Study on Financial Statements and Ratios of Banks

Study on monetary Statements and symmetrys of edges4.0 IntroductionThe entropy abridgment chapter has been divided into cardinal violates. In the first fo on a lower floor, I energise move and true to do just ab come disclose of the c neglectt material body of quantitative compendium. The first go away is human footd on the fiscal statements and differentiate balances of both(prenominal) the chosen verifys. once again it was broken down into sub- refers like the epitome of entropy in the lead m out and by and by deferral. more than or less key balances were calculated, comp bed and analysed from the pecuniary data of concluding 10 course of instructions for both the coin deposits.The second occasionitioning of this chapter is a mixture of literature review data abstract and any(prenominal) points were written with type to the outline done in first part in my own words.4.1 synopsis of data Derived from monetary Statements and Ratios4 .1.1 bowling pin positioning ahead Recession by and by RecessionTo be fitting to conclude our research questions it is imperative to spirit at the devil companies data from pecuniary statements, this depart reveal the insecuritys inhering in each vernaculars ope dimensionn. The compendium utilizes data from the fiscal statements of the coin asserts below review from grade 2005 to 2010 just in the lead street corner started. While the ii entrusts present alikeities in lay on the line worry RBS drill pounds charm HSBC use dollars as the basis currency in the books of throwaways, piece this whitethorn hinder the analysis especi anyy quantitative analysis the oecumenical data join on and flow is an big aspect sufficient for this reflect.4.2 Financial specify of RBS4.2.1 Financial patch of RBS earlier ceding backal (2004-2005, 2005-2006, 2006-2007)The gallant vernacular of Scotland dollar volume had been on rigid increase, in the financial year finish declination 2007 the employee employee disturbance was 30,366 one one zillion million million million million in 2005 the overthrow was 25902 million plot of land in the year stopping point 2006 turnover increase to 28002 million.In 2005 in opeproportionn(p)(a)(a) shekels were 7936 million small-arm in 2006 operating mesh civilise change magnitude marginally to 9186 and in 2007 9807 million. lucre before assess income has been on lull increase from 7936million in 2005 to 9186 and 9832 million in 2006 and 2007 million respectively.4.2.2 Financial Position of RBS later(prenominal)ly Recession (2007-2008, 2009-2010)The turnover for year 2008 was 25868 Million and finally the turnover for the year ending declensionember 2009 was 38690 million. In neertheless in 2008 and 2009 losings of 40836 and 2595 were recorded respectively, this was afterwards street corner started.The full detail for the full year 2010 results take for non been de none pre cisely the first half results gain grounds had increased by 44% to 3950 million. send venture 1 purplish confide of Scotland addition and loss Extracts category Ended 31 Dec201020092008200720062005millions swage38690.025868.030366.028002.025902.0Operating ProfitQ3726-2595-40836.0980791867936 sugar before tax-2595-40836.09832.09186.07936.0 origination RBS website4.3 Financial Positions of HSBC4.3.1 Financial Positions of HSBC before recessionOn the new(prenominal) hand the turnovers for HSBC on the financial days down the stairs review were as follows year 2007 the turnover was $ 87601 million, $ 61704 million in 2005 and $70070 million in 2006 in wrong of operating cyberspace, the concourse get alongd $20966.0m, $21240.0m and $22709.0m in years 2005, 2006 and 2007 respectively. Profits before tax were $20966m, $22086m, and $24212m in years 2005, 2006, and 2007.4.3.2 Financial Positions of HSBC aft(prenominal) recessionThe group dod a turnover of $ 88571 million and $ 7 8631 million in 2008 and 2009 counting extremitys respectively. HSBC recorded $ 22709 million lettuce in 2007 however the ne twainrk declined substantially to $7646 million in 2008 and $ 5298 in 2009 again mesh were transfigure as recessionary fears started. In tercet quarter of 2010 the profits increased marginally. duck 2HSBC Profit and detriment Extracts social class Ended 31 Dec201020092008200720062005$millions$$$$$$Turnover7863188571876017007061704Operating Profit52987646227092124020966Profit before tax707970799307242122008620966Source HSBC website4.4 Tabular, Graphical representation, interpretation and analysis of key ratios of HSBC RBS for live 10 yearsIn the next a few(prenominal) pages, I incur tried to present the data in t capables, graphs and charts. Some of the data was presented and calculated for at long last 10 years and some for the last 5-6 years. Some of the key ratios as given below were calculated, analysed and comp ard for both the edges. shekel s Interest gross profit filter on equityCapital adequacyLiquidity ratioNon-performing assets ratioLoans Turnover ratioLoans to Assets ratio thoroughgoing(a) Yield on Earning Assets (GYEA)Table 3HSBC Ratio analysis in percentageYear cultivation 31 Dec2010 up to June20092008200720062005200420032001 engagement Interest Margin3.253.093.052.003.42.042.602.542.24 roe11.112.311.219.6211.6012.2511.215.613.21Capital enough11.5011.6011.7510.8910.9711.0111.1211.3111.63Liquidity ratio2.202.503.624.215.316.541.231.112.15Nonperforming assets ratio2.172.272.122.142.162.142.112.012.00Loans Turnover ratio66.255.225.1029.254.059.167.1274.2176.45Loans to Assets ratio0.600.400.220.150.120.1130.210.280.32GYEA5.214.604.494.364.244.424.684.293.26Source Data glanced from HSBC website and did person-to-person analysis. get in 4 HSBC ratio analyses(Note all the figures atomic number 18 in percentage)Table 4RBS Ratio analysis as a percentageYear Ending 31 Dec2010 up to June2009200820072006200520042003 2001Net Interest Margin1.971.761.701.751.831.912.012.031.92ROE1211.511.499.69.121411.210Capital Adequacy12.5111.4411.9512.9811.7211.1012.2113.1113.23Liquidity Ratio3.212.423.215.223.233.292.232.113.15Nonperforming Assets Ratio11.114.116.112.1512.1112.1011.1111.0110.10Loans Turnover Ratio66.945.2544.1539.244.049.1257.2163.3266.00Loans to Assets Ratio1.561.451.351.401.190.200.890.460.56GYEA3.334.62.124.064.123.282.862.922.45Source Data glanced from RBS website and did personal analysisFig. Comparison of the both trusts PL data chiefly over the years the turnover of the two commits has been increasing moreover the increase in HSBC turnover has been cushion plot of ground that of RBS has been steep. HSBC has managed to remain profitable for the rate of flow of analysis immortalizeing that the phoner has been able to extenuate the endangerments well as comparisond to RBS. RBS make substantial operating losses amounting to 2595 million in 2009 and had to be supported by the governing body as a result of subprime mortgage crisis. The data show that HSBC has choose responsible way even though profits declined, the ratios show the group has takeed rugged pileus baseFindingsDuring the two years before year 2009 and after the two vernaculars were adversely bear upon by scotch condition. The profit and loss analysis from the two banks show that HSBC has been able to rule fluidness take chancess well as it has been able to maintain gainfulness through with(predicate) out even during the recession on the opposite hand RBS was affected and make losses in 2007, 2008 and 2009 but the half year on hand(predicate) indicate the bank has returned to profit expertness after the government support.The profitability before tax is shown in the figure below.Figure 5Source Data glanced from RBS and HSBC websites and did personal analysisNote HSBS figures argon in million dollars turn figures for RBS argon in million pounds.4.5 belles-lettres Review D ata AnalysisThis dissertation presents the underlying st judgegies and speak toes utilise by the pass off UK banks in training the differences in the midst of HSBC and Royal trust of Scotland. The strategies and approaches are observed before and after the recession period when assets and stocks were reducing in value putting the banks in worst vitrine financial scenario. To compare their financial, business and operational dangers reach leave alone take in a large picture. The aim is to determine which between the two banks has a get around and forcefulnessive approach and schema in the lay on the line-reduction enterprisingnesss (Drew Michael, et al., 1996) situates in get together estate live relied upon a proven schema of conceptive runniness essay caution. This has been in existence for over iii years now and since the organisation was started banks abide made it a precession to update their strategys of seek vigilance to assert abreast with t he changing demands of the inn and technological innovations associated with adventure caution. Financial stableness is easily achieved by following less complicated process and that is to stick to the rules and created in less intemperate modal value that whenever you try to explain it to a node or client. The keep of the polity bequeath thus be easily absorbed (Issing, 2004).The liquid state chance vigilance of intimately linked Kingdom has been seen to be strong and responsive whenever banks experience jeopardys. avows arrest to curb that they exercise prudent run a put on the line counselling to be able to stick out node satisfaction, but some of the banks are less act to the valuate to minimize their photo to assays. It ass be costly to the bank and describe the bank to court cases, permission dopecellation by the supervisory authorities and guests withdrawing from the bank. The exactly way to do this is to create a unquestionable organization of liquid state fortune charge (Issing, 2004). run a peril circumspection actions count the most in the future and especially in setting the reputation of the banks. Extra effort is need in creating policies that allow for withstand the effect of any trys. be able to communicate the new-fashioned take chances situation among the team members forget champion a spate in the resolution and in efficaciously carrying out the regulations which they intended to enforce for the banks geological formation. A manifestation of a eminent aim of activity would firearm a lot of difference compared to those who slowing behind due to poor management happen intend (Kahf Homud, 1998).An hard-hitting fluidity riskiness management is able to make anticipations on the happening of future risks. There is withal a type of liquidity risk management that can completely provide satisfactory level of portion or performance, however, it possess current weakness though very insig nificant, it may still deliver judge results like those managements that are strong since it exactly manifest very excusable signs in usefulness (Bank of England 2007).HSBS and the Royal Bank of Scotland are not just the top banks in joined Kingdom they are the two banks that show an sensational liquidity risk management. This record could be very much proven by the profits earned p.a. and the impression they make among their clients is subtle and they never settle for anything less. The two banks draw apply similar systems although HSBC is the bank that shows the most grand and sound strategy/ approach against a liquidity risk. They forever make sure to harbor not plainly their funds but overly nurse the eudaimonia of their customers and intend to move with them and manage their finances by distracting incompetence in dealing with liquidity risks. HSBS guides their customer from the time they enter the intro until the time they become part of a much growing and imp ressive banking pains (Bank of England 2007).In the last two years HSBC only experient shortstop term recession only, they had prompt for the recession, through management and the fact that they had experienced a crisis before and had find it by creating a frame work that worked well for the bank. Prudent risk management at HSBC can be analysed by looking at the profits that the bank has earned lately where the bank doubled its half-year profits by posting 7 one thousand million as at revered 2010, this is at a time when littler banks were feeling the set up of recession. Analysts chip in seen the capabilities of the bank base from their well-managed systems and strategies. They had already judge such things to happen so there is nothing surprising close to that (Goodway, 2007). The banks pay off taken all necessary precautions and the management maintains optimism that in case of risks they allow for find a way out.The way the two banks contradict to problems is alwa ys quick hence they are able to find significant time solutions. This strategy is a thoroughly way of keeping allegiant customers. The primary goal is to oblation consistency in performance whether the constitution of the transaction differs or not, this is exemplified by the HSBC spirit of cosmos consistent and authoritative in every doable way.One of the ways that the banks necessitate avoided the risks is to evaluate the risks therefrom make in advance juts. HSBC has made a point to anticipate risks and make plans to mitigate or avoid the risks completely, this is seen in the banks facility of the recession in the last two years the bank made adequate plans and adoptive prudent lending, adopted engineering science and decrease trading operations expenses, while other bank were unprepared and had to be rescued by the government. HSBC ope place inn flexible economies, this has been explained by looking at the diversity of the grocery stores it operates, and this gave the bank diversity as not all markets experienced recession.HSBC reaction to risks is a testimony to its objective lens to efficaciously handle risks, one such objective identified in the memorise was is to create liquidity through do an arrangement to leaseback or deceive assets whenever lends are defaulted (Goodway, 2007)On the other hand, the Royal Bank of Scotland has similar strategies, before recession the management had drawn a plan on risk management, this is exemplified by the fact that they didnt change their banking rates during this period. Although they needed to take precautions on the insurance, once this has been resolved they could go back to the most important part which is keeping the business even more profitable (Aldrick, 2008).Royal Bank of Scotland (2011) strategy has been to invest heavily in being relevant to the postulate of the customer the bank has also created a buffer to value the bank in times of recession.In 2007 the bank lost 3% in book value as it experienced subprime related mortgage crisis, but the bank made an effort in ensuring that the customers ineluctably were addressed as soon as likely and assure clients that their accounts with the bank were safe.The Royal Bank of Scotland has not seen changes in sub-prime related spare downs, the bank has remained stable. During the recession the bank still managed 1.1 billion in half year profits, though the bank was affected by recession as it could not prevent the effects of recession on their profits and capital enhancements.When making a parity between the two banks, they differ on how they carry out their risk strategies but live with similar characteristics.4.5.1 Implications of recession on preindication mortgage and corresponding subprime lossesHSBC has always tried to offer options that are sustaining and a relief to those who are about to lose their home due to the effect of recession, some of the options are leaseback and sales. In terms risk manage ment HSBC has adopted a different approach when it comes to lot customers experiencing cash flow problems in paying mortgage. The bank identifies the need to assess the urgency to save the customers financial status or his house under mortgage (Goodway, 2007) the bank allows customers to modify their loan allowing customers to pay the loan at an adjusted future time. This reduces the risk to both the customer and the bank.On the other hand Royal Bank of Scotland reduce risks by allowing variable or fixed mortgage rate, and has applied the ingenuous approach where a customer mortgage application is pass decisively, this ensures the hires are as flexible as possible. The bank has also limit the bank charges it can attach to an account thus creating customer satisfaction.4.5.2 Bank Strategies and Policies AppliedThe lastingness of the banks strategy and approach can be analysed by looking at how well the banks management performed their roles. As risks are accepted the managemen t needs to assess the risks and sleepless interpretation of the consequences. If the management do not conservatively assess the crisis, past the risk might probably worsen until it can no longitudinal be helped (RBS, 2011).The loan readjustment adopted by HSBC may not work as it is backbreaking to find a common ground. It may also not be possible to carry out estimation and evaluation.The Royal Bank of Scotland has minimized its risk moving picture by allowing the straightforward method, thus the bank is able to assess the qualification of each customer.4.5.3 Criteria for house mortgage loan assignationBoth banks utile interest options, period of payment, and a flexible payment options. However, the criteria need to be assessed on soul application basis while at the same time maintaining objectivity and should not be applied to all. This criterion has to be flexible in terms of meeting the customer needs such as out of the blue(predicate) circumstances. The current crit eria risk the banks profit if it is contravened, it should allow the customers meet their monthly loan repayment deadlines.It can be very well taken into account that the system utilise by these two is similar to those applied by the rest of the banks in United Kingdom (Effros, 1998). However, the researcher intends to discuss the reliableness of the system utilised by the two chosen banks as they regard indispensable risks in world(prenominal) economic environment. A theater of operations of the HSBC system shows how well they nurture managed risks that bring on dod other banks in receivership. The take aim helps to extrapolate the important issues needs to be tackled by a bank to manage risks successfully.The two banks have had good financial risk management, in terms managing the credit and market risks by having a proper risk sagacity. These two risks take place when an improper assessment is made (Newman, 2006). wholesome and reliable management cheek has been used as a peter to help the banks strengthen and acquire to a risk free system. In case of system failures a dependable measure has been created that would minimize financial implications.The banks initiative is to push the interest of the depositors in the program and to treat them as among the driving force which affects the system. The methods are extensively researched and adapted among institutions which mean that it has been measuredly checked (Banks, 2003).Extensive use up on the feasibility of the issue in addressing the effectiveness of system utilise in the banking institution. In the previous discussion, regarding the cunning of law affecting banking system, the European banks are known to be basic under a tight regulation whereby giving them less overcome over their own management. The divergence in the solution technique being utilise by either HSBC or the Royal Bank of Scotland cannot alone be the solution to this problem. It is the way they approach the proble m with a system proven by time.The HSBC and the Royal Bank of Scotland have several financial preparation portfolios in percentage the customers reach their goals. The two banks have manifested effectiveise in providing the most expert advice on training and investing. They consider it as their tariff to provide their customer with the best advice available and have to be right and fitting to their customers needs. They practise and commit themselves as they go the free mile of keeping their customers for a lifetime by answering and addressing apace their customers growing demands and they have never failed to do so (Newman, 2006).The banks will not wait in profitless but makes sure that they get to customers and provides them with a personalized service that cannot be found from other bank institutions creating assumption and trust with the customers. No oddity these two banks were voted top United Kingdom banks (Duttweiler, 2009).The assessment of the constitution utili zed by these two banks operates as a measure that monitors whether a bring down risk guideline has been complied with and then makes a report accordingly (Crouhy, 2006). The flesh of the insurance policy has been able to achieve the enchant strategy, though require the manikin and the mount capacity be adequately met by the funding institution. The convention as a result, gives the customer the agency and the security as they are given the key role and part in developing the system.The United Banking system has also been extensively analysed in this dissertation. Risks such as the financial and operational risks has been analysed by relating them to the strategies being employed by each bank, thus, an empirical method has been applied by exploring details about each bank. assorted important factors about a banking institutions risk management system have been looked into as well. Looking into the advantages of a well-organized risk management banking system will help minimiz e damages brought by liquidity risks. A well-managed and well carried management plan will save the bank from recovering from years, after suffering from significant financial risks.Chapter 6Conclusions and Recommendations6.1 ConclusionsWhile the data analysed show similarities in the way the two banks manage liquidity risks HSBC has prudently managed the risks better as compared to RBS. The profits before tax for the two banks indicate that RBS made losses for the last two years while HSBC has maintained profitability despite recession.Fair amount of loans have been advanced that may not pose great risk to both banks, the loan to asset rate is low for both banks and this reduces unnecessary exposure to bad debts.The ratios indicate the banks have maintained adequate capital bases that can with stand systemic risks. HSBC has managed to maintain low operating margins leveraging on technology to deliver products thus avoiding high staff expenses, on the other hand RSB government mono mania reduces the risk exposure and thus the bank has been able to obtain loans from the bank after the recent recession, the operating margins are negative for the last two years indicating the bank has not been able to achieve optimal operations.After a sustained increase in the operating profits of RBS before the recession profits declined from 9807 million pounds in 2007 to losses of 2595 million pounds, this emanated from the exposure of the bank to mortgage related risks thereof to ensure the bank is saved from the risk the bank should carry out evaluation on the ability of the customers to meet the monthly mortgage requirements.The effectiveness of the risks management policies of the banks under study has been evaluated, to be able to have a wider view about risk management bank mortgage and subsequent reaction to recession has been analysed.When the risk management policies that each of the banks under stipulation is evaluated, HSBC possess the most re questionable liquid ity risk management policy implementation well provide in the banks reaction to the recession.The study naturalized that the liquidity risk management plays an important role in observe the flow of assets into the banks system. Banks are required to have standard set of policy to affect its benefits. However, without a reliable system from which the organization management plan is created, it is easy to say that such a management plan will not be effective. It will produce no progress at all and could costly on the part of those who implement these management strategies.Since the two banks have applied similar systems HSBC is the bank that shows the most impressive and effective strategy/ approach against liquidity risk. They always make sure to protect not only their notes also they make sure that they protect the welfare of their customers.The dissertation focus on the UK banking system was ideal as the perfect niche where to study liquidity risk because the banks have a wide access to nearly all parts of the world and. The banks are universal and possess that impressive banking track record. HSBC and the Royal Banks of Scotland are evenly as competent and pull to a strong liquidity risk management (Casu Molyneux, 2001).However, this study was check to the top two banks it is recommended that in coif to understand liquidity risk a study should be conducted not only on those two banks but also on those bedded at the bottom. This way it is possible to understand the liquidity risk in the banking industry and serve as a basis of reference by other researchers or specific areas of concern that may be a source of risk for banks. It should also be necessary that a case study be conducted on a particular scenario focusing only on one risk management area so as to have a catcher view.The banking system is explained along with some points on how important it is to build a strong impression with international institutions by securing a reliable system a t heart the bank by good risk management policies that serve as its foundation.A discussion on the splendor of liquidity risk management policy has been explored using policies as the guidelines and indicators that help determine the confidence level in each banking system. If weak policy system is in place, it gives doubt as to the effectiveness of the risk management approach.Royal Bank of England has been analysed and the tariff it has on the control of rates. The bank has been used as the point of reference since it has flexibility in decision making as well as its crucial to the good functioning or detriment of the whole banking institution in United Kingdom.The HSBC and the Royal Bank of Scotland has impressive financial planning portfolios that are geared towards helping the customers reach their goals. They make it their utmost responsibility to provide their customer with the best options that are available and have committed to meet the customers need. The two banks prov ide the most expert advice on planning and investing.An analysis of HSBC system shows that they have managed risks well, including risks that have placed other banks in receivership. The Royal Bank of Scotland equally possesses reliable strategy where all the decisions regarding risks have to be decided after careful analysis and Proper management of credit and market risks is essential in eliminating financial risks. The study open that these two risks occur when an improper assessment is made. The commitment of the management of an organization is an important element needed to help reduce the risk on possibility of a bank to collapse. It is a guiding force that a responsible banking institution must constipate to, so as to avoid the consequences of financial failure because of mismanagement. Proper risk management could be a simple way of solving liquidity risk problem which management believe is difficult to tackle.In company to protect their earnings the banks have to instit ute proper risk management policies as it is not always predictable where risks will emerge. The two banks under study have implemented some of the most desired risk management policies. Many banks were earnestly affected by the recession but HSBC and RBS still returned maximum profits despite the operating environment real in 2010 the financial year under review.Customers are concerned with the risk management practises of their banks this is because it also determines the availableness of credit and all necessary bank products that they need.6.2 RecommendationsThe banks need to ensure that the risk exposure on their portfolios is minimized or eliminated completely. While the recession risks were inevitable the need to anticipate liquidity risks are imperative. HSBC had gone through a crisis however the management had foresight and aforethought(ip) well for the recession on the other hand RBS had to rely on government bail out to minimize the risks the mortgage portfolio had.The need to mesh vigorous risk management policies is important than before, while management decisions mold the direction of the banks, careful planning and consulting is essential. A deep analysis of the causes of the losses registered in the last two years would be a good starting point to be able to collect the mistakes. Management will be valuable in this, the ability of the management to run swimmingly the banks and predict future risk will determine the bank that emerges from recession stronger.From the data analyzed while turnover for the banks increased the operating profits were affected by the recession. care HSBC did RBS need to leverage on technology to reduce operating losses.6.2.1 Recommendations on Managing liquidity through Organizational social structure and GovernanceIt is imperative that the two banks define the liquidity risks exhaustively this will ensure that the risks the banks are unfastened to are identified and placed in respective risk category, then th e risks are communicated to the respective groups to that they can identify, understand and evaluate liquidity risks that the banks reckon including new lines of business, products, acquisitions, alliances or any initiative that the banks intend to participate.A clear understanding of the various risks is essential particularly distinguishing Market liquidity and funding liquidity risks. RStudy on Financial Statements and Ratios of BanksStudy on Financial Statements and Ratios of Banks4.0 IntroductionThe data analysis chapter has been divided into two parts. In the first part, I have tried to do some sort of quantitative analysis. The first part is based on the financial statements and key ratios of both the chosen banks. Again it was broken down into sub-points like the analysis of data before recession and after recession. Some key ratios were calculated, compared and analysed from the financial data of last 10 years for both the banks.The second part of this chapter is a mixtur e of literature review data analysis and some points were written with reference to the analysis done in first part in my own words.4.1 Analysis of Data Derived from Financial Statements and Ratios4.1.1 Bank Status before Recession After RecessionTo be able to answer our research questions it is imperative to look at the two companies data from financial statements, this will reveal the risks inherent in each banks operation. The analysis utilizes data from the financial statements of the banks under review from year 2005 to 2010 just before recession started. While the two banks have similarities in risk management RBS use pounds while HSBC use dollars as the basis currency in the books of accounts, while this may hinder the analysis especially quantitative analysis the general data increase and decrease is an important aspect sufficient for this study.4.2 Financial Position of RBS4.2.1 Financial Position of RBS before recession (2004-2005, 2005-2006, 2006-2007)The Royal Bank of S cotland turnover had been on steady increase, in the financial year ending December 2007 the turnover was 30,366 million in 2005 the turnover was 25902 million while in the year ending 2006 turnover increased to 28002 million.In 2005 operating profits were 7936 million while in 2006 operating profits increased marginally to 9186 and in 2007 9807 million. Profits before tax has been on steady increase from 7936million in 2005 to 9186 and 9832 million in 2006 and 2007 million respectively.4.2.2 Financial Position of RBS After Recession (2007-2008, 2009-2010)The turnover for year 2008 was 25868 Million and finally the turnover for the year ending December 2009 was 38690 million. In but in 2008 and 2009 losses of 40836 and 2595 were recorded respectively, this was after recession started.The full details for the full year 2010 results have not been announced but the first half results profits had increased by 44% to 3950 million.Table 1Royal Bank of Scotland Profit and loss ExtractsYear Ended 31 Dec201020092008200720062005millionsTurnover38690.025868.030366.028002.025902.0Operating ProfitQ3726-2595-40836.0980791867936Profits before tax-2595-40836.09832.09186.07936.0Source RBS website4.3 Financial Positions of HSBC4.3.1 Financial Positions of HSBC before recessionOn the other hand the turnovers for HSBC on the financial years under review were as follows year 2007 the turnover was $ 87601 million, $ 61704 million in 2005 and $70070 million in 2006 in terms of operating profits, the group managed $20966.0m, $21240.0m and $22709.0m in years 2005, 2006 and 2007 respectively. Profits before tax were $20966m, $22086m, and $24212m in years 2005, 2006, and 2007.4.3.2 Financial Positions of HSBC After recessionThe group managed a turnover of $ 88571 million and $ 78631 million in 2008 and 2009 accounting periods respectively. HSBC recorded $ 22709 million profit in 2007 however the profits declined substantially to $7646 million in 2008 and $ 5298 in 2009 again profits wer e affected as recessionary fears started. In third quarter of 2010 the profits increased marginally.Table 2HSBC Profit and Loss ExtractsYear Ended 31 Dec201020092008200720062005$millions$$$$$$Turnover7863188571876017007061704Operating Profit52987646227092124020966Profit before tax707970799307242122008620966Source HSBC website4.4 Tabular, Graphical representation, interpretation and analysis of key ratios of HSBC RBS for last 10 yearsIn the next few pages, I have tried to present the data in tables, graphs and charts. Some of the data was presented and calculated for last 10 years and some for the last 5-6 years. Some of the key ratios as given below were calculated, analysed and compared for both the banks.Net Interest MarginReturn on equityCapital adequacyLiquidity ratioNon-performing assets ratioLoans Turnover ratioLoans to Assets ratioGross Yield on Earning Assets (GYEA)Table 3HSBC Ratio Analysis in percentageYear Ending 31 Dec2010 up to June20092008200720062005200420032001Net I nterest Margin3.253.093.052.003.42.042.602.542.24ROE11.112.311.219.6211.6012.2511.215.613.21Capital Adequacy11.5011.6011.7510.8910.9711.0111.1211.3111.63Liquidity ratio2.202.503.624.215.316.541.231.112.15Nonperforming assets ratio2.172.272.122.142.162.142.112.012.00Loans Turnover ratio66.255.225.1029.254.059.167.1274.2176.45Loans to Assets ratio0.600.400.220.150.120.1130.210.280.32GYEA5.214.604.494.364.244.424.684.293.26Source Data glanced from HSBC website and did personal analysis.Figure 4 HSBC ratio analyses(Note all the figures are in percentage)Table 4RBS Ratio analysis as a percentageYear Ending 31 Dec2010 up to June20092008200720062005200420032001Net Interest Margin1.971.761.701.751.831.912.012.031.92ROE1211.511.499.69.121411.210Capital Adequacy12.5111.4411.9512.9811.7211.1012.2113.1113.23Liquidity Ratio3.212.423.215.223.233.292.232.113.15Nonperforming Assets Ratio11.114.116.112.1512.1112.1011.1111.0110.10Loans Turnover Ratio66.945.2544.1539.244.049.1257.2163.3266.00Loans to Assets Ratio1.561.451.351.401.190.200.890.460.56GYEA3.334.62.124.064.123.282.862.922.45Source Data glanced from RBS website and did personal analysisFig. Comparison of the two banks PL dataGenerally over the years the turnover of the two banks has been increasing but the increase in HSBC turnover has been moderate while that of RBS has been steep. HSBC has managed to remain profitable for the period of analysis showing that the company has been able to mitigate the risks well as compared to RBS. RBS made substantial operating losses amounting to 2595 million in 2009 and had to be supported by the government as a result of subprime mortgage crisis. The data show that HSBC has adopted prudent management even though profits declined, the ratios show the group has maintained strong capital baseFindingsDuring the two years before year 2009 and after the two banks were adversely affected by economic condition. The profit and loss analysis from the two banks show that HSBC has been able to tackle liquidity risks well as it has been able to maintain profitability through out even during the recession on the other hand RBS was affected and made losses in 2007, 2008 and 2009 but the half year available indicate the bank has returned to profitability after the government support.The profitability before tax is shown in the figure below.Figure 5Source Data glanced from RBS and HSBC websites and did personal analysisNote HSBS figures are in million dollars while figures for RBS are in million pounds.4.5 Literature Review Data AnalysisThis dissertation presents the underlying strategies and approaches applied by the top UK banks in learning the differences between HSBC and Royal Bank of Scotland. The strategies and approaches are observed before and after the recession period when assets and stocks were reducing in value putting the banks in worst case financial scenario. To compare their financial, business and operational risks concern will create a bigger picture. The ai m is to determine which between the two banks has a better and effective approach and strategy in the risk-reduction initiatives (Drew Michael, et al., 1996)Banks in United Kingdom have relied upon a proven system of strong liquidity risk management. This has been in existence for over three years now and since the system was started banks have made it a priority to update their systems of risk management to keep abreast with the changing demands of the society and technological innovations associated with risk management. Financial stability is easily achieved by following less complicated process and that is to stick to the rules and created in less difficult way that whenever you try to explain it to a customer or client. The grasp of the policy will then be easily absorbed (Issing, 2004).The liquidity risk management of most United Kingdom has been seen to be strong and responsive whenever banks experience risks. Banks have to ensure that they exercise prudent risk management t o be able to provide customer satisfaction, but some of the banks are less committed to the task to minimize their exposure to risks. It can be costly to the bank and expose the bank to court cases, licence cancellation by the supervisory authorities and customers withdrawing from the bank. The only way to do this is to create a reliable system of liquidity risk management (Issing, 2004).Risk management actions count the most in the future and especially in setting the reputation of the banks. Extra effort is required in creating policies that will withstand the effect of any risks. Being able to communicate the recent risk situation among the team members will help a lot in the resolution and in effectively carrying out the regulations which they intended to implement for the banks organization. A manifestation of a high level of activity would spell a lot of difference compared to those who lag behind due to poor management risk planning (Kahf Homud, 1998).An effective liquidity risk management is able to make anticipations on the occurrence of future risks. There is also a type of liquidity risk management that can only provide satisfactory level of service or performance, however, it possess certain weakness though very insignificant, it may still deliver anticipated results like those managements that are strong since it only manifest very minor signs ineffectiveness (Bank of England 2007).HSBS and the Royal Bank of Scotland are not just the top banks in United Kingdom they are the two banks that show an impressive liquidity risk management. This record could be very much proven by the profits earned annually and the impression they make among their customers is excellent and they never settle for anything less. The two banks have applied similar systems although HSBC is the bank that shows the most impressive and effective strategy/ approach against a liquidity risk. They always make sure to protect not only their money but also protect the welfare of t heir customers and intend to move with them and manage their finances by avoiding incompetence in dealing with liquidity risks. HSBS guides their customer from the time they enter the institution until the time they become part of a much growing and impressive banking industry (Bank of England 2007).In the last two years HSBC only experienced short term recession only, they had prepared for the recession, through management and the fact that they had experienced a crisis before and had rectified it by creating a frame work that worked well for the bank. Prudent risk management at HSBC can be analysed by looking at the profits that the bank has earned recently where the bank doubled its half-year profits by posting 7 billion as at August 2010, this is at a time when smaller banks were feeling the effects of recession. Analysts have seen the capabilities of the bank base from their well-managed systems and strategies. They had already expected such things to happen so there is nothing surprising about that (Goodway, 2007). The banks have taken all necessary precautions and the management maintains optimism that in case of risks they will find a way out.The way the two banks react to problems is always quick thus they are able to find real time solutions. This strategy is a good way of keeping loyal customers. The primary goal is to offer consistency in performance whether the nature of the transaction differs or not, this is exemplified by the HSBC spirit of being consistent and reliable in every possible way.One of the ways that the banks have avoided the risks is to anticipate the risks thus making in advance plans. HSBC has made a point to anticipate risks and make plans to mitigate or avoid the risks completely, this is seen in the banks preparation of the recession in the last two years the bank made adequate plans and adopted prudent lending, adopted technology and minimized operations expenses, while other bank were unprepared and had to be rescued by the government. HSBC operates inn flexible economies, this has been explained by looking at the diversity of the markets it operates, and this gave the bank diversity as not all markets experienced recession.HSBC reaction to risks is a testimony to its objective to effectively handle risks, one such objective identified in the study was is to create liquidity through making an arrangement to leaseback or sell assets whenever loans are defaulted (Goodway, 2007)On the other hand, the Royal Bank of Scotland has similar strategies, before recession the management had drawn a plan on risk management, this is exemplified by the fact that they didnt change their banking rates during this period. Although they needed to take precautions on the insurance, once this has been resolved they could go back to the most important part which is keeping the business even more profitable (Aldrick, 2008).Royal Bank of Scotland (2011) strategy has been to invest heavily in being relevant to the needs of th e customer the bank has also created a buffer to protect the bank in times of recession.In 2007 the bank lost 3% in book value as it experienced subprime related mortgage crisis, but the bank made an effort in ensuring that the customers needs were addressed as soon as possible and assured clients that their accounts with the bank were safe.The Royal Bank of Scotland has not seen changes in sub-prime related write downs, the bank has remained stable. During the recession the bank still managed 1.1 billion in half year profits, though the bank was affected by recession as it could not prevent the effects of recession on their profits and capital enhancements.When making a comparison between the two banks, they differ on how they carry out their risk strategies but have similar characteristics.4.5.1 Implications of recession on house mortgage and corresponding subprime lossesHSBC has always tried to offer options that are sustaining and a relief to those who are about to lose their h ome due to the effect of recession, some of the options are leaseback and sales. In terms risk management HSBC has adopted a different approach when it comes to helping customers experiencing cash flow problems in paying mortgage. The bank identifies the need to assess the urgency to save the customers financial status or his house under mortgage (Goodway, 2007) the bank allows customers to modify their loan allowing customers to pay the loan at an adjusted future time. This reduces the risk to both the customer and the bank.On the other hand Royal Bank of Scotland reduce risks by allowing variable or fixed mortgage rate, and has applied the straightforward approach where a customer mortgage application is approved decisively, this ensures the payments are as flexible as possible. The bank has also limited the bank charges it can attach to an account thus creating customer satisfaction.4.5.2 Bank Strategies and Policies AppliedThe effectiveness of the banks strategy and approach can be analysed by looking at how well the banks management performed their roles. As risks are recognized the management needs to assess the risks and careful interpretation of the consequences. If the management do not carefully assess the crisis, then the risk might probably worsen until it can no longer be helped (RBS, 2011).The loan modification adopted by HSBC may not work as it is difficult to find a common ground. It may also not be possible to carry out assessment and evaluation.The Royal Bank of Scotland has minimized its risk exposure by allowing the straightforward method, thus the bank is able to assess the qualification of each customer.4.5.3 Criteria for house mortgage loan allocationBoth banks utile interest options, period of payment, and a flexible payment options. However, the criteria need to be assessed on individual application basis while at the same time maintaining objectivity and should not be applied to all. This criterion has to be flexible in terms of meeti ng the customer needs such as unforeseen circumstances. The current criteria risk the banks profit if it is contravened, it should allow the customers meet their monthly loan repayment deadlines.It can be very well taken into account that the system used by these two is similar to those applied by the rest of the banks in United Kingdom (Effros, 1998). However, the researcher intends to discuss the reliability of the system utilized by the two chosen banks as they encounter inevitable risks in global economic environment. A study of the HSBC system shows how well they have managed risks that have placed other banks in receivership. The study helps to understand the important issues needs to be tackled by a bank to manage risks successfully.The two banks have had good financial risk management, in terms managing the credit and market risks by having a proper risk assessment. These two risks take place when an improper assessment is made (Newman, 2006).Strong and reliable management o rganization has been used as a tool to help the banks strengthen and arrive to a risk free system. In case of system failures a dependable measure has been created that would minimize financial implications.The banks initiative is to push the participation of the depositors in the program and to treat them as among the driving force which affects the system. The methods are extensively researched and adapted among institutions which mean that it has been carefully checked (Banks, 2003).Extensive study on the feasibility of the issue in addressing the effectiveness of system implemented in the banking institution. In the previous discussion, regarding the imposition of law affecting banking system, the European banks are known to be sanctioned under a strict regulation whereby giving them less control over their own management. The variability in the solution technique being employed by either HSBC or the Royal Bank of Scotland cannot simply be the solution to this problem. It is the way they approach the problem with a system proven by time.The HSBC and the Royal Bank of Scotland have several financial planning portfolios in helping the customers reach their goals. The two banks have manifested expertness in providing the most expert advice on planning and investing. They consider it as their responsibility to provide their customer with the best advice available and have to be right and fitting to their customers needs. They exert and commit themselves as they go the extra mile of keeping their customers for a lifetime by answering and addressing quickly their customers growing demands and they have never failed to do so (Newman, 2006).The banks will not wait in vain but makes sure that they get to customers and provides them with a personalized service that cannot be found from other bank institutions creating confidence and trust with the customers. No wonder these two banks were voted top United Kingdom banks (Duttweiler, 2009).The assessment of the policy utilized by these two banks operates as a measure that monitors whether a prescribed risk guideline has been complied with and then makes a report accordingly (Crouhy, 2006). The design of the policy has been able to achieve the appropriate strategy, though require the framework and the funding capacity be adequately met by the funding institution. The design as a result, gives the customer the assurance and the security as they are given the key role and part in developing the system.The United Banking system has also been extensively analysed in this dissertation. Risks such as the financial and operational risks has been analysed by relating them to the strategies being employed by each bank, thus, an empirical method has been applied by exploring details about each bank.Various important factors about a banking institutions risk management system have been looked into as well. Looking into the advantages of a well-organized risk management banking system will help minimize dama ges brought by liquidity risks. A well-managed and well carried management plan will save the bank from recovering from years, after suffering from significant financial risks.Chapter 6Conclusions and Recommendations6.1 ConclusionsWhile the data analysed show similarities in the way the two banks manage liquidity risks HSBC has prudently managed the risks better as compared to RBS. The profits before tax for the two banks indicate that RBS made losses for the last two years while HSBC has maintained profitability despite recession.Fair amount of loans have been advanced that may not pose great risk to both banks, the loan to asset rate is low for both banks and this reduces unnecessary exposure to bad debts.The ratios indicate the banks have maintained adequate capital bases that can with stand systemic risks. HSBC has managed to maintain low operating margins leveraging on technology to deliver products thus avoiding high staff expenses, on the other hand RSB government ownership r educes the risk exposure and thus the bank has been able to obtain loans from the bank after the recent recession, the operating margins are negative for the last two years indicating the bank has not been able to achieve optimal operations.After a sustained increase in the operating profits of RBS before the recession profits declined from 9807 million pounds in 2007 to losses of 2595 million pounds, this emanated from the exposure of the bank to mortgage related risks therefore to ensure the bank is protected from the risk the bank should carry out evaluation on the ability of the customers to meet the monthly mortgage requirements.The effectiveness of the risks management policies of the banks under study has been evaluated, to be able to have a wider view about risk management bank mortgage and subsequent reaction to recession has been analysed.When the risk management policies that each of the banks under consideration is evaluated, HSBC possess the most formidable liquidity ri sk management policy implementation well articulated in the banks reaction to the recession.The study established that the liquidity risk management plays an important role in monitoring the flow of assets into the banks system. Banks are required to have standard set of policy to affect its benefits. However, without a reliable system from which the organization management plan is created, it is easy to say that such a management plan will not be effective. It will produce no progress at all and could costly on the part of those who implement these management strategies.Since the two banks have applied similar systems HSBC is the bank that shows the most impressive and effective strategy/ approach against liquidity risk. They always make sure to protect not only their money also they make sure that they protect the welfare of their customers.The dissertation focus on the UK banking system was ideal as the perfect niche where to study liquidity risk because the banks have a wide acc ess to almost all parts of the world and. The banks are universal and possess that impressive banking track record. HSBC and the Royal Banks of Scotland are equally as competent and committed to a strong liquidity risk management (Casu Molyneux, 2001).However, this study was limited to the top two banks it is recommended that in order to understand liquidity risk a study should be conducted not only on those two banks but also on those ranked at the bottom. This way it is possible to understand the liquidity risk in the banking industry and serve as a basis of reference by other researchers or particular areas of concern that may be a source of risk for banks. It should also be necessary that a case study be conducted on a particular scenario focusing only on one risk management area so as to have a clearer view.The banking system is explained along with some points on how important it is to build a strong impression with international institutions by securing a reliable system wit hin the bank by good risk management policies that serve as its foundation.A discussion on the importance of liquidity risk management policy has been explored using policies as the guidelines and indicators that help determine the confidence level in each banking system. If weak policy system is in place, it gives doubt as to the effectiveness of the risk management approach.Royal Bank of England has been analysed and the responsibility it has on the control of rates. The bank has been used as the point of reference since it has flexibility in decision making as well as its crucial to the good functioning or detriment of the whole banking institution in United Kingdom.The HSBC and the Royal Bank of Scotland has impressive financial planning portfolios that are geared towards helping the customers reach their goals. They make it their utmost responsibility to provide their customer with the best options that are available and have committed to meet the customers need. The two banks provide the most expert advice on planning and investing.An analysis of HSBC system shows that they have managed risks well, including risks that have placed other banks in receivership. The Royal Bank of Scotland equally possesses reliable strategy where all the decisions regarding risks have to be decided after careful analysis and Proper management of credit and market risks is essential in eliminating financial risks. The study established that these two risks occur when an improper assessment is made. The commitment of the management of an organization is an important element needed to help reduce the risk on possibility of a bank to collapse. It is a guiding force that a responsible banking institution must adhere to, so as to avoid the consequences of financial failure because of mismanagement. Proper risk management could be a simple way of solving liquidity risk problem which management believe is difficult to tackle.In order to protect their earnings the banks have to inst itute proper risk management policies as it is not always predictable where risks will emerge. The two banks under study have implemented some of the most desired risk management policies. Many banks were severely affected by the recession but HSBC and RBS still returned maximum profits despite the operating environment existing in 2010 the financial year under review.Customers are concerned with the risk management practises of their banks this is because it also determines the availability of credit and all necessary bank products that they need.6.2 RecommendationsThe banks need to ensure that the risk exposure on their portfolios is minimized or eliminated completely. While the recession risks were inevitable the need to anticipate liquidity risks are imperative. HSBC had gone through a crisis however the management had foresight and planned well for the recession on the other hand RBS had to rely on government bail out to minimize the risks the mortgage portfolio had.The need to pursue vigorous risk management policies is important than before, while management decisions influence the direction of the banks, careful planning and consulting is essential. A deep analysis of the causes of the losses registered in the last two years would be a good starting point to be able to collect the mistakes. Management will be valuable in this, the ability of the management to run smoothly the banks and predict future risk will determine the bank that emerges from recession stronger.From the data analyzed while turnover for the banks increased the operating profits were affected by the recession. Like HSBC did RBS need to leverage on technology to reduce operating losses.6.2.1 Recommendations on Managing liquidity through Organizational structure and GovernanceIt is imperative that the two banks define the liquidity risks exhaustively this will ensure that the risks the banks are exposed to are identified and placed in respective risk category, then the risks are commun icated to the respective groups to that they can identify, understand and evaluate liquidity risks that the banks face including new lines of business, products, acquisitions, alliances or any initiative that the banks intend to participate.A clear understanding of the various risks is essential particularly distinguishing Market liquidity and funding liquidity risks. R