BK7019 bank financial risk management

0
Running head: BANK FINANCIAL RISK MANAGEMENT
BANK FINANCIAL RISK MANAGEMENT
Name of the Student
Name of the University
Author’s Note

1BANK FINANCIAL RISK MANAGEMENT
Abstract
The objective of the paper is to delve into the aspects of risk management through
covering the process of effective examination upon the financial performance of the considered
two banks which are HSBC bank and Lloyd bank. Quantitative analysis is being executed upon
the obtained financial data from 2011 till 2017 for the two banks and the respective results are
interpreted and compared. The involved ratios that were being undertaken for conducting the
financial ratio analysis are the efficiency ratio, profitability ratio, liquidity ratio, share
performance, management capacity and capital structure of the two banking firms. Descriptive
statistical analysis was then implemented to rank the financial performance of the firms followed
by revealing the existing banking scenario in terms of its overall stability and measure of
dispersion from the performance expected. The major finding reflected that both of the banks
performed substantially well though relative variability was been found in their financial
operation and way of asset utilization.
Keywords: HSBC, Lloyd Bank, Financial Ratios Analysis, Performance Measurement

2BANK FINANCIAL RISK MANAGEMENT
Table of Contents
Abstract............................................................................................................................................1
Introduction......................................................................................................................................3
Background Information..................................................................................................................3
Research Objective..........................................................................................................................4
Research Methodology....................................................................................................................4
Literature Review............................................................................................................................4
Financial Ratio Analysis..................................................................................................................5
Liquidity Analysis......................................................................................................................6
Profitability Ratios.......................................................................................................................8
Management Capacity Ratios....................................................................................................10
Capital Structure Ratios.............................................................................................................12
Growth Ratios............................................................................................................................14
Conclusion.....................................................................................................................................16
References......................................................................................................................................17

3BANK FINANCIAL RISK MANAGEMENT
Introduction
It is important to understand the existing state of financial health of the banks based on
which a bank undertakes its future actions. The financial reports helps to track the financial
statements of HSBC and Lloyds bank based on which the financial standings of the firms from
2011 till 2017 is being assessed (Schürmann. 2016). The purpose of risk management in case of
these banks is to detect the core issues related to financial problems before they takes place in
order to handle the uncertainties that exists in the industry and invoke a strategic approach that
will mitigate adverse impacts yet will be able to optimize the objectives of the firms. Financial
ratios help the banks to examine the state of efficiency, liquidity as well as gaps in financial
performance of the banks and in segments where it can improve its functionality. The study
delves into these issues in case of Lloyds & HSBC bank followed by interpreting their financial
ratios and revealing about the degree of sophistication required for practicing effective risk
management in those banks.
Background Information
Being a multinational company HSBC bank is the 7th largest banking and financial
service group that was established in 1865 in British Hong Kong. After that the company
expanded its business worldwide and currently have its presence in 73 countries. With more than
6100 offices and its global headquarter in London, HSBC encompasses nearby 216000
shareholders possessing 228687 employees. The bank have a market capitalization of 182 billion
US dollars by 2017 followed by having a total number of assets of $ 2.521 trillion, total equity of
190.24 billion US dollars. The operating income of the company is close to $ 14.792 billion and
the net income is of $ 11.879 billion by 2017. HSBC is involved in retail banking, mortgage
loans, insurance, wealth management, private banking, investment as well as corporate banking

4BANK FINANCIAL RISK MANAGEMENT
and has a customer base of 51 million worldwide. Lloyd bank on the other hand is headquartered
in London, and is among the big four clearing banks involved in retail and commercial banking.
The firm provides insurance services and by 2016 possessed an employee strength of 45856 and
Lloyd bank was having an operating income of 17.5 billion, followed by net income of 16.6
billion and average income earning banking assets of 436 billion.
Research Objective
The objective of the research encompasses the aspect of determining the financial ratios
of HSBC and Lloyd banks based on which their financial development and ability to manage
financial risks for the period 2011-2017 are examined followed by a comparison between the
two banks.
Research Methodology
The methodology of the research is done through descriptive research design and
maintaining a deductive research approach. The data of 2011-2017 are gathered from the annual
reports of the respective companies and the financial information thus obtained are further being
analyzed through quantitative measurements.
Literature Review
According to Yan et al. (2017), financial positioning is quite dependent upon the
variations that are being taking place within the ability of the banking firms to mitigate risks
associated with their business. Adaptive analysis of the pass trends of the financial ratios can
provide a predictive measures that needs to be undertaken for reducing the financial risks
involved. The paper clearly put forth that beside operational risk, reputational risk, the banks

5BANK FINANCIAL RISK MANAGEMENT
faces liquidity risks to cover up its liabilities with its assets as well as market risks which are
nothing but systematic risks in the business.
In accordance with Black et al. (2016), it assessed the performance of banks financially
and depicted that financial ratios are effective estimators of the responsive of firms to understand
its performance overtime. Measurement of the financial health based on the profitability ratios
and efficiency ratios gave that there exist statistically significant difference between the
performance levels of the banking firms.
Curi and Murgia (2018), investigated upon the influential factors that renders impact in
the long run upon the financial health of the banking sectors. Among them the wealth
management, liquidity positions, asset quality, earning ability measurements are found to be
important parameters that determine financial health of the banks.
Adelopo (2017), examined the financial anomalies of private and public banks and how
financial ratios helps to understand them. It was been reflected in the paper that the joint ventures
made by public and private banks are capable of strongly assessing the risk mitigation ability of
the banks by measurement of financial ratios. It was also revealed by the paper that ranking the
capital adequacy, return on assets, etc. renders adequate information about the existing capital
utilization and repayment ability of the banks of their debts.
Financial Ratio Analysis
The financial ratio analysis are done in order to understand the relationship between
various factors that boosts a firs ability to manage risks as well as ensure its success based on the
measurement of its past performance from the perspective of the investor as well as the bank.

6BANK FINANCIAL RISK MANAGEMENT
Liquidity Analysis
Table 1: Lloyd Liquidity Ratios
Liquidity Ratios
201
7
201
6
201
5
201
4
201
3
201
2
201
1
Me
an
Med
ian
Stand
ard
Devi
ation
Coeffi
cient
of
Variat
ion
Current Ratios
1.1
55
1.1
75
1.1
58
1.1
41
1.1
83
1.2
93
1.4
75
1.2
26
1.17
52
0.121
2
9.89%
Shareholder's equity
to total assets
0.0
536
0.0
526
0.0
511
0.0
507
0.0
460
0.0
476
0.0
473
0.0
50
0.05
07
0.002
9
5.81%
Liquidity ratios provides measurement regarding the financial metrics that determines the
ability of the debtors to pay off the existing obligations. However, in the way, raising of external
capital will not be permitted. The valuation of loans to total assets is closer to the mean of 0.64
which suggests that the bank possess less ability to cover up its short term liabilities with its
liquid assets. However, the loan to customer deposits suggest about the loans that went out from
the bank towards their customers and the amount that came back to the bank from the customers
as deposits. This valuation shows that the mean is 1.175 which is not got as it reflects that fact
that the amount of loan that are being given out from the bank to its customers are higher than
the amount of deposits that returned back from the customers to the bank. The shareholders

7BANK FINANCIAL RISK MANAGEMENT
equity to total assets on the other hand suggests that the mean of the residual claim that the
shareholders have upon the amount of assets is 0.0507 which not good.
Table 2: HSBC Liquidity Ratios
Liquidity
Ratio
2017
201
6
201
5
201
4
201
3
201
2
201
1
Me
an
Me
dian
Sta
nda
rd
Dev
iati
on
Co
effi
cie
nt
of
Va
riat
ion
Current
Ratio
0.6890
03168
0.66
915
077
0.68
158
912
3
0.72
250
620
1
0.65
377
095
4
0.70
354
548
7
0.65
437
922
8
0.68
199
213
3
0.68
158
912
3
0.02
542
656
7
3.7
3%
Shareholder'
s equity to
total assets
0.0754
43012
0.07
384
717
2
0.07
821
033
4
0.07
229
952
6
0.06
808
287
1
0.06
508
431
8
0.26
551
489
7
0.09
978
316
1
0.07
384
717
2
0.07
321
404
9
73.
37
%
The valuation of loans to total assets is closer to the mean of 0.40 which suggests that the
bank possess less ability to cover up its short term liabilities with its liquid assets. In fact
HSBC’s ability to pay back its short term obligation is lower than that of Lloyd bank. This

8BANK FINANCIAL RISK MANAGEMENT
incorporates a significant amount of risk which is necessary to be taken care of by not storing
case or non-cash assets rather by allowing for more loan opportunities for utilizing the market
value of the bank’s assets. However, the loan to customer deposits suggest about the loans that
went out from the bank towards their customers and the amount that came back to the bank from
the customers as deposits. This valuation shows that the mean is 0.68 which is well as it reflects
that fact that the amount of loan that are being given out from the bank to its customers are close
to the amount of deposits that returned back from the customers to the bank. The shareholders
equity to total assets on the other hand suggests that the mean of the residual claim that the
shareholders have upon the amount of assets is 0.0997. Notably the measure of dispersion
suggest that the variations in the HSBC bank is credible more than that of Lloyd bank.
Profitability Ratios
Table 3: Lloyd Profitability Ratios
Profitability
Ratios
20
17
20
16
20
15
20
14
20
13
20
12
20
11
M
ea
n
Me
dia
n
Standard
Deviatio
n
Coefficient
of Variation
Return on
Shareholder's
Equity %
8.1
4
%
5.8
4
%
2.3
1
%
3.4
6
%
-
2.0
6%
-
3.1
5%
-
5.9
1%
1.5
7
%
2.3
1%
0.0510 326.06%
Return on Total
Assets %
3.6
7
%
2.0
0
%
2.1
0
%
1.2
7
%
1.6
5%
4.1
5%
4.1
0%
3.0
1
%
2.1
0%
0.0122 40.74%

9BANK FINANCIAL RISK MANAGEMENT
The profitability analysis suggests that in case of Lloyd bank the return that are being
obtained based on the investments that are being made by the shareholders of the firm was
negative from 2011 till the end of 2013. However the company have recovered from that poor
financial health and from 2014 till 2017 the return that the shareholders of the bank have
obtained has monotonically increased. After 2015 though it faced a slight downfall yet it
recovered effectively in 2016 ensuring a return on shareholder’s equity of 5.84 which is almost 2
and half times as compared to previous its year’s financial performance. Apart from that, the
return on total asset has a mean of 3.01 %.
Table 4: HSBC Profitability Ratios
Profitability
Ratios
201
7
201
6
201
5
201
4
201
3
201
2
201
1
Mea
n
Med
ian
Stan
dard
Devi
atio
n
Coe
ffici
ent
of
Var
iati
on
Return on
Ordinary
Shareholder's
Equity %
0.06
243
889
6
0.01
887
412
5
0.07
642
847
7
0.07
353
308
9
0.09
345
843
5
0.08
373
332
5
0.10
738
929
8
0.07
369
366
4
0.07
642
847
7
0.02
818
449
1
38.
25
%
Return on Total
Assets %
0.00
471
057
0.00
145
095
0.00
626
479
0.00
558
246
0.00
666
337
0.00
569
499
0.03
078
127
0.00
873
549
0.00
569
499
0.00
987
307
113
.02
%

10BANK FINANCIAL RISK MANAGEMENT
8 6 5 9 7 9 6 3 9 1
The profitability analysis suggests that in case of HSBC bank, the company have a
moderate performance over its profitability yet the variation is low in its profitability. It has a
mean of 0.073 which is moderate. Apart from that, the return on total asset has a mean of 0.08 %
which is not at all good and the coefficient of variation is very high.
Management Capacity Ratios
Table 5: Lloyd Management Capacity Ratios
Managem
ent
Capacity
Ratios
201
7
201
6
201
5
201
4
201
3
201
2
201
1
Me
an
Me
dian
Standa
rd
Deviat
ion
Coeffici
ent of
Variatio
n
Loans to
total assets
%
0.59
444
237
2
0.59
704
228
3
0.60
058
287
7
0.59
664
801
3
0.61
627
215
1
0.59
695
398
4
0.62
924
786
7
0.60
445
565
0.59
881
258
0.0131
76621
2.18%
investment
to total
assets
- 0 0
0.00
53
0.00
57
0.00
58
0.00
67
0.00
39
0.00
53
0.0030
7
78.30%
From the valuations of loans cleared with respect to the total assets of the bank the
standard deviation and mean values are 0.013 and 0.605 respectively. The value suggests that
less amount of loans are utilized or managed directly from the assets and this incorporates the

11BANK FINANCIAL RISK MANAGEMENT
fact that from the perspective of risk less amount of risk is associated with the financial aspects
of the bank as the values are low. The lower value of it indicates lower risk. However, the
investment to total assets suggest that the assets that are being utilized to generate earnings is low
as its mean value is close to 0.0039 and moreover the standard deviation is low. The coefficient
of variation suggests that the degree of variation is 78 %.
Table 6: HSBC Management Capacity Ratios
Management
Capacity Ratios
201
7
201
6
201
5
201
4
201
3
201
2
201
1
Mea
n
Med
ian
Stan
dard
Devi
atio
n
Coe
ffici
ent
of
Var
iati
on
Loans to total
assets %
0.41
770
525
6
0.39
984
656
8
0.42
116
177
6
0.41
258
604
8
0.41
632
445
1
0.40
112
971
5
0.38
692
946
9
0.40
795
475
5
0.41
258
604
8
0.01
235
168
6
3.0
3%
Net interest
income to
interest income
ratios
0.68
797
460
6
0.70
290
470
1
0.68
937
676
2
0.68
109
115
9
0.69
422
956
7
0.66
438
573
6
0.64
537
735
1
0.68
076
284
0.68
797
460
6
0.01
965
652
6
2.8
9%
investment to
total assets
0.15
428
0.18
391
0.17
801
0.15
772
0.15
944
0.15
639
0.07
021
0.15
142
0.15
772
0.03
762
24.
85

12BANK FINANCIAL RISK MANAGEMENT
680
9
561
503
6
402
3
376
5
556
4
661
8
820
4
402
3
611
2
%
From the valuations of loans cleared with respect to the total assets of the bank the
standard deviation and mean values are 0.013 and 0.407 respectively. The value represents that it
is almost same as in the case of Lloyd bank. This incorporates the fact that from the perspective
of risk less amount of risk is associated with the financial aspects of the bank as the values are
low. The lower value of is associated with less amount of risk in case of both banks. However,
coefficient of variation suggests that the amount of relative variability is high in case of HSBC
bank as compared to that of the Lloyd bank. Notably, the investment to total assets suggest that
the assets that are being utilized to generate earnings is low as its mean value is close to 0.15 and
the standard deviation is low. The coefficient of variation suggests that the degree of variation is
24.85 %.
Capital Structure Ratios
Table 7: Lloyd Capital Structure Ratio
Capital
structure Ratios
20
17
20
16
20
15
20
14
20
13
20
12
20
11
Me
an
Me
dia
n
Standard
Deviatio
n
Coefficient
of
Variation
Total liabilities
to total assets
%
94
%
94
%
94
%
94
%
95
%
95
%
95
%
95
%
94
%
0.006281
349
0.66%
Total liabilities 15 15 16 16 20 19 19 17 161 2.229959 12.63%

13BANK FINANCIAL RISK MANAGEMENT
to equity %
53
%
75
%
17
%
13
%
53
%
69
%
83
%
66
%
7% 149
Share capital to
total assets
0.0
08
9
0.0
08
7
0.0
08
9
0.0
08
4
0.0
08
4
0.0
07
6
0.0
07
1
0.0
08
3
0.0
084
0.000679
492
8.21%
Capital
Structure
Ratios
2017 2016 2015 2014 2013 2012 2011
Mea
n
Med
ian
Stan
dard
Devi
ation
Coe
ffici
ent
of
Vari
atio
n
Total
liabilities to
total assets
%
0.92
1534
905
0.92
3124
599
0.91
8030
623
0.92
4082
214
0.92
8702
236
0.931
9864
75
1.866
0514
96
1.05
9073
221
0.92
4082
214
0.35
5873
567
33.6
0%
Total
liabilities to
equity %
11.7
4452
042
12.0
0806
231
11.1
9967
8
12.1
7214
394
13.0
2568
532
13.70
2958
02
6.718
1449
85
11.5
1017
043
12.0
0806
231
2.26
9582
979
19.7
2%

14BANK FINANCIAL RISK MANAGEMENT
Share
capital to
total assets
0.00
4028
915
0.00
4250
972
0.00
4084
4
0.00
3647
871
0.00
3524
477
0.003
4309
636
0.014
8512
136
0.00
5402
688
0.00
4028
915
0.00
4177
738
77.3
3%
Growth Ratios
Table 8: Lloyd Growth Ratios
Growth
Ratios
20
17
20
16
20
15
20
14
20
13
20
12
20
11
Mean
Me
dian
Standard
Deviation
Coefficient
of Variation
Revenue
%
Year over
Year
-
7.
44
40.
48
-
18.
63
-
2.8
6
-
2.9
9
67.
25
-
38.
32
5.3557
14286
-
2.99
36.167157
69
675.30%
3-Year
Average
1.
9
3.5
5
-
8.4
7
16.
37
0.0
3
-
0.3
4
56.
37
9.9157
14286
1.9
21.776799
47
219.62%
5-Year
Average
-
0.
06
12.
49
-
4.5
8
-
1.3
8
44.
05
19.
73
5.5
10.821
42857
5.5
16.926737
65
156.42%
10-Year
Average
9.
39
8.9
4
3.8
3
15.
15
15.
15
10.
95
10.
95
10.622
85714
10.9
5
3.9093678
7
36.80%

15BANK FINANCIAL RISK MANAGEMENT
The growth ratios suggests that over time the firm has passed through several upheavals
and downfalls for which the coefficient of variation is high. The standard deviation value suggest
that the dispersion is high within a period of 1 year, 3 year or 5 year period though on a decade
basis that deviation form mean is moderate financially.
Growth
Ratios
20
17
201
6
20
15
20
14
20
13
201
2
201
1
Mean
Medi
an
Standard
Deviatio
n
Coeffic
ient of
Variati
on
Revenue %
Year over
Year
4.3
3
-
13.1
8
-
4.6
6
-
2.9
6
3.1
1
-
12.0
3
4.3
1
-
3.01142
857
-2.96
7.44341
6394
-
247.17
%
3-Year
Average
-
4.7
7
-
7.04
-
1.5
6
-
4.1
6
-
1.8
3
-
2.31
-
3.5
6
-
3.60428
571
-3.56
1.93546
5983
-
53.70%
5-Year
Average
-
2.8
8
-
6.14
-
2.6
3
-
1.3
8
-
4.0
4 -3.8
3.3
1
-
2.50857
143
-2.88
2.95754
6441
-
117.90
%
10-Year
Average
-
3.3
4
-
1.53
1.1
7
3.5
8
6.1
4
10.4
2
12.
02
4.06571
4286
3.58
5.81274
4209
142.97
%

16BANK FINANCIAL RISK MANAGEMENT
In case of HSBC bank the same scenario is observed that over time the firm has passed
through several fluctuations from mean value or expected value. The standard deviation value
suggest that the dispersion is moderate within a period of 1 year, 3 year, 5 years or 10 years.
However, the coefficient of variation shows that the relative variability in case of HSBC bank is
greater as compared to Lloyd bank.
Conclusion
It can be concluded from the analysis that both of the bank have performed well over
time. However the ability to cover up the risks associated with its liabilities in case of HSBC is
high as compared to that of Lloyd bank. Maybe this is due to the bank’s extensive presence in
global sphere as compared to the other one. However, the Lloyd bank has executed a more
profitable business as compared to HSBC over the period of 2011 to 2017. However, the relative
variability of HSBC is higher than that of Lloyd bank. Apart from that the financial ratios
suggest that the risk mitigation ability is high in case of HSBC bank as compared to that of the
Lloyd bank for which it have performed batter over the period irrespective of the fact that Lloyd
bank possess a better liquidity ratio than HSBC. Apart from these aspect, both the banks has
performed well over the period of 2011-2017.

17BANK FINANCIAL RISK MANAGEMENT
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