BUSINESSEUROPEOPINION

Global business scenario planning – Uncertainties and suggestions for the financial world

By Bina ul Haq

Summary

  • Scenario planning can mitigate losses, increase market expansion, prevent business regional exit and maximise profits.
  • Global banks must form partnerships with local and Islamic banks in global markets to utilize local expertise, acceptance and success.
  • Businesses operating in different geographies with ranges of products and services are valuable, to leverage risk and create better playing field.
  • Global presence allows strategic support of clients as they grow and transact across markets and countries.
  • Geopolitical risk is the highlighted concern in regions with diversity such as Europe, the Middle East and Asia.

Scenario planning is a method for a firm or organisation to evaluate unconventional perspectives, which may occur in future. It supports strategic, operational, and financial planning for uncertainties in the most effective and efficient manner. It originated in military strategy and was adopted in the commercial world from the oil and gas industry, first at Royal Dutch Shell in the 1970s. Scenario planning was instrumental for Shell in preparing for the oil crisis of the 70’s. Since then, the utilisation of scenario planning has accelerated over 40 years into use across businesses and public sector entities.

It covers the Political, Economic, Social, Technological, Environmental and Legal factors, to analyze the macro-environmental (external marketing environment) and monitor the factors that environment may create and their impact on the entity. For an example, how the rapid economic growth of BRICS will change the dynamics of the global markets?

I looked at the following uncertainties in my article, Greece Debt Crises: Scenario Planning – Background, Current Landscape and its Future Global Impacts. These issues become even more prominent with uncertainty spreading across, especially to the West, including issues such as a potential Brexit evolve.

  1. Financial crises
  2. Regulatory environment
  3. Lenders of last resort
  4. Debt situation
  5. Economic shift in BRICs
  6. Globalization trend
  7. Securitization market
  8. Retirement environment
  9. Degrees of competition
  10. Customer empowerment stance
  11. Credit protection rights
  12. Repositioning Risk Management
  13. Technology advances
  14. Mergers, acquisitions and partnerships

Drawing from these uncertainties, I have proposed and evaluated four scenarios followed by strategies and solutions and suggestions.

Scenario One: Business as Usual

In scenario one, we assume no more financial crises, future regulatory environment would be unchanged or assume even less extreme regulatory enforcements than before. A predictable shift in economic power and opportunity will flow from developed to high-growth emerging countries. There will be predictable competition from non-bank firms and calculable protectionism. This will strengthen the stability and lenders of last resort, government and related private-sector debts and retirement systems would remain manageable, the securitization market would improve. There would be routine technology-driven changes, little change in consumer empowerment, fewer credit-protection rights and no race for mergers and acquisitions.

Scenario Two: Financial Disputes

Scenario tow envisions world with challenges, a tough financial crisis and new regulatory reforms to control the resultant mess. Government debt and retirement services would remain manageable, and there would be substantial shift in economic power to emerging markets. Mild fluctuations around protectionism, an increase in customer empowerment with strong footholds, strong credit-protection rights and the securitization market guarded. Operative action from lenders of last resort would occur and there would be more competition from non-bank firms. Political impacts, such as deepening of the economic crisis, are likely to bring some nations together e.g. Athens and Moscow. Other factors will be repositioning in risk management, interest in acquisitions, mergers and partnerships alongside technology advancements.

Scenario Three: New Marketplaces

This scenario assumes a world with overwhelmed issues, partial financial crisis, tougher regulatory environment with numerous frameworks, severe debt crisis, a downfall in government debt, a collapse of retirement systems, a significant shift of economic power to emerging countries, substantial competition between emerging markets and the developed world. Serious protectionism, no more safe heaven provided by lenders of last resort, alterations in both front and back-office operations based on major advances and technological change. Customers would have greater power, low credit-protection rights and the securitization market would be static. Synergies will be created from acquisitions, mergers and partnerships.

Scenario Four: Revolution, Transformation, and Modification

Scenario four predicts an intense environment with numerous opportunities and excessive challenges, financial crises, heavy regulations, economic shift towards growth markets and prevalent competition from non-bank firms. Facing a massive financial crisis, lenders of last resort would be unable to help, a severe government-debt situation would exist, and retirement systems would collapse. High customer empowerment in this environment results in customers that are confrontational toward financial institutions. Strong credit-protection rights exist and the securitization market starts progressing with massive technological changes.

Strategies and Solutions

  • Recognize change and act timely, exercise core strengths and values.
  • Consider mergers, acquisitions, alliances, local partners and joint ventures for swift and prompt entry into emerging markets with financial and non-financial and technology firms in order to achieve economies of scale and scope, talent, contacts, capabilities gaps and access new customer segments.
  • Conserve capital by relocating headquarters to countries with less onerous regulation. Implement cost controls by structural expansion in emerging markets and reducing operations in the developed world.
  • Prioritize laying infrastructure in emerging / global markets; start operations, make agile asset allocations, pursue a growth oriented business model. Focus on introducing retail products, and services while establishing strategically positioned wholesale markets. Seek opportunities in business banking, corporate banking, commercial banking and wealth management in fast growing emerging markets. Create value for the bank and high exit costs for the client by focusing on large clients in these markets.
  • It is absolutely fundamental to squarely allocate resources amid developed and emerging market banking segments such as retail, commercial and wholesale. The challenge is to broaden the horizons and then differentiate to cater products and services in domestic and emerging markets; it is essential to maintain firm foothold in both, by building relationships with new customers and maintaining long lasting relations with existing customers.
  • Financial institutions must retract themselves from developed market retail operations, including wealth management
  • It is fundamental to grow deposits, strengthen operations and gain the confidence of regulators and the trust of shareholders and customers.
  • In the future, once this progress gains stability, rebuild business lines such as securities, OTC which shrank due to the financial crisis. Businesses are required to focus on non-balance-sheet-intensive product lines and offered services.
  • Intensify regular reviews, analysis, an stress tests based on frameworks for all business lines, including scenario planning exercises, which will determine prevent black swan effects. Events need not be disasters for everyone – indeed; they can be excellent opportunities for those who are prepared.
  • Discuss and anticipate that geopolitically significant economic events, in combination with other political unrest and military agendas, could result in unintended consequences involving high-yield debt and disturbed infrastructure investments. Business can redeploy their structural strategy in timely fashion and allocate resources accordingly.
  • Invest heavily in information technology, it will provide an edge on competition.
  • I recall what I had been trained since my childhood ”to never risk money that you cannot afford to lose”.

Conclusion:

Global banks can ally with the best performing local banks and Islamic banks of global markets to utilize local expertise, product diversification, structured products, acceptance and success and well position themselves in the complex world. In the end of this article is a list of best performing global banks, local banks or emerging markets and Islamic banks.

Businesses operating in different geographies with different ranges of products and services are valuable, and can leverage to create a better playing field. Emerging markets present exciting possibilities for developed-market struggling financial institutions to improve return on equity. Globally, these countries offer the greatest economic growth, demand for sophisticated banking products and services and vigorous margins. BRICS countries account for about 42% of the world’s population and about a fifth of the global GDP, a tenth of the shareholdings in the IMF. So there is huge potential market to tap. The New Development Bank, with an initial pool of capital of $100 billion, is an alternative to the IMF by BRICs and is encouraging in terms of contingency reserves, capital, credit and liquidity matters.

However, there are also challenges associated with going global, such as shared values, governance structures, standards and practices, capital requirements, liquidity management, marketing strategies, transformation, judicial systems, political systems, mixes of traditional local culture and modern global culture, intellectual property right protection, bureaucracy, absence of specialized talent, lax contract-enforcement, taxation issues, transactional risks, income risks from infrastructure and operations, accounting and rate of exchange risks.

Developed countries’ businesses can provide emerging and global partners with the infrastructure, shared values, economic development and social responsibilities toward the country in which they operate; examples can be African countries and Panama in Central America.

While entering into these emerging markets, scenario planning exercises will allow them to focus largely on answering challenges and questions: What could happen? When could it happen? Where may it happen? Whom may it impact? Who to deal with it? What would be the impact on strategies, plans and budgets? How to respond? Investors can evaluate institutions based on the possible scenarios and look for those institutions that provide safety in and consider a blend of investments across established and emerging markets.

Scenarios planning can mitigate losses, increase market expansion, prevent business regional exit and maximise profits. Examples are SBC, HSBA.L, global banks such as Citigroup Inc (C) and Standard Chartered Bank Plc (SCBFF) have expressed interest in exiting units chiefly viewed as substandard and underperforming businesses. Credit Suisse has formed the Emerging Markets Council, it comprises senior professionals across the Bank who work together to advance their market share, better connect their people, execute global goals in local markets and expand their client businesses to exciting prospects for growing assets, personal wealth and corporate interests. Credit Suisse , Bank of America (BAC) and Deutsche Bank (DB) have established strong bases in all major emerging markets, while at CitiGroup 43% of the bank’s revenues comes from emerging markets. These ranking can be used as an objective tool for evaluating the stability and security of the world’s banks—both globally and by region, which may offers in-depth to the companies and investors.

Global Finance Names The World’s 50 Safest Banks 2015

1 KfW, Germany

2 Zürcher Kantonalbank, Switzerland

3 Landwirtschaftliche Rentenbank, Germany

4 L-Bank, Germany

5 Bank Nederlandse Gemeenten, Netherlands

6 Nederlandse Waterschapsbank, Netherlands

7 NRW.BANK, Germany

8 Caisse des Dépôts et Consignations, France

9 Banque et Caisse d’Epargne de l’Etat, Luxembourg

10 TD Bank Group, Canada

11 DBS Bank, Singapore

12 Oversea-Chinese Banking Corp, Singapore

13 United Overseas Bank, Singapore

14 Société de Financement Locale (SFIL), France

15 Banque Cantonale Vaudoise**, Switzerland

16 Royal Bank of Canada, Canada

17 National Australia Bank, Australia

18 Commonwealth Bank of Australia, Australia

19 ANZ Group, Australia

20 Westpac, Australia

21 DZ BANK, Germany

22 Svenska Handelsbanken, Sweden

23 Deutsche Apotheker- und Ärztebank*, Germany

24 Banque Pictet & Cie*, Switzerland

25 Rabobank, Netherlands

26 Nordea, Sweden

27 Bank of Nova Scotia, Canada

28 Hang Seng Bank, Hong Kong

29 National Bank of Abu Dhabi, UAE

30 AgriBank, United States

31 Caisse centrale Desjardins, Canada

32 Kiwibank*, New Zealand

33 China Development Bank, China

34 Sparkassen-Finanzgruppe (Sparkasse), Germany

35 Bank of Montreal, Canada

36 Agricultural Development Bank of China, China

37 Export-Import Bank of China, China

38 CIBC, Canada

39 DNB*, Norway

40 Korea Development Bank, South Korea

41 HSBC France, France

42 Industrial Bank of Korea, South Korea

43 Pohjola Bank, Finland

44 Qatar National Bank, Qatar

45 CoBank, United States

46 National Bank of Kuwait, Kuwait

47 Export-Import Bank of Korea (KEXIM), South Korea

48 BancoEstado, Chile

49 LGT Bank*, Liechtenstein

50 AgFirst, United States

Global Finance Names The Safest Islamic Financial Institutions In The GCC 2015

1 Al Rajhi Bank Saudi Arabia, 2 Al Hilal Bank UAE,  3 Kuwait Finance House Kuwait, 4 Abu Dhabi Islamic Bank UAE, 5 Ahli United Bank Kuwait, 6 Qatar International Islamic Bank Qatar, 7 Barwa Bank Qatar, 8 Qatar Islamic Bank Qatar, 9 Boubyan Bank, Kuwait, 10 Dubai Islamic Bank UAE, 11 Bank AlJazira Saudi Arabia, 12 Sharjah Islamic Bank UAE, Ratings current as of August 14, 2015

References:

  1. https://www.linkedin.com/pulse/greece-debt-crises-background-current-landscape-its-future-ul-haq-1?trk=prof-post
  2. http://uk.reuters.com/article/2015/04/13/uk-banks-latam-m-a-idUKKBN0N41KN20150413
  3. https://www.credit-suisse.com/ch/en/investment-banking/emerging-markets.html, Bank of America
  4. http://marketrealist.com/
  5. https://www.gfmag.com/media/press-releases/global-finance-names-worlds-50-safest-banks-2015
  6. https://www.gfmag.com/media/press-releases/global-finance-names-worlds-50-safest-banks-2015
  7. https://www.gfmag.com/media/press-releases/global-finance-names-safest-islamic-financial-institutions-gcc-2015

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Bina ul Haq

Bina ul Haq, MBA, is a London-based banker with extensive international financial experience. She has expertise in Business Management, Portfolio Management, Risk and Controls. Bina is continuing her studies in a Strategic Program in Global Business from the University of Oxford - Said Business School.

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