SWOT Analysis: BBK vs HSBC in the Gulf Region

Introduction

The banking industry is complex, and in any given market there will be a mix of local and global banks. This is true in the Gulf States as well. Global banks such as HSBC compete in the region alongside a number of local institutions, one of which is Bahrain & Kuwait Bank (BBK). This paper presents a SWOT analysis of these two banks, specifically with reference to their banking business in the Gulf region.

Bahrain & Kuwait Bank (BBK): SWOT Analysis

The Bahrain and Kuwait Bank is a retail bank serving the consumer market. One strength is its growth in the region, which has provided a growing base of deposits that can be lent back out to consumers, allowing the bank to enjoy a steady rate of growth over the past few years. A second strength is that it is a local bank based in Bahrain, which allows it to draw on the local government's support as well as its knowledge of local culture and Islamic banking — two aspects that regional banks share but that may be more challenging for foreign banks. The government of Bahrain is a shareholder, so this government support is well established. The bank also has a strength in its ability to tap capital markets, having raised $400 million to further its expansion ambitions.

One weakness is BBK's size. At less than $1 billion USD, BBK is a small bank by global standards. It does not have the ability to offer commercial banking because of its size, faces greater currency risk, and has a higher cost of capital than the world's largest banks. It also has a reduced ability to attract top international talent; its roughly 1,000 employees are mostly locals rather than top international bankers. A further weakness is that the home market is fairly small — Bahrain and Kuwait combined have only around 5.4 million people, far fewer than the major cities in which the world's biggest banks are headquartered. This small market makes scaling the bank more difficult.

Noting that one of BBK's strengths is backing by the government of Bahrain, the 2015 BBK Annual Report acknowledges that the nation's credit rating was recently downgraded. A further weakness is that the Central Bank of Bahrain designated BBK as a Domestic Systemically Important Bank (D-SIB), "which coupled with the new Basel III regulatory framework, makes capitalisation more challenging" (BBK 2015 Annual Report). The requirements for capitalisation are therefore more onerous than the conditions under which the bank raised capital in 2015.

There are meaningful opportunities for BBK. The bank wishes to expand its presence through greater international reach. While some expansion capability remains in the local markets, the bigger opportunity lies in other markets in the region. BBK has plans for expansion with offices in Turkey and London. Its CreditMax subsidiary is also expanding into Erbil, part of the Kurdish region of Iraq, though this carries risk. Turkey and London represent two of the more promising international operations because they give the bank access to capital in those areas and would further legitimize the business. The opportunity is compounded by the fact that Bahrain is one of the smallest banking markets in the region, while other markets such as Saudi Arabia are enormous. Kuwait, however, is a very attractive market in which to operate, offering significant room for further growth (EY, 2016).

There are perhaps as many threats as there are opportunities. Based in Bahrain, BBK's business is highly correlated with the price of oil, which has remained depressed for several years due to oversupply. This has had a cooling effect on the Bahraini economy, its credit rating, and other key variables (BBK 2015 Annual Report). The state of the Bahraini economy is considered a significant threat, as it directly impacts deposit and loan levels. Other threats include adverse currency movements that can affect the bank's overall net wealth. Competition from stronger, larger banks capable of offering customers more favorable terms is also a threat. Instability presents yet another risk — the CreditMax expansion into Erbil, for example, is under threat from ISIL. Erbil is an attractive market in peacetime, but an unstable environment would make it a poor investment.

Conclusion

The banking landscape in the Gulf region presents distinct challenges for both local and global institutions. BBK's path to sustained competitive advantage lies in leveraging its local identity and government ties while carefully expanding its international footprint through offices in London and Turkey and through subsidiary growth in adjacent regional markets. HSBC, by contrast, benefits from enormous scale and brand recognition but must navigate regulatory restrictions and the cultural nuances of Islamic banking. Understanding these dynamics is essential for any institution seeking to compete effectively in the Gulf's evolving financial environment.

References

Bahrain & Kuwait Bank. (2015). 2015 Annual Report. Retrieved May 4, 2016, from

EY. (2016). World Islamic banking competitiveness report 2016. Retrieved May 4, 2016, from

HSBC. (2015). 2015 Report and Accounts. Retrieved May 4, 2016, from http://www.hsbc.com/investor-relations/financial-and-regulatory-reports

Investopedia. (2016). High net worth individuals. Retrieved May 4, 2016, from http://www.investopedia.com/terms/h/hnwi.asp