In this section, we present the possible and theoretical alternatives to the Hub and Spoke model and discuss the advantages and disadvantages they might bring. The most likely alternative to the current would be to establish a third hub in China. Being local would give Credit Suisse the opportunity to participate in China's fast growing market and increase market shares. The other two alternative models described in the following section are rather based on a theoretical approach and realizations are unlikely.
China Bank Branch
China's attractiveness to foreign investors is first and foremost due to its size. The Chinese population is expected to reach 1.35 billion people during the course of 2010. More importantly, in terms of purchasing power, the growth rate is increasing very rapidly. The per capita GDP is expected to have increased from 2300 dollars in 2007 to 34'500 US dollar in 2010. It's high saving rate amounts to 55% of China's Gross Domestic Product (GDP).
As more and more people are getting rich, good private banking services are becoming more important.
China's booming economy offers a lot of opportunities for investment banks in terms of equity and debt issuance and advisory services such as merger and acquisitions and research.
To capture market shares in China and position itself to grow in the competitive but fast growing market, it would be best for Credit Suisse to establish local presence by setting up a domestic banking branch with international equities and capital market banking capabilities. Being "local" would allow the bank to participate in the domestic IBD deals including local Mergers and Acquisitions, A-share IPOs, Corporate Finance, etc.
Unfortunately, Chinese regulations restrict foreign investment banks from directly accessing the Chinese markets. Only a handful of investment banks have been granted QFII status, (Qualified Foreign Institutional Investor), though the requirements to be able to operate as a Qualified Foreign Institutional Investor in China are high as illustrated in following example in regards of requirements for Securities Companies and Commercial Banks:
Securities companies
At least 30 years of experience in securities operation
No less than USD1 billion of paid-in capital
Managed a minimum USD10 billion of securities assets in the most recent accounting year
Commercial banks
By total assets, ranked among Top 100 in the world in the most recent accounting year; managing no less than USD10 billion of assets.
The QFII applicant must also have a strong financial position and not had any material regulatory findings or sanctions against it. Importantly, the home regulator of the QFII must also have signed a memorandum of understanding with the Chinese Securities and Regulatory Commission.
Once the QFII is granted they can only trade publicly listed shares on the Shanghai and Shenzhen Exchanges. Furthermore the QFII can only invest 10% in any of the listed entity. Within the listed entity Chinese regulations allow that only a total of 20% of shares can be sold to QFII.
Applications for very few QFII's are granted, many large banks choose to enter joint ventures with local Chinese banks which is a slightly easier path but also generally restricted to a certain local. The benefit of a foreign institution entering into a joint venture is the local entity already has client base, knowledge and know how for the local clients, this allows the foreign joint venture partner learn about the local regulatory landscape including nuances of both these regulators and the joint venture clients.
Since Credit Suisse does not have a licence to operate a domestic branch in China, the bank has been establishing strategic relationships with a number of Chinese companies over the past few years. It has entered into a couple of joint venture with ICBC in Aug 2010 to form ICBC Credit Suisse Asset Management Company and has also expanded its investment banking business in the world's fastest-growing major equities and capital markets with China's Founder Securities in December 2007. With these strategic alliances, it allows Credit Suisse to have a role in underwriting securities such as domestic-A shares as well as government and corporate bonds and engaging other financial services.
With the help of China Coverage bankers in Hong Kong, Credit Suisse is tapping into the international deals as illustrated in below chart.
Figure : China IBD share of wallet rankings from 2005 until YTD
Credit Suisse has two representative offices in China - Credit Suisse Guangzhou and Credit Suisse AG, Beijing that offers mainly Research & Development services. It also has a bank branch namely Credit Suisse AG, Shanghai Branch that has limited product offerings in the form of Interest Rate Swaps, Domestic Bonds and with FX Options on G7 currencies in the pipeline to mainly Peoples Republic of china (PRC) Corporate clients. It is regulated by its licensing requirement and any interest in new investment vehicles or products will need to be applied and registered with the local regulators for their approvals.
Credit Suisse (Hong Kong) Ltd is licensed by the China Securities Regulatory Commission (CSRC) as a Qualified Foreign Institutional Investor (QFII) and trades in China equities markets via Direct Market Access through its joint venture Founders Securities on Shenzhen A shares and with CITIC (Shanghai A) and Shenyin Wanguo (Shanghai B) shares. Clearance of Settlement is through ICBC. The daily investment quota is RMB18m for Shanghai and RMB4m for Shenzhen market.
In order to tap into the vast and fast growing internal market in China, we need a domestic banking branch in China. This will allow us to participate in the domestic IBD deals including local Mergers and Acquisitions, A-share IPOs, Corporate Finance, etc. Emerging markets have for the first time this year attracted more deals than Europe as international investors target fast-growing economies like China. Overall M&A activities in emerging markets has surpass Europe with China as the most attractive for acquirers followed by Brazil, India and Russia. The 4 BRIC nations have been responsible for more than 50% of emerging market deal making this year with Credit Suisse advised the highest volume in 2010 followed by MS and BoA Merrill Lynch and is also ranked number 2 in M&A in China for Jan - Sep 10.
Figure : IBD Deal volume in China
Challenges
The challenge with this approach is that Credit Suisse does not have a license to engage in trading and advisory business in the local domestic bank branch in China. This alternative has been explored and found not feasible by our Legal department.
Fully Local Presence in each location
This is the extreme opposite to the Hub and Spokes model, with every location being a fully independent centre in itself, servicing the clients within the region. Each location will have a full-blown team consisting of coverage, product and sector bankers, their own execution team, legal and taxation experts and operational experts.
Advantages
Operating locally, the branch is fully self-reliant and can act upon its own discretion without asking the head office. Further, due to its strong presence locally the distance between the bank and its clients become closer which supports to strengthen client relationship.
Disadvantages
The two main disadvantages when building up branches locally are the significant cost increase and the negative impact on the operational risk due to fragmented processes and involved. Further, it could be difficult to maintain a pool of specialists on ground.
Recommendation
Despite some of the advantages this model brings, the cost of setting it up and running it is so high that it cannot be of practical relevance.
Collaborative Decentralized Model
The main disadvantage of the Fully Local Presence was the high cost and lack of cross-regional leverage of resources. In order to address this, we could make a few modifications to come up with what we call a Collaborative Decentralized Model.
In this, we would require roughly the same resources that the Hub and Spokes Model has, including generalists and specialists. However, there is no central location where most of the critical mass is located. The bankers are distributed more of less evenly across all the regional sites. Virtual teams are formed on-demand to work on deals as they come up.
Advantages
This affords us a lot of flexibility in managing our deploying the resources across the region and the distribution of resources can be changed in real-time as the business opportunities arise. It also allows us to attract talent who have a high affinity to their home location and are not willing to relocate.
Disadvantages
Although the flexibility that this model gives us looks attractive, it also increases the complexity for management. It can be very tricky to optimize it for best results. The operational risk is very high due to fragmented processes and systems. Communication issues could be very prevalent unless rigorous communication rules are put in place (which would also be counterproductive as it amounts to more red-tape). Further due to its fragmented processes the operational risk could improve significantly.
Recommendation
The complexity of the model is too high and it would be hard to make it work.
Conclusion
The global economy is undergoing tremendous change with the proverbial see-saw tilting in favour of emerging economies. In particular, the Asian economies such as China and India are experiencing phenomenal growth rates and also gradually liberalizing their economies. In order to remain a successful player, Credit Suisse would definitely have to proactively adapt its business and operating model to best leverage the future global economic landscape. It is imminent that China and India will figure as heavyweights in the Asian operating model.
In the meantime, Credit Suisse should gradually increase its present in the region, based on revenue forecast and its strategy. Over all, from a client relationship perspective, country coverage is important.
Looking at cross border issues, the bank should continue to improve the awareness at all levels and further ensure that cross boarder rules and regulations requirements are met and followed.
Another important strategic aspect is having the ability to accommodate strategic regulatory changes by remaining agile.
A particular focus should be given to Public Policy. In order to maintain the reputation of Credit Suisse and to promote the bank's interest with policy stakeholders, the Public Policy department is monitoring, assessing and engaging in relevant political, social and environmental issues in cooperation with the bank's management, line departments and experts. Its mission is to establish a solid, long-term relationship with public and private stakeholders and to ensure one voice in regards of Public Policy matters.
Last but not least, concentrating on a comprehensive product suite offering helps to attract more and more clients.
