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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College Of Technology London Bank Financial Management

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. Barclays
was Founded in 1690 by John Freame and Thomas Gould with started trading
as goldsmith bankers in Lombard Street, London. As per 2010, Barclays is
the World’s tenth biggest banking & financial services group and also
Barclays is the 21st biggest company by Forbes Magazine. Barclays has
worked in over fifty nations and territories across world with around 48
million customers. Barclays is the 3rd biggest of any bank worldwide after
HSBC & 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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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
customer’s 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 today’s banks are the emphasis on
personal selling of financial services and the trend to geographic expansion in
banking.

 Evaluation of External 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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College Of Technology London Bank Financial Management

Analysing bank performance with Financial Ratios

Return on equity

Ratios 2009 2008 2007

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

Net income 3512 4645 4555

Total Equity 58,699 43,574 31,821

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

capital by 35%

2008-09 2007-08
Profit (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

Shareholder’s equity, adding non-control interest, raised 23% to £58.5bn in 2009 driven
via PAT of £10.3bn.Total Shareholder’s equity raised £ 15,125m. In the first
year mandatory convertible notes, which were converted into ordinary
shares is June 2009. The Group’s authority to buyback share capital
were refurbished in AGM of 2009.

Return on Assets:
2009 2008
2007
Return on assets=NI/TA 0.25% 0.23%
0.37%

Net Income 3512 4645

4555
Total Assets 1,379,148 2,053,029
1,227,583

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

2008-09 2007-08
Profit (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 December
2008: £ 917bn lower) than if IFRS were allowed compensation for
assets and liabilities with the same counterparty or for which we
hold collateral species.

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:

Net income Operating Re venue Total Assets

= × ×
Operating Re venue Total Assets Total Equity

2009
= 3512 * 7277 * 1379148
7277 1379148 58699

= 0.48 * 0.0053 * 23.50

= 0.059784
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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 2007

0.85% 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 has
control 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 and
that at the low scale.
That’s means Barclays has more invest in securities and other assets in
which they can get more interest from interest earning assets.

Equity Multipier= TA/TE

2009 2008
2007
23.50 47.12
38.58

= 1379148 2053029
1227583
58699 43574
31821
Lower the Equity Multiplier the higher the Income (see net Income). It means
in the year 2008 company use higher borrowed funds.
In 2009 total assets down 33% around -673881 when in 2008 total assets
up 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). in
2009/08 Organizational costs grew by 2% (£ 98m) to £ 4,889 million (2008: £
4,791m). Operating expenses increased as a result of a £ 119m reduction
in profits from the sale of the property at £ 29m (2008: 148 million pounds)
than the group on the sale and leaseback of real
estate program to stop. primarily of intangible assets from the acquisition of
the corresponding Lehman Brothers' North American companies. In
2008/07 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 leaseback

some of his property apartment portfolio in 2008.

Risk Ratios:

Int. rate sensitivity=IRSA/IRSL 2009 2008

2007
= 1.63% 1.33%
1.72%

Here, Total earning assets are decrease -41% (616,150) when total bearing
liabilities were down 52% (582,360) that’s only reason for interest rate
sensitivity is higher in 2009 compare to in 2008.

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

21.11% in 2009
13.75% in 2008
19.93% in 2007

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

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

1.75% in 2009
1.06% in 2008
0.72% in 2007

Here net charge off on loan were increase 49% GBP 2652. Where total
Loans were reduce 9% in 2009 that’s reason to increase 1.75% and problem
in liquidity . when in 2008, net charge off on loan were 94% up £ 2654 and
total loan also increase 32% £124,004. That is only reason for liquidity
problem.

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

Total Equity+Long Term Debt+Reserve for Loan losses

Total Assets

9.80% in 2009
7.72% in 2008
9.97% in 2007
Capital ratios reflect a 15% decrease (£23,339) in Total Equity+Long Term
Debt+Reserve for Loan losses to £135,145 in 2009. Key drivers included a
reduction in the overall size of the balance sheet and foreign exchange
movements.
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Bank Performance Evaluation Based on

Economic Profit
Risk-Adjusted Return on Capital (RAROC)

RAROC=Risk adjusted income/Allocated Capital

Risk adjusted Total income 2009 2008

2007
Allocated Capital 1.80% 2.36%
3.00%

= 3512 4645 4555

194601 197,000 152,049

The ration is continuously fallen. Risks are unavoidable in any business. A

healthy enterprise without the proper protection can quickly dissolve under
the strain of a
near-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 is

a profit after tax , and the opportunity cost of capital equals. Cost of equity
times 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 of

bank 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 statement
and balance sheet all overheads were increase when income ratio was
decreased. Return on equity was 5.98% in 2009 when it was 10.66% in
2008 that means bank has lots of problem of liquidity . Bank has lots of
interest expenses or non-interest expenses compare to interest income and
fees and commissions. Where ROA was not more different between 2009
and 2008. In 2009 ROA was 0.25% and in 2008 it was 0.23%. In Equity
Multiplier ratio was also high in 2008 because bank has been taken more .

In economic model RORAC is continuously falling but economic value

added is increase by 1% P.A..

Where accounting model is helping in our negative point so bank has to

rectified their error and improve in profit and share capital. When economic
model 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 find
out when we were wrong. In 2009has done good performance compare to in
2008. May be in 2008 lots of financial crisis and also bank has been put more
invested outside . but main reason was very high financial crisis at that time
so bank was not got good return from outside. So bank has lots of changing
in 2009 and they try to increase their performance .

Appendix :
Bank Financial Statements
Balance Sheet

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As at 31st December
2,00
9 2008 2007
Notes £m £m £m
Assets
81,48 30,01 5,80
Cash and balances at central banks 3 9 1
1,59 1,69 1,83
Items in the course of collection from other banks 3 5 6
151,39 185,64 193,72
Trading portfolio assets g 5 6 6
Financial assets designated at fair value:
1 41,31 54,54 56,62
– held on own account 3 1 2 9
– held in respect of linked liabilities to customers 1 1,25 66,65 90,85
under investment contracts 3 7 7 1
1 416,81 984,80 248,08
Derivative financial instruments 4 5 2 8
1 41,13 47,70 40,12
Loans and advances to banks 5 5 7 0
1 420,22 461,81 345,39
Loans and advances to customers 5 4 5 8
56,65 65,01 43,25
Available for sale financial investments h 1 6 6
Reverse repurchase agreements and cash collateral 1 143,43 130,35 183,07
on securities borrowed 7 1 4 5
1 6,35 6,30 5,15
Other assets 8 8 2 3
34 38 51
Current tax assets 9 9 8
2 42 34 37
Investments in associates and joint ventures 0 2 1 7
2 6,23 7,62 7,01
Goodwill 1 2 5 4
2 2,56 2,77 1,28
Intangible assets 2 3 7 2
2 5,62 4,67 2,99
Property, plant and equipment 3 6 4 6
1 2,30 2,66 1,46
Deferred tax assets 9 3 8 3
1,379,14 2,053,02 1,227,58
Total assets 8 9 3
Liabilities
76,44 114,91 90,54
Deposits from banks 6 0 6
Items in the course of collection due to other 1,46 1,63 1,79
banks 6 5 2
322,45 335,53 295,84
Customer accounts 5 3 9
1 51,25 59,47 65,40
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Assets = Liabilities + Equity

Income statement
For the year ended 31st December
2,00
9 2008 2007
Notes £m £m £m
Continuing operations
21,23 28,01 25,29
Interest income a 6 0 6
Interest expense a (9,567) (16,595) (15,707)
11,66 11,41 9,58
Net interest income 9 5 9
9,94 7,57 6,74
Fee and commission income b 6 3 5
Fee and commission expense b (1,528) (1,082) (970)
8,41 6,49 5,77
Net fee and commission income 8 1 5
6,99 1,27 3,75
Net trading income c 4 0 4
28 68 1,21
Net investment income c 3 0 6
7,27 1,95 4,97
Principal transactions 7 0 0
1,17 1,09 1,01
Net premiums from insurance contracts 5 2 0 1
1,38 44 22
Other income f 9 4 2
29,92 21,39 21,56
Total income 5 0 7
Net claims and benefits incurred on insurance
contracts 5 (831) (237) (492)
29,09 21,15 21,07
Total income net of insurance claims 4 3 5

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

21,02 15,73 18,28
Net income 3 4 0

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

Administration and general expenses d (5,558) (5,301) (3,854)
2
Depreciation of property, plant and equipment 3 (759) (606) (453)
2
Amortisation of intangible assets 2 (447) (276) (178)
Operating expenses (16,712) (13,387) (12,096)
Share of post-tax results of associates and joint 2 3 1 4
ventures 0 4 4 2
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Profit on disposal of subsidiaries, associates and 18 32 2

joint ventures 8 7 8
4 2 2,40
Gains on acquisitions 0 6 6 –
4,55 5,09 6,25
Profit before tax 9 4 4
Tax e (1,047) (449) (1,699)
3,51 4,64 4,55
Profit after tax 2 5 5
Discontinued operations
Profit after the tax for the year from discontinued 6,77 60 57
operations, including gain on disposal 7 4 1
10,28 5,24 5,12
Net profit for the year 9 9 6
Profit attributable to equity holders of the parent
from:
3,22 4,25 4,21
Continuing operations 8 9 8
6,76 58 53
Discontinued operations 5 7 1
9,99 4,84 4,74
Total 3 6 9
29 40 37
6 3 7
10,28 5,24 5,12
Profit attributable to non controlling interests 9 9 6

Calculation

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