BANKING SECTOR-

AN OVERVIEW

SYED ASAD RAZA

HBL
BANKING Competitive market
structure
Three principal dimensions
 Client (C- dimension)
 Arena (A - dimension)
 Product (P-dimension)
 Client: Sovereign, Corporate, Financial
Services, Private, Retail
 Arena: onshore or offshore (each arena is
characterised by different risk/return profile,
levels of financial efficiency, regulatory
conditions, client needs,etc)
 Product: Credit products, Financial
engineering products, risk management
products, arbitrage, etc.
Scope-related linkages across commercial and investment
banking
Summary: C-A-P
 To analyse the size and durability of excess returns
associated with individual segments of domestic and
international financial markets by applying market
structure analysis.
 To analyse the linkages that exist between different
types of financial services (economies of scope).
 To identify appropriate public policies toward the
financial services industry in structure-conduct-
performance context.
 To identify market characteristics and firm specific
advantages.
Capital Adequacy Objective

 Difference between funding and capital

 Concept of capital management.
 Why do banks hold capital?
 Why are capital levels important?
Historical review
 Till the late 1970s, banks highly regulated
and protected entities.
 Banks protected from competitive forces.
 Strict control over the issue of banking
licences.
 Interest rate ceilings on deposits, etc.
 Basel Committee on Banking Regulation
and Supervisory Practices (BIS)
Why?
The liability side of the balance sheet (in
a financial institution) does not exit
purely to fund the activities of the bank,
but is itself part of the bank’s activities.

The role of capital is to act as a buffer

against future, unidentified, even
relatively improbable losses.
Thus:

The amount held or required to be held

by a financial institution to underpin the
risk of loss in value of exposure,
business etc., so as to protect the
depositors and general creditors against
loss.
How much capital does a bank
need?
Regulatory capital as an indicator of
bank soundness
Capital level determination

The following factors:

 the level of capital that is consistent with a given
credit rating
 appropriate vis-à-vis an internal assessment of of
the capital at risk
 a margin for error needs to be built into business
plan. A regulatory capital shortfall serious
consequences.
Does efficient capital allocation work?

Bank can optimise the relationship

between return and capital by:

1. Increasing the amount of return earned

per$ of capital
2. Decreasing the amount of capital
required per $ of return.
 Capital: an important part of managing
bank

 Do not forget that the bank capital is

special: to absorb financial risk!!!

 Although the banking more fee-based

income source still far way from a banking
industry which no longer acts as a risk
intermediator.
Four Views of Capital
1. The treasurer’s view:
- What Capital is available?
- What instrument exist to raise capital?
- How can we manage the available base to
meet requirements?
- How should we invest the funds raised?
2. The regulator’s view:
- Does the Bank have enough capital to
protect the depositors and other creditors
against loss?

3. The risk manager’s view:

- What does the risk profile of the banks
positions say about the potential size of loss?
4. The shareholder’s view:
- What returns are being earned on the funds
invested?
- Is the risk of the activities undertaken properly
compensated in the form of the returns
generated for shareholders?

A different view a different definition of capital.

BRANCH BANKING REVOLUTION>>>
Branch network development
The Impact of technology on the
delivery of financial services
 Advancements in technology have had a profound effect
on the delivery of financial services over the last few
decades.
 Technology was first used in the branches of banks and
building societies as a means of reducing the cost of many
routine processes, through centralisation and automation.
 Now it provides a cost-effective and competitive solution to
the delivery of products and communication with
customers.
Technology driven delivery methods
 Automatic teller machines (ATMs) have had an important
role to play in terms of automating routine services.
- increasing customer convenience
- accessibility to financial institutions
- providing an innovative method of communicating new
products and services.

 While investment in ATMs has been quite substantial in the

past, evidence suggests that they will receive less attention
in the future compared with other forms of delivery such as
telephone and on-line banking.
 ATMs do not allow a dialogue to be established with
the customer compared with other forms of delivery
where person-to-person contact may be possible.

 ATMs may be viewed as either a delivery channel

or a product in their own right. They do exhibit
qualities of both, and current pricing structures tend
to reflect both these considerations.
 Electronic funds transfer at point of sale (EFTPOS) is
essentially a payment system, although it may be described
as a delivery channel. It is worthy of mention because of
the impact it has had on money transmission.

 Since the introduction of EFTPOS, retailers have been

placed in a stronger position in terms of money
transmission and, through the provision of 'cash-back'
facilities have reduced the need for customers to visit either
a branch or an ATM to withdraw cash from their accounts.
 Telebanking, conducting one's financial
accounts over the telephone, has
increased dramatically in popularity
Consumers seem to be willing to
conduct almost all transactions over the
telephone.
 The acceptance of the Internet by the
public has been extremely rapid,
especially in comparison to other
technological developments.
 'Penetration and acceptance of the
Internet and associated networks have
been very rapid. It took 38 years for the
radio to achieve widespread mass use,
13 years for the television, and 16 years
for the PC – but only four years for the
Internet (once it was opened to the
general public)'.
• The concept of Internet banking is whereby consumers
can access their accounts and conduct business online
that they would previously had have done in a branch.
(This can include the setting up of a loan, transferring
savings from one account to another, setting up direct
debits, etc).
• The first ‘true’ Internet bank was Security First Network
Bank (SFNB), that was established in 1995 in Atlanta,
providing consumers with unlimited third-party bill paying,
web-based balance lookup, funds transfers and loans.
Number of Banks and Credit Unions
Offering Online Services

Year Number of banks % of Market

and Credit
Institutions

1998 1,200 6%

1999 8,400 42%

2000 12,000 61.3%

2003 15,845 75%

 During the mid to late 1990's Internet traffic doubled
every 100 days, and continues to accelerate;
 In 1995 there were approximately 350MM and by
2005 is expected to reach over 750MM.
 During 2002, 7.2 million people paid bills or
transferred funds in this way, 44% more than in
2001…In total, 72 million payments were made
online last year. People paying their credit cards
accounted for more than half of these.’
BRANCH BANKING
PROFITABILITY – A FUNCTION
OF DEPOSIT BUSINESS

 PRODUCTS
 CLIENTS TIERS
 MARKETING STRATEGIES
 ORGAN STRUCTURE
 CAREER PROSPECTS
DEPOSIT PRODUCTS

 SAVINGS
 CURRENT
 DAILY
 TERM DEPOSIT
 FC
 NEW SCHEMES>>
OTHER PRODUCTS
 PERSONAL LOANS
 AUTO LOANS
 CREDIT CARD
CLIENT TIERS
 INDIVIDUALS
 RETAILS
 COMMERCIALS
 CORPORATES/MINISTRIES
MARKETING STRATEGIES
INHOUSE>>
 EVENTS/GREETINGS/ PERKS
 FLYERS

MARKETING PRESENTATIONS
 EXISTING CLIENTS
 NEW CLIENTS
CAREER PROSPECTS……
 RETAIL/COMMERCIAL BANKING
 CORPORATE BANKING
 SALARY STRUCTURES
 PROMOTION POLICIES
THANKS & GOOD LUCK!!