Commercial Bank of Dubai: Strategic Audit

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Introduction

The purpose of the given strategic audit report is to describe the current performance and mission of Commercial Bank of Dubai (CBD) and analyze external and internal factors using EFAS matrix, IFAS matrix, and SFAS matrix. Based on the findings, the report will produce TOWS table to suggest strategic alternatives for the smooth functioning of the financial system and provide recommendations for the future development of this bank.

CBD is a public joint stock company formed in 1969 through an Emiri Decree. The bank offers a variety of conventional and Islamic commercial banking services, such as deposits, loans, credit cards, investment advisory services and so on (Irish Stock Exchange 15). People of the United Arab Emirates hold 80% of its share and Investment Corporation of Dubai owns the remaining part; however, this bank converted into a national Public Shareholding Company in 1982 and established itself as a progressive and modern banking institution.

Current Performance and Mission

The performance review of CBD illustrated that the net profit in the last year has decreased by 11.3% in comparison to the previous year while operating income raised by 5%, net interest income jumped by 3.6% and non-interest income boosted to 8.3% along with an increase of 22.9% from fees and commission. Although the bank has increased its operational expenses by 13.8%, this was the result of an enhanced retail distribution network. Therefore, the company is now improving its corporate and personal banking products by focusing on the strategic initiatives of CBD.

Due to the concurrent turndown of the financial service sector, the top management of the bank continued its careful approach to the corporate and SME sector and focused on boosting its market share in the diversified segments along with attractive digital capabilities (Kassem). The major achievements during the year pointed to launching four new outlets fully equipped with innovative digital technologies that gained customer attention for its unique mobile apps. As a part of the corporate social responsibility, the bank sponsored ‘World’s Elite Cyclists’ teams and “National Olympic Committee” while it is ready to get hold of a corporate loan portfolio of the Royal Bank of Scotland (RBS) operating in the UAE and issue a five-year bond. With an array of diversified product and funding base, the bank upholds its mission “to be loved for our passion and excellence.”

EFAS Matrix

Opportunities

CBD concentrates on the diversification of its products and services considering market demand, customer choice, economic and cultural factors; for instance, in 2008, CBD introduced sharia-compliant banking, which known as ‘Attijari Al-Islami.’ Furthermore, this bank established the first digital-only bank in the UAE to target digitally connected clients to manage their finances using technology; customers of this bank will get all financial services through their smartphone. Current performance of CBD represents that it has a financial capacity to expand business with new products and services in new and existing markets.

CBD was established through mergers of three banks; thus, the focus on this strategy will enhance the business opportunities to expand the banking services in the prospective domestic and international market (Irish Stock Exchange 15).

Threats

According to the annual report 2016 of CBD, the operating environment in the UAE remained competitive; however, the activities of the direct competitors, for example, PNC Financial Services Group, First Gulf Bank, Emirates NBD (UAE), BankDhofar, Abu Dhabi Commercial Bank, and Pacific Capital Bancorp, have created an overall challenging environment for trade (Commercial Bank of Dubai 19).

In the era of technology, ensuring cybersecurity is one of the biggest challenges faced by the management of the bank because CBD could suffer serious financial losses due to fraudulent transactions of hackers. Most common risks, for instance, include worms, Trojans, keystroke loggers, apps, software vulnerabilities, and web-based spyware, which are mainly created to collect customer information. In order to mitigate this threat, CBD needs to take different measures to proactively detect network vulnerabilities and prevent attacks. Therefore, it would require considerable funds to build a strong system.

External Factor Analysis Summary (EFAS)

Key External Factor	Weight	Rating	Weighted Score	Comments
Opportunities
First digital-only bank in the UAE	0.20	5	1.0	Greater profit, and larger growth rate
Diversification	0.15	4	0.60	Analyzing market demand perfectly
Business expansion in global market place through mergers	0.05	2	0.10	Merger and acquisition strategy will increase market share in comparison to other commercial banks
Growing economy	0.05	4	0.20

Threats
Competitors	0.10	4	0.40	CBD is usually responding to the issues in its external environment
Tax changes and regulation	0.05	4	0.20	It is performing its core strategies in an excellent way
The rising vulnerability threat or cybersecurity	0.20	5	1.0	The employees and IT experts are working hard to mitigate risks to ensure the security of the bank
Adverse economy	0.05	5	0.25	At the time of global financial crisis, the external financial environment of Dubai was challenging to some extent, but CBD was able to make profit efficiently
Raising deposits and increasing costs	0.10	4	0.40	Deposits increased by 6.2% in 2016
Customer satisfaction	0.05	4	0.20
Total	1.0		4.35

IFAS Matrix

Strengths

Brand value: From the last four decades, CBD is providing financial services with trusts to the customers; thus, it has a strong brand image in the banking sector of the UAE.
Customer satisfaction: As nationals of the United Arab Emirates owned 80% of its share, the prime intention of this bank is to design product and service line that will consider the needs of the clients.
Market growth: At the initial stage, CBD had only one branch, but now it is a highly profitable institution, which has about 24 outlets.
Financial position: According to the annual report 2016, this bank has enough financial strength to implement new strategic options to decrease expenses and increase revenue; however, the following table 1 provides more information about the financial capabilities of CBD.

Table 1: Financial position. Source: CBD (2).

Variables	2016 (AED’ 000)	2015 (AED’ 000)	Comment
Total assets	64.1 billion	57.8 billion	increased by 10.7%
Operating profit	1.59 billion	1.49 billion	increased by 6.6%

Performance of the employees: CBD has started its operation with only ten employees, but now it has more than 1200 efficient workers;
Technology: According to the annual report 2016 of CBD, this bank introduced the ‘Active Saver’ mobile app, a first-of-its-kind app, and the first digital-only bank in the United Arab Emirates to offer differentiated products, and innovative service and maintained its competitive edge.
Long experience: From the last four decades, CBD has provided reliable and high-quality services to the clients to build trusted relationships;

Weakness

Operating Costs: According to the annual report 2016, CBD has failed to reduce operating expenses, which adversely affects its financial position, and overall performance of the bank (table 2).

Variables	2016 (AED’ 000)	2015 (AED’ 000)	Comment
Customers’ deposits	43.8 billion	40.5 billion	boosted by8.2%
Operating expenses	870.5 million	858.8 million	increased by 1.4%
Loans and advances	42 billion	39 billion	amplified by 7.5%
Net profit	1 billion	1.07 billion	decreased by 5.90% lower

Table 2: Financial position. Source: CBD (62).

Higher charges: As the clients of the bank need to pay more for the services than traditional bank accounts, CBD focuses more on the purchasing power of the customers

Internal Factor Analysis Summary (IFAS).

Key Internal Factor	Weight	Rating	Weighted Score	Comments
Strengths
Brand value	0.10	3.5	0.35	CBD has developed strong brand awareness
Market growth	0.05	3	0.15	Slow and steady growth in global market
Performance of the employees	0.10	4	0.40	It plays a vital role in creating value for the clients of CBD
Customer base	0.10	3.5	0.35	Accomplish growth through greater focus on clients
Financial position	0.10	4	0.40	CBD has financial strength despite high operating expenses;
Technological factors	0.20	5	1.0	To maintain its competitive edge, the bank should focus more on technology
Long experience	0.10	5	0.50	CBD performs well since its establishment

Weaknesses
Reducing operating costs	0.15	3	0.45	Adverse effect on the future profitability
Higher charges	0.05	4	0.20	Reduce the number of customers
Majority of business in the UAE	0.05	5	0.25	Operation may hamper due to changing national business environment

Total	1.0		4. 05

SFAS Matrix

Strategic Factor Analysis Summary (SFAS)

The core constituents of this matrix have been derived from the exhaustive analysis of the above two matrices; the following table contains the details:

Strategic Factors	Weight	Rating	Weighted Score	Duration			Comments
Strategic Factors	Weight	Rating	Weighted Score	Short	Intermediate	Long	Comments
S1 Financial strength	0.10	4	0.40	x			Plays an important role in solving problems
S2 Utilizing technological factors	0.20	5	1.00	x			Properly using information technology
S3 Long experience	0.10	5	0.50		x	x	Presents a ompetitive advantage of the given bank
W1 Reducing operating costs	0.15	3	0.45		x		Need to take immediate action
W2Higher charges	0.05	4	0.20				CBD should reduce price
O1Business expansion through mergers	0.05	2	0.10			x	Effective strategy for CBD
O2 Growing economy	0.05	4	0.20		x		Key opportunity
T1 Cyber security	0.20	5	1.0	x			One of the main risks
T2 Impact of regulatory changes	0.05	4	0.20		x		Same impact on the industry
T3 Adverse economy	0.05	5	0.25		x	x	Uncertain condition may raise
Total	1		4.3

Analysis on Findings

The result of EFAS matrix of the bank shows that CBD scored 4.35, which indicates that Commercial Bank of Dubai is performing well in protecting the business from external challenges by means of using key advantages. At the same time, IFAS matrix is utilized to scrutinize the strengths and weaknesses of the functional sector of this bank. A total weighted score of CBD is 4.3, which shows this bank is responding to the internal business environment in an exceptional manner.

TOWS Table

The following table demonstrates the TOWS Matrix of CBD, which suggests strategic plans for its future development.

TOWS Matrix

IFAS

EFAS

Strengths

Brand image
Market growth
Performance of the human resources
Customer base
Financial condition
impact of technology
Long experience

Weaknesses

CBD is more costly than conventional banking institutions
Decreasing operating expenses
Higher charges
Majority of businesses in the UAE

Opportunities

First digital-only bank in UAE
Diversification
Business expansion in global marketplace through mergers
Growing economy

SO Strategies

CBD should seize global growth opportunities and expand business in large and fast-growing economies by using its financial strengths and human resources

WO Strategies

CBD should enter into international market;
CBD should diversify products and services;

Threats

Competitors
Tax changes and regulation
The rising vulnerability threat or cybersecurity
Adverse economy
Raising deposits and increasing costs
Customer satisfaction rate

ST Strategies

CBD Should invest in IT infrastructure in order to mitigate cyber risks
CBD should increase its number of services to achieve cost advantage over competitors
CBD is more expensive than traditional bank accounts; therefore, customers’ needs must be handled carefully

WT Strategies

Implementation of new tax regulation could decrease profitability; therefore, CBD should effectively implement accounting and regulatory change
CBD should expand more to train its employees to compete with national and international financial institutions

Strategic Alternatives

It has been reported that in the current year CBD has experienced a turndown of 5.9% in its annual profit due to the challenging operating atmosphere in the UAE, diminishing from the corporate and commercial banking along with the higher level of debt defaults for reducing oil price. At the same time, the bank has raised its income from personal banking, online banking, and non-net interest income, which ultimately indicates the success of diversification strategy of the CBD (Kassem).

The Commercial Bank of Dubai has introduced its three years strategic plan from 2016 to 2018 to attain a higher growth and profitability and ensure diversified income sources from new business segments rather than the traditional ones (Irish Stock Exchange 77). Due to the associated risks and uncertain business environment, CBD is required to evaluate and assess the existing strategies, and design and choose the strategic alternatives. The following table contains the strategic alternatives for CBD:

Strategy 1: Significantly Emphasis on Personal Banking Business

Evaluation Criteria	Decision Criteria for Strategic Alternatives	Score
Builds brand awareness	CBD could generate its brand image using this strategy with ICT integration;	4
Aligns with vision	This strategy could meet the vision of CBD in several aspects, but it would not be rewarding for long-term aligns;	4
Competition	In the UAE market, CBD is the pioneer for ICT integrated personal banking, but there are several competitors who would like to seek competitive advantage by introducing lucrative interest rates;	4
Differentiates and helps to generate unique experience	In the financial service sector, value formation is deeply aligned with cultural factors, demography composition, customers behavior and so on;	4
Creating loyal customer base	The concurrent financial sector of the UAE has a lower demand for loans; cost leadership strategy has the opportunity to generate a large customer base while the number of loyal customers of CBD is decreasing;	4
Financial risk	There is a low financial risk in employing this strategy, but it is associated with expansive market research and designing while the profit margin is cooperatively low;	4
Think customer first	This strategy has a limited scope to meet the criteria of thinking about the customer first;	4
Total / 35		28

Strategy 2: Introducing Digital Banking

Evaluation Criteria	Decision Criteria for Strategic Alternatives	Score
Builds brand awareness	Digital banking will create brand image	5
Aligns with vision	Match with vision	5
Competition	CBD must gain competitive advantages	5
Differentiates and helps to generate unique experience	Digital banking will give unique experience	5
Creating loyal customer base	Customers want cybersecurity	5
Financial risk	Fraudulent transaction could be the main cause of risk	3
Think customer first	Provide rapid solution	5
Total / 35		33

Strategy 3: Attention to the Islamic Banking Business

Evaluation Criteria	Decision Criteria for Strategic Alternatives	Score
Builds brand awareness	Islamic banking business will increase brand image	5
Aligns with vision	Attention to the Islamic banking could meet the vision of CBD	5
Competition	CBD would gain competitive advantages	4
Differentiates and helps to generate unique experience	This strategy would assist CBD to sustain itself as market leader in the UAE financial market;	5
Creating loyal customer base	As the customers are not worried about profit, CBD could build a large customer base	4
Financial risk	Low risk due to strong economic growth	5
Think customer first	This strategy considers needs of the customers;	4
Total / 35		32

Strategy 4: Merger

Evaluation Criteria	Decision Criteria for Strategic Alternatives	Score
Builds brand awareness	New brand will be introduced	5
Aligns with vision	Meet the criteria	4
Competition	Minimize market competition	4
Differentiates and helps to generate unique experience	Not always possible to offer unique products	3
Creating loyal customer base	It depends on market demand	4
Financial risk	High financial risks	3
Think customer first	This strategy considers business profits	3
Total / 35		26

Recommendation

This strategic audit report suggests to put a stronger emphasis on the digital banking system to meet long and short-term goals of CBD as this strategy scored 32 out of 35. To implement this strategy, the management of CBD needs to focus more on the cybersecurity to avoid fraudulent transaction. The following table gives more suggestions for each strategy-

Strategies of CBD 2016 to 2018	Outcomes	Recommendation
Significant emphasis on Personal Banking business;	In 2015 this strategy gained AED 6.9 billion which is 11.8% of total assets; In 2016 this strategy gained AED 7.5 billion which is 12% of total assets;	Modification and re-engineering required for this strategy include integrating customer care, one-stop service center, and further improvements;
Introducing Digital Banking	The online banking and increasing digital capabilities resulted in customers’ deposits of AED 40.5 billion in 2015 which was AED 32.2 billion in the previous year;	Essential to address the risk associated with the online banking and emergence to integrate digital signature along with other security measures for data center;
Attention to the Islamic banking business	In 2015, the loan portfolio considerably increased by 55% which is 9% of gross loans; In 2016, the loan portfolio raised at 30% accounting 11% of the bank’s gross loan portfolio;	Required to penetrate in the surrounding GCC counties to attract Muslim demography with strong distribution network;
Consolidating its Corporate and Commercial Banking franchise	This strategy resulted in an 11.3% lower Net profit in 2015; It caused 13.8% increase in the operating expenses	First of all the Commercial Bank of Dubai needed to introduce a strong framework of risk assessment; Initiative to reduce operating costs by means of outsourcing human resource ; Very selective target market;

Conclusion

From the result of EFAS, IFAS, and SFAS matrix, it can be concluded that CBD holds a highly profitable and stable position in the financial institutions. CBD faces several external and internal challenges to ensure cybersecurity, satisfy the customer, and gain a competitive advantage over the competitors; however, this bank has excellent brand awareness and financial strengths to make a profit in the adverse business environment. At the same time, the board of directors and employees of this bank are highly qualified, well trained, skilled, and specialized; therefore, high performance of the human resources make it easy to hold a strong market position in the UAE. However, this strategic report recommends this bank to reform personal banking business and give more attention to Islamic banking and merger in order to reduce high operating costs and provide more benefits to the customers through innovative banking services.

Works Cited

Commercial Bank of Dubai. “Commercial Bank of Dubai Investor Presentation – 9M 2015.” CBD. Web.

Irish Stock Exchange. “Base Prospectus.” ISE. Web.

Kassem, Mahmoud. “CBD Profit Dips on Bad Debts and Expenses.” The National, 2017. Web.

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