Bank Project
(Evaluating Bank Structure, Conduct and Performance)
This project is an analysis of the structure,
performance and conduct of TWO commercial banks (Lloyds bank and Barclays bank –
UK) across FOUR consecutive years starting in year 2020 to 2023.
Measuring bank performance is a lot like measuring the
performance of a traditional company. A bank’s revenue is the return it makes
from investments, and this income comes from interest or asset appreciation on
investments, such as stocks or real estate. Banks must also consider the cost
of the funds used to make these investments. Profits are ultimately made from
the spread between the amount banks pay for the deposits and the amount they
receive from borrowers and investments. The most commonly used measure of
profit for a bank is referred to as net interest margin. However, banks are
also one of the most heavily regulated financial institution, which affect
their performance and growth.
Learning
Objectives
· discuss the structure, performance and conduct of bank
in a regulated environment
· present a procedure for analysing bank performance
using periodic balance sheet and
income
statement data
· describe the components of financial statements,
provide a framework for comparing the trade-offs between profitability and
risk, and compare the performance of a bank with that of other banks
· analyse bank stock prices to assess the impact of the
COVID-19 pandemic on the banking sector
· how to use Bloomberg database
Instructions
1.
Select two banks (Lloyds bank and Barclays bank – UK) and find key
information about them. The primary things you need to find include the banks’
official names, the country of incorporation (and thus their regulators), and
the stock exchanges their shares are traded on. Bloomberg can help you answer
all of these questions.
2.
Access the
banks’ annual reports, which are available in Bloomberg. Read the reports, paying
particular attention to the banks’ assets, liabilities, and profits. Look at
the performance of the banks’ share prices, as they often are good indicators
of how well the banks are doing.
Use financial ratio analysis. The return on assets
(RoA) and return to equity (RoE) are most commonly used for its simplicity and
provides a snapshot measure of the risk and performance. It mainly captures the
banks’ ability to make returns from its services including net interest income.
This data is easily accessible in the bank’s audited balance sheet and income
statement and very likely will have been already calculated. An industry
comparison can guide you as to whether the figure is above par and hence the
bank’s overall performance is superior.
3.
Look at the
financial statements: the balance sheet, the income statement and the cash flow
statement. Pay special attention to the customers’ deposits, as they are a good
indicator of how the bank is performing. The liabilities compared with the
assets also provide great insight into the extent of risk the bank has
undertaken.
4.
Do a cross
sectional analysis by comparing the financial statements of your assigned banks
(if possible of similar market share size operating within the same economy).
You can access the accounts in Bloomberg; copy and paste them on your Excel
spreadsheet and match the items into different columns such as customer
deposits, interest rate charged and interest earned. This will give you a clear
indication of how your assigned banks are performing.
5.
Summarise and
make conclusions about your banks’ performance. Put together pieces of
information you have gathered about the banks’ growth in assets, liabilities,
share prices and profits, and compare this information with the financial press
and business news agencies articles you found, and determine if this
information confirms or denies the claims published from the banks’ own
corporate reports.
Desirable features for banks’ performance measures
should encompass more aspects of the performance than just profitability
embedded in a pure market-oriented indicator such as RoE and RoA. In particular, it may be useful to take account of the
quality of assets, and quality of banks’ capital to assess the banks’ earnings,
the funding capacity and the risk associated with the output. In that context, a good performance measurement
framework should incorporate more forward-looking indicators and be less prone
to manipulation from the markets.
6.
For businesses,
the toughest leadership test of the COVID-19 pandemic is how to sustain a business in an environment where
economies are still reeling from fall down of the pandemic. How did your two
banks navigate the COVID-19 difficult environment and remains sustainable? What
business strategies should your banks adopt to remain competitive and
profitable moving forward?
7.
Be sure to
include only critical and relevant ratios, figures, charts, and tables in
supporting your discussions
Calculating a series of financial ratios without explaining the relevance of the ratios to your
assigned banks’ conduct, structure, performance, risks, investments, etc. will
not add value to your overall report and grade. In fact they will hurt your
overall assessment. You should focus on interpreting the financial ratios
rather than just on the calculations.
The appendices should include relevant backup
information such as relevant financial tables if
appropriate, a
table showing the sequence of events if appropriate, any key articles, etc.
The case should conclude with a condensed summary of
any major insights gained or lessons
learned from the analysis. For example, how do you
incorporate risk elements (credit, market, and liquidity) into the assessment
of the banks’ performance during
Covid-19 pandemic? How do you
incorporate revenues and risks (market, liquidity, and operational) related to
off- balance sheet activities (i.e. asset management,
derivatives/securitisation, structuring, etc.) into the assessment of banks’
performance?
