UK Financial Sector Analysis and Risks

This assignment requires an in-depth analysis of the UK's financial sector. Students must examine its structure, including major institutions like banks (e.g., RBS) and regulatory bodies (e.g., Bank of England), and identify key players within this system. The analysis should delve into historical developments shaping the sector and contemporary challenges it faces, such as systemic risks and macroeconomic factors affecting profitability. Students are expected to draw upon scholarly sources and relevant data to support their findings.

Running head: PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Profitability in the Banking Sectors in United Kingdom
Name of the Student:
Name of the University:
Author’s Note:

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Acknowledgement
I am grateful to my supervisor _____________________ whose expertise; understanding
and generous guidance had supported me to work on this topic “Profitability in Banking Sector
in United Kingdom”. I would like to thank my Professor for being an excellent guide throughout
the course and be a reason for constant source of motivation and for helping me shape up my
translation skills.
I am thankful to my friends for giving the right advice at the right time and for being
constant source of motivation. I received constant guidance from my family members as without
their support, this dissertation was not possible. This dissertation becomes a reality with the kind
support and help of many individuals. I would like to extend my sincere thanks to all of them.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Abstract
This paper has the intention of explaining the factors that have an impact on the
profitability in the banking sector in United Kingdom. The paper has therefore selected four
banks that are performing in the economy of United Kingdom and has assessed their financial
data from the annual report. The secondary data that has been collected from the annual report
has been used for the purpose of computing correlation in order to find out the relationship
among the selected banks with respect to their profitability. The paper has looked to answer the
research questions that were constructed and has looked to attain the objectives of the research.
The assessment of the data reveals that there is a positive correlation among the selected banks
and Barclays has been found to be the bank that has the most effective level of profitability.
Recommendations have even been provided in order to improve the profitability of the banks.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Table of Contents
Chapter 1: Introduction....................................................................................................................5
1.1 Background of Research........................................................................................................5
1.2 Statement of Problem............................................................................................................8
1.3 Rationale of the Research....................................................................................................10
1.4 Research Aim and Objectives..............................................................................................11
1.5 Research Questions..............................................................................................................12
1.6 Research Methodology........................................................................................................12
1.7 Structure of the Research.....................................................................................................13
Chapter 2: Literature Review.........................................................................................................15
2.1 Theories of bank profitability..............................................................................................22
2.2 The market power theories..................................................................................................22
2.3 The efficiency theory...........................................................................................................23
2.4 The balanced portfolio theory..............................................................................................24
2.5 Risk Return trade-off theory, the signaling and bankruptcy cost hypotheses.....................24
Chapter 3: Research Methodology................................................................................................25
Chapter 4: Data Analysis and Findings.........................................................................................31
4.1 Introduction..........................................................................................................................31
4.2 Analysis...............................................................................................................................31
4.2 Correlation...........................................................................................................................36

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Chapter 5: Conclusion Recommendation and Future Work..........................................................39
5.1 Conclusion...........................................................................................................................39
5.2 Recommendation.................................................................................................................40
5.3 Future Work.........................................................................................................................42
Reference List and Bibliography...................................................................................................43

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Chapter 1: Introduction
Twenty-first centuries is considered as the era of business as massive improvements in
the businesses all over the worlds can be seen. In the recent years, it has been observed that the
businesses all over the world are progressing in a fast pace. It needs to be mentioned that there
are some major objectives of the businesses all over the world. One of those major objectives is
to increase the profitability of the companies. It is considered as one of the major objectives of
the business organizations as the future expansion of the businesses is largely dependent on the
profitability of the business organizations (Saeed 2014). In addition, it is considered as the most
important financial objective of the companies. The same theory is applicable for the banking
industry. It can be seen that the business operations of the banks are different from the other
companies, but one of the major financial objectives of the banks is to maintain the profitability
so that they can continue their banking operations in an effective way. In this aspect, it is
required to be mentioned that there are certain factors having their effects on the profitability of
the companies (Bikker and Hu 2012). This is also applicable for the banking sectors. In the
banks, certain factors have their negative as well as positive effects on the profitability of the
banks. Thus, this study takes an honest attempt to analyze the various factors affecting the
profitability of the banks of United Kingdom (UK).
1.1 Background of Research
From the above discussion, it can be seen that the study takes an attempt for the analysis
and evaluation of the various factors of profitability in the banking sector of UK. The banking
industry of UK is considered as one of the major sectors (Mirzaei, Moore and Liu 2013). This
particular banking industry contributes largely towards the economic development of UK. It

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needs to be mentioned that the economic crisis of 2009 had major effects on the banking industry
of UK. As a result of the crisis of 2009, the UK banking industry had to go through the process
of consolidation (Bennett and Kottasz 2012). In that time, many banks of UK merged with other
banks so that they can reform the banking industry of UK. In this context, it needs to be
mentioned that the banks of UK have to comply with different kinds of statutory rules and
regulations at the time of carrying on their banking operations. For this reason, there are many
factors in the UK economy that have both positive as well as negative effects on the profitability
of the banks. In this context, it is required to be mentioned the fact that there are certain banks
that have large dominance over the banking industry of UK (Cohn, Fehr and Maréchal 2014).
These certain banks have acquired the majority portion of the market share of UK banking
industry. Thus, it can be observed that the banking industry of UK is oligopolistic in nature. It
implies that certain large banks dominate the banking industry of UK and the number of
customers is huge (Beatty and Liao 2014).
In order to analyze various factors of profitability in the UK banking sector, four major
banks have been selected for measuring and analyzing the factors of profitability. The selected
four banks are Barclays Plc Bank, Bank of England, Royal Bank of Scotland (RBS) and
Lloyd Banking Group. All these four banks are the major banks that dominate the banking
industry of UK. It can be seen that the four banks have been fulfilling the banking demands of
most of the people of UK. It implies that all these four banks have good market reputation. It is
required for this research to discuss about these banks. Barclays PLC is one of the major British
multinational banks of UK (home.barclays 2017). It needs to be mentioned that Barclays also
provides different kinds of financial services to the people of United Kingdom. The bank is
headquartered in London and the bank was established in the year of 1690. The major products

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
of Barclays are retail banking, commercial banking, investment banking and wealth management
(home.barclays 2017). The bank has an employee base of 129400. The major business divisions
of Barclays are Barclaycard, Barclays Investment Bank and Barclays Wealth. In the banking
industry of UK, another major name is Bank of England (bankofengland.co.uk 2017). The
formal name of this bank is Governor and Company of the Bank of England. Bank of England is
considered as the central bank of United Kingdom. This bank was established in the year of 1694
and the bank of headquartered in London. In the banking industry of UK, Bank of England is the
second oldest central bank of United Kingdom. The major products of the banks are retail
banking products, commercial banking products and others (bankofengland.co.uk 2017).
The next major bank is the Royal Bank of Scotland. In UK, this bank is known as RBS
and is considered as one of the major retail banks (rbs.com 2017). It needs to be mentioned that
Royal Bank of Scotland has more than 700 braches all over the UK. The bank was founded in
the year of 1727 and the bank is headquartered in Edinburgh, Scotland. The major products of
Royal Bank of Scotland are finance and insurance, consumer banking and corporate banking. It
can be seen that the Royal Bank of Scotland has an employee base of 92,400 (rbs.com 2017).
The next major bank is Lloyd Banking Group. Lloyd Banking Group is a major British financial
institution. Lloyd Banking Group was developed as a result of the acquisition of HBOS by
Lloyds TSB (lloydsbankinggroup.com 2017). This bank was established in the year of 1995. The
key products of Lloyd Banking Group are retail banking, commercial banking, general
insurance, life insurance, pension and others. The company has an employee base of 75000
(lloydsbankinggroup.com 2017).
Thus, based on the above discussion, it can be seen that all the selected four banks are the
four major banks of UK. The research is based on these four banks. With the help of different

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
research tools, the research has taken an attempt to analyze and evaluate various factors having
impact on the profitability of these selected banks. In this context, it is required to be mentioned
that commercial banks play a crucial role in the allocation of economic resources in the countries
(Coulbeck 2012. ). They contribute largely towards the development of economic condition of
the countries by making sufficient funds available for the investors. Thus, for all these reasons, it
is required for the banks to run in the portability manner. For all these reasons, it is required for
the managers of the banks to take into consideration all the necessary factors having influence on
the profitability of the banks. Thus, the background of this research is based on the analysis of all
the necessary factors of bank’s profitability.
1.2 Statement of Problem
At the time of carrying on the banking operations, the banks have to take into
consideration some of the major factors. It needs to be mentioned that the focus and objectives of
the bans have been changed and shifted drastically as compared to the earlier time. In the past
years, the focus of the banks used to be on raising capital for their various banking operations.
Another major objective was to de-risk the balance sheets so that all the risk based requirements
can be met (Bennett and Kottasz 2012). These two used to be the major focus of the banks of UK
in the earlier year. However, after the introduction of Basel III regime, a drastic change can be
observed in the objectives and focus of the banks (Hong, Huang and Wu 2014). In this context, it
is required to be mentioned that the regime of Basel III has introduced some of the major
requirements that the banks have to meet. The new requirements of Basel III states that the banks
need to depend more on the stable funding (De Waal et al. 2013). In addition, the banks are
required to hold more liquid assets so that the liquidity of the banks can be maintained; this
aspect also lowers the risk factor for the banks. Apart from this, the banks all over the world

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
including United Kingdom are required to comply with different kinds of statutory rules and
regulations. It has been seen that the profitability of the banks have been affected as a result of
all these requirements and regulations (Rogers 2016). In addition, all of these aspects are creating
more challenges for the banks in continuing their different banking operations. All these aspects
have direct and indirect relationship with the profitability of the banks of UK.
It can be observed that the banking industry of UK has grown and expanded quickly till
the financial crisis of 2008. Both national and multinational banks can be seen in the banking
industry of UK. Currently, the total worth of the UK banking industry is nearly £8 trillion. Thus,
it can be seen that the banking industry of UK is one of the largest and major industries. From
the above discussion, it can be seen that there has been recent major changes in the banking
industry of UK. These changes can be considered as the major factor for the profitability of the
banks of UK (economicsonline.co.uk 2017). With the help of some of these changes, it has
become possible for the emergence of new players. However, on the other hand, due to these
changes, the banks of UK are facing some of the major challenges; as a result of this, the
profitability of the banks are affected. After the introduction of all these new changes and
regulations, it has been observed that the profitability of the banks have decreased due to some
major constrains (prospects.ac.uk 2017). The reason is the presence of major factors that can
influence the profitability of the companies. Thus, it is important to discover all these factors. It
needs to be mentioned that the banking industry of UK is one of the major contributors towards
the development of the overall economy (fca.org.uk 2017). The banking sector of UK provides
40% job among the total financial sector. In addition, the banking industry of UK contributes
nearly 3.7% of the total gross domestic product. For all these reasons, it is inherent to investigate
that factors having direct and indirect relation with the profitability of the banks of UK. Thus,

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
this research is helpful for discovering the factors having direct or indirect relation with the
profitability of UK banks.
1.3 Rationale of the Research
In every research program, there is a need to have some logical reason for the selection of
that particular topic. There is not any exception of this fact in case of this research program.
From the above discussions, it can be observed that the research program taken an honest attempt
to analyze and evaluate various factors having direct and indirect influence on the profitability of
the banks of UK. In this context, it needs to be mentioned that there are some major factors for
analyzing the factor having relation with the profitability of the banks of UK (Petria, Capraru and
Ihnatov 2015). First, it has been observed in the recent years that there has been a drop in the
portability of the banks of UK. From the above discussion, it can be seen that many factors are
responsible for the decrease in the profitability of the banks. This can be considered as one
reason for the analysis and evaluation of the factors for the profitability of the banks of UK.
Second, the above discussion also shows that the banking industry of UK is a crucial factor for
the financial success of the country (Masood and Ashraf 2012). The banking industry of UK
contributes in various ways for the economic development of UK; like it provides large number
of jobs top the people of UK, it largely contributes towards the gross domestic product of UK
and many others. However, the dip in profitability of the banks of UK can cause harm in the
above-mentioned factors. For this reason, it is important for the analysis and evaluation of the
factors for the profitability of banks in UK. Lastly, it can be observed that there are not many
studies conducted exploring the factors of profitability of UK banks. For this reason, this analysis
will be highly valuable for the future studies on this same topic.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
1.4 Research Aim and Objectives
It is important and required for every research program to have a clear aim along with
some well-developed research objectives. Research aim and objectives provides the research
programs with necessary directions to be completed in an effective way. There is not any
exception of this fact in case of this particular research. Based on the above discussion, it can be
observed that the main aim of this research is to analyze and evaluate the effects of various
factors on the banks of UK. For this research, for major banks of UK has been selected; they are
Barclays Plc Bank, Bank of England, Royal Bank of Scotland (RBS) and Lloyd Banking
Group.in order to achieve this particular goals, soma major research objectives have been
developed. They are discussed below:
 The first objective of this research is to indemnity various factors having influence on the
profitability of the banks of UK. The analysis has been done on the selected four banks of
UK. According to the earlier discussion, it can be seen that the banks of UK have positive
influence on the overall development of UK. For this reason, it is required to identify the
factors of profitability in these four banks.
 The next objective of this research is to conduct an analysis on how the above-identified
factors affect the profitability of the banks of UK. It needs to be mentioned that different
factors have different effects on the profitability of banks. Thus, it is required to know the
extent of impact of this factor on the profitability of the selected banks of UK.
 The next research objective is to develop different strategies to diminish the negative
effects of above-identified factors on the profitability of the selected four banks. In this
context, it is required to be mentioned that for the overall development of the banks of

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
UK, it is important to increase the profitability of the banks. Thus, it can be considered as
a major objective of this research program.
1.5 Research Questions
Research questions are developed based on the research objectives. The questions of this
research are mentioned below:
1. What are the major factors that have influence on the profitability of Barclays Plc Bank,
Bank of England, Royal Bank of Scotland (RBS) and Lloyd Banking Group?
2. How do these above-identified factors influence the profitability of Barclays Plc Bank,
Bank of England, Royal Bank of Scotland (RBS) and Lloyd Banking Group?
3. What are the major strategies that can be employed in Barclays Plc Bank, Bank of
England, Royal Bank of Scotland (RBS) and Lloyd Banking Group to diminish the
effects of negative factors on their profitability?
1.6 Research Methodology
Research methodology is one of the major steps in any research process. Research
methodology is the systematic and theoretical analysis of the applied methods for carrying on the
research program. The researcher has adopted certain techniques for this research process. The
researcher has adopted the strategy of thematic analysis for this research. It is considered as one
of the most common form of research (Vaismoradi, Turunen and Bondas 2013). In this method,
each objective is considered as a particular theme for the investigation of the selected topic. As
the part of this research process, the researcher has collected secondary data. The sources of
secondary data are different prior developed research papers, research articles, journals and other
materials. These are important sources of secondary data. Other most important sources of

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secondary data are websites of the selected banks, different newspaper articles related to the
selected banks and others (Joffe 2012). After the collection of secondary data, they have been
analyzed and evaluated in order to get the answers of the selected research questions. In addition,
it needs to be mentioned that the researcher has adopted the approach of quantitative analysis for
this particular research process (Garratt 2012). In addition, it is also required to be mentioned
that the researcher has adopted the positivism approach for this research as the relevant theories
and articles are linked with the literature review in order to acquire effective results. Due to the
adoption of quantitative research method, the researcher has adopted deductive approach for this
research.
1.7 Structure of the Research
It is required to have a particular structure for any research program. This research
process has developed based on a specific structure. It needs to be mentioned that the whole
research program has been divided into five major chapters; they are Chapter1 that is
Introduction, Chapter 2 that is Literature Review, Chapter 3 that is Methodology, Chapter 4 that
is Data Analysis & Findings; and Chapter 5 that is Conclusions and Recommendations. All these
factors are crucial for the successful completion of the research. Chapter 1 includes the
background of the research along with the problem statement. The rationale of the research is
also included in this part. After that, the research aim and objectives have been set along with the
research questions. Methodology and structure of the research have also been mentioned in this
part. Chapter 2 includes the literature review of the research. In this chapter, the researcher has
analyzed and evaluated different kinds of research papers, articles, journal and others. This step
is considered as a major part of the research processes. Chapter 3 includes the detailed
description of all the methods of research. The major parts of this chapter are research

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
philosophy, research design, process of data collection, justification of various research
processes, validity of research, ethical consideration along with limitations. Chapter 4 includes
the data analysis and findings part. In this chapter, the collected data are analyzed with the help
of various research tools. The analysis part is followed by the findings part. In this part, major
findings are described in detailer manner. The last chapter is conclusion and recommendations.
In this part, the overview of the research process is provided. Based on this, some
recommendations are provided for the future research in the same area.

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Chapter 2: Literature Review
In the current time period, individuals can definitely say that banks are helping in the
contribution to the growth of the economy as a whole for United Kingdom. The banking system
is one of the key sectors in the economy and only due to the fact that the institutions or the banks
provide various services. There have been a lot of researches, which tries to explain the
indicators of profitability of the banks. There have been various researches that have been
implemented different features, external variables of the bank level data among various nations.
Gibson and Thirlwall (2016) in their research have made use of the Regression Analysis
in order to ascertain the relationship among certain bank ratios and the measure for profitability.
According to the information and the data that is available from the banks that are functioning in
several countries, it has been discovered that differences in the margin of interest and the
profitability of the banks replicate several determinants that are inclusive of the banking
characteristics, macro-economic conditions, polices for instance of general financial system and
insurance of deposit. With respect to their research it has been discovered that the bank ratio of
the concentration can have an influence on the profitability of the bank as the bigger banks look
to have higher level of profit. The banks that are well capitalized have increased amount of net
interest margins and have been found to be much more profitable. This process connected with
the pattern that the banks with increased capital lower level of expenses. It has even been
researched that the banks with high non-interest earning assets give out less amount of profit.
The banks with increased amount of borrowed funds are less efficient. There are certain facts
about the international factors that have an impact on the level of profitability. There have been
researches that indicate that inflation optimistically has an impact on the interest margins and

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
generate increased amount of profit. The income of the banks become higher with the level of
inflation with respect to the costs that have been incurred by the banks.
There was another research that was undertaken in the banking system in Nigeria by
Alessandri and Nelson (2015). In their research they have undertaken research over 154 banks
during the time period of 1980 to 2006. It requires to be noted that the key areas their work is the
assessment of the external factors. According to their outcome, it has been discovered inflation,
actual rates of interest, the rate of exchange and the monetary policy are key macro-economic
indexes of the performance of the banks in Nigeria. This research has indicated a string
relationship between the performance of the macro-economic variables and the bank
profitability. This paper has even reported that development in the stock market, development in
the banking sector and the financial structure is not statistically vital: and the relationship among
the tax policy and the profitability of the bank in the economy of Nigeria is indecisive.
There has been another research that has been undertaken by Lewis (2015) who has
looked to recognize the determinants of profitability in the banking sector in Pakistan. In this
research 40 banks were assessed during the time period of 2006 to 2010. This paper investigated
the relationship among the macro-economic variables that are related to the bank and distinct
characteristics of the bank. This researcher has utilized the Return on Equity (ROE), Return on
Assets (ROA), Net Interest Margin (NIM) and Return on Capital Employed (ROCE) as the main
indicators of profitability. Pooled ordinary least square has been used for the purpose assessing
the impact of deposits, equity and economic growth deposits, loans market capitalization and
inflation of the measures of profitability. This research paper has discovered both the external
and the internal factors have a strong effect on the level of profitability. In this paper, it has even
been discovered that as the size of the bank is directly related to ROCE, which indicates that as

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
the size of the bank develops, the profitability even rises. The results of other diagnostics
recommend that Loans, MC, CD, INF and NIM have key positive association with the ROCE. If
the loan rises, the ROCE rises as well.
Another research that has been undertaken by White (2014) recognizes that the measures
of bank profitability and the net interest margins by making use of a balanced panel of around
167 banks during the time period of 2003 to 2008. It has been observed that 78 banks out of 167
banks are representing East Asia and the rest of 89 banks are from Latin America. By taking
assistance of the regression analysis model, it can be observed that the Gross Domestic Product
and inflation have a very less effect on the profitability of the bank. On the other hand, the size
of the bank, adequacy of capital, liquidity ratio, loss of loan reserves and cost to income ratio are
statistically significant. This explains that the macro-economic factors have very less influence
on the extent of profitability and on the other hand the internal factors are increasingly associated
with the bank system profitability in East Asia and Latin America.
Cooke (2016) in their research aimed to project the factors that ascertain the financial
performance of the banks. The paper therefore decided to discover the differences among the
Government banks and private banks that are functioning in Indonesia. This paper utilized return
on assets and the return on equity as the key factors of profitability. There are even macro-
economic factors, which explains the relationship among the variables and their level of
fluctuations. This paper has discovered that Credit to Deposits and Capital to Assets ratio
directly has an impact on the Return on Equity and Return on Assets. It was finally concluded
that capital adequacy ratio is the most significant factors that have an influence on the
performance of the bank. This indicated that there is a positive relationship among the bank
profitability and the internal factors.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Cohen and Scatigna (2016) in their research evaluated the various kinds of banks that
have been operating in China for a time period of 1999 to 2006. In this paper the variables that
are independent comprises of the financial ratios that have an impact on the performance of the
bank. The paper even included certain macro-economic variables. The research even discovered
that the net interest margin expresses the financial performance in a more effective manner that
the profitability measures like the return on asset and return on equity. It was even disclosed that
the size of the bank does not replicate the profitability of the banks in China.
Campiglio (2016) completed a research that is with respect to the influence of the
characteristics of bank and the external indicators that is associated with the performance of the
banks that are operating in Tunisia for the time period of 1980 to 2000. In accordance to this
research, certain conclusions were made about the procedure of banking in Tunisia. Initially it
was discovered that the net interest margin and the profitability is associated with the well-
capitalized banks. It was even concluded that the inflation is positively related with the
performance of the bank while the growth of the economy has no impact. It was even discovered
that the level of competition has even more effect on the Tunisian banks than on their
concentration.
Laeven, Levine and Michalopoulos (2015) has focused their study in order to discover
how the entry of foreign banks has an impact on the market of the domestic market. The outcome
of their study recommends that foreign banks are more than profitable than the domestic banks in
the developing countries and the contrary is seen in the developed countries. Furthermore, there
has been empirical evidence that the entry of the foreign banks leads to reduction in the margins
and profitability in the domestic banks and more distinctly the number of entrants and not even
their share in the market is accountable for this scenario.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
In the last few years more and more researches have been looking at the determinants of
the profit of the bank in various countries. Mathias (2013) has investigated the countries that falls
under the European Union like Spain, Germany, Portugal and France. They have discovered that
higher the equityto the assets ratio has similar positive impacts on the profitability and the
margin of interest. It has even been discovered that the operating costs have a positive
association with the net profit margin but on the other hand not with the profitability and the
opposite relationship is existent for the market share of the bank. At the aspect of the macro-
economic variables the rate of unemployment was discovered to be related negatively with the
profitability of the bank and statistically crucial in the case of return on assets. At the end, the
nominal effective rate of exchange does not have any effect on both the net interest margins and
profitability and on the other hand the inflation that is precise in every aspects.
Borio (2014) has investigated the contribution of external and internal factors to the
performance of the banking industry that is operating in European Nations. By looking at the
internal concerns, it is discovered that higher the equity to assets ratio the higher is the profit that
is inclusive of the developing and developed nations. Furthermore, they have made use of certain
new aspects like the tax variables and the legal indicators which have not been utilized in earlier
papers in order to assess the profitability of banks. The end results show a reverse relationship
between the loan to asset ratio, segment of the provision of loan loss and the return on asset of
the firm. Moreover, neither the hypothesis nor the conduct structure performance is assisted in
this research. By examining the external factors, the end result recommends a positive effect on
the degree of the rate of interest and on the other hand a negative effect of the interest rate
variability and the rise in the GDP.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Culpepper and Reinke (2014) has utilized the dynamic and the cross-sectional panel
anticipation to examine the factors that have an impact on the profitability of the bank in UK,
Denmark, Italy, Germany, France and Spain in the year 1992 to 1998. This research has
discovered that there is no relationship that is existent in a systematic and consistent manner
among the aspect of the performance and the size of the bank. Conversely, the end result
explains that the relative size of the off-balance sheet is positively associated with the revenue of
the banks for United Kingdom but is neutral or negative when assessed in other countries.
Furthermore, they find a positive relation among the capital-asset ratio and profitability and their
discoveries does not assist any systematic relationship among the profitability and ownership.
Claeys and Darvas (2015) has taken a sample of 26 domestic and 32 foreign UK banks
and has undertaken a multivariate assessment in order to assess how the there is an existence
between the performance of the domestic banks with respect to the foreign banks. The results
show that domestic banks perform in a better manner than the foreign banks in UK and this has
been discovered from the fact that the domestic banks reveal higher returns on equity, net interest
revenue to the total earning assets and providing loans to the consumers and short term funding.
In another paper, it has been observed that () has assessed by constructing an unbalanced panel
set of data of 224 observations and data has been collected from the time period of 1995 to 2002,
the effect of bank distinct aspects, macro-economic scenario and the structure of the financial
market on the profitability of the commercial banks that operates in UK. This paper has
discovered that the equity to the total assets that is indicative of the strength, is the most
significant aspect in the profitability of the banks in UK, while the cost-to-income ratio and the
size of the bank are related negatively to the profit of the banks. On the other hand, the end result
for the effect of liquidity ratio and the reserves of the loan loss on the net interest margins and

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
the ROAA are a mixture. At the end, the utilization of the external determinants in their
framework raises their explanatory power only in the scenario when they are utilized
individually.
By making use of the bank level data for the 15 European countries in the time period of
1995 to 2001, Ball (2014) assess how the profit of the domestic commercial and foreign banks is
impacted by the distinct features of the banks and the entire banking environment. The invention
in their research is that they utilize the financial market framework variables like the
capitalization of the stocks to the GDP, capitalization of the stock market to the asset of the
deposit money and the assets of deposit, money banks to the GDP. The outcome explains that
there is an existent of a positive relationship among the equity to assets and ROAA and on the
other hand the cost to income ratio and the size has been related negatively with the profitability.
Furthermore, the most key aspect of profitability for the national banks was equity to assets
whereas the cost to income was for the foreign banks. They discover that the aspect of size is
associated negatively with the profitability for the foreign and the domestic banks. The impact on
the growth of GDP and inflation has various signs for the foreign and the domestic and is not
distinctly for the aspect of concentration.
In the recent years after the financial crisis, the banks operating in United Kingdom have
slimmed down in a massive extent, shedding off the employees and spending lower level of
money as extensive scrutiny from the society and the regulators discloses their actions strongly
in the limelight (Hryckiewicz 2014).
After many years of struggle the banks functioning in United Kingdom have been
profitable largely again with the development of new challengers, conventionally key players

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
and constructing communities all delivering strong profits for the previous year. By making use
of the data that has been given by the magazine The Banker that covers the financial sector, the
Business Insider has amassed a list of lenders in UK which made the highest money in the last
year.
In an understandable manner the biggest banks in UK like Barclays, Lloyds and HSBC
simply by having greater assets than more than the lenders. One of the renowned lenders of
Britain, RBS has missed out by having losses of around £ 7 million last year as it sustains to
recover from the financial crisis.
Business Insiders has brought in those banks that have either their headquarters in UK or
undertake most of their business in UK which has made them pre-tax profit of more than £100
million.
2.1 Theories of bank profitability
Researches on the performance of the banks took place in the late 1970 s with the
incorporation of two industrial organizational frameworks: the market power and the Efficiency
Structure Theories. The theory of balanced portfolio has even added greater insight into the
research with respect to profitability of the banks. Hence, each of the theories and the other
associated theories in relation to the bank profitability and its aspects are explained in detail in
this specific section as follows:
2.2 The market power theories
As explained by Cull and Peria (2013), the market power hypothesis explains that the
performance of the banks is influenced by the structure of the market of the industry. There are
two specific methods within which the market power theory, the Structure-Conduct Performance

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
and the Relative Market Power hypotheses. With respect to the SCO method, the extent of
concentration in the banking market leads to potential market strength by the banks, which may
increase their profitability. The banks that are functioning in markets that are concentrated are
most likely to produce abnormal profits by their capability to lower the rates of deposit and to
charge increased level of loan rates as an outcome of monopolistic or collusive reasons than the
firms functioning in less concentrated markets irrespective of their effectiveness. On the other
hand, RMP hypothesis explains that profitability of the banks is manipulated by the market share
(Reinhart and Rogoff 2013). It presumes that only large banks that have differentiated products
can influence prices and rise in profits. They are able to make use of the market power and gain
non-competitive profits.
2.3 The efficiency theory
On the other hand, the efficiency theory explains that the banks can gain increased level
of profits as they are more effective than the others. There are even two distinct methods within
which the efficiency: the Scale Efficiency hypothesis and X-efficiency. With respect to the X-
efficiency method more effective organizations are more profitable due to their reduced cost
level. These companies look to gain larger share of the markets which can manifest in higher
levels on the market concentration, but without any causal relationship from the profitability
concentration. The scale approach concentrates on the economies of scale and rather than the
variations in the management or the manufacturing technology. The larger companies can gain
lower cost units and increased profits with the help of the economies of scale (Beaverstock, Hall
and Wainwright 2013). This helps the larger companies to gain market shares, which may lead to
increased concentration and then the level of profitability.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
2.4 The balanced portfolio theory
The portfolio theory process is the most precise and plays a significant role in the
performance of the bank. According to the Portfolio balance framework of asset diversification,
the optimal holding of every asset in the holder of the wealth portfolio is a function of the policy
decisions ascertained by various factors such as the rates of return vector on all the assets that is
kept in the portfolio, a vector of the risks related with the ownership of every financial assets and
the portfolio size (Zingales 2015). It explains that diversification of the portfolio and the
composition of the demanded portfolio of the commercial banks are an outcome of the decisions
undertaken by the management. Furthermore, the capability to attain maximum level of profits
depending on the feasibility of the assets and the liabilities ascertained by the management and
the unit costs that is incurred by the banks for manufacturing each aspect of the assets.
2.5 Risk Return trade-off theory, the signaling and bankruptcy cost hypotheses
The structure of the balance sheet can have an influence on the profitability of the banks
and in this respect, the equity to asset ratio is a significant balance sheet ratio that has gained
additional attention. For this ratio, the theoretical explanations predicts various relationship signs
with respect to profitability. According to the Modigliani and Miller theorem there is no
relationship among the capital structure and the market value of a bank. In this respect, there is
no relationship that is existent between the equity to asset ratio and funding costs and the
profitability.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Chapter 3: Research Methodology
3.1 Introduction
The third chapter of this research consists of research methodology. Research
methodology is considered as an important part of any research programs as this part includes
various designs, approaches and strategies that are required for acquiring the appropriate result of
the research (Mackey and Gass 2015). Research methodology helps the researcher to gain
effective research opportunities so that the authenticity of the results can be maintained (Flick
2015). Most importantly, research methodology helps the researchers in obtaining specific
directions for the successful completion of the research process (Panneerselvam 2014). Thus,
based on the above discussion, it can be seen that research methodology is an integral part of any
research and there is not any exception of this fact in case of this particular research.
3.2 Research Philosophy
Research philosophy plays an important part for the identification of the essence of the
research by the use of effective research paradigm. Four types of research philosophy are seen;
they are Positivism, Interpretivism, Realism and Pragmatism (Knobe and Nichols 2013). There
are some crucial characteristics of research philosophy like epistemology, ontology and
axiology. For this particular research, the researcher has selected positivism research philosophy.
There are some specific reasons behind this selection. Positivism philosophy is based on reality
with the help of various scientific techniques (Cohen, Manion and Morrison 2013). In this case,
the researcher has applied positivism research philosophy by linking various research articles,
theories and journals with the literature review section. For this reason, the researcher has uses
positivism philosophy for this research.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
3.3 Research Approach
Selection of effective research approach has its importance in order to arrive to the actual
and desired results of the research. In addition, research approach helps in the identification of
steps for the successful completion of the research process. Mainly, two types of research
approach can be seen; they are Inductive approach and Deductive approach (Hitchcock 2012).
The researcher has adopted deductive approach for this research. Deductive approach helps the
researchers in focusing on the examination of various available models, theories, articles and
others (Minker 2014). In this research, the research has taken the helps of quantitative analysis to
analyze and evaluate the factors of profitability in the selected four banks of UK. In addition,
deductive approach is linked with positivism philosophy. For all these reason, the researcher has
adopted deductive approach for this particular research.
3.4 Research Design
The adoption of effective research design provides the research with the opportunity to
guide the study towards the achievements of the research aim and objectives. Three kinds of
research designs can be seen; they are explanatory research design, exploratory research design
and descriptive research design (Edmonds and Kennedy 2016). Explanatory research design
helps in the identification of specific reasons of the research problems. This is one of the major
reasons behind the selection of explanatory research design for this study. In this context, it is
required to be mentioned that the main aim of this research is identify and analyze various
factors having influence on the profitability of the banks of UK. Thus, with the help of
explanatory research design, the researcher has been able to identify the specific factors of
profitability in UK banks (Buchanan, and Seligman 2013).

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
3.5 Data Collection Process
Data is considered as a fundamental needs for the success of any research program. Data
can be categorized in two types; they are Primary data and Secondary Data. Both primary and
secondary data have their utmost importance for any kind of research (Orkin 2014). For this
particular research, the researcher has collected secondary data. It needs to be mentioned that
secondary data are collected from the secondary sources. Some of the major sources of
secondary data are books, journals, articles, research papers, website of the companies, new
articles and others (Wilcox et al. 2012). Most of the researchers use to prefer the use of
secondary data as they are easy available from various sources.
Quantitative Data: Quantitative data refers to fragment of information that the researchers use to
get the correct result of the research. Quantitative data helps in the solution of the research
problem in the perfect way (Pierce and Sawyer 2013). In this context, it is required to be
mentioned that quantitative analysis requires large amount of data to get to the ultimate results.
In this research, the implementation of quantitative data analysis helps the researcher obtain
proper knowledge about the factors influencing profitability of the selected four banks of UK
(Clemence, Doise and Lorenzi-Cioldi 2014). Thus, it can be seen that quantitative data analysis
has its importance in the research.
Secondary Data Collection: In this context, it is required to be mentioned that the researcher has
gathered secondary data for this study in order to acquire the ultimate result. The researcher has
used various sources for the collection of secondary data for this research (Brewer 2012). The
major secondary data sources are pervious done research papers, journals, articles and books.
Apart from this, the researcher has also collected secondary data from the websites of selected
banks, their annual reports, newspaper articles related with them and others articles related with

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
them. The literature review chapter of this research has been developed based on collected
secondary data (Best and Kahn 2016).
3.6 Sampling and Sample Size
Sampling refers to the process to select the targeted respondents from a large population.
With the help of sampling process, most appropriate data can be selected from reliable data
sources (Gonçalveset al. 2012). For this particular research, the researcher has selected four
leading banks of UK. In this context, it needs to be mentioned that for the data analysis part, the
researcher has used the annual report of the selected four banks. Secondary data has been
extracted from the annual reports of selected four banks. For each bank, data has been extracted
from the annual report of the financial year 2012 to 2016 (Kogan and Herzog 2012).
3.7 Data Analysis Plan
The selected secondary data has been analyzed and evaluated with the help of some
specific analytical tools and techniques. It needs to be mentioned that the effective selection of
analytical techniques and tools is a crucial factor for the success of the research (Greenhoot and
Dowsett 2012). For this study, the researcher has applied the technique of correlation with the
help of gathered secondary data from the annual reports of the selected banks. The method of
correlation has been applied in order to make a comparison of the financial position of the
selected four banks (Thomson and Emery 2014). Apart from this, the researcher used Microsoft
Excel as the major tool for the analysis of collected secondary data. After the analysis of
secondary data, they have been presented in the tabular form for the ease of understanding.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
3.8 Ethical Consideration
It needs to be mentioned that the researcher has complied with all necessary code of
conducts, rules and regulations at the time of continuing various tasks of the research (Luck et al.
2012). The researcher has collected the necessary secondary data from valid and authentic
sources so that the trustworthiness of the total study can be ensured. The researcher has avoided
any kind of contradiction at the time of gathering secondary data. In this context, it is also
required to be mentioned that there is not any biasness in the data analysis part to obtain
favorable results of the research (Rid and Emanuel 2014).
3.9 Data validation and Reliability
The researcher has tried to maintain reliability while dealing with the secondary data of
the research (Daamen, Buisson and Hoogendoorn 2014). For this reason, the researcher has
gathered the secondary data from reliable sources. In addition, the researcher has used Microsoft
Excel for the interpretation of data, as it is a reliable tool for data interpretation. Apart from this,
the researcher has extracted secondary data from relevant and authentic websites so that
reliability and validity of secondary data can be maintained (Sargent 2013).
3.10 Limitation of Secondary Data
There are some limitations of the collected secondary data. In this case, it needs to be
mentioned that the genuineness of secondary data is the major constraint of this research
(Guyotet al. 2012). It can be seen that the companies do not always provide true and actual data
in websites or annual reports. Thus, this particular aspect can affect the result of the research. As
a result of this, the researcher could face major problems in the identification of major factor

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
having impact on the profitability of the selected four banks (Zhang et al. 2015). Thus, these are
the major limitations of secondary data.
3.11 Conclusion
According to the above discussion, it can be seen that the researcher has adopted the
philosophy of positivism as various theories, research papers and others are related with the
literature review. After that, the researchers has adopted deductive research approach as various
model and theories have been used for this research. As the study is based on the findings of
major influence on the profitability of UK banks, the researcher has used explanatory research
design. The above discussion also shows that the researcher has collected secondary data from
various secondary sources. For sample size, the researcher has chosen three companies and their
annual reports from the financial year 2012 to 2016. The above discussion shows that the
researcher has followed all the code of conducts as a part of ethical consideration.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Chapter 4: Data Analysis and Findings
4.1 Introduction
This section of the paper has the intention of assessing the secondary data that has been
collected from the annual reports of the companies that has been chosen for this research. The
financial data that is available from the annual report has been taken into consideration in order
to have an idea about the profitability of the four banks. The banks that has been taken for this
paper are Barclays, Lloyd Banking Group, Royal Bank of Scotland (RBS) and Bank of England.
The data that has been gathered has been used for the purpose of constructing the financial ratios
that will be used for the purpose of undertaking the process of correlation. The financial ratios of
each of banks has been constructed individually and an in-depth analysis has been done. The
ratios are then compared with each of the bank in order to have an idea which are the banks that
have been performing properly in the economy of United Kingdom and what are the factors that
are having an impact on the profitability of the banks. The analysis would be done in an effective
manner and in this process would help the researcher to gain an idea about the level of profit that
is incurred by the banks.
4.2 Analysis
There are several variables that can be taken into consideration while evaluating the
profitability of banks that are operating in England. In this research, Profit and Return on Equity
are the two variables that have been chosen in order to have an idea about the profit of the bank.
The profitability can be understood and in this manner would make the banks realize the
activities that can be undertaken in order to improve their operational function.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
The profits of all the four banks have been looked upon and in this respect a correlation
table has been constructed in order to understand the relation with respect to the profitability of
all the banks. The return on equity has even been taken as the other variable as it would provide
the profitability level as well. In this scenario, the analysis of the correlation of all the variables
has been constructed.
Profit
Profits
Barclay
s Bank of England RBS Llyod
2012 -236 0 -5890 -1427
2013 1,297 0 -8477 -838
2014 845 -225 -2477 1412
2015 623 179 -1185 1644
2016 2828 229 -4258 3888
This table represents the profits that has been incurred by the banks during the time
period of 5 years that consists of the year 2012 to 2016. It has been observed that Barclays in the
year 2012 has incurred a loss of -236. However, the bank assessed their operational activities and
made drastic reforms in their policies and regulations that led to a huge profit in the year 2013
accounting to 1297. In the year 2014, the profit of Barclays reduced a bit even though the profit
remained positive. The profit came down to 845. The profit level even declined in the year 2015
and the amount accounted to 623. There was a significant fall in the level of profit from 2013.
The bank again went through rapid transformations along with the changes that have been made
in the regulations in the banking sector. In the year 2016, the bank incurred a profit of 2828 and
this was a significant amount of rise in the level of profit. The profit that has been incurred in this
year has been significantly higher with respect to the other previous few years.

33
PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
By looking at the profitability of Bank of England, it has been observed that in the year
2012 and 2013 there was a no profit for the bank. This is bank has been functioning in United
Kingdom for a very long period of time and has been following the traditional methods that they
have using for a very long period of time. In the year 2014, the bank incurred significant level of
losses and hence the amount came to -225. The loss incurred by the banks are not good for them
as they provide loans and interests to their clients. The bank has therefore undertaken changes
and has assessed the competitive banks that has been functioning in their working environment.
The bank hence made changes and this was relevant as the bank was able to incur profit and
come out of their loss. The bank had a profit of 179 and the bank had the intention of increasing
their profit in order to maintain their completive edge. In the year 2016, the bank was able to
increase their profit and the profit accounted to 229. Therefore, it has been observed that the
bank has been improving their operational activity and therefore has been able to move out of
their losses and increase their profit steadily.
By assessing the profitability of Royal Bank of Scotland (RBS), it is seen that in the year
2012, the bank had faced a huge amount of loss as the value came to -5890. The bank has not
been performing properly in the market of UK and faced severe losses as well in the 2013 as well
and the loss came to -8477. The operating loss has been rising significantly and it was vital for
the bank to undertake significant changes that would reduce their losses. There was a loss in the
year 2014 as well but the loss decreased to -2477. The bank was unable to make profit as in the
year 2015 there was a loss of -1185. The loss has been reducing slowly and but in the year 2016
the loss again increased and the value increased to -4258. Therefore, it has been observed that
Royal Bank of Scotland has been unable to make profit and therefore various reforms are
necessary in order to attain profits.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
The next bank that is under consideration is the Lloyd Banking Group and in the year
2012, the bank faced a loss of -1427. The bank needed to reduce their level of losses and
therefore undertook various strategies in order to improve their position. In the next year in 2013
the bank even faced a loss of -838 and this value has been lower than the previous year. The
bank in the year 2014 was able to make profit and the value accounted to 1412. The bank was
able to raise their profit and the profit level increased to 1644 in the year 2015. The bank has
been functioning effectively and in this respect has been has been constructing various strategies
that would be influential for the development of the banks. In the year 2016, the bank was again
able to increase their profit as it is seen that the profit of the bank accounted to 3888. Therefore,
it is seen that the bank has been developing from time to time and has been able to maintain their
competitive edge and in this manner has been able to increase their value and customer base.
Return on Equity
Return
on
equity
Barclay
s Bank of England RBS Lloyd
2012 -1.91 0 -8.35 -2.99
2013 0.99 0 -14.18 -2.02
2014 -0.21 1.21 -5.98 2.57
2015 -0.54 1.42 -3.58 1.15
2016 2.38 2.62 -13.63 3.68
The table above looks to return on equity of the four banks that has been taken into
consideration by the banks that has been taken for research. The return on equity is a measure
that detects the profitability and computes how many dollars of a profit a firm generates with
each dollar of the equity of the shareholders. This is even known as the Return on net worth.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
By looking at the return on equity of Barclays, it has been observed that the value has
been -1.91 in the year 2012. The value in the year 2013 has become positive and the value is
0.99. This explains that the bank has been able to generate profit out of the equities. In the year
2014 the bank has a return on equity of -0.21 and in the next year the return on equity has been -
0.54. In the year 2016, return on equity has been 2.38 and this explains that the bank in the year
2013 and 2016 and therefore the bank needs to make drastic changes in order to maintain a
positive sustained return on equity for the coming years.
The next bank that would be assessed is the Bank of England. The first two years have
not revealed any Return on Equity. In the year 2014, the bank has return on equity accounting to
0.21 and this explains that the company has been able to make profit out of the same. The return
on equity in the year 2015 has increased for the bank and the value comes to 1.42. The profit of
the firm has been rising and therefore the return on equity has increased to 2.62 in the year 2016.
The return on equity for Royal Bank of Scotland has been negative throughout the five
years as the profit level has been negative. The return on equity has been -8.35 in the year 2012
and this level increased to -14.18. In the year 2014, the return on equity declined but remained
negative to -5.98. The value reduced to -3.58 but again increased to -13.63 in the year 2016.
Lloyd has experienced return on equity to be negative in the year 2012 accounting to -
2.99 and -2.02 in the year 2013. From the next year onward, the value became positive and the
value has been 2.57 in 2014, 1.5 in the year 2015 and increased to a significant level of 3.68 in
the year 2016. Hence, it can be said that Barclays has been the only bank that has been
experiencing effective profits and return on equity for the last five years.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
The data that has been gathered would be used for the purpose of constructing correlation
to make a comparison of the four banks for each year. The correlation are as follows:
4.2 Correlation
Profit
Barclays Bank of England RBS Llyod
Barclays 1
Bank of England 0.460926729 1
RBS -0.046287012 0.090439433 1
Lloyd 0.77393221 0.455403271
0.58762743
8 1
The correlation looks to understand the relationship between the financials of the four
banks. The value 1 reflects a perfect positive correlation. Any values in between 1 to 0.7 depicts
string positive correlation. Moderate positive correlation has a value between “0.3 to 0.7” and
weak positive correlation comprises of the value 0 to 0.3. 0 explains that there is no correlation at
all. Any value that is lower than 0 would explain that there is negative correlation.
There is a perfect positive correlation between Barclays with respect to their profit. Bank
of England a correlation of 0.460926729 and this explains that there is a moderate positive correlation
with Barclays. RBS on the other hand has a correlation value of -0.046287012 with Barclays and
0.090439433 with bank of England. This explains that there is a weal negative correlation with Barclays
and a weak positive correlation with Bank of England. On the other hand, Lloyd has a value of
0.77393221 with Barclays indicating a strong positive correlation. This bank has a value of 0.455403271
with Bank of England highlighting moderate positive correlation and has a value of 0.587627438 with
RBS that explains a moderate positive correlation.

37
PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Barclays Bank of England RBS Llyod
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
Profit
Barclays Bank of England RBS Lloyd
Return on Equity
Barclays
Bank of
England RBS Llyod
Barclays 1
Bank of
England 0.798512972 1
RBS -0.537873081 -0.001169926 1
Lloyd 0.620092648 0.93542883 0.10800324 1
This table explains the correlation among the return on equity among the four banks. The
value of Barclays has a value of 1 explaining perfect positive correlation. Bank of England has a
correlation value of 0.798512972 explaining string positive correlation. RBS has a correlation of
-0.537873081 that explains a moderate negative correlation. RBS has a correlation value of-
0.001169926 which indicates a weak negative correlation with the Bank of England. Lloyd on
the other hand has a correlation value of 0.620092648 explaining strong positive correlation.
Lloyd has a correlation of 0.93542883 with Bank of England that explains that there exists string

38
PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
positive correlation with each other. With respect to RBS and Lloyd, it has been observed that a
correlation value of 0.10800324, which indicates a weak positive correlation.
Hence, it can be explained that all the four banks are mostly correlated positively even
though RBS has experienced negative correlation due to ineffective profitability and return on
equity. Therefore, it can be explained that Barclays has been found to be the bank that has the
most effective profitability in the banking sector in United Kingdom.
Barclays Bank of England RBS Llyod
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
Return on Equity
Barclays Bank of England RBS Lloyd

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Chapter 5: Conclusion Recommendation and Future Work
5.1 Conclusion
This paper has actually looked to undertake an in-depth assessment of the financial
figures of the banks that have been functioning in United Kingdom in order to assess the
profitability of the banking sectors and the factors that has an impact on the same. The paper has
therefore selected four banks from the economy of United Kingdom and has gathered
information with respect to their financial transactions and records in order to evaluate and assess
the various aspects that would be useful for the conclusion of the research paper.
The introduction of the paper has explained the background of the banking sector that has
been operating in United Kingdom and has explained the transformations that have taken place
with the advent of time. The problem statement has looked to highlight the issues that are
existent in the banking sector and thereby has tried to understand the same in order to understand
the effect of profitability in the selected banks. The research objectives and the research
questions has even been constructed in order to have an idea about the course that would be
followed and the factors that would be explained in this paper.
The review of literature has explained the information that has been obtained from the
previous researches that has been undertaken by other researchers. These data has been useful for
the construction of the variables and the understanding of the variables that has significant effect
on the profitability of the banks. The return on equity, return on assets profits, return on capital
employed etc are the various variables that have been used for the purpose of understanding the
effect of profitability. The research methodology has defined the process and the path that has to
be followed in order to gather the data in an effective manner. The secondary data has been

40
PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
collected from the annual reports of the selected banks and this data has been useful for the
assessment of the financial figures useful for understanding the level of profitability and the
factors that have an impact on the same.
The completion of the paper has explained that all the banks have been selected for the
paper has been performing effectively and in this scenario the profitability of the banks has been
observed. The banks except Barclays has faced losses in certain years and then has undertaken
strategies that has been useful for the development of the firm with respect to profitability. Royal
Bank of Scotland has experienced the most number of losses as they have been unable to create
profit out of the same. The banks have positive correlation with respect to profit and return on
equity and therefore profitability has been observed except of RBS. Out of all the banks that
have been taken for consideration, it is seen that Barclays has been the most effective bank with
respect to profitability and return on equity. The bank has been able to establish profitability and
on the return on equity and therefore have been able to establish competitive edge and increase
their customer value.
5.2 Recommendation
After the assessment of the banks that have been taken into consideration, Barclays is the
most effective bank and the other banks have been unable to maintain profitability for the five
years on a consistent basis. The other banks has to transform their operational activities and has
to assess the regulations and policies on a frequent basis so that they can improve their
operational functions and in that manner generate profit for the banks.Recommendations can
even be provided for Barclays as well as they have the aim of improving their operational
function and stay updated with the transforming business environment globally. The
recommendations for Barclays can be given as follows:

41
PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Barclays
 Assess the operations of the business frequently in order to determine the various faults
that have been existent and in that manner rectify them in order to establish competitive
edge.
 Understand the demand that is existent in the market so that they can make changes
accordingly in order to stay updated with the market.
 Improve the financial transactions in order to sustain their profitability
 Look into the various factors that are related to profitability and evaluate them in order to
improve their level of profitability.
Recommendations have even provided for the other banks and are given as follows:
 Assess the operational function of the competitor banks and in that manner can construct
plans that would improve their financial condition.
 The banks can even construct plans and policies that would look to improve the
operational plans of the banks.
 Assess the various factors and the variables that are associated with profitability and in
that manner can be helpful for improving their level of profitability.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
5.3 Future Work
There are scope for future work on this topic as with the advent of time there are
transformations in the tastes and preferences of the consumers and in that manner can transform
the market. The banks therefore has to assess the market and accordingly change their policies
that can be useful for the development of the bank. As the banks changes their policies that even
changes their financial statements and level of profitability. Therefore, such researches can be
undertaken in the future as well. Similar researches can be undertaken by increasing the number
of banks and thereby a better idea about the factors that have an impact on profitability can be
assessed. A larger data set would mean more effective results for the topic. The timeframe of the
research can even be increased in order to provide more time to the researcher with the help of
which in-depth assessment can be undertaken. Hence, future work can be undertaken with
respect to this research paper.

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PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
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