China Bank Internationalisation Project

The project group will comprise the same 5 people as in your ‘presentation’ group on Wednesdays. The project will involve completing the assignment (in hard copy typewritten) to be presented by one of the group and then handed in, on Dec 5th. This will not be part of your course assessment but if any group does not present and hand in the typewritten project, 5 marks will be deducted from the multiple choice test which will precede the presentations on Dec 5th. I will be providing feedback on each of the presentations.

This approach to a project is very similar to what happens regularly in the financial services industry. A project has to be completed, a team is set up (usually with individuals of different skills with different backgrounds and from different countries) who then have to work together to complete the task. Managers then evaluate each team member in such a process on the basis of the quality of the final joint work produced.

BackgroundChina’s banks are trying to internationalise and your task is to help advise a Chinese bank on how to do this. Bank of China, for example, has on its website its ‘Strategic Goal” and other banks have similar goals:

Strategic GoalAiming at excellence, sustaining growth and building a first-class international bank.

Strategic PositioningA large transnational banking group focusing on commercial banking business and providing diversified services integrated both at home and abroad.

Commercial banking focused diversificationWith commercial banking business as the core and foundation of the group’s development, Bank of China will keep improving its brand popularity and core competitiveness by expanding business network and customer base and enhancing product innovation.

By taking advantage of the comparative competitiveness of diversified services for unified customers via unified channels under unified strategy and brand, it will strive to develop various business lines such as investment banking, fund, insurance, investment and leasing so as to create a synergistic effect on the diversified platform in the interest of comprehensive and excellent financial services for customers.

To provide a structure to this advice, you are required to write answers to each of the five topics below (though you need not follow exactly the items in each). Each of the five sections should be not more than 500 words i.e. 2,500 words maximum for the whole project. This will also make it much easier to present each project in class i.e. to read out the paper in class. Also, it will help you understand the need to be concise.

Most business papers have an ‘Executive Summary’ at the front of a paper and in the case of this project, the ‘executive summary’ is the actual paper. You will, of course, be likely to write more on your section in the first instance but you will then have to reduce it in size to make this summary the correct length.

Although you may choose to allocate one section to each person in the group, it is VITAL that the quality of English (grammar, spelling), is high throughout. Thus one person who is good at English should check through the whole paper. Also, each section should use the same font and typesize. You should also ensure that each of you understands each of the 5 topics and is able to speak in class about any of them. I may choose any one of you to present and to explain your proposals.

ProjectChina’s banks are trying to internationalise. You have been employed as consultants to a well-known large Chinese bank. They have asked you to write a report for them as below:

“Until now, we have been principally a domestic financial institution operating in mainland China. We expect that the profitability of our existing domestic business may decline and that our balance sheet size willnot increase as fast as before. We are therefore considering trying to internationalise. We need to learn from Western experience of internationalisation and try to apply that experience (though modified for specific Chinese characteristics) to our own internationalisation project. Please prepare a report that will help us achieve our objectives.”

Having chosen your bank (one of the big four) set out a strategy that it might follow. You should start by looking at the bank’s latest annual report and accounts and any press references to internationalization of Chinese banks. Some topics that you might cover are suggested below but the actual topics that you think are relevant may be wider than this. You should also look at the experience of Western banks which have tried to become full-service i.e. international financial supermarkets.

I. Examine balance sheet strength, current and future expected loan losses on existing domestic loans, current and future required Basel ratios and current price to book ratios of the bank or banks you have chosen and any other relevant information. You have to provide a summary of your chosen bank’s financial strengths and weakness relative to competitors. Consider any competitive advantages that Chinese banks might have in trying to internationalise in relation to any weaknesses of European or US banks at the present time in terms of funding availability, currency related issues, term of loans, regulatory ratios, ownership structure etc.

II. Consider reasons why Chinese domestic banking is likely to be less profitable from 2012 onwards compared with previous years (consider interest margins and loan write-offs and any other factors). Consider in which countries a bank might best open overseas operations, what commercial banking products and services might be offered and why. Consider products and services to be offered to Chinese companies doing business abroad and also local companies in the foreign market which may or may not do business with China.

Give reasons why you think a Chinese bank could gain competitive advantage in these markets with the different types of customer they might attract. Also consider where you might put the international head office of such a bank and whether the senior management in a country should be natives of that country or expatriate managers from China.

III. Chinese banks are currently principally commercial banks involved in lending, trade financing, foreign exchange services and leasing. Consider the other types of products and services, in particular investment banking and asset management services, that they might want to offer outside China and the advantages and possible drawbacks of trying to compete with US investment banks in such products. Finish with a recommendation on the scope of products the bank should offer.

IV. If you recommend that your bank should go ahead with an internationalisation programme, advise it on the relative merits of a new start-up bank versus a policy of acquisition of local banks in the chosen markets. You might, for example, suggest that the bank acquire RBS from the UK government.

V. Japanese commercial and investment banks have not been very successful in their internationalising efforts (see Chapter 27 of your textbook). Consider the economic, cultural and foreign branch/ subsidiary management, employee and governance (and any other) issues that might have hindered their development. Consider how a Chinese banks may, or may not, be able to overcome these same difficulties.

Citigroup has also proven not to be very successful. You should examine what its strategy was and why it collapsed (rescued by the US government) and why it is now downsizing and simplifying. RBS has also cut back its investment banking activities dramatically. You should consider why it has done this.

Some articles from the FT that might be useful in this endeavour are included on Blackboard under “Course Documents”. However, it is important that you access other sources of information which may include private information that you have access to. You should give references where appropriate.

Brian Scott-Quinn

——————————————–[ 1 ]. Bank of China, China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China