National Australia Bank Business Environment - Case Study Example

National Australia Bank Name Institution Instructor Course Date Table of Contents Executive Summary…………………………………………………………...3 Introduction…………………………………………………………………..4 Macro Economic Conditions in NZ………………………………………….4 Opportunities…………………………………………………………………5 Risks and Threats……………………………………………………………..8 Recommendations……………………………………………………………10 List of References……………………………………………………………12 Appendixes…………………………………………………………………...13 National Australia Bank Executive Summary The purpose of this report is to inform the CEO of the National Australia Bank of the existing business environment this bank in Australia and other countries. This report will be of importance to the CEO in making the necessary managerial decisions. The report has given detailed background information about the bank including the composition of its management team and when it was founded. Despite the fact that this bank was founded in Australia, it has over the years established operations in other countries such as United Kingdom, United States, and New Zealand. To be of relevance to the CEO, this report has strived to establish the various threats, risks, and successes associated with the National Australia Bank in New Zealand, based on the existing business environment. In conclusion, this report has issued some recommendations that can be utilized by the bank’s CEO as a way of enhancing performance. 1.0 Introduction The National Australia Bank (NAB) is a financial services organization that has more than 40,000 employees operating in more than 1,800 branches. The bank also has more than 460,000 shareholders (Enock and Green, 2007). It was founded in 1893 by Alexander Gibb, and was referred to as the National Bank Limited. In 1991, the bank merged with the Commercial Banking Company of Sydney Limited to become the National Bank of Australia. The bank operates major financial services franchises in Australia, United Kingdom, United States, Asia, and New Zealand. The objective for this bank is to deliver sustainable and satisfactory returns to shareholders (Tumbarello, 2009). It is also repositioning itself as an Australian personal bank capitalizing on a strong balance sheet. At international level the bank continues to develop businesses in New Zealand, United Kingdom, Asia, and United States with a main focus of increasing shareholder value. 2.0 Macro Economic Conditions in New Zealand In the recent decades, New Zealand’s economic growth has been relatively poor in comparison with the standards in other developed countries. Due to this the New Zealand’s position in the OECD is relatively below average (OECD, 2009). The poor economic performance is a reflection of a weak productivity growth which has undermined competitiveness, incomes, and people’s living standards. New Zealand has also demonstrated a low rate of saving in relation to investment. It is for this reason that investments needs are fulfilled with savings from overseas. This can further be demonstrated by the fact that majority of the New Zealand’s banks are owned by foreign companies. The low rate of saving has led banks in New Zealand to highly rely on foreign borrowing, although most of it is on short-term basis. As a commodity exporter, New Zealand enjoyed huge gains in terms of trade during the 2008/2009 economic crisis (Palffy, 2008). The gains also resulted in an increase in asset-income-spending ratio. The global recession also caused a reduction in New Zealand’s exports which eventually reduced its economy’s capacity to service external debt that was mostly denominated in NZ dollars. 3.0 Opportunities The NAB subsidiary in New Zealand is the Bank of New Zealand (BNZ). The favorable business environment in New Zealand plays a major role in attracting both the local and foreign investments. A Transparency international Corruption Perceptions Index (CPI) of 2009 reported New Zealand to be the least corrupt country in the world (Meyer, 2010). This is an opportunity that should be utilized by the NAB in establishing strong business foundation in New Zealand, as the core mandate of the banking industry revolves around integrity. For many years, the New Zealand economy has been assisted by the strong economic relations that the country has with Australia (Palffy, 2008). Some trade agreements have played a vital role in enhancing the partnership between Australia and New Zealand. For instance, both countries are members of the Closer Economic Relations (CER), an agreement that allows free trade in goods and services such as banking. Prior to 2002, the corporate card services within NAB and BNZ were providing client-oriented servers to their clients, and had plans to review their offers and how it was delivered. This prompted the bank to enter into discussions with Spendvision Company on the possibility of re-branding their Spendvision product and presenting it to the bank’s corporate customers as their own solution (Meyer, 2010). Development of the Information Technology is an opportunity that has led to the introduction of internet services that can be utilized in the banking industry. Through FlexiPurchase.com customers can access their data through the internet. The partnership between the Spendvision and the BNZ had direct benefits on to the NAB. It is a source of additional revenue as the customers can request for credit cards through the internet. Partnering with Spendvision is an opportunity for the BNZ to offer its clients with advanced solution that is constantly upgraded as per the latest technology (Tumbarello, 2009). This has enabled the bank to attract more potential customers who are attracted to the appealing customer solution systems. The responsibility of ensuring that the FlexiPurchase.com offers the relevant service to the customers remains with the Spendvision team while the BNZ remains to enjoy the benefits. The economy of New Zealand is greatly dependent on international trade from Australia, European Union, United States, and other countries from the Middle East (Meyer, 2010). Through economic free-market reforms, New Zealand has removed barriers to foreign investment prompting the World Bank to mention it as the most business-friendly in the world ahead of Singapore, in 2005. Traditionally, New Zealand’s economy was based on farming where wool, meat, and dairy products were produced in large scale. It is the high demand for these products that led to the New Zealand wool boom of 1951. The presence of farmers is an implication that there is an economic niche to be fulfilled as they have to bank their money (Enock and Green, 2007). NAB utilized this opportunity to provide banking services that were better than other banks. It is of significance to note that the farming sector has continued to grow in the recent past, leading to a high GDP, an indication that people need banks to save their income. Since 1984, the New Zealand government has been at the forefront in restructuring the economy from being agrarian-dependent to a more industrialized free market economy that can compete at a global level. Through this form of growth, general incomes have been boosted as the industrial sector continues being enhanced by technological capabilities (Palffy, 2008). The technological advancement is a positive indicator for investors, and this does not exclude the NAB. For any bank to thrive, in any economy, there must be willingness from the host government to improve the supporting infrastructure for such an investment. Inflation in New Zealand is among the lowest in the world while, the GDP has been growing to match the levels of world’s great economies. This is mainly achieved by introduction of monetary policies that reduce the government budget deficit. A low inflation is a positive indication that the economy is doing well, and that most of its population have enough disposable income, and hence can deposit their savings in a bank. The government of New Zealand has always been at the forefront in encouraging investors in the banking industry to buy some shares in the local banks. To achieve this, the government introduced the free floating of exchange rates in 1990’s and removed the controls on interest rates (OECD, 2009). The minimal interruption by the government in matters of economy, and especially the interest rates on borrowed funds, is an opportunity for NAB to expand in various parts of New Zealand. 4.0 Risks and Threats Businesses in New Zealand are supposed to adhere to all the set business regulations such as the environmental policy and the issue of Corporate Social Responsibility. The Reserve Bank of New Zealand (RBNZ) conducts the role of banking supervisor for all the foreign-owned banks. This scenario is a bit different from Australia where the central bank acts as the bank supervisor. The RBNZ supervises banks in accordance to the Reserve Bank of New Zealand Act which requires it to promote the efficiency of the New Zealand financial system. It also avoids any significant damage that can be caused by the failure of any registered bank operating in New Zealand (Murray, 2007). In case the boards of New Zealand banks fail to discharge their responsibilities appropriately, severe penalties can be issued by the RBNZ. Since the New Zealand authorities have the ability to take control of a bank that is not performing according to the set standards, it remains a challenge to many potential shareholders due to the fear of their shares being diluted to certain extent, in such an eventuality. The takeover of such banks may also be a blow to depositors and creditors as they are likely to bear some of the losses (Faul, 2008). The losses may be experienced when the New Zealand authorities lack the access to some critical operating and information system required to operate a bank when a failure occurs. In a bank crisis involving an overseas-owned bank, the RBNZ preference is to act unilaterally. This happens after conducting a co-ordinated response that involves the home and the host authorities. The challenge in this scenario is that the responses require both the authorities to have the capacity to manage the situation in their jurisdiction (OECD, 2009). This may however not be easily achievable as there is a risk that varying interests from the different regulatory authorities may arise. For instance, this may occur when an economic shock places stress on the financial system in one country and not the other. The respective regulators in the two jurisdictions may also have different priorities regarding the future of a failed bank. Another main requirement for the local authorities to manage a bank failure is to have clarity on its financial obligations and the assets needed to meet those obligations. This form of clarity in balance sheets may not be achievable for a bank that is a branch of an overseas parent. In relation to this, NAB may have limited chances of expanding into the New Zealand market without incorporating the local banks. Another risk is that the bank needs to invest heavily in Information Technology so as to prevent the ever increasing cases of bank fraud and hacking (Faul, 2008). The other banks in New Zealand also have advanced technologies that are continuously updated to meet the customers’ demands. To achieve this, the bank needs to invest heavily in research, a venture that might prove costly and risky, as returns are not assured. The over-reliance on trade as a main source of income may also prove to be a risk to the BNZ because any business or political instability in the trading partners, may affect the economy of New Zealand. This will in return have a direct effect on the earnings per capita and hence affecting the rate of saving in banks. The future of the foreign controlled banks in New Zealand remains quite uncertain. This can be explained by the emergence of many groups such as the Campaign against Foreign Control of Aotearoa (CAFCA) which complains that New Zealand’s economy is owned substantially by foreign companies (Brooks, 2009). This is likely to change in future due to political ideologies and hence affecting the NAB operations negatively in New Zealand. 5.0 Recommendations For the NAB to prosper in the foreign market such as New Zealand, it is paramount to conduct a survey on the business environment so as to understand all the opportunities available in comparison to the risks that can be found in such an environment. Once the opportunities have been identified, the management of the NAB should work towards exploiting them fully to the benefit of the shareholders. In addition, it is vital to understand that in any business environment there are certainly some risks associated with it. Any business, including the banking industry, involves some element of risk and so an effective CEO does not shy off from risks but comes out with effective strategies to counter them. The risk of over-relaying on agricultural products as the main source of income in New Zealand can be countered by introducing banking offers where businessmen are given low-interest loans by the NAB in association with BNZ, to establish their own businesses that do not rely on climatic changes. This will encourage many people in New Zealand to have ideas of getting income through other business ventures as a way of diversifying their investments. The bank can even form a committee of business experts who would advise farmers on the other types of businesses they can initiate. Consequently, the bank is likely to benefit through increased savings from the new businesses. It is also imperative for the management of the NAB to closely monitor the government intentions in New Zealand, in relations to the management of New Zealand banks by foreign- based companies. This will enable the bank to take the necessary action in case the government decides to halt the foreign ownership of banks. By being prepared, the bank is likely to reduce the risk that can occur when the government decides to control the bank through a government policy. List of References Brooks, R., 2009. New Zealand Bank Vulnerabilities in International Perspective: Issues 2009- 2224. California: Time Books. Enock, C., & Green, J., 2007. Banking soundness and monetary policy: issues and experiences in global economy. New York: Routledge. Faul, G., 2008. Business Environment: Tests & Cases. New York: McGraw-Hill Education. Meyer, R., 2010. Strategy Synthesis: Resolving Strategy Paradoxes to Create Competitive Advantage. Melbourne: International Monetary Fund. Murray, D., 2007. New Zealand: Financial System Stability Assessment. London: Cambridge. OECD, 2009. OECD Economic Surveys: New Zealand 2009. New York: Routledge. Palffy, G., 2008. Working and Living in New Zealand. Boston: Macmillan. Tumbarello, P., 2009. Australian Bank and Corporate Sector Vulnerabilities: An International Perspective. Sydney: International Monetary Fund. Appendixes Appendix 1: New Zealand Overseas Debt 1993 to 2010 Appendix 2: New Zealand Government Overseas Debt 1993 to 2010 Appendix 3: Gross Domestic Product trend of New Zealand at market prices estimated by the International Monetary Fund Year Gross Domestic Product (NZ$ millions) 1 US dollar exchange Inflation index (2000=100) Per capita income (as % of USA) 1980 22,976 NZD 1.02 30 58.67 1985 45,003 NZD 2.00 53 38.93 1990 73,745 NZD 1.67 84 55.80 1995 91,881 NZD 1.52 93 59.02 2000 114,563 NZD 2.18 100 38.98 2005 154,108 NZD 1.41 113 62.99 Appendix 4: GDP per capita (US dollars, current prices and PPPs) 2009 Appendix 5: Annual percentage change in New Zealand's labour productivity, 1989–2009 Read More