Financial systems vary in form, process, and application. Although there are universal financial models, countries prefer following their own policies because of several reasons. The most common practice involves the use of the International Financial Reporting System (IFRS). There are generally accepted accounting principles (GAAP) that serve as the basis for financial reporting. These policies are being implemented to secure transparency and to protect the welfare of the stockholders.
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The development of financial systems in emerging economies such as Saudi Arabia is well documented. Companies that once follow conservative policies have started opening their books to the public. This change is often attributed to the influx of Western companies in these economies. In Saudi Arabia, the U.S. and European firms have started operating. Forming joint ventures and alliances with local Saudi companies is the usual strategy. Since these firms follow strict financial rules, Saudi firms made the next step towards compliance.
Corporate Structure and Governance
Saudi NCB is a Saudi Arabian bank and the first to be established in the country. The bank’s initial paid-up capital is SR 30 million. The bank was created out of the Royal Decree on 20 Rabi Thani 1373H. At present, the bank operates in 266 local branches and two international hubs. The majority of the bank employees are Saudi Nationals, and the others are divided among different nationalities. The services provided by the bank strictly adhere to the laws prescribed by religion. This attachment is a common aspect among banks in Saudi Arabia.
The Board of Directors of NCB is composed of 7 individuals. These Directors are all natives of Saudi Arabia. This is implemented to maintain control of the Nationals to the leadership of the bank. As stated, services catered by Saudi NCB are in accordance with Shariah. To ensure that this clause is maintained, the government installs a Shariah Advisory Committee to oversee the transaction in the bank. There are esteemed individuals who composed the Advisory Committee. These are consultants who have established expertise in the industry and a strong sense of the Shariah laws.
The Deutsche Bank, however, has a typical corporate structure. The bank is heavily regulated as provided by the governing bodies in the U.S. and EU. The Board of Directors is composed of the supervisory and management bank. Deutsche has solid operations in Germany and has access to other branches in the world. In terms of governance, committees are established to address certain bank concerns. The role of these committees is to ensure that the bank meets the financial targets. Compliance with the rules and regulations in the banking industry is also a major consideration.
Saudi NCB implements a risk management strategy that is evaluated and approved by the bank’s Assets and Liabilities Committee. Designated financial assets are realized when NCB engages in a contractual provision of the deal. In the event when uncollectible revenues are determined, the automatic write-off is being implemented. Moreover, the risk management process followed by NCB considers the bank’s exposure to foreign exchange fluctuations.
In terms of credit, NCB’s risk management strategies are developed to evaluate the creditworthiness of the bank. Exposure of credit risks is being studied, and measures are designed to limit the involvement of the bank in these risks. NCB also ensures that the risk management provisions of products constantly revolve around client preference. This is an important clause that will ensure control of the market share. In addition, risk management concepts are used in assessing the value of assets and liabilities of the company. These risks are determined in accordance with market conditions.
Deutsche Bank, on the other hand, provides specific provisions to ensure risk management. The bank defines risk as an event that gives rise to actual, contingent, or potential claims against any borrower or obligor. When adverse results are observed, there are mitigating strategies used to minimize the negative effect on the company. In addition, the country risks possible deterioration of economic status, political and social detriments, and nationalization and expropriation of assets. Other major risks for the bank include operational, credit, liquidity, and market.
In 2006, the total business risk of the company had declined significantly. Credit this development to a strong process of risk management. The determination of overall risk exposure is done through a methodical process. The increase in operational risk economic capital is caused by methodology changes, specifically improved modeling of the size of operational risk losses. Moreover, the constant diversification in operations leads to the bank’s exposure to the risks present in the market.
NCB’s financial statements are prepared in compliance with the accounting standards imposed by the Saudi Arabian Monetary Agency (SAMA) and the IFRS. The firm prepares financial statements to comply with the Banking Control Law and Regulations for companies in the Kingdom of Saudi Arabia. Most of the items in the financial statements are measured using historical costs. The bank, however, uses the fair market value in some assets and liabilities. NCB follows IFRS 7, which provides new disclosures and qualitative and quantitative data related to company performance and risks.
The preparation of financial statements imposed by Saudi NCB strictly follows IFRS standards. The process requires the use of certain critical accounting estimates and assumptions that impact the reported amounts of assets and liabilities. The reporting method also requires management to exercise judgment in the process of applying the NCB’s accounting policies. These assumptions and judgments are constantly evaluated and are based on historical experience relevant aspects.
There are areas where management has used estimates, assumptions, or exercised judgments.
Deutsche Bank prepares consolidated financial statements in accordance with U.S. GAAP. Accounting policies are considered essential in the process of understanding reported operational and financial results. Some of the accounting policies require critical accounting estimates that involve complex and subjective judgments. Hence assumptions will be made to but eventually equated to the actual results gained by the bank.
Per compliance with EU and German regulations, the bank will adopt International Financial Reporting Standards (IFRS). This method is applicable in consolidated financial statements filed with the EU and German regulatory authorities. Deutsche Bank will also use IFRS as the basis of reporting in future SEC filings. Financial statements prepared using IFRS as a basis are accepted in SEC filings provided reconciliation between U.S. GAAP. Moreover, IFRS net income and shareholders’ equity are disclosed as supplemental information. This is an important clause for the company.
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Positioning refers to the perceptions developed in the minds of the target market. The process entails the creation of an image of the brand and the entire firm. Market positioning is purely procedural and relies on the completion of stages before making further improvements. The initial stage involves the definition of the firms’ target market. The development of a marketing mix entails strategies that are designed to ensure consistency in the quality of performance. These are important aspects of surviving the competitive banking industry.
NCB is mainly engaged in the provision of banking services in Saudi Arabia. The banking services provided by the bank are clustered into Personal, Commercial, Corporate, Private, and Islamic. These suggest the extent of the market scope being covered by the company. Other bank services catered by the bank include Investment, Treasury, Trade Services, and Credit Cards. The bank operates 1184 Automated Teller Machines and 10750 Point-of-Sale Terminals. The bank has also ventured into the telephone, Internet, and mobile banking.
On the other hand, Deutsche Bank is globally recognized as one of the premier financial powerhouses. The company is spread across 76 countries in the world. At present, the branch count of the brand reaches approximately 4,000 globally. In terms of products, the bank caters to all forms of clients and various financial needs. These are personal, corporate, and investment banking to satisfy the needs of the customers. In addition, the bank continues to expand its product lines to cater to other niche markets. Deutsche has dedicated efforts to improve the bank’s performance.
Asset and Liability Management
The process of asset management in NCB involves impairment. When such is determined, a recoverable amount is determined. Uncollectible assets are written off. Property and equipment are reported at cost and devalued through accumulated depreciation. The cost of the assets is depreciated using the straight-line method. Buildings have expected to last for 20 years, leases for the duration of the contract, and other equipment for 3-4 years. The gains or losses from the sale of assets are properly recognized.
In terms of liabilities, market deposits, customer deposits, borrowing, debt securities, and other liabilities are recognized at cost. Subsequent fair market values are considered upon receipt. Commissions bearing financial liabilities are valued at fair market. Premiums are amortized using an effective yield basis to maturity and provided with special commission expenses. Leases involving the bank are treated as operating leases. Loans and debts are valued depending on the contracts entered by the company.
For Deutsche, property, plant, and equipment are reported at cost less accumulated depreciation and impairment losses. Land and buildings are revalued every year to reflect current market value. Independent firms that value properties determine the valuations. Assets are reviewed for impairment in every accounting period and whenever events lead to the determination of unrecoverable assets. The entire value of the assets is written down immediately to minimize further losses. Intangible assets of the company are valued at cost, including licenses and fees.
The bank is involved in a range of transactions that result in the accumulation of contingent and future liabilities. The bank discloses contingent liabilities when possible obligation arising from past events has been determined. Contingent liabilities are disclosed when a present obligation is not recognized. The bank issues commitments to provide credit, letters of credit, guarantees, and other credit instruments. These financial vehicles attract fees related to market prices for similar deals and arrangements.
Profit and Loss Recognition
In NCB, special commission income for all special commission-bearing financial instruments are considered crucial components of revenue. These are recognized in the financial statement of income on an effective yield basis, including premiums amortized and discounts accreted. The carrying value of the financial asset is adjusted when the revision of bank estimates is done. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying value.
Deutsche has a developed method for recognizing revenues. Interest income is recognized on an accrual basis: fees and direct costs relating to financing and restructuring are deferred and amortized. Revenues from the bank’s other activities are recognized through criteria which include persuasive evidence of an arrangement exists, the services have been rendered, the fee or commission is fixed or determinable, and the collectible is assured. The Gains and losses from sales of assets result primarily from sales of financial assets in monetary exchanges and include other assets.
Benchmarking provides cost savings in executing operations and supports the organization’s budgeting and strategic planning process. Benchmarking is designed to leave the past behind and embrace the future. The benchmarking process has many defining features. In order to benchmark effectively, a company needs a strong strategic focus and some flexibility in achieving management’s goals. The process allows banks to review their performance in reference to other players in the industry.
The main strength of NCB is the bank’s diverse products and services lines. The bank has been a known spender for product research and development. Aside from the main bank services, NCB also provided niche products for women and Islamic purposes. Even with strict regulation, SAAB has gained ground in terms of product creation. The coverage of the company in the market is another notable aspect. The bank has established several branches and also provides electronic and mobile banking services.
Deutsche follows an approach similar to some of the established banks operating globally. The focus of the bank is to extend financial options to individuals and firms. The primary advantage observed in Deutsche is the bank’s efficiency model. In addition, the bank has an established network worldwide. The company also provides lucrative options for savings depositors. Another important service that Deutsche provides is Internet banking. Investment banking is also one of the firm’s strengths.
Loans and advances are non-derivative financial assets originated or acquired by the NCB with fixed or determinable payments. Loans and advances are initially measured at cost. Subsequent fair value is provided, including acquisition charges associated with the loans and advances. Following the initial recognition, transfers between the various classes of loans and advances are not ordinarily permissible. NCB’s loans and advances are classified as held at amortized cost less any amount written off and provisions for impairment. Hedged loans and advances are adjusted against the carrying amount.
Due from banks and other financial institutions are financial assets, which are mainly money market placements with fixed or determinable payments. These instruments are fixed maturities and are not quoted in an active market. Money market placements are not entered into with the intention of immediate or short-term resale. Receivable from banks and other financial institutions are initially measured at cost. Then the loans are stated at cost less any amount written off and provisions for impairment.
In Deutsche, loans are provided on the balance sheet at their outstanding principal balances net of charge-offs, discounts, costs on originated loans, and the allowance for loan losses. Interest revenues are determined on the unpaid principal balance. The costs and premiums or discounts are recorded as an adjustment of the interest income over the contractual period of the related loans. Commitment fees are related to commitments that are unaccounted for. Loans are placed on non-accrual status when either the loan has been in default or interest for 90 days or more, and the loan is in the process of collection.
Loans are reviewed at each balance date to determine whether there is any objective evidence of impairment. When such is ascertained, the recoverable amount is estimated, and provision is made for the difference between the carrying value and the salvage amount. The recoverable amounts of advances measured at amortized cost are calculated as the present value of the expected future cash flows. The value is then discounted at the instrument’s original effective interest rate for a fixed rate.
NCB recognizes derivatives as a valuable financial instrument. Derivative financial instruments in NCB include foreign exchange contracts, special commission rate futures, forward rate agreements, currency and special commission rate swaps, currency and special commission rate options, which are both written and purchased. These items are measured at a fair value premium received for written options. All derivatives are carried at their fair value as assets where the fair value is positive and as liabilities where the fair value is negative.
For Deutsche Bank, derivative features embedded in other contracts that meet certain criteria are also measured at fair value. The method of fair value is based on observable market prices and derived parameters. Valuation techniques include the use of models, which are dependent on parameters. The valuation process to ascertain the fair value and includes adjustments to the valuation model outputs Derivative assets and liabilities arising from contracts with the same party. The derivative features embedded in other non-trading contracts are measured separately at fair value.
In a nutshell, the banking industry in Saudi Arabia can be considered an evolving economic entity. The combination of local creativity and foreign capital has made Saudi firms more competitive. NCB, for instance, has become a prominent market player. The establishment of international branches is a testament to this claim. Despite the growth of the industry, the Saudi government has been active in providing sound regulations. The existence of SAMA and IFRS policies is critical in the success of the bank. In addition, the emphasis on Islamic laws is valuable.
When compared to a bank in a regulated market, NCBB is not far in terms of regulations. There are similarities and differences when it comes to reporting and other important financial recognition. NCB and Deutsche do value clients, as evidenced by both banks’ wide product range. In addition, the similarity is seen in the manner in which risks are mitigated. The most glaring difference is the value of Islam in NCB and Deutsche’s focus on business.
Deutsch Bank, (2007), 2006 Annual Report, Date retrieved: 2008. Web.
Saudi National Commercial Bank, (2007), 2006 Annual Report, 2008. Web.