The Rise And Fall Of Halifax Bank Of Australia

Formation and Merger with The Bank of Scotland

Halifax Bank of Australia was formed and domiciled in Australia. The company was named after the town of Halifax in West Yorkshire. It had its headquarters in Mound, Scotland. The HBoS was established after a merger of The Bank of Scotland and Halifax. Halifax was among the vastest building society in the UK. It was the leading UK Mortgage and Savings Company. In 2001, the merger company had total assets amounting to 275 Billion Sterling Ponds and was larger than Lloyds TSB.Initially Bank of Scotland had continuous gains a market shares before its downfall in 1990’s. The investors and the bank management raised concerns on why the strategy was commencing to stagnate. After several cognitive decisions, BOS considered a merger with Halifax to form the HBOS (Jessop, Young, and Scherrer,2014, pg. 10). Due to this the group expanded its distribution to an enlarged customer base. However, this merger collapsed seven years later. This led to the HBOS being taken over by Lloyd Banking group. The England’s Parliamentary Committee on Treasury carried out a research on the possible causes of the downfall of the HBOS and later categorized these problems into liquidity, capital inadequacy and cultural issues. The merger that has taken place between Halifax and BOS took place in 2001.The HBOS Group Reorganization Act 2006 transferred the assets and liabilities of the Halifax chain to the Bank of Scotland. The takeover of the HBOS by the Lloyd’s TSB was approved by the Court of Session on 12th January 2009, and on 19th January 2009 Bank of Scotland became the Lloyd’s Banking Group (Weiss,2018, pg. 12). The challenges facing both small scale and large scale companies have been highlighted. Small scale organizations comprise of sole proprietorship, limited partnership and Private limited companies.  

Liquidity Challenges  

Liquidity is the ability of the firm to meet its short term financial liabilities without suffering a catastrophic loss in its operations (Nikolaou,2019, pg.36). Halifax company underwent through liquidity challenge and was finally taken over by Lloyds TSB after this loss. The major grave tactical liquidity mistake made by HBOS was the transformation of treasury functions in the UK from their initial role of funding safely profit generating activities elsewhere in the business to being centers of profits in their own rights (Jessop,2015, pg. 96). This Division maintained liquidity through the use of wholesale funding. The liquidity was in form of government bonds and bank certificate of deposits. The company reduced its reliance on these holdings in 2004.The company launched new commodities, for instance, credit derivatives which in the company’s view though could poses a more liquidity characteristics and” leverage expertise” which will generate income. This led to the diversification of the liquidity portfolio. These deadly mistakes caused the company to incur a loss of 7.2 Billion Sterling Ponds. This was brought about by the company’s reduction in market valuations. The lending policy of the company was also not favorable to the condition of the company. At the end of 2008, The Retail Division had a customer deposit of 144 billion Sterling Ponds. The credit and lending department failed to published its divisional results for the HBOS Group which made it difficult for the Retail Division to know how much has been incurred. The Corporate Division published a loss of 25 Billion Sterling Ponds. The Internal Division incurred a loss of 15Billion Sterling Ponds. The Treasury Division made a loss of 7Billion. All these loses required recapitalization and led to the company being insolvent. The company’s share prices fluctuated despite its assurance from FSA’s as to its liquidity (Jessop,2015, pg. 100). The government of UK opted for the take over as the remedy to the company’s financial insolvency.  

Expansion and Diversification

Capital is the wealth in form of money and other valuable assets owned by the company (Keong,2018, pg.614). Although Halifax Group Strategy was majorly rooted in expansion along all the subsidiaries, as time progressed their asset growth was placed in areas with a higher financial risks. The bank lending on its balance sheet was treated as an asset (Bridges and Spaltro, 2014, pg.37). The occurrence of a permanent loss was avoided through writing down in a process termed as impairment. The company’s loan book was averaged at 15% on the underlying basis between 2001 and 2008.However, this blossomed in 2002 and 2003 to 26% and 17% respectively, but went down, but still maintaining a double digit figure, for instance 12% in 2008.The company strategized to apply the BOS expertise to widen its market share in SME’s in England. Under the leadership of Peter Cummings, The CEO of the Corporate Division, the institution focused on property and construction in the UK. This sector contributed a third of the Division’s customer loans (Ennew, 2013, pg.156). The lending for hotels, restaurants wholesale and retail trade formed part of the 59% of the net advancement in outstanding loans. Furthermore, there existed a close relationship between the conventional business loans in offering of equity and leveraged loans granting customers a complete full package. Increased in individual credit exposures, to an extent that an individual will have access to a loan of 963,000 and the amount raised up to 2.9 billion. The loans were also offered based on the continuous operation of the business in active markets. The loans were also granted on lowly rated debt, equity and joint venture. The company’s policy was poor in that, it adopted a” leaning against the wind” meaning maintaining customer’s commitment even during tough economic conditions the company encountered. The company’s divisions continued to expand even while nothing was being sold in their already controlled markets (Avgouleas, Goodhart and Schoenmaker,2013, pg,216). This led the company into to undergo a financial loss of 25billion between 2008 and 2011.The company overlanded posing it a greater threat to its operation. Great loses were chiefly brought about by concentration in real estate and leveraged loan books. Even if this loan expansion was not affected, the company would still have incurred loses brought about by the culture of high risk lending. Halifax expansion into Ireland Republic and Australia was another grave tactical mistake in its operations and an accident was to happen. The board settled on ambitious targets that were costly and high resource requiring for the company (Ellis and Taylor, 2011, pg.810). The company raised its concentration on property and construction. In Australia, the company fought to be amongst the largest companies. Halifax incurred a huge loss in Australia more than any other company. The loss was at 35.5 %.

Challenges in Liquidity

The loss suffered in Australia amounted to 3.6 billion (Grace and Cohen,2018, pg. 35).  

Organizational culture is the ideas, customs and social behavior of Halifax company (Kroeber and Kluckhohn,2012, pg.89). The cultural policy of this company was as it adopted a strategy of “Leaning against the wind ‘which costed the company a lot in terms of resources. The company strategized to a culture of continuous expansion when there were no sales made. During this phase of expansion, the company made a significant loss of 25 billion due to its over lending habit. Halifax targeted to be amongst the large companies in Australia and this culminated to a loss of 3.6 Billion. The Halifax bank is extremely faced with the difficulty of developing the perfect customer base which is a positive action towards its success (Byers and Tastsoglou, 2018, pg.30). It is working so hard to ensure that the clients are meeting good services with the company in an aim of boosting the positive culture within the bank. It is well indicated that since the year of 2010, the bank has had tremendous alterations in the structure of the regulatory activities. There is a great change in the manner in which the culture in various parts of the banking industry as well as the way personnel are remunerated. A number of people were remunerated so well by indulging in several behavioral risky activities in dangerous products (Yousafzai, Foxall and Pallister, 2014, pg.1202). People were given some pleasant incentives as a form of reward to undertake such activities even though they are perilous in nature. In the aim of eradicating the negative form of a culture, the bank has brought in remuneration structures which come together with cultural practices which have affected the bank badly to an extend that anonymous amount of loss was realized to curb farther harm. There were various bad behaviors which I term them as mis-selling and also misleading practices. These were dealt with by the bank through introduction of compensation packages which made people to be willing enough to solve such cultural challenges (McDowell,2015, pg.655). The cultural way of handling financial resources in the bank was so bad such that there was need of forming financial conduct which regulate the way personnel were using money within the company. This was aimed that reducing the effect of unfairness in the manner the resources were shared among the various stakeholders. The historic landmarks in the Halifax were totally ruined by the rapid change in the cultural practices (Urdank,2016, pg.633).     

Capital Inadequacy and High-Risk Lending

Conclusion

Halifax was destined to fall because of the grave tactical mistakes made by its administration. The UK’S parliamentary committee on Treasury investigates the causes of the fall of the company and in their findings in their report entitled” An Accident That was waiting to Happen” highlighted the key weakness of the administration that led to the company being taken over by Lloyd’s Banking Group which small than it during the period of its merger with Bank of Scotland. The management of the company set out ambitious and un attainable targets (Tay and Moore, 2012, pg.1568). Furthermore, the company set out a lending culture that was not favorable to the financial affairs of the company. In the modern world there exist small scale and large scale organizations faces several challenges. Small scale organizations include sole proprietorship, limited partnerships and private limited companies. Large scale organizations include public limited companies, public corporations and multinational companies. Small scale business faces several challenges that include inadequate capital, poor decision making and poor leadership. Large scale organizations in the name of multinationals may operate in many regions of the world. These organizations are faced with the challenges of coping with global politics, rules and regulations (Gulhati, 2018, pg.35).

Introduction

In any business transactions carried out on daily basis, there is high chances that the company undergoing such operations will have realized some challenges which need to be mitigated.

Following the fall of Halifax company and later its takeover by the Lloyd’s banking group, several business lessons can be learned. Based on the experiences that Halifax Bank faced, as a consultant, I would recommend that Fintech limited carries out the following activities.

Fintech should adopt a credit policy that is favorable to financial performance. The loan limit offers to individual customers should not be too high as individuals may failed to services their loans and this may result in great loses. Fintech should also keep records of its credit history.     

The company should not overland beyond its capacity thus lacking liquidity.  

Fintech should establish goals and objectives that can easily be attained without a stretch on the organization’s resources beyond their capacity. Setting up of too ambitious goals may result in fall of the company. Halifax strategized to expand and took easy paths for expansion without considering the possible consequences of the expansion. Its expansion to Republic of Ireland and Australia was a grave tactical mistake that led to it incurring a loss of 3.6 billion (Westar, Baden, and Albritton,2014, pg. 32) 

Cultural Issues and Risky Behaviors

The culture of the Fintech should be favorable both to the present and future situations of the entity. The company should not consider possible expansion without considering a financial implication it has on its financial performance (Ellis and Taylor,2013, pg. 810).

This is evident in the case of Halifax that continued to expand without making sales which later brought about a financial crisis and Falk of this company. The organization culture should be of that of customer’s commitment without considering the issues within the organization.   

Conclusion

It is evident that in any business which is starting, there is a high risk of it experiencing challenges. Fintech business is not exceptional since it faced several kinds of difficulties as its struggle to survive in this competitive world (Hutchcroft,2018, pg.46). As a consultant to this firm, I have vividly indicated the best strategies which it has to undertake so that good results are realized.                              

Risks and Rewards of Competing Financial Strategies.  

Competitive strategy is the process of developing competitive advantage and earning above average returns for stakeholders.   

Risks of operating competing financial strategies

Financial Reporting Risk

These are risks which are mainly related to the matters of finance. They are affecting the operations and management of loans within the company. As usually, the borrowers of the money from financial institutions may not be in a position to repay thus affecting the activities of such firms.   

Valuation Risk  

This is where the assets in the business are overvalued but it’s worth is very minimal than how the investor was anticipating when it sold out to buyers. They are involving in every step of processing of various transactions within the chain of management.                    

Marketing Risks  

These are highly related to the field of marketing. They include the losses that arises during the process of marketing. The activities which experience this risk are pricing of goods, conducting promotion, dealing with customer satisfaction needs, engagement in branding of products and even supply.

Liquidity Risk  

The is that type of risks where the common security or any other financial assets cannot be sold out as fast as possible to result in the inflow of money.

Credit Risk

These are those risks which occurs when the borrower of the money is not willing or unable to make payments as stipulated. The bank for example will not be able to receive its principal amount of money and interests which have accrued.

Investigations on Its Downfall

High probability of business failure.  

This is mainly caused by strategic business risks which may from competition when a company sets out poor and ineffective strategies that do not matched those of their competitors, this destines the business to fall since it cannot meet the pressure put in place by their competitors (Jay,2012, pg. 96).     

Embezzlement and mismanagement of funds.  

Financial strategies such as delegating financial decisions to operational level of organization may bring about misuse of the company’s resources since the lower level of management makes decisions that not be in the best interest of the company because of their inexperience on financial matters.

Untimely decision making. 

In an organization where strategic planning and power has been cantered for the top management, financial decisions that requires immediate and prompt decision making suffers a setback since consultations should be made and the authority of the top level of management obtained before implementation of a major decision. The decision making in these organization also follows a standard operating procedure making it difficult to make decisions fast.    

Compensation

Due to the high level of financial assets within the company, the chances of providing compensation to the employees is very high.

Increase in Salaries and Wages  

The company will give its workers an increase in the amount of payments through promotion pay as well as merit pay.

The company will give its workers an increase in the amount of payments through promotion pay as well as merit pay.  

Incentives  

Through the improvement of financial resources of the company, the employees are rewarded with incentives which take two forms such as; award of bonus in form of cash or even stock (Blum, 2014, pg. 761).  

Communication   

The management that adopts competing financial strategies creates an outline of where they are heading to. By doing this they are able to communicate goals to their workers.   

Small scale organizations refer to individual owned business such as sole proprietorship, partnership and privately owned corporations that have few employees and a small annual revenue.

This business is mainly retail operations, for instance convenience stores.  

Leadership Challenges

For small scale organizations there exists no academic qualifications for one to be a leader of this organizations. Leadership is not professional here and not any way will they make decisions and handle business matters beyond their capacities (Blum and Hellwig,2015, pg. 741).

Challenges of Small and Large Scale Organizations

Cultural challenges.  

Culture is the norms and beliefs of an individual, community. Having a right culture is important for business success. The business culture involves clarifying the purpose of a business. Small scale organizations lack this important virtue.                                                                                                           

Strategic Mistakes.  

Small scale organizations lack a management strategy which is caused by lack of academically qualified leadership. These organizations are operated by individuals who have no or poor management strategies for the growth of these entities

Decision making mistakes.  

Small scale organizations are run by individuals who obtained assistance from their cheap family labor. The decision making in these units are individuals in their own capacities without consulting anyone which makes their decision making poor and ineffective (DesJardins and McCall,2014, pg.46).

Capital challenges.  

 Small scale organizations are faced by the problems of lack of adequate capital. The main source of capital for these businesses are the owner’s contributions which is mainly limited Furthermore, small scale organizations have a limited access to loan facilities due to their small size of the organizations. Large scale organizations include the general partnerships, public limited companies and the public corporations and parastatals. These are institutions that are considered the largest on any county’s economy.  

Timely decision making mistakes

Decision making in large organizations is highly bureaucratic (Alper,2011, pg. 62). This makes decision making a slow process and do not respond promptly to urgent matters in the organizations. These organizations should delegate decision making units to reduce the number of people consulted before a decision is implemented.

Competitive challenges.  

Large scale organizations faced stiff competition from wholly established companies. For instance, general partnerships face competition from public limited company which have an added financial advantage over it Public limited companies also face competition from government parastatals funded by the state and operate at relatively low costs since they are not profit oriented.

Talent attraction, talent development and talent retention.  

The key success to any organization is its human resources. Large organizations are faced with the problems of hiring the right talent, developing human resources for the job and future work to be efficient and productive (Moyer,2017, pg. 130).

Customer satisfaction problems.  

It is difficult for corporations to cope with varying customer relationships and expectations by  offering timely and efficient services to better their customer needs and desires.                        

Financial complexity.  

Due to globalization the calculation cost, global price strategies, payments and currency rules becomes difficult for companies.  

Structural Changes in Banking

Several assets of the global banking sector resulted in a gradual growth due to the impacts of regulatory practices.

Impacts of System-wide in UK  

Regulatory changes in the financial setup causes complexity in the system; in terms of interactions within the economy.

Lending of money to the economy.  

The provision of credit services in the financial organizations and in UK has raised the level of money lending to various clients. These increase amount of money that flows in the economy.  

The current trend of financial institutions is the issue of taking full part in activities of derivatives such as bonds as well as treasury bills while including financial products in financial markets. There is great improvements in the way of innovating various projects which played a key role in accelerating expansion of many financial markets, as well as banks? margins falls, because of applicants of the loans who are of very low-quality ,inspire the moneymaking banks to offer advanced commodities and many more services to increase their incomes (O’Sullivan and Kennedy,2013, pg. 230).Due to the fact that traditional banking has been declining while the level of competitiveness has been rising continually, banks have been forced to make good use of the financial products such as unsecured loans, all types of home loans and call accounts among others. The banks also make use of   derivative activities. Activities like OBS which are derivatives, obligations and also sureties are sometimes the main sources which greater incomes to the banks. It is obvious that deposit insurance premiums as well as reserve requirements are always not imposed on off statement of financial position activities, the banks take advantage of this reality to earn more income by participating highly in markets of derivatives and financial products. However, these deeds can draw market, credit and more so operational risks among others, which may affect liquidity and creditworthiness of the profitmaking banks. Conversely, noteworthy rise in these commercial banks? derivatives actions might be caused by raised credit, interest and the rate of foreign exchange risk exposures, banks met in intercontinental and local markets (White,2011, pg. 49). Financial derivatives and financial products offer a means to evade these risks without considering to make ample modifications to their balance sheet. Handling risks by means of financial derivatives I and financial products is cheaper and could substitute for costly capital and provide banks the elasticity to attain their favorite risk disclosures without altering their initial business goals.  

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