Bahrain and Kuwait Bank Versus Hsbc Essay

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banking industry is complex, and in any given market there will be a mix of local and global banks. This is true in the Gulf States as well. Global banks such as HSBC compete in the region, but there are a number of local banks, one of which is Bahrain & Kuwait Bank. This TMA will present a SWOT analysis of these two banks, specifically with reference to their banking business in the Gulf region.

Bahrain & Kuwait Bank

The Bahrain and Kuwait Bank is a retail bank, serving the consumer market. One strength is their growth in the region, which has provided them with a growing base of deposits that they can lend back out to consumers. This is allowing the bank to enjoy a steady rate of growth over the past few years. A second strength that it draws on is that it is a local bank, based in Bahrain. This allows it to draw on the local government's support, and also its knowledge of local culture and Islamic banking, two aspects that all regional banks have in common but that might be more challenging for foreign banks. The government of Bahrain is a shareholder, so this government support is established. The bank also has a strength in its ability to tap capital markets. It just raised $400 million, allowing it to further its expansion ambitions.

One weakness that the bank has is its size. At less than $1 billion USD, BBK is a tiny bank on the world scale. It does not have the ability to offer commercial banking because of its size, has more currency risk and its cost of capital is higher than what the world's largest banks pay. It also has less ability to draw top talent --its 1000 employees are mostly locals, rather than top international bankers. The bank has a further weakness is that the home market is fairly small. Bahrain and Kuwait combined have only around 5.4 million people, which is much less that the major cities in which the world's biggest banks are located. With this small market, expansion is more difficult because it will be more difficult to scale the bank up. Noting that one of its strengths is that backing by the government of Bahrain, the 2015 BBK annual report notes that the credit rating of the nation was downgraded recently. A further weakness is that the Central Bank of Bahrain selected BBK as D-SIB, "which coupled with the new Basel III regulatory framework, makes capitalisation more challenging" (BBK 2015 Annual Report). The requirements for capitalisation are more onerous, and more difficult even than the conditions under which the bank capitalised in 2015.

There are opportunities for BBK, however. One such opportunity is that the bank wishes to expand its presence with greater international expansion. While there is still some expansion capability in the local markets, the bigger opportunity lies with other markets in the region. BBK has plans for expansion with offices in Turkey and in London. Its CreditMax subsidiary is expanding into Erbil, part of the Kurdish region of Iraq, though there is risk there. But the expansion plans that BKK has are certainly an opportunity. Turkey and London represent two of the more promising international operations because they give the bank access to capital in those areas, and would further legitimize the business. The opportunity in part lies with the fact that Bahrain is one of the smallest banking markets, where other regional markets like Saudi Arabia are huge. Kuwait, however, is a very attractive market in which to operate, so there is opportunity for more growth there (EY, 2016)

There are perhaps as many threats as there are opportunities. Based in Bahrain, BBK's business is highly correlated with the price of oil, which has remained depressed for a few years in the face of oversupply. This in turn has had a cooling effect on the Bahraini economy, its credit rating and other key variables (2015 BBK Annual Report). The state of the Bahraini economy is definitely considered to be a threat to the business, as this impacts on deposit and loan levels. There are other threats, such as adverse currency movements, that can affect the overall net wealth of the bank. Competition is also a threat, in particular from stronger, larger banks that can offer customers more favourable terms. Instability is another threat. An example is the CreditMax expansion into Erbil, which is under threat from ISIL. Erbil is an attractive market in peace, but without peace would be a bad investment.

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HSBC

There are many strengths on which HSBC can draw. As one of the world's largest banks, HSBC has tremendous access to capital, from around the world, at low rates. Its revenues were $59.8 billion in 2015, and profits of $18.9 billion. This size gives it tremendous competitive advantages in all aspects of the banking business, including brand awareness, access to capital, cost of capital and ability to serve different markets. HSBC was ranked 37th best brand in the world by Interbrand (2015), the second-highest bank after JP Morgan. The HSBC brand can establish in any country in the world because of this recognition. Consumers know that HSBC will not go out of business, for example, because it is too large. The same cannot be said for some of the smaller local competitors, whose survival is assured only because of ties to the local government.

Another major strength for HSBC is that the company has multiple different units. This makes it attractive for wealthier clients, because HSBC has superior ability to move money around the world, and to provide the services that high net worth clients and multinational corporations need. This is a distinct competitive advantage because of the importance of those two customer groups to the banking industry (Investopedia, 2016)

HSBC does not have many weaknesses, especially compared with local competitors. But the fact that it is a large global bank might be held against it by some, in particular in the Gulf to the extent that the bank has difficulty performing in line with the Islamic banking model and local customs. The bank is unlikely to put much effort into the Bahrain and Kuwait retail markets, because those are so small for it. This lack of attention and resources could put the bank at a disadvantage. Further, as a foreign bank it might receive different treatment, including certain restrictions on its activities in the region, as many countries do have different treatment for foreign and domestic banks, to reduce the influence of outside countries on domestic economic affairs.

There remain many opportunities for HSBC. Globally, the bank is one of the largest and most competitive, so its growth is largely tied to the world's overall economic situation. Regionally, HSBC still has room to grow, in particular if barriers to entry are broken down. The bank can grow at the high net worth individual and the commercial banking level as well, as there is still a lot of opportunity there. HSBC can also grow via acquisition in order to increase its market penetration. It could buy BBK, for example, very easily in order to increase its share in the retail market in Bahrain and Kuwait.

There are a few threats to HSBC. As a global bank, one threat is that it will face regulatory issues in some local markets. Where local markets seek to protect against foreign bank influence, HSBC may find limitations on its market activities. This can increase the threat posed by competition. HSBC generally sees its competition as being the other larger, global banks, rather than smaller local ones, which could create a blind spot in certain businesses. Moreover, HSBC's GCC operations are going to be challenged by the price of oil, which is highly influential on the health of those economies.

Competitive Advantage

There are a few ways, however, for BBK to work on its competitive advantages. The first is to gain a measure of legitimacy, and if it can open its joint venture in London that will help significantly. Allowing Bahrainis and Kuwaitis to move money more easily between their home countries and London will be a significant asset, allowing it to at least keep up with other banks operating in the region.

Another way to improve competitive advantage would be to focus on marketing as a local bank. There is some value in an appeal to national or regional patriotism, with some clients being swayed by those sorts of arguments. This is a source of pride for the bank, and it should play that up, as it is a key means of differentiating itself from the likes of HSBC.

A third way to build on competitive advantage is to open more branches, and increase the size of the bank. This might be more shoring up a weakness, but there is a lot of opportunity in Kuwait, for example. There is also the possibility of expanding in the region, internationally, as a means of….....

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