END TERM PROJECT End Term Project Comparative Analysis of the Global Operations of HSBC and DEUTSCHE BANK Submitted to: Prof. C P Joshi Submitted by: Siddhant Haralalka PGDM – IB (II) Roll no. - 17 K. J. Somaiya Institute of Management Studies and Research Page 1 END TERM PROJECT Table of Contents The Global Economy ..............................................................................Error! Bookmark not defined.3 DEUTSCHE BANK Introduction ...................................................................................................................................6 Credit Rating...................................................................................................................................8 Sturcture ........................................................................................................................................9 Strategy .......................................................................................... Error! Bookmark not defined.12 Financial performance...................................................................... Error! Bookmark not defined.13 HSBC Bank Introduction .................................................................................... Error! Bookmark not defined.15 Strategy .......................................................................................................................................13 Emerging Markets and oppurtunities .............................................................................................20 Credit Rating.................................................................................... Error! Bookmark not defined.27 SWOT.............................................................................................. Error! Bookmark not defined.28 Financial Performance............................................................................................................................30 References...............................................................................................................................................31 K. J. Somaiya Institute of Management Studies and Research Page 2 END TERM PROJECT The Global Economy The global economy is currently experiencing its steepest decline in post-war history and is expected to suffer its first net decline since World War II in the current year, after having expanded by 3.5 % in 2008. The global economy may start to stabilize by year-end 2009 before returning to moderate growth in 2010. The United States economy is the driver of the global contraction. After slipping into recession in early 2008, U.S. economic output appears set to contract by as much as 3 % in the course of the year, notwithstanding an economic stimulus package worth almost U.S.$ 800 billion and despite the Fed‟s zero-interest-rate policy. Only in 2010 is it likely to return to a growth trajectory, albeit much below its potential. Emerging markets have been unable to decouple themselves from the United States economy‟s strong downturn. Growth in Asia will probably decline to below 4 % in 2009, less than half the rate of 2007. Latin America will likely stagnate and Eastern Europe may even shrink slightly in the current year. The Eurozone economies have followed the U.S. into recession. A noticeable improvement is unlikely before early 2010. Germany, with its pronounced dependence on exports, is hit particularly hard by the slump in global demand. We expect real Gross Domestic Product in Germany to shrink by 3.5 %, despite supportive factors including lower oil and commodity prices, the ECB‟s relaxation of monetary policy and the government‟s extensive economic stimulus packages. The German economy may see a slight recovery in 2010, with GDP growth of around 1 %. Economic output in the Eurozone as a whole has experienced a decline in 2009 of more or less the same magnitude as Germany‟s. While some member states of the Eurozone are less dependent on foreign demand than Germany, corrections in the real estate markets of countries such as Spain, Ireland and the United Kingdom will likely weigh on the GDP growth of those nations. Driven by oil and commodities prices, inflation reached multi- year highs in industrial countries during 2008. As the recession set in commodities prices declined steeply, substantially alleviating inflation pressures. In the U.S., consumer prices have already stagnated in year-on- year terms in January 2009 and fell by close to 1 % in 2009 on average. Core inflation, however, which excludes fuel and food prices, is likely to come in at around 1.5 %. K. J. Somaiya Institute of Management Studies and Research Page 3 END TERM PROJECT Inflation also temporarily turned negative in Germany in 2009. Additional risks for the global economy could result from a heightening of geopolitical tensions, political instability, potential terrorist activities or regional outbreaks of armed conflict. A further deepening or substantial exacerbation of the financial crisis, particularly when combined with a failure of government intervention to control the impact, could result in significant disruptions in the financial sector, lead to the collapse of financial institutions, and cause the global economy to slide into a long-lasting economic depression. K. J. Somaiya Institute of Management Studies and Research Page 4 END TERM PROJECT The Global Branding Index K. J. Somaiya Institute of Management Studies and Research Page 5 END TERM PROJECT Deutsche bank Deutsche Bank is a leading global investment bank with a strong and profitable private client‟s franchise. Its businesses are mutually reinforcing. A leader in Germany and Europe, the bank is continuously growing in North America, Asia and key emerging markets. With 77,053 employees and about 2,000 branches in 72 countries (as of Dec. 31, 2009), Deutsche Bank offers unparalleled financial services throughout the world. Private & Business Clients Private & Business Clients provides private individuals and small to medium-sized businesses with a full range of traditional banking products, including c urrent accounts, deposits and loans, investment management products and business banking services. Global Banking comprises Corporate Finance and Global Transaction Banking. Corporate Finance is comprised of M&A Advisory, Equity Capital Markets, Leveraged Debt Capital Markets, Commercial Real Estate, Asset Finance & Leasing and corporate lending services. Global Transaction Banking delivers commercial banking products and services for corporate clients and financial institutions. Business units include Cash Management, Trade finance and Trust & Securities Services Mission We compete to be the leading global provider of financial solutions, creating lasting value for our clients, our shareholders, our people and the communities in which we operate. K. J. Somaiya Institute of Management Studies and Research Page 6 END TERM PROJECT Brand Deutsche is clear: we are here to perform – in business and beyond. We do this with a unique mix of passion and precision. This measured approach gives us the confidence to enable agile minds to look beyond the obvious, gaining advantage for everyone we work with. Personality We are: passionate precise confident agile minded Values The principles that guide our behaviour to deliver our brand: performance trust teamwork innovation client focus K. J. Somaiya Institute of Management Studies and Research Page 7 END TERM PROJECT Credit Ratings Deutsche Bank is rated by the leading independent rating agencies. We have favorable ratings as shown below. Ratings of Deutsche Bank Short term rating Long term rating Outlook Individual rating Moody's Investors Service P-1 Aa3 stable C+ Standard & Poor's A-1 A+ stable n.a. Fitch Ratings F1+ AA- negative B/C Rationale The ratings on Deutsche Bank AG are supported by its strong franchise in its global capital markets businesses, good performance in global transaction banking, a stable management team, and consistent strategy. These strong points are partly offset by relatively small and declining contributions to pretax income from the bank's private clients and asset management division, high dependence on wholesale funding, and vulnerability to the volatile cycles of the capital markets in the securities trading and underwriting business lines. Deutsche Bank, one of the world's largest financial institutions with €1.5 trillion in assets at year- end 2009, maintains one of the largest trading books in the global industry. It suffered substantial mark-to-market losses from the collapse of financial markets in the second half of 2008, at the onset of the recession. This left room for better results in 2009. In its Corporate Banking & Securities (CB&S) division--the group's main profit generator--write-downs dropped to €925 million in 2009, versus €7.5 billion in 2008. Part of the 2009 decline was due to the bank's reclassification of €38 billion of trading and available- for-sale assets to loans in accordance with International Account Standard (IAS) 39. This creation of a "legacy portfolio" allowed the bank to avoid even higher mark-to- market losses and to reduce volatility of results. Net income for 2009 was €5.0 billion, versus a loss of €3.9 billion in 2008. A robust rebound in full- year earnings in CB&S led the way. Nonetheless, weaker CB&S returns drove a decline in pretax profitability in the fourth quarter compared with that for the first nine months. The trading environment was less favorable at the end of 2009: bid-ask spreads narrowed, volatility remained lower, and customer business flows dropped. The bank's recognition of €554 million in deferred K. J. Somaiya Institute of Management Studies and Research Page 8 END TERM PROJECT tax assets in the U.S. helped offset the impact. Full- year results for 2009 included €1 billion in gains related to Deutsche Bank's minority stake in Deutsche Postbank AG (A-/Positive/A-2). The bank's credit loss provisions totaled €2.6 billion in 2009, about 1% of loans. Half were for legacy assets. Deutsche Bank continues to show good performance in credit underwriting. The group's Basel II Tier 1 capital ratio rose to 12.6% due to earnings retention and an 11% reduction in regulatory risk-weighted assets (RWA) in 2009. Standard & Poor's own risk-adjusted capital framework (RACF) assigns a greater (than Basel II) risk weighting for trading risk, corporate loans, and equity investments in the banking book. While our assessment of Deutsche Bank's capitalization is consequently much less favorable than that of the German and European regulators, our RAC ratio improved during the year. Structure Deutsche Bank‟s business model combines global investment banking activities with a strong, profitable and growing retail business, especially in Europe and Asia. In the light of the most severe financial crisis experienced in decades, this broad base is the key to securing a certain level of stability in the development of the company. Management structure The Management Board of Deutsche Bank AG has as its prime responsibility the Group‟s strategic management, resource allocation, financial accounting and controlling, capital and risk management, and internal controls. The Management Board is supported in the performance of its leadership and oversight duties by functional committees which are chaired by Management Board members, and by the Corporate Center. In April 2008, Stefan Krause joined the Management Board of Deutsche Bank AG; with effect from 1 October 2008, he assumed the position of Chief Financial Officer as successor to Anthony Di Iorio, who retired, as planned, on this date. The Group Executive Committee ( GEC ) is made up of the members of the Management Board, the heads of the five core businesses, and the head of Regional Management. The GEC supports the Management Board in its decision- making. At regular meetings, it reviews developments within the businesses, discusses matters of Group strategy and formulates recommendations for the Management Board. Josef Ackermann chairs both the Management Board and the GEC. K. J. Somaiya Institute of Management Studies and Research Page 9 END TERM PROJECT Group Divisions Deutsche Bank‟s Group Divisions are: the Corporate and Investment Bank ( CIB ), Private Clients and Asset Management ( PCAM ) and Corporate Investments ( CI ). Corporate and Investment Bank CIB is responsible for Deutsche Bank‟s capital markets business, comprising the origination, sales and trading of capital markets products including debt, equity, and other securities, together with our corporate advisory, corporate lending and transaction banking businesses. Our clients are institutions, both public sector, including sovereign states and supranational bodies, and private sector entities, from medium-sized businesses to large multinational corporations. CIB is subdivided into two Corporate Divisions: Corporate Banking & Securities (CB & S) and Global Transaction Banking (GTB). Corporate Banking & Securities comprises our Global Markets and Corporate Finance businesses, and covers Deutsche Bank‟s origination, sales and trading of securities, corporate advisory and M & A businesses, together with other corporate finance activities. Global Transaction Banking covers Deutsche Bank‟s trade finance, cash management and trust & securities services businesses and serves both financial institutions and corporate clients. Corporate Finance and Global Transaction Banking are together named Global Banking. Private Clients and Asset Management PCAM comprises two Corporate Divisions: Asset and Wealth Management and Private & Business Clients. Asset and Wealth Management comprises two Business Divisions: Asset Management and Private Wealth Management. Asset Management provides retail clients across the globe with mutual fund products through our DWS and DWS Scudder franchises. Asset Management also provides institutional clients, including pension funds and insurance companies, with a broad range of services such as traditional asset management, alternative assets, sophisticated absolute return strategies and real estate asset management. Private Wealth K. J. Somaiya Institute of Management Studies and Research Page 10 END TERM PROJECT Management serves high net worth individuals and families worldwide. We provide these very discerning clients with a fully- integrated wealth management service, encompassing portfolio management, tax advisory, inheritance planning and philanthropic advisory services. Private and Business Clients (PBC) provides private individuals and small to medium-sized businesses with a full range of traditional banking products, including current accounts, deposits and loans, investment management products and business banking services. Outside Germany, PBC has for some years operated in Italy, Spain, Belgium and Portugal, and more recently in Poland. We are also making focused investments in fast growing Asian markets, for example in China and India. Corporate Investments The Corporate Investments Group Division covers our industrial shareholdings, certain bank- occupied real estate assets and other non-strategic holdings. K. J. Somaiya Institute of Management Studies and Research Page 11 END TERM PROJECT Growth Strategy We regard the current financial crisis as very serious, but we are convinced that Deutsche Bank can emerge stronger. Our business model remains fundamentally intact. Our medium-term strategy remains committed to exploiting the growth potential in all of our core businesses, while also making adjustments to our platform to take account of the market upheavals we have recently witnessed. To this end, we aim to build on our broad-based business model. Corporate Banking & Securities will be recalibrated. Investment banking remains one of Deutsche bank‟s core businesses. However, we will withdraw resources from areas in which a recovery seems unlikely in the near future. At the same time, we will be investing in growth areas, including some „flow‟ trading businesses and commodities trading, corporate finance in certain industry sectors, and our German mid-cap business. Global Transaction Banking, which has delivered strong growth, will step up the pace of its activities. We are concentrating mainly on new and growing markets, for example by continuing to expand the local trust & securities services businesses and the development of new products and solutions for our clients. Our aim is to achieve organic growth while monitoring acquisition opportunities. Asset Management is focusing strongly on re-positioning its core business areas: retail, alternative investments, institutional investors and insurance asset management. In all core businesses, we are re-engineering in order to restore operating leverage in changed market circumstances. As a large provider with an extensive range of services, Deutsche Bank is also benefitting from the crisis-driven “flight to quality”. We will also continue to globalize our DWS brand. PWM will take measures to improve its cost efficiency, while also capturing selective expansion opportunities. In Private & Business Clients, the focus is on rolling out our growth and efficiency program. We are expanding the branch network in Germany and other European countries and increasing efficiency in the mid and back-office. Our minority share in Deutsche Postbank offers considerable immediate-term opportunities for co-operation, which we are already taking advantage of. Relatively robust business model The current crisis has exposed weaknesses in some parts of our business model, which we have addressed with focused and decisive actions. Furthermore, our fundamental business model K. J. Somaiya Institute of Management Studies and Research Page 12 END TERM PROJECT remains sound. With its diversified business portfolio and global franchise, its solid Tier 1 capital ratio and funding base, Deutsche Bank in 2008 has managed to increase its share in many businesses even in shrinking markets. However, revenues often were lower in absolute terms compared with 2007. Acquisitions Morgan, Grenfell & Company, 1990. Bankers Trust 30 November 1998. Scudder Investments, 2001 Berkshire Mortgage Finance 22 October 2004. Chapel Funding, now DB Home Lending 12 September 2006 MortgageIT Holdings 3 January 2007 K. J. Somaiya Institute of Management Studies and Research Page 13 END TERM PROJECT K. J. Somaiya Institute of Management Studies and Research Page 14 END TERM PROJECT The HSBC Group is named after its Parent company. The Hongkong and Shanghai Banking Corporation Limited, which was established in 1865 to finance the growing trade between China and Europe. HSBC Bank is the largest bank in Hong Kong and second largest group in the world after Citicorp. Before moving its headquarter to London in 1990, it was headquartered in Hong Kong Headquartered in London, HSBC is one of the largest banking and financial services organizations in the world. HSBC's international network comprises around 9,500 offices in 85 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by around 200,000 shareholders in some 100 countries and territories. The shares are traded on the New York Stock Exchange in the form of American Depositary Receipts. HSBC BANK Type Public (LSE: HSBA, SEHK: 005, NYSE: HBC, Euronext: HSB, BSX) Founded Hong Kong (1865) Founder Thomas Sutherland Headquarters London, England, United Kingdom Area served Worldwide Key people Stephen Green, Group Chairman Industry Finance and insurance Market cap US$ 175,661.42 million (October 14, 2008) Revenue US$ 146.50 billion (2008) Net income US$ 19.1 billion (2008) Total assets US$ 2.35 trillion (2008) Total equity US$ 128.2 billion (2008) Employees 330,000 (9,500 offices in 85 countries and territories) K. J. Somaiya Institute of Management Studies and Research Page 15 END TERM PROJECT Through an international network linked by advanced technology, including a rapidly growing e- commerce capability, HSBC provides a comprehensive range of financial services: personal financial services; commercial banking; corporate, investment banking and markets; private banking; and other activities PRINCIPLE ACTIVITIES: The group provides a comprehensive range of banking and related financial services. the group divides its activities into geographical segments: UK, Continental Europe and Rest of the World the group also divides its activities into the following business segments: UK Personal Financial Services; UK Commercial Banking; UK Global Banking and Markets; International Banking; HSBC France; Private Banking. CORPORATE BANKING RETAIL BANKING Corporate Solutions Home Loans Government Solutions Car & Two Wheeler Loans Capital Market Services Consumer/Personal Loans Agriculture Finance Saving & Term Deposit Structured Finance Salary Account Project Finance Roaming Current Accounts Infrastructure Finance Investment Products Term Loans Private Banking Working Capital Finance NRI Services Cash Management Services Demat Services Trade Finance Services Credit & Debit Cards International Banking Smart Cards Treasury Services Bill Payment Services Corporate Internet Banking E-Cheques Corporate Advisory Branches Custodial Services ATMs Professional Clearing Internet Banking Membership Services Phone Banking K. J. Somaiya Institute of Management Studies and Research Page 16 END TERM PROJECT STRATEGY - Four key businesses HSBC has four key businesses: Global Banking and Markets: Positioning for the next wave of emerging markets- led and financing focused global growth wholesale bank Private Banking: Building on intra-Group referrals a world leading international private bank integrated into a unique distribution network Commercial Banking: Strengthening international links the leading international business bank and best small business bank Personal Finance Services: We will use the business models, use our global scale and local knowledge to grow which give us a 'right to win' profitably in selected markets Alignment of presence with global trends HSBC's strategy is aligned with three trends which are shaping the global economy 1. Emerging markets are growing faster than developed countries 2. World trade is expanding faster than GDP 3. Longevity is increasing virtually everywhere Building on HSBC's heritage Our strategy is focused on delivery superior growth and earnings over time K. J. Somaiya Institute of Management Studies and Research Page 17 END TERM PROJECT Invest primarily on high growth economies The business is being re-shaped to focus primarily on high growth economies, by aspiring to trend to 60% of revenues coming from these economies. When looking at the developed markets K. J. Somaiya Institute of Management Studies and Research Page 18 END TERM PROJECT business, focus is to build particularly on those parts of the customer base which have international connectivity for which our "right to win" is particularly meaningful. Focusing on business models defining our 'right to win' Global Banking and Markets: 4,000 international customers, where emerging markets, balance sheet and global platforms (HSBCnet, Payments & Cash Management, Global Sub-Custody, Trade Services) are HSBC's calling card Private Banking: 90,000 customers, where our international connectivity and emerging markets footprint are HSBC's calling card Commercial Banking: 2.7 million customers locally, where top end customers and 40% of HSBC's SME customers have international needs, HSBC's calling card. The platforms used are shared with the Global Banking and Markets business. Personal Financial Services: the Global Premier market, focusing on customers looking for constant experience and recognition no matter where they are in the world allowing them to manage their credits and investments holistically. This refers mainly to our SME customers in Commercial Banking and the mass market in Personal Financial Services. There are two key areas which will support this strategy: Technology and Services: through the allocation of more than 25% of IT expenses to"global platforms", delivery a higher level of STP on higher volumes and focused internet solutions. K. J. Somaiya Institute of Management Studies and Research Page 19 END TERM PROJECT Global Resourcing: to continue transferring and reengineering processes to our group service centres, located in lower cost countries. Currently there are two products that we single out as important given our actual strength: Credit cards : a leading global position building on our global presence as a top five issuer with over 120 million cards in force; and Direct Banking: building our model once and deploying many times. Initially launched in the US in Nov05 with US$12bn in deposits as at Jun07 – 90% new to the bank. Then rolled out to Taiwan and Korea in 2006 and 2007, with the expansion into further markets with strong savings pools. It is our aspiration to roll out six totally standardized products worldwide: two assets, two liabilities and two insurance products. Execution of strategy Execution of HSBC's strategy entails improving intra- group linkages by joining up the Group's businesses and functions to more effectively create additional value. The HSBC brand and global networks will be leveraged to reach new customers and offer more services to existing ones. Efficiency will be enhanced by taking full advantage of local, regional and global economies of scale. Appropriate objectives and incentives will be adopted to encourage employees to be fully engaged in delivering the strategy. Emerging markets and opportunities Emerging markets are at the heart of HSBC's corporate identity. Throughout its history, the HSBC Group has maintained a strong presence in global trade, particularly in India and China, the world's most dynamic emerging markets. K. J. Somaiya Institute of Management Studies and Research Page 20 END TERM PROJECT HSBC has been a participant and a witness to the development of emerging markets for over a century. We have established branches even in countries that were considered closed, restricted or highly centralised. Over the years, HSBC rose to the status of a respected institution as it worked actively in these markets. Sensitive to the unique cultures in emerging markets, HSBC has often been the first foreign bank to work in partnership with local businesses. HSBC Amanah was among the first to offer Islamic banking products and has the largest Islamic banking team of any international bank. While some institutions have struggled in the turmoil that struck many of the world's financial markets last year, HSBC posted pre-tax profits of USD9.3 billion in 2008. Although representing a 62 per cent drop over 2007 performance, the Bank‟s strong fundamentals have allowed it to pay out dividends to shareholders in the amount of GBP4.6 billion, the second highest of any bank in the world and the third highest payment in the FTSE100. Source: From 2008 Final Results - Highlights, HSBC Holdings plc K. J. Somaiya Institute of Management Studies and Research Page 21 END TERM PROJECT There has been a shifting in the positions of the regions in terms of contribution to HSBC's numbers. In 2007, Europe, followed by Hong Kong, the rest of Asia-Pacific (including the Middle East), Latin America, and finally North America contributed to the Group's pre-tax profits, in that order. But the highest growth was from Asia, the Middle East and Latin America. In 2008, filling up the vacuum left by the pronounced economic downturn in the United States, Europe still contributed most to profit (116.7 per cent) and registered 26 per cent growth versus year-ago performance. But the rest of Asia-Pacific (including the Middle East) registered the highest growth (up by 27 per cent). Hong Kong, although second in terms of contribution to HSBC Group results, actually slowed down in terms of growth (down by 26 per cent). Latin America's performance also dropped by six per cent. The Bank's good relationship with host governments and regulatory bodies in these markets puts it in a strong position to advocate for financial reforms for the benefit of its clients and the industry. This rich international background serves Global Banking and Markets we ll, as we deliver a host of financial solutions for clients seeking expertise and experience in emerging markets. Profile and potential HSBC has established branches even in countries that have been considered closed, restricted or highly centralized. Working actively in these markets, the Bank has been a respected institution in these markets for many years. GDP growth trends Economic indicators growth rate (%) Market category 2005 2006 2007 forecast Annual GDP Developed 2.4 2.8 2.4 Emerging 6.6 7.4 7.5 Source: 'A battle of ills', HSBC Global Research Macro Global Economics Q2 2008 K. J. Somaiya Institute of Management Studies and Research Page 22 END TERM PROJECT Other key growth trends Industrial production 1 Developed 1.8 3.6 2.4 Emerging 9.1 9.5 10.3 Exports 2 Developed 5.5 7.9 5.7 Emerging 13.6 13.5 12.2 Source: 'Goodbye to all that', HSBC Global Research Macro Global Economics Q1 2008 1 Industrial production growth in emerging markets was twice to five times that in developed economies 2 Even in periods of economic slowdown in developed economies, exports from emerging markets continue to grow, showing less dependence on the former Risks and re wards Many investors look to diversify their portfolios across different economies, thereby distributing risk, while others seek out new, more affordable opportunities that may be available in the leading industrialized nations. In today's global economy, emerging markets have become a staple of many investor portfolios because of the high future rewards associated with being the first to put money into companies and economies with good growth potential. And, as recent economic indicators have shown, it is possible for emerging markets to accelerate their growth while more developed economies slow down. HSBC Group Chairman Stephen Green was co-chairman of the Capital Markets Consultative Group of the International Monetary Fund (IMF) which authored the 2003 Foreign Direct Investment in Emerging Market Countries report. The group observed that foreign direct investment (FDI) flows started streaming towards emerging markets in the 1990s. These were made possible primarily by mergers and acquisitions, particularly of state-owned assets. Since the writing of the IMF report, net foreign investments in the emerging markets have surged upwards. K. J. Somaiya Institute of Management Studies and Research Page 23 END TERM PROJECT Aside from good growth prospects, productivity-adjusted labour costs (labour efficiency rather than the cost of labour per se), physical and personal security, and good governance are among the country characteristics investors examine when considering investment in an emerging market. A ne w, evolving economic stage All indications point to a very different balance of economic power in the years to come. K. J. Somaiya Institute of Management Studies and Research Page 24 END TERM PROJECT Emerging markets represent approximately 80 per cent of the world's population and 20 per cent of the world's economy Many emerging economies are transitioning from centralized political and economic systems to more open market models: o Relaxation of controls on foreign exchange o Greater autonomy for financial institutions o Transparency in the capital markets o Removal of trade barriers o Political reforms that in turn facilitate more change Momentum for reform is driven by the need to raise living standards, increase opportunities for the local population and attract foreign investment As the driving force for development in its region, major changes in an emerging market are likely to reverberate throughout neighbouring economies. Although many emerging markets continue to receive overseas aid, the most successful have broken that dependency by raising their capital markets to international financial and governance standards, thereby becoming more attractive to foreign investors. An 'emerging markets' approach to global economics HSBC Global Research analysts are redefining the relationships between economic events in developed economies, particularly the US, and the effect of these on the rest of the world. "Tradition is wrong," asserts HSBC Group Chief Economist Stephen King. The recent performance of emerging markets shows that on the global economic platform, the direction of impact now seems to be going the opposite direction. While the USA struggled from a softening of the housing sector in 2005, analysts expected the rest of the world to follow suit and perform poorly. This didn't happen. In fact, it was apparently the dramatic performance of emerging markets and their continued demand for goods that helped keep the US economy from slipping any further. Among the top three US export partners that year, two were emerging markets (China and Mexico). Other K. J. Somaiya Institute of Management Studies and Research Page 25 END TERM PROJECT emerging market economies that made strong contributions to the US' export income were: Korea, Brazil, the United Arab Emirates (UAE), India, Chile, Turkey, Saudi Arabia, Taiwan, Russia, Argentina and South Africa. Since US GDP represented roughly 30 per cent of global GDP at that time (2006), conventional analysis dictated that a weakness in the US market would lead to a dip in economic performance elsewhere. Weaker US investment demand, in particular, and domestic demand, in general, did exert a depressing influence on US imports from its trading partners. But the actual performance of emerging economies debunked conventional analysis. For instance, forecasts for 2006 placed capital spending growth in China at 14 per cent. Actual performance, however, was almost double at 27 per cent. Mexico's GDP growth also surpassed expectations, driven by consumption and investments. The story was the same in the United Arab Emirates (UAE), another major emerging market. So despite lower domestic demand in the USA for goods from emerging markets, these economies continued to grow. 2006 forecasts versus performance Growth rates US China Mexico (% per year) Forecast Actual Forecast Actual Forecast Actual 2006Q1 31/1/07 2006Q1 31/1/07 2006Q1 31/1/07 GDP growth 3.3 3.4 8.9 10.6 3.4 4.8 Consumption 2.7 3.2 8.0 8.7 3.5 5.4 growth Investment 6.8 3.0 14.1 27.0 5.7 8.8 growth Government 2.5 2.1 5.0 6.0 2.5 4.0 spending Export growth 5.6 8.9 25.0 25.0 7.7 15.8 Import growth 6.9 5.8 20.0 20.0 7.1 16.3 Source: 'A shifting centre of gravity', HSBC Research K. J. Somaiya Institute of Management Studies and Research Page 26 END TERM PROJECT Credit ratings Moody's S&P* Fitch DBRS Rating Outlook Rating Outlook Rating Outlook Rating Europe HSBC Holdings Long Aa2 Negative AA- Negative AA Stable AA plc Term/Senior (high) Short Term P-1 A-1+ F1+ R-1 (high) HSBC Bank plc Long Aa2 Negative AA Negative AA Stable not Term/Senior rated Short Term P-1 A-1+ F1+ not rated HSBC France Long Aa3 Negative AA Negative AA Stable not Term/Senior rated Short Term P-1 A-1+ F1+ not rated Asia (Hong Kong) The Hongkong HK$ issues and Shanghai Long Aa1 Stable AA Negative not not Banking Term/Senior rated rated Corporation Ltd Short Term P-1 A-1+ not not rated rated Non-HK$ issues Long Aa1 Stable AA Negative AA Stable not Term/Senior rated Short Term P-1 A-1+ F1+ not rated USA HSBC USA Inc. Long A1 Negative AA- Negative AA Stable AA Term/Senior Short Term P-1 A-1+ F1+ R-1 (high) HSBC Bank USA Long Aa3 Negative AA Negative AA Stable AA NA Term/Senior Short Term P-1 A-1+ F1+ R-1 (high) HSBC Finance Long A3 Negative A Negative AA- Stable A Corporation Term/Senior Short Term P-1 A-1 F1+ R-1 (low) K. J. Somaiya Institute of Management Studies and Research Page 27 END TERM PROJECT SWOT of HSBC Strengths · The bank is well capitalised and this has enabled it to perform relatively well against other banks in recent economic events. · The level of capitalisation means that, going forward, the bank is unlikely to need to borrow from the UK government: this will enable it to retain more autonomy. · The bank has a strong presence in emerging markets, putting it in a good position to take advantage of future growth in those economies. · The bank‟s global presence in Europe, Asia and South America helps to spread risk and offers significant economies of scale. · Despite rebranding relatively recently (1999), the HSBC brand has become well established and is considered particularly valuable within the industry. Weaknesses · HSBC associates itself strongly with investment in the small business sector, but the current economic situation has led to increased risks, potentially compromising the activity levels in this area of the operation. · The bank was involved with sub-prime markets in the US and has had to write off large figures lent to high- risk borrowers. · Despite falls in the UK interest rate, HSBC has increased its mortgage rates. This may be perceived negatively by borrowers and potential borrowers, adds pressure to an already depressed housing market and could ultimately lead to more defaulting as borrowers struggle with higher repayments. · A redundancy program announced recently may affect morale among staff, leading to decreased production and loyalty. · HSBC‟s branding emphasizes its global presence, and this may be seen negatively by some customers in its implication of homogenization and lack of personalization. K. J. Somaiya Institute of Management Studies and Research Page 28 END TERM PROJECT Opportunities · HSBC‟s high level of capitalization places it in a strong position to acquire assets · Banks finding trading conditions particularly difficult at present may be available at low cost · HSBC also has adequate capital to purchase stronger banks such as Bank Ekonomi in Indonesia, in which it has purchased a stake to continue its Asian expansion despite challenging economic times. · HSBC‟s generally strong position presents the opportunity to outperform competitors during the economic downturn and to build a reputation for being one of the safer banks for depositors, helping to increase resources for lending. · Negative press coverage of competitors such as HBOS may encourage customers to choose HSBC instead. Threats · Trust in banks has decreased due to financial losses suffered by investors, who may be more inclined to invest elsewhere. · Financial losses affecting banks and investors on a global scale have resulted in less credit being available to customers. In the UK this is coupled with increases in living costs resulting in less money being saved. · The falling property market has created a rise in numbers of homeowners with negative equity. If a property is worth less than was borrowed to finance its purchase, there is little likelihood that the bank will recoup all its losses if owners default. · Claims have been made that HSBC has understated losses resulting from US subprime markets, and this could undermine confidence in the bank. K. J. Somaiya Institute of Management Studies and Research Page 29 END TERM PROJECT Financial performance SUGGESTIONS: for Deutsche Bank and HSBC Bank ►Strong In-house research & market Intelligence. ►Focused marketing- Focus on region-specific campaigns rather than national media campaigns. The growth of the retail financial services sector has been a key development on the market front. Banks (both public and private) will not only be keen to tap the domestic market but also to compete in the global market place. New foreign banks will be equally keen to gain a foothold in the Prospective markets. K. J. Somaiya Institute of Management Studies and Research Page 30 END TERM PROJECT References 1. Annual Report HSBC Holdings PLC 2008-09 2. Annual Report Deutsche Bank 2008-09 3. Annual Report HSBC Holdings PLC 2007-08 4. Annual Report Deutsche Bank 2007-08 5. Sustainability report Deutsche bank 2009 6. A Century of Deutsche Bank in Turkey, Istanbul 2008, pp.21-27. 7. Historische Gesellschaft der Deutschen Bank (ed.), Die Deutsche Bank in Frankfurt am Main, Munich, Zurich (Piper) 2005. 8. Manfred Pohl / Angelika Raab- Rebentisch, Die Deutsche Bank in Leipzig 1901-2001, Munich, Zurich (Piper) 2001. 9. Manfred Pohl, Deutsche Bank Buenos Aires 1887-1987, Mainz (v. Hase & Koehler) 1987. 10. Maximilian Müller-Jabusch, 50 Jahre Deutsch-Asiatische Bank 1890-1939, Berlin 1940. 11. "Special Report - The Global 2000," Forbes, April 2, 2008. 12. "HSBC tops Forbes 2000 list of world's largest companies," HSBC website, 4 April 2008 13. HSBC Shanghais CEO To Hong Kong, March 2008 14. Vidya Ram, "HSBC Gets Back In Touch With Its Roots" Forbes, 03.10.08 15. HSBC, "HSBC Fact Sheet" HSBC, March 2008 16. HSBC buys Bamerindus, Brazil Bank, for $1bn 17. UK Business Park: HSBC 18. Bank group to buy Republic New York 19. HSBC leads the way into euro zone with £6.6bn french bank takeover K. J. Somaiya Institute of Management Studies and Research Page 31
"Deutsche Bank Vs HSBC"