The Comparison of BNY Mellon and Barclay's Bank - Research Paper Example

?The comparison of BNY Mellon and Barclay's bank Table of Contents The comparison of BNY Mellon and Barclay's bank Table of Contents 2 3 The present paper aims at examining the financial positions of two leading banks namely, BNY Mellon and Barclay’s Plc through a close investigation of their respective financial ratios. Moreover, the paper targets at evaluating the strengths and weaknesses as well as the mission and vision of both banks. It shows that the financial position of Barclay’s Plc to be more robust than that for BNY Mellon, although both exhibit ample fluctuations in their profitability figures which are not in line with either of their mission and vision. 3 Introduction 4 Strengths and Weaknesses of the banks 4 Profitability of the bank over a span of 5 years 5 Mission and vision of the banks 6 Bank’s Financial Position 8 Projected Profitability of the banks 9 Conclusion 11 The above paper held a comparison between the financial states of BNY Mellon and Barclay’s bank with an aim of examining the extent to which each of them could withstand the brunt of the financial crisis and the way that they are prepared in meeting any such crises in future. The paper tried to assess their profitability and financial positions and found the degree of resilience of Barclay’s to be far higher than that of BNY Mellon. However, as far as their investment in assets are concerned, that of BNY Mellon is found to be in a better position than that of its peer. 11 References 11 Abstract The present paper aims at examining the financial positions of two leading banks namely, BNY Mellon and Barclay’s Plc through a close investigation of their respective financial ratios. Moreover, the paper targets at evaluating the strengths and weaknesses as well as the mission and vision of both banks. It shows that the financial position of Barclay’s Plc to be more robust than that for BNY Mellon, although both exhibit ample fluctuations in their profitability figures which are not in line with either of their mission and vision. Introduction Bank of New Mellon and Barclays Bank are two noted names among the financial houses of USA. The financial crisis spanning between 2007 and 2009 however, saw these institutions tumbling under the pressure of credit crunch. Both banks faced the brunt of the crisis which was reflected in their respective key financial ratios. The crisis had mainly been the outcome of poorly framed monetary policies which implemented a fall in the rate of interest initially and followed it by a sudden hike in the same. This fickle mindedness took a toll over the financial state of the economy and exposed the frail fundamentals of many of its financial houses. However, the intrinsic strength of many of them were also displayed which prevented these institutions from being fully victimized by the crisis. The present paper tries to draw a comparison between the features which characterize Bank of New York Mellon (BK) and Barclays Bank (BCLYF) on the basis of their respective financial figures over the last 5 years (2006-2010). A close examination into the historical key ratio values can possibly deduce the errors committed and precision adhered to by these banks, which determined the degree of their sustenance. Moreover, it also attempts to figure out the profitability of these banks provided fluctuations in the Fed rate. As the view portrayed by any organization is highly important while assessing its strengths and weaknesses, they too would be inspected though the format of the entire paper will be of a comparative nature. Strengths and Weaknesses of the banks Bank of New York Mellon Total assets of the bank used to consist mostly of fixed assets rather than current assets initially although this factor had been improving over time, implying that the bank’s liquidity position is improving over time. Moreover, the bank’s assets in comparison to its total liabilities are also improving over time. Its increasing reliability on equity financing is also remarkable which promises of the banks increased leverage. The bank however, has a highly fluctuating net income figures over the span of five years which might prove to be detrimental for the bank’s future profitability. In fact, the latest figures for 2010 had been quite bleak for the bank’s future and might have adverse implications upon the investors. Moreover, the amount of equity financing that the bank indulges into is very small indicating low degree of financial leverage at present. Barclay’s Plc The bank is characterized by a good amount of liquidity owing to the huge proportion of current assets which formed a part of its total asset figures. Moreover, the extent of equity financing that it relies upon is quite high implying a high degree of financial leverage. Barclay’s had been experiencing a highly fluctuating net income with the figures for the year 2010 being a fraction of its 2009 figures. The income tax paid by the company is quite high as well indicating that a large fragment of its income has to be given out. Thus, the bank’s profitability figures are far lower than its potential Profitability of the bank over a span of 5 years Profitability of a bank is found to be intrinsically dependent upon the market rate of interest which in this case is the Federal Rate. Higher the market rate of interest, lower will be the demand for loans and thus, lower will be their chances of acquiring profit. The following diagrams briefly present the profitability of Barclay’s Plc and Bank of New York Mellon over 2006 to 2010, in comparison to the prevailing Fed rates. BNY Mellon experienced a dip in their profitability rates at a time when the Federal Reserve hiked the Fed rate during the first half of 2007. However, gradually as the Fed rate dropped, the Return on Equity and Return on Assets figures experienced a climb as the demand for loans increased in the economy and the bank opted for equity financing to meet this increasing demand. Similar had been the situation for Barclay’s Bank Plc which saw increases in their respective ROA and ROE percentages post a hike in the Fed rates. However, a fundamental difference could be noted between the profitability figures of these two banks. These figures had been found to be extreme for BNY Mellon while it is moderate for Barclay’s indicating that the sensitivity towards interest rate movements of the former is much higher in comparison to that of the latter. In other words, a small dip in Fed rate saw far higher profitability figures for BNY Mellon than that for Barclay’s Plc. Such difference in behavior might be on account of the latter’s involvement in a large number of businesses other than banking, in contrast to the case of the former (MSN, 2010). In case that the rate of interests remained constant for another three years to come, the profitability of the banks is likely to rise. Mission and vision of the banks Since the year 2008-09 and 2009-10 were deleterious for the financial companies worldwide, both the banks have advocated for more prudent lending activities on their part. BNY Mellon has clearly stated such stance in its Annual Financial Report 2010. According to it, after a prolonged period of financial crisis, the bank now possesses “cautious optimism” as the world economy has started recovering, albeit slowly. In such environment, the bank envisages five key areas where it will lay its focus in future. Firstly, it will try to expand its “footprint, product capabilities and brand in key centers internationally”. Evidently this merely suggests that the bank will try to expand its business operation internationally and it will also strengthen its financial position in order to further establish its brand name on the international front. Secondly, the bank promises to make the relationship with its customers more profound and to make the most of its resources for their sake. Indeed the bank wants to form a wider base of customer for its products. Thirdly, the bank promises to streamline its global operations and to strengthen its infrastructure and “technology platform” that it currently is empowered with. The bank has been consolidating its position in its global growth centers which are cost efficient and are able to generate higher level of employment as well. Moreover it has a goal of raising its employment level up to 35% in 2015 and it also claims to invest $100 million per year in order to bring down the cost of operation. Fourthly the bank is committed to maintain one of the strongest balance sheets in the industry. Besides the ‘Risk Appetite System’ of the bank which will guide it in undertaking particular types of risk which are meant for providing consistent returns to bank’s shareholders, has been approved by its Board of Directors. Finally the bank envisages dealing with the litigation arising out of the recent financial crisis and it exhibits the confidence of CEO of the bank that eventually it will successfully pass through this last phase of the crisis. In a more general term the vision of BNY Mellon is broadly centered on improving client services, achieving a strong financial position and developing a diverse and inclusive workforce globally. The vision of Barclays Plc emphasizes upon diversification by the area of business, by location and by the sources of funds. It seeks to provide an improved performance through such diversifications and reach out to its global pool of customers. Barclays heavily focuses on its clients and customers in order to expand its business network. According to it, the “integrated universal banking strategy” is the most effective model to ensure a risk-optimized high return to its share holders and also to provide superior service to its customers worldwide. Barclay believes that the need of its customers is a priority and it has devised its business operation model centering on this need. It aims to diversify its revenue sources for the business, expand business segments and client base in order to achieve full geographical exposure. Secondly an effective risk management which underlies the commercial decisions of the bank, is also significant and one of the bank’s objectives is to understand the risk that the customers undertake and for this, again a well founded relationship with the customers is imperative. Thirdly it has been laid on the annual reports of Barclays in 2010, that ‘financial discipline’ is one of the most important goals of the bank and it envisages it to be absolutely essential to execute its strategy and develop businesses globally. Fourthly the bank claims to assess its performance on the basis of a defined set of ‘key performance indicators’ or KPIs while the strategy and its business models will determine the shape and direction of its businesses. Bank’s Financial Position Financial position of these two banks can be analyzed in terms of various financial ratios which help to understand different aspects of financial position of a particular company. Interest coverage ratio, which exhibits a firm’s ability to pay interest on its outstanding debt currently stands at 7.1% for BNY Mellon for the year 2010. Although this number has been oscillating around 2.5-3.0% in the last decade, in 2009 it went negative for BNY Mellon. The sharp rise in interest coverage in 2010 clearly indicates to a good financial recovery by the bank. A measure of financial leverage of a firm is its debt-equity ratio, which is 0.77 or 77% in 2010. Since a high leverage makes a firm highly exposed to the threat of any financial crisis, a low leverage is desirable to minimize financial risk. Debt-equity ratio has been consistently declining over the last decade for this bank and this trend clearly spells out bank’s commitment to achieve financial stability. Quite evidently as the proportion of equity in the total asset rises, the return on equity will show a low figure. In 2010 this figure stands at 8% which became negative in the previous year. Return on asset has also exhibited a clear positive trend for the last decade for this bank which in turn indicates to bank’s improved condition in terms of profitability. The net profit margin of 73.1% in 2010 in contrast to -31.3% in 2009 also shows that the bank has successfully bounced back from the financial crisis situation and has set itself on a even higher trajectory of profitability. Due to this improved profitability condition, the book value per share has shown a sustained increase over the years and in 2010 this stands at $26.06 per share. The average price-earnings ratio in 2010 stands at 13.1 which is quite low compared to the P/E ratio pertaining to the previous years. This low P/E leads to the conclusion that although the bank has started recovering from the financial crisis of 2008-09, investors are still skeptic about the future profitability of the bank and this fact is also supported by a declining price to book value ratio of BNY Mellon over the last few years. A low P/B ratio simply means that the stocks of BNY Mellon are undervalued and thus the bank is yet to reinstate confidence among the investors (BNY Mellon, 2010). Hence, the bank might not be regarded to be in a position yet of improving their brand quality with investors, which is what its primary mission is. The financial position of the Barclays Plc can now be analyzed in quite a similar fashion, on the basis of various financial indicators and in comparison to the BNY Mellon as well. In contrast to an extraordinarily high rate of interest coverage of BNY Mellon, Barclays’ interest coverage stands at 1.8% in 2010 and it is gradually decreasing over the last decade. RoE and RoA of Barclays in 2010 are 7% and 0.2% respectively. Thus the performance of the Barclays in comparison with the BNY Mellon in 2010 is a little worse in terms of profitability. On the other hand, leverage of Barclays as measured by the debt-equity ratio, is 16.05 in 2010 which is much higher compared to that of the BNY Mellon and thus Barclays are in a position to pay higher income or dividends to each of its share holders although by exposing itself to a larger amount of risk. The ability of the Barclays to pay a higher amount per share is again reflected by a higher average P/E ratio of 26.9 as compared to 13.1 of the BNY Mellon in 2010. The P/B ratio of the Barclays stands at 1.6 in 2010 which is too a little higher than that of BNY Mellon in the same year. Thus the fundamentals of the Barclays can be said to be stronger than the BNY Mellon, although in terms profitability, the latter’s performance is better. The net profit margin of the Barclays stands only at 29.3% in contrast to 73% of BNY Mellon in 2010. Finally it can easily be seen that the variability of return (RoE and RoE) of the Barclays are far less than that of the BNY Mellon over the last few years-even in the time of crisis in 2008-09, RoE and RoA pertaining to Barclays did not vary excessively as happened in case of BNY Mellon. Thus one final conclusion is that, vis-a-vis the BNY Mellon the Barclays Plc has shown a greater resilience against the crisis (Barclay’s, 2010). Although Barclay’s financial position is found to be stronger than its peer from certain aspects, the same might not be said about it in terms of profitability. Hence, the company’s position is not yet in line with its future objectives. Projected Profitability of the banks The banks’ profitability figures largely depend upon the rate of interest prevailing in the market. However, the returns on assets and returns on equity are independent of one another and hence, in order to forecast the banks’ profitability figures, it would be wise to actually predict the trend of each individual variable upon the Fed rate for each of the banks. The trends so yielded could be presented in the following tabular form for each of the banks. For BNY Mellon Bank of New York Mellon is found to be experiencing eventually low profitability figures in terms of ROE owing to the constant Federal rate figures. In other words, a constant rate of interest would mean that ROE is lowered by almost 50% from 2011 to 2012 and by more than 90% between 2012 and 2013. However, ROA is expected to fluctuate over the years with the value dipping down slightly in 2010 from 2011, but recuperating later in 2013 by nearly 1.5%. For Barclay’s If the Fed rate is found to stay constant at 0.18, then the Return on Assets and Return on Equity values for Barclays Plc for the period between 2011 and 2013 would be rising over the years as suggested by means of the trend analysis. Hence, profitability figures of the bank are found to be on a rise over the years under such a condition. ROA is believed to be rising initially by one percentage point and is followed by a 3% increase. On the other hand, ROE is forecasted to increase by 2% first and then by almost 8%. Hence, BNY Mellon is believed to experience a higher ROA than that of Barclay’s Plc, which obviously is a good indicator of its profitability. However, the ROE figures of Barclay’s are found to be quite high implying a better position in terms of the same. Conclusion The above paper held a comparison between the financial states of BNY Mellon and Barclay’s bank with an aim of examining the extent to which each of them could withstand the brunt of the financial crisis and the way that they are prepared in meeting any such crises in future. The paper tried to assess their profitability and financial positions and found the degree of resilience of Barclay’s to be far higher than that of BNY Mellon. However, as far as their investment in assets are concerned, that of BNY Mellon is found to be in a better position than that of its peer. References Barclay's PLC. Barclay;s PLC Annual Report 2010. 2010. 31 May 2011 . BNY Mellon. 2010 Annual Report: Financial Section. 2010. 31 May 2011 . MSN. Financials. 2010. 30 May 2011 . Read More