Banking Management in terms of Economic concepts - Research Paper Example

 Management 1. Main Products & general characteristics of the firm a. Background: Total Revenue/Sales and the Location of Its Headquarters The bank was established in the year 1985 after merging together with already three existing banks (Federal Commercial Bank, Emirates commercial Bank and Khaleej Commercial Bank). The main shareholder contributing 59.4% of shares is the Abu Dhabi Government (Government Entity-1.35% and Abu Dhabi Investment Council-58.08%). The bank is a full-service commercial bank that engages in a number of services and products. The bank offers retail banking, investment banking, private banking, commercial banking, and corporate banking. In addition, ADCB also provides wealth management, cash management, corporate finance, interest rate and currency derivatives, Islamic products and foreign exchange. Finally, the bank also offers project and property management and brokerage services. The ADCB headquarter is in UAE (Abu Dhabi) and has employed over 4000 employees from 62 nationalities. ADCB serves over 580, 000 retail customers and about 49,000 corporate and SME (Small-Medium Enterprises) clients in all its 50 local branches in UAE, 3 pay officers and 2 overseas branches in India and 1 branch in Jersey and a representative office in London. As its closing period that ended in 30th September 2014, its revenue base/ assets were rated at 198 billion. ADCB market capitalization was 44 billion at the September ending trading period. In addition, the customer deposits were AED 121,516 million by end of September 2014. The loan deposit ratio increased by 111.83% from 114.05% as at 31 December 2013. The net profit for the first 9 months period of 2014 was AED 3,179 mn, an increase of 16% from the previous trading period. The net profit from equity shareholders was AED 3,028 mn, an increase of 18% from the previous trading period. b. Important products / services that this business sells The important products are securities (bond) and mortgage services. About the bond, ADCB transacts the bond to get revenue. The bank buys and sells the bond in both primary market (debt securities are issued and sold to borrowers to lenders) and in secondary market (ADCB firm buys and sells previously issued debt securities-bond). The ADBC launched the 600 million five-year bond on September priced at 87.5 basis point. Over 1.5 billion investors placed their order just in one day after its launch as compared to initial basis points of 95 bps. On the hand, the ADBC offers mortgage services which is has attractive interest rates. Their mortgage packages are attractive as local experts assist people avoid common pitfalls. Their experts also offer professional consultants to guide people through the whole process. In addition, ADCB offers options between Islamic and Conventional Home Finance. Quite interestingly is the repayment period, (up to 25 years) which is rank as the best in UAE. The people pay less based on their ability. The mortgage amount is up to 80 percent of the property value. The bank also offers options between competitive interest rates and relaxing re-payment. The monthly installments are as low as AED 5,275 with 0% early settlement fees. EMI is based on 3.99% (per AED Million for 25 years tenure). Emi is fixed for the first year only followed by campaign rates. c. Discuss two opportunity costs your firm needs to consider in its business decisions. One of the opportunity cost ADCB faces is either to sale locally or expand its branches overseas. ADCB has to critically determine this opportunity cost for demand of its services in foreign countries such as China, (weak banking sector). Another opportunity cost lies within its line of product and services offered. The business offers a range of products such cash management, foreign exchange, corporate finance and even Islamic products. It has to face the opportunity cost in the choice of which product or service to expand in. The bank was awarded the most institution effective in 2014 cash management. This confirms that it had to forgo other services to pay attention to cash management service. d. Scarcity issue faced by Abu Dhabi Commercial Bank and how do they deal with the issue? The scarcity of security resources is the one of the scarcity issues facing the ADCB besides the bank’s need to comply with the PCI. The issue that would otherwise be straightforward to manage has increasingly become difficult. This is due to the fast speed of ADCB’s is growth rate within the UAE and overseas. This is because of the bank’s introduction of many new services in attempt to keep pace with latest market banking trends in the most secure manner achievable. To solve the scarcity issues, the bank introduced effective control for end points through building on an existing implementation of Symantec Antivirus and the deployment of Symantec Endpoint Protection. In addition to the combination of firewall, intrusion, antivirus protection and application and device control technology endpoints, the Bank also introduced real time threat monitoring and analysis. These strategies have resulted to advanced threat prevention and robust defense against malware for the ADCB desktops, laptops as well as servers through Endpoints application. The Symantec Consultants Services assisted through its Managed Security Services by providing real-time threat monitoring and analysis to reduce the impacts on operations and overall security risk. The installed technology in ADBC premises monitors and alerts both external and internal devices operated by Symantec Operation Center (SOC). 2. Analysis of the firm’s supply and demand: Bonds a. Consumers’ income: The bond is a normal product. The purchase of a bond is determined by the market interest rates and prices. People buy bonds when the income increases and when the market interest rates are high (Choudhry, 2010, p. 67). When the interest is high, the price of the bond is low and hence people buy the bonds with an expectation that the interest rate will fall and hence make profits. Therefore, an increase in income leads to purchase of bonds at higher interest rates as shown. From the diagram, the increase in income has shifted the demand curve of the bond from D1 to D2 as shown. On the hand, the quantity demanded has also increased from q1 to q2 while equilibrium changes from E1 to E2 as shown. This indicates that the bond is a normal good. b. Prices of competing products/services: (Loans/Deposits) Loans/Deposits are substitute/ competing products/services offered by other financial institutions in the market. When the loans/deposits interest rates charged decreases, people would prefer getting loans or depositing cash than bonds. This shifts the demand for bonds inwards as shown in the diagram from q1 to q2 and equilibrium shifting from e1 to e2. c. Number of consumers: The bond market is influence by the income levels and purchased by adults. Higher income level increases the demand for bond as people to invest to increase their wealth. Therefore with increased number of adults with an increasing income levels, the demand for bonds rises (Hubbard and O’Brien, 2009, p. 54). This can be explained similarly as figure 1 scenario. d. Technology: how change in company’s technology affect bond supply curve With an increased technology, the supply of the bond product may decrease based on the fact that people will tend to keep their cash in terms of deposits in the bank and use the ATM cards to access their cash unlike keeping their money in bonds which have higher risks as compared to deposits. Thus the supply of bonds shrinks from q1 to q2 as shown. e. Number of competitors: how entry/exit of companies of the industry affect bond. The competitors to the ADCB are very many due to the fact that UAE banking industry is a strong one as they withstood the economic recession in UAE and have effectively performed since 2009. ADBC faces stiff completion from Abu Dhabi Islamic Bank, Al Hilal Bank, Al Ahli Bank of Kuwait and Al Masraf among many others. The entry these other competitors shifts the demand for ADBC bond to the left and their exit leads increased demand of its bond hence a shift to the right as shown. Entry and exit of competitors shift demand of ADBC bond f. Costs of production: Corporate Internet Banking – Procash cost This is how the corporate internet banking cost is affected in ADCB and the supply curve is affected as follows. The supply curve shrinks inward with the increase in the cost of corporate internet banking from q1 to q2 and the new equilibrium is e2. Set-up Fee AED 400 Monthly Fee (Transaction) AED 200 Monthly Fee (Reporting Only) AED 100 Monthly Fee (For the customers using Procash for WPS only) -AED 50 Additional Vasco Tokens (First 2 Tokens Free) AED 200 per token g. Non-price determinant: supply/demand for bond Taste and preference affects the supply and the demand. A simultaneous positive taste for the bond leads to positive increases in both supply of demand and supply shifting both curves as shown to the right from Q1 to Q2 leaving the price unchanged. 3. Analysis of the Price Elasticity of Demand for one of the products a. Price elasticity of demand (PED) for Bond The PED of the bond is elastic as a mere change in price of the market price leads to a bigger change in the quantity of the demand. b. A diagram showing the price elasticity of bond As seen in the above diagram the demand is elastic. A small change in price leads to a bigger change in the quantity of the bond demanded. When the price of the bond increased from p1 to p2, the quantity demanded decreased by a bigger margin from q1 to q2 and when the price of the bond decreased from p1 to p3, the quantity demanded increased by a bigger margin than the decrease in price from q1 to q3. When the demand is elastic is in this case, a decrease in price leads to a rise in total revenue for the ADCB as more people purchase the bond (Mankiw, 2009, p. 60). Reference Choudhry, M. (2010). An introduction to bond markets. Chichester, West Sussex: Wiley. Federation of UAE Chambers of Commerce and Industry – at http://www.fcciuae.ae/en/ Hubbard, R. Glenn and O’Brien, A. Patrick, (.2009). 2nd Ed. Economics. Pearson Prentice Hall. Mankiw, N. Gregory, (2009). 5th edition. “Principles of Economics.” Southwestern. Zawya, Dow Jones – at http://www.dowjones.com/product-dj-local-languages-middleeast.asp Zawya Middle East- at http://library.hct.ac.ae/screens/wam.html#business Read More