London Stock Exchange Group PLC - Coursework Example

? of Paper Schools Number and of (e.g., October 12, 2009) Fundamentals ofFinance Executive Summary HSBC is the second largest banking and financial group in the world and it has been operating in 87 countries. This report analyses the financial statements of HSBC for the last five years. Financial ratios have been calculated in order to analyze the financial performance of this multinational bank. This report analyses the London Stock Exchange market and the stock price movement of HSBC and one of the competitors of HSBC, Barclays Bank. The returns of HSBC are compared against the London Stock Exchange and against Barclays Bank. This report includes the analysis of stock price movement of HSBC, Barclays Bank and London Stock Exchange. Apart from this, Beta of HSBC and Barclays have been calculated and the report also includes beta analysis of the two companies. INTRODUCTION This report analyses the stock price of one of the renowned financial institutions in the world, HSBC. HSBC is considered as the second largest financial and banking group in the world. In this report, stock price movement of HSBC has been compared with the average market movement of London Stock Exchange. In addition to this, the stock price movement of HSBC is compared with one of its competitors, Barclays Bank. In order to have better analysis, the return from market is also compared with return of Barclays as it would help in analysing better whether the movement in price is because of banking industry or the company itself. Barclays has been chosen as the competitor in the report because it is another multinational bank operating in different countries like HSBC. HSBC is considered as the second largest banking and financial services group of the world and according to Forbes Magazine it is also the second largest public company [6. 7]. HSBC has approximately 7,500 offices in 87 different countries of the world with its headquarters in London, United Kingdom [3]. Customers of HSBC have increased with the passage of time and now its total customers are almost 100 million (Annual Report and Accounts, 2010). Total assets of the company in June, 2010 were 2.418 trillion USD. Operating income of HSBC has increased in 2010 from 2009 and it has reached to a figure of 19.04 billion with a net income of 13.16 billion USD (Annual Report and Accounts, 2010). ANALYSIS Financial Ratios: Liquidity Ratio Liquidity ratios of HSBC do not show very positive figures as the current ratio of HSBC in 2010 is 0.27 which has decreased from 0.30 in 2009. However current ratio in the last five years has been in the range of 0.27 to 0.32 which shows that the bank does not have sufficient current assets or it has too many current liabilities. Liquidity Ratios Formulae 2010 2009 2008 2007 2006 Current Ratio Current Assets/Current Liabilities 0.27 0.30 0.32 0.30 0.28 Quick Ratio Current Assets - Inventory/Current Liabilities 0.27 0.30 0.32 0.30 0.28 Since banks do not have any inventory therefore, current ratio will be the same as quick ratio. Profitability Ratios: Net profit margin has increased in 2010 since 2007; however it is understandable because of the financial crisis that hurt the economy of the world particularly the financial sector. Net profit margin has increased to 36% in 2010 from 16% showing that the economy as well as HSBC is recovering from recession. Also the return on assets is not attractive and it is representing that the bank is not using its assets effectively or they are underutilized. The same is the case with return on equity as it is too low for investors to invest. Profitability Ratios Formulae 2010 2009 2008 2007 2006 Operating Income Margin Operating Income/Sales 42% 13% 18% 60% 62% Profit Margin Profit/Revenue 36% 16% 15% 54% 49% Return on Assets Profit/Assets 0.58% 0.28% 0.26% 0.87% 0.91% Return on equity Profit/Equity 4.39% 2.19% 2.22% 7.02% 7.16% Leverage Ratio Leverage ratio represents that HSBC has been heavily financed with Debt. The debt ratio of HSBC has been in the range of 86.82% to 88.40% which is very high and representing high risk. Debt to Equity Ratio represents relationship of total debt to total equity and it is very high as well. Leverage Ratio Formulae 2010 2009 2008 2007 2006 Debt Ratio Total Debt/Total Assets 86.82% 87.09% 88.40% 87.62% 87.34% Debt to Equity Ratio Total Debt /Total Equity 6.59 6.75 7.62 7.08 6.90 Efficiency Ratio With an average return of 6 to 8.5% over fixed assets, HSBC will not be going to impress too many investors as it is representing that the assets of the company are underutilized. In addition to this, Total Assets turnover shows a similar kind of picture with return over assets equalling around 1.6% to 1.8% which is very low. Efficiency Ratio Formulae 2010 2009 2008 2007 2006 Fixed Assets Turnover Revenue/Total fixed assets 8.01% 8.58% 5.74% 7.27% 8.58% Total Assets Turnover Revenue/Total assets 1.61% 1.72% 1.68% 1.61% 1.85% Stock Price Stock price of HSBC has shown fluctuations in the last five years and one of the main reasons for this fluctuation is the financial crisis that had an impact on most of the industries particularly the financial and banking industry. London stock exchange was also heavily influenced by the financial crisis and therefore most of the companies that were listed showed a decline in their price movement. Stock price of HSBC started declining in 2007; however in late 2009 the stock price showed signs of improvement and then it got stabilised during 2010 but after that since 2011 the price has started declining again as demonstrated in the following figure. Market Index London stock exchange has also shown fluctuations in last five years. In 2006, there was a positive trend in the market which started declining until recession came. The market crashed and the overall London Stock Market kept on declining till 2009. Since 2009, the market is showing gradual signs of improvement. Comparison of Stock Price of HSBC and Market Returns from London stock exchange and HSBC showed deviations on several occasions indicating that HSBC does not follow what the market trend is as in 2007, the returns from LSE reached very low more than -30% however at that time the returns from HSBC were at almost 0%. Another occasion in 2008, the returns from the market reached more than 30% and at that time the returns from HSBC were negative. The beta of HSBC is -0.066 and when beta is negative the returns of the stock would go in opposite direction to the market. In this example, the returns of HSBC and London Stock Exchange do not follow the same pattern and are going in opposite direction to one another. Stock Price of Competitors Stock price of Barclays was showing positive movement since 2006 until the financial crisis that made the stock price of Barclays decline. Recession made a huge impact on the stock price movement of Barclays as the price started moving down after the first quarter of 2007 and it could not grow until the second quarter of 2009 started. Since that time, the stock price has become little stabilised but in last four months or so, it has again started declining. Comparison of Return from Barclays and HSBC Returns from HSBC and Barclays have been more or less same however there are couple of occasions where the returns have shown large deviations. In 2006, the returns of HSBC and Barclays were going at the same rate until in 2008 Barclays showed negative returns and then in late 2008 stock of Barclays yielded very high returns of more than 80% to its shareholders and at the same time, HSBC was struggling to maintain positive returns. Also Barclays has shown positive movements in last couple of months whereas HSBC has been more or less stable. Comparison of Stock Price of Competitors and Market Returns of Barclays have been following the trend of London Stock Exchange market as the movement in returns of stock of Barclays are pretty much going with the returns of the London Stock Market. As in 2007, returns from London Stock exchange declined and so as the returns of Barclays shares decline. Then in 2008, the returns of London Stock market improved and at the same time returns of Barclays share also grew and the pattern remained very much the same throughout the last sixty months and even in last two months or so the stock market has shown signs of improvement and so as the returns of Barclays have improved. The beta of Barclays is +1.132 and when beta is positive then the returns of the stock follow the same pattern as of the market. In this example, the stock of Barclays is moving very much similar to the movement with the overall London stock exchange market. Beta Analysis Beta of any of any stock having positive value would follow the direction of market and beta having negative value would go in the opposite direction of the market. Beta of HSBC has a negative value and it is going against the market whereas the beta of Barclays is positive and it is moving with the same direction. Recent News Financial Service Authority has taken steps to scrutinize whether investment banks operating in UK are involved in bribery to win businesses. The main objective of this step is to ensure that market operates fairly. This will strengthen the defences of banks and at the same time it would be a warning for all those who are involved in such activities. In addition to this, steps have been taken to stop money laundering as after surveying the money laundering control of one third banks, it has been found that money laundering controls were not satisfactory. In addition to this, it has been emphasized to identify the source of income of the account holders of the bank. According to Brian Mairs, a spokesman for the British Bankers’ Association, all the banks in UK have become united in order to strengthen the defences against financial crime and all banks are committed to keep crime out of finance (Fortado, & Chellel, 2011). With increased control over bribery, big names like HSBC would be beneficiary as small and medium sized banks would be more involved in such cases as they lack brand name like HSBC and Barclays that which is helpful in winning business. Also, HSBC as a member of the banking industry of UK would increase its control in order to remove crime and thus this would help large banks like HSBC to further flourish. Conclusion HSBC is the second largest banking and financial group in the world. Financial performance of HSBC has not been impressive and it is represented by the financial ratios of the company. Most of the financial ratios are not very attractive for investors to invest in the company as the profit margin is low, return on assets is low along with this, the bank has high debt in its capital structure which is representing high risk. Even though ratios have improved in 2010 but still they are not attractive for investors. Because of financial crisis in 2007, the banking industry around the world suffered and this had a major impact of the stock price of most of the banks in the world. Stock price of HSBC was showing a positive trend but because of recession the price started declining. The same decline was also observed in London Stock Exchange Market and in stock price of Barclays. Beta of HSBC is -0.066 which shows that the returns of HSBC would go against the market so if the market is showing positive movements then the HSBC stock would yield negative returns and vice versa. Reference list Annual Report and Accounts 2010, ‘HSBC Holdings PLC’, HSBC. Available from [Accessed 1 November 2011] Fortado, L & Chellel, K 2011, ‘British Investment Banks to Face Bribery Scrutiny From FSA’, Bloomberg. Available from < http://www.bloomberg.com/news/2011-06-22/u-k-investment-banks-to-face-bribery-scrutiny-from-regulator.html?cmpid=yhoo> [Accessed 1 November 2011] Yahoo! Finance, ‘Barclays PLC’, Historical Prices. Available from [Accessed 1 November 2011] Yahoo! Finance, ‘HSBC Holdings PLC’, Historical Prices. Available from < http://finance.yahoo.com/q/hp?s=HSBA.L&a=04&b=15&c=2006&d=10&e=1&f=2011&g=m> [Accessed 1 November 2011] Yahoo! Finance, ‘London Stock Exchange Group PLC, Historical Prices. Available from < http://finance.yahoo.com/q/hp?s=LSE.L&a=02&b=23&c=2006&d=10&e=1&f=2011&g=m> [Accessed 1 November 2011] Appendix ASSETS 2010 2009 2008 2007 2006 Cash and balances at central banks 57,383 60,655 52,396 21,765 12,732 Trading assets 385,052 421,381 427,329 445,968 328,147 Financial assets designated at fair value 37,011 37,181 28,533 41,564 20,573 Derivatives 260,757 250,886 494,876 187,854 103,702 Loans and advances to banks 208,271 179,781 153,766 237,366 185,205 Loans and advances to customers 958,366 896,231 932,868 981,548 868,133 Financial investments 400,755 369,158 300,235 283,000 204,806 Other assets 147,094 149,179 137,462 155,201 137,460 Total assets 2,454,689 2,364,452 2,527,465 2,354,266 1,860,758 LIABILITIES AND EQUITY Liabilities Deposits by banks 110,584 124,872 130,084 132,181 99,694 Customer accounts 1,227,725 1,159,034 1,115,327 1,096,140 896,834 Trading liabilities 300,703 300,703 247,652 314,580 226,608 Financial liabilities designated at fair value 88,133 80,092 74,587 89,939 70,211 Derivatives 258,665 247,646 487,060 183,393 101,478 Debt securities in issue 145,401 146,896 179,693 246,579 230,325 Total Equity 323,478 305,209 293,062 291,454 235,608 TOTAL LIABILITIES AND EQUITY 2,454,689 2,364,452 2,527,465 2,354,266 1,860,758 2010 2009 2008 2007 2006 Net interest income 39,441 40,730 42,563 37,795 34,486 Net fee income 17,355 17,664 20,024 22,002 17,182 Net trading income 7,210 9,863 6,560 9,834 8,222 Net income/(expense) from financial instruments designated at fair value 1,220 (3,531) 3,852 4,083 657 Gains less losses from financial investments 968 520 197 1,956 969 Gains arising from dilution of interests in associates 188 1,092 Dividend income 112 126 272 324 340 Net earned insurance premiums 11,146 10,471 10,850 9,076 5,668 Gains on disposal of French regional banks 2,445 Other operating income 2,374 2,788 1,808 1,439 2,546 Total operating income 80,014 78,631 88,571 87,601 70,070 Net insurance claims incurred and movement in liabilities to policyholders (11,767) (12,450) (6,889) (8,608) (4,704) Net operating income before loan impairment charges and other credit risk provisions 68,247 66,181 81,682 78,993 65,366 Loan impairment charges and other credit risk provisions (14,039) (26,488) (24,937) (17,242) (10,573) Net operating income 54,208 39,693 56,745 61,751 54,793 Total operating expenses (37,688) (34,395) (49,099) (39,042) (33,553) Operating profit 16,520 5,298 7,646 22,709 21,240 Share of profit in associates and joint ventures 2,517 1,781 1,661 1,503 846 Profit before tax 19,037 7,079 9,307 24,212 22,086 Tax expense (4,846) (385) (2,809) (3,757) (5,215) Profit for the year 14,191 6,694 6,498 20,455 16,871 Profit attributable to shareholders of the parent company 13,159 5,834 5,728 19,133 15,789 Profit attributable to non-controlling interests 1,032 860 770 1,322 1,082 Financial Ratios Liquidity Ratios 2010 2009 2008 2007 2006 Current Ratio Current Assets/Current Liabilities 0.27 0.30 0.32 0.30 0.28 Quick Ratio Current Assets - Inventory/Current Liabilities 0.27 0.30 0.32 0.30 0.28 Profitability Ratios Profitability Ratios 2010 2009 2008 2007 2006 Operating Income Margin Operating Income/Sales 42% 13% 18% 60% 62% Profit Margin Profit/Sales 36% 16% 15% 54% 49% Return on Assets Profit/Assets 0.58% 0.28% 0.26% 0.87% 0.91% Return on equity Profit/Equity 4.39% 2.19% 2.22% 7.02% 7.16% Leverage Ratio Leverage Ratio 2010 2009 2008 2007 2006 Debt Ratio Total Assets/Total Debt 86.82% 87.09% 88.40% 87.62% 87.34% Debt to Equity Ratio Total Debt /Total Equity 6.59 6.75 7.62 7.08 6.90 Efficiency Ratio Efficiency Ratio 2010 2009 2008 2007 2006 Fixed Assets Turnover Sales/Total fixed assets 8.01% 8.58% 5.74% 7.27% 8.58% Total Assets Turnover Sales/Total assets 1.61% 1.72% 1.68% 1.61% 1.85% Read More