FINANCIAL MARKETS AND INSTITUTIONS

The core purpose of the following report is to analysis 5 of the top British Banks based on their total assets and by looking at their key balance sheet items, income statement items and financial ratios.. Most of the banks in the UK are MNCs. The top 5 banks in the United Kingdom have 90 percent market share. Here is the list of the top 5 banks in the UK: 1. HSBC 2. Lloyds Banking Group PLC 3. Standard Chartered Bank 4. Barclays 5. Royal Bank of Scotland Group
Analysis of the key balance sheet and income items is as follows:
Loans is one of the most important balance sheet items, as the ability to pool deposits from many sources that can be lent to many different borrowers creates the flow of funds inherent in the banking system.
Gross loan is the total amount of issued credits given to banks during the accounting period. We can see from the graph below that HSBC maintained the most steady gross loan figures between 2008 -2012. This was despite the economic depression of 2008 by which RBS was evidently affected by the most with their gross loan figure being the lowest in 2011 of only £24979 million. One of the reasons for this is that UK taxpayers bailed out RBS in with the government owning over 80% of the business while HSBC avoided government assistance.

Net Income is the amount of profit money a business has after determining total gross business income and deducting all expenses, taxes, depreciation, and interest. We can see a similar trend in the graph below where over the years HSBC has continued to grow and improve their performance after a slight dip in 2009 while Banks like RBS and LLyods saw their net income figures in a negative. This is largely due to the recession where banks had to set aside more funds to cover bad loans. In 2009 RBS claimed that they had made a loss of £3.6 billion due to lending billions of pounds of bad loans

A deposit is a sum of money paid into a bank or building society account. By looking at the graph below we can see that HSBC saw a slight dip in their deposits and short term funding in 2009, but because they took a lot of safety precautions they weren’t as badly hit by the recession as other banks and once again they saw a steady increase in their deposits and short term funding. Lloyds taking over HBOS resulted in them expanding and becoming a much bigger bank, this explains why Lloyds saw such an increase in their deposits.

Fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. Lloyds Tsb saw a dramatic increase in the amount of their fixed assets due to their 2009 takeover of HBOS. In 2009 RBS was nationalised as the government had to step in to bail out the bank. This is evident in the graph below as their fixed assets decreased year by year.

A few other key balance sheet and income items are shown in the graph below. The trends are quiet similar to the ones explained above.

Financial analysts tend to use profitability and risk ratios to determine how well banks or other companies are performing. Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity. For most of these ratios, a higher value is desirable. A higher value means that the company is doing well and it is good at generating profits, revenues and cash flows. Profitability ratios are of little value in isolation. They give meaningful information only when they are analysed in comparison to competitors or compared to the ratios in previous periods. Therefore, trend analysis and industry analysis is shown below to draw meaningful conclusions about the profitability of a company.
Operating Margin: 2009 was a very difficult year for the international financial sector. Far from being resolved, the downturn which began in August 2007 deepened during 2009. The result has been a significant restructuring in the banking sector including major international Banks. Table below shows that in 2009 Barclays’ operating profit margin was 17.8% which is much higher than in 2008 and although economic down turn was on peak in this year Barclays managed to good operating profit margin in this year. According to the graph below in 2009 Lloyds TSB’s operating profit margin was -1.3%. That is 16.5% lower compared to Barclays. This is due to large operating expenses of £15,984m. Another reason for the low profit margin could be due to the fact that there was a significant increase was in staff salaries of £4,369m. . In 2011 Lloyds TSB’s operating profit margin was 64.7%, the highest in the 5 years. Operating Margin % | | | | | | 2012 | 2011 | 2010 | 2009 | 2008 | Barclays | 24.5 | 15.2 | 18.7 | 17.8 | -5.7 | HSBC | 10 | 6.4 | 20.6 | 22.3 | 15.5 | Lloyds | 8.2 | 64.7 | -6.3 | -1.3 | 7.8 | Standard Chartered | 33.1 | 33.9 | 38 | 38.1 | 38.3 | RBS | -40,667 | -2,224 | -399 | -766 | -5,999 |

Earnings per Share (EPS)

This is the basic measure of a company’s performance from an ordinary shareholder’s point of view. It is the amount of profit, in pence, attributable to each ordinary share. Earning per share for Barclays rose from -0.34 % to 0.96 % in 2009. This was due to Barclays managed to boost their net profits. Barclays aso saw their total income net of insurance claims grew 34% to £30,986m, and income from continuing operations grew 37% to £29,123 m, with particularly strong growth in Barclays Capital. All this resulted in Barclays Earning Per Share increase steadily from 2008 to 2012. If we compare Barclays with RBS we get an idea that the EPS for RBS is very low. The graph below shows that in 2012 the EPS for RBS plummeted very dramtically from 2011 with a difference of 27.8%. It is fair to say by judging at the graph belowthat Standard chartered’s EPS were the most stable out of the 5 Banks in question.

Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). By observing the trend in the graph below it is fair to say that standard chartered has been the most efficient in being able to generate profits before leverage. RBS has improved the most since 2008 as they went from -0.42 to -0.18 in 2011.

Return on Capital Employed (ROCE)
ROCE considered to be a key ratio, ROCE gives a measure of how efficiently a business is using the funds available. It measures how much is earned per £ 1 invested.
Graph
Year | 2009 | 2008 | | Barclays | 7.84 | 12.82 | | Lloyds TSB | 2.36 | 8.32 | |
In 2009 Barclays’ ROCE decrease from to 7.84% to 12.82% in 2008. This is because of the non-cash expense of Impairment Charges and other Credit Provisions increased significantly in 2009 to £8,071m compare to £5,419m in 2008. This Impairment arises due to Barclays was exposed to credit risks arising from investments in debt securities and other exposures arising from its trading activities including, non-equity trading portfolio assets, derivatives as well as settlement balances with market counterparties and reverse repurchase loans.
In 2009 Lloyds TSB ROCE has fallen record low to 2.36% from 8.32%in 2008 a decline of almost 6 %. Lloyds TSB is constantly underperforming compared to Barclays.

RISK RATIOS:
Below is a brief definition of various risk ratios:

Credit Risk: The Probability that Some of the Bank’s Assets Will Decline in Value and Perhaps Become Worthless
Liquidity Risk: Probability the Bank Will Not Have Sufficient Cash and Borrowing Capacity to Meet Deposit Withdrawals and Other Cash Needs
Market Risk: Probability of the Market Value of the Bank’s Investment Portfolio Declining in Value Due to a Rise in Interest Rates
Interest Rate Risk: The Danger that Shifting Interest Rates May Adversely Affect a Bank’s Net Income, the Value of its Assets or Equity.
Earnings Risk: The variation (Risk) inherent in the Bank’s Bottom Line – Its Net Income After All Expenses
Solvency Risk: Probability of the Value of the Bank’s Assets Declining Below the Level of its Total Liabilities.

Net loans to total assets: This measures the total loans outstanding as a percentage of total assets. By observing the graph below we make an observation that all 5 banks have remained fairly constant throughout the 5 years in this particular ratio. Lloyds bank has the highest ratio of 61.03 % in 2009; however it starts to decrease as 2012 approaches.

Total loans by total deposits:
The loan to deposit ratio is used to calculate a lending institution's ability to cover withdrawals made by its customers. It can be determined that Lloyds is the most viable from the 5 banks in the short term. Lloyds saw a steady growth from 2008 till 2010 with their ratio increasing to 1.07% before experiencing a short dip in 2012 to 1.03 %. This loan to deposit ratio may be used to ensure that any money needed is immediately available. Barclays seems to be the most uncertain out of the 5 banks.

Loan loss provision by total loans ratio: The rise in this ratio signals that bank’s credit risk is increasing. If this ratio persistently rises, the bank may be heading for bank failure. From the graph below we can see that once again all 5 banks are performing quiet well and are not heading for bank failure. The ratios are very stable over the 5 years.

Interbank Ratio
Banks borrow and lend money in the interbank market in order to manage liquidity and meet the requirements placed on them. Standard Chartered had an interbank ratio of 129.45 % in 2008 and they continued to see an increase in this with their ratio being 182.62% in 2012. This means that they were most likely to lend money in the interbank market, receiving interest on their assets as banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential withdrawals from clients.

Standard Deviation:
In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. The higher the standard deviation or variance of bank income, the more risky is the banks’ earnings profile.
In 2009 RBS was at the highest risk as its SD of return on equity was 26.54%, but due to the bank being nationalised the risk on its earning profile decreased dramatically reaching the lowest percentage in 2011 of just 0.45. Standard chartered was the most steady throughout the 5 years and had the least risk involved on its earning profile.

We can see very similar trends on the S/d of return on average asset and S/d of net income as compared to SD of return on equity. This shows that they are very inter related and are affected by one another.

factors that explain the variations in a bank’s performance:

Interest rates: higher interest rates encourage people to save and make deposits in banks. This results in an increase in a banks liquid assets. This also means that they then have more to invest which could possibly result in a bank doing well and increasing their net income.
Inflation: When inflation is high there is usually more money circulating in the economy which means less savings. That decreases banks liquid assets.
Government policies: one of the reasons these can be set in place is to encourage banks to make loans they would not otherwise have made and to adopt looser lending standards that would make mortgage loans possible for individuals who could not meet the down payment.
Exchange rates: as most banks are big multinationals exchange rates play an important role in overseas transactions.
Money supply: the amount that is circulated in an economy is a very important factor. The higher the amount the better a bank’s financial health.
State of the economy: this is one of the most important factors, as it determines how well markets and business will do. As we saw the results of the recession in 2008.
Reputation: a good reputation will increase consumer confidence in a bank which will result in people using banks with such reputation for large financial transactions.
Aims and objectives: how a bank is run is another key factor. As some managers may choose to take risks and invest more and others might play it safe.
Supply and Demand: these market forces can play a major factor in determining how much the banks lend out.
Location: easy accessibility and popular locations for where the banks are can also affect a bank’s performance.

In conclusion we can say that the top 5 British Banks are still on a road to recovering from the global crises of 2008. Even though HSBC has pulled through the strongest of the 5 there are still a lot of areas that need improving. We live in the age where there is no certainty no the future, and no progression without risk. However what is needed is a clear view of the level of risk that the various stakeholders are happy for the banks to run, in the context of the economic growth they want to achieve.