Analyzing Brexit's Influence on UK Banks: A Financial Case Study

This case study examines the impact of Brexit on UK commercial banks, specifically focusing on HSBC Holdings Plc. The study begins by providing background information on Brexit and its potential effects on the financial sector. The objectives of the case study are clearly stated, focusing on analyzing the bank's performance and risk levels before and after Brexit. Financial data, including profitability, liquidity, efficiency, and solvency ratios, are collected and analyzed for the years 2016-2019. The analysis reveals a mixed impact of Brexit on HSBC, with initial improvements in some areas followed by declines, particularly in profitability. The study concludes by critically arguing the effects of Brexit on the bank's performance and risk, highlighting the challenges and uncertainties faced by UK banks in the post-Brexit environment. The analysis includes the use of financial ratios, and a discussion of how Brexit has affected the financial performance of the bank. The study highlights the importance of understanding the complex relationship between political events and financial performance.

Banking Theory and Practices

FINANCE 1
“Brexit- Effect on UK Banks”
Brexit was the withdrawal of the United Kingdom from the European Union. Before Brexit, UK-
wide referendum in June 2016 has been organized in which 52% of people voted to leave the
nation and 48% voted to remain in the EU. After all the voting programs, the British government
formally announced the country's existing from EU in March 2017(Clarke, Goodwin, Goodwin
and Whiteley, 2017). Beginning the Brexit process affects the industries or firms in the financial
terms. Brexit affects the economic situation of the country as the many companies has to exist
the market due to which the demand and supply has been affected. UK companies face the major
issues related to financial status. Financial sectors, hospitality industry, and many other
industries are also affected due to the procedure of Brexit. Financial institutions are the major
contributors of economic growth of the nation (Colantone, and Stanig, 2018). To examine the
Brexit effects on the financial institution, the financial situation of HSBC Holdings Plc will be
examined by calculating the financial ratio’s.
HSBC Holdings Plc is a multinational bank that offers the financial services to the consumers
such as financial loan, deposits and many others. The main headquarters is in United Kingdom
and it is considered as the 7th largest bank in the world (HSBC, 2019). The financial position of
the bank has been determined before and after the Brexit procedure in order to examine the effect
of Brexit on UK Banks.
Ratio Analysis 2016 2017 2018 2019
Profitability Ratio
(Net) Profit margin
(a/b) Net Profit 2479000 10798000 13727000 7383000
Net Sales 60807000 63439000 63587000 68067000

FINANCE 2
4% 17% 22% 11%
Return on Assets EBIT 48438000 47215000 44466000 49926000
Total assets-
TOTAL CL
18815370
00
21136670
00
2,211,527,
000
2,333,463,
000
2.57% 2.23% 2.01% 2.14%
In 2017, Brexit is time when UK companies exits from Europe nation. In order to evaluate the
effect of Brexit, the financial ratio of HSBC Bank has been estimated from the last four years
before the process of Brexit. As per the calculation of financial ratio of last four years, it is
observed that the net profit margin of the company has been increases from the year 2016 to
2017 but after Brexit the net profit margin ratio has been decreases such as 4%, 17%, 22% and
11% in 2016, 2017, 2018 and 2019 respectively (HSBC Holding Plc, 2019). The procedure of
Brexit directly affects the profit amount of the bank as the net profit has been decreases with the
increasing sales. Before Brexit the amount of net sales has been increases but due to the Brexit,
the generating capacity to generate the profit has been decreases and the net profit amount of
bank has been decreases with the high margin. The ratio of return of assets of the bank has been
increases due to increasing EBIT and working capital such as 2.57%, 2.23%, 2.01% and 2.14%
respectively. Brexit describes that the company generating the profit by using the working
capital. The increasing ROA ratio states that the company ability to generate the profit has been
increases by using assets (Yahoo Finance, 2019).
Ratio Analysis 2016 2017 2018 2019
Liquidity Ratio
Current ratio
(a/b) Current assets (a)
65400700
0
68843700
0
608,798,00
0
651,365,00
0
Current liabilities
(b)
49344900
0
40810400
0
346,597,00
0
381,689,00
0
1.33 1.69 1.76 1.71

FINANCE 3
Quick ratio (a/b) Quick assets (a)
12800900
0
18062400
0 162843000 -287
Current liabilities
(b)
49344900
0
40810400
0
346,597,00
0 381689000
0.26 0.44 0.47 0.00
According to the calculation of financial ratio of current ratio, it has been seen that the bank’s
current ratio has been increases from 1.33, 1.69, 1.76 from 2016 to 2018 respectively (HSBC
Holding Plc, 2019). But after Brexit, the current ratio of the bank has been increases which are
not beneficial for the bank because its ability to pay the current liabilities has been reduces with
the help of amount of current assets. According to the estimation of current assets, the amount of
current assets is high as compare to the amount of current liabilities due to which the capacity to
pay short term obligations is less which affects its business. After the year of Brexit, the current
ratio is increasing by 1.76 which states the poor liquidity position of the bank but in the current
year, the liquidity position of the organization has been improved as the bank improve its
position by decreasing current liabilities. The liquidity position of the bank is also affected just
because of Brexit with the major percentage but now it improves.
Ratio Analysis 2016 2017 2018 2019
Efficiency Ratio
Assets turnover
ratio Net sales 60807000 63439000 63587000 68067000
Total assets 2374986000 2521771000
255812400
0
271515200
0
9.35 9.18 9.07 9.15
Total assets turnover ratio of the bank has been constant before the process of Brexit. In the year
2016 and 2017, the total assets turnover ratio is 9.35 and 9.18 but Brexit is the procedure in

FINANCE 4
which the UK Companies exits from European market due to which the economic situation of
UK market has been affected (HSBC Holding Plc, 2017). The amount of assets has been
increases but the bank is not able to sell the assets as the demand of consumers is decreases due
to affecting the economic situation.
Ratio Analysis 2016 2017 2018 2019
Solvency
Ratio
Debt to Equity Total Debt 2192408.00 2323900.00
2363875.0
0
2522484.0
0
Total equity 182578.00 197871.00 194249.00 192668.00
12.01 11.74 12.17 13.09
Solvency ratio states that the bank has high of debt as compare to the amount of total equity. The
amount of total debt has been increases with the amount of equity but the amount of debt has
been increases with the high margin which states the bank borrow the money from third party
instead of issuing the shares for financing the operating activities (Schroeder, Clark, and Cathey,
2019).
As per the financial ratio of the bank, it has been seen that the financial sector has been affected
after the Brexit. UK banks are affected in terms of financial situation due to affecting the
economic situation of the market. The financial situation of HSBC Holding Plc is good before
the period of Brexit but after Brexit, the financial performance of the company has been
decreases due to decreasing the demand of consumers in purchasing or depositing the money.
The risk has been increases for the companies and banks as well in terms of insolvency due to
decreasing demand.

FINANCE 5
References
Clarke, H.D., Goodwin, M.J., Goodwin, M. and Whiteley, P. (2017) Brexit. Cambridge
University Press.
Colantone, I. and Stanig, P. (2018) Global competition and Brexit. American political science
review, 112(2), pp.201-218.
HSBC Holding Plc. (2017)Annual Report and Accounts 2017. Available From:
file:///C:/Users/SystemJP/AppData/Local/Temp/180220-annual-report-and-accounts-2017.pdf
HSBC Holding Plc. (2019) Annual Report and Accounts 2019. Available From:
file:///C:/Users/SystemJP/AppData/Local/Temp/200218-annual-report-and-accounts-2019-1.pdf
HSBC. (2019) HSBC UK. Available From: https://www.hsbc.co.uk/ [Accessed 15/3/2020].
Schroeder, R.G., Clark, M.W. and Cathey, J.M. (2019) Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Yahoo Finance. (2019) HSBC Holdings plc (HSBC). Available From:
https://au.finance.yahoo.com/quote/HSBC/balance-sheet?p=HSBC [Accessed 15/3/2020].