Barclays Bank Business Report Essay - Essay Prowess

Barclays Bank Business Report Essay

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Barclays Bank Business Report Essay

Introduction

The banking industry has experienced significant changes over the years as economies shifted from recession to recovery. Such changes resulted into the introduction of new regulations that which have had a direct impact in the way individual banks operate. There has also been the introduction of new financial technologies that compete directly with regular bank services. This trend is likely to continue given the success of such products as indicated by the increasing popularity of products such as cryptocurrency, in this case Ethereum and Bitcoin. The increase in online payments through services provided by companies such as PayPal and Venmo further offers direct competition to card payment technology supported by the banks (Dias and Ramos 2014). As the technologies gain popularity, it brings into perspective the changing dynamics on how people will be making their payments and saving. Such disruptions will have a significant impact on the normal banking model thus calling for drastic adaptation.       

Barclays Bank global operations

Barclays Bank represents one of the oldest banking institutions in the world, which has seen to its operational success across different economies. With its headquarters in London, the bank has consistently maintained a formidable presence in many countries where in some operating as the major banking institution. Market domination in such markets is ensured through offering of various banking products such as the management of wealth, investment, commercial and retail banking (Turner 2014). The company has been pushed to introduce changes to its model of banking as more players entered the market across the various economies. This has eroded the domination it enjoyed in various economies since people tend to gravitate towards companies that satisfy their most immediate needs. The greatest concern with Barclays pointed towards the lack of flexibility and inclusiveness across different financial classes. Failure to address the plight of majority of people requiring banking services but are within the lower financial classes played into the favor of its competitors.

Changing dynamics in the money market has led the management of the bank to settle for deconsolidation through a partial sale of Barclays Africa after a series of restructuring efforts. The bank has also endured a lot of scandals involving unfair business practices and most recently the attempt by its CEO in uncovering the identity of a whistleblower. In addition, the former CEO of the bank John Varley among other senior officials of the bank are set to stand trial following investigation on fraudulent activities in obtaining funds in 2008 (Ashton and Christophers 2015). The charges which include false representation is just an indication of the lack of proper oversight that existed in the company over the past when it dominated the banking industry. Although the company is in the process of reducing its ownership of particular entities in Africa considered underperforming, opportunities for expansion in various countries in Europe do exist (White and MacAskill 2017).

Banking business environment in Hungary

Hungary has a population of 10.1 million people which effectively provides considerable competitiveness for various companies offering banking services. The financial markets have experienced fluctuations and uncertainties brought about by politically driven market changes (Garnett, Mollan and Bentley 2015). However, Hungary is one of the few European countries that have maintained some level of control in the internal money market thus ensuring items such as exchange rates have remained fairly stable. The ability to survive such market shocks and fluctuations provides banking institutions with a lower risk environment for investment (Turner 2014). Hungary employs a two-tiered banking system with its Central Bank occupying the top tier while the second tier is occupied by commercial banks. As is similar within other nations employing the two-tier model, the main role played by the Central Bank is to ensure prices stability through currency controls (Paulet 2015). In addition, it also manages the various accounts held by commercial banks operating within Hungary.     

Barclays Bank will have to contend with strong competition from major banks already existent in the market and commanding a large market share. However, market penetration can be attained through strategic utilization of its extensive financial resources through products such as loans. The Hungarian banking sector has experienced changes in regard to government policy on financial fundamentals through the growth of credit (Johnson and Barnes 2015). As the levels of household incomes rise, it is expected that the quality of loans will improve whereby allowing the banks to profit through lending. The rise in the incomes is also consequently expected to lead to a decline in the size of non-performing loans held by banks which tend to reduce the profitability outlook when the levels are too high. The modest growth in the banking sector is a key indicator supporting the need for Barclays to invest in the industry.    

Analytical approach to banking industry in Hungary

PESTLE Analysis

Political- The stability of the Hungarian government is crucial for the success operation of the banking sector. The political environment in a country has a direct impact on how business operate (Turner 2014). The impact is much significant in the banking sector since unrest could lead people to make uncontrolled drawings from their accounts in anticipation of the system breaking down. This could lead to the collapse of a bank given the model of operation employed requires the maintenance of only a portion of the reserves. Other factors that could affect the industry include changes to legislature. In this case, the introduction of certain measures to control the banking sector could lead to inhibition of the way the banks operate and relate with their customers. In Hungary, there has been a reduction on banks reliance on comprehensive funding after the banking industry was deleveraged.

Economic- the level of economic growth witnessed in an economy is an indication of how well its performing. The Hungarian economy is expected to continue growing in years to come despite a slowdown in 2016 (Petkovski and Kjosevski 2014). The continued growth is driven by increase in the level of consumption and investment across various industries. Hungary experiences a low inflation rate of below 2.0 percent which is an indication better performance in the economy. A high inflation rate would be an indication that the prices of basic commodities such as food is on the rise hence reducing the purchasing power of the citizens. Therefore, it can be presumed that the Central Banks model has been able to control the stability of the industry in spite of adverse changes elsewhere in Europe. In addition, Hungary has a low unemployment rate of 4.1 percent which is a further indication of a greater customer base for banks (Trading Economics 2017).  

Social- the Hungarian economy has a literacy rate of 99.1 percent which is essential for a technology based world (European Commission 2017). Low literacy rates tend to act as an impediment to economic development due to the slow uptake of changes that could essential help elevate the living standards of citizens. This essential for the banking sector is it improves the level of understanding on the role played by banks within economies. The ethnic makeup of Hungary consists of various nationalities with Hungarians being the majority. The Roman Catholic is also the dominant religion. However, the society can be described as diverse where people exercise tolerance to alternative beliefs. Therefore, the social spectrum within the economy provides little obstacles for companies which may wish to launch operations. Given that majority of the people speak Hungarian, it is important for companies to ensure their operations are modified to allow that fully.     

Technology- the high literacy levels in the country are very crucial towards the uptake of new technologies. The country has therefore been able to adopt changes in the information technology over the years at a level which is in pace with most developed nations. Moreover, the low unemployment rate shows that the average purchasing power within the economy is high hence bolstering the uptake rates for new technologies. This is essential for the banking industry as there are various services that are to be offered by technology based businesses which would require for services such as payment processing (Garnett et al. 2015). Barclays thus has an opportunity to enter into the market and expound on their operations. While everything has to be structured to suit the local economy, uptake for the services would be expected to be high if at all the company offers excellent services.    

Legal- Hungary has flexible employment rules that do not contravene internationally accepted standards. This makes the business environment tenable given that too stringent restrictions may affect the hiring process consequently compromising operations (Kattel, Kregel and Tonveronachi 2015). This works to Barclays bank favor given its experience in operating in the global banking industry over the years. The taxation policies in the country are feasible and compound to the level and type of taxes levied in most countries across Europe. While incomes are taxed at 15 percent, corporate tax is levied at 9 percent of the income generated which does not compromise the operational capability of firms (Trading Economics 2017). While the banking system operates on a two-tier system, banks have the ability to change their financial products as long as it does not contravene any of the regulations. This flexibility is crucial especially for new entrants seeking to gain market share through diversification.     

Environment- Companies intending to set up operations in Hungary have to gain a better understanding of the immediate regulations governing the industry they are interested in. Proper certifications have to be obtained from the government through the Central Bank in order to establish operations (Pradhan et al. 2014). However, the main concern should be on understanding the dynamics of the population. This includes the attitude that the people are likely to have towards the company. With a population of around 10 million people, it is important to understand the population dynamics as the level of competition will be high. People might exhibit a tendency of falling back to companies that are considered more of local institutions which could act as an obstacle to a foreign owned entity such as Barclays Bank.  

SWOT Analysis

Strength- the competitive nature of the Hungarian banking market means that Barclays will have to exploit all the strengths it has to gain competitive advantage. One of these factors includes the brand name. Barclays has been a big player in the global banking scene for many years during which it has developed the brand through community partnerships and sponsorship of major events such as football league (Turner 2014). This has helped put Barclays within the public domain and in the process increased the valuation of its brand. This should offer the company competitive advantage when entering the Hungarian market as its brand is already easily identifiable to its core business. Its history and understanding of operations in a global environment will also be crucial towards redefining its systems to fit the Hungarian market given the level of competition already existent.   

Weakness- One of the weaknesses of Barclays is that it is likely not to be able to match the brand popularity of bigger local banks already operating in the country. The banks already have multiple branches through which customers may get banking services. On the other hand, the number of Barclays branches will be small hence less convenient for the customers. It might take many years before Barclays can be in position to provide the level of location convenience offered by major banks within Hungary. Recent scandals involving the company may deter some customers towards trusting on the strength of the brand (White and MacAskill 2017). Without adequate deposits and loan products being issued it would be difficult for Barclays to sustain its operations. Moreover, the closure of operations in other countries is likely to erode customer confidence with the bank.

Opportunity- with a growing economy, this provides an opportunity for Barclays to invest in the banking industry. The rates of inflation are low which guarantees a fairly stable business environment which is less likely to be affected by upheavals in other economies (Pradhan et al. 2014). The bank can also concentrate on improving the standard of service in the banking sector. This should include measures such as having highly trained employees who better understand the cultural dynamics of the market. In addition, the company can improve on the provision of loans whereby the waiting times for the approval of loans be reduced to lesser times than those of other banks. The bank has huge financial resources which it can use to influence the industry by for example offering introductory rates for loans. Such discounts would be effective towards attracting customers in spite of the competition.

Threat- there is slim chances of differentiation in the banking industry. Therefore, this could result into price wars in terms of interest rates on loan products and banking charges. This could make the venture much less profitable especially taking into consideration that Barclays bank will be having a lesser number of clients at the beginning. While the impact of the price wars will be felt by all players in the market, those with high customer numbers are likely to survive through (Reinhart and Rogoff 2013). On the other hand, local brands may decide to leverage their brands through evoking a sense of patriotism among Hungarians by banking with them. Such a move if successful would a big blow to the attempts by Barclays or any other outside player to enter the market. This could lead to deterioration of the profitability outlook for the company in spite of stability in the Hungarian economy.

Porters Five Forces Analysis

Competitive Rivalry- there is a lot of competition in the Hungarian banking sector. With the industry experience modest growth rates, the inability to increase the targeted population results in the shrinkage of market. While local banks already enjoy diversity in its portfolio, adopting the same for Barclays may prove to be difficult right from the start. Each banking product has to be launched strategically to identify the underlying market dynamics that would allow successful offering of the options available (Dias and Ramos 2014). On the other hand, in spite of Barclays being a global brand, local banks enjoy a greater level of brand identity in the Hungarian market which is likely to have a positive impact on their competitiveness.     

Supplier power- the banks in this case are the suppliers in the market. there is a very minimal differentiation in terms of the products being offered. However, there exist subtle differences in terms of the cost incurred by the customers in use of certain services. There are many banks already established in the market thus reducing any advantage that would be created by having fewer players (Kattel et al. 2015). The cost of changing from banking services to another form of business is likely to be high. This emanates from the uniqueness of the banking setup which renders the facilities unusable for any other function without incurring high renovation costs. Moreover, the market domination enjoyed by some of the players is likely to be a challenge to Barclays expansion plans.       

Buyer power- the buyer to the banking sector enjoys a lot of leverage in the Hungarian market. Information on the various aspects of the banking sector is readily available on platforms such as print and social media. Therefore, they are in a position to make informed decisions on the various aspects of the banking sector such as which loan product to take and from which bank (Paulet 2015). The banking products in the market are highly substitutable hence the customers can easily switch between different banks. This can be helpful to a new market entrant such as Barclays since by offering superior options they are in a position to attract customers eventually expanding their market share.   

Threat of New entry- the threat of new entry into the market is low. The cost of establishing a bank is high given the high rental charges for strategic locations and smooth operations. That initial high capital requirement works to discourage the entry of new competitors which is not a much of a problem for Barclays given its financial capacity. Another hindrance in the market to new entrants includes low economies of scale. For a bank to operate profitably, basic banking services such as savings have to operate at an optimal level in order to grow the size of their loan products (Johnson and Barnes 2015). This may not be possible for new entrants hence they have to operate for a certain period of time with minimal to no profits until their market share grows.  

Threat of substitution- the threat of substitution in the banking sector is also high. This emanates from the ease in which information on a certain banking product on offer is shared within the market. Therefore, dominance in a certain segment due to the introduction of an innovative product is short lived as other banks eventually start offering their own versions of the product (Paulet 2015). This leads to the risk of price wars between players further reducing the profitability levels previously enjoyed. Innovative approach to the market thus becomes a continuous process.

Data Application

The inflation rate in Hungary for the last 12 months

The table above indicates the recent trend in inflation rates. This has been very effective in promoting the strength of the banking sector as the cost of borrowing is reduced. Therefore, households are encouraged to make long-term purchases on durable goods such as homes will businesses are encouraged to increase the level of investment as a way of increasing their profit margins without having to change prices. In addition, low inflation rates help in increasing confidence in the economy whereby short-term price changes are weathered without transferring the burden to consumers whose purchasing power in this case increases.  

Overall economic forecast in Hungary

SOURCE ec.europa.eu: EUROPEAN COMMISSION

The low unemployment rate is an indication of the economy having the ability to achieve optimal production as a result of efficient usage of resources available which is crucial when trying to meet customer demand (Petkovski and Kjosevski 2014). On the other hand, this translates to higher purchasing power within the economy. Therefore, people are able to spend and in the process, support the businesses that offer the various goods and services.   

Conclusion

The banking industry is a volatile market that has the potential to shift at any given instance. Many factors have to be put into considerations when setting up operations in a particular economy. The opportunities should be gauged against the overall performance of the economy to determine what banking services are required. The Hungarian banking industry has undergone significant policy changes over the years, which have been helpful in making the industry among the most promising across Europe. This is an indication of how policy can be used to introduce changes to a market allowing it to perform to near optimum (Johnson and Barnes 2015). This has culminated into increase in consumer confidence which is crucial when dealing with financial products whose value is closely tied to perceptions within the economy. Competition in the industry through addition of more players is likely to further improve the efficiency levels.

References

Ashton, P. and Christophers, B., 2015. On arbitration, arbitrage and arbitrariness in financial         markets and their governance: Unpacking LIBOR and the LIBOR scandal. Economy and         Society44(2), pp.188-217.

Dias, J.G. and Ramos, S.B., 2014. The aftermath of the subprime crisis: a clustering analysis of     world banking sector. Review of Quantitative Finance and Accounting42(2), pp.293       308.

European Commission 2017. Economic forecast for Hungary [online] available from            https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/hungary/economic-forecast-hungary_en [6 August 2017]

Garnett, P., Mollan, S. and Bentley, R.A., 2015. Complexity in history: modelling the       organisational demography of the British banking sector. Business History57(1),  pp.182-202.

Johnson, J. and Barnes, A., 2015. Financial nationalism and its international enablers: The Hungarian experience. Review of International Political Economy22(3), pp.535-569.

Kattel, R., Kregel, J. and Tonveronachi, M. eds., 2015. Financial Regulation in the European       Union (Vol. 7). Routledge.

Paulet, E. ed., 2015. Financial markets and the banking sector: roles and responsibilities in a        global world. Routledge.

Petkovski, M. and Kjosevski, J., 2014. Does banking sector development promote economic         growth? An empirical analysis for selected countries in Central and South Eastern          Europe. Economic Research-Ekonomska Istraživanja27(1), pp.55-66.

Pradhan, R.P., Arvin, B.M., Norman, N.R. and Nishigaki, Y., 2014. Does banking sector  development affect economic growth and inflation? A panel cointegration and causality            approach. Applied Financial Economics24(7), pp.465-480.

Reinhart, C.M. and Rogoff, K.S., 2013. Banking crises: an equal opportunity menace. Journal of  Banking & Finance37(11), pp.4557-4573.

Trading Economics 2017. Hungary Inflation Rate [online] available from                https://tradingeconomics.com/hungary/inflation-cpi  [6 August 2017]

 Turner, J.D., 2014. Banking in crisis: the rise and fall of British banking stability, 1800 to the         present. Cambridge University Press.  

White, L. and MacAskill, A., 2017. Barclays suffers £1.2 billion first-half loss from Africa sale     [online] available from https://uk.reuters.com/article/uk-barclays-group-results-idUKKBN1AD0IR [1 August 2017]

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