HSBC: FINANCIAL AND STRATEGIC ANALYSIS
By Colin Grosh
HSBC: Financial and Strategic Analysis
The HSBC Group derived its name from The Hong Kong and Shanghai Banking Corporation Limited, which is its founding member. Founded in 1895, HSBC has grown to be a top tier institution offering financial services to over 200 million clients (KPMG, 2014). The financial institution was established with the aim of financing a growing Sino-European trade. It is currently a top FTSE-100 Company, with the second-largest (£121 billion) market capitalisation in the listings (The Financial Times, 2015). As per Bloomberg data, HSCBC Holdings closed as the top gainer on the 24th of April 2015 in the London stock exchange, recording an increase of 2.86% (Bloomberg.com). HSBC’s strategic objectives are founded on value creation and long-term sustainability (HSBC Annual Report, 2014). This report seeks to explore the organization’s financial and strategic frameworks through application of SWOT and Porter’s Five Forces analysis.
HSBC has a strong international network. This has enabled the organization to report strong growth in emerging markets, especially in Asia. A global reach enables the company to achieve economies of scale. According to Euromonitor (2012), the organization has access to both the leading and the fastest growing global trade corridors. The company also enjoys strong investor confidence. Closing as the top gainer at the London Stock Exchange on The 24th April 2014 best depicts this aspect (Liu & Morris, 2015).
According to Euromonitor (2012), the organization’s strengths are based on its diversified financial products. This maximizes client satisfaction, loyalty as well as sustainable financial performance. This enabled the organization to survive the aftermath of the financial crisis as two-thirds of the company’s first half year profits in 2013 came from Far East Asian markets as its European markets slowly recovered (O’Hara, 2013). The company’s debt reduced, while at the same time recording a good return on average assets (1.7%) as well as providing an attractive return on common shareholder’s equity of 10.9% (Euromonitor International, 2012).
HSBC Holdings has been faced with difficulties in controlling operating expenses in a way that does not affect profit. Since 2009, the company has recorded increases in the efficiency ratio from 52% in 2009 to 59% in 2013 (O’Hara, 2013). A higher efficiency ratio implies high operating costs and lower operating profits, which is negative for business. The Group’s operating expensed increased from $34,395 million to $38,556 million between 2009 and 2013 (Liu and Morris, 2015). This presents a potential hindrance to sustainable growth.
The company’s involvement in the events leading to the global financial crisis of 2009 has hampered the organization and its brands’ repute. Similarly, HSBC’s compliance with regulatory requirements has faltered in recent years. Euromonitor (2012) reports that the organization has been forced to part with large fines as a result. This is evidenced by fines paid totalling to $2.3 billion in 2012 and $1.2 billion in 2013 as a result of non-compliance with money-laundering regulations (Liu and Morris, 2015). This presents a strategic disadvantage to the organization’s operations.
HSBC has steadily increased its operations in emerging markets, especially in the Middle East and Asia-Pacific. The growth experienced there presents an excellent opportunity for HSBC’s business (Euromonitor International, 2012). In recent months, the Chinese government has narrowed its regulatory demands for institutional liquidity. As a result, HSBC may ride on this advantage to expand its retail operations in the Mainland Chinese market. Increasing consumerism in these markets may provide strong growth for the organization’s retail lending products.
The 2008/2009 financial crises have resulted in increasing controls over capital and financial markets in various economies (Euromonitor International, 2012). As a global institution, HSBC has been grossly affected by these demands. These regulations are deemed to increase the cost of doing business especially, in the financial sector. This may present a strategic disadvantage to the HSBC’s quest for growth thanks to its ballooning operational costs. Further to the financial crisis, financial institutions have been forced to reshape their banking architecture (Euromonitor International, 2012). As such, banks have realized the significance of strong capitalization and commercial funding deposits. The resultant effect is increased competition for retail deposits, which may impact HSBC’s operational performance (Euromonitor, 2012).
Porter’s Five Forces Analysis
The Intensity of Rivalry
The level of rivalry in the UK banking industry has hit an all-time high. According to a report released by KPMG (2014), the UK has constituted rules that have made switching easier, thus making the retail banking environment even more competitive. Transfer time has also been reduced from 1 month to seven days.
The Threat of Substitutes
HSBC faces a number of threats in the form of substitutes products from payday lenders such as Wonga. These entrants have provided competitive substitute products at the growing low-end borrowing business, which may be a problem for HSBC’s long-term growth in the segment (KPMG, 2014).
The Threat of Entry
Numerous organizations in the UK are looking to enter the UK banking sector as they seek advantage from the industry’s profits. These organizations are focused on capturing some aspects of the banking business, such as asset financing and payments processing (Euromonitor International, 2012). Companies such as Tesco have shown interest in these aspects of the banking sector, as they seek value addition for their existing services.
Bargaining Power of Buyers
The consumer tends to be a determining factor in the UK banking sector considering the number of competing institutions (Euromonitor International, 2012). This is especially true with regards to the savings and investment products that HSBC provides. As a result, HSBC is constantly seeking to provide consumers with competitive banking products (HSBC, 2015).
Bargaining Power of Suppliers
As far as HSBC is concerned, inputs are not a big component of the company’s cost structure. However, where audiences have shown to have a high supplier power, HSBC has effectively managed to charge a differentiated price based on the different target markets it serves (HSBC, 2015).
Recommendations and Conclusion
HSBC must take full advantage of their strong market capitalization and invest heavily in the emerging markets as well as diversifying into the local markets that are showing growth. To ensure long-term sustainability, the company must ensure strict compliance with financial regulations as well as engage in rigorous partnerships with other organizations to reduce the threat of substitute and increase competitive edge. The company should also engage in further investments in emerging marketplaces in Asia and Africa.
Euromonitor International,. (2012). HSBC Holdings Plc in Consumer Finance (1st ed., pp. 3-31). London: Euromonitor. Retrieved from http://www.euromonitor.com/hsbc-holdings-plc-in-consumer-finance/report
Hsbc.co.uk, (2015). HSBC Personal Banking and Online Banking | HSBC UK. [online] Available at: https://www.hsbc.co.uk/1/2/ [Accessed 25 Apr. 2015].
Kpmg.com, (2014). Rivalry in Retail Banking | KPMG | ZA. [online] Available at: http://www.kpmg.com/za/en/issuesandinsights/articlespublications/financial-services/pages/rivalry-in-retail-banking.aspx [Accessed 25 Apr. 2015].
Liu, A., & Morris, S. (2015). HSBC Surges Most in a Year After Report of Retail Spinoff Plan. Bloomberg.com. Retrieved 27 April 2015, from http://www.bloomberg.com/news/articles/2015-04-27/hsbc-jumps-most-since-11-after-report-of-retail-spinoff-plan
O’Hara, D. (2015). A SWOT Analysis Of HSBC Holdings plc And Standard Chartered PLC | The Motley Fool UK. Fool.co.uk. Retrieved 27 April 2015, from http://www.fool.co.uk/investing/company-comment/2013/11/19/a-swot-analysis-of-hsbc-holdings-plc-and-standard-chartered-plc/
PLC, H. (2015). HSBC:London Stock Quote – HSBC Holdings PLC. [online] Bloomberg. Available at: http://www.bloomberg.com/quote/hsba:ln [Accessed 25 Apr. 2015].
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