PESTLE analysis-J.P. Morgan in Kazakhstan
Written by:
SultanovaBakut
KulmurzaevDaniyar
Al-Farabi Kazakh National University
Higher School of Economics and Business
Accounting department
This research is based on the perception of the investment attractiveness of Kazakhstan’s banking sector. We try to imagine which hardship andadvantages has a new player on this market. We also try to identify its individual strategy that helps it to capture a certain segment of the market and will bring the constant income. For carrying out of this survey we use the PESTLE analysis. PESTLE analysisfactors are Political, Economic, Sociological, Technological, Legal and Environmental.In this way, we can prepare strategically for any changes that need to be made in the bank or simply to have the awareness of the external market to give them a competitive edge over other banks in the sector. PESTLE analysis factor are:
- Political: what is happening politically with regards to tax policies employment laws, trade restrictions, tariffs
- Economic: what is happening within the economy i.e economic growth/ decline, minimum wage, unemployment (local and national), credit availability, cost of living, etc.
- Sociological: what is occurring socially i.e cultural norms and expectations, health consciousness, population growth rate, career attitudes,.
- Technological: new technologies are continually being developed. There are also changes to barriers to entry in given markets
- Legal: changes to legislation. This may impact employment, access to materials, resources, imports/ exports, taxation etc.
- Environmental: what is happening with respect to ecological and environmental aspects.
JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.3 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers globally and many of the world’s most prominent corporate, institutional and government clients under its J.P.Morgan and Chase brands [2].
Suppose that "J.P.Morgan Bank International"is going to enter on the Kazakhstan’s market next year. Let’s start from “Political” factors.
Strong:
- The current political situation is stable and the government is seen as strong, proactive and willing to exchange opinions with investors.
Weak:
- Political situation will deteriorate over the next ten years. Existsan opinionthat after a change authority of the State can bea redivision of thesphere of influence in the business. There have concerns over future political predictability and lack of a guarantee of legal stability.
“Economic” factors
Strong:
- The Government plans to diversify the economy, it will need to require foreign financial transfers. That transfers could be provided through J.P.Morgan Bank’s direct investment. As a result, J.P.Morgan Bank can get the individual preferences for their business activity.
- Currently, Kazakhstan’s financial system is facing a problem with non-performing loans (estimated 18-27% of GDP), which is restricting the ability of the banks to finance new investment projects. The economic crisis made large-scale loan defaults and, as a result, the banks have non-performing loans in their accounts and are hard to lend business. Businesses are struggling to restructure their loans and finance future projects and working capital needs. The solution to the non-performing loans problem, which can kick-start the financial system into lending again and encouraging businesses to grow - is an entry a new, wealthy financial institute with large liquid funds, like J.P.Morgan Bank.
- In recent years the economics of Kazakhstan has demonstrated a sustainable growth. It led to increase of the incomes of the population and entities. Banks should be invest and redistribute this incomes among different sectors of economy.
Table 1 - The GDP of Kazakhstan[3]
Indicator / 2002 / 2003 / 2004 / 2005 / 2006 / 2007 / 2008 / 2009 / 2010 / 2011GDP (US$b) / 24.6 / 30.8 / 43.2 / 57.1 / 81.0 / 104.9 / 133.4 / 115.3 / 168.8 / 144.8
GDP growth / 9.8% / 9.3% / 9.6% / 9.7% / 10.7% / 8.9% / 3.3% / 1.2% / 7% / 7,5%
Weak:
- High risks take place consequence of instability, non-transparency and unpredictability of the business environment, in particular in work with individuals.
- Government intervention: concern over security of private foreign investments
- The labor costs will be attractive for J.P.Morgan Bank, but technical competencies need improvement. Employees with certain qualifications in the labor market are overpaid due to the lack of available specialists, even if the personnel are not fully skilled.
“Sociological” factors
Strong:
- The large international financial institutions, like J.P.Morgan Bank has a long-standing tradition of corporate social responsibility often contribute to the communities in which they operate.
- J.P.Morgan Bank can provide an employee-friendly environment, invest in people development, comply with corporate rules in terms of transparency and accountability, to standards which may be higher than those required by Kazakhstan legislation and those applied by local businesses.
Weak:
- Regional government could shift responsibility for regional economic development from the state to private foreign bank.
- Quality of life: gap between two main cities and the rest of the country. Living standards in the largest cities in Kazakhstan (Astana and Almaty) have been steadily improving. However, there is a substantial gap between these two cities and the rest of Kazakhstan in terms of quality of life and access to social infrastructure.
“Technological” factors
Strong:
- J.P.Morgan Bank may have the advantage of higher quality of services, faster speed of business processes (when compared with local banks) and higher degree of compliance with international standards.
Weak:
- However, it may be at a disadvantage in understanding the specifics of the local market and assessing the actual costs of operating in the country.
Legal factors
Strong:
- The corporate taxation system assess as attractive. Kazakhstan has introduces favorable tax rates in a number of areas (e.g., corporate income tax has been reduced to 20% from 30%).
Weak:
Transparency and stability of the legal and regulatory environment: significant progress has been made, but more reforms expected. Kazakhstan’s progress in recent years in reforming its legal and regulatory environment is evident, but I think the level of legal and regulatory transparency and stability remains unattractive. The reasons are:
- Insufficient assessment of the future impact, when introducing new laws and regulations. The introduction of new laws and regulations often results in unrealistic expectations of the ability of the business community to comply, and uncertainties in applying the law.
- The rapid rate of legislative change leads to uncertainty in interpretation and application of laws and regulations. The result is uncertainty and undermines J.P.Morgan Bank’s confidence.
- Over-regulation.
- Uncertainty of laws. The interpretation of some laws can be random and indiscriminate.
- Bureaucracy. Kazakhstan is perceived as a highly bureaucratic location in which to do business, which can mean lengthy and unnecessary delays to the smooth running of business operations.
“Environmental” factors
Financial institutionssuch as Banks don’t impact any direct influence by the surrounding environment.Environmental factors are crucial to industries such as farming or tourism and can greatly influence a company’s way to operate or even the products it offers.
In essence the job of the strategist is to understand and cope with competition. Competition for profits includes five competitive forces: bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitute products and rivalry among existing competitors.
Threat of entry
The need to invest large financial resources in order to open own bank and enter on the financial market. Authorized capital must be 5 billion tenge, except other expenses (advertising campaigns, open own office, purchasing equipment and software etc.).
Threat of Substitute Products
The Bank offers a standardize product – money. Also bank implements an obligation on storage and transfer of cash resources. Money hasn’t any substitute products, but the banks could offer a range of services. These services don’t differ among banks (deposits, credits, online banking etc.). The crucial factor is cost of money (rate). Therefore, bank couldn’t unilaterally determine the rate of interest; they should follow directions and requirements of National Bank of Kazakhstan.
Rivalry among existing competitors
Rivalry among existing competitors takes many familiar forms, including rate discounting, new services introduction, advertising campaigns, and service improvements. I think that existing financial institutes wouldn’t exert an impact activity and profitability of JP Morgan Bank’s. The bank possesses sufficient tools to resist to competitor. I would remind that it is the largest bank in the United States by assets and market capitalization. It is a major provider offinancial services, with assets of $2trillionand according toForbesmagazine is the world's largest public company based on a composite ranking. The power of buyers and suppliers
Suppliers for Bank are depositors and shareholders. Every Bank is interested in to attract outstanding depositors and principal shareholder. The main purposes are:
- correct invest invested funds;
- to ensure payments under the deposits and the shares;
- to make up owner's operating expenses;
- to get a certain profit.
Notice that money is finished product and doesn’t require any operation for giving to this product a final shape. Therefore dependence of suppliers is minimal. Influence of buyers isn’t so great. The issue consists in the following: good investment project analysis looks rigorously at the structural underpinnings of profitability.
The analysis of key advantages of foreign banks vs. Kazakh’s banks:
- possibility of provision of cheaper long-term loans;
- possibility of servicing of the largest subjects of economy at the expense of the sufficient size of the equity;
- possibility of operational increase in the size of own means at the expense of parent bank;
- efficiency in adoption of strategic decisions;
- global approach to a risks assessment;
- possibility to create a platform for development in the future in the new market, and also possibility to take a waiting position.
I recommend J.P.Morgan Bank International to open just one office in Almaty and concentrate force on servicing of legal entities. Bank can offer a broad range of financial and banking services, including currency conversion operations, money market transactions, securities and derivatives transactions. The bank shall not intend to provide its services to retail customers in consequence of high risks in this. J.P.Morgan Bank should target companies with a minimum of $10 million in investable assets who want capital preservation combined with wealth accumulation. I expect that J.P.Morgan excludes loans from range of banking services and concentrates the efforts only on investment banking.
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