Investigating Profitability Factors in the UK Banking Sector

This report examines the factors influencing profitability within the UK banking sector, focusing on Barclays, Bank of England, Royal Bank of Scotland (RBS), and Lloyds Banking Group. It investigates the impact of various factors on bank profitability, including regulatory changes and market dynamics. The research employs secondary data from annual reports to compute correlations and assess the financial performance of these major banks. The study addresses specific research questions and objectives, revealing a positive correlation among the selected banks, with Barclays demonstrating the most effective profitability. The report concludes with recommendations aimed at improving the overall profitability of banks in the UK, offering insights into future work and areas for further investigation. The study emphasizes the importance of profitability for the banking sector's continued operations and contribution to the UK economy.

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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PROFITABILITY 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

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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