HSBC Bank Financial Performance - Research Paper Example

Financial and Banking Performance Introduction to the HSBC Bank HSBC Bank (Honk Kong and Shanghai Banking Corporation) was established in Honk Kong in the year 1865 as a subsidiary of HSBC holdings plc, by a Scotsman named Thomas Sutherland. HSBC is known as to be the largest bank in Honk Kong and has its majority offices in most of the part of Asia Pacific region than compared to America, Europe and Middle East and Africa. The bank's headquarter is situated at Honk Kong. The bank covers all the areas of banking ranging from personal and private banking. In addition to these it also covers investment banking, corporate banking and commercial banking. The bank now has got over 9000 offices in 80 countries and workforce around 215,000 employees (About HSBC, n. d.). The HSBC holdings are one of the largest banking and financial services organizations in the world. HSBC holdings were established in Honk Kong in 1990 as a parent company to the HSBC and were incorporated as a public limited company in England and Wales in the same year 1990. The bank has its new headquarters at London after 1993. Formerly, that is until 1992 Honk Kong served as its headquarters. The reason was the takeover conditions for the acquisition of Midland Bank that forced the HSBC to move its headquarters from Honk Kong to London in 1993 (Cavallo, 2001). The bank's international network consists of around 8500 offices in 86 countries and territories with assets worth around US$ 2,527; 210,000 shareholders, 331,458 employees and 128 million customers worldwide. In the UK the number of HSBC was more that is, 1600 branches than that of UAE HSBC Bank that had only 8 branches and around 110 ATM machines. The Forbes magazine in April 2, 2008 recognized HSBC, as the fourth largest bank in the world in terms of assets ($2,348.98 billion); the second largest in terms of sales ($146.50 billion), the largest in terms of market value ($180.81 billion). And again in the year April 2009, the Forbes titled the HSBC as the largest banking group in the world and also the 6th largest company in the world. Thus in total Forbes recognized HSBC as the number one bank in the world. Introduction to the topic The HSBC Bank is considered to be one of the top five banks in British; the remaining 4 banks includes Royal bank of Scotland, Barclays, HBOS-Halifax-Bank of Scotland and Lloyds TSB (Top Ten Banks, n. d.). The factor that helped the HSBC to reach this position is its high loan-deposit ratio of 90% that claim to have more deposits than loans. Such a high loan-deposit ratio facilitated the bank to build and retain the trust among its investors and customers and also keeping these users assured with the financial strengths of the banks. Thus the sound financial position of the bank helped the bank to maintain stock at relatively high price even during the times of credit crunch phase, which could not been seen in other banks. The present study focuses on the aspects of financial and banking performance of HSBC bank. The study is carried out to achieve mainly three objectives, which are: To measure how well the HSBC banks are performing in compared to other banks; What are the necessary steps that have been taken by the HSBC banks to improve their overall performance and; Finally to provide sufficient important information to its investors (Hunter, 1990) Literature Review The analysis of financial performance has always been a subject of interest to scholars and academicians. The banking performance in particular invites the attention of bankers as well to evaluate how successfully their operations are being conducted and the interest of various stakeholders are protected. There have been many measures and indexes to evaluate the performance of a bank. These include broadly economic and non-economic measures. For instance, Rovell (1980) remarks banking performance can be best evaluated by interest rate margin over different periods of time. Interest income here is defined as the difference between the interest income and dividend expenses and the same is divided by total assets. Normal correlation analysis is another measure commonly used by researchers and banks (Arshadi and Lawrence, 1987). The efficiency of banks can be evaluated using different measures and scholars have found that the measures used are bank specific to a large extent and size of the bank and economies of scale is one of the most important factor that decide the high performance or otherwise of a bank. Keeping this in view the present study is an attempt to evaluate the performance in terms of three independent variables. The variables to be studied are: I. Benefits and compensation; II. Net Cost of Funds (NCF) and III. Management restrictions. Benefits and Compensation The ability of the financial arrangement has been one of the crucial issues in the new financial and banking environment. The ability and competitiveness of financial institutions cannot casually be measured; back their articles and casework are of an abstract nature. Many scholars have tried to evaluate the efficiency and ability of the financial industry application outputs, costs, ability and performance. Dave Bisson, a renowned author and senior consultant, Presidio Pay Advisors observes that there is a direct relationship between the executive's benefits & compensation towards the performance of the banks. This was clearly stated in his article Bank CFO Pay and performance: mixed relationship (COMPENSATION) (chief financial officers) a publication from Financial Executive. The study on the relationship between executive pay and banks' financial performance explored that changes in pay were effectively random relative to performance. The compensation consultants at Presidio Pay Advisors, made a study to evaluate executive pay and company performance among a group of 115 publicly traded banks which holds total assets of $11.9 trillion, and also which each of these banks received a minimum of $50 million in Troubled Assets Relief Program (TARP) investments (Jayaratne, 1999). Whereas the absolute levels of chief financial officer's compensation were dropped severely at most of the banks and at the same time there was no measurable link between the changes in pay and performance for the group as a whole (Arshadi, 1987). The study also explored that since 2006, more than 90 percent of the banks studied generated negative returns to the shareholders. However despite of the negative returns to the shareholders, the most surprising thing happened that the CFO's (Chief Financial Officers) of the banks received some sort of increase in their compensation who held the offices during the periods of 2006 to 2008, which were: A more than one-third (37 percent) of CFOs who held offices from 2006 to 2008 received an increases in their total cash compensation in 2008 of about 2 percent to 76 percent compared to 2006, which was amounted to 74 percent. There was an even greater percentage of 43 percent, of these CFOs who received in 2008 an increase in total direct compensation of 2 percent to 420 percent over the same period. In addition to these findings, the study also explored that compensation committees have given their approval to increases the size of equity grants so that it could help to offset lower stock prices. There was also an incredible increase in the total stock options granted to CFOs which showed an increased trend from 2.2 million in 2006 to 3.5 million in 2008, which was combined with an increase in restricted stock grants from 0.42 million shares in 2006 to 0.65 million in 2008 (Bisson, 2009). The treasury Secretary Timothy Geithner has provided guiding principles that, to have an effective compensation plans it should comprises of both the accounting for the time-horizon of risks and also the impact of incentives on various risk-taking activities. The guidelines provided by the Timothy Geithner can have a likely influence on both to the U.S. Securities and Exchange Commission regulations as well as to the congressional legislation. However the debate on the executive compensation is still continuing in the Washington, D.C., and elsewhere. Thus, to fix the programs a thoughtful compensation committee at banks should use the "time-out". If the committees failed to do so then the regulators and politicians may well use it for their purpose. The companies on other hand should consider the current environment when they go for review their programs. Net Cost of Funds (NCF) Net Cost of Funds (NCF) = Interest Expense + Operating & Overhead Expense - Fee Income- Interest Income + Loan losses/ Deposit Balances - Loans Outstanding William. D. Turner the author of the article 'A better measure for retail banking performance' published in the year 1979 from Mckinsey Quarterly publication has declared that Net Cost of Funds provided some benefits to the banks, which includes (Turner, 1979): It can help the banks to eliminate many of the limitations of traditional profit. It can focus on the strategic role played by retail in banks. It can help to trace over time to ensure that performance is improving. It can be determined with the help of variables such as: cross-selling of products, direct expenses, loan volume, quality, and pricing. Management Restrictions Chung - Hua, S., & Yuen-Hsiang, C. in 2006 in their article named 'Do regulations affect banking performance Government governance may matter' a publication from contemporary economic policy they clearly mentioned that suppose the commercial banks are restricted from engaging in to the corporate strategies such as mergers especially with securities and insurance companies, then it can noticeably bring a huge loss to those banks. So the better way for the banks is to merge with securities and insurance companies so that maximum profit could be earned than compared to the merging with real estate and other banks (Chung-Hua, 2006). Theoretical Framework From the study it is observed that all the literature review independent variables namely, benefits and compensation; Net Cost of Funds (NCF) and management restrictions are carried out to know whether they do or not influence the financial and banking performance of the bank. Hypothesis Thus to achieve the following objectives the study intends to test the following three hypotheses: The benefits and compensation has a positive relationship with the financial performance of banks and vice versa; The Net Cost of Funds (NCF) has a positive relationship with the financial performance of banks; and Management restrictions have a negative relationship with the financial performance of banks and vice versa. Methods The methods used for the study can be studied under the following sub heads: Research Design: The research design employed for the study is explanatory research so as to describe the financial and banking performance of HSBC bank. Questionnaires, group discussions, interviews, random sampling, etc are used to conduct explanatory research. The type of investigation used is co relational one. And only minimal level of interference is required. The non contrived, field study setting is adopted. The unit of analysis taken is divisions and the time horizon is longitudinal. Measures and Scales: Dave Bisson has given a good example of a measure in an article. According to him there exist a direct relationship between benefits and compensations of top management employees and the bank's performance. The compensation consultants at Presidio Pay Advisors conducted a study among a group of 115 banks that proved there is no relationships between the pay and bank's performance. They found that more than 37% of CFO's (Chief Financial Officers) received an increase of 2% in cash compensation between the periods of 2006 to 2008 making the total rate of compensation an outstanding 78%. Questionnaire Design: Under this head a short introduction in the beginning is explained to provide why the questionnaire is done and who is going to execute it. In addition to this, personal information questions and short questions are also asked. The recipients for the purpose of questionnaire will be categorized on the basis of gender, position in the company and their total time spent in the banks. Data Collection Methods: A carefully drafted questionnaire is suggested for collecting the information from the recipients in the banks. Sampling Design: To conduct a study an appropriate procedure is adopted to ensure the authenticity and accuracy of the findings. Therefore the proposed sampling technique for the present study is simple random sampling on account of its reliability and acceptability to come up with generalized findings. A simple random sampling is one where in each and every item of the population is given equal chance of being chosen. Conclusions and Recommendations The study on the banking and financial performance of HSBC bank is undertaken mainly to find out to know the influence of variables on the banking and financial performance. The study thus provided a crystal conclusion that the every banks other than HSBC banks across the world also gives primary priority to reach to the climax of banking and financial performance, and also to be able to gather the maximum profit possible by using the best techniques, highest standards, and there by maintaining the most privileged reputation. At the same time the banks also look upon the vital variables namely, benefits and compensation; Net Cost of Funds (NCF) and management restrictions in order to find out their influence on banking and financial performance. References "About HSBC" (No Date). HSBC [Online] Accessed on 26th November, 2009, from http://www.hsbc.com/1/2/about Arshadi, N. and E. C. Lawrence, 1987, "An Empirical Investigation of New Bank Performance", Journal of Banking & Finance, 11, 33-48 Bisson, D. (2009). Bank CFO Pay and Performance: Mixed Relationship. Financial Executive, 25(8), 10. Retrieved from Business Source Premier database Cavallo, L. & Rossi, S., 2001, "Scale and scope economies in the European banking systems", Journal of Multinational Financial Management, 11, 515-531 Chung-Hua, S., & Yuen-Hsiang, C. (2006). DO REGULATIONS AFFECT BANKING PERFORMANCE GOVERNMENT GOVERNANCE MAY MATTER. Contemporary Economic Policy, 24(1), 92-105. Hunter, W. C., S. G. Timme and W. K. Yang, 1990, "An Examination of Cost Subadditivity andMultiproduct Production in Large U.S. Commercial Banks", Journal of Money, Credit and Banking, 22, 504-525 Kosmidou, K., Zopounidis, C., 2005, "Evaluating the performance of the Greek banking system", Operational Research: An International Journal, 5, 2, 319-326 Miller, S. and A. Noulas, 1996, "The Technical Efficiency of Large Banks Production", Journal of Banking & Finance, 20, 3, 495-509 Top Ten Banks (No Date), Mortgage Guide, Accessed on 26th November, 2009, from http://www.mortgageguideuk.co.uk/mortgage-rates/top-10-british-banks.html Turner, W. (1979). A better measure for retail banking performance. McKinsey Quarterly, (1), 39-48. Read More