Alpesh Kabra .. Bank Financial Management

8/8/2019 Alpesh Kabra .. Bank Financial Management

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College Of Technology London Bank Financial Management

College Of Technology London

Bow House,153-159 Bow Road,

London E3 2SE

First Name: Alpeshkumar Student Id no: 096720-84

University id no: 29007544

Family Name: Kabra. Group : MBA-Term 2

Lecturer: Vishwajeet Rana

Banking & Finance

Module: Bank Financial Management

Title:Critically discuss how bank overall performance should be evaluated. In this

context, you should compare and contrast the accounting and economic models of bank

performance evaluation.

Alpeshkumar S Kabra096720-84 Page 1


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Introduction:Barclays is a large British multinational financial services

company. Barclays PLC is Listed in London and New York Stock Exchange.Barclays is a Public limited Company . LSE : BARC and NYSE:BCS. Barclayswas Founded in 1690 by John Freame and Thomas Gould with started trading

as goldsmith bankers in Lombard Street, London. As per 2010, Barclays isthe Worlds tenth biggest banking & financial services group and alsoBarclays is the 21st biggest company by Forbes Magazine. Barclays hasworked in over fifty nations and territories across world with around 48million customers. Barclays is the 3rd biggest of any bank worldwide afterHSBC & BNP Paribas with $ 1.94 Trillion Total Assets as of 30 June, 2010.

[Sources: http://en.wikipedia.org/wiki/Barclays ]

A Framework for Evaluating Bank Performance:

Evaluation of Internal Performance Bank planning:

Barclays launches Bond Wealthbuilder 6 yrs related

to the stock

Market , it aims to return 31.2% over six yrs and will be

taken out within a cash IAS. The Bond aims to distribute an

annual return of 5.2% per years.

Improve the share market of low risk loans.

Always try to improve their share capital.

[Sources: http://www.newsroom.barclays.com/content/Detail.aspx?ReleaseID=1814&NewsAreaID=2]

Goal:Barclays Goal is to generate peak quartile Total

Shareholder Returns (TSR) in excess of Time.

Key strengths:

High generally structure to achievement rates

Carry on to do something as liable commercial general public

Excellent gaining of customer care skills

http://en.wikipedia.org/wiki/Barclayshttp://www.newsroom.barclays.com/content/Detail.aspx?ReleaseID=1814&NewsAreaID=2http://www.newsroom.barclays.com/content/Detail.aspx?ReleaseID=1814&NewsAreaID=2http://www.newsroom.barclays.com/content/Detail.aspx?ReleaseID=1814&NewsAreaID=2http://www.newsroom.barclays.com/content/Detail.aspx?ReleaseID=1814&NewsAreaID=2http://en.wikipedia.org/wiki/Barclays


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Follow a progressive dividend & Bonus policy

Fine utilize of criticism for quality upgrading

[Sources:http://www.barclaysannualreport.com/ar2009/index.asp?

pageid=151]

Budget : Each and every business needs to make a obvious

plan for that budget for where they are going and what they are

trying to reach. They have key factor of their business plan.

What is a budget and why should you prepare one?

How do you prepare a budget?

If they can find out the question and get the answer as early as

possible it is easy for them to prepare their budget for all

different department like budget for sales etc.

[Sources:

http://www.barclays.com/latitudeclub/pdf/introduction_to_preparing_a_budge

t.pdf]

Technology: Barclays has to provide good technology to

customers which customer will satisfy with their services.Customers are easily do their transaction and save their time

and also protect from fraud activities. Which Barclays can win

customers confidence.

Personnel development : Barclays has to provide good policy for their

employees which they are always happy and do work very well. Every employee

are satisfy with their post and job . and also they have to make good plan for

challenging world where every rival are adopt new strategy for increase their

business.Challenges: Two major challenges that face todays banks are the emphasis on

personal selling of financial services and the trend to geographic expansion in

banking.

Evaluation of Ex ternal Performance

Market share: Market share is the proportion of the assets, deposits, loans and

total financial services held by a bank in its business region relative to other

banks. Failure to meet market demand normally will result in a decline in market

share.Earnings: Market share can affect the earning of the bank.

http://www.barclaysannualreport.com/ar2009/index.asp?pageid=151http://www.barclaysannualreport.com/ar2009/index.asp?pageid=151http://www.barclays.com/latitudeclub/pdf/introduction_to_preparing_a_budget.pdfhttp://www.barclays.com/latitudeclub/pdf/introduction_to_preparing_a_budget.pdfhttp://www.barclaysannualreport.com/ar2009/index.asp?pageid=151http://www.barclaysannualreport.com/ar2009/index.asp?pageid=151http://www.barclays.com/latitudeclub/pdf/introduction_to_preparing_a_budget.pdfhttp://www.barclays.com/latitudeclub/pdf/introduction_to_preparing_a_budget.pdf


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Analysing bank performance with Financial Ratios

Return on equityReturn on equity


Ratios 2009 2008 2007

1) Return on Equity = NI/TE 5.98% 10.66% 14.31%

Net income 3512 4645 4555Total Equity 58,699 43,574 31,821

Companies Profit is decrease by 24% in compare to increase in Equity

capital by 35%

2008-09 2007-08Profit (1,133) -24% 90 2%Total Equity 15, 125 35% 11,753 37%

*Here we assume that equity is increase/decrease at the 1st day of the

year

Shareholders equity, adding non-control interest, raised 23% to 58.5bn in 2009 driven

via PAT of 10.3bn.Total Shareholders equity raised 15,125m. In the firstyear mandatory convertible notes, which were converted into ordinaryshares is June 2009. The Groups authority to buyback share capitalwere refurbished in AGM of 2009.

Return on Assets: 2009 20082007Return on assets=NI/TA 0.25% 0.23%

0.37%

Net Income 3512 46454555

Total Assets 1,379,148 2,053,0291,227,583


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Companies Profit is decrease by 24% in compare to Decrease in Total Assets by 33%

2008-09 2007-08Profit (1,133) -24% 90 2%Total Assets (673,881) -33% 8,25,446 67%

Total Assets reduced by 674bn to 1379bn in 2009. Mainly active derivatives market rates and the reduction due

to movements in the balance. Attributable to assets and derivative

liabilities balances was 374bn lower (31 December2008: 917bn lower) than if IFRS were allowed compensation forassets and liabilities with the same counterparty or for which wehold collateral species.

Unravelling Profit Ratio:Unravelling Profit Ratio:

ROE=ROA*Equity Multiplier

Here Equity Multiplier is Total Assets / Total Equity 2009 2008= 1379148 / 58699 = 2053029 /47574= 23.49 = 47.12

ROE = 0.25% * 23.49 = 0.24% * 47.12= 5.87 = 11.30.

Profitability Analysis: The DuPont Identity:

Return on equity (ROE) can be decomposed as follows:

2009= 3512 * 7277 * 1379148

7277 1379148 58699

= 0.48 * 0.0053 * 23.50= 0.059784


EquityTotal

AssetsTotal

AssetsTotal

venueOperating

venueOperating

incomeNet=

Re

Re


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2008= 4645 * 1950 * 2053029

1950 2053029 43574= 2.38 * 0.04474= 0.1064

Other Profit Ratios

Net Interest Margin

= (TIIncome TIExpences) / Total Assets

2009 2008 20070.85% 0.56% 0.78%

:- 2009 -:Companies is good in regular business which is reflected from % which is

increase.Further, Companies is good business at the low scale in compare to

big scale (See F.Y.2007 & 2009) Group NII improved 4% (449m) to

11,918m (2008: 11,469m).NII includes the impact of the

Group covers structure whose function is to reduce the impact of

volatile short-term interest rates on balances of equity and

customers who are not re-prices market rates.

:- 2008 -:

Group NII Raised 19% (1,871m) to 11,469m (2007: 9,598m) shiny

balance sheet expansion across the Global Retail. Due to good result of

Barclays capital to improved in net interest income from capital market and

worldwide loans.

Spread

= (Interest Income / Interest Earning Assets) - (Interest Expense / Interest

Bearing Liabilities)

= 0.0064 in 2009

= 0.0039 in 2008

= (0.0027) in 2007.

As mentioned above company is good in their core business. Because Barclays hascontrol on their interest expense and more focuses on interest income.



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Earnings Base

= Earnings Base = Interest Earning Assets / Total Assets

= 63.68% in 2009

= 72.79% in 2008= 51.61% in 2007.

As mentioned above Company is good in his core business i.e lending andthat at the low scale.

Thats means Barclays has more invest in securities and other assets inwhich they can get more interest from interest earning assets.

Equity Multipier = TA/TE

2009 2008

200723.50 47.12

38.58

= 1379148 20530291227583

58699 4357431821

Lower the Equity Multiplier the higher the Income (see net Income).It meansin the year 2008 company use higher borrowed funds.

In 2009 total assets down 33% around -673881 when in 2008 total assetsup 67% around 825446.

Operating Efficiency Ratio

=Total operating expense / Total operating revenues.

= 2.30 in 2009= 6.87 in 2008

= 2.43 in 2007.

Operating expenses increased 25% (3,324m) to 16,715m (2008: 13,391m).Operating expenses increased 11% (1,295m) to 13,391m (2007: 12,096m). in2009/08Organizational costs grew by 2% ( 98m) to 4,889 million (2008: 4,791m). Operating expenses increased as a result of a 119m reductionin profits from the sale of the property at 29m (2008: 148 million pounds)than the group on the sale and leaseback of realestate program to stop. primarily of intangible assets from the acquisition ofthe corresponding Lehman Brothers' North American companies. In2008/07 operating expenses were reduced by gains from the sale of

assets of GBP 148 million (2007: 267m) as the Group continued the



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sale and leasebacksome of his property apartment portfolio in 2008.

Risk Ratios:

Int. rate sensitivity=IRSA/IRSL 2009 20082007

= 1.63% 1.33%1.72%

Here, Total earning assets are decrease -41% (616,150) when total bearingliabilities were down 52% (582,360) thats only reason for interest ratesensitivity is higher in 2009 compare to in 2008.

Temporary Inv.=(cash,short term sec.)/TA

21.11% in 200913.75% in 200819.93% in 2007

Higher the ration higher rate of Income, here cash and short term securitieshas been raised 3% when total assets were go down 33% (673,881).

Loss Ratio=Net charge off on loan/Total Loans:

1.75% in 20091.06% in 20080.72% in 2007

Here net charge off on loan were increase 49% GBP 2652. Where totalLoans were reduce 9% in 2009 thats reason to increase 1.75% and problemin liquidity . when in 2008, net charge off on loan were 94% up 2654 andtotal loan also increase 32% 124,004. That is only reason for liquidityproblem.

Capital ratio=(TE+LL+Res. For loan losses)/TA:

Total Equity+Long Term Debt+Reserve for Loan lossesTotal Assets

9.80% in 20097.72% in 20089.97% in 2007Capital ratios reflect a 15% decrease (23,339) in Total Equity+Long TermDebt+Reserve for Loan losses to 135,145 in 2009. Key drivers included a

reduction in the overall size of the balance sheet and foreign exchangemovements.



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Bank Performance Evaluation Based onEconomic Profit

Risk-Adjusted Return on Capital (RAROC)

RAROC=Risk adjusted income/Allocated Capital

Risk adjusted Total income 2009 20082007

Allocated Capital 1.80% 2.36%3.00%

= 3512 4645 4555194601 197,000 152,049

The ration is continuously fallen. Risks are unavoidable in any business. Ahealthy enterprise without the proper protection can quickly dissolve underthe strain of anear-catastrophic disaster. Because total income fallen in -24% (1,133)when allocated capital down only -1%.

EVA=Adjusted Earnings-Opportunity cost of cap.

Adjusted Earning on Equity 5.98%10.66% 14.31%Less:Opportunity cost of cap (Banks Preime Lending Rate) 5.00%Economic value added 0.98%10.70% 14.3%

It means company's economic value increase by 1% Pa. Adjusted Earning isa profit after tax , and the opportunity cost of capital equals. Cost of equitytimes equity capital.

CAPM MODEL

Kc = Rf + beta x ( Km - Rf )

Kc is the risk-adjusted discount rate (also known as the Cost of Capital);Rf is the rate of a "risk-free" investment, i.e. cash;Km is the return rate of a market benchmark, like the S&P 500.

= 3.56+2.72(7)

http://www.moneychimp.com/glossary/beta.htmhttp://www.moneychimp.com/glossary/beta.htm


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= 23.

Compare and contrast the accounting and economic models ofbank performance evaluation:

As per accounting model bank did not perform very well compare to 2007.After that bank all profit ratio has been reduced . in the income statementand balance sheet all overheads were increase when income ratio wasdecreased. Return on equity was 5.98% in 2009 when it was 10.66% in2008 that means bank has lots of problem of liquidity . Bank has lots ofinterest expenses or non-interest expenses compare to interest income andfees and commissions. Where ROA was not more different between 2009and 2008. In 2009 ROA was 0.25% and in 2008 it was 0.23%. In EquityMultiplier ratio was also high in 2008 because bank has been taken more .

In economic model RORAC is continuously falling but economic valueadded is increase by 1% P.A..

Where accounting model is helping in our negative point so bank has torectified their error and improve in profit and share capital. When economicmodel helping in bank when they have to invest and get some profit.

Conclusion.

As per our discussion we see all our financial ratio. And we can easily findout when we were wrong. In 2009has done good performance compare to in2008. May be in 2008 lots of financial crisis and also bank has been put moreinvested outside . but main reason was very high financial crisis at that timeso bank was not got good return from outside. So bank has lots of changingin 2009 and they try to increase their performance .

Appendix :Bank Financial Statements

Balance Sheet



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As at 31st December2,00

9 2008 2007

Notes m m m

Assets

Cash and balances at central banks81,48

330,01

95,80

1

Items in the course of collection from other banks1,59

31,69

51,83

6

Trading portfolio assets g151,39

5185,64

6193,72

6

Financial assets designated at fair value:

held on own account13

41,311

54,542

56,629

held in respect of linked liabilities to customers

under investment contracts

1

3

1,25

7

66,65

7

90,85

1

Derivative financial instruments14

416,815

984,802

248,088

Loans and advances to banks15

41,135

47,707

40,120

Loans and advances to customers15

420,224

461,815

345,398

Available for sale financial investments h56,65

165,01

643,25

6

Reverse repurchase agreements and cash collateralon securities borrowed

17

143,431

130,354

183,075

Other assets18

6,358

6,302

5,153

Current tax assets349

389

518

Investments in associates and joint ventures20

422

341

377

Goodwill21

6,232

7,625

7,014

Intangible assets22

2,563

2,777

1,282

Property, plant and equipment

2

3

5,62

6

4,67

4

2,99

6

Deferred tax assets19

2,303

2,668

1,463

Total assets 1,379,14

82,053,02

91,227,58

3

Liabilities

Deposits from banks76,44

6114,91

090,54

6Items in the course of collection due to other

banks1,46

61,63

51,79

2

Customer accounts

322,45

5

335,53

3

295,84

91 51,25 59,47 65,40


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Assets = Liabilities + Equity

Income statement

For the year ended 31st December

2,009 2008 2007

Notes m m m

Continuing operations

Interest income a21,23

628,01

025,29

6

Interest expense a (9,567) (16,595) (15,707)

Net interest income11,66

911,41

59,58

9

Fee and commission income b

9,94

6

7,57

3

6,74

5Fee and commission expense b (1,528) (1,082) (970)

Net fee and commission income8,41

86,49

15,77

5

Net trading income c6,99

41,27

03,75

4

Net investment income c283

680

1,216

Principal transactions7,27

71,95

04,97

0

Net premiums from insurance contracts

5

1,17

2

1,09

0

1,01

1

Other income f 1,38

9444

222

Total income29,92

521,39

021,56

7

Net claims and benefits incurred on insurancecontracts

5 (831) (237) (492)

Total income net of insurance claims29,09

421,15

321,07

5

Impairment charges

7 (8,071) (5,419) (2,795)

Net income21,02

315,73

418,28

0

Staff costs

8 (9,948) (7,204) (7,204)

Administration and general expenses d (5,558) (5,301) (3,854)

Depreciation of property, plant and equipment23 (759) (606) (453)

Amortisation of intangible assets22 (447) (276) (178)

Operating expenses (16,712) (13,387) (12,096)

Share of post-tax results of associates and jointventures 20 34 14 42



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Profit on disposal of subsidiaries, associates andjoint ventures

188

327

28

Gains on acquisitions40

26

2,406

Profit before tax

4,55

9

5,09

4

6,25

4

Tax e (1,047) (449) (1,699)

Profit after tax3,51

24,64

54,55

5

Discontinued operationsProfit after the tax for the year from discontinuedoperations, including gain on disposal

6,777

604

571

Net profit for the year10,28

95,24

95,12

6

Profit attributable to equity holders of the parent

from:

Continuing operations3,22

84,25

94,21

8

Discontinued operations6,76

5587

531

Total9,99

34,84

64,74

9296

403

377

Profit attributable to non controlling interests10,28

95,24

95,12

6

Calculation



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Alpesh Kabra .. Bank Financial Management

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