Exit Decision of Multinationational Banks. The Case of HSBC Kazakhstan


Seminar Paper, 2014

52 Pages, Grade: 1


Excerpt

Table of contents

ABSTRACT

List of Figures

List of Tables

List of abbreviations

1. Introduction

2. Theoretical background

3. Conceptual framework

4. Methodology

5. Results

6. Discussion, limitations and directions for further research

7. Conclusion

List of References

ABSTRACT

Straight after a new CEO was assigned, Hong Kong and Shanghai Banking Corporation (HSBC) announced its exit from a number of markets including those that were considered to be high growth markets. The paper attempts to identify the key factors, which influence the exit decisions that are taken by multinational banks. The research is based on the analysis of HSBC’s publicly available financial documents, strategy releases and other world economic databases. The results of the study reveal two main factors that forced HSBC’s exit from Kazakh market. These findings can potentially be generalized to overall banking industry.

Keywords

Market exit, de-internationalization, divestment, exit decision factors, divestiture in banking industry.

Appendix

Appendix 1: Table of literature review

Appendix 2: Content analysis of the CEO Speech

Appendix 3: Key characteristics of the Kazakh market

Appendix 4: Average ROE rates among 22 banks offering similar services in Kazakhstan (2009-2013)

Appendix 5: HSBC Kazakhstan market share and cost efficiency ratio

List of Figures

Figure 1: Conceptual framework

Figure 2: Kazakhstan Trade Statistics (2009-2013), in million US dollars per year (2009-2013)

Figure 3: GDP growth forecast, in percent (%) per year

Figure 4: HSBC Kazakhstan return on equity rate, in percent per year (2009-2013)

Figure 5: HSBC Kazakhstan cost efficiency ratio, in percent per year (2009-2013)

Figure 6: HSBC Kazakhstan market share, in percent per year

List of Tables

Table 1: Factors influencing exit decision according to literature review

Table 2: Performance indicators

List of abbreviations

illustration not visible in this excerpt

1. Introduction

The fall of international trade barriers between economies, especially during the last half of the 20th century, has led to an extraordinary growth of international business operations among large corporations.1 In pursuit of their global strategy, companies in different industries have been discovering new markets where they could increase their profit and benefit from the local economic environment at the same time minimizing risks through geographic diversification.

The internationalization of banking industry has played an important role in facilitating international operations of other industries. The reason for this is obvious – global banking has created a universal pool of finance and made it more accessible worldwide.2 While international banking has a positive spillover effect on other industries, divestment in banking industry, on the other hand, can have serious socioeconomic consequences such as, for example, job cuts.3

In 2011, “The world´s local bank”, The Hong Kong and Shanghai Banking Corporation (HSBC), announced its exit from around 20 countries, including Kazakhstan in Central Asia, cutting jobs of approximately 30 000 of its employees worldwide.4 Obviously, there should be a clear reason for such a decision on the bank´s corporate strategy level. However, it is still not clear whether such decisions are driven internally, meaning change in strategy or poor performance, or triggered externally as a response to a negative macroeconomic development and increase in competition within the markets they operate in. Therefore, the aim of this paper is to analyze the key factors that make multinational banks such as HSBC exit certain markets. In order to be more precise in the objective of the research, the following research question was set:

“What are the key factors that make multinational banks exit markets?”

The analysis is based on the following datasets:

The transcript of HSBC Group strategy presentation for the year 2011;

Financial statements of 22 banks based in Kazakhstan;

Official statistical data on Kazakhstan market and world economic data sources such as World Bank and International Monetary Fund (IMF).

The structure of the paper is as follows: at first, theoretical background on the topic of divestment and market exit is presented. After this, based on the literature review, a framework for analyzing factors of market exit is proposed. The next part of the paper deals with methodology used for analysis, which is then followed by the results of the analysis. The research paper is finalized by a discussion and conclusion.

2. Theoretical background

The literature base on the topic of divestment in banking industry turned out to be extremely limited. Therefore, the theoretical background of this particular paper is based on the studies of divestment within not only banking but also other industries.

Despite the fact that the topic of internationalization has been drawing researchers’ attention more than the topic of de-internationalization, such terms as divestment, divestiture and market exit are already widely used by researchers. Turcan, for instance, defined divestment as “the process of reduction of international involvement”5, while Drogendijk defines it simply as a reverse of the internationalization process.6 Reiljan defines divestment as a total or partial discontinuation of foreign operations by companies.7 In the context of this paper, discontinuation of foreign operation regardless the volume is referred to as market exit.

The state-of-the-art literature suggests different factors that force companies to exit markets. Dunne et al. suggest that exit decision is determined by the structure of the host market. The structure of the market is, in turn, determined by the competition within it. As the competition within the market increases, the value of entering into the market and the value of operating in the market decreases. As a result, the profit expectation in the market declines and the probability of exit from the market increases as the competition becomes tougher.8

Hryckiewicz and Kowalewski, on the other hand, argue that there is a strong relation between poor performance of a parent company and probability of closing subsidiary units in foreign markets. The link becomes even stronger if the performance of a subsidiary also reports a decrease in profitability. However, they insist that weak performance of the parent company has a stronger influence on market exit decision from foreign markets.9 This was also supported by Praet’s studies. He found out that a weak financial performance of a subsidiary increases the likelihood of divestiture. Especially, subsidiaries performing below the industry average are not usually kept under control of parent company- they are usually either sold off or closed down. 10 Decker and Mellewigt, having studied divestiture phenomenon among 213 German companies during the period of 1999 and 2004, support the fact that poor performance of a subsidiary has a strong influence on divestment decision.11

However, besides a subsidiary’s weak performance, Praet suggests that the parent company’s desire to focus on core business can also be a key determinant of a market exit. He argues that subsidiaries that are not operating within the framework of group activities are more likely to be divested.12

Disposal of non-core businesses as a factor of market exit decision was previously discussed also in the studies of Daley and Mehrotra. In their studies, they suggest that companies significantly improve their financial performances through removing overseas operations that are not related to the core activity of the group.13 Lee et al. also confirm that subsidiaries that have a greater synergy with their parent companies are less likely to be divested.14

Nowadays, divestment in terms of market exit is also considered to be a means of cost optimization among some of the merger and acquisition consultative services.15 It is seen as a part of portfolio management. Managers resort to such a method in order to raise the efficiency of financial performance of their company.16

Examining divestment processes among large UK companies between 1985 and 1989, Haynes, et al. came to the conclusion that divestment can also be a response to environmental changes, such as decline in market growth or decrease in the volume of trade in the foreign market.17 Brealey et al., for instance, suggest that there is a strong relation between number of international banks in a foreign market and the volume of trade with the market.18

Weisbach, on the other hand, argues that a change in management can also lead to divestment in non-performing business units, since new a management tend to improve overall performance of the company, which will in turn indicate their managerial skills.19

Mata and Portugal came up with a completely different suggestion in their studies. They claim that selling off a subsidiary can also be a result of reorganization within a company or a means of making a profit out of selling a business unit.20 This supports Kaplan and Weisbach´s studies. Having analyzed divestitures which took place among companies in early 1980`s, they found out that only 44% of them experienced loss while the other 56% made profit out of selling their subsidiaries.21

Pursuing existing clients as a motive for going international was also proposed by Abd Rahman and Anuar. In their studies of a number of Malaysian banks, they suggest that preserving the relationship between banks and their existing clients is one of the most common reasons for internationalization.22 Thus, their study suggests that exiting a market can also be followed by a key client`s exit from the market.

Pauwels and Matthyssens distinguish two types of divestment decisions, these are: tactical and strategic. In their study, tactical decision is characterized as a response to internal factors such as weak performance of the subsidiary, while strategic decision is a way of response to external changes such as macroeconomic decline in the foreign market.23 This also found a support in Berry´s studies where he suggests that decision to sell off a subsidiary or to exit a market has to do with the overall strategy of a company.24

Procher et al. have rather a radical suggestion regarding divestiture phenomenon. They argue that divestment is a result of internationalization strategy failure. Companies, after investing in certain markets, realize that the expenditures are not covered by the revenue they generate in the foreign markets, as a result decision to sell off or to shut down the business is taken.25

Finally, poor or insufficient pre-investment activities can also be a reason for market failure which is followed by a market exit. Reiljan suggests that lack of experience and poor pre-investment research can be a factor influencing the divestment decision.26

As it can be seen, authors suggest variety of factors making companies exit markets. Based on the literature suggestions, a conceptual framework is proposed in the next section of the paper.

3. Conceptual framework

The literature review in the previous section of the paper shows how diverse the authors` opinions regarding the factors influencing exit decision27 are. As seen in Table 1, some motives are not classified as factors; they are rather classified as strategic responses. For instance, while focusing on core business is seen as a factor in the literature, during the course of present paper, it is rather assumed as a decision which acts as a response to a weak performance of a non-core business.

illustration not visible in this excerpt

Table 1: Factors influencing exit decision according to literature review28

In the same manner, although change in strategy is also considered to be a factor influencing exit decision among some of the authors29, it is not, however, considered as a factor in this paper. Rather, change in strategy is considered to be a response to an external or internal trigger30, such as e.g. poor performance, economic decline in a host market or company`s desire to focus on core activities. Therefore, out of the literature review, a conceptual framework illustrated in Figure 1 is proposed.

illustration not visible in this excerpt

Figure 1: Conceptual framework31

As can be seen from Figure 1, the de-internationalization process consists of three stages, these are: trigger, response and consequence. In the first stage, different factors act as a trigger for a company to react, decisions of the management act as a response to the trigger and the consequence is either the company`s exit from a market or its commitment to it. In the next section of the paper, a methodology employed in the analysis is discussed.

4. Methodology

The analysis in the present paper was mainly based on the following datasets:

The transcript of HSBC Group strategy presentation for the year 2011 (The Group chief executive officer`s (CEO) speech);

Financial statements of 22 banks in Kazakhstan for the years of 2009- 2013; Official statistics on Kazakhstan market and world economic overview databases.

To explain how these datasets were used and which research tools were employed for each of the data, a more detailed description is provided below.

The transcript of HSBC Group strategy presentation

As it was mentioned in the conceptual framework section, a strategy is considered to be a response to external and/or internal factors. Therefore, the strategy was expected to provide with the information regarding how the group`s management reacted to the factors. The group`s strategy presentation particularly for the year 2011 was selected due to the fact that it is considered to be the very strategy, implementation of which caused HSBC`s divestment around the world.32 Moreover, it was the first strategy release since the time a new CEO of the group was assigned in September 2010.33

The transcript of the group`s strategy presentation contains the group CEO Stuart Gulliver`s speech in the Investor Day event which is held annually by the group. In this event, the group`s strategy and “expectations or beliefs concerning the future events”34 are presented by the group´s CEO along with the other management staff.

Content analysis as a research tool was used in this research paper to analyze the transcript of the CEO`s speech. This method was preferred since it is considered to be effective in examining most of the written media sources such as newspapers, websites, speeches, etc. One of the advantages of such a method of analysis is that the analytical data is relatively more accessible.35

Financial statements of 22 banks in Kazakhstan

Financial statements (in this case balance sheets and profit and loss statements) were required to assess the performance of HSBC`s subsidiary in Kazakhstan for the last 5 years. The performance of the subsidiary in Kazakhstan was assessed on the basis of return on equity (ROE) and bank efficiency ratio indicators. ROE is one of the most popular indicators used to asses a company`s performance and is mainly used by investors to make an investment decision. It indicates how effectively investors` funds are used to generate income.36 Bank efficiency ratio is used to measure a bank’s operating expenses to generate each unit of income.37 The ratios are calculated by the formulae illustrated in Table 2.

illustration not visible in this excerpt

Table 2: Performance indicators38

[...]


1 cf. Twarowska & Kakol, 2013, p. 1006.

2 cf. Mullineux & Murinde, 2003, p. 3.

3 cf. Slater, 2014, “HSBC cost cuts set to lift profits as CEO faces growth challenge“ [online].

4 cf. Cassidy, 2011, “HSBC to axe 30,000 jobs despite pre-tax profits rise“ [online].

5 Turcan, 2003, p. 209.

6 cf. Drogendijk, 2001, p. 12.

7 cf. Reiljan, n.d., p.145.

8 cf. Dunne et al., 2009, pp. 36-37.

9 cf. Hryckiewicz & Kowalewski, 2010, pp.17-18.

10 cf. Praet, n.d., pp. 21-22.

11 cf. Decker, 2010, p. 17-18.

12 cf. Praet, n.d., pp. 21-22.

13 cf. Daley et al., 1996, p. 280.

14 cf. Lee et al., 2010, pp. 29-30.

15 See e.g. Sguazzin & Weirens, 2008, “Enterprise cost reduction as a part of divestment“.

16 cf. Ernst and Young, 2013, p. 17.

17 cf. Haynes et al., 2000, p. 20.

18 cf. Brealey et al., 1996, pp. 577-579, as cited in Abd Rahman & Anuar, n.d., p.2.

19 cf. Weisbach, 1987, p. 433.

20 cf. Mata & Portugal, 1999, p. 13.

21 cf. Kaplan & Weisbach, 1992, pp. 136-137.

22 cf. Abd Rahman & Anuar, n.d., p. 13.

23 cf. Pauwels & Matthyssens, 2002, pp. 20-21.

24 cf. Berry, 2004, p. 27.

25 cf. Procher et al., 2010, “Effects of divesting from abroad“.

26 cf. Reiljan, n.d., p. 146.

27 For the list of literature, see Appendix 1, p. 28.

28 Compiled by the author.

29 See e.g. Berry, 2004, p. 27.

30 cf. Rajagopalan & Spreitzer, 1996, pp. 2-3.

31 Proposed by the author.

32 cf. Quinn, 2011, “HSBC chief Stuart Gulliver is carrying out a quiet revolution“ [online].

33 cf. Treanor, “HSBC chief Mike Geoghegan ousted after brutal boardroom battle“ [online].

34 Gulliver, 2011, “Group strategy“.

35 cf. Treadwell, 2014, p. 215.

36 cf. Traub, 2001, p.4.

37 cf. Investing answers, n.d., “Efficiency ratio“ [online].

38 Compiled by the author.

Excerpt out of 52 pages

Details

Title
Exit Decision of Multinationational Banks. The Case of HSBC Kazakhstan
College
University of Applied Sciences Villach
Course
International Business Management
Grade
1
Author
Year
2014
Pages
52
Catalog Number
V301406
ISBN (eBook)
9783668007512
ISBN (Book)
9783668007529
File size
627 KB
Language
English
Notes
This paper was chosen as the best conference paper. The author was recognized as the winner of International Marketing Research Seminar that took place in June at Carinthia University of Applied Sciences in Villach, Austria.
Tags
exit, decision, multinationational, banks, case, hsbc, kazakhstan
Quote paper
Darkhan Shildebayev (Author), 2014, Exit Decision of Multinationational Banks. The Case of HSBC Kazakhstan, Munich, GRIN Verlag, https://www.grin.com/document/301406

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