Investigation into Capital Structure and HSBC's Financial Performance

This report analyzes the capital structure of HSBC Holdings, a British multinational investment bank and financial services company. The study investigates the impact of capital structure on the organization's profitability within the financial sector of the United Kingdom. The research includes a literature review, exploring the concept of capital structure, various forms of financial resources, and their relationship with company profitability. The methodology involves both primary and secondary research, including qualitative research with HSBC managers. The report aims to understand the significance of capital structure, identify financial resources, analyze their relationship with profitability, and recommend an appropriate capital structure for enhancing HSBC's financial performance. The structure includes an introduction, literature review, research methodologies, data analysis, results, discussions, conclusions, and recommendations, along with a personal development section. The research highlights the importance of capital structure in maximizing profitability and offers insights for financial sector management.

Analyse of financial capital
and financial resources HSBC
holdings of United Kingdom.

Acknowledgement
I will like to special thank my lecturer that has given me opportunities to conduct
research on study related to impact of capital structuring on profitability of organisation. At the
same time I will also thank god. Furthermore, it has helped me in doing more and more research
and gathering useful insight related to topic so that it can be used by interested parties as per their
purposes. Valuable guidance and feedback given by my lecturer has helped me in improving the
study and getting useful information related to the study.

Abstract
Capital structure has been an important aspect for consideration to maximise the profitability. A
loss making firm can make them profit making by correcting and modifying their debt-equity
ratio. In this report, the researcher has conducted both primary and secondary research to gather
response and information pertaining to the relationship between capital structure and
profitability. Also, various components forming part of capital structure has been studied by the
researcher along with the corresponding effect occurred on profits due to their inclusion in
capital of the company. The qualitative research has been done on 30 managers of HSBC
holdings to gather information in order to accomplish the objectives of the research.

TABLE OF CONTENT
CHAPTER -1 INTRODUCTION....................................................................................................5
1.1 Background.......................................................................................................................5
1.2 Aim and Objectives..........................................................................................................5
1.3 Research questions...........................................................................................................6
1.4 Rationale...........................................................................................................................6
1.5 Significance......................................................................................................................6
1.6 Dissertation structure........................................................................................................7
CHAPTER – 2 LITERATURE REVIEW.......................................................................................9
2.1 Theme 1: Concept of capital structure and its importance for organisation.....................9
2.2 Theme 2: Various forms of financial resources that are parts of capital structure........11
2.3 Theme 3 Relationship between financial resources and profitability of company........12
CHAPTER – 3 RESEARCH METHODOLOGIES......................................................................14
3.1 Research Type................................................................................................................14
3.2 Research approaches......................................................................................................14
3.3 Research Philosophy......................................................................................................15
3.4 Data collection................................................................................................................15
3.5 Validity and reliability....................................................................................................15
3.6 Research Limitation........................................................................................................16
3.7 Data analysis...................................................................................................................16
3.8 Research design..............................................................................................................17
3.9 Sampling.........................................................................................................................17
3.10 Ethical consideration....................................................................................................17
CHAPTER – 4 DATA ANALYSIS..............................................................................................18
CHAPTER- 5 RESULTS AND DISCUSSION............................................................................31
CHAPTER -6 CONCLUSION AND RECOMMENDATION.....................................................33
6.1 Summary.........................................................................................................................33
6.2 Evaluation of Results......................................................................................................33
6.3 Recommendations based on Evaluation.........................................................................34
6.4 Future Work....................................................................................................................35

CHAPTER -7 PERSONAL DEVELOPMENT.............................................................................35
REFERENCES..............................................................................................................................37
APPENDIX....................................................................................................................................39
Appendix................................................................................................................................2

Topic: To investigate the impact of capital structure on the profitability of an organisation within
financial sector of United Kingdom: A case of HSBC holdings.
CHAPTER -1 INTRODUCTION
It is chapter that has covered introduction the of dissertation, aim, objective and rationale
which helps in understanding why research was important to conduct and to whom it is fruitful.
Furthermore, it has contained detailed background of the topic or crucial points that are covered
in the dissertation so that users can easily understand and interpretate. Therefore, it can be
understood that this chapters have covered all necessary information related to impact of capital
structure over profitability of HSBC.
1.1 Background
Capital structure can be termed as company mix of capital that is debt and equity or firm
long-term capital that is used for effective operation of business. It is permanent sources of
funding that are used in various process of enterprise so that better services can be rendered to
customers. HSBC is British Multinational investment bank and financial services that was
established in London in 1991. This research is based on impact of capital structure on
profitability of HSBC holding and the way it leads to growth and success of firm (Hanna, Khor,
and Ali, 2019). It has also included necessary information related to forms of financial resources
that contributed in forming capital structure of organisation. Moreover, there is direct
relationship between financial resources and profitability of company, so manager needs to
consider the same for benefit of enterprise.
1.2 Aim and Objectives
The aim of this study is to assess the impact of capital structure over the profitability of HSBC
holding.
To develop broad understanding of the concept of capital structure and its importance
within organisational context.
To identify various forms of financial resources that form part of the capital structure.
To analyse the relationship between various financial resources and profitability of the
organisation within financial sector.
To suggest an appropriate and profitable capital structure for HSBC to enhance its
financial performance.

1.3 Research questions
 What is concept of capital structure and its importance for organisation?
 What are different form of financial resources that form part of capital structure?
 What is the relationship between financial resources and profitability of HSBC bank that
is operating in financial sector?
 What is some suggestion related to appropriate and profitable capital structure for HSBC
that contribute to enhancing overall financial performance?
1.4 Rationale
The topic “impact of capital structure on profitability of organisation that are operating
in financial sector” is important to study as it helps manager in taking correct decision.
Moreover, it can be understood that topic is crucial as it helps in understanding several sources
from which capital can be arranged and used in the organization so that end objectives can be
achieved. The research on topic is important in current scenario as manager are unable to decide
appropriate capital structure that could be helpful company in gaining competitive advantages
(Sadalia and et.al., 2019). It would be fruitful for management and companies that are operating
in financial sectors as they are able to decide appropriate capital structure and contribute to
growth and success of firm. Moreover, the research on the topic will help in getting information
related to relationship between financial resources and profitability of bank.
1.5 Significance
It can be stated that the topic of capital structure is significance as it helps in
understanding why it is crucial for organisation to effectively organized its capital structure. The
study is also fruitful in gathering relevant information related to the different sources that could
be used to gathered capital which can be used in smooth operation of business. Companies by
having sufficient financial resources can meet its expense, cost thereby delivered better services
to customers in limited time frame (Osadchy and et.al., 2018). So, overall, it can be understood
that study on impact of capital structure on organisation is significant as it will help manager in
taking right decision regarding the way capital needs to be utilized for better outcome.
1.6 Dissertation structure
This is section of introduction that specific about the sequence or process in which
dissertation will be pursued so that necessary information can be gathered and evaluated. There
are various chapters in dissertation that include significant data or information in context of topic

“impact of capital structure on profitability of HSBC bank in financial sector. So, overall it will
give brief about the several chapters that are present in the study to gathered necessary
information related to impact of capital structure.
Chapter-1 Introduction
This is an chapter which include detailed information about various points that are
covered in the dissertation so that research can be made useful. The introduction chapter has
contained aim, objectives, research question and significance of research so that users or
individual can easily understand and interpretate as per their requirement.
Chapter- 2 Literature review
It is second chapter which include review of several well-known author about the topic
so that necessary information can be derived and end information can be gathered. Therefore, it
is survey of scholar sources from journal, article and books (Robiyanto, Putra and Lako, 2019).
Chapter-3 Research methodologies
Research methodologies explained about the various method that are used by researcher
in order to collect, analysis and interpretate necessary information related to the topic of capital
structuring. It helps in understanding tool, techniques or method used by scholar in order to
complete the research in the best possible manner.
Chapter-4 Data Analysis
It is the chapter that has included key information related to the way data will be analysed
and interpreted so that interested parties or users can make use of its as per their preferences or
needs. Theme, graphs and bar charts are used in order to data analysis regarding the topic of
impact of capital structure on organization.
Chapter-5 Conclusion and recommendation
This is last chapter of dissertation that include conclusion and recommendation regarding
the topic which can be used by company in order to enhance its profitability. Thus, it can be
stated that it has contained summary of research conducted and some suggestion regarding
capital structuring that could be used by firm to grow and expand its business operation (Mendes,
2020).

CHAPTER – 2 LITERATURE REVIEW
Literature review can be termed as publish information related to specific subject areas
that helps in getting necessary information. So, it is just simply summary of sources or review of
scholarly papers, article related to current knowledge and finding pertaining to particular areas of
study. In preparation of dissertation, journal article literature review is made so that information
can be critically reviewed. Moreover, it leads in credibility of work, demonstrates things that
have been learn from others and research is starting point for new ideas. So, literature review
related to impact of capital structure on profitability of organization within financial sector can
be illustrated as follows:
2.1 Theme 1: Concept of capital structure and its importance for organisation
As noted by Mendes (2020), capital structure is combination of both equity and debt that
are used by organization to finance its capital for various operation and growth of business in
external environment. Moreover, it can be stated that loans or bond issues that come under debt
on the other hand retained earning are parts of equity. At the same time the author also illustrate
that short term debt are also part of capital structure. So, concept of capital structure is
arrangement of capital that are raised from different sources so that various fund needs of
business can be meet in the best possible manner.
From the view point of Al-Thuneibat (2018), concept of capital structure is important as
it specific the way total long and short term capital of company will be arranged for achievement
of end goals. Like it contribute in increasing overall value of organization as sound capital
structure lead in enhancing market price of share of company. Furthermore, it helps in effective
utilization of available funds by effective determination of financial requirement, sources from
which it can be raised and utilized. Thus, it can be illustrated that it protect company from both
under and over-capitalization.
Another author Putri and Rahyuda (2020), also supported that capital structure is also
important as it contributed in maximizing return of company. Effectively capital structure helps
in enhancing overall profitability of company in terms of higher return on equity shareholders.
Flexibility is another key importance for enterprise as manager can easily expand or reduce debt
capital as per demand of capital within organization. Furthermore, the author also stated that it
also lead in minimization of financial risk such as with increase in debt in capital structure,
associated financial risk also increases.

There are some points related to importance of capital structure for organization which
are explained by SUMANI and ROZIQ (2020), are it helps enterprise in retaining its market
position. The author illustrates that it saves company from raising much debt capital thereby
leading effectively growth and sustainability of business for longer time frame. Thus, all these
are various benefits of capital structure for organization.
As per the study undertaken by Yapa Abeywardhana (2017), it has been revealed that
there are various important factors that plays an important role while deciding upon the
components of capital structure and proportion of both equity and debt in it. For this various
risks are taken into account such as risk of going insolvent, where the concern firm is not able to
pay off its fixed interest as it become due. This occurs due to the fact that the company has
become insolvent as iit has not earned sufficient profit to service its interest charges. And such
insolvency occurs due to the inclusion of higher proportion of debt into capital structure.
The second factor identified by Kumar, Colombage and Rao (2017), if there are risks of
occurring variations in the return derived by the shareholders due to the higher payment of
interest charges, then this may leads to less use of debt component. But if the returns are
exceeding the interest charges, then they may prefer to include higher debt in the capital
structure.
Another factor which has been considered is the capital costs. When firm borrows funds
from outsiders like banks, debenture-holders and financial institutions, then they are required to
compare the expected cost of such sources of raising finance against their company's
profitability. This is due to fact that if the company dose not generate enough profit to meet its
fixed interest charges, then this may results in liquidation of the company.
Another author Shahar and Manja (2018), who had studied in the same area of factors
affecting the composition of capital structure, where it has been identified that the controlling
aspect also affect the capital structure, as debt capital doesn't lead to dilution of control of the
existing shareholders. Another factor identified them is trading on equity. Trading on equity
refers to the inclusion of fixed interest carrying securities along with equity capital. It is an
attempt of management to increase shareholder's return by including debt capital carrying fixed
interest payment. It is for those companies where there is only equity component in the capital
structure of the company, then the return to shareholder's return can be increased by including
debt component to some extent. This is due to the fact that the interests charges are deductible

expense before assessing profit for income tax purpose. It lowers the profit available for income
tax purpose and accordingly raise shareholder's return. Also, the post tax interest charges gets
low accordingly.
2.2 Theme 2: Various forms of financial resources that are parts of capital structure
According to Shahar and Manja (2018), financial resources are all financial fund that are
raised by company in order to meet its various expense and cost so that needs of customer's can
be fulfilled in the best possible manner. Share, bonds and debentures, promissory notes and
checks are some of the financial resources of capital structure that are used to meeting several
expenses of business. Moreover, as per the author financial resources are liquid assets of
company that are used for continuous operation of business.
As per view of Almansour, Alrawashdeh and Almansour (2019), equity is form of
financial resources in capital structure that represent the value that would be returned to the
shareholder of organization. It can also be offered to shareholder in payment or cash thus equity
represent the book value of company. The author illustrate that in order to calculate shareholder
equity, total assets is minus with total liabilities. It also specifies about debt which is another
financial resources that is used by organization to meet its several expense so that it can attain its
end goals in the best possible manner. Almansour, Alrawashdeh and Almansour (2019), states
that retained earning is the financial resources part of capital structure which refers to the net
income left with business after paying dividends to shareholder of company. The profit earned
by company is reinvested in the firm for its growth and development so that it can attain higher
success. So, the decision of distributing retaining earning of shareholder is with management of
company.
Another author Putri and Rahyuda (2020), further supported that contributed capital is
also part of equity capital as in this money is originally invested in business with exchange of
share or stock of company. It is most costly financial resource of company as it attract investors
to invest money in order to get maximum return. There are various large organization that are
making use of equity capital to meet its financial requirement or promote smooth operation of
business for more time frame.
According to Robiyanto, Putra and Lako (2019), debt is amount of money or capital that
is borrowed by company from one party to another party in order to performed various functions.
Many of the organization make use of debt method to make large purchase of products and

services so that it can attain its end objectives. Cost of debt generally depends on financial
condition of company, there are varieties of debt capital such as long term bonds, short term
commercial papers, vendor financing and float. Like long term bond are most the safest type of
financial resource that are part of capital structure and while amount of interest need to be paid in
meantime. Another financial resources is short term commercial paper in which billions of
dollars can be raised so that day to day working capital requirement can be fulfilled in the best
possible manner. The author further illustrated that Vendor financing is also financial resources
in which organization sells its products and services to customer's before paying the bill to the
vendor. Thus, it contributes in saving overall cost of company with drastically increase in return
on equity. Policyholder floats, it is capital which does not belong to firm while it helps in earning
maximum return on investment.
The author Klasa and et.al., (2018), illustrate that preferences share are share of company
stock with dividends that are given to shareholder before stock dividends are issued. It also does
not include voting rights as compared to common shareholder so it has fixed dividend. There are
various types of preferences share such as participating preferred stock, non-cumulative,
cumulative and convertible preferred stock. So, preferences share is also finance resources of
company that helps in arrangement of capital for smooth operation of business in external
environment.
2.3 Theme 3 Relationship between financial resources and profitability of company
Financial resources are the key for any business operations. No business can survive
without proper acquisition of financial resources. But these resources must be obtained after
assessing all the costs associated in servicing it. The ability of an organization to generate profit
is the most important factor that is being considered before obtaining finance from any source.
There are various sources available to an organization for obtaining finance, but all the sources
differ in terms of profit and thus affect the profitability of the concern. There must be a need to
design an optimum capital structure to minimize the cost associated with it and maximize the
overall profitability.
There always prevails clashes of views when decision related to the proportion of equity
and debt in the capital structure are taken. As per the views of Jouida (2018), equity is cost-
efficient and cheaper source of finance as compared to debt. If studying this aspect of capital
structure in terms of profitability, then it can be said that it is true because debt require