HSBC's Key Performance Indicators Analysis - Case Study Example

STRATEGIC FINANCIAL MANAGEMENT By (Name) Institution Instructor Class/Course City Date НSBС's Key Performance Indicators Analysis HSBC is one of the largest banking and financial services organizations in the world. Founded in 1865, the company has over 6,300 offices in both established and emerging markets, and aims at being where the growth is experienced; the company connects with its customers in order to create opportunities for its sustained growth. This has strategy has enabled the company’s businesses to thrive and prosper (HSBC Interim Report, 2012). HSBC has an ultimate purpose of helping economies to grow as well as helping people to fulfill their hopes and realize their ambitions. More importantly, the company serves approximately 100 million customers through our four Global Businesses: Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, and Global Private Banking (HSBC Sustainability Report, 2011). More than that, the company’s network is outreached to over 75 countries in the world as well as territories in Europe, the Asia-Pacific region, the Middle East, Africa, North America and Latin America. The purpose of this paper is to analyze the key performance indicators of HSBC by first identifying the current strengths and weaknesses of the company in a sector and/or market that the company’s main businesses fit. More than that, this study will discuss the strategic financial management concepts and the performance indicators for strategic purposes for organizations such as HSBC. Analysis of HSBC strengths and weaknesses The main vision of HSBC is to become the world’s leading international bank therefore making most of its strategic alignment to tend to long term trends. Basically this objective is pursuing two major goals; capital flows and international trade whereby the company takes advantage of the connectedness of the world economy. The concentration of the financial flows of different economies and regions is really high and the company expects to advance into more than 35 market niches and generate over 90% of the world trade growth considering the same concentration of capital flows. Secondly, the mentioned objective is aligned towards economic development and wealth creation whereby the company expects to help increase the GDP of the emerging economies thereby benefiting demographics and urbanization. The company draws much of its strength by the correspondents of the international market concentration and its well developed network corresponds well with the market relevant to international financial flows (Plunkett, 2007). This makes the company to access and be exposed to high-growth market and businesses all around the world (HSBC Interim Report, 2012). HSBC also draws much of its strength from its strong and stable balance sheet that helps the company to generate a very resilient stream of earnings. This position helps the company to sustain its long term trends and become equally competitive. HSBC has a well positioned image hat capture the growing international financial flows. Based on the company’s global reach and range of services, the company has stamped itself in a strong position to serve not only the corporate clients but also to even help the grow from small firms to become large international enterprises. Thus it has a well connected business orientations in the world (HSBC Interim Report, 2012). The company also reaps its strength from its core wealth management and retail with the local scale firm’s objective and thereby captures the innate opportunities that arise from the social mobility and wealth creation processes in the faster growing markets in the world. Based on this diversified approach, both geographically and on basis of customer group, the company invests in such retail businesses in the market in order to spread it profitability through out the world (Plunkett, 2007). Notably, the company draws this strength from its three priorities for the group; to grow business and dividends, to implement global standards, and to streamline the processes and procedures aimed at maximizing wealth and profits. Graph 1: Profit before tax by divisions   According to the graph above, and based on the operational divisions, CMB and GB&M business lines are the main drivers as to profit before tax (HSBC Interim Report, 2012). Towards the end of 2010, they represented about 80% of the group's profit before tax. Personal Financial Services which include retail suffered from the losses in consumer finance activities especially from 2007 to 2009 as stated by HSBC Sustainability Report of 2011. HSBC Sustainability Report (2011) also states that HSBC recorded a registered a material increase in PBT in 2010, a figure that increased from USD7bn in 2009 to USD19bn (Plunkett, 2007). This significant rise primarily resulted from the strong decline in loan loss provisions in all the group's operational segments. Looking into HSBC divisional level of operations, the income in PFS has declined, by 8% to USD32.6bn as a result of the winding down of HFC, which has led to a decline of 16% of the division's loan portfolio between 2007 and 2010. Nevertheless, PFS returned to profitability in 2010, the first time since 2008 (HSBC Interim Report, 2012). CMB registered a 39.4% increase in PBT underpinned by operations in emerging markets. GB&M posted a PBT down by 9.5% to USD9.5bn due to lower interest income and trading revenues. In GBP, PBT was roughly stable to USD1.1bn. The size as well as the diversity of HSBC is also a major strength considering its London & NY listing with prestige and visibility, access to UK and US capital markets for future capital rising, and its stretches to America, Europe, Asia, and Australia and across boarders (HSBC Interim Report, 2012). According to Forbes, HSBC is the largest in size (based on a composite score) and most profitable banking corporation in the world, with the highest international presence of basically over 128 million customers worldwide. In fact, according to Plunkett (2007), in the first half of the year, the Far East contributed nearly two-thirds of group profit. This balance may shift in coming years as European and North American markets recover. Graph 2: Geographic diversification of HSBC's loan portfolio China today is Brazil’s largest trading partner and the best part is, HSBC with its deep heritage in China as well as global geographical presence presents the bank with an increasing share of this international trade (Plunkett, 2007). As China continues to seek future trade opportunities in resource rich countries, HSBC is set to profit by financing this trade (HSBC Interim Report 2012) Financially, the HSBC stocks prices is/has been listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by about 216,000 in 131 countries and territories. HSBC’s current stock price as at New York Stock Exchange (NYSE) is $26.94. The company benefits from its large financial strength. According to HSBC Sustainability Report (2011), HSBC doubled its profits to over $19bn last year as bad debts tumbled and every trading division improved its performance. The UK’s largest bank posted a pre-tax profit of $19bn, an increase of $12bn, or 169%, on 2009's $7.1bn, even though net interest income fell 3.2% to $39.4bn Graph3: Geographic breakdown of profit before tax   After the announcement of the financial statements above, the market reaction was sown by the movement of the HSBC share price which moved in the direction shown in the graph below. Weaknesses Although HSBC has great financial and strategic scopes that stand great to maneuver through the global market, the company also faces certain weaknesses that normally seem to become the backdrop of the company agendas. To start with, HSBC currently does not have the grasp of investment banking as do other international banks such as Barclays, standards chartered, and Morgan Stanley (Plunkett, 2007). According to HSBC Interim Report (2012), this was one of the greatest advantage of HSBC during the global financial crisis. However, currently, with the situation in the global financial trends, the markets are picking up and as it seems, HSBC may lose some of its critical competitive grounds to its major rivals in the global markets. According to HSBC Sustainability Report (2011), the HSBC asset quality has declined over the past few years and the company has undergone through heavy loss particularly in its customer finance subsidiary HFC that recorded a loss of USD 10.5 billion. Basically, HSBC loan portfolio accounts for around 40 % of the company’s total assets. This loan portfolio is divided into the personal loans and corporate and commercial loans. Any write downs of the company’s goodwill result into heavy losses as there are cases of doubtful loans and customer loan breakdown related cases as shown in the graph below. Graph 4: Breakdown of customer loans by category   As stated by FT.com (2012), HSBC associates itself highly with investments in the small business sector and the emerging markets. However, the current economic situations have created enough risks not only to the small business and the emerging markets, but also to HSBC itself (Plunkett, 2007). This has increasingly compromised as well as risked the company’s operations and activities in such areas. Moreover, the HSBC profits in the North American region declined massively due solely to the bad debts built up in the housing which has lead to credit deterioration and a week housing market. Strategic Financial Management and Performance Indicators for Strategic Purposes Financial management involves aspects of risk management, capital structure strategies, financial strategies, corporate governance strategies, as well as other related strategic financial management, thus aims at positioning a firm strategically from the financial perspective (Allen, 1991). However, strategic financial management involves the aspects of leadership, competitiveness, decision making, value creation, and other financial issues that make a firm become strategically position in the industry (Weaver, & Weston, 2008). In this case therefore, strategic financial management is the application of the strategic decisions of the available financial techniques in order to achieve the decision maker’s (management) objectives. It helps a firm to be in a position to identify strategies that are capable of maximizing the firm’s net present value and allocate the scarce resources among the competing opportunities in order to achieve the set goals and objectives. According to Chartered Institute of Management Accountants, CIMA (1998), the concept of the strategic financial management is the assessment of the strategic options, choices, and business performance from the strategic and financial analysis perspective. Risk management Risk management is one of the strategic financial management concepts that have great significance to the organization considering the various financial risks that surround every organization in the normal financial operations (Weaver, & Weston, 2008). Risk is the chance, probability, certainty, or hedging from the business perspective. It involves venturing into a financial or strategic activity where the probabilities of future events are known. It is thus the potential variability in future cash flows. Arguing from the context of the strategic financial management, the analysis of risk management help an organization to understand best the differences and the similarities that exits between the management of the business risk and the financial risks. It also helps in evaluating the corporate risk management and strategic risk management. Finally, Hill (2008) states that analysis of the risk help a firm to be in a position to determine risk as a strategic issue for a corporation. Risk management encompasses aspects of cash flows, the expected cash flows, and the expected rate of return (Weaver, & Weston, 2008). Varied by their nature, risks are classified into general (political, macroeconomic, and natural risks), industrial risks (competitor moves, customer needs, regulation, technology, and emerging trends), and company risks (operations, decision making, failures, negligence etc). As it seems, focusing on the financial risks, the related movements in financial variables such as debts and equity must be well analyzed and understood by an organization through the aspects of exchange rates, market risks, and the interest rate risks. According to Chartered Institute of Management Accountants, CIMA (1998), the management of risks involves first identifying the risk factor, outlining the risks exposures, analyzing the cost and benefits associated with the risk, and assessing the possibilities of the hedging the risk or transferring the risk. The process involves identification, collection of information, measuring the risk, evaluation, managing the risk and finally monitoring the risk. Key performance indicators for strategic financial management Value creation Value creation involves the strategic financial approaches that management takes in order to create a competitive advantage for the firm (Allen, 1991). This may be in terms of quality increment, price reduction, product development, customers etc. there is a direct link between value creation and strategic management in the sense that value creation take into the perspective of the stakeholders (mainly stockholders) interest, competitive advantages, risk and policy management. Value creation strategies are among the factors indicators of financial performance of an organization. Dividend policy Dividend policy is the determination of the periodic proportion of profits to be paid out to the shareholders (Weaver, & Weston, 2008). Dividend are normally classified as the value of shares repurchased, given out, and either in cash or in stock. Normally reported to the shareholders, the dividends are normally strategized by the firm management in accordance with the pricing indices at the market valuation. In this case, the allocation of the capital to the business and the investment management becomes the focal point in dividend policy (Allen, 1991). Notably, dividend payout policy is a financial decision making component of the financial management considering that it form part of the company’s finance and capital budgeting. Investors are normally attracted to companies whose dividend polices suit their interest by offering the best post-tax returns which leads to high income on the share value. Cost of capital One of the financial considerations of a firm’s financial management is the source of its capital financing. Capital financing consist of debt financing and the equity financing (Hill, 2008). Therefore, the cot of capital is the weighed average cost of debt and equity capital, i.e. the cost of the different components f financing used by a firm, weighed by market or book value proportions. It is very important performance indicator and the rate of return that companies offer the finance providers. It is also important in making successful investment decisions. In this way, the cost of capital is normally used to discount the future flow of income and the value created from investments and other investment appraisals. Share valuation Shares are the units of ownership of a firm that determines the capital base of the company (Weaver, & Weston, 2008). These shares are valuated through various methods such as asset valuation (using the going concern or the wind-up methods), multiplier basis (using the earnings or the sales method), the discounted cash flow method, and using the dividend yield method. Investors are normally very critical on the share valuation and this aspect of financial management determines to greater extent the success of the business (Hill, 2008). 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