Critical Analysis of the UK: HSBC Bank - Case Study Example

Produce a critical analysis of the UK (HSBC Bank) Table of contents Introduction 3 2. The banking industry of UK in the context of the international economy - HSBC 4 3. Overview of the political economic UK, especially from the FDI perspective 9 4. UK - The role of the trade unions and employer associations in regulating employment relations 12 5. Conclusion 15 References 16 Bibliography 17 1. Introduction The performance of industries worldwide is usually difficult to be precisely estimated. The continuous turbulences in the global market set obstacles towards the long-term growth of industries of different characteristics. Such problem seems to exist in the case of the UK banking industry. As in all countries worldwide, in UK also banks have a critical role in the country’s economic and social life (National Audit Office 2009). Currently, the performance of UK banks can be characterized as satisfactory, a fact that is highly related to the initiatives developed in UK from 2009 onwards, including the report of Lord Turner, chairman of FSA (BBC News 2009). Current paper focuses on the examination of the current status and the challenges of the UK banking industry. Reference is made to a specific organization, the HSBC bank. As revealed through its financial results, despite the global market pressures, in 2011 the firm managed to improve its performance, compared to 2010, in all regions globally, apart from Europe (Figure 1 below). More specifically, in 2011, the performance of HSBC reached the 1.7USDbn, while in 2010 the performance of the organization reached the 4.4USDbn; the 61% decrease in the firm’s performance in 2011 needs to be explored as of its reasons and its effects on the firm’s image in the global market. Figure 1 – HSBC, worldwide performance for 2010-2011 (Source: HSBC Financial Results 2011, p.5) On the other hand, the political economy of UK, which is standardized, and the rules on industrial relations, as applied in the particular country, do no seem to be related to the limitation of profitability of HSBC in UK, as revealed through the issues discussed below. 2. The banking industry of UK in the context of the international economy - HSBC The banking industry in UK has introduced two key priorities for managing the global financial pressures: the effective control of costs and the elimination of failures in regard to internal processes (Harris 2010). The above priorities could possibly help banks in UK to secure their market position, which seems to be threatened if taking into consideration the graph in Figure 2 below, where the net income of banks in G-7 countries from 1981 up to 1987 is presented. Figure 2 – Average net income of banks in the G-7 countries (Source: Scholtens 2000, p.2) The above diagram shows a clear trend for continuous limitation of banks of G-7 countries from 1989 onwards; this fact can lead to concerns as for the potentials of banks, including HSBC, to stabilize their performance. One of the key characteristics of the UK banking industry seems to be its diversification. In a report published in 2011 by the International Monetary Fund, emphasis is given on the differences of business models used by major UK banks. According to the graph in Figure 3, each bank in UK focuses on different financial sectors; HSBC seems to rely heavily on international retail, Investment banking and Wholesale, while its involvement in the insurance sector is limited (Figure 3). Figure 3 – Different business models of major UK banks (Source: IMF 2011, p.9) The Bank of England ensures the stability of banking industry in UK (Davies et al. 2010). It should be noted that through the decades the consolidation of banks in UK has been extensively used for standardizing and enhancing the performance of the industry’s major competitors. This trend is made clear in Figure 4, below. Figure 4 – Consolidation of banks in Britain from 1960 up to 2010 (Source: Richardson et al. 2010, p.323) Through the graph in Figure 4 it is made clear that from 1960 up today, the changes in the structure of UK banking industry have been significant. In fact, during the above period a significant reduction in the number of the industry’s competitors has taken place, a trend that can lead to concerns for the industry’s future. Through the above diagram, the historical development of HSBC within the UK market is made clear. According to the diagram, HSBC, a bank first established in Hong Kong in 1865, has entered the UK market in 1992; it was then that Midland joined HSBC (HSBC, 2012, corporate website, UK timeline). For increasing the competitiveness of the organization and avoid confusing Midland’s customers in regard to the identity of the new bank, Midland ‘was renamed to HSBC’ (HSBC, 2012, corporate website, UK timeline); the above initiative took place in 1992, changing the UK banking industry structure. The new firm, HSBC, would have many prospects for growth in the context of the UK banking sector, which is highly competitive but also highly performing UK industry, as revealed through the comparison between the performance of the UK and USA banking industries (in Figure 5 below). According to the graph in Figure 5, below, the performance of UK banks is significantly higher compared to that of the USA banks; the prospects for UK banks to achieve a further growth is increased, compared to the USA banks, which do not seem to have such potentials. Figure 5 – UK v USA banks in terms of their size (Source: Richardson et al. 2010, p.325) In terms of its exposure to credit risks, the UK banking industry seems to be quite powerful. More specifically: the credit of UK banks ‘is equally distributed between local and international funds’ (Bank of England, Financial Stability Report 2011, Figure 6 below). This means that UK banks are equally exposed to the risks of the UK and the international market. From this point of view, the stability of UK banks would be set in risk in case of turbulences in the global or the local market. Indeed, in the ‘Systemic Risk Survey of Bank of England’ (Bank of England Financial Stability Report 2011, p.17) it is revealed that the key threat for the UK banking industry would be a recession, either at the level of the international market or the UK market (Bank of England Financial Stability Report 2011, p.17). At this point, the review of the performance of UK’s political economy is considered as necessary, in order to identify, as possible, the prospects of the country’s banking sector. Figure 6 – Exposure of UK banks to credit risks (Source: Bank of England, Financial Stability Report 2011, p.17) In January 2010, S&P announced that the banking industry of UK ‘is no more classified among the most stable and low risk banking systems globally’ (Reuters 2010), a fact that leads to important concerns for the industry’s stability in the long term. It is assumed that all UK banks, including HSBC, will be asked to introduce specific strategies for increasing their efficiency and credibility. As a member of the UK banking system, HSBC also faces difficulties in stabilizing its performance. Figure 7 – Financial results of HSBC for 2011, compared to 2010 (Source: HSBC, Financial Results 2011, p.7) At this point it should be noted that in 2011 the profits of the firm were slightly higher compared to 2010; however, at the same time, the firm’s expenses were also increased; in other words, the company’s performance has remained stable in 2011, compared to 2010; (HSBC, Financial Results 2011, p.7, Figure 7). Indeed, the firm’s revenues in 2011, in the first line of the above diagram, are absolutely the same with its revenues in 2010, i.e. USD68.3bn. 3. Overview of the political economic UK, especially from the FDI perspective The UK economy can be characterized as stable. Despite the lack of continuous growth, the performance of this economy is satisfactory, as revealed through the figures presented below. A report published by the House of Commons in 2012 reveals the perspectives of the UK economy for 2012 and 2013 (Figure 8). Through the table in Figure 6, it is clear that for 2012 strong pressures are expected against the UK economy. For 2013 however, the chances for the economy’s recovery are significant; in fact, the average GDP growth in 2013 is estimated to reach the 1.6, which is highly increased compared to 2012, where a GDP growth of just 0.6 is expected. Figure 8 – Forecasts for the UK economy for 2012 and 2013 (Source: HM Treasury 2012, p.3) The important prospects of UK economy are also made clear if referring to a recent report of House of Commons. More specifically, in March 2012 the House of Commons published a report in regard to the UK Foreign Direct Investment; emphasis is given on the country’s FDI level for the year 2010, while forecasts for the FDI of 2011 are also presented. According to the above report, for the year 2010, the performance of UK economy in terms of FDI can be characterized as satisfactory, reaching the $52 billion of inflows (House of Commons, Foreign Direct Investment 2012). However, the above figure is rather disappointing if compared to the FDI of USA, which reached, in 2010, the $228 billion (House of Commons, Foreign Direct Investment 2012). In terms of its flows to third countries, the UK economy can be also characterized as strong; the UK FDI internationally is presented in Figure 9 below. It is clear that the turbulences in the global market could not severely threaten the UK economy, even if downturns periodically appear in its industries; the UK economy is based on FDI in many countries worldwide, in countries with valuable resources, such as Russia, South Africa, Brazil and Mexico, a fact that secures its position in the global market (Figure 9). Figure 9 – FDI from UK to countries internationally (Source: DEFRA, Joint Nature Conservation Committee 2008, p.5) According to Farnsworth & Irving (2012) the UK economy has an important advantage compared to other economies worldwide: its high flexibility. At the same time, the particular economy is aligned with modern trends on economic structure and decision-making, while its major rivals, such as Germany, avoid such initiatives (Farnsworth & Irving 2012). This means that the growth of banks in UK would be easier compared to other countries; however, the USA banks could possibly threaten the performance of UK banks (Balling et al. 2001). For HSBC also, the current status of UK economy is encouraging, indicating the chances for the organization’s further growth; indeed, it seems that in 2013 the firm will be able to increase its profits, as assumed from the data presented through the Figure 9 above. Such assumptions can be made if reviewing the performance of HSBC up today. Indeed, according to the firm’s financial statements, Figure 10, the profit of the organization for 2011 was £3,111 m, significantly low, compared to 2010 and 2009, during which the firm’s performance was standardized at about £4,011 m and £4,014 accordingly. Figure 10 – Performance of HSBC from 2009-2011 (Source: HSBC, corporate website, financial statements) Reviewing the firm’s current performance in terms of achievement of its strategic goals also reveals the prospects for HSBC, as a member of the UK banking system. According to the organization’s Financial Results Report for 2011, in 2011 the firm’s progress in regard to the management of cost and the promotion of organizational growth has been significant (Figure 11 below). The diagram below shows the priorities of the organization in terms of its strategic planning: management of capital, control of costs and growth (Figure 11); specific achievements are mentioned for indicating the progress of the organization in achieving its targets. Figure 11 – Progress of HSBC, for 2011, in regard to its strategic goals (Source: HSBC Financial Results 2011, p.17) 4. UK - The role of the trade unions and employer associations in regulating employment relations In the context of the British industrial relations, the conflicts between employers and employees are considered as a necessary means for the achievement of agreement in regard to the terms of employment relations (Clark 2002). Still, the potentials of unions to fight for the rights of their members using collective action seem to be limited. The Taff Vale case in 1901, where ‘a trade union was held liable after a strike’ (Clark 2002, p.96) is usually regarded as the most indicative example of the above trend. Moreover, Gospel & Palmer (1993) refer to the use in UK of independent institutions to regulate employment relations in particular industries. It is explained that in the above cases, trade unions and employer associations were considered as non having the right to negotiate for their members’ rights (Gospel & Palmer 1993). On the other hand Singh (2011) focuses on the following fact:’ in UK ‘there are two different systems of trade unionism: one formal and one informal’ (Singh 2011, p.51); the former ‘is based on the rules set by the Agency of the State’ (Singh 2011, p.51), while the latter is based on the common practices of trade unions and employers associations (Singh 2011). It is explained that the former is more difficult to be ignored by the State (Singh 2011); however, when having to deal with informal practices, of either a trade union or of an employer association, the State is not obliged to conform to the suggestions made. From another point of view, Gennard & Judge (2005) note that the limitation of the power of trade unions and employer associations to regulate employment relations is possibly related to the significant reduction of labour conflicts and negotiations the last two decades (Gennard & Judge 2005). It is implied, through the views presented above, that, in UK the potentials of unions to take initiatives for the protection of their members’ rights have been limited. For HSBC the specific fact can be characterized as positive, since it could be guaranteed that organizational operations will not be interrupted or cancelled because of trade unions’ plans. Moreover, HSBC has established an integrate framework for ensuring the promotion of interests of its employees (HSBC, Corporate website, Careers). For this reason, the potential failures of trade unions in UK to intervene in employment disputes would not affect employment relations in HSBC. The HRM practices developed by HSBC, as an international company, had played a key role in the firm’s growth globally. The review of these practices is necessary in order to check whether the performance of employees in HSBC would be negatively affected by trade unions policies in UK. According to ‘B.Hine, former head of HR in HSBC’ (Armstrong and Baron 2002, p.175), HSBC has traditionally focused on fair rewarding as a means for keeping employees motivated. In fact, a particular scheme has been introduced, named as ‘Let’s Reward Success’ (Armstrong and Baron 2002, p.175). It is implied that employees of the organization who would thrive in their position would be rewarded fairly for their contribution in the organization’s success. Another practice of the organization for supporting its employees in their daily tasks is the following one: employees are given training according to their position in the organizational hierarchy and the demands of their role; for example, ‘the senior managers of the firm in India are trained in the firm’s training centre in London’ (Budhwar and Bhatnagar 2009, p.122). According to Jackson (2002) the practice of the organization to send its employees for training to training centers locate abroad can be explained as follows: the firm aims that its employees become aware of cultural differences, so that they are able to handle the requests of customers of different cultural backgrounds (Jackson 2002, p.71). Price (2011) notes that the HRM practices of organizations are aligned with the organizational structure, otherwise they cannot support the organizational growth. In HSBC such issue appears; the firm operates globally, in countries with different cultural frameworks; so, it is necessary for the firm’s employees to be able to communicate with customers of different cultural characteristics. At the same time, HSBC has introduced a new, innovative, form of banking services globally; its employees need to be aware of this system of banking so that they can promote organizational culture in the firm’s branches internationally (McKenna and Beech 2008, p.139). A similar issue is promoted in the study of Shermon (2004). The above researcher notes that the HRM practices of each firm denote its culture and its vision (Shermon 2004). HSBC is a multinational bank that has alternated the standards of banking services globally. Its HRM practices reflect the need of the firm for continuous growth and innovation. Under these terms, the potentials of rules related to a country’s industrial relations to affect the relationship between the organization and its employees would be limited. 5. Conclusion Traditionally, the level at which employees’ rights are secured is depended on the potentials of employees to join a trade union. Moreover, in countries that face severe financial pressures, problems and delays are likely to appear in various sectors, including industrial relations. In UK, no such case seems to exist. The country’s economy, as proved through the figures presented above, has achieved a continuous growth. Also, the performance of the banking industry, as analysed in section 2 above, is significant, a fact that has also benefited all industry’s firm, including HSBC. Thus, in UK, the power of trade unions to promote the rights of their members should be significant, and higher than the relevant power of the employees associations. The standardization of the industry’s performance would be depended on many factors: the recognition of the trade union’s right to have increased power in order to regulate the employment relations in the particular industry would be a key factor for securing the industry’s position in the international market. As for HSBC, the organization’s chances for growth are significant, as explained in sections 2 & 3 of this study. However, in terms of employment relations the firm’s strategies would be reviewed, if they promote the interests of employees or not. References Armstrong, M., and Baron, A. (2002) Strategic HRM: The Key to Improved Business Performance. London: CIPD Publishing. Balling, M., Hochreiter, E., & Hennessy, E. (2001) Adapting to financial globalisation. London: Routledge. Bank of England (2011) Financial Stability Report. Section 2: Credit Risks to the banking system. June 2011, pp.17-28. 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