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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.
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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
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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/Barclays8/8/2019 Alpesh Kabra .. Bank Financial Management
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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.
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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.pdf8/8/2019 Alpesh Kabra .. Bank Financial Management
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Analysing bank performance with Financial Ratios
Return on equityReturn on equity
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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
Alpeshkumar S Kabra096720-84 Page 5
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)
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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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