The use of financial and non-financial ratios in the assessment of the performance of a business entity allows the stakeholders including the management and the investors to determine the growth potential, profitability and competitiveness of a firm in a given industry for strategy formulation (Annand, 2018). Informed decision-making that results from the performance appraisal of a business is deemed as an important aspect in overcoming existing and projected challenges while also optimizing on the available opportunities (Collins, 2014). It is important to note that financial and non-financial ratios provide a standard measure for the understanding of the business wellbeing of a firm and the comparison with the competitors in the industry. In the case of the United Kingdom’s major banks, financial and non-financial ratios allow for the comparison of the performance of Barclays, HSBC and Lloyds banks in order to determine the individual firm’s positions in the banking industry.
Accounting Ratios
Item
Barclays
HSBC
Lloyds
P/E Ratio
29.5
15.45
11.4
Ranking
1
2
3
Dividend Yield
2.63
4.97
5.18
Ranking
3
2
1
Return on Equity
1.61
6.74
7.86
Ranking
3
2
1
Return on Assets
0.15
0.53
0.51
Ranking
3
1
2
Liquidity Coverage Ratio
1.54
1.58
1.27
Ranking
2
1
3
Current Ratio
1.50
0.90
1.44
Ranking
1
3
2
Average ranking
2.17
1.83
2
Key: Highest Score = worst bank, Lowest Score = Best bank
Source: (Author, 2018).
Accounting ratios provide a platform for the assessment of a business’ profitability and efficiency by determining the relationship between various financial data (Davidson, 2018). As far as the accounting ratios are concerned, it is evident that the three major United Kingdom banks have varying scores as far as individual efficiency and profitability is concerned. Deducting from the figures provided by Reuters (2018), it is evident that Barclays has the highest P/E ratio of 29.5 compared to HSBC’s 15.45 and Lloyds’ 11.4. Here, the investor perception of Barclays is deemed as positive thus allowing for the high demand of the bank’s shares as the investors are portrayed as anticipating a future increase in the income generated per share. Also, Reuters (2018) indicates that the United Kingdom’s financial service industry has an average P/E ratio of 17.95 thus communicating that the performances of HSBC and Lloyds banks as far as investor perception of future profits per share is below the industry average.
The data from Telegraph (2018) indicates that Lloyds Banking Group has the highest dividend yield of 5.18 compared to the 4.97 recorded by HSBC Holdings and the 2.63 generated by Barclays Bank. A high dividend yield indicates that a business is creating sufficient profits that warrant the increased dividends paid out to the shareholders. In this case, Lloyds Banking Group is portrayed as the best performing firm with Barclays bank being the least performer as far as dividend yield is concerned.
Return on equity ratio measures the efficiency of a company in creating income from the shareholders claim in the business (Iyer, 2018). Here, Lloyds Banking Group is able to optimally utilize the available equity to create income by recording a 7.86 return on equity ratio compared with the Barclays Bank that attained 1.61 and HSBC Holdings with 6.74 according to the data from Reuters (2018). Return on equity ratio renders Lloyds Banking Group as a better investor destination.
Return on assets ratio portrays how a company is using the available assets at its disposable to generate revenues for the shareholders. HSBC Holdings are depicted as the best performing bank with a return on assets ratio of 0.53 with Lloyds Banking Group recording a close figure of 0.51. Barclays Bank, on the other hand, is the least performing bank with a return on assets ratio of 0.15 according to the data provided by Reuters (2018). Here, the business efficiency of the three banks is communicated with the imminent effect of affecting the investor perception as well as indicating the competence of the respective human resource teams and adopted technologies.
Liquidity coverage ratio reflects the level of liquid assets set aside by financial firms to cover short-run obligations. According to the 2017 annual financial reports, Lloyds Banking Group’s (2018) maintained a liquidity coverage ratio of 1.27, HSBC Holdings (2018) reported a ratio of 1.58 while Barclays Bank (2018) held 1.54 ratio. Here, it is imminent that in the case of a market-shock, HSBC Holdings is in a relatively better position to cater for short-term obligations with Lloyds Banking Group being portrayed as exposed to the risks associated with market shocks that can affect liquid assets.
The current ratio of a business allows the stakeholders to assess the ability of the firm to pay for the short and long-term obligations. Here, Barclays Bank is deemed to be in the best position to cover its obligations with a current ratio of 1.50 compared to Lloyds Banking Group which recorded a 1.44 ratio and HSBC Holdings that attained a current ratio of 0.90 as per the data from Macrotrends LLC (2018).
As far as the accounting ratios are concerned, it is evident that on an average, HSBC is the best performing bank among the three major banks in the United Kingdom with an average ranking of 1.83 followed by Lloyds Banking Group with a score of 2 and Barclays bank is the worst performing bank with a mean rank of 2.17.
Market-Based Ratios
Item
Barclays
HSBC
Lloyds
Book-to-market Value
0.44
0.66
0.85
Ranking
3
2
1
Key: Highest Score = worst bank, Lowest Score = Best bank
Source: (Author, 2018)
The book-to-market value ratio (price-to-book ratio) is a financial tool used to measure the prevailing market price of a firm in comparison to the value indicated in the books (Bouwens et al, 2018). A book to the market value of below 1.0 portrays a company which is probably undervalued and hence, the figure is considered as a desirable ratio. In the case of the three major United Kingdom banks, the ratios are below 1.0. As far as market-based ratios are concerned, Lloyds Banking Group is deemed as a better performing firm as the high price to book ratio is desirable for value investors. However, while Barclays Bank and HSBC Holding banks have lower price-to-book values, the figures are below 1.0 which renders the given business as relatively exemplarily performing.
Non-Financial Ratios
Item
Barclays
HSBC
Lloyds
Staff Turnover Ratio
9%
11%
10%
Ranking
1
3
2
Business Plan KPIs ratio
73%
66.2%
46.8%
Ranking
1
2
3
Average Ranking
1
2.5
2.5
Key: Highest Score = worst bank, Lowest Score = Best bank
Source: (Author, 2018)
According to Reuters (2017), the banking industry is faced by an imminent crisis as the costs incurred by the sector players increase due to staff turnover. Regarding the performance of the three major United Kingdom banks, Barclays Bank is performing better with an employee turnover rate of 9% compared with Lloyds Banking Group’s figure of 10% and HSBC’s ratio of 11% according to the respective banks 2017 annual reports. The employee turnover rate is affected by the wage rates and the benefits provided by a firm in that, monetary as well as intrinsic motivation is important in employee retention. On the business plan key performance indicators ratio, the cost income efficiency ratio is used in comparing the three banks. According to the 2017 annual reports, Barclays Bank performed well as far as the given key performance indicator is concerned with cost efficiency ratio of 73% followed by HSBC Holdings with 66.2% and Lloyds Banking Group’s figure of 46.8%. Here, the companies performances are assessed on how they manage costs while conducting daily operational activities.
Research and Analysis of the Competitive Structure of the Banking Industry
The competitive structure of the United Kingdom’s banking industry is characterized by the extensive efforts of the individual financial institutions to cope with the emerging technologies and consumer needs while maintaining sustainable growth. The aspect of competition in the United Kingdom’s banking sector can be analyzed to comprise of six factors which include regulatory recalibration, technology management, cyber risk, restructuring of the workforce and customer centricity as well as the Fintechs and big techs (Deloitte, 2018). Also, amidst the emerging competitive trends, United Kingdom banks are faced with challenges regarding wealth management, payments, capital markets, retail banking, and corporate banking.
United Kingdom Banking Industry Competitive Structure
Source: (Deloitte, 2018)
Customer Centricity
The current banking industry in the United Kingdom is bound to change as the need for genuine customer centricity and the shifting from product and sales focus towards strategic customer segmentation prove to be the avenue towards sustainable long-run growth. The increased technology and access to information have increased the consumer awareness in the banking industry thus allowing for the customers to be more critical in determining the preferred financial services and products (Mullineux, 2014). The growth of Fintech (financial technology) is reviving service delivery and the formulation of solutions to the emerging customer needs in the financial industry (Deloitte, 2018). However, technology is portrayed as part of the efforts towards enhancing customer centricity. Banking institutions are compelled to further the investment in partnerships with tertiary players such as the information technology companies as well as the investment in talent to increase personalized customer service delivery and curb the increasing competition. Here, the competitive focus is enhancing organizational agility to be responsive to customer needs and maintain loyalty.
Regulatory Recalibration
The competitive structure of the United Kingdom’s banking industry is marked by the need to ensure regulatory compliance amidst the strategic programs aimed at cost efficiency, risk management, operational simplification and growth (Rucker, 2018). Financial institutions in the United Kingdom seeking to remain competitive and profitable ought to align the inherent business strategies with the regulatory requirements governing the sector. The diversification of business is deemed as an important strategy to mitigate risks and increase the total revenues, however, the venturing into other business opportunities attract the scrutiny of other bodies that govern sectors such as the capital markets, corporate banking, and payments besides the normal retail banking rules. While regulatory recalibration can be seen as a limiting factor in the optimal operations of banks, adherence to the provided rules give companies a competitive advantage for growth through the derivation of strategies within the confines of regulatory provisions (Reuvid, 2018).
Technology management
While technology is defined as the necessary aspect that allows banking institutions in the United Kingdom to embrace organisational agility, technological infrastructures require substantial capital and human resource outlays to sustain efficiency. Here, most banks in the country are striving to secure updated technologies that would address the company managerial needs and boost the customer service delivery. Externalisation efforts, as well as the attainment of cost efficiency from technology, presents banks with competitive advantages that go a long way in increasing total revenue, customer satisfaction and sustainable growth (Singh, 2016).
Mitigating Cyber Risks
The increased embrace of technology by banks in the United Kingdom presents a new challenge of potential cyber-attack. However, the United Kingdom’s banking industry is characterized by collaboration among the financial institutions and regulatory agencies. The need to assure customers of the security of their personal information and money saved in banks is important in the maintenance of customer trust, growth of the market share and increased revenues necessary for sustainable growth. Banks are investing in mitigating cyber risk through the recruitment of personnel. Here, banks with established cybersecurity are bound to attract customers and maintain a competitive edge in the market marked by increasing service providers and a relatively slow growing market.
Fintechs and big techs
According to Deloitte (2018), fintechs provide a competitive platform where banks can enhance innovation and increase the focus on consumer experience. Here, financial institutions are striving to attain Fintechs market leadership through the overcoming of technological regulatory hurdles, convincing customers to switch to new technologies and attain the capital requirements of Fintechs. Banks are able to remain competitive by incorporating Fintechs in the daily operations to streamline service delivery and increase customer experience leading to increased revenues and sustainable growth.
Reimagining the Workforce
While the automation of the banking services could be perceived to reduce the need for human labour, the United Kingdom’s banking industry is marked by the competition among the banks to secure top talent and allow the alignment of the personnel roles with the automated provisions. A competent workforce is a requirement for the maintenance of robust service delivery and the provision ideas (Nesvetailova, 2018). Banks with a skilled labour force are bound to maneuver through the competitive market structure and increase its revenue generation as well as maintain sustainable growth.
Analysis of the Firms’ Core Capabilities
Financial Capability
From the assessment of the performance of the three United Kingdom’s major banks; Lloyds Banking Group, HSBC Holdings, and Barclays Bank, it is imminent that financial resources are necessary for the exemplary performance of financial institutions. The financial capabilities of Lloyds Banking Group, HSBC Holdings, and Barclays Bank are the core capabilities that have allowed the given firms to sustain sustainable growth amidst competition. Here, the key framework is the companies’ abilities to meet financial obligations including the purchase of new technologies, the hiring of top talents and the funding of expansion programs to meet the market needs. In the event that the financial capability is compromised, banks are bound to provide sub-standard services and fail to cope with the changing trends in the market. The assessment of the financial ratios indicated firms with sufficient assets to cover obligations and enhanced efficiency to convert assets into revenues as the highest performing. Financial strength enhances the competitiveness of banks in the United Kingdom.
Provision of Personalised Services
The ability to understand and modify the service delivery to address the needs of the consumers is portrayed as a core capability for the major firms in the United Kingdom’s banking industry. Here, the key framework includes the hiring of top talents, embracing innovation and researching on consumer preferences. In the event that consumer experience is low, banks are bound to lose customers and the individual market share leading to low revenues due to the inability to cope with competition.
Innovation
The analysis of the United Kingdom’s banking industry reflects the need for banks to invest in technology as a way of ensuring competitiveness and relevance in the market. The influx of fintechs (financial technologies) present an opportunity for the banks to increase the efficiency of service delivery while reducing the costs associated with business transactions. However, the need to identify the right technologies and comply with the regulatory requirements while aligning the new developments with the business strategies forms the framework for determining the efficiency of innovation. A competitive bank is able to identify the consumer needs and the appropriate innovative idea that can solve the problem at hand.
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