Executive Summary
Any organization faces risks as it undertakes its operations. There are various types of risks that these organizations can face, which include operational risks, management risks and financial risks. Financial risks that a company can face, which are a focus of this report, are risks that affect the financial performance of an organization; they include interest rate risks, currency exchange risks, credit risks, and liquidity risks. HSBC Holdings Plc is a British universal bank and financial service institution that has its headquarters in London, England. The company has businesses linked to East Asia and is the largest Europe-based bank with an origin in Asia with a total asset base of $2.953 trillion. The presentation seeks to identify the financial risks the company has faced recently, analyze them, and the mitigating strategies the bank has as options. the presentation will be in sections of methodology, analysis, recommendation, and conclusion.
Methodology
Methodology refers to the techniques and procedures that are used in research to identify data, select, process, and analyze information about a given topic (Pandey & Pandey, 2021). In this context, the research involves identifying the financial risks that HSBC Holdings has been undergoing in the last four years. The report uses both primary and secondary sources of data, the primary being the company’s financial reports and the secondary data being reports written by other agencies, authors and organizations about HSBC. The idea is to create a report that involves a thorough examination of HSBC’s financial statements, industry-specific data, and risk disclosures. Additionally, insights from the company executives and industry experts, together with reviews of the regulatory frameworks, have come in handy in giving insights as to the financial risks that HSBC has been embroiled in. The analysis is based on historical performance, emerging trends in the global financial sector, and current market conditions. The main objective is to provide holistic information on the risks facing HSBC and to formulate rationale recommendations for risk mitigation.
Analysis
Credit Risk
Credit risk refers to the possibility of a loss as a result of borrowers not meeting their contractual obligation or defaulting on their loans. During the Covid 19 period, HSBC found itself exposed to credit risk. The bank, for the longest time, has been offering credit solutions to a variety of clients ranging from individuals, organizations, governments and other big lenders (Saunders, 2021). Over the COVID-19 period, there were individuals and other organizations that had loans, mortgages, and other financial help from the bank and the fact that their streams of cash flow reduced, they could not pay their loans back to the bank. The company reported a reduction in revenue during the Covid 19 period while the non-performing loans increased. One of the ways in which HSBC can mitigate credit risk is by coming up with an advanced credit scoring model that helps assess the creditworthiness of its clients. The bank can also diversify its loan portfolio across various industries and geographic locations to reduce the risk of loss with the collapse of one industry, for example, mortgages.
Liquidity Risk
Liquidity risks are another type of risk that HSBC has exposed itself to over the last couple of years as a bank. Around 2020, many money market funds and banks witnessed challenges with their liquidities. Around that time, the bank was strategizing to make long-term investments in various projects. The sudden change in the events around the global market made many companies and banks recall their strategies and opt to meet their short-term obligations. HSBC found it a bit challenging to move their plans as liquidity requires a company to have more net working capital (Agačević et al., 2019). The bank has come up with a contingency plan to help solve its short-term obligations and free the bank from challenges regarding the lack of current assets to solve the company’s obligations. The bank can also undertake regular stress-test liquidity positions under various scenarios to know how to manage the bank’s liquidity.
Currency Risk
Currency risk refers to the exposure faced by a company as a result of operating in different countries (Higgins, 2016). The exposure is a result of the unpredictability of losses and gains as a result of currency appreciation or depreciation. HSBC operates in 62 countries, which have different currencies, and operating in these countries means that the bank has to undertake currency exchange. Issuing loans, investing, and undertaking transactions across various countries exposes the bank to currency risk. One of the ways of mitigating currency risk is through hedging through the use of financial instruments such as options and forward and future contracts. Such hedging ensures that the company avoids losses from currency exchange depreciation. Diversification of the portfolio provides a natural hedge against currency risks. Real-time monitoring of currency exchange rates makes the bank abreast and ready for any unexpected change in currency fluctuations.
Recommendation
The section gives recommendations that HSBC can use in the future to help minimize or avoid the financial risks that it faces. These recommendations include:
Enhance Risk Monitoring and Reporting
HSBC Bank deals with clients from different regions. Thus, the company is bound to face currency risks; one of the best ways to mitigate the risks is to implement advanced analytics and reporting mechanisms that enhance real-time monitoring of the financial data that might cause risks. Having an early warning indicator, for example, “stop loss,” can help mitigate any risk.
Invest in Technology and Cybersecurity
In modern-day society, technology has come in handy for organizations such as banks in helping track data of assets, transactions, liabilities and any other operations of the business (Sheedy & Lubojanski, 2018). HSBC could invest in cyber-security and train its employees on matters tracking, monitoring and knowing when to raise alarm regarding warnings. Liquidity is a good example of an aspect that investment in technology can help. The company, in as much as it is investing and undertaking various projects, use of technology can help track the minimum required reserve of liquid amount that the bank must have. Such a move will minimize the possible risk of liquidity risks.
Diversifying Revenue Streams
In order to mitigate credit risks, HSBC can diversify its portfolio. The company operates with clients from both the East and the West in terms of geographic location. Diversifying portfolios in the East and West will buffer the bank from incurring credit risk. The company can also diversify its portfolio in various industries. Investing in technology could be a good investment for the future; investing in manufacturing would guarantee revenue streams and so on (Mishchenko et al., 2021). Diversification of the portfolio ensures that default by borrowers in one industry does not affect the operations and liquidity of the company.
Strengthening Compliance and Regulatory Frameworks
HSBC must comply with the necessary frameworks, ranging from the International Standards of financial reporting and recording to international bank compliance regulations so as to avoid any possible loophole in terms of risks (Trudeau & McLarney, 2017). Being proactive with the compliance of the evolving regulatory requirements ensures that the firm does not undertake any actions that would compromise the bank and increase its risks.
Conclusion
HSNC faces various financial risks, such as credit risks, currency risks, interest rate risks and liquidity risks, which happens to other business ventures as well. The report has proposed the mitigation strategies of the respective risks and recommendations with the aim of strengthening the bank’s risk management framework and its ability to be resilient in times of uncertainty. Being proactive as a bank will ensure that the company is able to mitigate any possible risks and come up with a long-term solution to mitigate them in the future.
References
Agačević, A., Ming, X., & Ali, S. A. (2019). Financial Supply Chain Management and Working Capital Management: The Competitive Analysis of HSBC Financial Chain Management. International Business Research, 12(1), 65.
Higgins, R. C. (2016). Analysis for financial management. McGraw-Hill.
Mishchenko, S., Naumenkova, S., Mishchenko, V., & Dorofeiev, D. (2021). Innovation risk management in financial institutions. Investment Management and Financial Innovations, 18(1), 191-203.
Pandey, P., & Pandey, M. M. (2021). Research methodology tools and techniques. Bridge Center.
Saunders, A., Cornett, M. M., & Erhemjamts, O. (2021). Financial institutions management: A risk management approach. McGraw-Hill.
Sheedy, E., & Lubojanski, M. (2018). Risk management behavior in banking. Managerial Finance, 44(7), 902-918.
Trudeau, C., & McLarney, C. (2017). How Can Banks Enhance International Connectivity with Business Customers? A Study of HSBC. IUP Journal of Business Strategy, 14(2).
write