Capital Requirement and Risk Assessment Process of HSBC Bangladesh.
Chapter 1: Introduction
1.1 Background
Various newspaper articles published in the last few months reveal that Bangladesh Bank, the regulator of the banking industry in Bangladesh, is planning to implement the Basel II accord for the banks in Bangladesh from 2009. Basel II is an effort by international banking supervisors to update the original international bank capital accord (Basel I), which has been in effect since 1988 (in Bangladesh since 1996). Basel II reflects the latest round of deliberations by central bankers held in Basel, Switzerland, where they agreed to ensure uniformity in the way banks and banking regulations approach risk management across national borders. The Basel-II Capital Accord titled “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” has been published by the Bank for International Settlement (BIS) in November 2005 for adoption globally.
The new accord, though complex, carries a lot of virtues and will be a milestone in improving commercial banks’ internal mechanism and supervisory process. It will be beneficial to the commercial banks, as it requires review and measurement of different types of risk, which ultimately have effect on risk management approach to comply with the accord standards. Once implemented, banks would also be benefited with significant improvements in their risk management systems, business models, capital strategies and disclosure standards as well as overall efficiency. At present, Bangladesh is following Basel-I for banks’ capital adequacy requirement, wherein risk-weighted capital adequacy ratio was 8 per cent when it was first adopted in 1996. Later in 2002, the ratio was increased to 9 per cent. The idea of the new framework is to strengthen risk-based requirements by laying out principles for banks to assess the adequacy of their capital. It will also enable the supervisors to review such assessments to make sure that banks have adequate capital to support their risks. It also seeks to strengthen market discipline by enhancing transparency in banks’ financial reporting.
The new Basel accord has been prepared on the basis of three pillars: minimum capital requirement, supervisory review process and market discipline. Three types of risks — credit risk, market risk and operational risk — have to be considered under the minimum capital requirement. For credit risk measurement, new framework provides two different methods – standardized approach and internal ratings-based approach. Implementation of standardized approach requires credit assessment intuitions or rating agencies for determining capital requirements of the banks in line with the Basel fixed risk-weight. On the other hand, internal rating based approach allows banks to rate their credit risks, which again have two different approaches — foundation approach and advanced approach.
However, implementation of Basel II at individual bank’s level is not likely to be an easy task. It will require training for the banking professionals, investment in hard and soft infrastructure and high level professional skill in risk management system implementation. More importantly, it may increase the banks’ capital requirement as the banks’ risk weighted capital adequacy ratio may fall because of more stringent risk assessment and higher risk weights.
This report provides a brief overview of the prevailing status and conditions of the banking sector in Bangladesh in line with Basel II requirements. However, this study has mainly concentrated on the implementation aspects of Pillar I, which has three components such as credit risk, operational risk and market risk. In fact, this study has further narrowed down its scope to focus on different approaches for the measurement of capital charge against credit risk and operational risk and seeks to answer the following questions: (a) What kinds of challenges are likely to be faced by both the Bangladesh Bank and the scheduled banks (including HSBC Bangladesh) in adopting different approaches to credit risk and operational risk? (b) Which approaches are likely to be more appropriate for Bangladesh to measure and charge capital against those risks?
1.2 Objectives
This report tried to achieve the following objectives:
- Give a brief overview of the Basel II accord and the requirements under this accord.
- Analyze the advantages and disadvantages of the options available under Basel II to assess different types of risks and predict which methods are likely to be adopted by Bangladesh Bank for implementation by the scheduled banks in Bangladesh.
- Analyze how the adoption of Basel II accord by Bangladesh Bank will affect the capital adequacy position and existing risk assessment process of HSBC Bangladesh
- Determine the level of preparedness of HSBC Bangladesh to meet the new requirements and find out the steps the bank should take to minimize these effects.
1.3 Scope
The report stayed limited only to evaluating the changes that will have to be implemented in risk assessment processes due to the first pillar of Basel II accord, i.e. Minimum Capital Requirement, by Bangladesh Bank and HSBC Bangladesh. It did not focus on the other two pillars, namely Supervisory Review and Market Discipline in detail. Neither did the report attempt to judge the overall impact of Basel II accord on the banking industry of Bangladesh.
The report used both secondary data and primary data. Secondary data was collected and used to provide overview of the Basel II accord and the requirements under this accord, the changes introduced in measuring credit risk, market risk and operational risk etc. Secondary data was also used to determine the suitability of the various alternative risk assessment approaches for implementation in Bangladesh and their likelihood of being selected by Bangladesh Bank. Primary research was done to find out the impact of the proposed changes on capital requirement and risk assessment process of HSBC Bangladesh.
Primary source
Primary data was collected by interviewing concerned officials of the bank in the Financial Control, Credit Risk Management, Operations and Corporate Banking Divisions of HSBC Bangladesh.
The secondary data was collected partly from the Basel II accord itself, i.e. “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” published by the Bank for International Settlement (BIS). Additional data was collected from various newspaper articles, internet articles and Bangladesh Bank publications on the accord. Some data was also collected from the HSBC Group’s intranet to find out the Group’s planned strategy in meeting Basel II requirements.
Data Collection Method
For the organization part and secondary data for the research part, information was collected from different published articles, journals, reports and brochures on HSBC. Primary data for the research part was collected through interviewing the relevant officials of the bank. However, no formal questionnaire for data collection will be used.
1.5 Limitations
Some of the relevant information of the bank is confidential & critical. For this reason, these figures were not available from the bank. In such case, proxy figures was used, if possible, while analyzing many issues related to risk assessment and capital adequacy.
Chapter 2: Overview Of HSBC Group
2.1 An Overview of HSBC Group
The HSBC Group is named after its founding member, The Hongkong and Shanghai Banking Corporation Limited, which was established in 1865 in Hong Kong and Shanghai to finance the growing trade between China and Europe.
Thomas Sutherland, a Hong Kong Superintendent of the Peninsular and Oriental Steam Navigation Company helped to establish this bank in March 1865. Throughout the late nineteenth and the early twentieth centuries, the bank established a network of agencies and branches based mainly in China and South East Asia but also with representation in the Indian sub-continent, Japan, Europe and North America.
The post-war political and economic changes in the world forced the bank to analyze its strategy for continued growth in the 1950s. The bank diversified both its business and its geographical spread through acquisitions and alliances.
HSBC Holdings plc, the parent company of the HSBC Group, was established in 1991 with its shares quoted on both the London and Hong Kong stock exchanges. The HSBC Group now comprises a unique range of banks and financial service providers around the globe.
HSBC maintains one of the world’s largest private data communication networks and is reconfiguring its business for the e-age. Its rapidly growing e-commerce capability includes the use of the internet, PC banking over a private network, interactive TV, and fixed and mobile, including wireless application protocol or WAP-enabled mobile, telephones.
The HSBC Group has an international pedigree, which is quite unique. Many of its principal companies opened for business over a century ago and they have a history rich in variety and achievement.
Foundation and Growth
The inspiration behind the founding of the bank was Thomas Sutherland, a Scot who was then working as the Hong Kong Superintendent of the Peninsular and Oriental Steam Navigation Company. He realized that there was considerable demand for local banking facilities both in Hong Kong and along the China coast and he helped to establish the bank in March 1865. Then, as now, the bank’s headquarters were at 1 Queen’s Road Central in Hong Kong and a branch was opened one month later in Shanghai.
Throughout the late nineteenth and the early twentieth centuries, the bank established a network of agencies and branches based mainly in China and South East Asia but also with representation in the Indian sub-continent, Japan, Europe and North America. In many of its branches the bank was the pioneer of modern banking practices. From the outset, trade finance was a strong feature of the bank’s business with bullion, exchange and merchant banking also playing an important part. Additionally, the bank issued notes in many countries throughout the Far East.
During the Second World War the bank was forced to close many branches and its head office was temporarily moved to London. However, after the war the bank played a key role in the reconstruction of the Hong Kong economy and began to further diversify the geographical spread of the bank.
The post-war political and economic changes in the world forced the bank to analyze its strategy for continued growth in the 1950s. The bank diversified both its business and its geographical spread through acquisitions and alliances. This strategy culminated in 1992 with one of the largest bank acquisitions in history when HSBC Holdings acquired the UK’s Midland Bank plc (now called HSBC Bank plc). However, it remained committed to its historical markets and played an important part in the reconstruction of Hong Kong where its branch network continued to expand.
Table 1: Timeline of Progress: HSBC
| Key events in the growth of the HSBC Group | The HSBC Group evolved from The Hongkong and Shanghai Banking Corporation Limited, which was founded in 1865 in Hong Kong with offices in Shanghai and London and an agency in San Francisco. The group expanded primarily thought offices established in the bank’s name until mid-1950s when it began to create or acquire subsidiaries. The following are some key developments in the Group’s growth since 1959 |
| 1959 | The Hongkong and Shanghai Banking Corporation acquires The British Bank of Middle East (formerly the Imperial Bank of Persia, now called HSBC Bank Middle East Limited). |
| 1965 | The Hongkong and Shanghai Banking Corporation acquires a majority shareholding in Hang Seng Bank Limited, now the second-largest bank incorporated in Hong Kong. |
| 1971 | The British Bank of the Middle East acquires a minority stake of 20% in The Cyprus Popular Bank Limited (now trading as Laiki Group) |
| 1972 | Midland Bank acquires a shareholding in UBAF Bank Limited (now known as British Arab Commercial Bank Limited). |
| 1978 | The Saudi British Bank is established under local control to take over The British Bank of the Middle East’s branches in Saudi Arabia. |
| 1980 | The Hongkong and Shanghai Banking Corporation acquires 51% of New York State’s Marine Midland Bank, N.A. (now called HSBC Bank USA). Midland acquires a controlling interest in leading German private bank Trinkaus & Burkhardt KGaA (now HSBC Trinkaus & Burkhardt KGaA). |
| 1981 | Hongkong Bank of Canada (now HSBC Bank Canada) is established in Vancouver. The Group acquires a controlling interest in Equator Holdings Limited, a merchant bank engaged in trade finance in sub-Saharan Africa. |
| 1982 | Egyptian British Bank S.A.E. is formed, with the Group holding a 40% interest. |
| 1983 | Marine Midland Bank acquires Carroll McEntee & McGinley (now HSBC Securities (USA) Inc.), a New York based primary dealer in US government securities. |
| 1986 | The Hongkong and Shanghai Banking Corporation establishes Hongkong Bank of Australia Limited (now HSBC Bank Australia Limited) |
| 1987 | The Hongkong and Shanghai Banking Corporation acquires the remaining shares of Marine Midland and 14.9% equity interest in Midland Bank plc (now HSBC Bank plc). |
| 1991 | HSBC Holdings is established; its shares are traded on the London and Hong Kong stock exchanges. |
| 1992 | HSBC Holdings purchases the remaining equity in Midland Bank. |
| 1993 | The HSBC Group’s Head Office moves to London. |
| 1994 | Hongkong Bank Malaysia Berhad (now HSBC Bank Malaysia Berhad) is formed. |
| 1997 | The group establishes a new subsidiary in Brazil, Banco HSBC Bamerindus S.A. (now HSBC Bank Brasil S.A. – Banco M?ltiplo), and acquires Roberts S.A. de Inversiones in Argentina (now HSBC Argentina Holdings S.A.). |
| 1999 | Shares in HSBC Holdings begin trading on a third stock exchange, New York. HSBC acquires Republic New York Corporation (now integrated with HSBC USA Inc.) and its sister company Safra Republic Holdings S.A. (now HSBC Republic Holdings (Luxembourg) S.A.). Midland Bank acquires a 70.03% interest in Mid-Med Bank p.l.c. (now HSBC Bank Malta p.l.c.), Malta’s largest commercial bank. |
| 2000 | HSBC acquires CCF, one of France’s largest banks. Shares in HSBC Holdings are listed on a fourth stock exchange, in Paris. The Group increases its shareholding in Egyptian British Bank to over 90% and later renames it HSBC Bank Egypt S.A.E. |
| 2001 | HSBC acquires Demirbank TAS, now HSBC Bank A.S., Turkey’s fifth largest private bank; and signs an agreement to purchase an 8% stake in Bank of Shanghai. |
| 2002 | Acquisitions include Group Financiero Bital, S.A. de C.V., one of Mexico’s largest financial services groups; and a 10% interest in Ping An Insurance Company of China Limited, the second largest life insurance operations in China. |
| 2003 | HSBC acquires Household International Inc., a leading US consumer finance company; and Lloyds TSB’s Brazilian assets including Losango Promortora de Vendas Ltd, a major consumer credit institution. Four French private banking subsidiaries combine to form HSBC Private Bank France. HSBC Insurance Brokers Limited forms a joint venture, Beijing HSBC Insurance Brokers Limited, in which it has a 24.9% stake. Hang Seng Bank acquires 15.98% of Industrial Bank Co Ltd, a mainland China commercial bank, and HSBC agrees to purchase 50% of Fujian Asia bank Limited (no Ping An Bank Limited). |
| 2004 | HSBC acquires The Bank of Bermuda Limited, a leading provider of fund administration, trust, custody, asset management and private banking services; and shares in HSBC Holdings are listed on a fifth stock exchange, in Bermuda. |
| 2005 | HSBC marked 140 years in China by increasing its stake in the country. In the Middle East, HSBC reopened its branch in Kuwait, while in the USA, the integration of Household International with the Group’s North American operations was completed, under the name ‘HSBC Finance Corporation’. HSBC Asset Management, HSBC Investment Management and HSBC Multi-manager become HSBC Investments. HSBC Halbis Partners, a specialist fundamental active investment business is formed from part of HSBC Asset Management and all of HSBC Alternative Investments. |
| 2006 | HSBC acquires Bank of Panama for USD 1.77 billion to increase its presence in South America. Currently the Group has presence in 76 Countries worldwide. |
The HSBC Group at present
HSBC Holdings is a public limited company incorporated in England and Wales. Headquartered in London, the HSBC group operates in five regions: Europe; Hong Kong; the rest of Asia Pacific; including the Middle East and Africa; North America; and South America. The entities which form the HSBC Group provide a comprehensive range of financial services to personal, commercial, corporate, institutional and investment, and private banking clients. To more easily promote the Group as a whole, HSBC was established as a uniform, international brand name in 1999. In 2002, HSBC launched a campaign to differentiate its brand from those of its competitors by describing the unique characteristics which distinguish HSBC, summarized by the words ‘The world’s local bank’.
2.3 Banks under the HSBC Group
Many of the members of the group have changed their name into HSBC (The Hong Kong and Shanghai Banking Corporation Limited) to introduce the whole group under one brand name.
Midland Bank, one of the principal UK clearing banks, was acquired by HSBC Holdings in 1992. The bank has a personal customer base of five and a half million, business customers of over half a million, and a network of almost 1,700 branches in the United Kingdom. Midland has offices in 28 countries and territories, principally in continental Europe, with a number of offices in Latin America.
Hang Seng Bank, in which HongkongBank has a 62.1% equity interest, maintains a network of 146 branches in the Hong Kong SAR, where it is the second-largest locally incorporated bank after HongkongBank. Hang Seng Bank also has a branch in Singapore and four branches in China.
Marine Midland Bank, headquartered in Buffalo, New York, has 380 banking locations state-wide. The bank serves over two million personal customers and 120,000 commercial and institutional customers in New York State and, in selected businesses, throughout the United States.
Hongkong Bank of Canada is the largest foreign-owned bank in Canada and the country’s seventh-largest bank. It has 116 branches across Canada and two branches in the western United States.
Banco HSBC Bamerindus was established in Brazil in 1997. The bank has its head office in Curitibank and a network of some 1,900 branches and sub-branches, the second largest in Brazil.
Hongkong Bank Malaysia is the largest foreign-owned bank in Malaysia and the country’s fifth-largest bank, with 36 branches.
The British Bank of the Middle East (British Bank) is the largest and most widely represented international bank in the Middle East, with 31 branches throughout the United Arab Emirates, Oman, Bahrain, Qatar, Jordan, Lebanon and the Palestinian Autonomous Area, including an offshore banking unit in Bahrain. The bank also has branches in Mumbai and Trivandrum, India, and Baku, Azerbaijan, as well as private banking operations in London and Geneva.
HSBC Banco Roberts was acquired in 1997. Based in Buenos Aires, it is one of Argentina’s largest privately owned banks, with 60 branches throughout the country.
HongkongBank of Australia has 16 branches across Australia. It is the flagship of the HSBC Group’s businesses there, operating under the name HSBC Australia, and providing a complete range of financial services.
The Saudi British Bank, a 40%-owned member of the HSBC Group, has 63 branches throughout Saudi Arabia and a branch in London.
Other associated Group banks are British Arab Commercial Bank, The Cyprus Popular Bank and Egyptian British Bank. Wells Fargo HSBC Trade Bank is a San Francisco-based joint venture between HSBC and Wells Fargo Bank, providing trade finance and international banking services in the United States through its offices in five western states and in conjunction with Wells Fargo’s 32 regional commercial banking offices in 10 western states. In addition, the Group has a non-equity strategic alliance with Wells Fargo Bank, which provides access to a wide range of banking services through that bank’s more than 1,900-staffed outlets. The Group also has a non-equity alliance with Wachovia Corporation, one of the leading corporate banks in the United States, with business relationships in 50 states.
2.4 HSBC’s International Network
The HSBC Group’s international network comprises of some 9,500 offices in 76 countries and territories. A brief list is presented below:
Table 2: HSBC’s International Network
Country Classifications
To ensure that the key resources (management time, capital, human resources and IT) are correctly allocated and that the exchange of best practice is accelerated between entities, thegroup has classified the countries where it operates into 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:
Figure 1: Map of HSBC International Network
2.5 HSBC Brand & Corporate Identity
A key part of the Group’s business strategy, announced in 1998, is the creation of a global brand featuring the HSBC name and hexagon symbol. The symbol is now a familiar sight around the world. The Group has embarked on the next phase — making the HSBC brand universally synonymous with its core values of integrity, trust and excellent customer service.
The Hexagon logo of HSBC is derived from HSBC’s traditional flag, a white rectangle divided diagonally. Like many other Hong Kong company flags in the last century, the design of the flag was based on the cross of St. Andrew, The Patron Saint of Scotland.
HSBC presents it self as a prudent, cost conscious, ethically grounded, conservative, trustworthy international builder of long-term customer relationships.
2.5.1 HSBC Vision Statement
“We aim to satisfy our customers with high quality service that reflects our global image as the premier international bank”
2.5.2 Objectives of HSBC
HSBC’s objectives are to provide innovative products supported by quality delivery of systems and excellent customer services, to train and motivate staff and to work in a socially responsible manner. By combining regional strengths with group network, HSBC’s aim is to be the leading bank in its target markets. HSBC’s goal is to achieve sustained earnings growth and continue to enhance shareholders value.
2.5.3 Basic Drives
HSBC’s basic drives are Higher Productivity, Team Orientation, and Creative Organization & Customer Orientation.
The essence of HSBC brand is integrity, trust and excellent customer service. It gives confidence to customers, value to investors & comfort to colleagues.
Through the process of listening to individuals needs and then acting in partnership to deliver the right solutions, HSBC’s is committed to helping the clients make the most of their financial assets.
HSBC operate on a global basis, but also work on a local level to ensure the cross-border differences are identified and any related benefits exploited. HSBC teams of specialists ensure that whether you need solutions across the world, regionally or locally, they have the skills, expertise and resources to deliver them. They automate as many functions as possible, whilst ensuring you retain control.
HSBC claims that they are the people to talk to if anyone wants the following: –
· Global cash flow co-ordination
· Enhanced risk management
· Improved security and audit controls
· Minimized costs and reduced operating expenses
· Maximized liquidity, returns and interest benefits
2.5.4 Group Business Principles and Value
The HSBC Group is committed to Five Core Business Principles:
· Outstanding customer service;
· Effective and efficient operations;
· Strong capital and liquidity;
· Conservative lending policy;
· Strict expense discipline;
HSBC 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 Group’s interests ahead of the individual’s;
· 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 wherever we conduct our business;
· The promotion of good environmental practice and sustainable development and commitment to the welfare and development of each local community
HSBC’s reputation is founded on adherence to these principles and values. All actions taken by a member of HSBC or staff member on behalf of a Group company should conform to them.
In the following two sections a brief outline of the HSBC group’s financial profile and customer segment is provided.
2.6 Financial Profile of the Group
| Assets | US $ 1,034 billion (£ 579 billion, HK $ 8,029 billion) at 31 December 2005 | |
| Profit (pre-tax) | US $ 14,401 million (£ 8,813 million, HK $ 112,141 million) for 2005 (excluding goodwill amortization) | |
| Capital strength | Tier 1 capital ratio: 8.9% | } at 31 December 2005 |
| Total capital ratio: 12.0% | ||
| International Reach | Over 9,500 offices worldwide | |
| Staff | 223,000 employees in 79 countries and territories | |
| Customers | Over 110 million worldwide, with a total e-customer base of more than 14 million | |
| Share listings | HSBC Holdings is listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges. The company’s US $0.50 ordinary shares are traded on the London, Hong Kong, Paris and Bermuda stock exchanges and are traded in New York in the form of American Depository Shares, each of which represents five ordinary shares. Shares in HSBC Holdings are held by around 200,000 shareholders in some 100 countries and territories. | |
2.7 Customer Segments of HSBC Group
| Personal financial services | HSBC provides a full range of personal financial services, including current and savings account, mortgages, insurance, credit cards, loans, pensions and investments. In 2003, residential mortgages across the Group – excluding Household – grew by 15%, while non-mortgage personal lending increased by over 20%. Credit cards in issue grew by 20% worldwide. Sales of repayment protection insurance and deposit growth reached record levels. Current account balances in the UK exceeded £ 10 billion for the first time at year-end 2003. The number of customers registered for e-banking services – via the internet and telephone – more than trebled in 2003. The internet generated sales of over 2.3 million products and 87 million transactions. |
| Consumer finance | Through Household International, Inc., HSBC is now a major provider of consumer finance and a top 10 issuer of credit cards in the USA. Household provides consumer loans, credit cards, vehicle finance, mortgage financing and credit insurance to middle America. During 2003, Household achieved good organic loan growth, which it supplemented with portfolio acquisitions. The strongest growth was in the real estate portfolio and the mortgage services business, and also in branch-based consumer lending. Synergy benefits with HSBC included store cards and point-of-sale financing. |
| Commercial banking | The provision of services to small and medium-sized enterprises around the world is a core strength of HSBC. During 2003, HSBC increased its leading position in the UK business start-up market to 21% and attracted record levels of business current and deposit account balances. Business internet banking was offered in 20 countries and territories, and the number of registered users more than doubled to 540,000. Money transmission revenues, trade finance fees, wealth, savings and insurance products all saw growth during 2003. |
| Corporate, investment banking and markets | This customer group comprises four main business lines – Corporate and Institutional Banking, Global Investment Banking, Global Markets and Global Transaction Banking – which focus on long-term relationships with major international corporations and institutions. Record results were achieved in 2003. The Global Markets business excelled, particularly in international debt issuance, risk management and structured products, and foreign exchange. Global Investment Banking was entrusted with a number of landmark deals in capital restructuring, corporate reorganization and strategic advice. |
| Private banking | This customer group provides world-class financial services to high net worth individuals and their families. In 2003, Private Banking posted improved financial results in all regions, led by Asia, which had a record year. New business initiatives and a general improvement in investment markets led to increased client activity across a range of products. An increase in discretionary mandates, together with a strong demand for client-tailored structured products, contributed to higher fee revenues and dealing income. Funds under management grew by 18%, reflecting both net inflows of client assets and improving market conditions. |
Chapter 3: Overview Of HSBC Bangladesh
3.1 HSBC Bangladesh
The HSBC Asia Pacific group represents HSBC in Bangladesh. HSBC opened its first branch in Dhaka in 17th December, 1996 to provide personal banking services, trade and corporate services, and custody services. The Bank was awarded ISO9002 accreditation for its personal and business banking services, which cover trade services, securities and safe custody, corporate banking, Hexagon and all personal banking. This ISO9002 designation is the first of its kind for a bank in Bangladesh. The HongKong and Shanghai Banking Corporation Bangladesh Ltd. primarily limited its operations to help garments industry and to commercial banking. Later, it extended its services to pharmaceuticals, jute and consumer products. Other services include cash management, treasury, securities, and custodial service.
Realizing the huge potential and growth in personal banking industry in Bangladesh, HSBC extended its operation to the personal banking sector in Bangladesh and within a very shortspan of time it was able to build up a huge client base. Extending its operation further, HSBC opened a branch at Chittagong, three branch offices at Dhaka (Gulshan, Mothijheel and Dhanmondi) and an offshore banking unit on November 1998.
HSBC Bangladesh is under strict supervision of HSBC Asia Pacific Group, Hong Kong. The Chief Executive Officer of HSBC Bangladesh manages the whole banking operation of HSBC in Bangladesh. Under the CEO there are heads of departments who manage specific banking functions e.g. personal banking, corporate banking, etc.
Currently HSBC Bangladesh is providing a wide range of services both two individual and corporate level customers. In the year 2000, the bank launched a wide array of personal banking products designed for all kinds of (middle and higher-middle income) individual customers. Some such products were Personal loans, car loans, etc. Recently the bank launched three of its personal banking products – Tax loan, Personal secured loan & Automated Tele Banking (ATB) service. These products are designed to meet the diverse customer needs more completely.
HSBC in Bangladesh also specializes in self-service banking through providing 24-hour ATM services. Recently it has introduced Day & Night banking by installing Easy-pay machines in Banani, Uttara and Dhanmondi to better satisfy the needs of both customers and non-customers. In total HSBC currently has 10 ATMs and 3 Easy-pay machines located at various geographical areas of Dhaka & Chittagong.
Over the years, HSBC has dynamically expanded its operations in Bangladesh both in terms of customer base and business volume. At present it is one of the fastest growing and most profitable banks in Bangladesh.
HSBC in Bangladesh also has an Offshore Banking Unit, which provides banking services for foreign companies based in the Export Processing Zones in Dhaka and Chittagong.
3.2 Different Activities in Bangladesh
As one of the largest international banks in Bangladesh, HSBC has a long-term commitment to its customers and provides a comprehensive range of financial services: personal, commercial and corporate banking; trade services; cash management; treasury; consumer & business finance; and securities and custody services.
3.2.1. Personal Banking Services
HSBC offers a full range of personal banking products and services designed to take care of its customers’ growing needs and requirements. HSBC in Bangladesh has launched a number of loan products during 2000. Personal Installment Loan is an unsecured loan that does not require any personal guarantee or cash security; Car Loan, also, does not require any down payment or personal guarantee. The Bank has already launched Phone banking, a state-of-the-art automated telephone banking service available 24 hours a day, 7 days a week, and 365 days a year, which allows customers to access their account from the comfort of the office or home. HSBC is the market leader in the local Auto-Pay service with which the company can initiate bulk Taka payments to, or Taka collections from, any HSBC current or savings accounts of counterparts for a specified sum at a specified date, regardless of the branch. HSBC also offers Power-Vantage, a unique all-in-one package of products and services designed to give total financial control to the customer; a unique savings account, which allows the customer to do any number of transactions without any charges being incurred or credit interest lost. To satisfy the growing needs of real estate HSBC Bangladesh recently launched Home Loan Scheme and a special type of deposit product named “Bangladesh International” for non-resident Bangladeshi. Details of these products and more will be discussed later.
3.2.2. Corporate Banking Services
HSBC offers a wide range of cash financing, working capital, short and medium-term loans and guarantee facilities from its Head Office and Chittagong branch. The Offshore Banking Unit (OBU) provides US Dollar denominated working capital as well as short-term finance for capital imports to eligible businesses. Using high-speed communication links, HSBC connects customers to international payment systems.
3.2.3. Trade Services
As the leading provider of trade finance and related services to importers and exporters in Asia, HSBC in Bangladesh operates a highly automated trade-processing network and offers an Electronic Data Interchange (EDI) capability through Hexagon. The Bank also uses SWIFT, an efficient and secure mechanism for bank-to-bank global communications used for all trade related activities including fund transfers and issuance of DC’s (Documentary Credit).
3.2.4. Financial Institutions
HSBC provides global trade services and cash management services to local banks. HSBC’s worldwide network strength, with over 9500 offices in 76 countries and territories, coupled with a world class reputation in Trade Finance (“Best Trade Documentation Bank” – Euro money) places HSBC in an ideal position to render unmatched correspondent banking services.
HSBC’s commanding presence in the USA (5th largest USD clearing bank globally), UK (largest GBP clearing bank globally), and the Euro land (largest Euro clearing bank in the UK) allows the Bank to also provide first class cash management solutions in 3 major global currencies; USD, GBP and Euro.
3.2.5. Payments and Cash Management
HSBC was the pioneer in introducing electronic cash management solutions in Bangladesh, by introducing its state-of-the-art proprietary software, Hexagon, back in 1997. This was initially made available to corporate clients only but has since been expanded to include banks and retail clients.
With Hexagon, the Bank’s cash management system, corporate customers can access banking services from anywhere in the world to view account balances and statements, make transfers and international payments, and to open documentary credits, by using only a PC, a modem and a telephone line.
3.3 Organizational Structure of HSBC Bangladesh
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 supervises the heads of all the departments and he is the ultimate authority of HSBC Bangladesh. The HSBC Chief Executive Committee is formed with the heads of all the departments along with the CEO. Its structure is shown in the following figure.
Figure 2: Organogram – Chief Executive Committee
HSBC follows a 4 layer management structure in Bangladesh. These are Managers, Executives, Officers and Assistant Officers. The CEO is the top most authority. Managers are the departmental heads who are responsible for formulating the strategies and the overall activities of their departments. Executives are basically responsible for certain activities & organizational functions. e.g. Admin Executive. These two layers represent the management level of HSBC Bangladesh.
Officers are the typical mid-level employees and are responsible for managing the operational activities and operating level employees. The operating level employees of HSBC who are ranked as Assistant Officer fill the last layer of this hierarchy. They perform the day-to-day operational activities of HSBC. An organizational hierarchy chart is shown below:
Figure 3: Organizational Hierarchy
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3.4 Functional Departments of HSBC
HSBC activities are performed through functional departmentalization. So, the departments are separated according to the functions they perform. Within the major departments there are some other subsidiary departments that allow smooth operation of their own major departmental function.
Personal Banking / Personal Financial Services (PFS)
PFS is the most flourishing department of HSBC Bangladesh. This department basically deals with the management of products and services offered to the individual consumers. Within a span of only five years, HSBC PFS has grown tremendously and is still growing with its innovative products and service offerings. PFS Head Mr. Mamoon Mahmud Shah manages this department. PFS Head manages and supervises the Personal Banking activities of the branch network of HSBC Bangladesh. The branches and booths of HSBC basically deal with the personal banking activities and provide various accounts services to individual customers.
Operations of PFS
· Manages daily operation
· Plans and directs sales and marketing
· Plans for service development
· Top-level authority for customers’ dealings and transaction
· Provides required service to the customers directly
· Maintains documentation and report flow vary rapidly
· Helps in planning in field level
· Assists PFS Head in decision-making process
· Assists PFS Head in different level of research
· Assists PFS Head day-to-day work
· Keeps track and inform PFS Head in present condition of the competition in the market
Branch Network
There are eight branches of HSBC. Only the Dhaka office (head office) branch & Chittagong branch deals with both corporate and personal banking. The other offices only deal with the personal banking activities. There functions are to provide various financial services to the consumers. These include customer services, sale of various PFS products, opening new accounts, providing cash, remittance and other teller services, etc. The branches are quite decentralized for better delivery of services to customer and have their own premises and facilities. These branches are headed by branch managers. Each branch is staffed with its own team of employees. A great deal of teamwork is seen within these branches. ATM’s are situated with each branch premises.
ATM Center
The ATM center ensures smooth operation of the ATM machines. The ATM center is responsible for regular replenishment of the off-site ATM’s and servicing of all the ATMs. Currently a total 16 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.
Bond Department
This department is under the same manager as the ATM center. They basically deal with all the buying and selling of government bonds and treasury bills as per customer instruction, i.e. BSP, PSP, TSP etc. This department keeps under its control the transactions regarding USDB, USDIB and WEDB.
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 January 2001. Currently this department is staffed with one executive and one officer.
PFS Credit Department
The personal banking credit department deals with the consumer credit schemes such as the Personal loan, Car loan, Travel Loan, Personal Secured loan, etc. which are tailored to meet the demand of individual customers. The manager of PFS credit who approves and 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. This department is a member of ALCO (Asset Liability Management Committee), which coordinates in preparation of lending analysis and data on concentration of risk and identifies possible lending risks. This department is also responsible for monitoring all necessary documents and securities related to loans.
Corporate Banking
This division if HSBC provides financial services to organizational (corporate) 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 Corporate Banking 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.
Figure 6: Structure of Corporate Division
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 Group’s 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. CIB has two separate wings: Relationship management department and Hexagon. These are discussed below:
Relationship Management Department
The RM department consists of various relationship managers who are assigned to different corporate client to better satisfy their needs. These RM’s 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.
HSBC Trade Services
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 group’s 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 HSBC’s excellence in trade. The trade service department has two separate subsidiaries: Credit Administration & Foreign Exchange Division.
Payment and Cash Management (PCM)
PCM deals with the inter-bank payment. PCM strategies are designed to ensure efficiency, profitably and comprehensive support.
Marketing Department
The sixth major department of HSBC is the marketing department. The marketing department of HSBC play a vital role in fostering the continuos growth HSBC in Bangladesh. A manager is assigned to this department who looks after the overall marketing operation of HSBC in Bangladesh. This department is basically concerned about marketing the company’s products, services and building a strong corporate image. The marketing department of HSBC has three subdivisions: Direct Sales, Promotion & Marketing Administration. These are discussed below:
Direct Sales (DS)
An executive is assigned to this part of the marketing department. The Direct Sales division coordinate & manages the sales activities of all the Mobile sales officers (MSO) of HSBC Bangladesh. The MSO’s basically makes sales of the company various Personal Banking products such as, savings accounts, consumer loan, etc outside the banking premises. There are a total of more than 50 mobile sales officers (MSO) employed in the cities of Dhaka and Chittagong. A MSO’s 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 MSO’s 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.
Promotion
This part of the marketing department deals with all the promotional activities of HSBC Bangladesh. Prime responsibilities of this department are: Maintaining strong public relations with various media intermediaries, Advertising the companies products and services, building a strong corporate image of HSBC in Bangladesh.
Public Relations
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. Maintaining strong relationship with news media is another major duty of this department.
Advertising
The promotion also coordinates all the advertising of HSBC products within Bangladesh. Some of the advertising tools that are frequently used by the company 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 colour signposts focusing on various products of HSBC are found on the roadsides of various posh areas such as, Gulshan, Dhanmondi, Baridhara, Motijheel, etc.
d) Mailers: various product updates and new product information are regularly sent to existing customers of HSBC.
e) Brochures: Various colourful brochures featuring specific products of HSBC are being displayed and distributed to existing and potential customers via branch offices and Mobile sales officers.
Marketing Administration Department
This department formulates & executes various marketing strategies of HSBC Bangladesh. This department also administers various marketing research activities on the existing and potential customers of HSBC. Some such research activities are: mystery shopping, critical incident surveys, customer suggestion surveys, etc. The results of these surveys are integrated while formulating various marketing strategies. This department also deals with the billing and invoicing of various marketing & advertising costs of HSBC Bangladesh.
Treasury
This department works under FCD. Their main job is to take decisions regarding purchase and sell of foreign Currency. The purpose of Treasury’s 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.
Credit Administration
Credit Administration department basically deals with all the documentation, processing, administration and disbursement of the import-export services provided to corporate clients. This department is known to be the heart of HSBC trade