Assignment Sample: Barclays & Trust Bank Analysis

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Barclays PLC And Securities Trust Bank Financial Performance Analysis

Introduction

Generally, financial performance has defined the techniques of determining a company’s financial strengths and weaknesses from various financial statements such as income statements and balance sheets. The financial analyst evaluates the relationship between the firm’s financial position statement and the profit and loss account. It is significant to embrace financial performance analysis as it helps determine the firm’s SWOT analysis, which helps in decision making.

Additionally, financial performance analysis helps compare purposes and forecast the firm’s financial position. Every firm desire to have a pleasing and healthy financial status, and thus, Barclays PLC and Securities Trust Bank are not an exemption. As a result of the desire to have a good financial position, the two banks have to conduct a financial performance analysis of their firm at the end of every fiscal year.

Therefore, this paper seeks to provide a financial performance analysis of the two banks and a recommendation for various techniques on how the banks can improve their poor performance.

Barclays PLC and Securities Trust Bank Background

Barclays bank is one of the biggest and old banks in the globe. It was formed in the 17th century in the United Kingdom when banking services were introduced. The Barclays bank was founded by John Freame and Thomas Gould, who was trading as a goldsmith in London in a city called Lombard Street. The business name Barclays was formed when John’s son in law became a partner in the enterprise. The Barclays bank was moved to 54 Lombard city in 1728, which is identified by the sign of the black spread eagle, which in consequent years would turn to be a vital part of the bank’s visual identity (Orbell, 2017).

The family of Barclays bank was highly engaged in the slave trade. Barclay’s bank is a parent company and holds other subsidiary firms as a major player in the banking industry. The bank opened many of its branches across the globe to ensure that its services are efficient and effective to its users.

The PLC has spread its services into different areas such as corporate banking, credit cards, use of ATMs, retail banking, and wealth management. The bank has a customer base of approximately forty-eight million across the globe, thus reflecting a good reputation for the bank. The bank has been experiencing a lot of economic hardship even though it has maintained a competitive advantage as it applies robust scientific investments and gap management techniques.

The firms in the banking sector need to keep monitoring the interest rate cycles. To avoid making losses, a bank keeps watching the interest rate cycle to ensure that its lending rates are per the prevailing interest rates (Orbell, 2017). Barclays bank has enjoyed the validation that it has been built on strong finance principles for the last three decades. However, if the principles of finance are corrupted, the firm may make a lot of losses, thus having a bad reputation. Currently, the firm has a market capitalization of over 35.1 billion pounds and an asset book value of 1312 billion pounds.

Securities Trust Bank is a retail bank that provides saving and lending services to its customers. It was founded in 1952 in West Midlands by the Bank of England and the British treasury to help dispose of government assets. Currently, it has a customer base of approximately 1.5 million whom they provide services such as savings, vehicle financing and real estate services. Currently, this bank is operating at a net revenue of £ 180 million, operating returns of £164.5 million, net assets of £ 2.9 billion and net income of £ 45.6 million as per their 2021 financial statements.

CAMELS Rating system

The camel rating system is a common technique that all banks worldwide use to evaluate their financial performance. It is primarily helping the bank to rank its various financial performance. Being an international bank rate system, it has six elements represented by the name camel (C-capital adequacy, A-asset management, M-management quality, E – Earnings, L – Liquidity, S – Sensitivity to Market Risk). The supervisory team of every bank has the authority to assign scores on the scale for each factor to each bank.

A bank with a score of less than two is considered to be of high quality, while a bank with a score of more than three is termed to have a less than the satisfactory establishment (Babu and Kumar, 2017, p.5). The camel’s system plays a vital role in helping the bank supervisory team critically identify areas that need attention, as it is the most successful bank rating system globally. This rating system helps the depositors to trust the bank as it protects them from potential financial shocks of losses that the bank would make them incur.

The bank manager maintains the bank’s adequacy level of capitalization by ensuring that it is followed. The quality of assets determines the toughness of the financial institutions against any asset value. Most banking firms focus on assets, loans and advances, which indicates the vulnerability of assets to credit risk, particularly when the portion of the non-performing assets is significant.

Financial institutions’ quality management can be evaluated in terms of the six factors in the camel rating system. Additionally, it may also depend on compliance with the predetermined norm’s ability to cope with changes, leadership quality and technical competence. Good management is a vital factor in the prerequisite for the growth and firmness of financial institutions. The making and profitability of any financial institution help it to increase its capital. Strong earnings and revenues help the bank to have the capability to meet it is current and future operations.

Increased income ensures that the bank has enough capital that can help in absorbing all the losses and provides the shareholders with enough dividends (Singhal, 2020) . The bank’s adequate liquidity position refers to a circumstance where the bank obtains sufficient funds by advancing liabilities and easily converting assets at a reasonable price.

For a bank to have a good camel rating system, it may use various financial performance analysis techniques such as financial ratios and trend analysis. The mainly used method is the financial ratios analysis technique. Various ratios help analyse the bank’s financial performance, namely liquidity ratios, gearing ratios, activity ratios, and leverage ratios. The mentioned ratios would help determine the bank’s capital adequacy, asset administration, quality management, earnings, liquidity and sensitivity to market risk.

Comparative Analysis of Bank Performance

The return on equity ratio measures the returns that a firm obtains from the shareholder’s equity, expressed as a percentage. The return on equity can be delivered by deducting the dividend payout ratio. The higher the ROE, the higher the chances of the firm meeting the camels rating system requirement. Based on our case study, the Security trust bank has a higher ROE than Barclays bank; thus, it is making more returns from shareholders’ equity which may attract more customers to invest with them. Barclays has a low ROE, which indicates that the bank may have inadequate efficient usage of investors’ equity.

The net profit margin of the bank helps in making comparisons of firms’ profits and returns to the total amounts that it brings. It also helps measure the bank’s effectiveness and efficiency in its operations. If the bank operates with a net profit margin of 10%, it keeps $0.10 for every $1 in sales or revenue. Based on our case study, Barclay’s bank has not had a pleasing net profit margin as in 2017; it had a net profit margin of -10.26%, which indicates that they made losses. However, in 2018, they made a profit and had a net profit margin of 7.09 %, which may not be pleasing. Compared to the security trust bank, most of the shareholders and investors would prefer not to invest in Barclays bank as it lacks capital adequacy.

Additionally, return on assets helps evaluate the amount of return that the firm gets from every dollar it spends on investment. A low and declining return on assets simply indicates that the firm shows the negligence of the firm is investing more in assets, thus failing to generate good and pleasing revenue, thus indicating that the firm may experience liquidity problems.

Based on our figures, Barclay’s bank is likely to experience financial troubles as it has a low ROA which indicates that it has probably over-invested in assets (Islam,2020, p.39). This figure may scare away most investors, which may make them invest in other banks, such as security trust banks, as it has a pleasing ROA which indicates that it has better management of assets.

The debt-to-equity ratio helps the firm evaluate its financial leverage by dividing total liabilities by the shareholder’s equity. It helps determine a firm’s degree to which it can finance its activities using debts. A firm with a ratio of less than one would be safer, while a firm with more than 2 is risky and unpleasant. Both the firms have good a ratio of less than one, thus indicating they are safer.

Memo to MD of the WORSE performing Bank

Date:17th July 2021

To: Managing Director Barclays Bank
From: Financial advisor
Subject: Recommendation on how to improve the banks financial performance

From the above discussion, it is evident that the Security trust bank is performing better than Barclays bank, yet the two firms are in the same industry. From the above-calculated ratios, Barclay’s bank needs to pay attention to its camel’s rating system to improve its financial performance. For Barclays to have a pleasing return on assets, it needs to ensure that all the available assets are efficiently used to bear maximum benefits and returns. The bank can manage its fixed assets to ensure increased productivity; that is, it should reduce its operating costs on the fixed assets.

The firm should also avoid operating on leases, resulting in high operating costs. Additionally, for the firm to increase its return on assets, the firm may increase its net income by increasing its total sales for a certain period which would automatically result from increases in net income.

Barclays bank can improve its profit margin by reducing utilities through various techniques such as limiting power consumption by turning off the idle equipment on standby. The firm may also reduce labour costs by reducing overtime work which might be expensive as payment is made at a regular rate. The firm should develop a working schedule where staff avoid having employees work more than what is required. Before hiring employees, a firm should consider whether the employees would be comfortable if they are added more tasks.

Additionally, the firm may also embrace contract-based employees such as data entry and marketing activities. Reducing the operating costs would also help in increasing the net profit margin. A firm should always check with their vendors whether they would obtain discounts if they pay their bills early. The firm may also purchase products in bulk to obtain a good discount.

Furthermore, the firm uses more financial leverage to finance its activities. By obtaining more debt capital to equity capital, a firm will be able to increase equity. Increasing profit margin would also help the firm increase the return on equity. A person may not only increase their profits through selling but also through increasing the product sold and reducing overhead expenses.

Conclusively the financial analyst evaluates the relationship between the firm’s financial position statement and the profit and loss account. financial performance analysis helps compare purposes and forecast the firm’s financial position. Every firm desire to have a pleasing and healthy financial status, and thus, Barclays PLC and Securities Trust Bank are not an exemption. It is primarily helping the bank to rank its various financial performance. Being an international bank rate system, it has six elements represented by the name camel (C-capital adequacy, A-asset management, M-management quality, E – Earnings, L – Liquidity, S – Sensitivity to Market Risk). The supervisory team of every bank has the authority to assign scores on the scale for each factor to each bank

References

Singhal, P.K., 2020. An Analysis of Public Sector Banks’ Performance using CAMEL Rating Model.International Journal of Financial Management.
Babu, M.R. and Kumar, M.A., 2017. Adequacy of camels rating system in measuring the efficiency of banking industry: a retrospect.International Journal of Research in Arts and Sciences,3(3-8), pp.3-6.

Orbell, J., 2017.British banking: a guide to historical records. Routledge.
https://www.macrotrends.net/stocks/charts/BCS/barclays/financial-ratios

Islam, M.J., 2020. Sustainability reporting of banking companies in Bangladesh: a study on environmental aspect.Canadian Journal of Business and Information Studies,2(2), pp.35-44.
Miha, S. and Alkhatib, A., 2021.Trust Bank Limited Financial Statement Analysis. [online] Available<https://www.researchgate.net/publication/356816771_Trust_Bank_Limited_Financial_Statement_Analysis> [Accessed 6 June 2022].

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