FIN2138M: Analysis of HSBC Bank's Financial Performance Report

This report provides a comprehensive analysis of HSBC's financial performance, focusing on its capital and liquidity management. It examines key financial ratios such as Net Interest Margin, Return on Assets, Capital Adequacy Ratio, Liquidity Ratio, Return on Equity, and CET1 Ratio, comparing HSBC's performance with competitors like Royal Bank of Scotland and Barclays Bank. The report also explores the importance of capital and liquidity management in modern banking, particularly in light of the 2008 Global Financial Crisis, and discusses changes in HSBC's practices, including Basel III and CRD IV. Furthermore, it identifies current challenges in the banking sector, such as the impact of digitalization, and offers recommendations for how these can be addressed through diversification, improved digital services, enhanced security measures, and organizational restructuring. The report concludes by emphasizing the critical role of liquidity and capital management in ensuring the stability and long-term success of banking institutions.

Running head: FIN138M-1920
FIN2138M - 1920
Name of the Student
Name of the University

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Executive Summary
This report contains an analysis of the business model of HSBC and its financial performance in
comparison to Royal Bank of Scotland and Barclays Bank in recent years. The focus is also laid
on the importance of liquidity and capital management of the modern day banks. The changes in
the liquidity and capital management procedures of HSBC after the 2008 Global Financial Crisis
is also discussed. The report concludes by identifying the challenges occurring in the modern day
banks and the manner in which they can be overcome by the businesses.

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Author Note

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Table of Contents
Introduction..................................................................................................................................2
Evaluation of Financial Performance...........................................................................................2
Importance of capital and liquidity management.........................................................................6
Conclusion and Recommendations..............................................................................................8
Bibliography.................................................................................................................................9

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Introduction
The Hong Kong and Shanghai Business Corporation (HSBC) is one of the largest
multinational investment banking and financial services holding company in the world. As of
2018, it was one of the largest banks in the world with its total assets valued around $2.5 trillion.
The company first opened in 1865 and was incorporated in the year 1866. The business model of
HSBC is based on an international network which connects faster growing and newly developing
markets with each other. The banks tend to take deposits from customers and use these funds in
conducting business activities like providing loans, mortgages, overdrafts and loan facilities to
entities. Apart from these, other services provided by the business include asset management,
broking, financial advisory, corporate finance and alternative investments. The key aspects of the
revenue generated by the entity include the net interest income, net fee income and the net
trading income of the business. The key revenue generators of the business of the entity include
the interest charged on loans, discount earned from bills discounted, commission earned by
providing guarantee and other payments received from the customers for providing the services.
The costs Some of the key costs incurred as a part of the business of the entity include the cost of
funds, fund distribution and infrastructure costs, staffing, marketing and Risk Management and
Compliance Costs.
Evaluation of Financial Performance
In order to evaluate the financial performance of the entity, a ratio analysis of the bank
was conducted. The main aspects which were analysed with the help of these ratios are the
liquidity, profitability and the capital adequacy of the business. In order to obtain a better
understanding of the adequacy of the performance of the bank, analysis was also conducted in

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relation to the competitor banks. In this case, these banks were the Royal Bank of Scotland and
the Barclays Bank. The results of the ratio analysis were as follows:
Particulars Formula HSBC Bank RBS Barclays
Bank
Interest Income 54695 8047 15456
Interest Expenses 24233 1245 6049
Total Assets 2715152 72303
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Net Interest Margin (Interest Income - Interest
Expenses)/Total Assets
1.12% 0.94% 0.83%
The Net Interest Margin measures the difference between the income generated from
interest and the expenses incurred in the form of interest. As a major source of payment to the
banks is the interest generated by them, it is necessary to generate sufficient income to cover the
payments. Hence, a margin of more than 1% is said to be healthy for the banks. It means that
they are able to cover the expenses incurred by them with the help of interest income. In this
case, the margin of HSBC bank at 1.12% is higher than that of RBS and Barclays Bank. Hence,
the Net Interest margin of HSBC can be said to be adequate.
Return-on-Assets
ratio
Net Income 10231 3800 2461
Total Assets 271515 723039 114022

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2 9
Return-on-Assets (Net Income)/Assets*100 0.38% 0.53% 0.22%
If the Return-On-Assets ratio of the banks is higher than 1%, then the bank can be said to
be extremely profitable. As per the 2019 reports of Deloitte, the annual average ROA of the
global banking industry was 0.90%. In the given situation, the ROA of all three banks is lower
than the predicted 0.90%. In case of RBS, it was higher than 0.53%. This was relatively higher in
comparison to HSBC which was at 0.38%. This needs to improve more in case of Barclays
which is extremely at 0.22%. In case of HSBC, the profits posted by the business came down
significantly in 2019 than in 2018. Hence, there is a need for the improvement in the
performance of the entity in using its assets more efficiently.
Capital Adequacy
Ratio
Equity Capital 183955 43556 65660
Total Assets 2715152 723039 1140229
Capital Adequacy
Ratio
Equity Capital/Total Assets 6.78% 6.02% 5.76%
The capital adequacy ratio of a bank measures whether the business is able to maintain a
sufficient balance between its equity capital and the total assets available as a part of the
operations. As per the requirements of Basel III, an ideal capital adequacy ratio of the banks is
measured at 8%. However, this ratio measures the capital on the basis of the risk weighted assets
of the business. However, in the normal circumstances, a business with a higher capital adequacy
is considered to be safer as it measures the obligations of the business. Having higher equity also

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suggests a greater availability of funds for investing in a business. In this case, all the three banks
are maintaining a sufficient capital adequacy ratio. However, Barclays bank can improve its
performance in this regard.
Liquidity Ratio HSBC RBS Barclays
Total Advances 103674
3
160300 339115
Total Deposits 149813
7
389740 415787
Liquidity Ratio Total Advances/Total Deposits 69.20% 41.13% 81.56%
A good balance between the deposits taken by the banks and the advances is necessary to
ensure the liquidity of the business. According to the CAMELS rating system, the liquidity ratio
of a bank is said to be healthy when the percentage of liquidity is more than 65%. In the given
situation, the liquidity of RBS is not very high and it is a cause of concern. HSBC has been able
to maintain required level of liquidity. This is particularly high in case of Barclays which is
maintaining an extremely high liquidity of 81%. The bank is able to maintain the flow of funds
in an adequate manner. The chances of the bank facing the issues of bankruptcy in the given
situation is extremely low.
Return on Equity
Net Income 10231 3800 2461
Total Equity 183955 43556 65660
Return on Equity Net Income / Total Equity *100 6% 9% 4%

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In the given situation, the return on equity generated by the business of HSBC is
moderate at 6%. It is extremely low for Barclays Bank at 4%. However, it is extremely high for
RBS at 9%. This suggests that the capital employed by RBS is being put to the optimal use by
the business whereas in case of Barclays the funds available for using in the business are not
being used in the most efficient manner. Hence, there is a need for the business to overcome this
limitation.
CET1 Ratio CET 1 Capital / Risk-Weighted
Assets
36.89
%
32.29
%
52.57%
Equity Capital 183955 43556 65660
Retained Earnings 127188 14312 44204
Common Equity Tier
1 Capital
Equity Capital + Retained Earnings 311143 57868 109864
Risk Weighted Assets 843395 179200 209000
The CET1 Ratio measured against the Risk-Weighted Assets is required to be a minimum
of 4.5% according to the requirements of Basel III convention. Hence, any ratio above that is
said to be ideal. This ratio was introduced in the year 2014. The purpose of this ratio is to act as a
precautionary measure for the banks and protect them against the economic fluctuations
occurring at any point of time. The CET1 capital consists of the equity capital and the retained
earnings ploughed back by the entity. These act as a safety net to the business when there is a
downfall in the market of the business for the entity. Hence, it is essential for the business to
manage the risk faced by it in an efficient manner.

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Importance of capital and liquidity management
In case of a bank, there is a tangible difference between the liquidity and the capital
available to the business. While liquidity measures the cash and other short term assets available
with a bank to quickly pay off the short term bills, capital measures the resources that a bank has
to absorb the losses incurred by it. Researchers suggest that the quick ratio and capital adequacy
ratio have a positive impact on the performance of a bank. This is based on their positive impact
on the determinants of profitability such as the earnings per share and return on assets. Cash ratio
and current ratio have been found to have a negative impact on the return on assets. Interest
coverage ratio is positively associated with the return on equity whereas earnings per share also
has a negative impact on the return on equity. Hence, on an overall basis, it can be suggested that
the liquidity management by an entity plays an important role in positively impacting the
profitability of a bank. These findings suggest that banks should look to maintain sufficient
amount of liquidity. This not only meets the short term requirements of the business but also
helps in exploiting the short term investment opportunities available to the banks. Lack of
adequate liquidity management makes it difficult for the banks to fulfil their short term
obligations and lose out on the profit making ventures.
The major changes which have occurred in the Banking Industry after the 2008 Global
Financial Crisis are the increase in the reforms and their implementation. Many governments
across the world pushed for increased transparency to provide more transparency and reduce the
risk in the financial systems. Some of the steps which are followed by HSBC in the liquidity
management and the capital management processes are the Basel III reforms and the CRD IV.
The BASEL III is designed to increase the resilience of the bank and reduce the impact of the
financial crisis. These include the management of a minimum amount of Tier I capital against the

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risk-weighted assets of the business. There should also be an increase in the disclosure of the
decisions made by the business. The need for transparency in the business has increased
significantly.
With respect to capital management, the Capital Requirement Directives (CRD) suggest
that the business holds sufficient resources to cover the well-known risks of the business. These
guidelines tend to focus on strengthening of the prudential framework guiding the individual
institutions. The guidelines of the Directive are mostly as a response to the issues arising from
the Financial Crisis. The main aspects to which the CRD IV offers an enhancement on the
previous known legislations include the enhanced governance and enhanced transparency on the
part of the banks.
Conclusion and Recommendations
On the basis of the above discussion, it can be suggested that the two most important
aspects related to a banking business include the liquidity and the capital management. These are
not only necessary in measuring the performance but also required to ensure its stability in the
long run. Some of the more recent trends occurring in the Banking Industry include greater
stability, more regulations and the increased speed of digitalisation of the business. The business
should opt for diversification strategies and focus more on improving their capabilities in
providing these digitalised services. The power of the available data and technologies should be
harnessed together to drive a more competitive growth in the industry. The issues arising with
the digitalisation include the security and privacy issues. Sufficient security measures should be
undertaken to maximise the security procedures of the organisation. The restructuring of the
organisation should take place more quickly to ensure that the businesses are able to meet the
new challenges occurring due to digitalisation. Similarly, the reach of investment banking should

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be increased by implementing new client interaction models and orchestration of a better and
more conductive business environment.

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Bibliography
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%20Annual%20Report%202019.pdf [Accessed 15 Apr. 2020].
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https://www.gbm.hsbc.com/financial-regulation/capital-and-liquidity/basel-iii/crd-iv [Accessed
15 Apr. 2020].
Deloitte . (2020). 2019 Banking Industry Outlook | Deloitte. [online] Available at:
https://www2.deloitte.com/global/en/pages/financial-services/articles/gx-banking-industry-
outlook.html [Accessed 15 Apr. 2020].
Ojo, M., 2015. Implementing Basel III through the Capital Requirements Directive (CRD) IV:
leverage ratios and capital adequacy requirements.
RD, M.A., 2020. E-Banking–Challenges and Opportunities’. Our Heritage, 68(33), pp.613-622.