Chemistry

Executive Summary

Written by “UST SBM Best”

Zhao Xiaolin, Wang Chen, Yuen Hay Tung, Lam Long Ching

Part 1: Overview of ABC

Background: ABC is established in 1951, and its orientation is an international financial bank that provides comprehensive services for both urban and rural areas in China.

Ranking: As of 2011, it ranks 8th among the Top 1000 World Banks, meanwhile In 2015, it ranks 3rd in Forbes’ 13th annual Global 2000 ranking of the biggest, most powerful and most valuable companies in the world.

Supplement of their Product offering & Target segments: Based on agro-related financial service, its service covers both corporate and retail bank service, and extend to some advance financial service. Their favorable and preferential product focus on peasant and township enterprise. For example, Jinsui Huinong card, a card that can be provided the cardholder the trade details of the account, farmers small loan carrier, rural social security health insurance identification and other characteristics of service functions.

Supplement for weaknesses: Except traditional credit market, emerging financial markets and investment banking have relatively low competitive advantages over other big banks, and are sharing a low market size, which is around 2%. (2013 data)

Part 2: ABC’s current strategies and future outlook

Based on and developing from agriculture related banking services, ABC’s current strategy still focus on “Agriculture, Rural area and Farmers”, by means of actively building branches in counties and township area and promoting preferential loan product, which fulfills the need of  individuals and SMEs in rural area. Secondly, in the age of IT, ABC takes advantage of rapidly developing intelligent hardwards and internet technology to upgrade its current operation system, which effectively saves operating expense and enhances service efficiency. In addition, influenced by more intense competition in credit market caused by interest rate marketization, the profit margin of conventional loan and deposit business is declining. Under this condition, ABC takes the strategy to enhance competitive advantage in more diverse financial services and emerging financial market.

By quantitative analysis of indicators related to its strategies, we found that its market share increased by expansion to and domination of county and township area. The loan volume and NIM also benefited from this strategy. In addition, the digitalization reform contributed to the lower operation cost. In the foreseeable future, the trend of focusing on agri-related service and intelligentization will still continue. However, as credit business is still the major proportion of about 80%, the interest rate growth rate and NIM will slowly decrease.

Part 3: Options Analysis: Stay in China or Expand Aboard?

(1) Push Factors (Threats>Opportunities): Based on what we learned from ABC’s current financial performance and the overall Chinese macroeconomy benefits for banking industry, we think staying in China will bring ABC continuous and rapid growth of investment in loans and receivables. As ABC’s target segments are rural customers, combining with the demography in China, we also believe large development potential still remains in rural areas. But threats also exits. From a broader view into the long-run Chinese economy, actually China’s banking industry growth rate is dropping recent years. Not only in banking industry, but China’s overall economy slows down after GFC, so if we stick in China for long, we will spend a long time to recover from the slowing trend. But if we use this manpower and asset to expand oversea, this may lead to a head start over other Chinese banks in oversea service field over decades.

(2) Pull Factors: Why is expanding aboard a suitable strategy?: Expansion abroad will benefits us in the following ways. This will help us develop a diversified business to decentralize China’s business risks and if ABC can take advantage of the “Going Out” strategy for Chinese-funded banks, it will gain decent international reputation and a competitive positioning in both China and oversea target region.

(3) Target --- India: Based on the proportion of ABC’s loan revenue generated from two different fields, we found we can focus on these two segments. General benefits could be lower cost of operation in India, overall rapid growth of Indian economy and opportunities generated by “Waste Money Order”. For retail banking, opportunities can be that Indian society suit the policy and positioning of ABC, and moreover, low banks penetration rate is very attractive. For corporate banking, drastic increase in Chinese investments in India owing to political support and higher loan interest rate compared to China will give delightful room for ABC to develop in India corporate banking industry. However, although there are many opportunities to develop our oversea market in India, there are still assignable obstacles. Standing on politic anchor, bilateral tensions due to political disagreement could worsen Sino-Indian relations. And improvement in Indian banks and entry of foreign banks have caused tenser competitors.