Economic Development of Ireland - Essay Example

Introduction Ireland is an industrial and service based country, with one of the highest GDPs per capita in the European Union (EU). Ireland has the second highest GDP with more than 39,000 per head. The Irish government has planned and established several national economic reform programs to decrease inflation and government spending and to widen foreign investment. Due to Ireland's excellent economic growth for the past five years, the unemployment levels have gone down considerably. The unemployment rate of Ireland for 2006 is a low four percent (4.4%). The 2007 GDP per head (euro) is 39,695. The GDP average growth rate is a steady (five percent) 5.5%. Inflation rate is a low two percent (2.7%). Ireland has chalked up a strong annual growth in Gross National Product and Gross Domestic Product. The National Development Plans are giving the economy a boost. Ireland can be considered as a small, open, trade-dependent economy and is one of the fastest growing economies in the developed world. Its openness is reflected in the international mobility of capital and by encouraging levels of foreign direct investment. With low tax rates, Ireland presents a very attractive economic climate for international and local businesses. In the field of international trade, the UK is the most important exporter to Ireland accounting for thirty-seven percent (37.1%) of all the Irish imports. The second biggest exported is the US at three percent (3.8%). The third exporter is Germany at nine percent (9.2%). Finally, the Netherlands accounts for more than four percent (4.5%.) Ireland exports most of its products to the US and the UK (both around 18%), followed by Belgium (15.2%), Germany, France, the Netherlands and Italy. SITUATIONAL ASSESSMENT BANKING AND FINANCE The Central Bank and Financial Services Authority of Ireland (CBFSAI) consists of two entities. The first entity is the Central Bank, which carries responsibility for the monetary policy functions, financial stability, economic analysis and currency, and payment systems. The second entity is the Irish Financial Services Regulatory Authority, which has the mandate of safeguarding the financial sector and providing consumer protection. The CBFSAI has a supervisory responsibility for over 1000 financial entities in Ireland, of which more than 80 are banks and around 400 are credit unions. The banking sector is a reliable contributor of the country's economic growth. The banking sector contributed six percent (6) to the Irish GNP in 2005 compared to three percent (3%) in 1998. Employment in banking has risen from 29,400 in 1998 to 37,700 in 2005, of which 82% represents retail banking. These retail banks have over a thousand branches and satellite offices. TOP IRISH BANKS The two major Irish banks, AIB Bank and Bank of Ireland, are both publicly listed companies. These companies have generated their capital through the Irish Stock Exchange. In each case, ownership is widely diversified, with over 100,000 shareholders, most of whom are private individuals with relatively small holdings. In the case of AIB Bank, 41 per cent of shareholders own fewer than 1,000 shares each, while in the case of Bank of Ireland this figure is 54 per cent. Taken as a whole, these small bank shareholders own only 1 per cent of the total bank shares. Moreover, the Irish clients normally transact with the bank branches for retail banking services. They continue to be the predominant form of access to banking services. The growth of new suburbs and the emergence of suburban shopping malls has led to the opening of bank branches in or near these centres. The top four banks in Ireland are Allied Irish Bank, Bank of Ireland, the National Irish Bank and Ulster Bank. Allied Irish Banks p.l.c. was formed in 1966 when three banks merged. The three banks had been established in 1825. The AIB's emphasis is on business banking in Britain in the 1970s. In the 1980s, the AIB formed a subsidiary, the FMB, which marked the start of AIB's expansion to the U.S. The AIB is a highly diversified financial services firm, with offices in the Asia Pacific and Central Europe. It has 23,000 employees and over 900 retail bank branches. Approximately ninety percent (90%) of its profits come from commercial banking activities and ten percent (10%) from investment banking. There AIB Group has three divisions. These are the AIB Bank (the bank in Ireland, the U.K., and the Channel Islands), the U.S. division, and AIB Capital Markets. The "U.S." includes FMB and subsidiaries, plus a representative branch of AIB Bank in New York, while Capital Markets includes operations in the U.S., Europe, Malaysia, and Singapore. Out of AIB's $358.5 million in midyear profits, $192 million came from AIB Bank, $94 million from the U.S. division, and $63 million from the capital markets division. However, the strongest growth, (33%) was in capital markets, fueled by 17% growth in noninterest income from funds management, life insurance, and treasury operations. AIB Bank profits grew twenty-three percent (23%,) and U.S. profits by eleven percent (11%). The U.S. would have grown twenty percent (20%) had it not been for the six percent (6%) write-off for the credit card division. The FMB subsidiaries include a credit-card bank, First Omni Bank N.A., in Millsboro, Delaware. Moreover, the Allied Irish Bank (AIB) puts a premium on their human resources. They have provided significant training to bank staff which has led to higher levels of satisfaction, more productive performance and increased retention levels. By developing a competent, motivated and committed workforce the Allied Irish Bank is equipped to deal with future challenges and to implement changes to achieve desired organisational goals. As part of its expansion in high growth areas in Europe, Allied Irish Bank acquired a 49.99% stake in Bulgarian-American Credit Bank (BACB) for 216m in cash in March 2008. The stake in BACB, which provides secured finance to small and medium sized business in Bulgaria, will be bought from majority shareholder the Bulgarian-American Enterprise Fund. Operating income from the year came in at 4.86 billion euros from 4.32 billion euros last time. Pre-tax profit dipped to 2.5 billion euros from 2.6 billion euros before. The group said trading income was affected by negative developments in the global market. The core business of this bank is investment banking. AIB's visibility has increased with its acquisition of the Dauphin Deposit Corporation in the United States. It was AIB's subsidiary, the First Maryland Bank which had acquired the $6 billion-assets Harrisburg, Pa., bank. The Dauphin acquisition has propelled First Maryland Bank into the ranks of the top 50 U.S. banks. The $1.36 billion acquisition has also reinstated AIB as Ireland's largest bank, with total assets of $51.8 billion. Funds under management jumped to $26.6 billion, from $19.2 billion as a result of the acquisition. Both Dauphin and FMB operate in the Mid-Atlantic region, the U.S. market targeted by Allied Irish. The Bank of Ireland is a major bank in the Irish market and a niche player in chosen international segments and markets. The bank is able to use scale efficiently in market leading positions and to use skill effectively in specialist areas. The bank's main strategy reflects this distinction. The core strategy is to maximise returns from their leading position in Ireland by substantially growing their businesses in the UK and by growing a portfolio of niche, skill-based businesses internationally. The company's vision is "To be the number one bank in Ireland with dynamic businesses growing internationally". (www.bankofireland.com) Furthermore, the bank is the leading distribution network in mortgages. Its mortgage business Is well positioned in higher margin non-standard markets, it recorded strong positive growth, it has a solid track record on credit management. Its Business Banking has solid fundamentals. It has 200 business bankers and faces multiple growth opportunities for relationship led provider of consumer financial services. The main strategy decision to focus on fast-growing, higher margin, skill-based market segment distributed through chosen intermediaries. Finally, it has a strong corporate Banking franchise with several multi-national companies as valued clients. The Bank Of Ireland is the preferred Irish banker to 46% of the total multinational corporations operating in Ireland and it also won approximately 63% of inward investment projects by multinational companies. The bank's goal is to achieve its natural market share of the mid-corporate and property sectors. The main focus is to target niche sectors: where skill not scale is required which shows high growth potential. In line with Ireland's other banks, shares in Bank of Ireland have halved over the past 12 months after the global credit crisis compounded worries over an end to the country's decade-long property boom and the resulting slowdown in lending growth. Bank of Ireland has steadily reined in its earnings forecasts this year from a low double-digit percent forecast given in May to the high single in the next quarter. The National Irish Bank is No. 1 in Personal Banking and leads Europe in Internet Banking. It is also No. 1 in mortgage lending as it offers the lowest rate in the market. It is No. 4 in Personal savings. It is No. 3 in Business. It is particularly strong in business banking, treasury and wealth management services. It has a 47 branch retail network with most branches offering a full service retail bank. The bank's priorities are to establish a new corporate structure; assemble the Executive Team by inviting quality external recruits; migration programme to Danske IT platform and develop new products and services based on Danske model. The National Irish Bank prides itself in preserving local autonomy by keeping close to the customer, faster decision making and a unified team covering 59 Branches and 13 business centers. Another 20 million will be invested to open 15 new branches over the next 3 years and to speed up mobile business banking teams. The Ulster Bank has made aggressive marketing attempts to obtain more retail banking customers. The bank has offered cash seeks to lure other banks' clients. Ulster launched its 'Big Switch' campaign, which promises every new customer up to 2,000 if they switch their mortgage and current account business to the bank before the end of next month. Potential customers need not switch both accounts to be able to accept the deal. The bank is offering 1,650 if people switch their mortgage business, another 150 if they also switch their current account and a bonus 200 if they switch both. (Irish Examiner, February 7, 2008). Ulster Bank has introduced the bank switching culture in Ireland. It was the first of the Irish banks to put the Irish Bankers Federation switcher code in place and the first to offer cash incentives to customers who wants to move to new banks. The bank was able to grow its customer base by fifteen percent (15%) based on the results of the switching strategy. The switching culture among Irish banking customers has grown tremendously last year. The rate at which people are switching to new banks is expected to double over the next two years. This switching move is designed to encourage customers to compare the level of value they receive from their existing bank in relation to both their mortgage and current accounts. The Ulster Bank is the second bank for the (SMEs). The Ulster Bank conducts an annual survey of small and medium scale enterprises in Ireland. The survey found that most Irish businesses (approximately 83% of the respondents) believe their own performance will remain strong. However, the bank has adopted a cautious perspective about the general business environment in which they operate. Over third four percent (34%) of the consumer respondents believe the market conditions are worse now than 12 months ago which represents an increase of ten percent 10% since April 2007. In Northern Ireland, the number of companies who believe market conditions are worse has risen from 22% to 32%. Identification of the major strategic issues facing the company There are four strategic issues in the banking sector which has a significant impact on HSBC Ireland. The first one is that the four Irish banks have made inroads in all major areas of personal, corporate, investment and internet banking. HSBC Ireland must choose one area of banking in order to give its Irish bank competitors a strong competitive presence. The second issue is that the four Irish banks are run by Irish executive bankers. HSBC Ireland must get a dependable and executive local talent to run its banking operations. The Irish banking scene is fairly nationalistic The third issue is that HSBC can request for help from other country branches to get new clients since it has a strong investment banking presence. The fourth issue is that the bank will need a huge capital base in order to compete with the four major Irish banks. The competition is quite keen. It has to establish many branches and field offices in order to give a strong market presence. Recommendation to the CEO of HSBC Ireland Hong Kong Shanghai Bank Ireland has to face five issues. First, the bank needs to local bank executives to run its Irish operations. Second, it has to update its technology levels to offer a stronger internet and personal banking services to prime clients. Third, the bank needs to mount an aggressive marketing and promotions campaign to win new customers over. The bank can make use of the switching culture which is prevalent in the banking industry. Fourth, the bank must improve its mortgages, small and medium scale enterprises services and personal banking services. Fifth, the bank must make a distinct contribution to the Irish culture so that it will acquire brand recognition in this close-knit country. Therefore, the bank can invest in a local football club, donate to a university and social organization and participate in national Irish events to increase customer awareness. PORTER'S VALUE CHAIN ANALYSIS The first part is inbound logistics. The bank has to take stock of its array of banking services it offers to the clients. It has to compare the cost efficiencies of its products and services. The second step is operations. The bank needs to check its efficiency and effectiveness in banking operations. The third fact is the outbound logistics which refers to the way it delivers the products and services for the clients. The fourth factor is marketing and sales which the bank needs to focus on. At this point, HSBC Ireland is unknown compared to its London main regional headquarters. Banks perform six broad functions: (1) conducting exchange (clearing and settling claims); (2) funding large-scale enterprises (pooling and dividing resources); (3) transferring purchasing power across time and distance; (4) providing risk management (hedging, diversification, and insurance); (5) monitoring borrower performance (mitigating adverse incentives); and (6) providing information about the relative supply and demand for credit (Jordan, 1997). Banks strengthen the risk-mitigating effect of the debt contract by building a "banker-customer" relationship with their clients. The core of this relationship is confidentiality. By credibly committing to confidentiality, a bank induces reluctant borrowers to reveal private information that would damage them commercially if it were to be released publicly Holbrook's research on time perceptions in a decision context provided the following findings: (1) the value of time is context dependent; (2) consumers prefer to integrate time losses; and (3) consumers are consistently risk-averse when making time- as opposed to money-related decisions. STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS Strengths The main strengths of HSBC Ireland are a strong investment banking division and a strong brand in international banking. A major strength of the Irish banks is their relative efficiency in terms of operations in the main headquarters and the branch structures. Another strength is that the Irish retail banking market is relatively sheltered. The third strength is that after some years, the Irish retail banking market will be integrated within the euro area because of the euro itself, the single market and technology. The fourth strength is that the pricing structures for credit cards in Ireland are different from those applying in other European countries. Annual charges do not automatically apply to credit card holders and when they do, the charges are lower than those of other European banks. Irish consumers who pay off their bills within the interest free period or those who keep a low average debit balance over the year may tend to pay less for their credit card compared to European credit card holders. On the other hand, those in Ireland who use credit cards as a method of borrowing tend to pay more than they would by using authorized overdraft or personal loan facilities. They also tend to pay more than counterparts in other European countries a when they use their credit cards as a method of borrowing. The fifth strength is the high profitability of Irish banks. The top commercial banks were earning an interest margin, on average, over 1990-98 of 4.1. per cent. Non-interest income pushed the total income margin up to 6 per cent creating a return on assets of 1.3 per cent. The sixth strength is that the cost/income ratios for Irish banks also compare very favorably with those of other European countries. Weaknesses The weaknesses of the HSBC Ireland are that it has not found its niche in its operations in Ireland and that it does not have quality local recruits among the existing bank staff. The bank must find executive bankers in the region. Another weakness is its poor marketing of its products and services in Ireland. The HSBC needs to step up its presence all over the country through new branch offices and satellite offices. The Irish retain their wealth in personal savings. A third weakness is that Irish banks are relatively unknown in areas outside Europe and North America, Asia. There is a need for these Irish banks to have a presence in the growing Asian region in order to support Irish multinational companies which have invested in the region. The fourth weakness is that the banks does not have any agency agreement with established Irish companies which can help it generate new customers from the target market. Opportunities Many opportunities are coming to Ireland which will help the Irish economy to grow even better. The upcoming London Olympic Games presents an opportunity for Ireland to prepare for international tourists and businessmen who will visit and hopefully invest in the country. The second opportunity in banking is found in private banking and HNW (high net worth) individual banking. Ireland has a very sustained and strong market leading performance here due to the high levels of strong relationship management, service quality and reputation. The banks need to offer more flexibility regarding product offerings, fast service and loyalty customers. Based on the study done by the CBSFAI, mergers and acquisitions and the emergence of large financial conglomerates are among the major opportunities of the banking industry in Ireland. The main rationale for these opportunities is diversification and growth. Rationalization of operations is the reason for continuing mergers and takeovers in retail banking to achieve more cost-effective operations. Mergers and acquisitions are effective responses to a requirement for cost rationalization because economies of scale and rationalization of branches can eliminate surplus capacity. Mergers happen in culturally, geographically and legally similar regions such as the Benelux region, the Iberian Peninsula, Latin America, Scandinavia and the UK. This pattern shows the absence of cultural and legal obstacles to effective rationalization in cross-border mergers. Rationalization arises from the need to manage resources effectively by having the technical and general management expertise. A perceived requirement to improve management by importing expertise can be the motive for a change of ownership of a bank. Given the corporate structure of publicly listed companies, this merger is seen by institutional investors as the best strategy to change the bank's management culture. Furthermore, mergers and acquisitions help secure qualified bank personnel for the increased international financial integration and competition among banks. Hence, the transfer of technical skills can be a significant factor in international mergers and acquisitions. If it becomes generally accepted that international rationalization of processing and head-office activities is timely and appropriate, the case for cross-border mergers of Irish banks will become stronger. Thus, the banks may still seek out mergers or acquisitions for diversification reasons. THREATS The potential threat to the Irish banking industry is its slowdown in investing in more technology applications and internet architecture for e-commerce banking operations. The Irish banks should develop new programs and policies that will enhance e-business transactions and financial operations. The second threat is that of a potential take-over of Irish local banks and international banks operating in Ireland such as HSBC by the British and American banks. Since Irish banks are profitable, the foreign banks can appreciate the banks more easily. The third threat is the pirating of international bank staff by other regional banks. The banks should offer competitive salary and fringe benefits all the time. The fourth threat is agency arrangements where retailers (bank or non-bank) sell the banking products of other banks, either branding them as their own or branding in a way which highlights the agency arrangement. The agency arrangement enjoys a low cost base for and these have the ability to attract customers through cross-subsidisation. This will force Irish banks to restructure their pricing and to control costs in the branch network in order to remain competitive. The sixth threat is that the increased competition for traditional bank services has led to a declining trend in net interest margins in recent years and a move towards non-interest sources of income. The Irish banks need to discover new areas where they can generate added revenues. Moreover, the increased competition for savings has obliged banks to provide new products which offer higher rates of interest than traditional demand deposits WORKS CITED Gup, Benton. (2003). The Future of Banking. Westport, CT: Quorum Books. O' Sullivan, Orla. "What's Allied Irish Up To." (1997). ABA Banking Journal. Volume: 89. Issue: 11. Page Number: 72+. Holbrook, Morris. (1999). Consumer Value: A Framework for Analysis and Research. London: Routledge. Page Number: 43. Banking and Industry Profile. (2007). Euro Info Centre: London Chamber of Commerce and Industry. Report of the Department of Finance/ Central Bank Working Group on Strategic Issues facing the Irish Banking Sector . (2007). "Bank of Ireland cuts EPS estimate, now 3-5 pct." Reuters. March 31, 2008. "Ulster Bank All-Island survey shows SME confidence for 2008 remains high in Ireland despite changing market conditions. Finfacts Team. January 2, 2008 "Cash up for grabs as Ulster Bank seeks to lure other banks' clients". Irish Examiner. February 7, 2008. "Ulster Bank sees 2% growth" RTE. February 4, 2008. Read More