Profitability in Banking Sector in United Kingdom

Running head: PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
Profitability in the Banking Sectors in United Kingdom
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1PROFITABILITY 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.

2PROFITABILITY 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.

3PROFITABILITY 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

4PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
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

5PROFITABILITY 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

6PROFITABILITY IN THE BANKING SECTOR IN UNITED KINGDOM
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

7PROFITABILITY 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