Winning in a financial crisis

Michael Alan Hamlin

Posted on October 11, 2008

And pursuing opportunity

By now, it should be clear that anyone outside the Philippines’ business process outsourcing industry claiming that the global financial meltdown won’t negatively impact the Philippine economy is in a dangerous state of denial. The collapse of the U.S. investment banking sector and the forced consolidation of major financial institutions with direct and indirect exposure to the subprime mortgage market is fundamentally changing how companies do business and consumers finance their lifestyles everywhere. It will take at least two years and more than the $700 billion taxpayer-funded bailout to stabilize the U.S. economy and the global economies it supports.

The meltdown extended last week and over the weekend to Europe and now, Asia. Following on the heels of the British government rescue of mortgage-lender Bradford and Bingley late last month and HBOS’s sale to Lloyds TSB last week, the Belgian government announced that it will pay $23 billion to assume control of Fortis ’ Dutch operations, which includes the recently acquired ABN Amro. Fortis Luxembourg is also set to be fully nationalized. And Swiss banking giant UBS admitted it has been hit hard by the mortgage crisis. Over the weekend, Europe’s four major powers vowed to help banks access funds they desperately need to cover debt obligations.

It also became clear that acquisition deals in Asia, such as Nomura ’s purchase of Lehman Brothers’ Asian operations, have overshadowed trouble closer to home (Nomura is reportedly spending millions in bonuses to convince key employees to stay on board when they take over, suggesting that deal is troubled.). Hong Kong’s Hang Seng Bank and Dah Sing Banking warned that they have exposure to Washington Mutual, which was seized by U.S. regulators in September. The Hong Kong Monetary Authority gave banks easier access to funds because they have been too nervous to lend money to each other. Worldwide, hedge funds originally considered relatively safe have stopped allowing investors to withdraw funds.

Given this escalation of bad news globally, is it reasonable to assume that the Philippines and the rest of Southeast Asia are safely distant from this financial cauldron and won’t get burned? The answer: Absolutely not. Can we do more than batten down the hatches? Indeed, we can. Like any crisis, there is opportunity in this one waiting to be recognized and exploited.

The signs are already apparent. Last week, the U.K.’s biggest supermarket chain and a celebrated entrepreneur announced that they will become mortgage lenders because so many banks are disappearing. According to a report in Advertising Age , Tesco finance director Andrew Higginson said the crisis is “an opportunity for a challenger brand like Tesco,” explaining that, “we have seen the return of more rational pricing, and that affords us the opportunity to go in (to mortgage lending).”

Flamboyant British entrepreneur Richard Branson said the crisis provides the opportunity for his Virgin group of companies to return to the mortgage market. Virgin previously offered “offset” mortgages in a joint venture with Royal Bank of Scotland. (Offset mortgages only charge interest on “the difference between the mortgage and the amount of money the homeowner has in the financial institution issuing the mortgage,” according to the Advertising Age report.)

Many observers agree that this is, ironically, a good time to enter the mortgage business. Competition is definitely much thinner, which also improves margins, making it possible for new market entrants to provide funding for truly qualified mortgage applicants and make a reasonable return. New entrants also have the advantage of not having to deal with the baggage associated with bad debt established lenders must somehow manage.

A study by McKinsey & Company suggests that opportunities normally unavailable become possible in times of crisis because boundaries that normally limit the scope and nature of a business shift dramatically. Shifts in regulatory environments, the competitive landscape, customers’ attitudes, and the organization’s ability to change together provide opportunities previously out of reach.

Developments over the past month show how regulatory environments shift. Scrambling by governments around the world to provide liquidity to their financial systems is creating opportunities for companies in diverse industries to provide a new set of consumer services, mortgages. It also provides the opportunity for foreign financial institutions to enter new markets, as Nomura is attempting to do, and as some China and Japan banks are considering.

We’ve also seen how crisis can rationalize the competitive landscape. But perhaps the greatest opportunities come in the form of customer and employee mindsets. Before the crisis, it was unlikely that consumers would consider taking a mortgage from their supermarket, for instance, and Virgin previously exited the industry but now thinks the mindset is right. And employees are also more willing to step up to new challenges.

But there’s still the biggest challenge: management must acknowledge that things have changed fundamentally, and lead their organizations in implementing winning strategies made feasible by the crisis.

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