Chapter 1 Introduction / Purpose
1.1 Background of the Industry
Every business Endeavour or venture is constantly faced with financial management problems to which the owner or manager should be able to attend to in order to take the business to success especially during the times of crisis that the global communities are facing. Thus, key financial decisions normally confronts the managers in issues and problems that concerns financial investments they usually provide answer to the problems regarding the assets on which the company of firm needs to put money and how a chosen investment should be financed.
With this consideration, we may say that the recent financial tsunami is one of the problems experienced not only by some firms in the United States but also by the global economy including the banks and other business in Hong Kong. Basically, the recent financial tsunami of 2008 in Hong Kong is actually related to the concept classified by the general media as a “credit crunch” or “credit crisis” was started last 2007 of July. The crisis was triggered when most investors loss their confidence in the value of securitized mortgages in the United States and then later it spread out not only in America and Europe but also in Asia. This development created a liquidity crisis that prompted an extensive inoculation of capital into financial markets by the United States Federal Reserve, European Central Bank and Bank of England ( 2007).
For evidence of the emergence of this credit crisis, TED indicator spiked up in July 2007 and remained volatile for a year and again spiked even higher in September 2008 This indicates that the crisis deepened as of September 2008 in which the global stock markets worn-out and go into a period of high volatility, and a significant number of banks, insurance companies and mortgage lenders failed in the following weeks.
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As the nature of financial management becomes more and more complex in today’s business world, finance managers face a wide array of challenges, opportunities and options to enhance the investing and financing activities of the organisation as well as to minimize the inherent risks and circumstances of the financial decisions that will be made. The challenge now for the financial mangers is to explore the options and take advantage of the opportunities while taking caution in managing the business risks partially the credit crunch issue. “Experiences differ and common usage lack precision” (1988) with regard to risk. From this statement, we may say that risk involves both hazards and opportunities to people/organisation who undertake changes and development. People/organisation evaluates result based on their evaluation of the situation based as guided by criteria of gains and losses. Furthermore, risks brought by recent financial tsunami in which there are some groups who may experience losses in exchange to others goals to profit.
With this, this paper will be considering the impact of financial tsunami taken place in 2008 on the performance of the “Bank Industry” in Hong Kong in terms of profitability ratio, liquidity ratio, efficiency ratio and ROCE. Managers of major banks in Hong Kong will be surveyed regarding the impact financial tsunami in 2008 in Hong Kong. Three major banks will be included in this paper such as Hong Kong and Shanghai Banking Corporation (HSBC), Standard Chartered Bank (Hong Kong) and Citibank (Hong Kong).
1.1.1 Hong Kong and Shanghai Banking Corporation (HSBC)
The Hong Kong ad Shanghai Banking Corporation Group was established in 1865 to finance the growing trade between China and Europe, and is one of the largest banking and financial services organisations in the world. Its international network comprises of over 10,000 offices in different countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East, and Africa (‘Who is HSBC?’ 2009). Through an international network linked by advanced technology, including a rapidly growing e-commerce capability, HSBC provides a comprehensive range of financial services, including personal financial services, commercial banking corporate, investment banking and markets, private banking, and other activities (‘Who is HSBC?’ 2009).
This company has been developed successfully to become a true global bank, being the largest bank in Hong Kong and the largest foreign bank in China. It emphasizes the importance of building shareholders’ value, and believes in the values and talents of its own employees, which are employed and spread all over the world. HSBC wishes to stay ahead in a very competitive global financial market, and by maintaining a great brand name, an established customer base, good and loyal employees, tight control over operating costs and constant adjustment of business strategy to cater to customers’ needs, it maintains its success in its leadership position in Hong Kong’s highly competitive banking industry.
1.1.2 Standard Chartered Bank (Hong Kong)[1]
Standard Chartered Bank (Hong Kong) Limited is a licensed bank incorporated in Hong Kong. Basically, the Standard Chartered Bank Building is found in Des Voeux Road, Central, Hong Kong which is named after the bank, even though it’s now part of Hang Lung Group. From company’s website: , the bank is currently one of the SAR’s three note-issuing banks. They employ 30,000 people in over 500 offices in more than 50 countries. The bank is also publicly listed on both the London Stock Exchange and the Stock Exchange of Hong Kong. As stated in the Website of the Standard Chartered Bank (Hong Kong) Limited Hong Kong, “Well-established in growth markets, the Bank combines deep local knowledge with global capability and aims to be the right partner for its customers. Standard Chartered is trusted across its network for its standard of governance and its commitment to making a difference in the communities in which it operates.”
Based on personal experience, the Standard Chartered Bank (Hong Kong) Limited Bank of Hong Kong offers quality professional service to its customers. The employees are moderately friendly and they welcome customers thoroughly. However, the employees themselves are not quite persuasive as they should be, but nonetheless, services are satisfactory in terms of speed of service delivery and customer orientation. But perhaps, a more persuasive and friendly approach can be possible.
1.1.3 Citibank (Hong Kong)
Citibank started their operations in Hong Kong in 1902. Actually, they are the first foreign bank to offer bank services in the said country. Currently, Citibank (Hong Kong) Limited is a licensed bank incorporated in Hong Kong. And since Citibank is considered as one of the world’s largest financial institution with a strong global network in over 100 countries, Citibank International Personal Banking lets people abroad to hold bank accounts in Hong Kong without setting foot in the country.
Compared to other banks, Citibank Hong Kong offers a variety of types of bank, investment products, loans, accounts options, and credit cards to its customers. . In fact Citibank, one of the more common credit card issuers, regularly changes their processes to outflank the competition in quality and buttress their search for better customer service.[2] Thus, a management information system, especially an effectively and efficiently managed one, should be in place within financial companies, as it could, apart from facilitating the basic processes of credit card management, be able to create a customer database, an interface to customers’ management information systems, smart card options and multimedia base ( 2009).
1.2 Key Issue on the bank industry listed in Hong Kong
The financial tsunami of 2008 considerably create significant impact to the not only to the bank businesses in Hong Kong but also to global economy. Basically, the general concept of financial tsunami of 2008 refers to the degree to which the performance of a firm or an industry is affected by the global financial crisis. The financial tsunami of 2008 which directly affect the lenders and other financial institutions can also affect an individual investor who owns a portfolio; a company; an exporter and importer who concentrates on international trade and even a firm that has no direct international activities. Furthermore, financial tsunami of 2008, through their impact on the costs of inputs, outputs, and substitute goods play a significant role in determining the competitive position of companies with no direct international operations relative to foreign firms ( 2000).
In the case of the current financial crisis, businesses should have careful assessment of their business process to avoid downfall. They should have risks management. The cost of indemnity had restricted management’s alternatives in dealing with the hazards faced by the organisation. One of the foremost problems was that insurers rated firms according to business in such a way that a fine run firm that had few losses were required to pay for the claims of poorly run firms within the same industry.
On the other hand, the debt collection, as an integral part of the credit management unit of banks, is a business activity performed to secure payments from the debtor. A credit management unit usually handles these transactions where before, most banks perform this activity by hiring their own debts collection agent. With the advent of the business phenomenon of outsourcing during the early 1990s, whose foremost aim is to cut costs of doing business, a sizeable number of collection agencies have surfaced to provide the banks with the service of debt recovery. Whichever way the banks choose to collect the debts owed to them, problems arise which require the intelligent planning of the credit management unit of the institution. (1998), in his opening sentence in chapter 8 of his book ‘Credit Management’, stated that ‘Effective collections do not just happen. They are the result of planning.’ Every business, not only banks, should have a system for chasing debt payments, and an effective system starts with planning it. The debt collection plan of contemporary credit management units is the place to start if debt collection is to obtain a semblance of organisation. And with respect to the recent financial tsunami, the growing number of nonpayers has made the task of debt collection more difficult than it was in the past. Additionally, the increase in the intensity of competition among banking and other financial institutions to acquire clients has made this concern more severe.
In accordance financial tsunami of 2008, extensive auditing procedures among banks must be practiced. This includes everything from external audits of risk management policies and procedures to internal reviews of quantitative exposure measurement models. In essence, this process involves the evaluation whether or not its risk management process is working properly and efficiently (Culp 2001). This must be done to assess if the company addresses the problems and risks being identified in the first process. Without this step, the banks in Hong Kong would not be able to come up with policies and regulations regarding ASA570, and would not be able to know if their measuring, monitoring and controlling processes are effective enough to suggest improvement of their operation and profit.
From the current stance of global finance, banks needed to create ways to counter the increasing risks and classified it based on categories i.e. credit risks, liquidity and funding risks, market risks, operational risks, reputation risks, insurance risks and pension risks. The processes or steps could be a possible means of providing solutions or answers to the problems or crises being faced by the banks in Hong Kong, and this includes the policies stated in ASA570.
Credit risk-Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from lending, trade finance, treasury and leasing business. It also arises when issues of debt securities are downgraded and the value of bank’s holdings of assets falls.
Liquidity and funding risk- The objective of bank’s liquidity and funding management is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due, and that wholesale market access is coordinated and disciplined.
Market risk- Market risk is the risk that movements in market elements, including foreign exchange rates, commodity prices, interest rates, credit spreads and equity prices, will reduce bank’s income or the value of its portfolios.
Operational risk- Inherent in every business organisation, operational risk is the risk of loss arising from fraud, unauthorized activities, error, omission, inefficiency, systems failure or external events such as litigation risk.
Reputational risk-The safeguarding of bank’s reputation is of paramount importance to its continued prosperity and is the responsibility of every member of staff. Reputational risks can arise from social, ethical or environmental issues, or as a consequence of operational risk events.
Insurance risk- The principal insurance risk faced by banks in Hong Kong is that the cost of claims, along with the cost of acquiring and administering business, may exceed the aggregate amount of premiums received and investment income.
Pension risk- Most banks in Hong Kong operates a number of pension funds throughout the world. The primary risks are that investments deliver a return below that required to provide the projected plan benefits, that interest rates or inflation cause an increase in scheme liabilities, or that scheme members live longer than expected.
Aside from these risks, banks in Hong Kong need to look and consider the following risks in order to continue and develop their business operation and enhance their financial status.
Regulatory and compliance risk- banks in Hong Kong operates globally in which most of the greatest strategic challenge facing by global businesses is this type risk. With regards to this, banks in Hong Kong needs to educate employees, implement a fraud reporting hotline, develop good policies that help to ensure ethical practice and keep corporate counsel on speed dial.
Global financial shocks- Global financial shock is also an issue in banks in Hong Kong like we have today, i.e. Financial Tsunami of 2008. Since most of banks in Hong are considered global business, it is not exempted in this type of risk. Basically, global financial shocks are most like concerned to the inflation and deflation issues of certain countries in which a certain was operating.
Aging consumers and workforce- According to the experts, aging consumers and workforce are really a factor in global businesses. This type of risks is also apparent in banks in Hong Kong. It means, the company needs to reform their global strategies to maintain and enhance their appeal to consumers. Actually, areas such as asset management and insurance are experiencing dramatic shifts in demand as their consumer age. HSBC is facing severe competitive challenges as a result of their aging workforces. To be competitive, banks in Hong Kong need to better understand specific needs of these new consumers.
Emerging markets- In accordance to growth, emerging markets also create great risks. Global companies like most banks in Hong Kong will need to partner/form networks with firms in many markets. There are also currency, regulatory, operational, cultural and language, risks in these countries, especially as firms manage outsourced business and supply chains in these markets.
Industry consolidation/transition- As part of the development in business, banks in Hong Kong would continue to create a key strategic challenge because of the changes in underlying structural trends, GDP growth, such as population growth, restructurings, consolidation and spin-offs, mergers driven by competitive pressure, and need for acquisitions to meet growth targets.
Energy shocks- Shocks in energy prices and access to supplies are challenging not only to the energy sector but also to other bank sectors since it can also trigger economic shocks that could impact their business operation.
Execution of strategic transactions- In accordance to this factor, there is an ultimate risk that transactions undertaken in response to business consolidation may fail to deliver, not because they are poorly envisioned, but because of a failure to meet business challenges.
Cost inflation- The return of high inflation is a major risk.
Radical greening- The banks in Hong Kong should consider this risk since there are only little efforts that the company given in this type of variable. Increasing environmental concerns from the voluntary world of corporate social responsibility – to hard regulatory and economic necessity. Radical greening is a strategic risk, partly driven by the consumer and regulatory responses to climate change, and also by the weather events resulting from climate change.
Consumer demand shifts- The failure to foresee and react to consumer demand shifts driven by demographic shifts, such as rising consumer aging could be a strategic risk when the changes are significant, quick or unexpected.
Basically, the issues and risks considered by banks in Hong Kong is actually reflecting to their ratios such as profitability ratio, liquidity ratio, efficiency ratio and ROCE.
1.3 Rationale of doing the study
Financial reporting is a continuous process that provides management information and financial statements. As part of the reporting procedure especially during the times of crisis, financial ratios are very important. To effectively review interim and annual financial statements, the review committee must understand the current status of bank industry, and the attendant risks. The committee should be satisfied that the key financial systems and the procedures and controls that support them will generate information necessary to manage and properly report on the operations of the bank.
On the other hand, financial issues particularly the financial tsunami of 2008 has a significant influence not only on the financial reporting at most banks in Hong Kong but also to their overall business process. Thus, this study will be discussing the issues and impact of the recent financial tsunami of 2008 to the development of well known banks in Hong Kong in terms of profitability ratio, liquidity ratio, efficiency ratio, and ROCE.
1.4 Significance of the study
This study plays a significant role to the development of bank industry in Hong Kong since more banks are now considering different measures to be more competitive. And in order to counter the impact of financial tsunami of 2008, reporting so very vital. Basically, these banks are now developing creative ways to their overall business process to increase business development. In particular this study will:
1. Promote awareness of investors in financial performance of the Hong Kong listed bank industry since the recent financial tsunami taken place in 2008.
2. Provide alert for management to take proactive action to meet challenges from the recent financial tsunami.
1.5 Research question, diagnosis on the issue and proposition development
This study intends to find adverse impacts on the financial performance of the bank in Hong Kong in terms of profitability ratio, liquidity ratio, efficiency ratio, and ROCE. Specifically, the study intends to answer the following questions:
1. There is no significant difference of profitability ratio of bank industry between pre and post of the recent financial tsunami taken place in 2008.
2. There is no significant difference of liquidity ratio of bank industry between pre and post of the recent financial tsunami taken place in 2008.
3. There is no significant difference of efficiency ratio of bank industry between pre and post of the recent financial tsunami taken place in 2008.
4. There is no significant difference of ROCE of bank industry between pre and post of the recent financial tsunami taken place in 2008.
1.6 Scope of the Study
As seen in the background of the study, the financial tsunami that hit Hong Kong created issues of economic fall down and bankruptcy among businesses around the globe. For this reason the following scope are considered in this research.
1. To overview, assess and verify on whether the bank industry have been facing difficulties of debt collection during the recent financial tsunami taken place in 2008.
2. To analyse, assess and verify on whether there is no significant difference of profitability ratio of bank industry between pre and post of the recent financial tsunami taken place in 2008.
3. To analyse, assess and verify on whether there is no significant difference of liquidity ratio of bank industry between pre and post of the recent financial tsunami taken place in 2008.
4. To analyse, assess and verify on whether there is no significant difference of efficiency ratio of bank industry between pre and post of the recent financial tsunami taken place in 2008.
5. To analyse, assess and verify on whether there is no significant difference of ROCE of bank industry between pre and post of the recent financial tsunami taken place in 2008.
1.7 Aim of the Research
This the paper aimed to achieve the following:
1. Determine the current status of bank businesses in Hong Kong.
2. Compare the past and previous performances of surveyed Hong Kong Banks in terms of profitability ratio, liquidity ratio, efficiency ratio, and ROCE with respect to financial tsunami of 2008.
3. Identify the banks preventive measures imposed by these banks in accordance to recent Financial Tsunami of 2008 and in order to avoid possible bankruptcy.
1.8 Objectives of the Study
With respect to the given background and aims, this study will consider the following objectives:
1. Promoting awareness of investors on risk of financial difficulties of the Hong Kong listed bank industry since the recent financial tsunami taken place in 2008.
2. Provide as an alert for management of these companies and government to take proactive measurement on the matter.
Credit:ivythesis.typepad.com
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