Finance and Accounting: Brewin Dolphin Holdings plc - Essay Example

Contents Introduction 2 Business and key markets study 3 Corporate and financial actions 5 Financial trends 5 Profitability 6 Liquidity 7 Financial gearing 8 8 Investment 9 Risk Management 9 Exchange rate risk management 9 Political Risk Management 11 Conclusion and Recommendations 12 Reference List 14 Bibliography 17 Introduction Brewin Dolphin Holdings Plc is a company that is based in the United Kingdom and conducts its business in the field of investment management. The business portfolio of the company also includes a number of activities other than management of investment and they are provision of financial advice and services related to execution in the U.K. and Eire. The primary aim of the company is to provide best financial service to its clients all over the U.K. and presently has more than 28 billion worth of investor’s money (Bloomberg Businessweek, 2014). The company presently employs 1877 employees and have more than thirty plus offices (Brewin Dolphin, 2014b). The table below shows the market share Brewin Dolhin. The business portfolio of the company has broadened over the period of time and provides an array of wealth management services to its clients that range from opening and managing savings accounts to that of managing pension funds. The business also encompasses managing funds of charities and conducts estate planning. Figure 1: Market Share of Competitors (Source: Brewin Dolphin, 2014b) Brewin Dolphin Holdings has the second position in the financial sector of the U.K. in terms of market share. The present market share of the company stands at £284m. Despite the volatile conditions in the financial sector of the U.K, the company has managed to increase its adjusted profit by margin 2% from 2012. The total income of the company has shown an increase of 5.3% in 2013. The purpose of this report is to discuss the political and exchange risk management of Brewin Dolphin. Financial performance of the company is also analyzed. Business and key markets study Few key indicators are being used to determine the performance of the company over the last five years. They are revenue earned by the company, growth observed in earnings per share and the dividend yield. Figure 2: Revenue Earned by Company (Source: Morning Star, 2014) The table shows the division of revenue between financial planning and investment management services indicating that investment management fees is a major revenue generating factor of Brewin Dolphin. Figure 3: Revenues earned by main departments (Source: Brewin Dolphin, 2014b) Figure 4: EPS Growth and Dividend Yield (Source: Morning Star, 2014) Revenue generation of the company has been formidable despite the weak economic recovery of the U.K. Growth in EPS can be treated as volatile. The weak economic performance of the U.K. had particularly affected EPS in 2009 and 2010. The value had peaked in 2011. Finally, dividend yield has also been impressive during the turmoil. A consistent rise in revenue indicates that a firm is making profit on a whole. One of the explanations is that the performance of the overall financial sector in the U.K. has fallen drastically and is now 100% below the peak value before the occurrence of recession (Burgess, 2011). The financial market in the U.K. has suffered a huge setback after the financial crisis of 2008 and this has been particularly problematic for the company. Corporate and financial actions The corporate governance of the company is stringent and it heavily focuses on increasing its client base and improving efficiency. Reducing the risk of financial transactions is also a major agenda of the company. For instance, there has been a renewed commitment to reduce the operational costs by increasing investment in technology. Brewin Dolphin has hired HP in order to reduce the operational cost of stocktrade program. The results obtained are spectacular as it has brought down costs by 40% (HP, 2013). New computer technologies are also being implemented to execution service, to enhance customer satisfaction. The corporate governance of the company is also trying to create a sustainable business environment by focusing on reduction of greenhouse gas emission and installing solar cells (Brewin Dolphin, 2014a). In terms of improving the financial performance of the company, Brewin Dolphin believes in capitalizing on resourceful human assets. The hiring of Lucie Gordon can be considered as an attempt to improve the relationship it shares with the Independent Financial Advisors all over the U.K. The expertise of Ms. Gordon is expected to help in establishing strong relationships with the IFA (Richardson, 2014). Similarly, hiring of Mr. Donald Tosh is an effort to improve the performance in Glasgow (Lobo, 2014). Financial trends Four key indicators are studied in order to interpret the performance of the company namely investment, profitability, financial gearing and liquidity. Figure 5: Key Financial Indicators Indicators 2009 2010 2011 2012 2013 Net Profit margin 8.3 9.62 5.68 7.27 7.82 Current Ratio 1.06 1.13 1.17 1.16 1.31 Debt/Equity Ratio 0.04 0.01 0 0 0.01 Dividend Payout Ratio 98.6 78 112.7 82.6 89.4 (Source: Morning Star, 2014) Profitability Figure 6: Net Profit Margin (Source: Morning Star, 2014) The net profit margin of the company has been somewhat not steady with severe profit squeeze observed in 2011. Recurrent factors responsibles for weak performance are shocks in the commodity markets, declining confidence of customers and structural inadequacy has resulted in the sharp decline. The slow recovery of the exports market in Eurozone caused sharper decline (Bloomberg Businessweek, 2014). The global fincial crisis of 2008 had greatly affected the financial performance of these companies and investors began to lose confidence in the financial institutions perpetuating in their fall (Bloomberg Businessweek, 2014). Liquidity Figure 7: Current Ratio (Source: Morning Star, 2013) The current ratio of the company has shown steady rise over 2009-2013. This means that the current assets are higher than the current liabilities. This situation can be treated as a good one as it proves that there is a balancing between the current assets and liabilities. The financial liquidity of the company is stable because it is able to repay the debt (Brigham and Houston, 2011). Financial gearing Figure 8: Debt/Equity Ratio (Source: Morning Star, 2013) The D/E ratio of Brewin Dolphin is considerably low and this is necessarily a good sign. This is because the company can be expected to create a favourable cash flow in the future and can manage its debts credibly (Nissim and Penman, 2001). Growth in the discretionary assets of the company in the past year is a major factor that has contributed to the overall growth of the assets in the company. It accounts for 70% of the total assets (Brewin Dolphin, 2014b). Investment Figure 9: Dividend/Payout Ratio (Source: Morning Star, 2014) The dividend payout ratio of the company has been high and reached the highest point in 2011. Analysis of the dividend payout ratio is a complex one because some of the investors prefer that the dividend payout ratio should remain high and others are of the notion that it should be reinvested in order to generate higher yields from capital gains. Researchers have argued that a company should manage its low dividend payout ratio with favourable returns on equity (Goldstein, 1993). Risk Management Brewin Dolphin has restricted its operation only in the United Kingdom and Eire. This implies that though the company cannot be strictly termed as a multinational company, it still has to manage the political and exchange rate risks. Exchange rate risk management Exchange risk management is one of the key factors that have formidable influence on the profits of the company. Exchange rate risks for a company can be described as a type of risks to which its investors are exposed during the transaction (Choi and Prasad, 1995). Broadly speaking managing the exchange rate risk is a part of the overall corporate strategy dealing with market risks. In order to manage the foreign exchange risks, the company keeps aside capital for the management of the foreign exchange fluctuations. As Brewin Dolphin operates only in the U.K. so the company is not subjected to multiple exchange rate risks. In case of the Netherlands and the U.K. managing the foreign exchange positions are related to limiting the “net open positions to working balances” (Holburn and Zelner, 2010). The Bank of England has framed a policy regarding foreign currency that the net open dealings in one currency should not be greater than 10% of the capital (Bank of England, 2011). Brewin Dolphin ensures that this regulation is met. It has been found that most of the financial institutions in the U.K. use hedging as an instrument of minimization of their exchange rate risk (Bank of England, 2011). In other words, the foreign exchange market acts both as a source of profit generation and exchange rate risk (Broderick and Cox, 2010). Brewin Dolphin has introduced the Bond Fund (GBP) promising investors to earn greater return than the U.K. Gilt market (Brewin Dolphin Holdings PLC, 2013). This is an example of hedged fund that can generate both profits for the company minimizing profits. Similarly, another product of the company termed as the Discretionary management service is also subjected to fluctuations in the currency (Brewin Dolphin, 2014a). Therefore, the exchange rate risk remains a formidable management issue for the company. Generating profits during exchange rate fluctuations causes profit distortions. Money of investors is subjected to risk in case of fluctuations. In order to calculate the foreign exchange risk, Brewin Dolphin uses the foreign exchange RRR method to calculate the foreign exchange risk in its investment portfolio. The net open position in different currencies is first converted to base currency at the applicable spot rates (Brewin Dolphin Holdings PLC, 2008). Most of the financial companies in the U.K. have more or less adopted a uniform policy for managing the currency risk and reducing their exposure. Integration of the economy of the U.K. with the global economy has been a major factor which have caused majority of companies to take up hedging as their preferred strategy (Graham and Smith, 1999). According to the research that was conducted by Modigliani and Miller (1958) it was found that mitigating exchange rate risks through hedging are likely to work only when there is symmetry in information and negligible transaction costs. Other researchers have suggested that if the aforementioned conditions do not hold, then hedging may affect value of a company (Holburn and Zelner, 2010). In an empirical research that was conducted by the Lloyd’s group it was found that hedging is particularly avoided by smaller financial companies as fixed costs associated with hedging are quite high which can exceed the benefits (Bank of England, 2011). It has been found that companies that have been using hedge funds to minimize their risks have recorded an increase in their profits prior to the recession by using hedging (Bank of England, 2011). Though this trend of rising profits had diminished after recession yet it is slowly picking pace with economic recovery. Operational risk framework is employed to minimize risk. The Operational Risk framework decides the extent of risk the company is willing to take and eventually take measures to fight them. There are three main pillars of mitigating operational risk which includes exchange rate risk namely owning the risk, overseeing the risk and providing assurance (Brewin Dolphin Holdings PLC, 2008). Political Risk Management In case of Brewin Dolphin, political risks arise from the actions that are taken by the government the U.K and that of Republic of Ireleand. Analysts across the world have recognized that political risk varies between countries depending on two main factors. The first one is the capacity to prevent external shocks and the effectiveness of the rulers in terms of creating policies to mitigate the risk (Jensen, 2003). In the Republic of Ireland it has been found that the government can change policies drastically which indicates political stability is lower (DiPiazza and Bremmer, 2006). Similarly, the operations of Brewin Dolphin Plc can also be jeopardized by election of the new Muslim government in Egypt. Researchers have established that abiding by the government laws in each country of operation and lobbying political agents can be an effective way to mitigate the country based political risks (Brewin Dolphin, 2014). Brewin Dolphin has a very high regard for the legislations in the countries in which it invests money. At present the general elections that are going to be held in the following financial year is the biggest concern for financial companies. At present the government of Ireland is framing policies to speed up the recovery of the economy and in doing so it is creating asymmetrical current account flows that can cause problems for Brewin Dolphin (Standard & Poor’s Financial Services, 2014). A second major political risk can come from the European Union Referendum (Financial Times, 2014). It is now being argued that drastic changes in the policy measures by the government will drag economic recovery. Policies such as asset price bubbles fuelled by credit instruments may particularly cause problems for the company. Weaker economic recovery in Ireland is expected to affect long-term profitability of Brewin Dolphin. The government in Ireland has been taking up fiscal policies In Ireland the policies regarding the financial institutions regarding are taken by the Central Bank of Ireland (Standard & Poor’s Financial Services, 2014). It has also been found that financial companies mainly enter into contracts with the government to reduce their political risks. The government in turn regulates the supreme bank and ensures that the policies taken by the financial institutions are not causing harm to the investors. The statutory code of conducts by the Central Bank guides the policies of the financial institutions. (DiPiazza and Bremmer, 2006). Brewin Dolphin Holdings Plc is planning to incur £5000 as donations to political parties. Similarly, Brewin Dolphin Limited, which is a subsidiary of the company, is expected to incur £22,000 pounds as political donation (Brewin Dolphin Holdings PLC, 2013). Finally, Brewin Dolphin has always made sure that it never violates the legal standards in the the Republic of Ireland. The company has a strong regard for the legislations of the country and always abides by the auditing standards that are formed by the country (County Contact Centers PLC, 2006). The overall corporate strategy of Brewin Dolphin treats the legal risk as a part of the overall operational risk. The management of the company first identifies the risk, then assess the risk and finally devise strategies to mitigate the risks (Brewin Dolphin Holdings PLC, 2013). The risk committee or the boards ensures that the code of conduct in Ireland is not violated in the process of auditing. Conclusion and Recommendations The management strategies undertaken by Brewin Dolphin have greatly helped the company to manage its political and exchange risks. The management follows a series of coordinated steps before identifying the risk and managing them effectively. Brewin Dolphin had experienced fall in profits just after the recession, as has been observed from analyzing the key financials indicators. As the company operates exclusively in the U.K. and Eire so it is not subjected to multiple exchange rate risks. However, exposure to foreign currency increases the vulnerability of the company. In terms of political risk, general elections in the U.K. can create turbulent times for the company. In order to mitigate the exchange rate and the political risks it can be suggested that Brewin Dolphin can take certain measures. Firstly, the political risks can also be minimized by fixating the contracts with the government. Secondly, it will be imperative for Brewin Dolphin Plc to be associated with the legislative group decision making process so that outcomes are in favour of Brewin Dolphin. Finally, in order to manage the exchange rate risk in a comprehensive manner it will be important to consider hedging as an important strategy. This will help the company to pass on the risk to the investors. Other options to reduce the risk in the financial market can be through future and forward contracts, swap and options. In other words, managing exchange rate risks through the external methods can be a feasible option for the company. Reference List Bank of England, 2011. A review of the work of the London Foreign Exchange Joint Standing Committee in 2010. Bank of England Quarterly Bulletin, 51(2), pp.158–62. Bloomberg Businessweek, 2014. Brewin Dolphin Holdings Plc. [online] Available at: [Accessed 19 November 2014]. Brewin Dolphin Holdings PLC, 2008. 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Choi, J.J. and Prasad, A.M., 1995. Exchange risk sensitivity and its determinants: a firm and industry analysis of US multinationals. Financial Management, pp.77-88. County Contact Centers PLC, 2005. Annual report and accounts 2005. [pdf] County Contact Centers PLC. Available at: [Accessed 19 November 2014]. DiPiazza, S.A. and Bremmer, I., 2006. Integrating political risk into enterprise risk management. [pdf] PWC. Available at: [Accessed 19 November 2014]. Financial Times, 2014. Brewin Dolphin Holdings PLC. [online] Available at: [Accessed 19 November 2014]. Global Data, 2013. Brewin Dolphin Holdings PLC - Financial analysis review. [pdf] Global Data. Available at: [Accessed 19 November 2014]. Goldstein, M., 1993. International Capital Markets: Exchange rate management and international capital flows. Washington: International Monetary Fund. Graham, J. and Smith, C., 1999. Tax incentives to hedge. Journal of Finance, 54(6), 2, pp.241–62. Groom, B., 2014. Political risks top concerns for U.K. financial firms. Financial Times, [online] 7 January. Available at: [Accessed 19 November 2014]. Holburn, G. L. and Zelner, B. A., 2010. Political capabilities, policy risk, and international investment strategy: Evidence from the global electric power generation industry. Strategic Management Journal, 31(12), pp.1290-1315. HP, 2013. Brewin Dolphin cuts software test costs by 40 per cent. [pdf] HP. Available at: [Accessed 14 November 2014]. Jensen, N.M., 2003. Democratic governance and multinational corporations: Political regimes and inflows of foreign direct investment. International Organization, 57(03), pp.587-616. Lobo, D., 2014. Brewin Dolphin hires Speirs & Jeffrey's Tosh for Glasgow expansion. . [online] Available at: [Accessed 14 November 2014]. Modigliani, F. and Miller, M. H., 1958. The cost of capital, corporation finance and the theory of investment. The American Economic Review, pp.261-297. Morning Star, 2014. 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