on the cost of operation will be imperative. This will enable the bank realize its objectives and become one of the most performing financial institutions in the world. Introduction The Barclays bank is one of the oldest of all banks that still stands strong. It has among the top 10 most active and performing banks in the world. Founded in 1690, the bank has subsidiaries in about 50 countries worldwide (Werdigier 2007, p.61). The old mutual on the other hand commenced its operations in 1845, making it one of the oldest financial institutions in Africa. With its headquarters in London, the Standard Bank serves more than 70 countries worldwide and millions of customers. On the other hand, Barclays Bank employed thousands of professionals throughout the world to provide services to its more than 48 million customers. The Old Mutual on the other serves slightly more than 14 million customers worldwide. The banks have had mixed performance especially after the economic recession of 2007/2008. The total assets of the Barclays stand at slightly more than US$ 2.33 trillion. As a result, the bank has been listed in the London Stock Exchange. In addition to that, it is a constituent of FTSE 100 index. The bank has gone through difficult financial moments to a point of taking objective measures to cut down the cost of operations. For instance, in 2011, 1,400 employees lost their employment. In 2012, the bank suffered a loss of about 1.04 billion pounds prompting the management to consider further cutting of jobs. This was followed by loss of about 3,700 jobs. Apart from that, the earnings per share have also been on the decrease since 2008. For instance, in 2012, the EPS stood at 34.50p down from 51.24p in 2008. Other affected factors included the dividends. However, to build confidence on its members, the dividends have remained relatively even. For instance, while the earning per share fell in 2012, the dividends were 6.50p compared to 2.50p in 2009. This was however done, as a strategy to build confidence about the bank is potential to grow. The bank needs to do its risk assessment and take necessary precautions to avoid losses, and subsequent loss of customers. Banks performance As indicated before, several factors have played a big role in determining the banks’ performance. The main factor has however been the economic downturn of 2007/2008, which has adversely affected the revenue, EPS, dividends, and profits of the company. Several controversies within the bank have also played a minor role. The following is a breakdown of performance of the Barclays bank since 2008. Appendix 1. The following figure provides summary of the Barclays bank performance Revenue (?m) Pre-tax (?m) EPS P/E PEG EPS Grth. Div Yield 31-Dec-08 21,436.00 5,136.00 51.40p 3.0 n/a -25% 11.50p 7.5% 31-Dec-09 29,954.00 4,585.00 24.10p 11.5 n/a -53% 2.50p 0.9% 31-Dec-10 32,204.00 6,065.00 30.40p 8.6 0.3 +26% 5.50p 2.1% 31-Dec-11 33,033.00 5,879.00 27.70p 6.4 n/a -9% 6.00p 3.4% 31-Dec-12 25,291.00 246.00 34.50p 7.6 0.3 +24% 6.50p 2.5% Source (Barclays bank) Market capitalization, dividends, and EPS of Barclays, Standard Chartered and Old Mutual institutions This is the value of shares that are traded by a given company. It is the indicator of the markets economic performance and its worth compared to other companies (Lerego 2000, p.87). From the market capitalization, individuals are able to make an opinion about a given company. For that reason, this determines whether such individuals will be willing to invest in such a company or not. The Barclays bank has had a strong market capitalization owing to its number of assets and customer base. In September 2009, the market capitalization stood at 37 billion (Airmic 2010, 12). That of the Standard Chartered Bank stood at 33 billion in 2011, while that of Old Mutual was 8,919 million pounds in 2012. In the same month in 2010, the market cap of Barclays was 31.21 billion. In 2011, 2012 and April 5, the market capitalization was 28.61b, 46.67b, and 54.75b respectively. The differences in these have been attributed to the company’s performance. The earning per share and dividends have been the major determinants for the performance of market capitalization. However, this could be disputed when focusing on the case of 2009 and 2010. For instance, though the dividends rose from 2.50p in 2009 to 5.50p in 2010, the market capitalization was lower. The other factor that could be used to explain this phenomenon was the concomitants of the economic downturn. The economic crisis has affected the purchasing power of the customers. This is especially because of the increased lending rates. The unpredictable economy especially in Europe has discouraged many customers from purchasing shares for fear of making losses (Slater 2008, p.87). This on the other hand has affected the operations of the bank adversely. The dividends of Old Mutual were placed at 1.17p and 1.50p in 2012 and 2011 respectively. This demonstrated an increase meant to boost confidence amongst the investors. The dividends of Standard charted bank are also said to have increased by about 10% in 2011. In 2007, the Barclays bank had to borrow about $3.2 billion from the Bank of England to facilitate the payment of debts (Ward 2007, p.43). The operating costs had increased due to high costs of living caused by the onset of economic depression. Still focusing on the market capitalization, dividends and earning per share (EPS), more differences can be observed. In 2011, the EPS reduced from 30.40p to 27.70p. At the same time, the dividend rose from 5.5p to 6.00p. This is a strategy used by the bank management to ensure that the bank remained strong amid challenges faced. However, despite the increased dividends, the market capitalization fell from 31.21b in 2010 to 28.61b in 2011. This was also the time that the bank is reported to have made major losses in decades. A net loss of about 1.04 billion pounds was reported in the same year. This prompted the company to consider reducing the cost of operation. This began by shutting down some of its branches operating in remotest parts of Europe and other parts of the world. These were especially the branches that did not yield much for the company. At the same time, the company was able to cut down the cost of operation by reducing the number of its work force. For instance, about 3,700 employees were rendered redundant in the same period as a strategy to ensure that the company was back on track of performance. The increase in dividend despite the fall in market capitalization and general performance of the company was seen as a strategy to build confidence on the customers. The latter are imperative in determination of the business profits or losses. For instance, as a result of high dividends despite the economic turmoil, the market capitalization rose to 46.67 and 54.75 in 2012 and 2013 respectively. However, this increase could also be attributed to the increased dividends and EPS, which changed the attitudes of the customers. For instance, the increase of dividends to 6.50p in 2012 from 6.00p in 2011 explains the increased market capitalization in 2013. The customers were able to purchase and sell many shares from the company. At the same time, the earning per share rose to 34.50p in 2012 up from 27.70p in 2011. Revenue and pretax of Barclays, Standard Chartered and Old Mutual The profits of Standard Chartered bank increased in 2012. The profit stood at $2.86 billion, which represented an 11% increase compared to the previous year. High revenue in a company is a demonstration of excellent performance. This is imperative since it gives the customers and investors a lot of confidence when investing in such a company. In the case of Barclays, the revenue obtained has been dwindling due to similar factors discussed above. In 2011 for instance, the revenue fell from 33,033 million pounds in 2010 to 25,291 million pounds. This loss is said to be one of the highest in decades. Apart from being attributed to the general rise in cost of operation, other factors have also been at play. For instance, the company has recorded the highest number of complaints from the customers, especially from the United Kingdom. Majority of the customers feel unappreciated by the company due to the services they receive. The negative attitude towards the bank has contributed to the fall in the number of customers and transactions. On the other hand, other controversies such as that of tax evasion in 2009 had a negative effect on the image of the bank. It was said that the bank was involved in some unscrupulous business activities, which were aimed at tax evasion. In 2012 for instance, the bank was forced to pay more than 500 million pounds. This amount was equivalent to the tax evasion accrued for a period. Such and other controversies have tarnished the image of the bank and eroding the confidence and trust of the customers. The bank has therefore in the process of building its image once again to gain acceptance by the customers. Due to such efforts, the bank projects that its revenue is likely to hit about 29,000 million pounds by December of 2013. At the same time, the EPS is likely to increase to 7.00p to appease the customers. In 2011, the losses prompted the company to take drastic measures meant to address the situation. This led among other things closure of subsidiary companies. At the same time, the number of employees had to be reduced to ensure that the bank remain sustainable. This was imperative to save the bank from more losses. The efforts have yielded fruits due to the growth in market capitalization and the dividends. The profit before tax has also been on the decrease especially because of the economic crisis in many parts of Europe and the world. For instance, the pretax stood at 5,879 million pounds in 2011 compared to 246 million pounds in 2012. These falls are attributed to the increased operating cost of the company and decreased number of transactions amongst the customers. Risk management This is the process through which the management identifies and assesses risks with a view of addressing them to enable a company realize its goals (Hopkins 2012, p.98). Focusing on the trend of performances by the Barclays bank, Standard Chartered, and Old Mutual, it is imperative that the management takes objective drastic measures to control the situation. Unless this is done, the companies may cease to become some of the most competitive financial institutions they have been for decades (Carrington 1997, p. 32). With its image in question, the Barclays bank will need to focus on leadership and marketing strategies. The customers need to feel that their money is safe with the bank (Stoneburner 2002, p.76). Their trust need to be won back by the bank through a number of strategies. The bank should also avoid the scandals such as the tax evasion, which have negatively affected the company. For the purpose of this section, all the risk management strategies are aimed at ensuring the bank is out to achieve its benchmark. It must make profits to attract more investors and customers. This is vital for the sustainable growth of the company. The following are the risk management strategies which the management ought to take to ensure that it performance. 1. Focus on return on investment A business assesses certain investments before investing in them through return on investment process (Nederpelt 2012, p.89). The evaluation of such investments is vital to enable the company to avoid making profits. Investment is one of the best ways through which a company is able to make more profits and boost the investor confidence (Alberts 2008, p.54). For that reason, it is important for the Barclays bank, Standard Chartered, and Old Mutual to consider investing its money in certain areas such as the real estate. This would be able to increase Barclays total asset for instance from the current $ 2.33 trillion. This on the other hand will enable the company meet its increased cost of operation such as debts. As indicated before, the bank of England had given a loan of about $3.2 billion to the company. While this is a good thing to enable the bank meet its obligations, it is also an indication of poor performance by the bank. It indicates that the bank is not independent yet. This on the other hand may prompt the investors to walk out of the company or joining its business activities. The bank should therefore focus on investments with the ability to significantly add value to the company. Such investments should be aimed at making the company self-reliant. When this is achieved, the market capitalization, total profits, earning per share and dividends are likely to increase. This will attract more customers and encourage them to purchase shares from the company. 2. Mergers and Acquisition The three financial institutions have been involved in mergers and acquisition. This is a business strategy aimed at eliminating increased competition from the market (Alexander 2005, p.67). It is done by purchasing all or part of the assets of a competitive business. In the past for instance, Barclays bank has been able to acquire the other banks not only to mitigate the increased competition but also to increase its asset base. For instance, the bank acquired the Absa Group limited of South Africa and purchased more than 54% of Juniper Bank in the United States. On the other hand, the Standard Chartered acquired the assets of the Union Bank of Pakistan. This was in 2006 where the bank acquired more than 81% of the assets. These investments are vital in the growth of the bank and increasing its customer base. Mergers and acquisition will enable the company increase its asset value and the number of customers served. The profits of the company are also likely to increase though in the end. The company ought to focus on future on how to counter any economic crisis effects in future. Currently, the company has been a victim of the economic recession of 2007/2008 due to lack of early preparations. 3. Focusing on customer satisfaction The three financial institutions should focus on customer satisfaction. This imperative strategy is aimed at building customers’ trust. As indicted before, some of the negative effects the Barclays bank has suffered have been attributed to the negative attitudes of the customers towards the bank. This is especially because of various controversies the bank has been alleged to have been involved in. customers have the ability to determine the profits and losses of any given institution. Customer satisfaction determines both customer retention and attraction. In 2011 for instance, it is indicted that the bank witnessed more than 11,000 complaints from customers. They were unhappy with the way the bank dealt with the issue of payment protection insurance. Other clients complained that their problems were not addressed adequately by the bank. Unless this trend changes, the bank is on the verge of making losses and losing more customers. Communication is an imperative tool that connects the customers with the bank. Customers are looking for financial institutions that are able to provide instant feedback. For that to be achieved, several issues have to be dealt with. Firstly, the bank ought to focus on direct communication with the customers. This is especially though emails. Dealing with the customers directly enables the bank to understand the needs of customers and address them instantly. It also enables the customers have a positive view about the bank. This is likely to increase the number of loyal customers within this institution as well as attracting new ones. Communication on the other hand will enable the management to pursue the customer-centered services. At times, the banks focus much on how they can make profits while not necessarily looking at how the customers may be affected in the process. For instance, the increased lending rates in 2008-2009 discouraged many customers from taking loans. The aim of increasing such interest rates was to cushion such banks against making losses. However, because of the increased interest rates, customers could not take loans from banks. On the other hand, the bank was also reducing the dividends of its shareholders and the earning per share. While these strategies are aimed at saving the company in bad economic times, they may plunge a company to more losses. For instance, the increased dividends and earning per share does not necessarily have to affect the company negatively. It is actually a strategy meant to increase activities within the bank. This was witnessed in 2011, where despite the losses suffered by the company, the high dividends and EPS assisted the company to increase its market capitalization and profits. This is an imperative strategy, which the company should aim to replicate in future for more development. For instance, it is indicated that there is a relationship between the increased ESP and increased transactions. This is a psychological strategy creating confidence and trust on the customers. They are not afraid to invest in the bank’s shares despite the fact that the bank is making losses. 4. Focus on cutting operating cost The economic crisis has made it difficult for most institutions to operate normally. This is especially due to the increased cost of operations. When this happens, the profit of such a financial institution is affected. Focusing on the bank’s performance, it is obvious that certain measures ought to be taken to minimize the operation cost. The focus will be the need for automation of services to reduce the number of employees. In 2011 for instance, the bank has been able to cut down more than 6,700 jobs as a way of increasing the sales volume and profits. This has been able to ensure that that bank is back on track. The profits increased in 2012 and projects are that by December 2013, the bank will have significant improvements. However, laying off employees may send a negative picture to other employees as well as customers. While the company may be doing it to reduce cost of operation, other people may interpret it a sign of poor performance within the bank. This may create tension especially amongst the employees. To avoid this, the company could use another strategy to reduce the cost of operation. For instance, outsourcing is one of the current strategies employed by many institutions. It is the process through which employees are obtained from oversees. In Europe for instance, the cost of employment is higher compared to finding it elsewhere. For instance, China is known to have a high number of qualified and experienced work forces. Apart from that, the cost of labor from these employees is significantly lower compared to obtaining it from other areas especially the developed nations. Barclays bank should therefore embark on fetching such employees to work in most of its branches in many parts of the world. 5. Focus on leadership As indicted above, the bank has been criticized for a number of unscrupulous activities, which the management should seek to address. Leadership offers direction and maintains the discipline within an organization. Leaders should be in the forefront in enabling employees to achieve the goals and objectives of the company. However, as it stands, it seems as of some of the leaders have been colluding to perform certain degrading business activities. For instance, the bank has been involved in tax evasion, which is a crime that is punishable by law. The bank has had to pay fines going to millions of dollars. This is especially in 2012 when the company had to pay more than $500 million as fines due to tax evasion. The leaders must have been aware of this owing to the fact that they have been following the financial status of the company. This move by the company to defraud the taxman could be attributed to the fact that the company was in a fixed position. It had just suffered one of its major losses in the previous year. Evading tax was therefore a way of ensuring that the company continued to operate and pay some of its debts. The bank should therefore focus on how to build its reputation once again in order to perform well in the market. All the controversies that the bank has been through ought to be explained by its management. The increase in dividends and EPS alone is not enough to address the current issues. Unless the leaders publicly denounce such ill activities within the institution, the bank will be on the verge of losing credibility. Its loyal customers may be forced to move in financial institutions that they are able to trust. This will make the company continue making losses and discourage investors. In conclusion, the Barclays, Old mutual and Standard chartered banks have been some of the most performing financial institutions in the world. They have several branches operating in several parts of the world with a view of making more profits. The companies have been through one of its difficult moments due to the effects of economic downturn. The 2007/2008 economic depression did not spare the banks operation. As the cost of operation rose, the companies sought other mechanism to mitigate such effects. This was meant to ensure that the companies could be able to perform sustainably. One of the greatest reductions in the number of workers followed the need to cut down on operating cost. In total for instance, over 6,700 employees of Barclays have lost their jobs since 2011. This was the year that the company reported the greatest loss, prompting the bank of England to intervene. The bank has posted mixed performance in terms of market capitalization, dividends, and earning per share. Currently, the market capitalization has been able to hit its highest point and stands at 54.75 million. This is however after a number of strategies were taken by the bank. For instance, despite the dismal performance by the bank, the bank dividends and EPS remained high in 2011 and 2012 at 6.00p and 6.50p respectively. This is a strategy used by the company for the purpose of attracting more customers and building the investor confidence. As a result, the bank has realized profits for the first time since 20111. However, the risk of making losses and losing customers is far from over. With the bank suffering from a number of controversies, it means that the management must work hard. Various strategies meant to ensure the bank is back in profit making should be taken in consideration. For instance, there is need to ensure customer satisfaction. Improving the services and making them customer centered will enable the bank to make more profits and attract more customers. Secondly, the bank should focus on its leadership skills. With the reputation of the company in question, it will be imperative that the management takes drastic measures to assure its customers. Firstly, the management should condemn all the unscrupulous activities within the bank. This includes the tax evasion incidences that the company has been known for. All the perpetrators of such incidences need to be punished to discourage them from repeating such behaviors. To cut down the cost of operation within the bank, it will be imperative to take certain strategies such as outsourcing and use of technology. Getting employees from other countries have been perceived as one of the ways to reduce cost of operation. Bibliography Alberts, Christopher; Audrey Dorofee, Lisa Marino 2008. Mission Diagnostic Protocol, Version 1.0: A Risk-Based Approach for Assessing the Potential for Success. Software Engineering Institute. Retrieved 2008-05-26. Alexander, Carol and Sheedy, Elizabeth 2005. 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"The Pursuit of Courage, Judgment and Luck" (PDF). Defense AT&L (Defense Acquisition University): 28–30. Archived from the original on 2008-04-08. Retrieved 6/04/2013 Appendix 1 summary of Barclay’s market performance Revenue (?m) Pre-tax (?m) EPS P/E PEG EPS Grth. Div. Yield 31-Dec-08 21,436.00 5,136.00 51.40p 3.0 n/a -25% 11.50p 7.5% 31-Dec-09 29,954.00 4,585.00 24.10p 11.5 n/a -53% 2.50p 0.9% 31-Dec-10 32,204.00 6,065.00 30.40p 8.6 0.3 +26% 5.50p 2.1% 31-Dec-11 33,033.00 5,879.00 27.70p 6.4 n/a -9% 6.00p 3.4% 31-Dec-12 25,291.00 246.00 34.50p 7.6 0.3 +24% 6.50p 2.5% Read More