Introduction
The latest economic crisis that resulted from a subprime crisis showed how several factors could affect the ability of banks to maintain their finances under stress. The consequence of an increase in the U.S interest rates and the falling house prices (the subprime mortgage rates) significantly augmented, leading to the downgrading of other structured securities. Securities issued by banks started having trouble in raising funds in the market for the money. The financial markets, financial institutions, and the financial regulators suffered surprise from the crisis, for their lack of preparation in any way: they could not develop sophisticated measures to highlight the implications of the crisis to businesses. The financial crisis exposed the weaknesses of the credit policies of banks in the U.S.
Due to the crisis, the central banks had to undertake a significant effort to support the money market so that it could function as well as individual financial institutions. Any sources of instability usually affect financial markets and threaten their stability. Some of the threats included the drying up of liquidity in the market, opaque products, lack of strong incentives by some operators to monitor and screen their customers, et cetera, though some events that can result in drastic effects may be difficult to predict. This is because of diversification and dispersion of risks, which may take risks to be larger than expected. Moreover, the current risk models of liquidity undervalue the events that can affect the funding and risks in the markets worldwide.
Moreover, financial regulators and supervisory bodies are national-based: they are therefore differential, showing huge variety. This can lead to arbitrages in regulations at times, and the reduction of the effectiveness of supervision. Thus, confidence lacks on the part of the regulators concerning the capital requirements that can help prevent and avoid credit risks. This dissertation highlights the important elements considered in the implementation of effective credit policies and practices that can help banks to achieve integrated and effective supervisory actions for the financial markets in the world. The failure of banks to maintain their liquidity has led to the use of commercial diplomacy to help formulate credit policies. This has been evident with organizations such as Deloitte and Global stakes Inc., providing diplomacy to the formulation of effective credit policies that can improve the banks’ liquidity strongly and positively. This study evaluates the extent to which commercial diplomacy applies to formulate credit policies in commercial banks.
Bank of Ireland SWOT Analysis
The SWOT analysis reveals the strengths, weaknesses, opportunities, and threats of the bank. The strengths and weaknesses reveal the internal environment of the bank while the external environment is illustrated using the opportunities and threats.
Strengths: The Bank of Ireland enjoys a strong market position in the Irish economy. Due to this position, the bank dominates the market hence forming strength for the firm. Another point of strength for the bank is the strong growth prospects for the banking group.
Weaknesses: The Bank of Ireland Group has a weakness in its low return on equity. The low return on equity indicates that the investors in the bank are not able to earn higher income on their investments hence scaring them away. Due to this, the bank is likely to experience issues with low capital funding from investors in the future. In addition to the low returns on equity, the bank has a weakness of declining market share as competition in the market sector increases. The declining market share could be also linked to the low returns on equity and poor economic conditions that adversely affected the bank.
Opportunities: The Bank of Ireland Group has the opportunity of investing and venturing into the larger EU market. The EU market is doing well economically and the union has rules and regulations that favor the operation of the bank in the region. In addition, the bank has the opportunity to venturing into the well-performing BTL mortgage market.
Threats: the global financial crisis affected the activities of the bank leading to poor performance. The crisis reduced bank lending to its clients and corporate firms. Furthermore, the bank is threatened by increased costs of funding. Due to higher costs, the banks registered poor financial results, especially the return on investments.
Financial Performance
Financials provide financial information regarding the performance of the banking group for different financial periods.
Income
The Ireland Banking group has not been performing well in terms of income. As indicated in the table below, the company has been realizing losses for some time now. The income of the firm decreased over time beginning from € 1980 million in 2008, -€1,813 million in 2009 and -€950 million in 2010. The losses in income realized by the firm are attributed to the global financial crisis that affected the business environment throughout the world. The bank of Ireland was affected leading to its rescue by the bailout program of the state.
The comparison of the net profit of Ireland banking Group with the industry indicates that the bank made a loss of -9.1% while the industry posted a positive net profit margin of 20.4. In addition, the pre-tax margin of the bank was at a negative of 14.2 while the banking industry in Ireland posted a pretax margin of 25.8 in the financial period that ended in December 2010.
The credit risk incurred by the banking group could be made worse by various factors. For instance, the Irish government policy may not favor the goals and objectives of the banking group. In addition, the banking group has entered into various contracts with its subsidiaries. The contracts and other agreements containing control provisions could affect the credit issue in the firm if the interests are not the same. The banking Group operates in the EU. The restructuring plans of the EU could subject the bank to various credit risk issues.
Liquidity risk: According to the Bank of Ireland, liquidity risk is realized whenever an organization faces difficulties in financing its assets or meeting its short-term liabilities as they fall due. Banks face liquidity risks especially because of the reluctance of counterparties of the firm to finance the operations of the firm (126). The liquidity issues of the bank could also arise from business environmental issues that are beyond t eh controls of the banking group. They may include sovereign credit ratings, financial markets disruptions, and negative developments regarding the financial institutions. The negative perceptions about the banking group could result from material unanticipated losses or changes in the credit ratings of the bank. The liquidity risk of the Bank of Ireland Group can be worsened by overreliance on a given source of finance rather than diversification.
Operating Expenses
Expenses of an organization determine the level of income realized by the firm. The operating expenses of Ireland banking group kept on reducing from €2,140 in 2008, €1,891 in 2009, and €1,785 in 2010. The expenses are expected to reduce further to €1,695 by the end of the 2011 financial period. In spite of the reducing operating expenses, the bank realized losses (reducing net income) due to the economic uncertainty the country faced.
Assets
The company’s return on investments is not doing well since the returns have been reducing over time. To begin with, the total assets of the company gradually reduced from €197,434 million in 2008, €194,116 millions in 2009 and €167,473 in 2010. The reduction in assets can be depicted by the reduction in the return on investments for the organization. The reduction trend is expected to continue in the 2011 financial period with the total assets being €16,024, current ratio, 1.039 and return on equity of 4%. The ROA of the firm gradually reduced following a reduction in the total assets of the banking group. The return on assets reduced from 18% in 2008 and 21% in 2009 to 12% in 2010. The reduction in the return on investments was accompanied by a low return on capital of -0.3 in 2010. The net income of the bank reduced because if the losses.
The comparison of the return on assets of the company and the industry reveals that, as the Ireland banking group was realizing negative return on capital of 12%, the banking industry was posting a return n equity of 14.4%. In addition, the overall industry ROC was 1.4 while the ratio for Ireland banking group was -0.3. These results indicate that the banking group was performing poorly when compared to the industry hence calling for fast measures to change the performance trend.
Liabilities
Deposits from banks increased gradually from €14130 in 2008 to €28,814 in 2009 and €41,075 in 2010. In spite of the bank deposits increasing, the customer deposits decreased gradually from €86,234 in 2008 to €83,119 in 2009 and to €65,443 in 2010. The deposits are expected to reduce further in 2011 to €59,495. The reduction in the individual customer deposits could be one of the reasons for the poor performance of the bank. Issues in derivative securities also declined gradually over the three-year period with the figures reducing from €60,842 in 2008 to €45,133 in 2009 and €28,693 in 2010. The overall total liabilities for the company also reduced gradually over the three years. The liabilities reduced from €190,912 in 2008 to €187,203 in 2009 and €160,066 in 2010. The liabilities are expected further decline €155770. Due to these declines, the overall liabilities and equity of the firm reduced gradually over three-year period.
Treasury
Liquidity
The company’s liquidity was maintained since the current ratio of the firm was 1.034 in 2008, 1.036 in 2009 and 1.046 in 2010. The ratio indicates the ability of the bank of Ireland group to meet its short-term liabilities. The 2010 debt to equity ratio for the group was 0.38, a figure that was below the industry’s ratio of 1.16. The advantage ratio of the firm was 22.8 compared to the industry’s 22.5. This is a good indicator for the organization since it indicates the ability of the firm to meet its short-term obligations as they fall due.
Interest Rates
The treasurer in the Bank of Ireland is responsible for setting the interest rates that the bank trades in the market in Ireland and setting the interest rate used in lending to other banks. The market interest rate is utilized by the bank to lend to other banks in the market and is based on other competitors in the banking industry in EU. The international banks that the bank deals with borrow from the bank. The treasurer is responsible for setting the rate at which international banks can borrow from the bank. The rate is based on the Euro. Interest rates are vital for the performance of the bank since they determine the level of borrowing and lending in the firm.
Foreign Exchange
The exchange rates are important for the clients of the Bank of Ireland. The treasurer is responsible for setting up an exchange rate that is favorable for the customers as well as the organization. The foreign exchange rate is usually based on the Euro fluctuations in the countries of operation.
Marketing
Main Activities
The Bank of Ireland is responsible for providing full banking and investments services for its customers and for its own account in Ireland, UK, Europe and U.S. the bank achieves this by offering a comprehensive range of banking and related services for retail and corporate customers as well as financing all types of trade and industrial projects and activities. Additionally, the Bank provides a varied range of asset management and brokerage services based on the needs of the customer and respective capital markets, as well as providing a wide range of mutual funds and investment services.
Main Achievements
The bank has achieved various things regarding provision of services to its clients and corporate banking is concerned. Significant progress was made in strengthening the capital of the bank. The capital requirement was exceeded through utilization of liability management practices over the 2010 financial period. The capital raising strategy employed in the year led to collection of €1.4 billion in equity. The bank improved its funding initiatives through deleveraging initiatives, gathering deposits, extending maturity. In spite of these efforts, the funding of the group was adversely affected by the downgrades of sovereign ratings and extension of eligible liabilities. Due to these limitations, the banking group recorded a loss of €1 billion before tax. The report released by PCAR in early 2011 indicates that the economy of Ireland was growing at a slow pace, elevated unemployment for prolonged periods a decline in residential house prices. These factors are responsible for the low performance of the firm.
Strategies and Objectives
The banking group aims at becoming a leader in consumer banking and corporate banking in Ireland. The management of the bank would like to achieve the objective by extending the branch network, using eBanking, telebanking and the distribution of life, pension and investment products. In addition to these, the bank intends to improve its performance through asset financing, treasury and corporate banking businesses. As the bank employs these strategies, it hopes that the economic trends in the Irish economy would change positively. The competition of the bank in Ireland is form a dominant position since the bank is a leader in key market positions across the country.
The banking group in UK has continued to target consumers through consumer banking and collaborating with the UK post office to reach out to the consumer. The group has over €2.3 million clients across UK accessing the services of the bank. The establishment of the UK licensed banking subsidiary has enhanced the positioning of the bank in UK. The bank has also continued to support the international based treasury and corporate lending in which it believes that it has competitive capabilities and strengths. Through the international strategy, the bank provides various portfolios such as UK portfolios, selected international niche businesses, international commercial investment and land and development loans. The bank estimates to sell all international portfolios by the end of 2013.
Bank of Ireland
This financial institution provides banking and financial services to the Irish community and other established markets. The bank was established in 1783 by the royal charter as a group that provides financial services. It has grown over time to become what it is today. The back executes many central bank roles although it is not the bank of the state. Such included the operation of the exchequer account in the 19th century hence acting as a banker of the last resort. It is headquartered in Dublin. The bank group operates in other countries throughout the world. The bank has subsidiaries in Asia, Europe, Northern Ireland, and UK and in the U.S.; the operations of the bank in all of its subsidiaries are based on the parent company policies and guidelines.
Major Segments
The bank of Ireland has major segments that contribute towards the group’s financial performance. The segments include:
Retail Republic of Ireland: this segment includes all retail branches and outlets of the banking group in Ireland offering a variety of services such as lending, deposits, account opening among others.
Bank of Ireland Life (Bol Life): this segment offers life assurance services to the customers. It includes New Ireland Company Plc that provides protection, investment and pension products to the company clients.
UK Financial services: this comprises banking business in the UK and Northern Ireland. Others are the mortgage business and UK Post office activities. Through this segment, the group provides loans, capital financing, leasing and electronic banking.
Capital Markets: this is a division of the corporate banking and global marketing of the Bank of Ireland group. It includes asset Management Services and IBI corporate finance.
Group Center: the group center segment includes capital management activities of the banking group. These segments contribute towards the consolidated bank statements of the Bank of Ireland as indicated in the figure below.
Banking Industry in Ireland
The Irish economy is knowledge based since it focuses on service provision industrial activities. The banking industry was one of the profitable industries. However, the turn of economic environment and the global financial crisis led to the wiping away of the extra profits realized by firms in the industry. The industry is not fully recovered hence poor performance of the banks operating in the industry. The country has the best quality of life that has led to increased banking activities for both individuals and organizations. The banking industry of Ireland was adversely affected by the global recession as the banks in the country went bankrupt. Poor credit policies led to the country being the first member of the EU to declare the recession. The AIB and Bank of Ireland dominating the market with many small banks with small market shares characterize competition in the bank (DOF 1).
PESTLE analysis
Political environment: the political environment in Ireland is favorable for conducting of business in the country since it is stable and led by the legislature. The term of the head is state is long enough (seven years) to avoid any business cycles associated with politics in the country. Coalition governments are common. Due to the favorable political climate, the banking industry in the country is doing well except for the global financial crisis that affected the financial sector in which the bank of Ireland also operates.
Economic Environment: the economic environment of the Republic of Ireland is favorable for the operations of any banking institutions. The economy has been known to transform from an agrarian focused economy to a knowledge economy. According to DOF, knowledge economy is an economy that is based on service provision and industrial activities (2). The average economic growth of the country has been about 10% between 1995 and 2000 and 7% between 2001 and 2004. An increase in consumer spending in the economy indicates a positive trend towards increased banking activities and service provision for the Bank of Ireland. With the overcoming of the global financial crisis, investment activities in the country have increased indicating that many investors are certainty of future business conditions in the country. Due to increased investment activities, the Bank of Ireland has realized increased service provision. Being considered as a world leader in service provision, the Irish republic benefits from the EU, a union in which Ireland is a member since 1973. The fact that the country is a member of the EU is a positive indicator for the banking industry since the banks in the country are able to establish business in any other EU member. It is one of the reasons for the diversification of the Bank of Ireland Group (Bank of Ireland 33).
According to Bank of Ireland, Ireland joined the launch of the Euro in 1999 leading to the drop of its Irish pound and adoption of the Euro (29). The common currency has promoted business leading to increased economic growth. The country has the best quality of life in spite of high inflation towards the end of 2008. Success in the economic growth in the country has always been accompanied by increasing economic inequality. However, the country is one of the most expensive in Europe.
Socio-cultural environment: the official language of communication in Ireland is English and Irish. Elementary, tertiary and secondary education is offered freely for all citizens originating from any of the EU countries. The country’s social status is changing due to the influence of diverse culture in EU. For instance, it has been argued that the legal status in relation to divorce is changing with new legal options being sought. The film industry and the music industry in Ireland are flourishing hence providing necessary business for the banking industry that provides financial investment services. The structure of the society is catholic oriented. From the cultural standpoint, the performance of banking is highly supported.
Technological Environment: the technological environment in Ireland favors the operation of financial institutions such as banks. The country has well developed infrastructure with three main airports linking the country and the outside world. The good railways structure in the country provides public transport. The National roads Authority manage the road network in Ireland. The ferry system also adds to the transport system of the country hence transacting business in the country is easier. Due to the ease with which business is transacted, the banking industry in the country performs well (Bank of Ireland 35).
Trends
The banking industry in Ireland used to be very profitable. According to Bank of Ireland, the industry used to enjoy good working environment that led to increased profitability of the firms in the industry (43). However, the recession wiped away the abnormal profits that were being enjoyed by industry operators leading to low profitability of the industry. The events that happened in the end of the last decade (2008/09) have reduced competitiveness in the banking industry in Ireland. Risks in the market increased reducing the number of entrants in the industry. Following the conservative nature of banks in Ireland, the level of competition has gone down. According to Bank of Ireland, the bailout plan offered by the state to the firms in the country is very hostile towards banking institutions because it was developed within the political context (66).
Asset Management
The bank offers different funds to different groups of the company customers as differentiated by the firm. The services provided by the organization target both individual and corporate clients. Some of the services offered by the firm include Business banking and personal banking. The banking group did not perform well in terms of efficiency. The efficiency in organizations is determined by the utilization of the company resources. In this case, Ireland banking group does not utilize its resources effectively. This is evident from a negative value of income/employee ratio that was €-59,749 in the 2010 financial period. The industry is doing well since it has a positive ratio of income/employee of 358,598. Another ratio revenue/employee was positive for both the banking group and the industry. However, the industry figure is higher than the ratio of the company since it is €4 million while the company’s figure is only €655,176.
Business banking: under this form of services, the bank has funds set aside for funding business activities. some of the main activities funded in this category is the funding of business activities in regions the bank operate including Ireland, UK, EU and in the U.S. through business financing, the bank provides services that suit businesses in different regions. In addition, asset finance is provided in line with business requirements.
Personal finance: the bank provides funds that help its individual customers. Some of the services offered include personal banking, personal loans, mortgages, asset finance (hire purchase, leasing, chattels etc).
Corporate Finance
Bank of Ireland Group is committed in providing high quality advice in corporate finance to its customers. The IBI Corporate finance subsidiary of the bank delivers high-level advice that is unrivaled in the Irish market. The advice offered covers various aspects encountered by organizations and people in their daily lives and business lives. Some include advice on mergers and acquisitions, disposals of assets, buy-outs and raising finance. The IBI corporate finance subsidiary of Bank of Ireland is dominant in the Irish market for corporate finance.
Economic Trends and Future Plans
The operations of the bank of Ireland group depend on the economic trends in the Irish economy. The Irish economy faces many business cycles similar to any other economy. The economy realized a recession in 2008 and has not fully recovered from the recession effects. The banking industry in Ireland is promising since the recession effects are gradually fading away. The bank of Ireland is positive on looking forward to posting positive financial results. The bank depends heavily on the UK and Irish market in addition to other subsidiaries in other countries. The recovery of the UK and Irish economies indicates that expenditure would begin to rise due to increased certainty of investors about the future. Gradually, they will increase their loan and capital application from the bank hence leading to improved performance. However, the bank is cautious on credit policies so that to reduce credit risks and improve its future performance while reducing vulnerability to credit risks (The Outlook 1).
The poor performance of the company is set to stop due to good economic conditions in different regions of operation such as EU, Asia, and U.S and in UK. The good economic conditions in the UK and EU would transform the performance of the group from loses (negative) to profits. The bank of Ireland is committed to helping the Irish population. The achievement of this objective is based on the pricing strategy undertaken by the banking group. The Irish government affirms the role of the bank in the Irish with the state indicating that the bank plays an important role in the economy. Therefore, the bank plans to increase its expenditure in the Irish economy with the target being provision of funds to SMEs and the provision of specialized loans and venture capital to the sector in the economy. The plan of the bank in EU that was approved by the EU is to restructure the EU economy. The bank intends to continue with this plan.
The outlook of the bank indicates that the bank has been operating in challenging conditions since the beginning of the 2011 financial period. This is due to the increase in the funding costs, cost of customer deposits and difficulties in the liquidity of the bank. However, the bank hopes to overcome the difficulties in operating conditions since the operating costs are strictly controlled with an expectation of further reduction in the non-NAMA designated loans.
Chief Financial Officer
This officer is responsible for all foreign investments made by the company in all countries and regions it operates such as investments in EU, UK, U.S and in Asia. Some markets such as China and India are emerging markets, full of potential and should be the target of the officer. In addition, the focus on international markets, the officer should focus on domestic environment in Ireland. Some of the sector that might of interest to the officer includes individual consumption, Construction industry, manufacturing and the private sector.
Treasurer
The individual in this position is responsible for ensuring that the firm maintains its liquidity through maintenance of proper liquidity ratios. This will help the firm meet its short-term obligations. In addition, the person should maintain required interest rates in the bank to avoid any credit, liquidity and interest rate risks.
Operations VP: the official holding this position help the bank improve its operations in order to avoid any operational risks. This could involve public relations and maintenance of high quality service provision to the clients. He/she is at the heart of operational risk management. The person should be involved in process examinations and control in order to control fraud cases.
Investment banking VP: He/she is responsible for increasing investments of the bank as well as helping increase the investment customer base for the organization. This could be achieved through reduction of rates where necessary to attract more investors.
References
Bank of Ireland, Annual Report 2008, Web.
Bank of Ireland, Annual Report 2009, Web.
Bank of Ireland, Annual Report 2010, Web.
DOF, Report of the Department of Finance/ Central Bank Working Group on Strategic Issues facing the Irish Banking Sector, 2009, Web.
The Outlook, Quarterly Analysis of Trends in the Irish Economy. 2008, Web.