Introduction
Abide a Wee While Deposit Account targets mature citizens at the age of above 50years who are returning home after working abroad. It also targets residents locally. This includes professionals such as doctors and lawyers. It also includes self-employed persons, entrepreneurs, and retired persons. Andrew Bank Ltd currently holds less than a third of the private individuals’ bank accounts and less than a tenth of the business firms’ bank accounts. Consequently, there is a large market share held by competitors, which the bank wants to tap.
Abide a Wee While Deposit Account can generate $ 10 million annually in deposits. This account will earn 1% more interest on deposits than other accounts. The account holders will receive checkbooks free and access to other banking and personalized banking services at reduced prices. The purpose of this account is to source funds for the proposed 100% mortgage-financing project.
This project is by the government to public servants. The demand for funding will be increasing at the rate of 50% every year starting the first year. Additionally, the management expects the account to keep the loan to deposit ratio at 80%, which is within the range required by the Central Bank of 75% to 85%. Currently, the ratio stands at 81.45% as reported by the consolidated statement of financial position on 30 June 2010 (Hopkin, 2010).
Andrew Bank Ltd is state-owned. This makes it vulnerable to political interference and changes resulting in reduced confidence in the bank by the business people. Business people feel that the account information is available to the government and its agencies due to its ownership structure. This explains the reason for the low percentage of business accounts in the bank. Given the foregoing, there are risks associated with the introduction of this account. The following paragraphs analyze the risks outlined in the summary in detail.
Liquidity
Liquidity risk is the risk that the bank will not be able to meet its obligations as they fall due. Liquidity risk in the bank will mean that the bank does not meet its obligations with the intermediacy which are either lenders or borrowers (Drehmann & Nikolaou, 2009). Obligations that the bank will be expected to meet include having enough cash to meet withdrawal demands by customers, therefore, ensuring full access to their money when they need it.
The other is to provide financing to the mortgage project. One feature of the Abide a Wee While Deposit Account is that the account holders have access to their money whenever and wherever they need it as they will be issued with ATM cards to withdraw from the six ATMs that will be strategically placed.
Additionally, they will have access to their accounts through mobile banking. This way they can transfer funds and pay bills without having to visit the bank. The reason for introducing this account is to provide mortgage financing to public servants (Alexander and Sheedy, 2005).
The new accounts are to generate $10 million annually. The demand for mortgage financing has been projected to be nearly $10 million in the first year, with an increment of over 50% in the subsequent years for 25 years. The repayment period will last approximately 25 years for every loan-able amount dispatched. Banks that make commitments to lend are normally more exposed to liquidity risks and, therefore, before a bank commits it should ensure it has enough financing to make lending.
Analyzing these figures there will be a shortfall of $8 million by the second year and $27 million by the third year in the mortgage financing. Given the full access to deposits by the accountholders versus the 25-year repayment period, the bank runs the risk of running out of cash when needed. Given the foregoing, the term of the deposits does not match the mortgage term. According to the IMF, a key financial soundness indicator for a bank is that the deposit period should be matched to the loan period to avoid liquidity risk (IMF, 2006).
Additionally, as it stands currently the loans to deposits ratio is at 81.45%, just 3.55% short of the upper limit of 85% set by the Central Bank. With the introduction of the account with its full access to deposits feature the bank runs a risk of going over the limit and therefore raising liquidity issues. If this happens, then the bank will face compliance issues from the Central Bank and will have the effect of reducing market share as the word goes around that the bank is facing cash flow problems.
To add to that the bank will not be able to attract the clientele it targets as business people need access to cash so as not to miss on business opportunities. Another factor that would cause liquidity risk is the fact that 28% of the loans are advanced to the public sector, which earns low interest and receives concessionary interest rates, which have the effect of lowering the return on assets to 0.65, which is below the industry average of 0.81.
With the high-interest rates to Abide a Wee While Deposit Accounts, this will bring the return on assets lower further increasing the liquidity problem (Hubbard, 2009).
Cash flow problems will result in negative publicity, which may have consequences the first being reduction of a market share already held and second being keeping new customers away. Therefore, the bank should critically analyze its ability to raise the required financing before committing to the government mortgage plan for public servants (Crockford, 2006).
Competition
The target markets of the Abide a Wee While Deposit Account are the business people who are not comfortable with the state ownership of the bank since they have the perception that all the account information will be open to the government and its agencies. Additionally, business people lack confidence in the bank due to its political interference or changes therefore they would prefer to hold accounts with the other four commercial banks.
These banks Barclays Bank Plc, Scotia Bank, CIBC, and Caribbean Banking Corporation have better-qualified staff due to international exposure and research departments that can successfully cope with changing legal, technological, and operational environments (Gorrod, 2004).
Andrew Bank Ltd only holds only approximately a quarter of private individuals’ accounts and less than a tenth of business firm accounts. This, in essence, means that a high percentage of these accounts are held by competition. This can be attributed to the fact that business people deal a lot with foreign exchanges and Andrew Bank Ltd depends on correspondent banking relationships to conduct business and therefore run the risk of losing business to international competitors if these relationships were closed.
Given these, the business people may not feel so confident when doing business with Andrew Bank Ltd. In addition to that, the competition uses better technology than Andrew Bank Ltd as all the other four banks provide online services through a network of ATMs in the region (Gorrod, 2004). With the introduction of six strategically placed ATMs, the bank might be able to attract these business people but that will need a lot of hard work as the bank is already lagging in terms of technology.
In the face of the merger between Barclays bank and CIBC will rank the new entity as a market leader and therefore displace the bank from being the market leader. The new entity, which will be formulated after the merger known as First Caribbean International Bank, is expected to be a force to reckon with in the field of competition.
Observers say that it will have a wider branch network. This is because of the combined strategic capabilities and competencies, human and financial resources that the merger will bring. In the current industry climate if a firm cannot provide the services at a higher quality than competitors then it stands to lose its customers the bank has to come up with strategies to keep it as per with the other players in the industry(Borodzicz, 2005).
The bank further faces competition from non-bank financial institutions that accept deposits and provide traditional banking services. These institutions are not regulated by Central Bank and, therefore, pay very high rates of interest on deposits and this could affect the Abide a Wee While Deposit Account market gave that the selling point is the higher interest rate offered on deposits.
In addition, the Eastern Caribbean Securities Exchange, which has recently opened across the eight-member territories, will present other investment opportunities thereby reducing the current deposits and making it even harder to raise additional deposits (Dorfman, 2007).
Market
The market for the Abide a Wee While Deposit Account is the mature citizens at the age above 50 years. The projected population of this age group is twenty four thousand at the end of the year 2012. This is in comparison to the youth group whose population is projected to be one hundred and sixteen thousand. These figures show that there is limited market for the account and the market targeted may not be able to rise the required funding for the 100% mortgage government project for public servants.
This then may result in liquidity problems as the bank has already committed to financing the mortgage project. Currently Andrew Bank Ltd customers consist of middle and low-income earners therefore the business class may not like to share a bank with low-income earners who may probably be their employees.
In order to attract business people the bank will need to open new prestige branches to suit the esteem needs of this class of clients. On the other hand, given that most of these accounts are held by competition it will not be too easy for the banks to sit back and just watch their clients be taken without reacting (Borodzicz, 2005). Counter attacks from competition is to be expected and therefore should be prepared for. The other banks may decide to introduce similar accounts to protect their market share or even accounts with better terms.
Given the age group of this target market a factor to consider is there resistance to change. Over the years that they have banked with the other four banks and have been getting the services they need they may see no need to change to another bank. The youth are more likely to embrace change and try out new accounts just for diversification. Consequently, because of the high demand for financing the youthful market should be considered to generate higher deposits.
Additionally as it stands now, business people do not prefer state owned bank this works against the new account. Convincing, experienced marketers will be needed to win the clients over otherwise the bank will not be able to meet the deposit amount needed for the mortgage financing. In order to increase market share better customer service will be required, better technology, and better wealth-management products to attract the target group (Borodzicz, 2005).
Conclusion
For Abide a Wee While Deposit Account to be successfully launched these three risks analyzed above should be mitigated. The liquidity risk as discussed above arises from mismatch of deposit periods and loan periods. To mitigate this, the bank should long for ways of raising long-term deposits through fixed long-term accounts.
Fixed accounts require no withdrawals before maturity period. Therefore, the risk of cash shortages greatly reduces. The market success of the account revolves around how well Andrew Bank Ltd faces these risks. This report provides comprehensive starting ground for the bank. It critically analyzes every aspect of those three major risks and provides some tangible solutions.
Competition is increasing with the launch of CARICOM Single Market and Economy; therefore, the bank should invest heavily in technology, and staff training to be able to survive and remain relevant in the market. Market targeted should be widened to incorporate the completely bankable population in the economy.
The target market could focus on the unbaked population therefore has an edge over competitors. Targeting the wealthy individuals may result in the wrong perception that the bank is only interested in the wealthy population with little regard to the low-income earners who should be the main target for a state owned bank (Moteff, 2005).
Reference List
Alexander, C. & Sheedy, E. (2005) The Professional Risk Managers’ Handbook: A Comprehensive Guide to Current Theory and Best Practices. New York: PRMIA Publications.
Borodzicz, E. (2005) Risk, Crisis and Security Management. New York: Wiley.
Crockford, N. (2006) An Introduction to Risk Management. Cambridge, UK: Woodhead-Faulkner.
Dorfman, M. S. (2007) Introduction to Risk Management and Insurance. Englewood Cliffs, N.J: Prentice Hall.
Gorrod, M. (2004) Risk Management Systems: Technology Trends (Finance and Capital Markets). Basingstoke: Palgrave Macmillan.
Hopkin, P. (2010) Fundamentals of Risk Management. London: Kogan-Page.
Hubbard, D. (2009) The Failure of Risk Management: Why it is Broken and How to Fix It. London John Wiley & Sons.
Moteff, J. (2005) Risk Management and Critical Infrastructure Protection: Assessing, Integrating, and Managing Threats, Vulnerabilities and Consequences. Washington DC: Congressional Research Service (Report).