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Comparative Financial Analysis of Barclays Bank and HSBC Bank

For a critical analysis of the banking financial performance preparation, I have chosen Barclays Bank UK PLC which is a well known and very reputed bank of UK. In this report, I will try to conduct a critical analysis of capital adequacy, liquidity and asset quality ratios and all do some in-depth evaluation of different related theories and their implications for Barclays Bank. Here I will try to analyze the overall recent performance and analysis of the “Barclays Bank” and its main competitor “HSBC Bank” based on their past five years’ annual report. The continuous business activities of these banks have a direct impact on their business performance which reflects in their actions and works (Ab. Bari, 2018). So here you will find a Comparative Financial Analysis of Barclays Bank and HSBC Bank.

Comparative Financial Analysis of Barclays Bank and HSBC Bank

Comparative Financial Analysis of Barclays Bank and HSBC Bank

Barclays’ Profile

Barclays Bank is doing its business on the sector of retail and commercial banking, credit and investment banking, and investment management services. The company operates in the UK, the US, Europe, Africa, and Asia. It is a financial services organization to lend and invest money to 30 million customers in almost 50 different countries.

Their primary objective is to maximize shareholders’ wealth. The business is also responsible for contributing to the well-being of society by conducting their business responsibly and by performing well (Abuharb, 2016). Barclays has its operations through ten business divisions and their major competitors are:

Major Competitors Barclays Bank

The following companies are the major competitors of the bank. They are:

  • Lloyds TSB Group plc
  • Alliance & Leicester plc
  • HSBC Holdings plc
  • Standard Chartered PLC
  • Bradford & Bingley Plc
  • Kensington Group plc

HSBC Bank’s Profile

HSBC bank has started their journey in 1865 as a local bank to meet up international needs. It was founded by Sir Thomas Sutherland. The bank has around 7,200 offices in 85 countries and in different territory areas such as Africa, Asia, Europe, North America, and South America, etc. and they have almost around 89 million customers all over the world. HSBC Bank’s stock is traded on London, NewYork, HongKong, Paris, and Bermuda stock exchanges. With its diversified human resource and improved technological support, HSBC provides personal, commercial, corporate, investment and private banking services around the globe.

Literature review on the role of regulators in averting the future banking financial crisis or financial system failure

Banking is one of the most regulated industries in the world. The vast literature on desirability bank regulation provides two major reasons for the necessity of regulation in the banking sector (Batten and Fetherston, 2002). The first reason is the existence of systemic risk and the second reason is the existence of asymmetric information problems and the inability of small depositors to monitor banks.

Basel Accord is a very important development for bank regulation in case of establishing a healthy competition in banking and paying special attention to sufficient capitalization. Proper regulation of the banking system is essential for the performance and the economy. The rules given by BASEL III required all the banks to reduce their dependency on borrowed money. By doing these they can become less susceptible to losses from bad loans and market turmoil.

The Basel III now mainly focusing on the banks to hold more capital. They should rely less on borrowed money so that losses can be absorbed without collapsing. The regulations also require banks to maintain enough liquid assets to survive any cash crunch coming in the future.

Here the focus should be given to strengthening individual financial institutions the financial system as a whole. Overall the European regulations take the shift from government bailouts to a “bail-in” approach (Rebelo, n.d.). It suggests the shareholders and investors carry the burden of failure. Banks are required to keep sufficient convertible liabilities to change them into common equity capital when additional capital is needed. To prevent a serious economic downturn the banks need to ensure sufficient time to make the insolvent banks properly restructured and recapitalized. This will help to ensure that banks and their investors will bear the cost of bank failures and work for the betterment of it.

To focus on regulating potential risks, there needs to find a tradeoff to make the system regulated by providing financial intermediation and successfully deterred runs on short-term liabilities which are related to commercial banking.

An interest rate ceiling is another important way to averting future banking financial crisis. Regulators can reduce bank risk-taking by led to the emergence of non-bank competitors. As a result, a large segment of deposits started to move from the commercial banking system to non-banks into money market mutual funds (Cargill, n.d.). Eventually, by doing all these, it is possible to avert any financial crisis in the long run.

Analysis of Financial Performance

To measure the financial condition of the selected bank, we will do a ratio calculation of two different types. One is liquidity and another one is leverage ratio for the last five years (2014-2018).  Ratio analysis is the most popular technique to measure a company’s financial condition in the related market.

Liquidity Ratio

The liquidity of a firm refers to the ability of a firm to meet up its current or short term liability with the help of its short term assets. It also indicates the solvency position of the firm as the illiquid firms may face bankruptcy problems or lose the trust of customers. This ratio indicates how much liquid the firm is. Too many liquid assets are not good for a company because it decreases the profitability of the company (Grabel, 2003). A standard liquid ratio is 2. A higher ratio indicates lower profitability whereas too much lower ratio tends to bankruptcy. Companies’ profitability depends on long term investment. So higher liquidity in hands tends to lower investment for the long term period and it will bring less profitability. The two major measures of liquidity ratios are the current ratio and the quick (acid-test) ratio.

Current Ratio

To measure the liquidity level of a company current ratio is calculated. This calculated to find out the company’s current liquidity position. Liquidity level must be in a range to meet up it’s a day to day activity.  To maintain customers’ demand and their requirement holding liquid assets in hand is a must (Laffont and Maskin, 1988). The amount of liquid assets mostly depends on various factors. Like some factors are organization size, current liability, and daily expenses and so on. A higher current ratio specifies more liquid the company is whereas a lower ratio indicates less liquid amount is available to meet up its obligation. The Formula of the current ratio is:

Financial Analysis of Barclays Bank

Current Ratio = (Current asset/Current Liabilities)

Barclays Bank of UK Plc
Year Current Assets (£’m) Current Liabilities (£’m) Current Ratio
2014 953843 853983 1.12
2015 733032 619164 1.18
2016 774733 647545 1.20
2017 787421 631209 1.25
2018 785788 642745 1.22

Barclays bank of UK Plc maintains a good liquidity ration over the last five years. It indicates that this bank able to meet up its current obligations with the help of current assets. From the table, it is clear that the company holds a sufficient amount of current assets in hand to do its regular activates.

HSBC Bank of UK Plc
Year Current Assets (£’m) Current Liabilities (£’m) Current Ratio
2018 233857 209850 1.11

Current Ratio Comparison: From the above calculation it is clear that both the two banks have maintained a good liquidity ratio over the years. Their ratio was not so high and not so low. It belongs to its standard level.

Quick Ratio

This ratio is considered as the most liquid ratio as it is calculated based on the current asset except inventory and divided by total current liability. Inventory is the lowest type of liquid asset as it is sold on the credit and the selling process of inventory is time-consuming. That’s why inventory is considered as less liquid than most other current assets. At first, it creates account receivables and gets the selling amount in the future, not in present. So for this reason converting inventory in cash is a time-consuming process. The formula of the quick ratio is:

Quick Ratio = (Current Asset-Inventories-Prepaid expenses/Current Liabilities)

Barclays Bank of UK Plc
Year Cash & Cash Equivalent asset (£’m) Current Liabilities (£’m) Quick Ratio
2014 39,695 853983 0.05
2015 49,711 619164 0.08
2016 102,353 647545 0.16
2017 171,082 631209 0.27
2018 177,069 642745 0.28

The quick ratio indicates the amount of most liquid assets in respect to current liabilities. From the table, it is clear that the bank did not hold more liquid asset to meet up it obligations. Though year-wise this ratio shows an increasing trend and it is a good sign for the company.

HSBC Bank of UK Plc
Year Cash & Cash Equivalent asset (£’m) Current Liabilities (£’m) Quick Ratio
2018 33796 209850 0.16

Comparison: After comparing these two tables, we can see Barclays Bank of UK Plc has in a better position than that of HSBC Bank of UK Plc. A lower ratio is concerning here as it indicates the failure of meeting up daily obligations and customers’ demands.

Leverage Ratio

To measure the long term solvency, whether the firm is able to meet up its long term obligations or how long it can manage its long term requirement leverage ratio is used.  The capital which is used to finance a company’s obligation is a mixer of equity and debt. Try to maintain a good mixer ratio of these two.

Debt Ratio

The debt ratio shows the result that how much the company is dependent on its creditor’s finance. A higher debt ratio indicates the company is financed with more debt than equity finances. The debt ratio is calculated as follows:

Debt Ratio = (Total debt/Total Assets) x 100

Barclays Bank of UK Plc
Year Total Debt (£’m) Total Assets (£’m) Debt Ratio
2014 1,291,948 1,357,906 0.95
2015 1,054,148 1,120,012 0.94
2016 1,141,761 1,213,126 0.94
2017 1,067,232 1,133,248 0.94
2018 1,069,504 1,133,283 0.94

 

From the table, it is clear that the company has used more debt financing over the last five years. It is not a good sign. As they take more risk. High risk may provide high profitability. But there is a huge chance of bankruptcy.

HSBC Bank of UK Plc
Year Total Debt (£’m) Total Assets (£’m) Debt Ratio
2018 216,606 238,939 0.91

Debt Ratio Comparison:  From the table, we can understand that HSBC bank uses more debt to finance its long term obligations but the ratio is slightly low from the Barclays bank. And here the ratio is 91%. So it can be concluded that both the two banks should decrease their debt level.

Debt to Equity Ratio

To measure total debt in respect of total equity, the debt to equity ratio is calculated. A higher ratio indicates using higher financial leverage.

The formula of debt to equity ratio is:

Debt Equity Ratio = (Total Debt/Shareholder’s Equity) x 100

Barclays Bank of UK Plc
Year Total Debt (£’m) Total Equity (£’m) Debt to Equity Ratio
2014 1,291,948 65,958 19.59
2015 1,054,148 65,864 16.00
2016 1,141,761 71,365 16.00
2017 1,067,232 66,016 16.17
2018 1,069,504 63,779 16.77

The ratio shows the result that year by year, this bank increases its financial leverage, which is not a good sign for the firm.

HSBC bank of UK Plc

Year Total Debt (£’m) Total Equity (£’m) Debt Ratio
2018 216,606 22333 9.70

 Debt Equity Ratio Comparison: HSBC uses less leverage compared to Barclays bank. Using a low leverage ratio indicates more financial strength.

Financial Leverage Ratio

The financial leverage ratio is used to find out the leverage level of the firm. A higher ratio indicates highly levered, a lower ratio indicates less leveraged. The formula of this  ratio is:

Financial Leverage Ratio = (Total Asset/Total Equity) x 100

Barclays Bank Of UK Plc
Year Total Assets (£’m) Total Equity (£’m) Financial Leverage Ratio
2014 1,357,906 65,958 20.59
2015 1,120,012 65,864 17.00
2016 1,213,126 71,365 17.00
2017 1,133,248 66,016 17.16
2018 1,133,283 63,779 17.77

After analyzing the table it is clear that this bank is mostly financed by external capital. Their internal capital is less than financed capital.

Financial Analysis of HSBC Bank

HSBC bank of UK PLC
Year Total Assets (£’m) Total Equity (£’m) Financial Leverage Ratio
2018 238,939 22333 10.70

Financial Leverage Ratio Comparison:  HSBC holds less financial leverage than that of Barclay Bank. So it is a good sign for the company.

Capital Adequacy Ratio

 This ratio indicates the amount of net capital with respect to total risk-weighted assets. A higher ratio indicates the firm is safe to meet up its obligations (Dewaelheyns and Van Hulle, 2008). So, a higher ratio is good for the company. The formula is:

CAR= (Total working capital/ Risk-Weighted Assets) x 100

Barclays Bank of UK Plc
Year Total Capital (£’m) Risk-Weighted Assets (£’m) CAR
2014 99860 6930 1.44
2015 113868 6950 1.64
2016 127188 6750 1.88
2017 156212 3180 4.91
2018 143043 2600 5.50

The table shows the capital adequacy ratio the trend was on the increasing rate. The increasing rate is a good sign for the company that indicates the company has sufficient capital to meet up its obligation.

HSBC bank of UK Plc
Year Total Capital (£’m) Risk-Weighted Assets (£’m) CAR
2018 24007 91,839 0.26

In comparison between the above mentioned two banks, Barclays Bank shows a better ratio than that of HSBC bank of UK.

Asset Quality Ratios

This ratio determines the annual expenses of a total entity from the loans of impaired loans with the respected amount of total assets.

The formula of this ratio could be as follows,

Asset quality ratio = (Loan Impairment charges /Total assets) x 100

Barclays Bank Of UK Plc
Year Total Assets (£’m) Loan Impairment charges (£’m) Asset Quality Ratio
2014 1,357,906 1821 0.13
2015 1,120,012 1762 0.16
2016 1,213,126 2373 0.20
2017 1,133,248 2336 0.21
2018 1,133,283 1468 0.13

After analyzing the table, it is clear that this bank is mostly determined its loan impairment that is not over the asset value. Therefore, the asset quality is satisfactory.

HSBC bank of UK PLC
Year Total Assets (£’m) Loan Impairment charges (£’m) Asset Quality Ratio
2018 238,939 349 0.15

Financial Leverage Ratio Comparison:  HSBC holds more assets than that of Barclay Bank. So it is a good sign for the company.

Various types of Risks

The bank is a financial institution and has to operate the business industry. So in their operation, banks face several types of risks. Doing business in a competitive market is not enough easy. It has to face many obstacles and manage that carefully. Some major risks that Barclays bank Plc faces generally are described below:

  • Credit risk: Credit risk increases when the borrower unable to repay the loan. This is also known as default risk. If the default loan increases, the possibility of bank failure increases (Mayland, 1993). And when investors know about banks’ high credit risk, they don’t want to invest there or charges a high amount against their investment.
  • Liquidity risk: Another important risk that the bank faces is liquidity risk. This risk arises because of not holding sufficient liquid assets to meet up with its current obligations. Customers of a bank may want to withdraw their savings amount within a specific period. A bank should be provided their required amount in time. Making a delay seems like a liquidity crisis (Haugen, 2010). But holding too many liquid assets is bad. As it is good for meet up daily requirement but bad for profitability (Murray-Jones and Gamble, 1991). The more you invest the more profit you will get. So invest less and hold a more liquid asset, will bring less profit.
  • Operational risk: While doing any business or operate some work, there is a hidden operational risk. The risk incurred internally in all banking transactions, system failure, external event and so on (Marcelin and Mathur, 2014). This risk may occur in every department like credit, trade, management, investment, and treasury and also in the information technology department.
  • Exchange risk: This risk is associated with foreign currency risk. They may face loss for the lower price of the currency. Bank keeps reserve foreign currency to gain a high exchange rate buy selling them from the customers (SOMALIA: Barclays Faces Pressure, 2013).
  • Reputational risk: Reputational risk associated with the damage of a bank brand and its reputation. It may face because of other risk factors and causes disruption like loss of sales and customs, may face huge expenses and so on (Martin, 2009).

Strategies of mitigating bank risks

Risks cannot be removed forever but can mitigate which helps to reduce the loss. Barclays and HSBC bank also faces the above-mentioned risks. To mitigate those risks banks may follow the following steps:

  • To minimize credit risk, the loan officer must follow the KYC (know your customer) role. Without proper judging and collecting all available documents, no loan order should be passed (T. Jacques, 2017). Besides bankers should take proper collateral against the loan and measure the collateral price in the current market value.
  • To mitigate liquidity risk, the bank should follow the standard of holding the liquid asset and the liquidity ratio should be within 2. Remember that too much liquidity is unnecessary and that won’t bring any positive outcome.
  • To minimize operational risk, the banking system should be under observation by an expert team. And any disturbance in the system, the authority should try to fix the system as early as possible (The appraisal of investments in educational facilities, 2000).
  • Exchange rate risk can be minimized by forecasting the exchange rate for a specific period and reserve that much foreign exchange to do business. This risk also depends on the country’s economic condition, inflation in the world market and so on.
  • If all the above risks can be minimized, the reputational risk will automatically minimize. The reputational risk may hamper the higher credit risk, liquidity risk, etc. and these gradually impact banks’ reputation and people lose trust in the bank.

Efficient Market Hypothesis (EMH)

EMH reflects the company’s share price which helps to earn profit only by investing risky shares and common shares are on fair value not in undervalue. The reason behind this concept is to reduce attraction on undervalued shares (Read, n.d.). The believer of this concept considers that not only the technical but also the fundamental analysis is not useful to forecast market trends. The tag line of this theory is “all information available”. And based on information this theory can be divided into 3 types:

Strong from: Price of share information both external and internal when available than it is called strong form. All information is available here.

Semi-strong form: In this form of efficient market hypothesis all external information regarding share price is available as in a financial statement, forecasting future plans, and previous share prices and so on.

Weak form: Here only given the past information on share prices. The lowest possible information is possible here.

According to the efficient market hypothesis (EMH) between Barclays bank and HSBC bank, Barclay’s bank shares more information than HSBC bank, though all information is external. They published the financial report annually, disclose share price, forecast future events, publish dividend rate and for this reason, this bank belongs to the semi-strong form of an efficient market hypothesis.

Findings

Barclays Bank Plc and HSBC Bank Plc is a renowned bank in the UK. They perform in the banking industry as competitors and provide services to the customers according to their demands. Year-wise they include different products and services according to the customer’s demand. They offer several types of retail banking and industrialized products to meet up the customers’ demands (Uche, 1998). Interest income is their main income source which is earned from different types of loan and the main expense is the proving interest to the customers on their deposits product.

After analyzing the financial performance of these two banks, some major findings have been found and they are:

  • The liquidity ratios provide a good result that indicates both banks have enough available liquid assets to meet up its current liability. Without sufficient liquidity, the bank cannot sustain itself in the position where they belong. Because when the bank fails to fulfill the demand of a customer for the reason of not holding enough liquid assets, customers can spread the news outside and it makes a huge crowd in the bank of all customers. As a result, a bank cannot meet up their demand and after that bank becomes bankrupt.
  • The leverage ratios provide poor results because a higher ratio indicates that the bank is mostly financed by debt capital rather than equity capital. Using more debt refers to taking more risks. Debt-based financing is riskier than that of equity-based financing. Using more equity in the business is a good sign as it refers that the company is able to meet up its obligation with internal financing.
  • Asset quality ratio procedures the loan loss charges as a percentage rate. A good asset quality ratio indicates the bank is getting or repaid loans on time. So the Non-Performing loans numbers decrease over the period. On the other hand, poor asset quality indicates the increasing number of NPLs. High NPLs are a bad sign for a bank. That indicates that the bank is not able to manage its credit risk and also refers to the mismanagement of the credit risk department.
  • Capital adequacy ratio provides the result of whether the bank has enough internal strength to face losses before they turn into bankruptcy and lose investors’ funds. This ratio shows moderate results in the analysis part. Barclays has increased the ratio gradually over the last five years but HSBC shows the poor result and it is very concerning for the bank.
  • After analysis of the annual report of these two banks that the report is clear in understanding. All available information is disclosed in a specific part which is mentioned in the earlier page with specific page numbers. Price earning ratio, share price, EPS, dividend rate, etc (Virgo, 2013). which information is necessary to buy or sell the share, all are available there. As all external share price-related information is available and they publish their annual report regularly, show the previous trend, prices and provide an announcement on divided and future activities. Only they hide their internal confidential information, so they fall the semi-strong form of an efficient market hypothesis.

Recommendation and Conclusion

Being a multinational British investment bank, the performance of Barclays bank is recommendable than that of HSBC bank of UK. Barclays Bank UK Plc should take some precautions to improve its financial health. At first, a bank should use more equity capital than debt capital. Dependency on debt capital should be reduced. To maintain solvency ratios they should focus on their equity capital and try to keep leverage ratios at a minimal rate. Precautions should be taken for asset quality ratios. So try to keep small the NPL ratio. Overall to maintain healthy financial health, a bank should be stay concern and maintain all government rules and regulations. Here window dressing makes help to show annual report an attractive one which may bring more investors to invest the bank, but after some time when they found poor performance, then they switch from the bank. So improving internal health is very important.

Barclays Bank UK Plc is renowned for satisfying their customers throughout the United Kingdom (UK) and around the whole globe from their branches. It is one of the UK’s important banks with the highest number of customers. The main competitor of the Bank HSBC is also performing well throughout the year and trying to improve its overall business strategies too. (Wolff, 2010)The financial performance is impressive based on their performance of a capital structure, liquidity, and other ratios. So overall the analysis represents a better overview of both of the banks and their performance level.

References

Abuharb, S. (2016). The Response by the UK Regulators to the Banking Crisis. SSRN Electronic Journal.

Batten, J. and Fetherston, T. (2002). Financial risk and financial risk management. Amsterdam: JAI.

Cargill, T. (n.d.). The financial system, financial regulation, and central bank policy.

Dewaelheyns, N. and Van Hulle, C. (2008). Internal Capital Markets and Capital Structure: Bank Versus Internal Debt. European Financial Management, 16(3), pp.345-373.

Grabel, I. (2003). Averting crisis? Assessing measures to manage financial integration in emerging economies. Cambridge Journal of Economics, 27(3), pp.317-336.

Laffont, J. and Maskin, E. (1988). The efficient market hypothesis and insider trading on the stock market. Cambridge: Dept. of Applied Economics, University of Cambridge.

Mayland, P. (1993). Bank operating credit risk. Chicago: Bankers Publishing Company.

Murray-Jones, A. and Gamble, A. (1991). Managing capital adequacy. Woodhead-Faulkner.

Read, C. (n.d.). The efficient market hypothesis.

SOMALIA: Barclays Faces Pressure. (2013). Africa Research Bulletin: Economic, Financial and Technical Series, 50(6), pp.20025A-20026A.

  1. Jacques, K. (2017). Capital regulations, supervision and the international harmonization of bank capital ratios. Banks and Bank Systems, 12(1), pp.175-183.

The appraisal of investments in educational facilities. (2000). Paris: OECD.

Uche, C. (1998). Accounting and control in Barclays Bank (DCO): the lending to Africans episode. Accounting, Business & Financial History, 8(3), pp.239-260.

Virgo, J. (2013). Investment risk, loss, and causation: After Rubenstein v HSBC Bank Plc [2012] EWCA 1184. Trusts & Trustees, 19(5), pp.430-434.

Wolff, K. (2010). Stanford International Bank: Caribbean Central Bank Regulation and Supervision. SSRN Electronic Journal.

Ab. Bari, N. (2018). Bank Specific and Macroeconomic Determinants of Profitability in Barclays Bank PLC, United Kingdom. SSRN Electronic Journal.

Haugen, D. (2010). Should the federal government bailout private industry?. Farmington Hills, Mich: Greenhaven Press.

Marcelin, I. and Mathur, I. (2014). Financial development, institutions, and banks. International Review of Financial Analysis, 31, pp.25-33.

Martin, P. (2009). As risk management evolves, is operational risk management important?. The Journal of Operational Risk, 4(4), pp.75-84.

Rebelo, S. (n.d.). Managing foreign exchange risk.

Written by

Md. Shadequr Rahaman

Email: [email protected]

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