Chartered Bank Limited Current Performance and Risks - Case Study Example

Running header: Banking and finance Student’s name: Instructor’s name: Subject code: Date of submission: The standard Chartered Bank Limited Introduction This paper presents the analysis of the Standard Chartered bank’s current performance, the risk it faces as well as its future prospects. The paper also looks at the competitive forces as well as opportunities that the bank faces. Finally, the paper gives recommendations on measures and strategies that the bank ought to adopt. It is hoped that their application will help the bank become stronger in future and hence become more profitable. 1a) Analysis of current financial performance The bank registered a decline in its financial performance in 2014 in comparison to 2013. In 2014, the company’s profitability was $2,705,000,000 in comparison to $4,200,000,000 in 2013. This declining performance saw its return on equity fall from 8.97% in 2013 to 5.79% in 2014. The declining performance is also reflected in its returns on assets from 0.62% in 2013 to 0.37% in 2014. The company’s profit margin was 14.36% in 2014 which was a decline from 2013’s 22.37%. The declining performance is also depicted in the bank’s ability to utilize its assets to generate income. The bank’s asset utilization ratio was 2.59% in 2014 compared to 2.78% in 2014. The bank’s net interest margin also declined from 1.65% in 2013 to 1.52% in 2014. This was similar to the decline in cost/income ratio from 77.63% in 2013 to 82.98% in 2014. Arising from the above ratio analysis, it is clear that the company’s current performance has declined. The decline is associated to the increasing competition in the market implying declining market position for the bank. It should also be noted that the company saw a significant increase in costs thus bringing down income levels. Below is an analysis of the bank’s current performance over the years 2013 and 2014. Return on equity = Net income/ Total equity 2014 = ($2,705,000,000/$46,738,000,000)100% =5.79% 2013 = ($4,200,000,000/$46,841,000,000)100%= 8.97% Return on assets = Net income/Total assets 2014 = ($2,705,000,000/$725,914,000,000)100% = 0.37% 2013 = ($4,200,000,000/$674,380,000,000)100% = 0.62% Equity multiplier = Total Assets/ Total equity 2014 = ($725,914,000,000/$46,738,000,000) =15.53 2013= ($674,380,000,000/$46,841,000,000) = 14.40 Profit margin = Net income/Total revenue 2014 =$2,705,000,000/18,834,000,000 = 14.36% 2013= $4,200,000,000/18,777,000,000= 22.37% Asset Utilization ratio Total revenue/total assets 2014 = $18,834,000,000/$725,914,000,000 =2.59% 2013 =$18,777,000,000/$674,380,000,000 =2.78% Net interest margin= (Interest income-Interest expenditure)/Total assets 2014 = $11,003,000,000/$725,914,000,000 = 1.52% 2013 =$11,156,000,000/$674,380,000,000 =1.65% Cost/income ratio (C/I) Non-interest expenditure/Net interest income+ Non interest income) 2014 = $15,629,000,000/$18,834,000,000 =82.98% 2013= $14,577,000,000/18,777,000= 77.63% 1b) The bank’s prospects The bank’s future prospects are greatly affected by the economic performance of the regions it operates. As indicated above, the banks financial performance as far as profitability is concerned greatly declined in 2014 in comparison to 2013. However, this is in line with the performance of the economies within which the bank operates. The bank’s prospect for the future is therefore optimistic given that the global economy is expected to perform even better. The bank also continues to put in place strategies and policies that will enable the bank to recover and perform better in the future. Such strategies include consolidation of its online business, implementation of new cost cutting measures thus enabling it offer more affordable services to its customers and taking advantage of advances in technology to come up with more innovative strategies for the customers thus enabling it to overcome the ever increasing competition. The company also plans to put more emphasis on its middle east, Asia and Africa businesses where growth is expected thus assuring it of a bright future. Thus, despite the fact that the bank’s current financial performance has deteriorated, it is projected to improve in future and the bank is expected to recover as far as its financial performance is concerned. 1c) Risk analysis The bank faces several risks and uncertainties likely to affect its future performance incase mitigating strategies are not put in place. These are listed below; i) Credit risk- This is likelihood of loss to the bank owing to failure of counterparty to meet their obligation for paying the bank as per the agreed terms. The risk stems from lending and other financial commitments by clients and third parties. To mitigate this, the bank considers helping clients manage their financial risk as core to its services. ii) Country cross-border risk-it’s the likelihood of loss arising from inability to obtain payments from clients or third parties owing to actions of foreign governments as to affect conversion and transfer of foreign currency. The risk arises from lending across borders or in foreign currencies so as to facilitate trade and cross-border investments. iii) Market risks-risk of loss of economic value or earnings owing to changing market rates or prices. The risk arises since the bank provides clients access to financial markets involving assumption of moderate market risk. The risk arises from the requirement to hold a large liquid asset buffer of high quality liquid debt securities and translating non-dollar denominated assets, earnings and liabilities. iv) Liquidity risk –the risk of the ban not having sufficient financial resources in the short run for meeting obligations as they are due or if the bank can only access the financial resources at excessive cost. v) Operational risk – this is likelihood of damage of the bank’s franchise leading to income loss or market capitalization being adversely impacted owing to stakeholders having a negative view on the ban and its actions. vi) Pension risk – this is likelihood of loss associated with meeting an actuarially assessed shortfall in the bank’s pension scheme. vii) Capital risk –it’s the risk of loss arising from suboptimal capital allocation or increasing cost of capital. viii) Geo-political events-the risk of geopolitical tensions and conflict in the bank’s markets likely to affect trade flows and client’s ability to pay and cross border capital management. ix) Fraud and other criminal acts- the banking industry faces the risk of fraud, theft and related illegal activities especially with increased criminal sophistication especially as far as cyber-crime is concerned. x) Exchange rates movements- changes in exchange rates affect asset, earnings and liabilities denominated in foreign currencies. Such changes could also impact trade and wealth client’s wealth which could also affect the bank’s performance. 2. Competitive challenges and opportunities faced by Standard chartered bank The bank has its operations in more than seventy countries across the globe’s seven continents. As such, it has a long list of competitors in every region it operates. It is worth noting however that the banks operations are mainly concentrated in the Asian, African as well as the Middle East markets. In these markets, the bank faces severe competition from a few but big international competitors who include the Citi group, HSBC Holdings limited as well as the JP Morgan Chase limited. In the international level, the bank is facing the ever growing competition from the local banks who are increasingly expanding their footprint in the regions they operate. At home, the bank also faces severe competition from its traditional competitors including such banks as Barclays bank among others. It is also worth noting that new emerging challengers are also on the rise hence intensifying the level of competition. Another competitive challenge that the bank faces emerges from the advancement in technology. This means that the industry is ever evolving with innovation bringing on board more competitive products on a daily basis. This means that the bank has to be innovative on a daily basis rest it be by-passed by the competition. For the bank, rivalry among existing banks as well as new entries continues to pose a great competitive challenge. The existing banks whether local or foreign in the markets where the bank operates are competing to increase their market share. However, Standard Chattered has adopted some strategies to counter this. For instance, it acquired Grindlays thus enhancing its market share. However, competitive forces abound and hence the reason why the banks financial performance declined above as indicated above. Thus, the bank has to come up with effective strategy or countering competition and hence remaining relevant in the market. Despite the many competitive forces described above that face the bank, there are also many opportunities that the bank could take advantage of hence becoming even more competitive. For instance, an opportunity exists for the bank to expand its Islamic banking segment. Given that there are more than 1.5 billion Muslims across the globe, the standard chartered bank should aim at expanding into this market and serving at least half of the market. This should increase its marketing value by over 750 billion dollars. This calls for the bank to come up with more innovative sharia compliant products for the market. Even in the bank’s existing markets, such products ought to be introduced. The bank should also take advantage of the current advance in technology to come up with new and more competitive products while consolidating its online business. This should make banking easier and friendlier than before while minimizing the cost of the services it offers to its customers in comparison to its peers. This way, the bank stands to become more competitive than ever before. The company also ought to consolidate its position in the emerging markets by ensuring continued expansion. Opportunity exists in China and India markets which are rapidly growing. The African market is also expected to grow rapidly thus providing the bank with huge trading opportunities as well as opportunities for skills and knowledge transfer. Thus, the bank should take advantage of this wealth creating opportunity in a bid to consolidate its competitive position. Recommendations and the best policy that the bank should pursue As indicated above, the bank’s performance deteriorated during the last financial period. To make the matters worse, competition in the banking industry is ever increasing and hence the needs to put in place sound policies that will enable the bank survive the competition. The bank also ought to take advantage of technology and hence become more innovative in a bid to increase its competitiveness and hence improve its financial performance. It is for this reason that this paper gives recommendations on the best policies that the bank ought to pursue in a bid to remain relevant in the market while assuring the shareholders of better returns in future. In a bid to ensure a bright future, the bank should adopt policies that aim at ensuring differentiation by ensuring that Standard Chartered focus on the different cultures found in the various places it operates. For instance, the bank’s strategy for the Middle East should focus on Islamic banking. The bank also ought to aim at market penetration through increasing its target markets to such places as the Scandinavian countries, Russia as well as the East European countries. The bank’s policies also ought to ensure high customer royalty as well best management of human resources talents. In the short run, it is recommended that the bank’s policy ought to be on acquisition of local banks such as happened to Union bank of Pakistan and the American express. Such acquisitions will enlarge the bank’s service offering base which will in turn increase its client base. The bank also ought to strengthen its SME banking as well as wealth management services segments especially in its emerging markets. This is aimed at making the bank the ideal bank for clients in its markets. The medium term strategy ought to aim at bettering its Muslim banking services while consolidating the bank’s presence in existing markets. The bank also ought to aim at creating new innovative products and services for the markets it operates in. The long-term strategy ought to take advantage of the emerging and growing markets such as Asia, Middle East and Africa. The bank also ought to come up with cost cutting measures probably through increased use of technology. This will in turn ensure that it offers affordable services to its clients thus beating its rivals in terms of service cost. It is hoped that by applying the above recommendations and policies, the bank will be better positioning itself for survival in the increasingly competitive market. This will also ensure that its deteriorating performance starts to improve. Conclusion Arising from the above analysis, it is clear that the bank’s current performance is on the decline. However, its future prospects paint a bright picture. If the bank will put in place sound policies to overcome the many competitive forces that it faces, then it will be able to ensure its survival in the market. This paper has recommended a number of measures and policies that the company ought to adopt in a bid to ensure that it performs better in future while remaining relevant in the market despite the increasing competition. References: Bikker, J&, Bos, B2008, A theoretical and empirical framework for the analysis of profitability competition and efficiency, London, Rutledge. Standard Chartered, 2014, Annual Report 2014. Kumar, S2011, Financial performance analysis in the banking sector, New York, Taylor & Francis. Vives, X2001, Competition in the changing world of banking, Oxford Review of Economic Policy, vol. 17, no. 4, 535-545. Sc.com, 2015, Standard Chartered announces new strategy to create lean, focused and more profitable bank, Retrieved on 4th March 2016, from; https://www.sc.com/en/news-and-media/news/global/2015-11-03-Standard-Chartered- announces-new-strategy.html Read More