Significance of Financial Measures in Banking - HSBC UK

Finance Assessment

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................5
CONCLUSION................................................................................................................................7

INTRODUCTION
In this report the author will cover the significance and importance of the capital
adequacy, liquidity, leverage, duration and profitability of the bank. The report will further
enhance the use of financial reports of banks to make certain decisions. To illustrate these factors
HSBC Bank UK has been chosen. HSBC Holdings plc is a British Global Investment Bank and a
financial service holding organisation which was founded in 1865 with its origin from The
Hongkong and Shanghai Banking Corporation. It has its headquarters in London, England, UK.
It has its operations in more than 65 countries with more than 38 million customers. It is also the
largest bank in the entire Europe.
TASK 1
There are various measures which helps the directors, managers and investors to
understand the financial information in an easy and effective way. Various measure used to
evaluate banks are:
Capital Adequacy: Capital adequacy is a ratio which depicts the capacity of the bank to
payback its leverage. This ratio determines the capital adequacy of the bank. It is generally set by
the central bank or the banking regulatory authorities of the specified country where the bank is
carrying out its business. This ratio further prevents the banks from getting insolvent as it limits
their ability to generate more credit than their capacity to pay. This is the ratio of bank capital in
relation to its risk-weighted assets and current liabilities. This prevents the depositors and
maintains discipline in the financial system by promoting stability and efficiency.
The formula used to measure Capital Adequacy Ratio is = (Tier I + Tier II + Tier III
(Capital funds)) /Risk weighted assets). Tier 1 capital consists of the bank's core capital which is
equity and retained earning reserves. Tier 2 includes reserves like revaluation reserves with
mixed capital instruments and short term debts. HSBC UK maintains its capital adequacy ratio
which is set by The Prudential Regulation Authority (PRA) and Bank of England.
Liquidity: A bank's liquidity refers to its ability to pay short term debt, day to day
business obligations and the due bills. This measures the cash and other current assets that the
bank has to maintain to carry out these obligations. Liquid assets are the assets that can be easily
converted into cash and can be used to pay financial obligations. Some examples of liquid assets