A Comparative Study Between SCB and HSBC About Its Business Strategy Towards Small and Medium Enterprise in HK

8/3/2019 A Comparative Study Between SCB and HSBC About Its Business Strategy Towards Small and Medium Enterprise in

1/39

A comparative study between SCB and HSBC about its business strategy

towards small and medium enterprise in HK

ABSTRACT

The Hong Kong banking sectors does have innovative opportunities for small and

medium-sized enterprises upon extending the customer base within the global

marketplace. However, SCB and HSBC will need to adopt such approach to financial

planning and management which deploy an effective banking network by linking

towards a better financial approach determining financial statement in its value and

strength. This research represents better framework for analysis and crafting of financial

patterns of SCB and HSBC in their business strategy pointing to the management as

well as execution of finance factors into SME context. This research investigation can

be that the banks involved can achieve better financial status and competence without

experiencing much delinquency of such financial statements found in cash flows and

balance sheets with HK banking competencies for managing business relations as well

as engagements with other banking sectors (in, Venkatraman and Henderson 1998).

The setting of standards by SCB and HSBC is an important factor upon determining

such company financial strength mostly dealing to various SME businesses focusing the

Hong Kong region.


2/39

INTRODUCTION

SCB and HSBC are two of the most known financial institutions soaring its business

opportunities by serving clients with greatness and confidence and in order to assume

spontaneity of financial services offered by these banks it is just imperative to create

certain set ups pointing towards the financial standards in such picking up of financial

strength within financial functions as for example, those present in small and medium

sized enterprises. Thus, ideal to compare such financial standards of SCB and HSBC

respectively. To realize certain applicable domains upon which effective standards for

finance review should be looked at within the two banks. Aside, understanding of the

SME process must also be considered to provide linking to such figurative outcomes of

finance side, being aware of SCB and HSBC finance standpoints for the past interim

years. Indeed, the importance of such standards are seen through effective assimilation

of such financial statements serving as the valuable indicator wherein ample strength of

SCB and HSBC is looked upon in its business strategy towards SMEs in Hong Kong,

there can accounts for delinquency and such pricing relationships in such financial

statement understanding. The comparative analysis of SCB and HSBC can be

supported by such case study evaluation and is backed up with qualitative and

quantitative approach for research study as the banking sector in HK is aware of

determining strength over delinquency when talking to effective presentation of financial

statements in such cash flows and balance sheets of the two banks that can be ideal for

SME assimilation into the HK region.


3/39

RESEARCHBACKGROUND

Financial Institution such as the SCB and the HSBC incurs a useful potential to play

major role in finance through SME companies in Hong Kong. With increased global

competition, the finance function can be exploited to allow HSBC for instance, to gain

financial advantage in the HK market stance as there can be delinquency of banking

operations affecting the overall indication of the financial statement and its ways. There

has to be comparative case study between SCB and HSBC as to how the two banks

can positively achieve accuracy and appropriateness in the financial standards such as

by looking through the financial strength they can offer to SME business. Thus,

incorporating success of the financial services of SCB and HSBC can be their ideal

business strategy to be executed for SME business in Hong Kong.

The methodology value by then, can be based on literature studies of SCB and HSBC

through research analysis as supported by reviewed studies on small and medium-

sized in HK with the objective of understanding the background of the banks financial

strength and how it relates to pricing opportunities as the banks do strive to become

more financial competitive centered (in, Eccles and Holt, 2001; Rugby Estates, 2000).

The data required for case analysis have been collected SCB and HSBCs annual

reports and statements have been referred for the collection of accurate data. The main

objective of the research is to understand how the two banks developed good financial


4/39

strength over the years, avoiding delinquencies to the financial statements. Thus,

analyzing history of the company, its strategy and goals, strategies as well as the

process they used to bring the company to the position as of the present. Then, certain

banking decisions should involve the volume and timing of orders and deliveries and the

packing of items in consolidation (in, Eccles and Holt, 2001; Rugby Estates, 2000).

There are several constraints influencing the level of stock and the speed of material

flow along the banking logistics chain. The level of stock and the speeds the material

flow depend upon the nature of the supply and demand. The management of banking

demand drives the level of capacity required (in, Barth et al., 2002; Calomiris and

Powell, 2001). The study examines different banking approaches to determine whether

a bank will be associated with good financial concepts and will focus on certain clients

as Hong Kong has been Chinese-dominated society with different types of banks and

this allows for cross-section of cases in order to test the reality and applicability of

research over financial statements with specific relationships such as pricing within the

banking service ways. In order to clarify objectives of whether there is an indication of

delinquency of SCB and HSBC statements that can adhere if there impose a good

borrower of the banks into customer awareness and such hypothesis are developed as

below.

RESEARCHHYPOTHESES


5/39

HypothesisOne:Debt/credit assessment method of SCB and HSBC upon considering

location of SME borrowers does reduce delinquency as compared to the assessment

method that only considers financial information

HypothesisTwo:Debt/credit assessment method of SCB and HSBC upon considering

management experience of SME does reduce delinquency as compared to the

assessment method that only considers financial information

CONTRIBUTIONSTORESEARCHANDPRACTICE

The research calls for precise execution of factual knowledge supporting financial

strength over delinquency within SCB and HSBC as geared towards SMEs in HK.

Hence, for practice the recognition of resources to research and its evidences will

amiably be a part of the whole continuum basically, achieving details of banking finance

statements through cash flows and balance sheets and the underlying issues within

finance sectors of SCB and HSBC in order to fully adopt and execute in the hope of

maintaining good banking business in Hong Kong.


6/39

RESEARCHAPPROACH

The ideal research approach significant for research is by means of thorough

applications of comprehensive financial analysis imposing standards and strength from

within into useful research paradigm through case study assimilation as well as having

factual evidence that can be directed to financial aspect of the banks as supported by

reliable case studies presented through reliable journals and articles as based on the

topic. The involvement of SCB and HSBC in such media releases of banking fact is a

positive factor to value application of financial approaches found within case patterns

and such financial context and principles.

THEREVIEWOF LITERATURE

SEVERAL FACTSCONCERNINGSCBANDHSBC

StandardCharteredBank (SCB)


7/39

SCB is known and trusted for having high standards of corporate responsibility as the

bank is committed to building sustainable business through social inclusion,

environmental protection and good governance, by combining the global capabilities

with deep local knowledge, SCB develop innovative products and services to meet the

diverse and ever-changing needs of individual, corporate and institutional customers in

some of the world's most exciting and dynamic markets (in, Barth et al., 2002; Calomiris

and Powell, 2001). There is about SCB in terms of their SME Banking which offers

variety of products and services to help small and medium-sized enterprises manage

the demands of growing business through providing global support in Standard

Chartered, the bank knows that doing business in today's economic climate is

challenging and situations as well as business needs can change overnight as the SCB

can help SMEs in HK for such business expansion plans. The SME Banking team is

dedicated to the people and the business thus, helping SME business reach ample

potential by means of customize product packages, responsive services and access to

expert advice incurring effective business operations (in, SCB report, 2007).

HongKongShanghaiBankingCorporation (HSBC)

HSBCs commitment to maintaining its financial strength is unwavering. HSBC remains

both strongly capitalised and liquid and have maintained key credit ratings, generated

good profitability in adverse market conditions and continued to focus investment on our


8/39

strategic priorities. The principal concerns in this environment have been risk

management, strict cost control, supporting customers and continued investment to

support long-term strategic ambitions in broad-based and resilient revenue streams

continue to provide stable platform from which to achieve strong, longterm performance

(in, HSBC Holdings Plc, 2008).

Brief InformationonFinancialStatements

Indeed, objective of financial statements is to provide information about the financial

strength, performance and changes in financial position of an enterprise that is useful to

a wide range of users in making economic decisions and it should be understandable,

relevant, reliable and comparable. Reported assets, liabilities and equity are directly

related to an organization's financial position. Financial statements are intended to be

understandable by readers who have "a reasonable knowledge of business and

economic activities and accounting and who are willing to study the information

diligently (in, Klh and Stella, 2003, 2008). Then, SCB and HSBC require financial

statements to make important business decisions that affect its continued operations.

Financial analysis is then performed on these statements to provide management with a

more detailed understanding of the figures as these banks are external users can be

outside the business but need financial information about the business for diverse

number of reasons. They are financial institutions able to decide whether to grant


9/39

company with fresh working capital or extend debt securities to finance expansion and

other significant expenditures (in, Klh and Stella, 2003, 2008).

FinancialStrength Someconceptsandideas

Financial strength was used in describing certain extent to which an entity is

constrained by its financial situation in pursuing its strategic goals or policies. An entity

is financially strong when it is relatively unconstrained and weak when financial

constraints are binding on policy choices. The financial strength of the banks is

intimately linked to the successful management of the enterprise. Henceforth,

enterprises with a large market capitalization have either been successful at generating

earnings in the past and/or are expected to be profitable in the future. Furthermore,

what appears to be confusion over micro and macro performance is responsible for a

certain lack of general understanding about the importance of central bank financial

strength. SCB and HSBC financial accounts do provide useful information on the cost of

achieving policy outcomes. Indeed they provide information vital to any discussion as to

whether the outputs are being attained at least cost (in, Klh and Stella, 2005, 2008).

The bank deals in financial markets to achieve policy goals, not to maximize its

revenues.


10/39

When the issue of financial strength does arise in those countries, it is difficult to argue

that marginal deterioration in banks financial strength would be inimical to

macroeconomic performance. Ideally, SCB and HSBC financial strength is positively

associated with good policy performance. Financially weak institution generates losses

which undermine business stability and call into question the credibility of their policies.

In assessing banking financial strength careful examination of the policy regime and the

volatility of the economic environment is necessary and conventional measures of

private enterprise financial strength, profitability and capital can be very misleading

when applied to banks (in, Klh and Stella, 2008).

In Asia, Hong Kong has the most developed markets in the area of mortgage financing

amongst other Asian countries since, the outlook of Hong Kong is stable, supported by

strong liquidity position and the absence of protracted fiscal imbalances within financial

institutions. In general, SMEs in HK as borrowers may have several options for calling

into mortgage for example that can be prior to maturation of payment duration and time

(cited in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson, 1998) There is the

need to understand such terms as discussed below.


11/39

Prepayment this refers any payment made in addition to the scheduled paymentsunder the original terms of the mortgage (cited in, Chow, Huang and Liu, 2000; Hilliard,

Kau and Slawson, 1998)

Delinquency this incurs a monthly scheduled payment being terminated for certain

period, but the cash flow may continue following delayed payment with additional

delinquency interest (cited in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson,

1998)

Default

the process terminates the monthly scheduled payment but no further

payment will be received from the borrower like, the underlying asset will be sold after

certain period and the cash flow will be terminated by having lump sum of the selling

price of the property that has to be less in transaction costs (cited in, Chow, Huang and

Liu, 2000; Hilliard, Kau and Slawson, 1998)

Thus, unlike previous studies of mortgage financing, there introduces the concept of

delinquency management to describe the whole process from delinquency to default

(cited in, Ambrose et al., 1997; Brunson, Kau and Keenan, 2001; Charlier, 2001). When

SCB and HSBC as lenders need to select either one of them to launch in the market,

they should consider additional factors such as the potential size of market and

customer. From the point of view of borrowers, the banks should consider their liquidity

need during the selection process. For example, if SME customers do not have

sufficient funds to pay the initial down payment, they may select the cash rebate

mortgages even if the standard mortgage is of more benefit to them. Then, there can be

assumption of constant probability functions on prepayment, delinquency as well as


12/39

default rates as such factors are not constant and varies according to diverse business

environments and mortgage quality in general (cited in, Ambrose et al., 1997; Brunson,

Kau and Keenan, 2001; Charlier, 2001). The study outcome incurs that SCB and HSBC

upon utilizing comprehensive evaluation does reflect lower delinquency rate and it is a

fact that more money in revenue form has been brought back to those banks.

METHODOLOGY

ResearchDesign

The descriptive method of research was used for this study. To define the descriptive

type of research, Creswell (cited in, 1994) stated that the descriptive method of

research is to gather information about the present existing condition. The emphasis is

on describing rather than on interpreting. The aim of descriptive research is to verify

formulated hypotheses that refer to the present situation in order to elucidate it.

Quantitative approach is useful as it helps the researcher to prevent bias in gathering

and presenting research data. The phenomenon need to be explained by means of data

analysis gathered through objective measurement (cited in, Gall, Gall and Borg, 2003).

The ideal method has been the presence of comprehensive research with regards to

the SCB and HSBC in their banking activities showing information how they are as a


13/39

lender to SME business and how SMEs as borrower to the banks mostly, in

determining certain payment abilities SME utilizes to keep mutual relationships to the

banks and such business strategy thus, showing relevance to the financial strength in

standards.

FINDINGS

The Hong Kong sectors are being focused on developing bank mechanisms for

preventing financial crises as compared to the positive financial strength within SCB and

HSBC. The efforts respond to the realization although globalization can bring significant

financial benefits to SMEs undertaking effective and sustainable financial standards as

well as policies, liberalizing SCB and HSBC financial systems within financial issues

and concerns of the financial strength (in, ASB 1999; 2005). In comparison, SCB and

HSBC have set finance standards within different domain as identifying appropriate

financial standards is not easy for the two banks. There guarantees the stability of

financial standards within a multitude of banking operation for financial consistency and

effective ruling of financial frameworks as geared towards HK SMEs within a number of

bank institutions into a more precise information. As for example, Gordon Brown, have

written that, there exists danger of pushing inappropriate measures for given countrys

state of financial specs and institutional development within priority for implementation

of the standards as carefully established in ensuring positive finance benefits (cited in,


14/39

Brown 1998 p. 8). SCB and HSBC engaged in setting standards and assessing SME

strength fully recognize that creating financial standards is crucial to the banking

policymakers upon ensuring financial stability into the banking sector. The presence of

inappropriate finance standards and the under provision of financial reserves such as

those against credit losses stand out as better examples of inadequacies that reduce

the effectiveness of finance requirements based on standards. For SCB, there should

be emphasizing of financial innovation as designed to carry out a productive SME

banking plan as the SCB aims to build finance and banking environment and legal

framework in line with SME global norms and supports banking development needs,

raising HKs business competitiveness in the financial services industry, with goal of

transforming SCB to become HKs most trusted financial service center. More

specifically, the plan to have major strategies and certain response measures to create

better financial and banking environment, thus promote better statements and cash flow

management upon strengthening fundamentals of SCBs financial markets that include

raising the financial services industry's GDP contribution to 20 percent in 2010 with an

operational footprint for SMEs. Meanwhile, HSBC on the other side may be able to

increase standards through improved strength in pricing within the market by 25

percent. Then, doubling financial standards watch out for uncontrolled risk that can be

reflected in the HSBC balance sheets and for HSBC to grow the total asset value being

better financial institutions as a whole. Bringing monitoring and supervisory systems that

regulate financial markets and banking in HK in line with international standards, for

example revising regulations on capital adequacy ratios to meet financial strength

requirements. Improving SCB and HSBC in their corporate governance by requiring


15/39

several financial institutions to strengthen the internal control systems and enhancing

the operational efficiency of HKs financial services industry. Thus, SCB and HSBC can

create single financial body as the finance and banking groups have been compelled to

follow suit, with laws and regulations being revised to create a single law and

supervisory body to meet the changing needs of globalize HK economy. SCB and

HSBC may establish Financial Services Law that focuses on functional rather than

business issues in presenting greater financial standards challenge, as there aims to

integrate HKs finance related laws and regulations and the creating of comprehensive

framework that will meet future SME demands for diverse offerings in the finance and

banking industry.

In credit markets, illiquidity remained a major issue, with trading volumes low and no

sign of resumption of normal activity levels in the securitization markets. Then, HSBC

helps SMEs grow as in addition to financial services, HSBC helps small and medium-

sized enterprises grow their business by becoming more profitable and productive as

well as by providing counseling service (in, HSBC Holdings Plc, 2008). Then, HSBC

Living Business Awards recognize socially and environmentally responsible SMEs in

Hong Kong, through seminars where SMEs can get practical advice on sustainable

business practices and the website which provides information and advice on a range of

corporate responsibility issues The Bank provides various counseling services to help

SMEs develop and grow their business. Since 2001, HSBC has supported the Business

Advisory Service program organized by the Hong Kong Trade Development Council.


16/39

ResearchCase:BankingcriteriaforSMEsysteminsuchDefaultRate

HSBC

The HSBC Bank, as one of loan issuer, there is about customization and how value

propositions HSBC delivers to specific business loan requirements for example and the

default rate of SME owners that can be well managed by the banks payment services

division of HSBC in their SME banking system process. Then, HSBC bank uses

computer based scoring system to approve new card issues and sophisticated software

allowing it to track and chase after delayed payments. As HSBC has six authorized

collecting agencies and the staff of these outsourced companies has been empowered

to persuade the defaulters to make payments due to the bank. Such payment activities

of business agencies are strictly monitored by the bank and any complaints of

harassments to customers will be promptly investigated by the HSBC authorities as the

HSBC has tight rules on provisioning of loans which can be higher than SCB.

SCB

Standard Chartered Bank has revised the lending criteria only to exclude any segments

that have had poor repayment history. The decision is in line with the past performance

of the said segments and expecting that they may perform worse in line with the

increase in inflation. The bank has outsourced collections to such SME business and

monitored by SCB bank authorities and that less than 2 percent of SCB SME borrowers

can be within the stage of defaulting as the bank takes measures on proactive basis to

recover the dues (cited in, Bandula Sirimanna

http://sundaytimes.lk/071223/FinancialTimes/ft339.html )


17/39

The banks are required to maintain capital to risk weighted assets ratios of such

percentage as required by the financial system. SCB and HSBC do follow International

Accounting Standards, although financial authorities in HK are active in supervising and

monitoring regulations on financial institutions. In a global financial market, finance

strength regulators that operate SCB and HSBC banks should think about the

compatibility of the regulatory setting within standards. Through a deep understanding

of SCB and HSBC SME banking business and within banking supervisory framework,

financial regulators will be able to develop sound banking system as better business

strategy applied towards SMEs in HK without loosing reliable financial services.

Thus, lending to the SME sectors require that the bank establishes appropriate

structures for servicing the customers and learns how to successfully finance such

target group within capacity building to ensure that SCB and HSBC have the required

skills and technology to service borrowers in efficient way. The banks generally need

collateral from borrower as guarantee towards repayment of mortgage loans as an

example. SCB and HSBC could take the lead in organizing financing fairs for SMEs in

order to address some of the critical aspects involved like employing of relationship

managers to reach out to prospective clients and provide services to understand each

other better and facilitate services adapted within ample needs. SCB and HSBC as

better financial institutions must then construct profitable and efficient credit and equity

programs for HK SME sector. To compete effectively in SME financing sector, SCB and


18/39

HSBC need to provide financial services that meet specialized needs of the company

while coping with the high risks and costs associated. The emphasis should shift from

product-based focus into customer-oriented focus for providing packages of financial

services tailored to pricing needs and the potential of improving the SCB and HSBC

relations of SMEs and increasing such profitability of providing financial services from

within as the banking sector is different in some respects from the markets for other

goods and services. A range of factors could create potential sources of market failure

even if there is strong competition between banks.

SeveraleffectonSCBandHSBCas long-termprovidersof finance applied to

SMEs

Ideally, bank management based lending decisions on a long-term view of the market

requiring values to be determined by reference to short-term movements in loan

spreads and interest rates of the SME business but, there would invariably bring short-

term factors into lending decisions and that the banks behavior being influenced by

financial considerations has been not supported by economic reality. For instance,

some volatility injected into the balance-sheet would increase short-term pressures on

lending decisions by SCB and HSBC. Changes in loan and capital spreads would have

bearing on reported profit and yet the counterparty may still be debt worthy and the

effect on the bank in terms of the SME payments due like, on a loan basis can be

neutral. The effect will possibly be the banks being reluctance to provide long-term

finance to SME sectors that may have track record of volatile credit default ratings. It


19/39

would also seem high that the finance bias in favor of floating rates would have an

adverse effect on the provision and use of fixed rate lending. This results from the fact

that value would be measured no longer by reference to cash flow but to the

comparative difference between the fixed interest rate implicit in payments and the

variable market rate. This could potentially have bearing on fixed rate lending to small

and medium-sized enterprises fixed rate mortgages and the fixed rate securities

markets. The general effect could be to weaken the position of SCB and HSBC as the

providers of better finance to SME industry, discourage lending to the business wherein

payment abilities as well as credit ratings are volatile over precise economic cycle as

SMEs does attract lower levels of finance at rates that reflected the greater perceived

risk. In times of economic downturn, there would be pressure on the banks to hold

greater proportion of assets in high quality bonds, given the stability that returns would

bring to ideal financial performance.

Assessment of Findings

Comparison of HSBC to SCB in showing

financial strength to SMEs

Furthermore, the following figures show findings in numbers below show how SCB and

HSBC considers financial strength as major factor with such data on delay payment

through such SMEs served by the two banks within certain number of days.

Example

Time line: 2007

HSBC(Considering financial strength as majorfactor)

Sample: 46000 SMEs


20/39

% of SMEsLoan aging days (i.e. days of loan repaymentdelay)

96.36Ontime

3.64 Delay

1675SMEs with delay payment, spread asbelow:-

370-15days

19 16-30 days23 31-45 days16 46-60 days

5> 60days

SCB(Considering financial strength along with other factor with equalweight)

Sample: 13000 SMEs

% of SMEsLoan aging days (i.e. days of loan repaymentdelay)

95.47Ontime

4.53 Delay

589

SMEs with delay payment, spread as

below:-

340-15days

22 16-30 days20 31-45 days13 46-60 days

11> 60days

The above data shows how HSBC and SCB consider financial strength as a major

factor for SMEs in such loan days from within days of repayment delays made by the

SMEs. For HSBC for instance, there has been a total of 46000 SMEs showing that only

3.64 percent have delayed their loan payments as of the year 2007 showing only a


21/39

small percentage of delay as compared to those SMEs who paid on time comprising of

9.36 percentage of the total SMEs served by the HSBC The most delayed payment in

days format have accumulated to 15 days with a total of 1675 SMEs and so on and that

16 SMEs made payments to HSBC from around 40 to 60 days and only 5 SMEs made

payments in less than 5 days in duration. Thus, in comparison to SCB serving to a total

of 13000 much lesser to HSBC has gained consideration in financial strength within

equal weight as more SMEs paid on time loans to SCB comprising of 95.47 percent and

only 4.53 percent have assumed delay of payment. The most delay is of 15 days

payment time as 34 SMEs were involved and the least, less than 60 days of 11 SMEs

then 22 paid SCB 16 to 30 days and so on.

The findings entail that for SCB and HSBC, effective financial strength shows a positive

notion to the banking strategy success for SME banking services both banks offered

and that the relationship of the bank as a lender to the SMEs as borrowers have shown

balance outcomes since, most SMEs as indicated in data shows on time payment

attitude for the loans they have made within the bank. This ascertain that financial

strength adheres to a powerful banking operation activities of SCB and HSBC and such

strategy applied within HK SMEs maybe of worth value.

Geographic location that SMEs mainly deal with, identified by sales contribution from location(within SCB)

SMEs

On time Delay% ofDelay

North America 4367 172 3.94%Latin America 361 42 11.63%European 1231 33 2.68%


22/39

UK 568 18 3.17%Eastern Europe 56 6 10.71%Middle East 38 2 5.26%

Australia 187 6 3.21%Japan 1553 34 2.19%Korea 292 34 11.64%

Taiwan 1389 157 11.30%China 2369 85 3.59%

12411 589

The information above explains how such geographic location shows ample strength

within SMEs in certain countries as identified by sales contribution and location, this

shows percentage rates of delayed payments as the most delay happens in Korea of

11.64 percent followed by Latin America of 11.63 percent and comes next is Taiwan of

11.30 percent. Thus, most on time payments is within the North America region

comprising of 4367 SMEs and the least is within the Middle East by having only 38

SMEs this can be due to more strict policies imposed by the countries within the

banking sector and business industry respectively.

Management experience that SMEs mainly having

SMEs

On time Delay% ofDelay

30yr 2589 22 0.85%

25yr 2438 30 1.23%20yr 2367 106 4.48%10-15yr 2689 164 6.10%


23/39

The above emphasizes management experiences in years that several SMEs have

experienced in such ways having 30 years as the most time duration and less than 10

years time as the least of delayed percentage in such on time and delayed payments

done by the SMEs. There shows that on time payments happens to be within 10 to 15

years with a total of 2689 SMEs comes next is the 30 years period of 2589 SMEs and

so on while on the delay side it happens to be less than 10 years experience of 267

SMEs in delay followed by 164 SMEs and 106 SMEs having the least delayed of 22

SMEs with 30 years experience. The overall findings then, manifest a stable banking

financial strength of SCB and HSBC and the fair finance standards valuation as duly

imposed within banking operation services given to the SME business.

Group A: HSBCDBS

Group B: StandardCharteredBankBank of ChinaHang Seng BankICBCCitibank

GroupA: LocationofBorrowerforAssessmentGroupB:UseonlyFinancial Information

(Net income / Sales revenue)

on SMEs loan product

(Bad debt / Sales revenue)

on SMEs loan productHSBC 6.38% 3.64%DBS 5.78% 3.87%Standard Chartered Bank 6.57% 4.53%Bank of China 5.73% 4.27%Hang Seng Bank 5.82% 4.42%ICBC 5.42% 4.02%Citibank 5.96% 4.87%


24/39


25/39

Group C: HSBCDBS

Group D: StandardCharteredBankBank of ChinaHang Seng BankICBCCitibank


26/39

GroupC: ManagementexperienceforAssessmentGroupD:UseonlyFinancial Information

(Net income / Sales revenue)on SMEs loan product

(Bad debt / Sales revenue)on SMEs loan product

HSBC 6.38% 3.64%DBS 5.78% 3.87%Standard Chartered Bank 6.57% 4.53%Bank of China 5.73% 4.27%Hang Seng Bank 5.82% 4.42%ICBC 5.42% 4.02%Citibank 5.96% 4.87%


27/39


28/39

The above bar chart shows the difference pointing to HSBC over SCB in specific group

denomination wherein HSBC a part of Group A by having comprehensive assessment

linking towards geographic location comparison to SCB in Group B that have application

of financial information assessment only and there is Group C that adheres to

management experience in comparison to Group D with use of financial information for

its assessment. The comparison of bad debt ratio and what accounts for such

profitability or sales revenue pointing towards SME loan product of the two banks as the


29/39

data shoes that only a slight difference occurred in percentage of about 0.19 percent as

HSBC is of 6.38 percent lower than SCB of 6.57 percent thus, accounting for bad debt

assumption of the banks wherein SCB is much of high risk at 4.53 percent as compared

to HSBC of 3.64 percent. The information of such standardization process can be that

SCB have higher delinquency rate as compared to HSBC when it comes to loans done

by SMEs. Furthermore, SCB and HSBC have attempted to improve the measurement

and management of financial risks by means of assigning risk ratings for certain

business loans such as for SME business and it is true that riskier loans generally carry

high interest rates and that such location of the business and certain management

experience does integrate an effect as to why delinquency issues are present within the

banking sector as there can be indication that SCB and HSBC have imposed price for

experiencing too much risk as a lender to SMEs that may outcome into a delinquent

borrower and by this, delinquency rates are rampant within the banks and since, SCB

and HSBC can serve as a commercial or business banks to such business

organizations, the graph below shows how delinquency rates strikes such as applied

commercial real estate that may assume mortgage loans among SME business and it is

clear that high delinquency rate is within business arena comprising of 12 percent ratio

as compared to consumer usage of cards and residential estates ratio.


30/39

Source: Federal Reserve, adopted from: Calculated Risk: Finance and Economics(2008), Fed: Delinquency Rates Rose Sharply in Q1 (May 21, 2008)

Retrieved at:

The above is shown because it can be of ideal purpose to research investigation

wherein some financial standards are not in parallel to the banks financial statements

such as those in audited report domain. Thus, banking delinquencies is rising quickly

and reinforces the banks long-standing view that the surge in mortgage defaults rather

than such reflection of poor underwriting standards in specific subprime process.

Understanding that the main driver of the defaults is the decline in such service prices,


31/39

the increase in negative equity positions and the inability of SMEs as borrowers who

encounter financial stress to continue refinance several ways out of trouble in business.

Although big enterprises borrowers are quite likely to encounter financial stress than

SMEs and the share of negative-equity borrowers who will end up defaulting can be

much higher in the business banking sector wherein there is better outlook for the

trajectory of credit losses in the global market is not different in major stance. For HK

SMEs, the investment in capital goods is determined by the expected returns from

investment which must be high enough to cover all costs including the cost of

borrowing. Conversely, when the economy is near good employment and the price level

is rising, fiscal and monetary policies aimed at keeping rates constant could contribute

to an increase in delinquency among unemployed owners of business loans and

mortgage accounts. The mortgage delinquency rate is positively related to the interest

rates. Therefore, SCB and HSBC money policy will be boosting SME economy by

lowering the interest rate in order to encourage borrowing as well as contribute to the

decline in delinquency rate associated with periods of business slump. As the lower

interest rate reduces the costs associated with debt outstanding, thereby reducing risks

involved in delinquencies. In contrast, when bank raises the interest rate in order to slow

down an economy heading towards inflation, the associated extra costs does increase

the risks of default payments on debt outstanding and awareness as created by SME

business. There provides evidence that expanding loans to lower income and more

risky borrowers under the affordable mortgage portfolios and lending policies do

contribute to the rise in delinquency rate of SCB and HSBC as the effective

management policies undertaken by debt issuers have allowed the banks to reduce the


32/39

delinquencies generated by lower income and risky SME owners in particular. Indeed,

by any given time, the variation in past due payments and the duration of delinquency of

SME business accounts does have significant effect on such delinquency rate within the

present financial time (cited in, Sissoko, Macki (2006), The Determinants of

Delinquency Rate on Commercial Banks Mortgage and Credit Card Debts, Credit and

Financial Management Review). The financial statements have been prepared in

accordance with generally accepted accounting principles which require the

measurement of financial position and results of operations without consideration of

changes in the relative purchasing power over time due to inflation.

CONCLUSION ANDRECOMMENDATIONS

In conclusion, the debt/credit assessment method of the two banks upon considering

management experience as well as location of SME borrowers can help in reducing

delinquency rate as compared to certain assessment method that only considers using

financial information. The presence of delinquency rates then, incurs to certain

percentage of accounts in the portfolio greater than days of past due as it can forecast

future charges and subsequent losses. For instance, banks collection managers

develop strategies such as campaign structures focused on reducing delinquency rates

for SME banking as the financial services companies indicate that low delinquency does

not necessarily guarantee low losses as it represent significant departure from


33/39

conventional collection theory, a trend experienced by many lenders in recent years.

Indeed, delinquency is not necessarily good indicator for losses as strategies and

technologies can be implemented that allow independent collection treatments in early

stage collections from those found in the later stage. The relationship between

delinquency and finance standards of such information will continue to diminish as long

as there can be effective repayment as well as collection strategies throughout the

delinquency cycles. Then, SCB and HSBC need to ready banking operations for a

possible banking turbulence by leveraging their ability to mitigate such loss without

losing focus on too much delinquency rates and accounting of bank load through the

adoption of a possible effective loss mitigation approach. Aside, it is important to fully

understand banking processes, policies and technologies being used for banking

activity to ensure these banks are maximizing the probability of success. For example, it

is important to align collection recovery strategies by credit type as ideal for small

businesses. The linking credit booms with banking crises, current mortgage

delinquencies in the mortgage market appear indeed to be related to past credit growth

and find that delinquency rates rose more sharply in areas that experienced larger

increases in number and volume of originated loans (cited in, Dell Ariccia, Igan, and

Laeven, 2008). The relationships then have to be linked upon decrease in the lending

standards that can be measured by significant increase in loan to income ratios and

decline in denial rates, not explained by improvement in the underlying economic

fundamentals. There can be deterioration in the banks lending standards within certain

finance factors as standards tended to decline more wherein credit boom was larger

consistent with evidence on aggregate credit booms. Lower standards are being


34/39

associated with fast rate of mortgage price appreciation, consistent with the notion that

lenders were relying on the fact that borrowers in default could always liquidate the

collateral and repay the loan and some changes in business structure mattered as

lending standards declined where large absent institutions entered the market. The

increasing recourse by banks to loan sales and asset securitization appears to have

affected lender behavior, with lending standards experiencing greater declines in areas

where lenders sold larger proportion of originated loans. In mortgage market most of

these effects appear to be stronger and more significant than in the prime mortgage

market, where loan denial decisions seem to be more closely related to economic

fundamentals. The findings have to be consistent with the notion that credit growth

episode within cycles of lending standard does create vulnerabilities in SCB and HSBC

financial system. The experience demonstrates that even highly-developed financial

markets are not immune to problems associated with credit booms. Truly, monetary

tightening can reduce both the demand and supply of bank loans; its effectiveness is

often limited by capital account openness. This is especially the case in small open

economies and in countries with more advanced financial sectors, where banks have

easy access to foreign credit, including from parent institutions. Applying policies in

order to ensure that banks and SME head are equipped to deal with enhanced credit

risk for certain categories of loans, limits on foreign exchange exposure and maturity

mismatch regulation thus, reducing distortions and limit excessive borrowing and

lending (cited in, Ho and Pennington-Cross, 2007). For appropriate recommendation as

based on research findings, SCB and HSBC banking process in financial standards as

measuring financial strength can be utilizing accurate details of payment schedules and


35/39

dates to avoid payment delays of such mortgages and loans made by such SMEs

mention and thus by having more banking securities needed for specific finance areas

as applied for Hong Kong SMEs as the businesses may have high delinquency rate as

it becomes apparent that SCB and HSBC in their banking strategy are among the vital

aspects for SMEs in HK to succeed and meet the goal of having satisfied clients. From

this discussion, several important points had been suggested. On the other side, in

order for SCB and HSBC to stay competitive, price approach must be considered upon

such determination of default rates that may vary amounts for loan interests as the

banks provide finance charges but give SMEs greater payment chances and time upon

having better banking standards and quality and have such quantity of a particular

mortgage item as by this manner, SCB and HSBC are trying to keep basic banking

rates ideal upon meeting the demands of customers regarding credit usage and avoid

issues of delinquent borrowers. Truly, SCB and HSBC must be able to utilize payment

models for SMEs in order to generate return of revenues being used and should have

the capability of prioritizing banking operations at the maximum level of financial

standards and strength.

REFERENCES

Ambrose, B.W., Buttimer, R.J., Capone, C.A. (1997), "Pricing mortgage default andforeclosure delay", Journal of Money, Credit and Banking, Vol. 29 No.3, pp.314-25


36/39

ASB (1999), Statement of Principles for Financial Reporting, Accounting StandardsBoard, London

ASB (2005), Standard-setting in a Changing Environment, Accounting Standards Board,London

Barth, James R., Gerard Caprio Jr., and Ross Levine. 2002. Bank Regulation andSupervision: What Works Best. World Bank Working Paper 2725

Bodie, Zane; Alex Kane and Alan J. Marcus (2004). Essentials of Investments, 5th ed.McGraw-Hill Irwin, 455

Brunson, A., Kau, J.B., Keenan, D.C. (2001), "A fixed-rate mortgage valuation in threestate variables", Journal of Fixed Income, Vol. 11 No.1, pp.17-28

Calomiris, Charles W., and Andrew Powell. 2001. Can Emerging Market BankRegulators Establish Credible Discipline? The Case of Argentina. In PrudentialSupervision: What Works and What Doesnt, ed. F. S. Mishkin. Chicago:University of Chicago Press

Charlier, E. (2001), "Quantifying the refinance incentive and losses from prepayments",

Journal of Fixed Income, Vol. 11 No.1, pp.55-64

Chow, Y.F., Huang, C., Liu, M. (2000), "Valuation of adjustable rate mortgages withautomatic stretching maturity", Journal of Banking and Finance, Vol. 24 No.11,pp.1809-29

Creswell, J.W. (1994). Research design: Qualitative and quantitative approaches.Thousand Oaks, California: Sage


37/39

Dell Ariccia, Giovanni, Deniz Igan, and Luc Laeven, 2008, Credit Booms and LendingStandards: Evidence from the Subprime Mortgage Market, CEPR DiscussionPaper No. 6683, London, UK: CEPR.

Eccles, T., Holt, A. (2001), "Accounting standards and the property manager", Journalof Property Management, Vol. 19 No.5, pp.417-32

Epstein, Barry J.; Eva K. Jermakowicz (2007). Interpretation and Application ofInternational Financial Reporting Standards. John Wiley & Sons, 91-97. ISBN9780471798231

Gall, M. D., Gall, J. P., & Borg, W. R. (2003). EducationalResearch: An Introduction(7th ed.). Boston: Allyn & Bacon

Klh, Ulrich and Peter Stella, 2008, Central Bank Financial Strength and PolicyPerformance: An Econometric Evaluation, forthcoming (Washington:International Monetary Fund)

Koh, S.C.L., Maguire, S. (2004), "Identifying the adoption of e-business and knowledgemanagement within SMEs", Journal of Small Business and EnterpriseDevelopment, Vol. 11 No.3

Hadjimonolis, A. (1999). Barriers to Innovation for SMEs in a Small Less DevelopedCountry (Cyprus). Technovation 19(9), 561-570.

Hilliard, J.E., Kau, J.B., Slawson, V.C. (1998), "Valuing prepayment and default in afixed rate mortgage: a bivariate binomial options pricing technique", Journal ofRealEstate Economics, Vol. 26 No.3, pp.431-68


38/39

Ho, Giang and Anthony Pennington-Cross, 2007, The Varying Effects of PredatoryLending Laws on High-Cost Mortgage Applications, FederalReserve Bank of St.Louis Review89(1), pp. 39-59

Rojas-Suarez, Liliana. 2001. Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators. Working Paper WP 01-6.Washington: Institute for International Economics

Rugby Estates (2000), Annuel Report, Rugby Estates, London

Stella, Peter, 2003, Why Central Banks Need Financial Strength, Central Banking, Vol.XIV, No. 2 (November)

Stella, Peter, 2005, Central Bank Financial Strength, Transparency, and PolicyCredibility, IMF Staff Papers, Vol. 52, No. 2 (September)

Venkatraman, N, Henderson, J.C (1998), "Real strategies for virtual organizing", Sloan

Management Review, Vol. 4 pp.33-48

World Bank. 2001. Finance for Growth: Policy Choices in a Volatile World. New York:Oxford University Press

Website:

SCBAnnualReport, Interim 2007, LeadingtheWay

http://www.standardchartered.com/about-us/en/index.html


39/39

HSBCReport, 2008

http://www.hsbc.com/1/2/newsroom/news/news-archive-2008/hsbc-holdings-plc-2008-interim-results-highlights

Read more: http://ivythesis.typepad.com/term_paper_topics/2010/07/a-comparative-study-between-scb-and-hsbc-about-its-business-strategy-towards-small-and-medium-

enterp.html#ixzz1kaLo5cV7

Documents

A Comparative Study Between SCB and HSBC About Its Business Strategy Towards Small and Medium Enterprise in HK