Introduction
The BNP Paribas group is a market leader in the banking industry with operations in over 75 countries. It has a strong presence in Europe, Asia, and North America, where it provides investment, commercial, corporate, and retail banking services. Retail banking covers direct banking services such as credit facilities and mortgages extended to individual customers.
The purpose of this report is to recommend an international expansion strategy for BNP Paribas. The report analyzes the macro-environmental characteristics of the Singaporean market, available opportunities and threats, and BNP’s strengths and weaknesses in respect to its international expansion strategy.
Potential Target Market
The Singaporean retail banking market has seen an accelerated growth over the past few years. The accelerated growth is projected to reach a value of $297bn by 2019 (MarketLine 2015). From 2010 and 2014, the market grew to a value of $228bn, averaging an annual growth rate of about 8%, which is higher than that of South Korea (MarketLine 2015).
The significant growth rate has made the Singaporean retail banking market highly competitive in the Asia-Pacific region. The key segments driving the Singaporean retail banking market include mortgage and customer credit. In 2014, mortgages were valued at $168bn, which was equivalent to 74% of the market (MarketLine 2015).
In contrast, the credit segment was worth approximately $60bn, an equivalent of 26% of the market. In this view, BNP Paribas can leverage on its market leader position in retail banking to expand its mortgage and consumer credit services to the Singaporean market.
Macro-environmental Characteristics of the Market
Macro-environmental characteristics encompass the external factors that are not under the direct control of a firm. In this report, the PESTLE framework will be used as a model for analyzing the macro-environmental characteristics of the Singaporean retail banking market.
Political
Singapore enjoys a relatively stable political and governance landscape. The country’s competent leadership has favored competitive capabilities in many sectors, particularly the manufacturing industry. Singapore’s strict anticorruption policy has seen it being rated among the top five countries with the least corruption index globally.
As a result, there has been an increased flow of foreign direct investments into the country in recent years. Singapore has a thriving banking sector with strong liquidity levels. According to MarketLine (2015), the country’s regulatory body, the Monetary Authority of Singapore (MAS), requires tier 1 banks to maintain “capital ratios of above 9.0” (para. 8).
In addition, the authority requires banks to observe the Base III capital standards on capital adequacy. Under this global regulatory framework, banks must maintain a mandatory “common equity ratio of 4.5%” to operate in Singapore (MarketLine 2015, para. 12). The strict regulations have ensured that banks maintain a high liquidity even when cash outflows are rising.
Singapore has strict business regulations that guide foreign firms entering into its market. Any foreign firm is required to register as a limited company before being allowed to operate in Singapore. Furthermore, regulations enacted in 2007 stipulate that any private limited company must file annual returns with the country’s income tax department (MarketLine 2013). Thus, foreign companies operating in Singapore cannot keep their financial records confidential.
Economic
Singaporean economy is based on trade and manufacturing. It has a business-friendly environment that attracts massive foreign direct investment inflows. The economy weathered the 2009 recession to grow at an annual rate of 14.7% in 2010 (MarketLine 2013). However, in 2011, the economic growth slowed to a low of 5.1% in response to the financial crisis experienced in the EU.
The susceptibility of the Singaporean economy to external shocks is due to its openness to international firms and investors. The country ranks third globally in per-capita GDP and has a relatively low tax regime (MarketLine 2015). The low tax rates make Singapore an attractive foreign investment destination.
Singapore stands out as a financial hub in the Asia-Pacific region. Over 123 banks operate in the Singaporean economy with 117 of them being foreign (MarketLine 2015). Overall, the country’s economic landscape is highly attractive to foreign investment.
Social
Singapore ranks high in terms of literacy levels internationally. The Singaporean government’s expenditure on education constitutes 3% of the country’s GDP with much of the funds going to elementary and secondary education (MarketLine 2013). In higher education, Singaporean institutions feature among the top 20 universities in the Asia-Pacific region.
Singapore’s population consists of a disproportionate number of the elderly. The high number of elderly population is caused by the country’s low birthrate of 10.8 births per 1,000 persons (MarketLine 2013). The growing elderly population coupled with the low birth rate will present financial and socioeconomic challenges to the government in the future. The unemployment rate stands at 1.8%, down from 2.2% in 2010 (MarketLine 2015). The low unemployment rate is due to the sustained economic growth in the country.
Technology
Singapore’s technology landscape is characterized by a high mobile penetration of 156.6 per 100 persons (MarketLine 2015). The government’s ‘iN 2015 strategy’ aims to transform Singapore into a technology hub. Under this plan, the government plans to fund various programs geared towards stimulating the adoption of technologies such as e-health in the country.
In 2012, Singapore score on patented technologies stood at 152.5 patents per million people, which was higher than that of France (82.5). Singapore has also invested in ‘e-learning’ and e-government to provide the requisite infrastructure for technological innovation.
Legal
Singapore’s legal environment is characterized by a low tax regime and strict regulations. According to MarketLine (2015), the country’s corporate tax, which stands at a rate of 17%, is among the lowest in the Asia-Pacific region. The government reduced the corporate tax by a percentage point to 17% in 2009, making it among the lowest in the region.
The government has also reduced the duration it takes to register a business. It takes three days to register a new company compared to an average of 12 days it takes in other OECD nations (MarketLine 2015). Moreover, in the Asia-Pacific region, it takes an average of three weeks to start a new business. Thus, Singapore’s legal environment is favorable to the growth of business and industry.
Environment
Singapore’s environment policy focuses on energy efficiency. The country undertook to improve its “energy efficiency by 35% and recycling by 70%” by the year 2030 (MarketLine 2015). Singapore’s efforts to increase energy efficiency will reduce the cost of doing business in the country. However, the country faces many environmental challenges because most of its land mass lies near sea level. Therefore, its coastal areas are vulnerable to the effects of rising sea level because of its long coastline.
The Key Strategic Issues
BNP’s strong position in its market segments is a source of competitive advantage. However, to be successful in the retail banking market in Singapore, the BNP Paribas group must leverage on its competitive advantages and strengths to take advantage of the market opportunities and business threats or challenges that characterize the external environment.
Opportunities
Mobile Payment Systems
The Singaporean personal finance and mobile payment systems are key subsectors that offer opportunities for growth. BNP can venture into these two areas to increase its penetration into this market. In 2007, BNP launched a “mobile contactless payment system” in partnership with MasterCard (BNP Paribas 2015, para. 7).
The multi-operator mobile solution, called Payez Mobile, brings retail banking services closer to the customers. BNP can capitalize on Singapore’s high mobile penetration, currently estimated to be 156.6 per 100 people, to penetrate the retail banking market. Mobile solutions, such as Payez Mobile, that allow customers to manage their transactions can give the BNP a strategic advantage.
Such solutions can increase the firm’s visibility in the retail banking market by allowing customers to withdraw or deposit funds in their accounts through their mobile devices. An integrated mobile solution that enables customers to transact across different operators is another way BNP can penetrate and grow in the Singaporean retail banking market.
Personal Finance
Personal finance is replete with growth opportunities for new entrants. BNP already has a personal finance division that was started in 2007 in partnership with the UCB bank (BNP Paribas 2015). The BNP personal finance stands a good chance of tapping into the opportunities available in Singapore’s retail banking sector.
Through the personal finance division, BNP can extend competitive credit facilities and mortgages to new clients in Singapore. According to BNP Paribas (2015), the group’s personal finance in the Eurozone is experiencing a double-digit growth, which is an indication that the bank has opportunities in the Singaporean personal finance sector.
To gain a strategic advantage, BNP will need to utilize different platforms to increase its geographical reach. The bank can enter into agreements with partners or agents to market its personal finance product. Alternatively, it can sell the products (mortgages and credit facilities) directly to the people or via the internet. The multi-channel approach will enable BNP to capture a large market and enhance its capacity to be competitive in the Singaporean market.
Threats
Singapore comes second in the Economic Freedom Index, an indicator of the business-friendliness of a country’s economic policy (MarketLine 2015). However, the increasing trade regulations, dependence on foreign labor, and rising property prices pose a threat to business growth.
Trade Regulations
Although Singapore’s business regulations favor investment inflows, recent trends indicate a toughening of the laws guiding foreign investments. As from 2013, any foreign-owned organization, regardless of its status in the country of origin, is required to register as a limited liability company to operate in Singapore (MarketLine 2015). In contrast, in other countries, registering as a private limited company is optional.
Therefore, the BNP will have to register as a private limited company to operate in the Singaporean retail-banking sector. In addition, the bank must comply with the country’s 2007 regulations that require firms to file annual returns to the income tax department.
Dependence on Foreign Labor
Singapore experiences a persistent labor crunch, forcing it to rely on foreign labor to drive its economy. According to MarketLine (2013), foreign labor in 2012 constituted 37% of the country’s workforce, which is among the highest globally. Singapore’s overdependence on foreign labor is a threat to sustained economic growth. In addition, the government’s restrictions on labor inflows to provide opportunities for local workers are likely to slow down economic productivity.
Rising Property Prices
It is projected that the rising inflow of foreign labor will lead to an increase in the demand for property in Singapore. As a result, prices in the real estate and property market will rise, posing a threat to business growth. Private and public residential property in Singapore increased in value by over 120% and 70%, respectively, between 2009 and 2013 (MarketLine 2015).
The rise in property prices is attributed to the high foreign labor inflow that drives the demand upwards. The rise in property prices has increased the value of mortgages extended to households. According to MarketLine (2015), in 2013, up to 49,000 households in Singapore had two mortgages.
As a result, Singapore’s household debt amounts to 77% of its GDP. The high household debt means that lenders cannot increase interest rates. Therefore, the BNP will face the threat of high household debt that will affect the growth of the mortgage segment. In addition, a high default rate, which is estimated to be 10%, is another threat to growth in this subsector.
Strengths
BNP’s strengths in the banking sector lie in its leading market position in the Eurozone, sustainable revenue mix, and strong capital base. These factors give the institution a strong strategic advantage as it expands its retail banking to new markets.
Market Leader Position
The BNP group is a market leader in Europe, particularly in France, where it is the largest bank. It offers banking services to the major international markets in Europe, Asia, and Africa, among other regions. Besides retail banking, BNP’s three other complementary products include “corporate banking, investment banking, and asset management” (BNP Paribas 2015, para. 4).
Its market leader position in retail banking means that it has sufficient capabilities to leverage on to expand successfully into the Singaporean market. On the global front, the BNP group ranks as the eleventh largest firm in its market segment. It is a leading provider of personal finance in the Eurozone. It’s French Lease Group dominates the equipment leasing market in France. Thus, BNP can capitalize on its position as a market leader to build its brand image in the Singaporean retail-banking sector.
Sustainable Revenue Mix
BNP’s revenue model is well balanced and sustainable. The share of its retail banking accounted for 56% of the total revenue earned in 2011, underscoring the significance of this segment to BNP’s growth strategy. In the same year, the combined income from the investment and corporate banking division constituted 24% of the revenue.
Therefore, these complementary products provide a sustainable revenue mix that can help BNP expand its operations to international markets, such as Singapore. In addition, BNP generates revenue from net interest income from its business divisions. In 2011, its net interest contributed about 57% of the revenue while income from commissions contributed 32% (Datamonitor 2012). Thus, BNP relies on multiple products to drive its growth, which means that it is resilient to shocks in the retail banking market.
Strong Capital Base
Since 2010, the BNP group has been recording an increase in its capital and common equity ratio. The group’s capital grew from $88,754 million to $91,930 million between 2010 and 2011, increasing its common equity ratio to 9.6% (Datamonitor 2012). The high capital gains indicate that the firm has sufficient resources to expand into international markets, including Singapore.
In addition, BNP group’s massive capital surplus, which, according to Datamonitor (2012), stood at $42bn in 2012, can enable the firm to weather disruptive market developments. Thus, the BNP group can remain resilient in the face of unfavorable market conditions
Weaknesses
Despite its leading market position, BNP has some internal weaknesses that affect its profitability. The declining quality of the bank’s loan book and cost management are some of the challenges facing BNP’s internal environment (Carter & McNulty 2005). In particular, the rising operational costs have had a significant effect on the group’s profitability.
Declining Loan Book Quality
BNP’s retail banking division extends credit and mortgages to customers. Since 2010, the bank’s debt or doubtful loans have been rising and currently stands at $47.9bn (Datamonitor 2012). The increased lending risk associated with financial crises in Eurozone countries has had an effect on the firm’s operating income.
As a result, the bank’s coverage dropped to 80% in 2011 down from 81% the previous year (Datamonitor 2012). The declining coverage shows that the internal provisions have had little effect on the quality of the bank’s loan book and operating income.
Inappropriate Cost Management
BNP has been unable to control operational costs in some of its business divisions. The cost/income ratio of its Eurozone division increased to above 80% in 2013 from a low of 65% in 2010 (MarketLine 2015). In another division, called BancWest, costs reached 57% relative to the operating income earned in 2010, up from 52% the previous year (MarketLine 2015). Clearly, the firm’s cost/income ratio is unfavorable, a scenario that has a significant effect on its profitability and growth plans.
Recommended Actions
The retail banking market in Singapore has grown significantly over the past few years, making it highly attractive to international players. Consumers show confidence in large financial institutions that have a strong brand identity, such as DBS. Therefore, new entrants must seek to build brand identity in the Singaporean market.
In this respect, the writer recommends the use of an intermediary as the entry mode to the Singaporean retail banking market to reduce entry costs. In addition, this entry mode is less subject to the stringent regulations imposed on full-fledged institutions. The MSA regulations require all banks to maintain a capital ratio of 6%, in line with Basel III standards (MarketLine 2012).
Thus, entering the market as a full-fledged will be more costly than the intermediary entry mode. To penetrate the market faster, BNP will need to adopt innovative banking systems. The writer recommends that BNP should invest in in-house systems that can handle large volumes of customer data and allow contactless transactions via mobile devices.
BNP will need to integrate vertically with network providers in Singapore to reach more customers. Additionally, BNP will need the services of firms that offer data processing software to roll out its credit/debit card product in the Singaporean market. Examples of such firms include MasterCard and Visa. Strategic partnerships with network/software providers will enhance the security of BNP’s credit cards.
The partnerships will increase consumer confidence in the bank’s products and translate into a better brand image and business growth. Debit cards will also provide BNP with an opportunity to penetrate the Singaporean retail banking market. Debit cards offer extra advantages over hard currency, including security and ease of use.
BNP can provide debit cards that facilitate online transactions or payment for services and goods to attract more customers. Product differentiation is another strategy BNP can use to penetrate and grow in the retail banking market. Current players have comparable product offerings, which limit the degree of business competitiveness.
BNP can introduce insurance and investment products in addition to credit/debit cards and mortgages. In addition, according to MarketLine (2012), the high-interest rates imposed by the current players have led to a decline in demand for credit services. In this view, BNP should offer credit facilities at competitive interest rates to attract new customers.
As a big corporation, BNP can leverage on its huge capital base to provide credit services at competitive rates. The competitive interest rates will reduce the rate at which consumers switch to competitor products. To increase its geographical reach, BNP will have to use agents or intermediaries. Through agents, the bank can expand its coverage and proximity to individual customers.
Additionally, through vertical integration with mobile service providers, BNP can bring its services closer to the people. A multi-operator system, such as the Payez Mobile, will be useful in expanding the bank’s reach into areas currently underserved by the existing market players. Thus, partnerships with leading service providers will be a source of competitive advantage for BNP.
Singapore is experiencing a property boom fueled by the increasing inflows of foreign investments. Between 2009 and 2013, private property value in Singapore increased by over 120% (MarketLine 2015). The rising property value shows that the demand for mortgages for building residential property is high. Thus, the real estate market is a lucrative segment that BNP can target.
The current high-interest rates have forced property buyers to resort to renting, a scenario that has reduced the level of competitiveness of the mortgage sector. Therefore, BNP should offer mortgage products at low-interest rates to attract customers wishing to purchase residential houses.
Singapore’s business environment and less restrictive policies are attractive to a foreign workforce. Thus, international firms expanding to Singapore can employ skilled foreign labor to drive their growth strategies. BNP can rely on an experienced foreign workforce to drive its retail banking business in Singapore. Experienced managers working in other BNP divisions can be redeployed to head its new operations in Singapore.
The use of experienced managers will cut down the costs associated with training and turnover in the industry. BNP is a market leader in personal finance in its existing markets. The bank’s personal finance product is doing very well in the European markets. BNP can sell the same product in the Singaporean market to tap into existing opportunities.
In this respect, the writer recommends a multi-channel approach in reaching out to clients. BNP can use different channels, including internet, agents, and social networking sites to increase its digital presence. In addition, product offerings that complement customer credit and mortgages, such as insurance cover, would enable BNP to penetrate the Singaporean retail banking market successfully.
References
BNP Paribas 2015, Retail Banking and Services. Web.
Carter, D. & McNulty, E. 2005, ‘Deregulation, Technological Change, and the Business-Lending Performance of Large and Small Banks’, Journal of Banking and Finance, vol. 29, no. 5, pp. 113-130.
Datamonitor 2012, BNP Paribas Group: Company Profile. Web.
Market Line 2012, BNP Paribas Group. Web.
Market Line 2013, Country Profile Series: Singapore. Web.
Market Line 2015, Market Line Industry Profile: Retail Lending in Singapore. Web.