Professional Documents
Culture Documents
1.1.0Introduction
This report is prepared on The HongKong and Shanghai Banking Corporation- HSBC, in
Bangladesh. With its symbol of a Hexagon and the illustrative theme The worlds local bank
HSBC is known to a lot of countries and territories of the world as a leading financial service
institution.
Although the history of its operation in our country is relatively new, yet HSBC already
commands a great deal of respect and reputation in our banking community. We consider our self
privileged as an MBA student from ASA University Bangladesh, to work with HSBC.
While working with different sections of Personal financial Services Department, We got the
opportunity to observe various principles and procedures followed in this department. On
completion of our visiting duration, we decided to start compilation of a report on our works,
side by side with our routine job assignments.
1.2.0 Background
Every Financial Institute irrespective of its size is generally exposed to market liquidity and
interest rate risks in connection with the process of Asset Liability Management. Failure to
identify the risks associated with business and failure to take timely measures in giving a sense
of direction threatens the very existence of the institution. It is, therefore, important that the
strategic decision makers of an organization assume special care with regard to the Balance
Sheet Risk management and should ensure that the structure of the institutes business and the
level of Balance Sheet risk it assumes are effectively managed, appropriate policies and
procedures are established to control the direction of the organization. The whole exercise is with
the objective of limiting these risks against the resources that are available for evaluating and
controlling liquidity and interest rate risk.
1.3.0 Objectives
HSBC is a well known fact that the function of Asset and Liability is very crucial for any bank.
In Bangladesh, banking is relatively underdeveloped, and the practice of a prominent foreign
bank like HSBC in its asset and liability management can be greatly enlightening.
Here high light some facts of this sector in the hope that it may serve as useful references for the
local banks to observe. The process they employ to manage and analyze facts of their asset and
liability gives them a clear picture of their strengths and weaknesses in operation. That enables
HSBC to make better decisions and obtain greater strength.
The objectives of this paper are:
To assess and identify the possible sources of risk in connection with the funding and lending
activities.
Ratio Analysis of the Financial statements
To assess the impact of risk on the business and financial performance.
To be familiarized with the qualitative and quantitative techniques needed to avert and or
minimize risk.
1.4.0 Methodology
The method to do the analysis on HSBC is by observation. We also took the help of the officials
of the Personal financial Services Department to clarify our queries and used secondary data to
come up with a report on the topic. We had to discuss one to one on the topic with the people
responsible for managing this section in HSBC
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The general methodology of the work includes analyzing already followed practices of the
Financial Institutions of South East Asia and local Financial Institutions to manage Balance
Sheet Risk. Practices followed by Banks to the extent it matches with the activities of Financial
Institutions have also been analyzed. Different reports, Bangladesh Bank Guidelines, web site
information of different financial institutions were used as primary input for this paper.
1.5.0 Scope & Limitation
The initiative to write a detail procedure of how HSBC works in managing the asset and liability,
in the time of internee there across a lot of limitations which slowed me down and in some cases
changed my course to write it up. The department is an important department in HSBC
Bangladesh, so deriving data from PFS in any form is a severe breach of rule in the HSBC code
of conduct. As a result, the project could not be compiled on actual data of operation. Therefore,
it is restricted to general principles and process of HSBC BD in respect of its asset and liability
management.
2.0.0 Overview of Bank
Bank is a financial institution and intermediary, which collect deposits through its different
deposit mechanism and provide loans and advances among the loan makers / investors with the
view to earn profit. Thus a bank is a financial intermediary, a dealer in loans and debts. In
financial concept, banking means safe custody of money and at the same time an institution for
money transaction.
To regulate the banking business there followed some financial laws of the government the old
one is British stamp Laws in 1981 and English Exchange Bill in 1982. Other laws are the English
Financial act of 1915; ht e India Companys Act of 1936 and Indian Banking Regulation Act of
1949 are worth mentioning.
The concept of banking is an old as civilization itself. Banking activities in its earliest crude form
of lending and exchange prevailed during the ancient period. The legend of huge treasure of the
Great King Solomon, the man of great wisdom, son of David (Alaihee-aas-Salam) and the
activities of taxation and banking during his reign in 1005 B.C. The Indus Valley Civilization,
the Roman Civilization, the Greek Civilization, the Egyptian Civilization, the Mesopotamian, the
Babylonian Civilization, the Vedic Indian Civilization, the Muslim Civilization played important
roles in giving birth to and flourishing of bank.
2.1.0 Origin of Bank
The trace of banking has been discovered in Saudi Arabia in ancient period eight thousand years
ago. In middle age in Italian Republics some. Jews dealt in money exchanging activities sitting
on Bonca (Italian word), Banque (France word), meaning a long bench, which now converted
to English as Bank meaning a financial institution. The earliest known bank started in China in
600 B.C., which was followed in Greece. With the advancement of urbanization people found it
difficult to exchange goods against goods (Barter). The medium of exchange was thus a
necessity and to control the exchange market the idea of a financial institution i.e. bank came
into being.
HSBC Group
Corporate directors Safra Catz Vincent Cheng Marvin Cheung John Coombe Jos Durn
Rona Fairhead Douglas Flint Sandy Flockhart William Fung Michael Geoghegan (CEO)
Stephen Green (Chairman) Stuart Gulliver James Hughes-Hallett William Laidlaw Rachel
Lomax Sir Mark Moody-Stuart Gwyn Morgan Narayana Murthy Simon Robertson John
Thornton Sir Brian Williamson
Brands Bank of Bermuda first direct Hang Seng Bank HSBC HSBC Bank International
HSBC Direct HSBC Halbis Partners HSBC Insurance HSBC Insurance Brokers HSBC
Investments HSBC Premier HSBC Private Bank HSBC Rail HSBC Trinkaus M&S
Money Proa SABB
Principal local banks Argentina Australia Bermuda Brazil Canada China Egypt El
Salvador France Germany Hong Kong Malaysia Middle East Malta Mexico Panama
Poland Turkey United Kingdom United States
Minority stakes and joint ventures Bank of Communications (19%) HSBC Saudi Arabia (60%)
British Arab Commercial Bank (47%) SABB (40%) Wells Fargo HSBC Trade Bank (20%)
Ping An (19.9%) Techcombank (15%) Bank of Shanghai (8%) Axis Bank (4.99%)
Annual group revenue: $88.6 billion USD (1% FY 2008)
Employees: 335,000
Stock symbols: LSE: HSBA, HKEX: 005, NYSE: HBC, Euronext: HSBC, BSX: 1077223879
Group website: www.hsbc.com
Group Headquarters: 8 Canada Square, London, E14 5HQ, United Kingdom
3.1.0 Foundation & Growth of HSBC
The HSBC Group has a remarkable history in banking and financial services. That history has
left its mark and helped to make one of the leading organizations in the modern financial world.
HSBCs pride in its history is not a matter of nostalgia. The experiences have shaped the Groups
character and business approach.
Headquartered in London, HSBC Holdings plc is one of the largest banking and financial
services organizations in the world. HSBCs international network comprises over 9,500 offices
in 79 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East
and Africa. Through an international network linked by advanced technology, including a rapidly
growing e-commerce capability, HSBC provides a comprehensive range of financial services:
personal financial services; consumer finance; commercial banking; corporate, investment
banking and markets; and private banking. At 30 June 2003, the Groups total assets amounted to
US$983 billion (595 billion, HK$7,663 billion). It has 218,000 employees and nearly 200,000
shareholders around the world. Although the Groups holding company, HSBC Holdings plc,
was formed as recently as 1991, many of its principal constituent companies opened for business
over a century ago and have long experience in their home and international markets. The story
of the growth and development of these companies is rich in variety and achievement, with an
international pedigree that is unique in banking history. This brief history describes the origins
and evolution of the companies that make up the HSBC Group. The history concludes with a
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summary of the far-reaching changes in recent years that have given HSBC its special place in
todays major financial markets.
3.2.0 The HSBC Group in the Asia-Pacific region
Beginnings, 1865
The HSBC Groups name is derived from The Hongkong and Shanghai Banking Corporation
Limited, the founding member of the modern Group. The bank owed its origins to the business
communities of the China coast in the 1860s. At that time, the finance of trade in the region was
not well developed and most transactions were still handled by the European trading houses, or
hongs, rather than by professional banks. By the early 1860s, local businessmen needed larger
and more sophisticated facilities. In Hong Kong, in particular, business leaders required
specialist banking services preferably from a bank that was locally owned and managed.
The founding of the bank in 1865 answered this need. The new company was the inspiration of
Thomas Sutherland, then the Hong Kong Superintendent of the Peninsular and Oriental Steam
Navigation Company, who produced a prospectus for a locally based bank operating on sound
Scottish banking principles. The prospectus attracted the support of a broad spectrum of Hong
Kong interests, including American and Indian trading houses as well as European firms, and the
initial capital of HK $5 million was quickly taken up in Hong Kong, Shanghai and Calcutta. On
this basis, the bank opened for business in Hong Kong on 3 March1865. Then, as now, the banks
headquarters were at 1 Queens Road. One month later, on 3 April 1865, the banks Shanghai
office opened for business. Initial response from customers in the two cities was favorable, both
from the foreign business community and from the compradors, the influential Chinese
intermediaries in charge of local staff and business dealings in the Chinese community.
The new banks commitment to local ownership and management required a special arrangement
for incorporation. Rather than operate under existing British or colonial regulations which
would have required a London head office the banks directors persuaded the Treasury in
London to accept incorporation under a special Hong Kong ordinance. This allowed the bank to
maintain a head office in Hong Kong without losing the privilege of issuing banknotes and
holding government funds. In this way, the bank (which had started life under a local Companies
Ordinance as the Hongkong and Shanghai Banking Company Limited) assumed the name The
Hongkong and Shanghai Banking Corporation in December 1866. Thereafter, the banks
statutory framework remained basically unchanged until 1989, when registration under the Hong
Kong Companies Ordinance was completed. Early business and development soon after its
formation in Hong Kong and Shanghai, the bank established a network of agents and branches
around the world. Although that network reached as far as Europe and North America, the
emphasis was placed on building up representation in China and the rest of the Asia- Pacific
region. In many of its branches and agencies in Asia, The HongKong and Shanghai Banking
Corporation was the pioneer of modern banking practices. From the outset, trade finance was a
strong feature of its local and international business, an expertise that has been recognized
throughout its history. Bullion and exchange businesses were also important in the early years. In
Japan, where a branch was opened at Yokohama in 1866, the bank acted as an adviser to the
government on banking and currency. In 1888, it was the first bank to be established in Thailand,
where it printed the countrys first banknotes. By 1900, the branch network in Asia extended to
India (1867), the Philippines (1875) and Singapore (1877), and to cities in what are now
Malaysia, Myanmar, Srilanka and Vietnam.
In the 19th century, international banking of this kind required innovation and high levels of risk.
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The bank had its share of setbacks in its early years, including over-commitment to a number of
local industrial ventures. From the mid-1870s, however, the bank renewed its focus on trade
finance. Thomas Jackson, Chief Manager on three occasions between 1876 and 1902, dominated
this period of the banks growth and led it to become the foremost financial institution in Asia. In
achieving this reputation, Jackson and his successors were supported by a distinctive cadre of
managers and staff. These officers, many of whom had begun their careers with English or
Scottish joint-stock banks, were trained in London before taking up appointments in Asia.
3.2.1 Business in the early 20th century
After the shock and disruption that the First World War brought to international trade, The
Hongkong and Shanghai Banking Corporation looked forward to expansion in its Asian markets.
The new head office at 1 Queens Road (1935) and the new buildings at major branches such as
Bangkok (1921), Manila (1922) and Shanghai (1923) reflected this confidence. In contrast, the
political outlook in China grew increasingly uncertain and, in South-East Asia, the bank faced
heavier competition from Dutch and French banks. Throughout the 1930s, in keeping with its
long-standing connections with government finance in China, the bank took a leading part in
efforts to stabilize the Chinese national currency.
In the Second World War, the majority of the banks European staff became prisoners of war as
the Japanese advanced through Asia. Those in Manchuria, Japan and Indo-China were
repatriated, but most of those who failed to escape were interned. The Chief Manager, Sir
Vandeleur Grayburn, and his designated successor, D C Edmondston, died while prisoners in
Hong Kong. Meanwhile, in 1941, British regulators required that Arthur Morse, as Chairman of
the banks London Advisory Committee, should act as Chairman of the bank. Two years later, the
London Committee was empowered to act as a Board of Directors and Morse was appointed to
the dual role of Chairman and Chief Manager.
3.2.2 Post-war recovery
After the Second World War, in June 1946, the bank was able to restore its head office powers
and functions to Hong Kong. In the immediate postwar period, the bank quickly took on a key
role in the reconstruction of the Hong Kong economy. Its support for the skills and experience of
newcomers to Hong Kong was especially vital to the upsurge in manufacturing in this period. As
a result, the banks total assets tripled to HK$3.6 billion between 1940 and 1954.
3.5.0 New alliances in Asian banking
The changes of the post-war period the concentration on Hong Kong and the closure of the
branches in mainland China carried the risk that the bank was growing too narrow in its
sphere of interests. Under Michael Turners leadership between 1953 and 1962, the bank avoided
the risk by diversifying its business in a series of acquisitions and alliances. These additions,
which included the formation of The Hong Kong and Shanghai Banking Corporation of
California and the purchase of The British Bank of the Middle East, were to be the banks first
experience of working as a group of companies.
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In the Asia-Pacific region, key additions were the Mercantile Bank in 1959, a controlling interest
in Hang Seng Bank Limited in 1965, and the formation of Wardley Limited in 1972. The
Mercantile Bank, originally established as the Mercantile Bank of Bombay as early as 1853, had
its own distinguished history in Asian banking.
When its acquisition by The Hongkong and Shanghai Banking Corporation was completed in
1959, the Mercantile Bank was operating 35 branches, with an especially strong presence in the
Indian sub-continent and Malaysia. The Mercantiles head office was transferred to Hong Kong
in 1966, and its business was then gradually integrated into the larger Group.
Hang Seng Bank, in contrast, was a local Hong Kong bank established in 1933. The Hongkong
and Shanghai Banking Corporation obtained a controlling interest in 1965, shortly after banks in
Hong Kong had faced a brief period of crisis.
Hang Seng, under its own name and management, has since emerged with great success as the
second largest bank incorporated in the Hong Kong Special Administrative Region. Not all these
alliances were in commercial banking. In 1972, a new wholly owned company, named Wardley
Limited after the banks original headquarters in Wardley House, was created to serve as a
merchant banking subsidiary. Wardley later developed its own series of subsidiaries in financial
centers throughout Asia. In 1981, it also acquired a controlling interest in Equator Holdings
Limited, whose subsidiaries offer merchant and investment banking, trade and advisory services
in Africa. In 1995, as part of the Groups strategy of adopting a unified identity for its investment
banking and capital markets activities, the principal Wardley businesses were renamed and
brought together as HSBC Investment Bank Asia Limited.
The Hongkong and Shanghai Banking Corporation continued to seek new opportunities for
diversification in the emerging markets of the Asia-Pacific region. The globalization of the
economy in the 1980s and 1990s opened up financial markets that had previously been closed to
foreign banks. In 1985, the bank obtained a banking licence in Australia and then established
Hongkong Bank of Australia Limited in the following year (now HSBC Bank Australia Limited).
3.3.0 New directions in Asia-Pacific
The Group has extended its services on the mainland since the late 1970s, following the
introduction of Chinas open door economic policy and in support of the countrys growing
international trade. In 1980, The Hongkong and Shanghai Banking Corporation opened a
representative office in Beijing. More offices followed in Chinas other major cities and, in 1984,
it became the first foreign bank since 1949 to be granted a banking license, allowing the
Shenzhen office to be upgraded to a full branch. In 1997 (the year in which the Peoples
Republic of China resumed sovereignty over Hong Kong), HSBC was one of the first
international banks to be given permission to conduct renminbi business in mainland China. By
the beginning of 2008, the Group had the largest network of any foreign bank in China with 62
outlets. This network has been supplemented by a series of strategic partnerships. In 2001, an 8
per cent share in the Bank of Shanghai was purchased and, in the following year, HSBC acquired
a 10 per cent share in Ping An Insurance Company of China, the second largest life insurance
operator in the country.
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There has been major business growth in India. 2001 saw the opening of the only branch in the
HSBC network that is open 365 days a year in Pune, western India, and, in the same year, HSBC
was able to enter the insurance market in India for the first time. The Group has also pioneered
the use of global resourcing centers to achieve a competitive advantage. Indias pool of skilled
workers has made it an ideal location for such operations and it now boasts seven of the Groups
15 centers. These centers have allowed HSBC to utilize its worldwide reach and to improve
services by conducting back office functions on an international basis.
In addition to investing in the emerging markets of China and India, the Group has also
strengthened its businesses in other parts of the Asia-Pacific region.
3.4.0 HSBCs International Network
The HSBC Groups international network comprises of some 10,500 offices in 81 countries. It
would be difficult to list them all individually, so I have the names of the major entities on the
following pages along with their region and number of operations as of 2004:
Region Number of offices
Americas
5,673
Asia-Pacific
1,013
Europe
2,559
Middle East & Africa
275
3.4.1 Country Classification
To ensure that key resources (management time, capital, Human resources and information
technology) are correctly allocated and that the exchange of best practice is accelerated between
entities, the group has classified the countries where it operates 3 categories: the large, the major
and the international.
These classifications are a function of sustainable, attributable earnings, the number of retail
clients, balance sheet and size of operation. A brief presentation of this classification is shown
below:
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Group Values
Long term, ethical client service
High productivity through team work
Confident and ambitious sense of excellence
International character, conservative orientation
Capable of creativity and strong marketing
3.5.1 HSBCS Governing Objectives
We will beat the mean Total shareholder return performance of a peer group of financial
institutions over a three year rolling average; and target to double share holder returns in five
years.
3.5.2 HSBCS Business principles & Values
The HSBC Group is committed to five Business Principles:
Outstanding customer service;
Effective and efficient operations;
Strong capital liquidity;
Conservative lending policy;
Strict expense discipline;
HSBC also operates according to certain Key Business Values:
The highest personal standards of integrity at all levels;
Commitment to truth and fair dealing;
Hand-on management at all levels;
Openly esteemed commitment to quality and competence;
A minimum of bureaucracy;
Fast decisions and implementation;
Putting the Groups interests ahead of the individuals;
The appropriate delegation of authority with accountability;
Fair and objective employer;
A merit approach to recruitment/selection/promotion;
A commitment to complying with the spirit and letter of all laws and regulations;
The promotion of good environmental practice and sustainable development and commitment
to the welfare and development of each local community.
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Founded 1996
Headquarters Dhaka, Bangladesh
Key people Sanjay Prakash (CEO)
Industry
Finance
Products
Financial Services
Revenue
$58 million (2009)
Parent
HSBC Holdings plc
Website
www.hsbc.com.bd
4.2.0 Technology
Offers full online banking from branch to branch and also from Dhaka, Chittagong & Sylhet
through their own networking solution call HUB.
4.3.0 Customer
Serves individual and corporate customers within Dhaka, Chittagong & Sylhet region.
5.0.0 Functional Departments of HSBC
In the banking sector, HSBC is expending through out Bangladesh. It is one of such
multinational company which has captured the market share by providing good service and
introducing lucrative product for their customers.
In this organization the leadership role is mainly played by CEO himself but all the department
head of the organization also contribute individual leadership skills for the company. To maintain
a close touch with in the organization, each man works in separate cubicles in a floor with easy
communication facilities. The working environment is very friendly and the open
communication between the seniors and the juniors makes the whole working environment easy
to resolve the problems.
The HSBC culture of doing a job with every one contribution created a strong management team
that fells integrated and work as one bank one team strategy. Each and every employee of
HSBC takes pride of being a part of HSBC and his or her pride comes from the freedom of direct
communication with the top management.
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The management of HSBC willingly accepts suggestions, ideas, and innovations of the officers
and junior officers level. There are awards, incentives, and status for innovative ideas and hard
works in HSBC, to encourage employee participation to encounter in the management process.
Again the management style can also be termed as Collegial as high amounts of team work and
participation exists between the top and bottom parts of HSBC.
According to my perspective, the management at HSBC Bangladesh falls between supportive
and collegial. A table below shows the four segments of character:
Management of HSBC Bangladesh
AUTOCRATIC
Power
Authority
Obedience
Dependence on Boss
CUSTODIAL
Economic Resources
Money
Security and benefits
Dependence on organization
SUPPORTIVE
Leadership
Support
Job performance
Participation
COLLEGIAL
Participation
Teamwork
Responsible Behavior
Self -discipline
In Bangladesh HSBC follows a 4-layer management philosophy. These are Managers,
Executives, officers & Assistant officers. The top most authority of all the levels is the CEO. All
Managers are the departmental heads who are responsible for the activities of their departments.
They are the heads of their respective department and formulate strategies for that department.
The Executives have the authority next to managers. They are ultimately responsible for certain
activities & organizational functions.
After these two layers, represent the management level of HSBC Bangladesh. Officers are the
next persons to stand in the hierarchy list. They are the typical mid-level employees of HSBC
organizational hierarchy. These officers are responsible for managing the operational activities
and operating level employees. The operating level employees of HSBC who are ranked as
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Assistant Officer (AOs) fill the last layer of this hierarchy; this is the entry-level position in
HSBC Bangladesh.
They perform day-to-day operational activities of HSBC. They belongs closure relationship with
the end customers of HSBC. An organizational hierarchy chart is shown below:
The organizational structure of HSBC Bangladesh is designed according to the various service
and functional departments. The Chief Executive Officer (CEO) heads the chief executive
committee, which decides on all the strategic aspect of HSBC. The CEO is the person who
supervises the heads of all the departments and is the ultimate authority of HSBC Bangladesh.
He is responsible for the all the activities of HSBC Bangladesh and all its consequences. He
administers all the functional departments and communicates with the department heads for
smooth functioning of the organization. The HSBC Chief Executive Committee is formed with
the heads of all departments along with the CEO. The structure of this top-most authority is
shown in the following figure. Besides the CEO the Chief Executive Committee is staffed with 8
more managers: Chief Operating Officer, Manager Human Resources, Manager Credit Risk
Management, Manager Personal Financial Services, Manager Treasury, Senior Corporate
Banking Manger and Manager Compliance & Control, and Manager Group & Public Affairs.
5.1.0 Human Resource Department
The Human resource Manager currently heads this department. The major functions of this
department are Recruitment, Training and developments, Personnel Services and Security. The
HR department is very much concerned with the discipline that is set up by the HSBC group.
HSBC group has got strict rules and regulations for each and every aspect of banking, even for
non-banking purposes; i.e. The Dress Code. All these major personnel functions are integrated in
the best possible way at HSBC, which ensure higher productivity. The Human resource officer
monitors the employee staffing and administration activities.
The Training officers supervise and monitor Training, development & rotation activities. To keep
control on timely presence of the employee, the employee has to punch their card in the office
premises within 8.45am everyday. Late comers are highly discouraged. The structure of the HR
department is shown below:
HSBC Bangladesh limited follows a standard procedure for recruitment and selection. However,
there is no set time period when this recruitment and selection takes place. Each Departmental
head places the requisition for recruitment to the Human resource officer, if any vacancy is
created due to (1) Retirement, (2) Resignation (3) Death, or (4) Extra work load.
In order to enhance the efficiency of the employees, HSBC gives emphasis on the both
theoretical and practical training for its personnel. All the training and development programs are
aimed at two basic reasons
Skill development
Motivation through counseling and persuasion to change value system.
For the top management or senior Managers there is provision for overseeing training arranged
by HSBC group. For the mid-level manager or other managerial level there is provision for
regional training courses. Besides, for non-management level there are training programs
arranged in different institution and also with in the organization. For the operatives, various on
the job-training program are conducted within the company.
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administers all the activities heads this department. He is staffed with one loan approval officer,
one loan processing officer, two assistant officers and one MIS clerk. The approval officer
mainly rejects or approves the credit requests. After being checked by the approval officer, the
credit requests go to the processing officer for further processing of the application.
5.2.3 ATM Center
The ATM center ensures smooth operation of the ATM machines that are located at Dhaka and
Chittagong. The ATM center is responsible for regular replenishment of the off-site ATMs and
servicing of all the ATMs. Currently a total 14 ATMs are in operation. The ATM center also deals
with issuance, termination and servicing of the ATM cards. On a whole, the ATM center is the
department that is solely responsible for all the activities related to ATM and is the facilitating
department that enables customers 24 hour banking support. Now day and night banking started
in HSBC. The easy pay machine is providing 24 hours services to the HSBC customers as well
non HSBC customers. These machines are situated in the ATM booths only.
5.2.4 ATB Center
ATB refers to Automated Tele Banking. This department deals with the back office servicing of
the HSBC phone banking services provided to customers. This department is basically
responsible for the activation of ATB, ATB pin generation, and ATB security management, ATB
blocking and troubleshooting of all ATB problems. This department is fairly new and was
constructed on January2001. Currently this department is staffed with one executive and one
officer
5.3.0 Corporate Banking
This division if HSBC provides financial services to organizational clients. HSBC is a worldwide
leader in banking and financial services whose success is based on its relationships with its
corporate clients. Whether it is locally or around the world, HSBC offers a comprehensive range
of services that can be tailored to the individual needs of the company. The Head of this
department is the Chief of Corporate Banking. He is also the Vice-CEO of HSBC Bangladesh.
The chief of CB manages the activities of corporate banking of HSBC Bangladesh. Two offices
of HSBC Bangladesh offer corporate banking services to corporate clients. These are the Dhaka
Head Office and Chittagong office. Corporate Banking of HSBC Bangladesh includes Corporate
Institutional Banking (CIB) Trade Service (HTV), and Hexagon. These sub-divisions are
discussed briefly in the following sections along with a structure chart of Corporate Banking
division of HSBC Bangladesh.
**Hierarchy of Corporate Banking Department of HSBC
5.3.1 Corporate Institutional Banking (CIB)
As their major customers operate internationally, HSBC services them internationally. Operating
through the major centers and in close liaison with HSBC Investment Bank, Corporate and
Institutional Banking provides the full range of the Groups capabilities at local and global
levels, with a particular focus on payments and cash management, trade and securities custody.
HSBC also offers local financial institutions and banks access to wide range of financial services
available on an international basis. The services are tailored to suit the needs of the companies.
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CIB has two separate wings: Relationship Management Department and Hexagon. These are
discussed below:
5.3.2 Relationship Management Department
The RM department consists of various relationship managers who are assigned to different
corporate client to better satisfy their needs. These RMs communicate with the clients and are
solely responsible for the companies they deal in. Any information regarding a corporate client
must be communicated through the respective RM assigned to that corporate client. A
Relationship Manager may be assigned more than one company and this decision depends on the
chief of Corporate Banking.
5.3.3 Hexagon
The Hexagon department deals with all aspects related to HSBCs Unique Banking software
product Hexagon. It is the global Electronic Banking system of HSBC, which offers the
customers more convenient and efficient banking than ever before. It is an innovative desktop
banking system developed by the HSBC group, which operates via the groups proprietary
worldwide communications network.
5.3.4 HSBC Trade Services (HTV)
Trade service is known by various names in other banks, e.g. Trade Finance Foreign Exchange,
Foreign Trade etc. However, the functions are the same. As the name suggests, this department is
involved in facilitating trade, both international & within Bangladesh.
HSBC is the leading provider of trade finance and related services to importers and exporters in
Asia. Trade is considered a core business of the group. The groups presence in 81 countries of
the world gives a good opportunity to control both ends of a trade transaction and keep the
business within the Group. The various awards it has won from the leading publications of the
world acknowledge HSBCs excellence in Trade. The trade service department has two separate
subsidiaries:
under direct supervision of Chief Operating Officer (COO). Along with Financial Control
Department, The COO has other departments under his supervision they are Network service
center (NSC), Administration, HSBC Universal Banking (HUB), Information Technology (IT),
Management Internal Control (MIC), Group public Affairs (GPA) etc.
In the financial control department, there are five departments, in the following; the five
departments of FCD are briefly discussed.
Five Departments of FCD
5.4.1 Treasury
The treasury department of FCD is the treasury back office. It acts as a support function of
treasury front office, which is the Capital market dealing room. The treasury back office
calculates the (CRR) Cash reserve Ratio, (SLR) Statutory Liquidity ratio and that is analyzed by
the front office, and treasury deals are done, the cash reserve ratio is in BDT amount. The bank
has to maintain a minimum amount of 4% of demand and time liability. The customer deposits
and demand liabilities are taken into account for calculation. Statutory Liquidity ratio is set as
16% as minimum to be maintained. The back office of FCD processes both the local currency
and the foreign currency deals made by front office. The treasury back office of FCD also checks
the deals and authenticates the dealing. Then the information is inputted in the HSBC Universal
Banking (HUB). The treasury back office also makes conformations with local counterparts and
sends swift messages to foreign counterparts for deals made by the front office.
5.4.2 Return
The Return section acts as an important support function of financial control department. The
department works to maintain proper Bangladesh Bank Regulatory policy. The department
maintains proper financial reports and also looks after the bank compliance with tax and
company laws. By this way the return section overviews the different sections of FCD which as a
result give optimum level of performance.
5.4.3 Payments
The payments section of Financial Control Department looks after the cost of operation aspects
HSBC Bangladesh. The payments department deals with appropriate bills under their proper
payments. The department allocates proper bills under the proper cost centers of the bank. The
payment section also verifies the authenticity of the bill as per banks policy.
5.4.4 Reconciliation
The Reconciliation section of Financial Control Department deals with the Nostro and Vostro
Balances with other banks and entities. The section deals with HSBCs accounts in other banks
(Nostro) and other banks account in HSBC (Vostro). The section checks the transfer of fund with
different accounts. This department settles payable and receivable balances in different accounts
and informs treasury about different account positions.
5.4.5 ALCO
The word ALCO stands for Asset and Liability Committee. This section of Financial Control
Department acts as an Management Information System of the bank. The department cosines all
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the data in a manageable form for the authority to look into. These data helps to make managerial
decision for the top level of the bank. The asset and Liability management section segregates all
the business lines of the bank. This helps the top level to understand the different business lines
performance in specific terms. The ALCO also sets the targets to be met to the departments as
per the Group Head office and Intermediate Head office. The department reports various
information to group Head Office in England and Intermediate Head Office in Hongkong as per
bank policy. The department also calculates various ratios related to banks performance. That is
why the section maintains a high degree of secrecy, so that there is zero level of information
drainage out side the section. The section uses software like HMI, Sarasen etc. for performing
their job.
5.4.6 Foreign Correspondence (FC)
FC keeps records of all the accounts of HSBC. All the vouchers, notes, advices and transaction
reports of the branches are sent to FC for record keeping purposes. FC also prepares the financial
statements for the banks and decided upon banks assets and liabilities. It also deals with the
returns that are submitted to the Central Bank on regular interval.
5.4.7 Treasury Front Office
This department works under FCD. Their main job is to take decisions regarding purchase and
sell of foreign Currency. The purpose of Treasurys operations is to utilize the funds effectively
and arrange funds at a lowest possible rate of interest, through maintaining effective relationship
with other banks and following the Government rules and foreign exchange regulations
5.4.8 Payments & Cash Management (PCM)
PCM deals with the Inter-Bank payment. PCM strategies are designed to ensure efficiency,
profitably and comprehensive support.
Savings Accounts, various Consumer Loans outside the bank premises. There are a total of more
than 300 mobile sales officers (MSO) employed in the cities of Dhaka and Chittagong. A MSOs
are assigned to specific Branches for making sales activities more smoothly. The DS executive
sets sales strategies & targets for the Sales officers and manages the whole team of MSOs in
Bangladesh.
The direct sales department also decides upon the commission and remuneration of the mobile
sales officers as their salary structure is based on sales performances. Thus this part of the
marketing division is very important for the overall growth of the Personal Banking Division in
HSBC.
5.5.2 Promotion
This part of the marketing department deals with all the promotional activities of HSBC
Bangladesh. Major responsibilities of this department including:
Maintaining strong public relations with various media intermediaries.
Advertising the companys products and services.
Building a strong corporate image of HSBC in Bangladesh.
The promotion department organizes various environmental and social activities in order to build
a strong corporate image of HSBC in the minds of customers as well as in the media world wide.
5.5.3 Public Relations
Maintaining strong relationship with news media is another major duty of public relations
department. In every year employees are selected for different social events and give them the
opportunity to travel through the world.
5.5.4 Advertising
The promotion also coordinates all the advertising of HSBC products within Bangladesh. Some
of the advertising tools that are frequently used by this Bank are as follows:
a) Newspapers Advertising: Regular advertisements of various products and services of HSBC
are given in some of the countries most renowned daily newspapers.
b) Billboards: Huge colourful billboards with HSBC logo are found in various major areas of
Dhaka and Chittagong. These billboards emphasize on the needs of customers and shows HSBC
logo as solution to their needs.
c) Road Side Signposts: Medium sized multi color signposts focusing on various products of
HSBC are found on the roadsides of various posh areas such as, Gulshan, Dhanmondi,
Baridhara, Motijheel, Banani etc.
d) Mailers: various product updates and new product information are regularly sent to existing
customers of HSBC.
e) Broachers: Various colorful broachers featuring specific products of HSBC are being
displayed and distributed to existing and potential customers via branch offices and Mobile sales
officers.
f) Call Center : Tele Sales Officer are continuously follow up exiting customer as well as non
exiting customer by giving them phone calls about new product and services.
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report to the higher authority for audit purposes. This gives different departments the chance to
know their mistakes and take necessary corrective actions.
Again, the Bank annually administers a company wide audit program to evaluate the overall
performance of the bank in Bangladesh. The department also looks after the Bangladesh bank
return and the regulatory policies to be maintained properly.
5.6.4 HSBC Universal Banking (HUB)
The HSBC banking system is called HUB. HSBC does the online banking and it is HUB, which
sets up the parameter for that. This HUB is linked with the HSBC group via satellite and each
and every transaction made by HSBC within Bangladesh is being recorded at the HSBC Asiapacific headquarters at Hong Kong via HUB. Thus the HUB is the most powerful and important
equipment of HSBC Bangladesh that monitors and tracks any fraud and faults made with HSBC
Bangladesh.
5.6.5 Network Services Center (NSC)
This department can be described as the Power House of HSBC Bangladesh. NSC does the back
office job for the bank. The main four jobs that are performed by NSC are Clearing, Scanning of
signature cards, issuing checkbooks and sending & receiving Remittances. NSC looks after the
clearing process of HSBC and makes necessary contact with the central bank for maintaining
account flows. All the customer signatures are scanned in this department and are entered into
the system. NSC also issues checkbook for new and old accounts based on requisition from
various branches. Remittance is a banking term, which means Transfer of funds through
banks. When a bank remits on behalf of its customers, it is termed as outward remittance. On
the other hand, when the bank receives the remittance on behalf of the bank, it is inward
remittance. The following are the methods that NSC used to remit money for customers:
Telegraphic Transfer (TT), Demand Draft (DD) & Cashiers Order. In this department there is
part of the Payments and Cash Management (PCM). The PCM deals with the Inter-Bank
payments and designed strategies to ensure efficiency in managing cash of various corporate
clients and give comprehensive support to the bank by managing salary accounts of various
corporate clients, which helps the bank to have large amount of deposit.
6.0.0 Product & Services
HSBC Bangladesh carries out all traditional functions, which a commercial Bank performs such
as Mobilization of deposit, disbursement of loan, investment of funds, financing export & import
business, trade & commerce & so on. Besides it also offers some specialized services to its
customers. Products & services offered by HSBC can be categorized according to the customers
they serve. Thus two major groups can be identified. They are individual customers or
consumers & corporate customers or organizations. An in-depth analysis of HSBCs product and
services in Bangladesh is presented in this section.
The summary of all the products and services of HSBC Bangladesh is displayed with the help of
a diagram. The liability products of the bank are discussed. After that the various products and
services of personal banking division will be presented, followed by a brief discussion of the
corporate banking services offered to corporate clients will be given.
6.1.0 Accounts
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comprises over 9,500 offices in 85 countries and territories, serving over 100 million customers
worldwide.
Bangladesh International offers an exclusive range of banking services for non-resident
Bangladeshis and foreign currency account services for resident Bangladeshis.
6.3.1 Foreign Currency Current Account
A choice of currencies US Dollar, Pound Sterling and Euro
An ATM card for US Dollar, Pound Sterling and Euro accounts that gives you access to your
funds in local currency of the respective country from around the world through 800,000 ATMs,
24 hours a day
The balance of the account is freely remittable, i.e. you may transfer funds overseas subject to
foreign exchange regulation of the recipient country
Cheque book facility
6.3.2 Foreign Currency Time Deposit Account (NFCD)
Interest bearing time deposit account
A choice of currencies US Dollar, Pound Sterling and Euro
Competitive interest rates
A choice of tenures of one, three, six and twelve months with auto renewal facility
Interest is tax free within Bangladesh
Both interest and principal are fully repairable, i.e. you may transfer any outstanding fund of
your account to your country of residence/overseas subject to foreign exchange regulation of the
recipient country
6.3.3 Non-resident taka account
Local currency account
Can be opened as either a local currency interest bearing savings or non-interest bearing current
account
Not freely remittable
Cheque book facility.
6.4.0 Loan Products
6.4.1 Travel Loan
Travel Loan is offered within the existing Personal Installment loan structure. The purpose of
launching this product is to attract and aid customers with their travel related services.
Features
No personal guarantee or cash security.
The loan amount ranges from BDT 50,000 to BDT1,000,000 or a maximum of four times of
your monthly income, whichever is lower.
If you are an AutoPay customer, you can get six times or if you are a CEPS customer you can get
ten times of your monthly income.
Competitive interest rates.
Low processing fees.
You can repay the loan in 12, 24, 36 or 48 months.
Loan against partial security is also available.
Documentation-travel quotation along with other documents.
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principles of financial management say that attempting to maximize the banks stock value is the
key objective that should have priority over all others. But the bank I have worked in is not
enlisted in the local stock market; as a result I could not calculate the value of the banks stock
price.
7.2.0 Profitability Ratios
The profitability Ratios are one of the most difficult attributes of a firms performance as it
reflects the market evaluation of the firms performance. This indicator is often not reliable in
banking. The reason is that most bank stocks especially stocks issued by smaller banks are not
actively traded in international or national stock markets. Thats why to analyze through market
value indicators in the form of various profitability ratios are a better option.
7.2.1 Return on Asset
ROA
One of the common measure of managerial performance is the ratio of income to average total
assets after tax. It primarily indicates the management efficiency; it also shows how efficiently
the management of the bank has been converting the institutions assets into net earnings.
ROA= Net Income after Tax / Total Asset
Year 2010 2011 2012 2013
Value of ROA 0.0276 0.029 0.031 0.03
Explanation
Here we can observe an increase in trend of ROA over the 3 years. Though there is a decline in
ROA in year 2008 as the assets were far greater then its return as income from it.
7.2.2 Return on Equity
ROE
On the other hand ROE measures the rate of return flowing to shareholders. It is the net benefit
that the shareholders have received from investing their capital in the bank.
ROE= Net Income after Tax / Total Equity Capital
Year 2010 2011 2012 2013
Value of ROE 0.2112 0.2421 0.2530 0.2446
Explanation
The above statistics shows that the banks operations have grown significantly. The operation is
giving the HSBC group a good business through efficiency in the tax management, resulting in
higher net income after tax. Moreover, the equity to total asset ratio has also improved over the
years that has boosted the earning of HSBC Bangladesh.
7.2.3 Efficiency
Net Operating Margin
The net operating margin is efficiency measure and profitability measures. It indicates how
management and staff have been able to keep the growth of revenue which comes primarily from
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the banks loans, investments and service fees. Ahead of rising costs principally the interest on
deposits and money market borrowings and employee salaries and benefits.
NOM= (Total Operating Revenue Total Operating Expense) / Total Asset
Year 2010 2011 2012 2013
Value of NOM 0.057 0.062 0.06 0.064
Explanation
Here we can understand that there is an upward trend over the years of the banks Net Operating
Margin. The trend shows how well the management has kept a growth in the revenue generation
with respect to their cost.
7.2.4 Earning Spread
Earning Spread
Another traditional measure of evaluating a bank is the earnings efficiency with which a bank is
managed, that is called earning spread. It measures the efficiencies of a banks intermediation
function in borrowing and lending money and also the intensity of competition in the banks
market area. Greater competition tends to squeeze the difference between average asset yields
and average liability costs. If other factors are held constant, the banks spread will decline as
competition increases.
Earning Spread= Total Interest Income / Total Asset
Year 2010 2011 2012 2013
Earning Spread 0.044 0.0397 0.039 0.042
Explanation
There is a decrease trend in the Earning Spread of the bank. As the bank try to grow over the
years, it has offered more products and services for the customers. They had recovered it on year
2008 by offering various product and services.
7.2.5 Net Profit Margin
Net Profit Margin
The banks Net profit margin reflects the effectiveness of expense management and service
pricing policies.
NPM= (Net Income after Taxes / Total operating Revenue)
Year 2010 2011 2012 2013
Value of NPM 0.351 0.371 0.406 0.369
Explanation
This trend shows a mixed reaction over the years. As there has been a sudden decline in the trend
though it had a stable growth, but it came up sharply in the year 2007. The profit margin of a
bank or the ratio of net income to total revenue is a subject to some degree of management
control and direction. The banks can increase their earnings and their return to shareholders by
successfully controlling expenses and maximizing revenues. That HSBC needs to look into, in
this case.
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Explanation
The higher the ratio the higher the liquidity position of the company. We see the banks Liquidity
position decrease in year of 2006 to 2007. But in 2008 it is in higher position.
7.3.2 Cash Position
Cash Position
Cash Position= (Cash / Current Liability)
Year 2010 2011 2012 2013
Cash Position 0.395 0.41 0.251 0.385
Explanation
The cash position ratio discussed captured one dimension of liquidity. . It measures how quickly
a firm can pay it current debt. The higher the ratio the higher the cash position of the company.
From 2005 to 2006 it has increased but in 2007 it decreased, which is recovered by the bank in
2008. In this case the firm has enough cash to pay its current debt in previous year & also the
following year.
7.4.0 Leverage Ratios
Leverage ratios provide insight into the extent to which non equity capital is used to finance the
assets of the firm. Which components to include in the numerator or denominator of the ratios
depend on how one defines liabilities and shareholders equity.
7.4.1 Total Debt Ratio
Total Debt Ratio
Total Debt Ratio = (Total Asset-Total Equity) / Total asset
Year 2010 2011 2012 2013
Total Debt Ratio 0.869 0.88 0.879 0.877
Explanation
It measures the firm solvency. The Higher the ratio the higher the proportion of assets financed
by nonshareholder parties. We can see that there is a nearly stable position of debt ratio from the
year of 2007.
7.4.2 Time Interest Earned
Time Interest Earned
Time Interest Earned= (EBIT/Interest)
Year 2010 2011 2012 2013
Value 1.779 1.842 1.836 1.85
Explanation
The Higher the ratio the higher the proportion of assets financed by nonshareholder parties. We
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can see that the interest earning has increased in 2007 and 2008. In this case the firm was in
better position in last year to pay its interest expenses than other years.
7.4.3 Cash Coverage
Cash Coverage
Cash Coverage= (EBIT+ Depreciation /Interest)
Year 2010 2011 2012 2013
Value 1.841 1.900 1.900 1.915
Explanation
The Higher the ratio the higher the proportion of assets financed by nonshareholder parties. The
cash coverage ratio has in stable position in 2006 and 2007. In this case the firm has enough cash
to pay its current debt in previous year & also the following year.
Treasury department in subsidiaries/area takes an active role in the ALM process. Their key
responsibilities are to;
Treasury also manages actual interest rate currency and Liquidity risk in the market on a day-today basis within parameters authorized by the local ALCO within limits approved by Group
Head Quarter.
8.2.3 Role of ALCOs
The ALCO is the primary vehicle for achieving the objectives of ALM. The main purposes of an
ALCO are to;
due to clients failure to repay loan installment, reinvestment risk is associated with reinvestment
of prepayment/regular repayment proceeds at less than the existing rate and event risk is
associated with happening of an unforeseen event that may cause financial loss to the
organization.
Liquidity Risk
Asset Structure
Assets serve as a source of liquidity and must be framed in groups according to the nature of
either available for sale or held to maturity. Status of liquidity is to be judged in terms of
length of time it takes to dispose off the asset and the price the asset carries when it is sold. The
following points are to be considered at the time of asset structuring:
a) Nature of business.
b) Tenure of lending.
c) Interest rate structure fixed or floating.
d) Pattern of repayment regular installment or bullet payment.
e) CRR and SLR requirement.
Liability Structure
Every organization meets its funding needs through liability management. Liability structuring
must be made in such a way so that it matches with the tenure of asset structure. The following
points are to be considered at the time of liability structuring:
Grouping of liability into two major categories according to the maturity namely, long term and
short term.
Pricing option.
Exchange rate fluctuation in case of foreign currency transactions.
Early repayment option.
Capital Structure
Capital structure includes Equity, Preference share, long term Bond under both clean and
securitization arrangement etc. The following points are to be considered at the time of capital
Structuring
Regulatory framework.
Favorable gearing ratio.
Capital adequacy ratio.
Value of the organization.
Interest Rate Risk
Interest rate risk affects spread from lending business. Interest rate risk arises due to change in
overall market interest rate structure both on borrowing and lending.
Interest on borrowing
Interest on borrowing has a significant bearing on the pricing of lending. It affects profitability of
an organization and desired margin to the shareholders.2.2.2 Interest on Lending Interest rate risk
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arises due to reduction of interest rate on lending from time to time on several occasions. The
Company has to reduce interest rate on several occasions to attract more clients and to compete
with the competitors.
Prepayment Risk
Prepayment risk arises due to early repayment either partial or entire loan portfolio, which result
in loss of interest income.
Credit Risk
Credit risk can be classified into two categories as under:
Default Risk
Default risk arises due to clients failure to repay loan installment in due time. Default risk
analysis help identify the reason of default, customer group of making default in respect of their
profession and income status. Default risk is quantified in terms of loan being classified as SS,
DF, and BL etc.
Credit Spread Risk.
Credit spread risk arises due to non-recovery of regular installment repayment, which ultimately
decreases the overall effective lending rate and erodes margin from lending business. Credit
spread risk also arises due to stringent Income Recognition policy in respect of framing time for
SS, DF, and BL.
Reinvestment risk
The risk that the amount of prepaid loans will be reinvested at less than the existing rate is
reinvestment risk. Declining interest rate environment induces borrower to make prepayment and
forces Financial Institutions to invest at comparatively lower rate.
Event Risk
Financial Institutions are prone to event risks, a few examples are as under:
Restriction regarding participation on money market transactions and accepting short-term
Customer deposit.
Introduction of VAT on the service charge of Lease and Housing Finance business.
Disallowing loan loss provision.
Highest Corporate tax bracket.
8.3.0 Capital Growth and Profitability
In 1988, The Bank for International Settlements (BIS) agreed common international standards
for the measurement of capital, calculations of risk-weighted assets and determination of
minimum capital adequacy ratios. All banks incorporated in the group of Ten countries (Belgium,
Canada, France, Germany, Italy, Japan, Netherlands, Sweden, United Kingdom and United
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States) must meet these standards, as amended by subsequent pronouncements and implemented
by local regulators. Now some 120 countries subscribe to similar standards. These guidelines
allow credit risk to be measured according to internal grading or models and oblige banks to hold
capital for operational risk.
8.3.1 Capital adequacy ratio
The measurement of capital adequacy is critical in calculating and reporting the Groups capital
position. Furthermore, the Banking Act requires that the Group maintain sufficient capital which
is commensurate with the nature and scale of its operations.
The measurement of capital adequacy is measured in terms of two ratios:
The published ratio.
The supervisory ratio
These ratios are calculated by comparing the levels of capital requirement with the amount of
regulatory capital. Moreover, the Financial Services Authority specifies the Group that is
calculates these ratios.
These two ratios are extremely important. The published ratio is used as a gauge of the Groups
capital strength by external parties such as investors, shareholders and rating agencies while the
financial service authority uses the supervisory ratio to asses the Groups capital strength for
supervisory purposes.
8.3.2 Capital Ratio calculation
The Group and any subsidiaries regulated directly by the financial services authority must
calculate two capital ratios as set out
for public discloser
Risk Asset Ratio (%) = eligible capital / (banking book RWAs + trading book national RWAs)*
100
Trading book national Risk Weighted Assets =
Trading book capital requirement * 12.5
for supervisory purpose
Separate trigger ratios are set for the banking and trading books ands supervisory (cover) ratio is:
Supervisory capital adequacy (%) = Eligible capital / {(banking book RWAs * banking book
trigger ratio) + (trading book national RWAs * trading book trigger ratio)} * 100
8.3.3 Risk-weighted Assets
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Following the implementation of the Capital Adequacy Directive, risk assets are calculated
separately for the Banking Book and Trading Book.
In the Banking Book, risk-weighted assets are the aggregate of:
On-balance-sheet assets multiplied by the risk-weight appropriate to each category of asset, and
Off-balance-sheet risks multiplied by a conversion factor to convert to on-balance-sheet
equivalents and then by the appropriate risk weight.
In the Trading Book, the concept of notional risk weighted Assets apply. The Trading Book
Capital requirement is first determined for the following types of risk using the CAD system.
Foreign Exchange Position Risk.
Equity Position Risk.
Interest Rate Position Risk.
Large Exposures.
Trading Book Counterparty and Settlement Risk.
Notional of risk weighted assets are required from each Group office at the end of each quarter.
8.3.4 Economic Profit
The results from a particular activity or entity will be assessed on the basis of the economic
profit generated by that area. The calculation to economic profit is described in detail in section
13 of this manual. Subsidiaries should to incorporate economic profit considerations at all levels
of the ALCO process.
Self-capitalization
Self-capitalization is a measure of the degree to which actual risk asset growth has been financed
by profit retentions while maintaining target capital ratio levels. It is Group policy that
subsidiaries / areas should self-capitalize.
Profit retentions are made up of:
Net profit of the preceding 12 months.
Movements through the reserves reflecting currency translation differences (the effect of which
will also be reflected in the level of risk assets).
A deduction for dividends in accordance with Group Capital Plan payout ratios for individual
subsidiaries; and
The profit retentions column may also include the impact of any issues of Tier 1 qualifying
preference shares or innovative Tier 1 securities. The profit retentions figure divided by the
entitys target Tier 1 ratio gives the level of self-financed risk assets. Where self-financed risk
assets are higher than the actual risk asset growth a self-capitalization ratio in access of one
arises indicating that the entity has self capitalized. Self capitalization is expressed as a ratio
there by allowing an assessment of the degree to which an entity has generated retained profits to
support its risk asset growth. In some cases a ratio of less than 1 may indicate planned reduction
of excess capital.
It is possible that a product may have a low or even negative economic profit. The economic
profit for the relationships- customers or customer segments which use that product, will
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indicate whether the cost of its provision is compensated for other aspects of the relationships.
In case of individual customers it is important to manage price on a relationship basis. In case
of a corporate customer who has many banking relationships and tends to shop for the best but
these will tend not to produce acceptable economic profit.
The Asset liability management committee who reviews the economic profit & performance of
various portfolio, products and relationships.
In establishing economic profit guidelines for individual products and customers a factor may
have to be added to cover the unabsorbed area over heads / costs.
8.3.5 Business Growth
It is group policy to encourage profitable growth. Growth has two dimensions, namely
operational and capital.
8.3.6 Operational implication
Expansion of business will affect internal resources such as manpower, technology funding etc.
Such expansion is characterized by the dollar value of the balance sheet and off-balance sheet
business, as well as the number of accounts and transactions to be handled.
ALCO deliberation should include the effects of growth on liquidity and funding. Operating
plans should consider the other aspects of growth. In some areas manpower, property and
technology resources may not be fully utilized and thus represent idle capacity. In such cases a
good strategy would be to increase business and account / transactions volumes to make use of
idle capacity and thus increase revenue at minimal cost.
8.3.7 Capital implications
Risk Assets will influence capital adequacy ratios. Growth in Risk assets in encouraged provided
that it generates additional economic profit. This will be the case if the increase in net profits
arising from the growth exceeds the cost of the additional capacity required to support the risk
assets generated by the new business.
8.4.0 Interest Rate Risk
Interest Rate Risk arises from holding assets and liabilities on-balance-sheet with different
reprising dates, creating exposure to charges in the level of interest rates. An over-lent positionliability reprising later than liabilities benefits if interest rates fall and suffers if interest rates rise.
An- over-borrowed position-liabilities reprising later than assets-benefits if interest rate rise and
suffers if interest rate falls.
Discretionary and structural interest rate risk:
Interest rate risk can be divided into discretionary and structured (non discretionary) interest rate
risk.
Discretionary interest risk is that which is managed in Group Treasury with the objective of
profiting from movements in interest rates.
Structural interest rate risk is that which originates from the pricing characteristics of the banking
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assets and liabilities of the Group and from other balance sheet items such as share holders
funds, net of fixed assets, investments and other participating interests. In accordance with the
Group Transfer Pricing guidelines this structural interest rate risk should be transferred to
treasury where it can be managed by treasury specialists within risk parameters approved by
Group Executives Committee and delegated by the Group Treasurer.
Foreign exchange trading risk is measured by the use of out right limits expressed in USD terms
on an over-night and intra-day basis. Limits are set for each subsidiary / branch by Group
treasury on a regular basis.
There are other foreign exchange risks which arise in the course of business, the differences on
which are accounted for through the profit and loss account. Such exposures are foreign currency
assets and liability, future currency fees/ expenses/ expense recoveries and other transactions
denominated in foreign currencies.
Group Policy
As a matter of Group policy such exposures are hedged unless hedging is uneconomic,
impractical or it is decided by local ALCO that such exposures should remain unhedged.
Role of ALCO
Unhedged exposure are subject to foreign exchange limits approved by legal entity ALCOs and
should be subject to their regular review limits should be incorporated in the limits frame work
over seen by CIBM.
8.5.1 Stress testing
Stress testing estimates the profit and loss account effects of certain scenarios taking into account
the movements in exchange rates and in test rates which would be expected to occur in a given
scenario. Certain scenarios are defined at HSBC Holding Plc. Level but subsidiaries may also
wish to model additional scenarios which are relevant to local circumstances. ALCOs monitor
the profit and loss accounts exposure to the scenarios on a regular basis.
8.6.0 Liquidity
8.6.1 Objective of Liquidity
The objective of liquidity management is to ensure that a bank has ability to meet all legitimate
demands for funds from depositors and all facilities committed to borrowers.
Liquidity management depends on three factors:
A banks expected cash flow,
Its capacity to borrow in the market and
Its stock of readily available high quality liquid assets.
The HSBC Groups approach to liquidity management takes the following factors into account;
Compliance with regulatory liquidity requirements in each location which the HSBC Group has
activities.
Reporting of projected future cash flows in major subsidiaries in major currencies and
consideration of the level of liquid assets relative to the cash flow position.
Maintenance of the balance sheet ratios (1st and 2nd line Liquidity) which are required by
management.
Monitoring of structural liquidity measures including balance sheet maturity analysis.
Monitoring of depositor concentration both at the higher level of commercial / professional
funding and at the lower level of reliance on large individual depositors.
Maintenance of liquidity contingency plans for raising cash in an emergency.
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In forming the view that a deep and liquid market exists for particular securities holdings, local
ALCO should take account of all relevant factors, including (but not limited to) the following:
The number of market makers for the securities;
The size of the holding relative to the recent daily average market turnover in the security;
The volatility of recent price movements for the security;
The existence of any price support mechanism, short of a formal repo arrangement, proved by
the local central bank; and
Trading and price patterns in historical stress scenarios.
IHO ALCO (where appropriate) and Head of Treasury will also take account of the above
considerations in evaluating the proposal from the local ALCO.
Holdings of securities for which the Group acts as the sole or main market maker will not be
eligible for treatment as Liquid Securities during the primary marketing period (normally 90
days).
Liquid Securities, other than those issued by G7 governments or the government of the country
in which the relevant entity operates or those for which formal repo arrangements exists with
local central banks or AAA rated asset backed securities denominated in USD and issued into the
US market. These are subject to the following limits:
They may constitute a maximum of 25% of an entitys total Liquid Asset and
Such Liquid Securities of any single issuer may constitute a maximum of 5% of an entitys total
Liquid Assets.
Holding of Liquid Securities outside of these limits will be treated as Semi-Liquid Assets.
These are Assets that will comprise inter-bank placements from 1-12 months. Government
securities not qualifying as Liquid Assets (at 90% of market value) and non-government
Securities (at 90% of market value ) not included in Liquid Securities but which are judged to be
liquid by the local ALCO, IHO Alco (where appropriate ) and approved by the Group Finance
Director.
If portfolios of Liquid assets are very large as to be judged unrealizable in a 0-30 days time
frame; then a cap on the absolute amount of the relevant Liquid Assets used in the 1st line ratio
should be set by local ALCOs with approval of the IHO ALCO and Head of Treasury.
8.7.0 Portfolio and Concentration risk
8.7.1 Industry inter relationships
ALCO also gauge the true degree of diversification in the portfolio by evaluating industry inter
relationships. There will be correlations between any single industrys activity and the rest of the
portfolio arising through a number of factors such as a dependence on common markets
dependence on common input factors or a common vulnerability to an external event. The
assessment of this degree of correlation is a process judgment. ALCO merely establishes a
correlation between each sector and evaluate the degree of concentration risk accordingly.
8.7.2 Conglomerates
Areas which have significant exposure to conglomerates are not to rely completely on market
sector reports in their analysis of sectoral risks because of this bias arising from inter company
financing.
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9.0.0 Conclusion
HSBC is a global banking and financial services organization headquartered in London. The
groups international network comprises more than 10,000 offices in 82 countries and territories,
operating the Asia Pacific region, Europe, USA, and Middle East & Africa. HSBC Group is
represented in Bangladesh by its subsidiary bank HSBC, Bangladesh. We had the opportunity to
analysis for this banking giant during preparation our report. During this time we got an
opportunity to observe the overall service process of HSBC personal banking division. We also
got the scope to interact with customers and reveal their expectations and perceptions about the
banks services.
In a well-managed bank, all of these management decisions must be coordinated across the
whole bank to ensure that they do not clash with the each other, leading to inconsistent actions
that damage the banks earnings and values. Todays HSBC have learned to look at their asset
and liability portfolios as an integrated whole, considering how the banks total portfolio
contributes to its broad goals of adequate profitability and acceptable risk. This is how the bank
HSBC manages their Asset and liability to stand as one of the leading banks in the banking
sector in 80 countries and territories around the globe.
Finally, we would like to say that this report on HSBC has increased our practical knowledge.
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