HSBC Banking and Finance

Table of Contents

Introduction

Analyze the bank’s profit performance for the period 2007-2011 using financial statements and ratios

Ratio Analysis of HSBC for 2007-2011

Evaluation on how ROE is decomposed to measure HSBC performance

Evaluation of how the bank measures and manages its interest rate risk

Main strategies adopted by the bank in recent years and their effect on the bank’s core businesses

Recommendations to senior management about the potential issues that might affect profitability

Recommendations to Manage Interest Rate Risk

How management could position the company strategically

Introduction

Financial sector has been one of the fastest growing sectors in the world. Due to heavy competition among leading financial organizations and uncertain market, it has become mandatory for every financial organization or bank to evaluate its financial performance and strategies against financial objectives. In this small research paper, as one of the members of HSBC’s Asset and Liability Committee, I am going to assess the bank’s performance of over the last four years. Some of the key aspects considered in this paper are analyzing some of its risk exposures and assessing the impact of the major strategic choices the bank has made. HSBC is one of the leading multinational banking and financial services organizations in the world. With the headquarters located in London, the United Kingdom, the bank has been operating around 7200 offices across 85 countries in the world (HSBC, 2011).

Analyze the bank’s profit performance for the period 2007-2011 using financial statements and ratio analysis

Ratio analysis is one of the popular methods used to understand the relationship between various items in the financial statements as well as to understand the operational performance and financial position of an organization (Giacomino and Mielke, 1993).

Ratio Analysis of HSBC for 2007-2011

Ratio analysis can be divided into 4 major parts. They are Liquidity Ratios, Efficiency Ratios, Profitability Ratios and Solvency Ratios (Streuly, 1994). Liquidity ratios are used to understand the ability of the organization to meet the short term obligations. Profitability ratios are used to understand the ability of the organization to generate profits against costs and expenses. Efficiency ratios are used to understand the ability of the organization to manage the internal assets and liabilities. In the same way, solvency ratios are used to understand the ability of the organization to meet the long-term obligations (Giacomino and Mielke, 1993).

Net Profit Margin

Net Profit Margin = Net Profit after Tax/ Sales

The net profit margin ratio is calculated to determine the profitability of the organization, i.e. the net profit earned by the organization after paying interests and taxes (Giacomino and Mielke, 1993).

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In the financial year 2007, HSBC has recorded healthy net margin of around 23%. By looking at the trend of the net profit margin ratio of the organization from 2007 to 2009, it is apparent that the net profit has significantly gone down in financial years 2008 and 2009. The major reason behind this slump was the recent economic recession, which had significant impact on the global banking sector. The net profit margin ratios of HSBC for financial years of 2010 and 2011 have recorded as 18% and 21% respectively. This sudden jump in the net profit margin is attributed to the banking sector recovery.

Return on Assets

Return on Assets = Net Profit after Tax/ Total Assets.

Return on Assets ratio will help investors to understand the ability of the organization to acquire funds and deposits at a reasonable rate and distribute them to profitable investment portfolio (Streuly, 1994).

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This ratio also shows how effectively the organization has used its assets to generate profits. The higher return on assets indicates higher profitability of the bank and vice versa. The analysis of return on assets of HSBC for 2007-2011 indicates that the organization has not been able to invest funds on profitable investments. The ROA ratios for financial years 2008 and 2009 show how HSBC has struggled to invest funds on profitable investments; HSBC has recorded ROA of 0.0028 and 0.0026 for 2008 and 2009 respectively.

Tax Burden

Tax Burden = Net Income / Pretax Income

Interest Burden shows the proportion of profits retained after paying tax (Giacomino and Mielke, 1993).

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The tax burden of HSBC has been fluctuating for the five year period. The highest tax burden rate was recorded in 2009 majorly because of the low levels of operating revenues. The tax burden has increased by approximately 10% again from 2010 to 2011.

Interest Burden

Interest Burden = Pretax Income/EBIT

Interest Burden shows the proportion of profits retained after paying interest (Giacomino and Mielke, 1993).

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The interest burden ratios of HSBC have also been fluctuating for the five year period. In fact, the year, 2009, HSBC has recorded high interest burden compared to other years due to poor economic conditions as well as less operating revenues. The analysis also makes it clear that the interest burden has again increased from 2010 to 2011 by 20%.

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