Banking Sector: PESTLE and SWOT Analysis - Essay Example

?Banking sector (PESTLE and SWOT analysis) Table of Contents Table of Contents 2 Introduction 3 PESTLE Analysis of UBS 3 SWOT Analysis 8 Strategic recommendation 13 Reference 15 Bibliography 18 Introduction UBS is among the leading financial firms in the world and ranks sixth in the world in terms of market capitalisation. The bank is based in Basel and Zurich, Switzerland with offices in over 50 countries. This includes all the major financial hubs. Drawing on its 150 year old heritage the investment bank serves institutional, private and corporate clients across the globe including some Swiss based retail clients. The bank has integrated its investment banking, wealth management and asset management services with the Swiss operations to provide high quality financial solutions (UBS-a, 2011). The bank is relatively new. It came into existence in 1998 with the merger of Swiss Bank Corporation and Union Bank of Switzerland. Today the bank has grown as a global firm with a strong market position in Europe, US and Asia and a higher employee base in US than Switzerland, despite a dominant presence in the Swiss retail market. Most of the growth achieved has been through the M&A (mergers and acquisitions) deals. PESTLE Analysis of UBS The PESTLE analysis of the banking sector examines the various factors that affect the industry thereby impacting the companies operating in the industry. PESTLE is an acronym of political, economic, social, technological, legal, and environment analysis. The factors relating to economy include interest rates, economic growth, rate of inflation and exchange rates. The social factors include changes in buying patterns, culture, changes in consumer preferences etc. Technological factors include R&D, advancement in technology, innovation, new inventions etc. The legal factors include the legal framework of the country i.e. whether the legal environment in a country is conducive to conducting business activity, the banking rules and regulations in the country whether it is stringent or liberal etc. The environmental factors generally do not have any influence on the performance of the banking sector. Political- The political condition in Switzerland is quite stable. In fact some economists assigned the political stability of the country as an important factor that propelled the country’s economic success. The political system of the country is very effective as is evident from the high authoritative powers granted to the county and state governments. As compared to the Federal government the state level offices are in a position to react more efficiently and are equipped with better decision making power. The success of the banking sector in the area of asset management is owing to a traditionally stable political condition, reliability and high efficiency of banks and the overall good performance of the investments (Swiss Bankers Association, 2004). A stable political environment is conducive for the operations of the banks. Economic- The country enjoys the status of tax haven that makes it an attractive destination for making investments. Switzerland is renowned as the most prosperous and advanced countries in the world. The per-capita income of Switzerland is one of the highest across the globe. The prosperity of the country is on account of its trade with exports being a source of income and import of necessary raw materials contributing to the wide range of indigenous supply of goods and services. The domestic currency is among the soundest currencies in the world. Moreover the country is reputed for high quality financial and banking services. The investment in a country thrives on a stable exchange rate. As mentioned above the country attracts good investments on account of a strong domestic currency. The performance of the banks depends strongly on this factor. The banks can draw good investments from the overseas as the clients are convinced about the value of their investments. Besides the added benefits of tax haven is also one of the reasons that make the region an attractive investment avenue. The nation is closely related to the US and Western European economies therefore its economy is also affected by the growth spurts or slowdowns in these economies. This explains the recent drop in the domestic economic activity that fell by 1.5% in the year 2010, on account of the recent slowdown in the global economy (U.S. State Department, 2010). Even the banking sector in the country did not remain immune during this crisis period. This is evident from the huge losses suffered by the banks. The share price of UBS fell from CHF 75 in 2007 to CHF 8 in the first quarter of 2009 (Thunderbird School of Global Management, n.d.). The portfolio of the bank comprised huge volume of sub-prime debt following which the bank reported huge losses. On the whole it shows that the economic climate of the country is largely influenced by the economic conditions prevailing in the other countries with which it has business tie-ups. Social- The attractive locale of Switzerland brings in a number of multi-talented and high skilled staff. This means that the banking sector can hire the services of professionals. The cultural diversity of the country also works in the favour of the businesses. The high literacy rate in the country is also a positive factor (Central Intelligence Agency, 2011). This implies that the country will never have a shortage of skilled workforce. Besides a significant amount of the country’s GDP goes towards meeting the education expenditure of the country. The country holds an important position in terms of lifestyle, which includes per capita income, insurance coverage, usage of internet technology and health care services. All these reasons have ensured that the country is an attractive destination for the businesses that want to launch new products (U.S. State Department, 2010). Technological- The country has a well developed infrastructure and telecommunications network providing high quality international and domestic services. This ensures better connectivity between the banks and the consumers. The internet user base of the country is 6.152 million (Central Intelligence Agency, 2011). A high internet user base means that the people in the country are technologically advanced. This aids the development of online banking services in the country. In the current business environment when most of the consumers prefer doing online transactions it helps in saving the banks’ resources. Moreover the electronic nature of the banking operations also expedites the transactions. This leads to greater customer satisfaction which is one of the keys for the success of any business activity. The internet based banking means lesser number of queues thereby enabling the banks to spend less on the office spaces. Considering the benefits associated with the online banking services the customers prefer to transact with the banks by sitting in the comfort of their homes which is advantageous for both the banks and customers. The banks are benefitted in the sense that they have to spend less on manpower as the number of client interactions gets limited whereas the customers do not have to take the pain of travelling to the banks. The mobile cellular base of the country is 9.255 million (Central Intelligence Agency, 2011). The advanced technology has been integrated with the mobile services to develop mobile banking in the country. Therefore, the mobile services enable in making various banking related transactions. Legal- The Federal Banking Commission (FBC) monitors the financial markets and banks. The supervisory power of this commission covers stock exchanges, investment funds, brokers, institutions dealing in central mortgage bonds and various disclosures relating to public issue and holdings. Besides safeguarding the interests of the investors and creditors the FBS guarantees a smooth functioning of the securities markets and banking institutions. Other than this it has to monitor any issues like money laundering prevention and make sure that the various financial intermediaries meet the terms of the Anti-Money Laundering Act. The banking law in Switzerland does not contain any clear-cut definition of its purpose. Nonetheless, the individual articles and the existing supervisory authority state that its primary function is the protection of the creditors of the banks’, specifically depositors. Over the last few years a considerable amount of attention has been given to individual customer protection and also to the overall banking functions. This includes safeguarding the system and confidence. All this is needed in maintaining stability in the financial sector. The legislations of the banking system are primarily aimed at ‘public interest’. This includes Central Bank Act (CBA), Federal Act on Banks and Savings Banks (Swiss banking law, SBL), etc. Besides all this special laws relating to bonds, consumer lending, money laundering and other relevant ordinances complement the above mentioned legislations. The performance of business operations in the country requires a license from FBC. The issue of this license is subject to a number of legal requirements. To obtain this license the banks have to maintain an impeccable conduct in its business activities failing which the FBC is authorised to revoke the license. This often results in bank liquidation (Swiss Bankers Association, 2004). Presently, the banking system is engaged in a legal tangle with US and European Union in matters like tax evasion and claims on money laundering. UBS and IRS are already involved in a legal battle. It is clear that things like banking secrecy and confidentiality are changing. The Swiss government and Swiss banks are set to adopt the global framework which is likely to bring back the banks to its old flourishing self (Thunderbird School of Global Management, n.d.). Environmental- The environmental conditions generally do not have any significant impact on the banking activities. However, it must be mentioned that the attractive location of Switzerland helps in attracting highly talented and multi-skilled workforce. Besides, the high compensation packages offered by the Swiss banks help in retaining the staff. SWOT Analysis Strength- UBS is firmly established in the worldwide financial markets as is reflected from the global share trade where one in every nine shares is handled by the investment bank. This has made the bank a leader in the worldwide primary and secondary markets equities and equity based derivative products. The investment bank has for main businesses. UBS Business Banking and Wealth Management comprise the largest “private banking business” in the world and also the largest ‘corporate banking businesses” in Switzerland. The Global Asset Management arm of UBS is one of the leading mutual fund service providers and also excels in the institutional asset management. It has invested assets worth US$403 billion and offers a wide range of asset management related products and services to the retail and institutional clients across the globe. UBS Paine Webber, a top rated wealth manager in US, merged with UBS in the year 2000. With a distribution network base of 8535 financial advisors it manages invested assets of more than US$464 billion, offering high quality wealth management services to the affluent (Grosse, 2004, p.95). UBS has maintained itself as an integrated services firm and takes pride as the provider of a comprehensive set of products and services in the financial services industry. The strength of the company lies in the ‘size’, global presence and its specialised services in the areas of investment banking, asset management and wealth management (Wet Feet, 2009, p.11). UBS ranks among the top European players in the market in terms of assets management. There has been a steady rise in the demand for its services. The onshore business of UBS works towards targeting the core affluent, financial intermediary and ultra HNI markets Germany, France, Spain, Spain, Italy and UK. The investment banking unit of UBS is among the best known in Europe. Its advisory model which is actually a comprehensive matrix of sector, country and banking professionals facilitates the most challenging and complex overseas corporate finance agreements. The group’s peers as well as business clients acknowledge the bank’s leadership in equity as measured in terms of business volume and a series of awards. The high ranking of its analysts testify the quality of equity research. The stronghold of the bank in money markets, fixed income, commodities and currencies give it a commanding position in the debt market of the region (UBS-b, 2011). The strength of the bank is also evident from the rise in the brand value. As per the survey conducted by Business Week/Interbrand the total brand value of UBS is worth $9.8 billion making it the thirty-ninth most valued brand in the world as compared to forty-two in the year 2006. This signifies a rise of nearly 13% in the year 2007. A strong name in the market facilitates better market penetration besides enhancing the customer recall (Research Markets, 2008). Recently UBS management adopted the ‘umbrella brand strategy’. This means that all its three businesses- investment banking asset management and wealth management will now operate as ‘one single firm’. The main reason behind this move is said to be the synergistic growth gains. The presence of a single brand enhances brand awareness, familiarity and consideration for UBS thereby reducing the client’s confusion in the case of multiple brands (Knoll, 2008, p.165). Weaknesses- Despite the strategic initiatives taken by the bank suffered severe losses in the recent financial crisis. With a huge amount of subprime debt carried by the investment banking division the bank suffered severe negative results. Besides deteriorating results the bank is grappling with legal pressures from European Union and US on issues relating to money laundering and tax evasion. The legal battle between UBS and IRS highlights the changing banking scenario. The investment bank is also facing a loss of its trustworthy clientele base. Some of the affluent clients of the bank have abandoned the bank in the fear of worst. The situation has been further worsened by the flight of its highly talented workforce for better opportunities. Switzerland is considered by some countries as a platform of tax haven. This is the reason the region has been strongly criticised for attracting funds from undesirable people like dictators, politicians, etc. This calls for some changes by the Swiss bank in the operational front i.e. the UBS has to work towards redesigning the financial products and offer more transparency and sophistication. The credit-rating of the bank was lowered by Standards & Poor’s and Fitch Ratings more than once in the years 2009 and 2008. A further fall in the ratings can raise the funding costs especially with respect to funds obtained from unsecured wholesale sources and impact its capital market accessibility (UBS-c, 2011). The long history of its wealth management services and the political and economic stability offer the Swiss bank a strong competitive advantage. Besides the country being an attractive destination brings in highly talented professionals. To forge a relationship with the employees the bank needs to offer an attractive compensation package which will ensure a long stint of these multi-talented individuals. Opportunities- The investment bank is known for its stronghold in areas like sales, research and trading. This has catapulted its growth in areas like asset management, commodity trading and hedge fund. The hedge fund operations of UBS offer cross-product and structured financing to the big hedge fund. The growth areas of UBS within the investment banking business include leveraged finance, structured credit, commodities and real estate finance. The bank has a presence in the major financial regions of the world giving it a stronghold in the emerging markets of the world. In Russia the bank has been functioning for over ten years. It has captured a significant chunk of the domestic equities market and investment banking. Currently it is focused on developing foreign exchange and fixed income business in the region to tap the available opportunities in the local region. The physical presence of the bank in key business locations together with the tie-up with the local talent has strengthened its position to exploit the opportunities in the Middle-East countries. UBS also has an office in Dubai’s International Financial Centre thereby providing it the necessary platform for renewed expansion (UBS-d, 2011). Threats- The performance of the financial services firms depends on the economic conditions. Any adverse development can mar the business activities of UBS. The financial services companies flourish in times of stable political conditions, strong economic growth, transparent and buoyant capital markets and positive investor outlook. An economic slowdown, severe credit crisis or inflationary situation can have an adverse impact on the revenues of UBS as the bank may not be able to adjust its costs immediately with the deteriorating market conditions. As the worldwide financial markets are interconnected any local happening is bound to impact the other regions as well. A reduction in the level of market volumes and business activity affects commissions, fees and margins earned on various customer related transactions. An illiquid market restricts arbitrage and trading opportunities and hinders risk management ability of the investment bank. Suppose, the countries where the bank operates enforce restrictions on overseas payments then UBS could incur huge losses due to restrictions on accessibility of owned assets. Liquidity is an important factor for the UBS businesses. Most of the liquidity needs of the bank are met through unsecured short term funding sources such as retail & wholesale deposits and issue of money market instruments. Though the volume of this funding has been more or less stable but this may get impacted by any market disruptions in the future. Such changes could force the investment bank to dispose-off its assets from the trading portfolio to honour deposit withdrawals or pay-off its maturing liabilities. Given the low prices of the trading assets the profitability of the bank could be adversely affected. The financial services firms are characterised by continuous financial innovation, intense market competition. The competitive edge that the bank currently enjoys may get wiped out if the bank is not able to identify major market developments and trends. Its failure to respond to these changes by revising its business strategies or its inability in retaining qualified talent can have a severe impact on the functioning of the bank. The huge losses incurred by the bank in 2008 forced it to cut-down the variable compensation package of the employees giving rise to the fears of loss of key employees. The clients, regulators and investors relationship of UBS is based on its reputation. Any misconduct on the part of its business partners or employees can severely tarnish its market image. This may result in high client attrition and can adversely the financial performance of the business (UBS-e, 2011). Strategic recommendation The recent events have had a bad impact on UBS’s business activities. At this juncture it is important for the bank to restructure itself to be able to revive the past glory. Despite the severity of the recent crisis it will not take too long to bring back the austerity, given the positive track record of the bank. On the operational front the investment bank would have to work towards re-designing its financial services and products in terms of making it more sophisticated and transparent. UBS most re-focus on its core business activities. The services and products of the banks require readjustments to make it more appealing to the clients besides ensuring that these products satisfy the regulations of all jurisdictions. The senior managers of the bank must focus on wealth management expertise such that the tax issues are also taken care of besides maintaining client confidentiality. This will create an undisputed market space for UBS that takes care of tax declaration and lucid wealth management service of the overseas clients. Besides bringing back the focus on the core business activities the bank can supplement it with expert tax advice and real estate planning (Thunderbird School of Global Management, n.d.). All this will ensure the return of its once faithful and affluent client base adding to the invested asset base of the bank. Conclusion The recent financial crisis sent ripples across the worldwide financial markets. Like many financial institutions even UBS was affected by the impact of the recent crisis. The financial result of the investment bank deteriorated drastically during the period on account of the huge losses on its position in various classes of derivative instruments. This eroded the faith of its once faithful and loyal customers. This loss of trust caused the bank heavily in terms of loss of valuable clients. But with time the bank has slowly recovered from the crisis as reflected from its improved financial performance. Given the political stability and the attractive location of Switzerland, the region offers good future prospects for the banking system. The investment bank is in a position to get back to its normal self if it focuses on its core activities and values the need for lucid wealth management for its clients that takes care of confidentiality as well as transparency needs. Reference Central Intelligence Agency. 2011. The People. The World Factbook. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/sz.html [Accessed on March 5, 2011]. Grosse, E.R. 2004. The future of global financial services. Wiley-Blackwell. Knoll, S. 2008. Cross-Business Synergies: A Typology of Cross-Business Synergies and a Mid-range Theory of Continuous Growth Synergy Realization. Gabler Verlag. Research Markets. 2008. UBS: Strategic Corporate Assessment - Strategy, SWOT Analysis and 5-year Financial Insights with In-depth Company Profile. Available at: http://www.researchandmarkets.com/reports/577740/ubs_strategic_corporate_assessment_strategy.pdf [Accessed on March 5, 2011]. UBS-a. 2011. UBS in a few words. About us. Available at: http://www.ubs.com/1/e/about/ourprofile.html [Accessed on March 5, 2011]. Swiss Bankers Association. 2004. The Swiss Banking Sector. Compendium Edition 2004. Available at: http://www.swissbanking.org/en/111_e.pdf [Accessed on March 5, 2011]. Thunderbird School of Global Management. No Date. Can UBS Survive The Crisis? Lessons to Be Learnt. Available at: http://knowledgenetwork.thunderbird.edu/students/2010/07/12/ubs/ [Accessed on March 5, 2011]. UBS-b. 2011. UBS in Europe, the Middle East and Africa. Available at: http://www.ubs.com/1/e/career_candidates/exp_professionals/regional_footprint/emea.html#growth_areas [Accessed on March 5, 2011]. UBS-c. 2009. Risk factors. Available at: http://www.ubs.com/1/e/investors/annual_reporting2008/spr2008/0004.html [Accessed on March 4, 2011]. UBS-d. 2011. Growth areas. UBS in Europe, the Middle East and Africa. Available at: http://www.ubs.com/1/e/career_candidates/exp_professionals/regional_footprint/emea.html#growth_areas [Accessed on March 4, 2011]. UBS-e. 2011. Risk Factors. Available at: http://www.ubs.com/1/e/investors/annual_reporting2008/spr2008/0004.html [Accessed on March 4, 2011]. U.S. State Department. 2010. People. Background Note: Switzerland. Available at: http://www.state.gov/r/pa/ei/bgn/3431.htm [Accessed on March 4, 2011]. Wet Feet. 2009. Ubs 2009. WETFEET, INC. Bibliography Chang, H. 2007. Institutional Change and Economic Development. Anthem Press. Swiss Bankers Association. 2010. Compendium 2010 The Swiss Banking Sector. Swiss Banking. Available at: http://www.swissbanking.org/en/kompendium-2010.pdf Read More