Financial Ratio Analysis Of HSBC & Lloyds Banks For Risk Management Strategies

Background Information

It is important to understand the existing state of financial health of the banks based on which a bank undertakes its future actions. The financial reports helps to track the financial statements of HSBC and Lloyds bank based on which the financial standings of the firms from 2011 till 2017 is being assessed (Schürmann. 2016). The purpose of risk management in case of these banks is to detect the core issues related to financial problems before they takes place in order to handle the uncertainties that exists in the industry and invoke a strategic approach that will mitigate adverse impacts yet will be able to optimize the objectives of the firms. Financial ratios help the banks to examine the state of efficiency, liquidity as well as gaps in financial performance of the banks and in segments where it can improve its functionality. The study delves into these issues in case of Lloyds & HSBC bank followed by interpreting their financial ratios and revealing about the degree of sophistication required for practicing effective risk management in those banks.

Being a multinational company HSBC bank is the 7^th largest banking and financial service group that was established in 1865 in British Hong Kong. After that the company expanded its business worldwide and currently have its presence in 73 countries. With more than 6100 offices and its global headquarter in London, HSBC encompasses nearby 216000 shareholders possessing 228687 employees. The bank have a market capitalization of 182 billion US dollars by 2017 followed by having a total number of assets of $ 2.521 trillion, total equity of 190.24 billion US dollars. The operating income of the company is close to $ 14.792 billion and the net income is of $ 11.879 billion by 2017.  HSBC is involved in retail banking, mortgage loans, insurance, wealth management, private banking, investment as well as corporate banking and has a customer base of 51 million worldwide. Lloyd bank on the other hand is headquartered in London, and is among the big four clearing banks involved in retail and commercial banking. The firm provides insurance services and by 2016 possessed an employee strength of 45856 and Lloyd bank was having an operating income of 17.5 billion, followed by net income of 16.6 billion and average income earning banking assets of 436 billion.

The objective of the research encompasses the aspect of determining the financial ratios of HSBC and Lloyd banks based on which their financial development and ability to manage financial risks  for the period 2011-2017 are examined followed by a comparison between the two banks.

The methodology of the research is done through descriptive research design and maintaining a deductive research approach. The data of 2011-2017 are gathered from the annual reports of the respective companies and the financial information thus obtained are further being analyzed through quantitative measurements.

 According to Yan et al. (2017), financial positioning is quite dependent upon the variations that are being taking place within the ability of the banking firms to mitigate risks associated with their business. Adaptive analysis of the pass trends of the financial ratios can provide a predictive measures that needs to be undertaken for reducing the financial risks involved. The paper clearly put forth that beside operational risk, reputational risk, the banks faces liquidity risks to cover up its liabilities with its assets as well as market risks which are nothing but systematic risks in the business.

Research Objective

In accordance with Black et al. (2016), it assessed the performance of banks financially and depicted that financial ratios are effective estimators of the responsive of firms to understand its performance overtime. Measurement of the financial health based on the profitability ratios and efficiency ratios gave that there exist statistically significant difference between the performance levels of the banking firms.

Curi and Murgia (2018), investigated upon the influential factors that renders impact in the long run upon the financial health of the banking sectors. Among them the wealth management, liquidity positions, asset quality, earning ability measurements are found to be important parameters that determine financial health of the banks.

Adelopo (2017), examined the financial anomalies of private and public banks and how financial ratios helps to understand them. It was been reflected in the paper that the joint ventures made by public and private banks are capable of strongly assessing the risk mitigation ability of the banks by measurement of financial ratios. It was also revealed by the paper that ranking the capital adequacy, return on assets, etc. renders adequate information about the existing capital utilization and repayment ability of the banks of their debts.

The financial ratio analysis are done in order to understand the relationship between various factors that boosts a firs ability to manage risks as well as ensure its success based on the measurement of its past performance from the perspective of the investor as well as the bank.

Table 1: Lloyd Liquidity Ratios

Liquidity Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Current Ratios	1.155	1.175	1.158	1.141	1.183	1.293	1.475	1.226	1.1752	0.1212	9.89%
Shareholder’s equity to total assets	0.0536	0.0526	0.0511	0.0507	0.0460	0.0476	0.0473	0.050	0.0507	0.0029	5.81%

Liquidity ratios provides measurement regarding the financial metrics that determines the ability of the debtors to pay off the existing obligations. However, in the way, raising of external capital will not be permitted. The valuation of loans to total assets is closer to the mean of 0.64 which suggests that the bank possess less ability to cover up its short term liabilities with its liquid assets. However, the loan to customer deposits suggest about the loans that went out from the bank towards their customers and the amount that came back to the bank from the customers as deposits. This valuation shows that the mean is 1.175 which is not got as it reflects that fact that the amount of loan that are being given out from the bank to its customers are higher than the amount of deposits that returned back from the customers to the bank. The shareholders equity to total assets on the other hand suggests that the mean of the residual claim that the shareholders have upon the amount of assets is 0.0507 which not good.

Table 2: HSBC Liquidity Ratios

Liquidity Ratio	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Current Ratio	0.689003168	0.66915077	0.681589123	0.722506201	0.653770954	0.703545487	0.654379228	0.681992133	0.681589123	0.025426567	3.73%
Shareholder’s equity to total assets	0.075443012	0.073847172	0.078210334	0.072299526	0.068082871	0.065084318	0.265514897	0.099783161	0.073847172	0.073214049	73.37%

The valuation of loans to total assets is closer to the mean of 0.40 which suggests that the bank possess less ability to cover up its short term liabilities with its liquid assets. In fact HSBC’s ability to pay back its short term obligation is lower than that of Lloyd bank. This incorporates a significant amount of risk which is necessary to be taken care of by not storing case or non-cash assets rather by allowing for more loan opportunities for utilizing the market value of the bank’s assets.  However, the loan to customer deposits suggest about the loans that went out from the bank towards their customers and the amount that came back to the bank from the customers as deposits. This valuation shows that the mean is 0.68 which is well as it reflects that fact that the amount of loan that are being given out from the bank to its customers are close to the amount of deposits that returned back from the customers to the bank. The shareholders equity to total assets on the other hand suggests that the mean of the residual claim that the shareholders have upon the amount of assets is 0.0997. Notably the measure of dispersion suggest that the variations in the HSBC bank is credible more than that of Lloyd bank.

Research Methodology

Table 3: Lloyd Profitability Ratios

Profitability Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Return on Shareholder’s Equity %	8.14%	5.84%	2.31%	3.46%	-2.06%	-3.15%	-5.91%	1.57%	2.31%	0.0510	326.06%
Return on Total Assets %	3.67%	2.00%	2.10%	1.27%	1.65%	4.15%	4.10%	3.01%	2.10%	0.0122	40.74%

The profitability analysis suggests that in case of Lloyd bank the return that are being obtained based on the investments that are being made by the shareholders of the firm was negative from 2011 till the end of 2013. However the company have recovered from that poor financial health and from 2014 till 2017 the return that the shareholders of the bank have obtained has monotonically increased. After 2015 though it faced a slight downfall yet it recovered effectively in 2016 ensuring a return on shareholder’s equity of 5.84 which is almost 2 and half times as compared to previous its year’s financial performance. Apart from that, the return on total asset has a mean of 3.01 %.

Table 4: HSBC Profitability Ratios

Profitability Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Return on Ordinary Shareholder’s Equity %	0.062438896	0.018874125	0.076428477	0.073533089	0.093458435	0.083733325	0.107389298	0.073693664	0.076428477	0.028184491	38.25%
Return on Total Assets %	0.004710578	0.001450956	0.006264795	0.005582469	0.006663377	0.005694999	0.030781276	0.008735493	0.005694999	0.009873071	113.02%

The profitability analysis suggests that in case of HSBC bank, the company have a moderate performance over its profitability yet the variation is low in its profitability. It has a mean of 0.073 which is moderate. Apart from that, the return on total asset has a mean of 0.08 % which is not at all good and the coefficient of variation is very high.

Table 5: Lloyd Management Capacity Ratios

Management Capacity Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Loans to total assets %	0.594442372	0.597042283	0.600582877	0.596648013	0.616272151	0.596953984	0.629247867	0.60445565	0.59881258	0.013176621	2.18%
investment to total assets	–	0	0	0.0053	0.0057	0.0058	0.0067	0.0039	0.0053	0.00307	78.30%

From the valuations of loans cleared with respect to the total assets of the bank the standard deviation and mean values are 0.013 and 0.605 respectively. The value suggests that less amount of loans are utilized or managed directly from the assets and this incorporates the fact that from the perspective of risk less amount of risk is associated with the financial aspects of the bank as the values are low. The lower value of it indicates lower risk. However, the investment to total assets suggest that the assets that are being utilized to generate earnings is low as its mean value is close to 0.0039 and moreover the standard deviation is low. The coefficient of variation suggests that the degree of variation is 78 %.

Table 6: HSBC Management Capacity Ratios

Management Capacity Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Loans to total assets %	0.417705256	0.399846568	0.421161776	0.412586048	0.416324451	0.401129715	0.386929469	0.407954755	0.412586048	0.012351686	3.03%
Net interest income to interest income ratios	0.687974606	0.702904701	0.689376762	0.681091159	0.694229567	0.664385736	0.645377351	0.68076284	0.687974606	0.019656526	2.89%
investment to total assets	0.154286809	0.18391561	0.178015036	0.157724023	0.159443765	0.156395564	0.070216618	0.151428204	0.157724023	0.037626112	24.85%

From the valuations of loans cleared with respect to the total assets of the bank the standard deviation and mean values are 0.013 and 0.407 respectively. The value represents that it is almost same as in the case of Lloyd bank. This incorporates the fact that from the perspective of risk less amount of risk is associated with the financial aspects of the bank as the values are low. The lower value of is associated with less amount of risk in case of both banks. However, coefficient of variation suggests that the amount of relative variability is high in case of HSBC bank as compared to that of the Lloyd bank. Notably, the investment to total assets suggest that the assets that are being utilized to generate earnings is low as its mean value is close to 0.15 and the standard deviation is low. The coefficient of variation suggests that the degree of variation is 24.85 %.

Table 7: Lloyd Capital Structure Ratio

Capital structure Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Total liabilities to total assets %	94%	94%	94%	94%	95%	95%	95%	95%	94%	0.006281349	0.66%
Total liabilities to equity %	1553%	1575%	1617%	1613%	2053%	1969%	1983%	1766%	1617%	2.229959149	12.63%
Share capital to total assets	0.0089	0.0087	0.0089	0.0084	0.0084	0.0076	0.0071	0.0083	0.0084	0.000679492	8.21%

Capital Structure Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Total liabilities to total assets %	0.921534905	0.923124599	0.918030623	0.924082214	0.928702236	0.931986475	1.866051496	1.059073221	0.924082214	0.355873567	33.60%
Total liabilities to equity %	11.74452042	12.00806231	11.199678	12.17214394	13.02568532	13.70295802	6.718144985	11.51017043	12.00806231	2.269582979	19.72%
Share capital to total assets	0.004028915	0.004250972	0.0040844	0.003647871	0.003524477	0.0034309636	0.0148512136	0.005402688	0.004028915	0.004177738	77.33%

Table 8: Lloyd Growth Ratios

Growth Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Revenue %
Year over Year	-7.44	40.48	-18.63	-2.86	-2.99	67.25	-38.32	5.355714286	-2.99	36.16715769	675.30%
3-Year Average	1.9	3.55	-8.47	16.37	0.03	-0.34	56.37	9.915714286	1.9	21.77679947	219.62%
5-Year Average	-0.06	12.49	-4.58	-1.38	44.05	19.73	5.5	10.82142857	5.5	16.92673765	156.42%
10-Year Average	9.39	8.94	3.83	15.15	15.15	10.95	10.95	10.62285714	10.95	3.90936787	36.80%

The growth ratios suggests that over time the firm has passed through several upheavals and downfalls for which the coefficient of variation is high. The standard deviation value suggest that the dispersion is high within a period of 1 year, 3 year or 5 year period though on a decade basis that deviation form mean is moderate financially.

Growth Ratios	2017	2016	2015	2014	2013	2012	2011	Mean	Median	Standard Deviation	Coefficient of Variation
Revenue %
Year over Year	4.33	-13.18	-4.66	-2.96	3.11	-12.03	4.31	-3.01142857	-2.96	7.443416394	-247.17%
3-Year Average	-4.77	-7.04	-1.56	-4.16	-1.83	-2.31	-3.56	-3.60428571	-3.56	1.935465983	-53.70%
5-Year Average	-2.88	-6.14	-2.63	-1.38	-4.04	-3.8	3.31	-2.50857143	-2.88	2.957546441	-117.90%
10-Year Average	-3.34	-1.53	1.17	3.58	6.14	10.42	12.02	4.065714286	3.58	5.812744209	142.97%

Literature Review

In case of HSBC bank the same scenario is observed that over time the firm has passed through several fluctuations from mean value or expected value. The standard deviation value suggest that the dispersion is moderate within a period of 1 year, 3 year, 5 years or 10 years. However, the coefficient of variation shows that the relative variability in case of HSBC bank is greater as compared to Lloyd bank.

Conclusion

It can be concluded from the analysis that both of the bank have performed well over time. However the ability to cover up the risks associated with its liabilities in case of HSBC is high as compared to that of Lloyd bank. Maybe this is due to the bank’s extensive presence in global sphere as compared to the other one. However, the Lloyd bank has executed a more profitable business as compared to HSBC over the period of 2011 to 2017. However, the relative variability of HSBC is higher than that of Lloyd bank. Apart from that the financial ratios suggest that the risk mitigation ability is high in case of HSBC bank as compared to that of the Lloyd bank for which it have performed batter over the period irrespective of the fact that Lloyd bank possess a better liquidity ratio than HSBC. Apart from these aspect, both the banks has performed well over the period of 2011-2017.

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