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Analyzing Financial Performance of

HSBC USA and comparing to National Credit and Commerce Bank

Based on a financial performance study of

Year 2005 to Year 2009.

pg. 1

Analyzing Financial Performance of

HSBC USA and comparing to National Credit and Commerce Bank

Based on a financial performance study of

Year 2005 to Year 2009.

Course Title: Financial Market & Institutions (Fin433)

Prepared for:

Mr. Raisul Islam (RSM)

Faculty

School of Business

North South University

Prepared by:

Group-09

Name ID Section

M Mostafa Al Mahmud 081 – 312 - 030 3

Fahad Abdul Malek 073 – 461 – 030 3

M. Mahmudul Haque 061 – 296 - 030 3

M. Mahmudul Islam 052 – 365 - 030 3

MD. Sabbir Hossain 071 – 770 - 030 3


December 21, 2010

pg. 2

ACKNOWLEDGEMENT

We would like to thank our faculty, Mr. Raisul Islam, (Lecurer, School Of Business) for

providing us with a project guideline that has been extremely helpful for the preparation of

this project. We are extremely grateful to him for helping me with his suggestions and

advices whenever we needed. His precious opinions and continuous monitoring has made this

project achievable. We would like to express our gratitude to him for guiding me during the

project and helping us to make the most possible sound report.

December 21, 2010

pg. 3

Mr. Raisul Islam

Course Instructor, FIN 433


Dear Sir,

We are delighted to submit the ratio analysis and performance comparison of National Credit

and Commerce Bank Limited with HSBC in an attempt to arrange a group report for the

course Financial Markets & Institutions. We feel fortunate as we had the option to work on

such an educative assignment. The entire project was accomplished in observance of your

guideline.

Your kind and consistent assistance throughout the duration of this process was highly

supportive. We highly appreciate the opportunity you gave us.

We will always appreciate your kind advice, patience, cooperation and suggestions regarding

this report. Your kind advices and suggestions will help us to ahead as a brilliant guideline.

Sincerely,

M Mostafa Al Mahmud

Fahad Abdul Malek

M. Mahmudul Haque

M. Mahmudul Islam

MD. Sabbir Hossain

pg. 4

TABLE OF CONTENTS

PREFACE………………………………………………………………………..........................................................6

PUPORSE………………………………………………………………………………………………………………………………7

METHODOLOGY…………….……………………………………………………..………………………………………………8

CONSTRAINTS…………………..……….…………………………………………………………….....……………………….9

LITERATURE REVIEW..................................................................................................…………..11

HSBC, AT A GLANCE................................................................................................................18

NCC Bank, at a Glance………………………………………………………………………………………...................19

REASONS OF FINANCIAL RECESSION......................................................................................20

WHY HSBC WAS AFFECTD …………………………………………………………………………………………….......23

COMPARISON BETWEEN HSBC AND NCC BANK………………………………… ………………………………31

CONCLUSION:.........................................................................................................................42

BIBLIOGRAPHY........................................................................................................................43

APPENDIX # 1 (FINANCIAL STATEMENT)................................................................................44

APPENDIX # 2......................................................................................................................... 77

pg. 5

PrefaceA bank as a matter of fact is just like a heart in the economic structure and the Capital

provided by it is like blood in it. Bankers play very important role in the economic life of the

nation. Nowadays modern banks are very constructive for the utilization of the resources of

the country. The banks are mobilizing the savings of the people for the investment purposes.

Bank industry has frequent interaction with customers, so the service quality and customer

satisfaction are very important to it. Hence the bank industry has invested numerous

resources to improve its service quality, because, high service quality results in customer

satisfaction and loyalty. Excellent performance feature and high customer satisfaction is the

important issue and challenge for banking industry. Today, service quality is considered a

critical measure of organizational performance and continues to compel the attention of

managers and academics. Moreover, investors are more concerned about bank’s performance

now a day.

Financial ratios are one of the most important tools to measure the performance of

commercial banks. It facilitates to discover the movement in their performance in a specific

phase of time in addition to evaluating those with parallel banks in the same industry. There

are various categories of financial ratios. Liquidity, Leverage, Activity, Profitability and

Market Position ratios are the most meaningful and significant among those to banks

operations and state of affairs about security and future prospects. It aids the present and

probable shareholder and customers to banks with additional confident.

pg. 6

Purpose

The intention of this report is:

Find out the reason for the financial recessions

Link those reason with HSBC

Investigating the execution of NCC Bank (NATIONAL CREDIT AND COMMERCE

BANK) from the year 2005 to the year 2009.

Calculating a variety of financial ratios that aids to examine the performance.

Preparing time series analysis to evaluate performance whether it is enhanced or deteriorate

over the time length.

Preparing a cross sectional analysis to contrast the operational and financial functions of

NCC bank with the operational and financial functions of HSBC in the same time interval.

Indicating the improvement or fading region

Determining the reflection of the fundamentals of banks on its share prices.

And finally advocating the existing and prospective investor in relation to their investment

decisions regarding NCC Bank and HSBC.

pg. 7

Methodology:Source of information:

To organize this report secondary data has been used. There are two sources of secondary

data. This are-

Internet: The websites of the both company and also several additional websites like

Wikipedia, Investopedia were awfully constructive to acquire the information of the two

banks.

DSE library: the annual reports, collected from DSE library, were the origin of the

numerical data .the income statement and balance sheet were in the main focus to analyze

the ratios.

Computation and investigation procedure:

Different ratios were the main to tool to measure the performance of the two banks.

Liquidity ratio, leverage Ratio, activity (efficiency) ratio, profitability ratio, and market

position ratio are the key subdivisions ratio folder that constructed the trend and cross section

analysis. Graphs and diagrams were nominated as the essential choice to visualize the six

years ratio assessment of the two banks.

pg. 8

ConstraintsThe level best effort was given to construct the report with accurate information and ideal

analysis procedure, yet there are some restrictions that may be considered as barrier on the

way to assemble a totally flawless performance examining report.

Time duration: The time frame to prepare this report was limited to a single semester. If

more time were allocated, more vivid inspection and presentation the information would have

been possible.

Secondary source: The required records were collected from the annual reports which are

the secondary sources of data. Though the reports are audited if information were collected

from the primary sources, it might have more accuracy.

Accounting policy: Audited reports were used to ensure the most possible accurate and

applicable data. Still cross sectional analysis might be misleading if the two banks use

different accounting policy. Besides, changes in accounting policy also may affect the

comparison of results between different accounting years as misleading. The problem with

this situation is that the directors may be able to manipulate the results through the changes in

accounting policy. This would be done to avoid the effects of an old accounting policy or

gain the effects of a new one. It is likely to be done in a sensitive period, perhaps when the

business’s profits are low or during an economic meltdown

Insignificance of Historical Cost: Since the both banks are public limited company, a lot of

difficulties were encountered while gathering the historical financial information about the

bank. Moreover, the use historical cost of accounting was commended to business by ASB

Conceptual framework. As historical cost principle is worn, asset assessment in the balance

sheet might be disingenuous. Ratios supported on this assessment will be very ineffective

concerning decision making procedures.

Technology: While constructing trend analysis, actions in technology obliges particular

concentration as the movement in performance should be in line with the changes in

technology. To adjoin, employees’ output boost does not necessarily denote that employees

are more proficient now. It may occur because of hi-tech progress.

pg. 9

Inflation or deflation: Inflation or deflation in economy does not affect the ratio analysis.

Initial profit figure may be increasing. But that might nit be because of good performance,

rather that might be because of inflation and in inflation money value goes down .So ratio

doesn’t always show the true condition of a company.

pg. 10

Literature Review

A. Liquidity ratio :

“Liquidity ratio indicates a bank’s ability to satisfy its short term obligations as came due.

Liquidity refers to the solvency of the bunk’s overall financial position, the ease with which it

can pay its bills. These ratios are leading indicators of cash flow problems. Often banks have

to give up a profit portion to get enough liquid assets as liquid assets are the least profitable

segment of banks’ asset.

1. Cash position indicator:

Cash position ratio is obtained from the calculation of cash and deposits due from depository

institutions divided by total assets will give the cash position indicator.

Cash Position indicator = Cash and Deposits due from depository institutions / Total Asset.

A larger amount of cash means the institution is in a controlling situation to grip instant cash

requirements.

2. Liquid securities indicator:

Liquid securities indicator is acquired through the computation of government securities are

divided by total assets.

Liquid Securities Indicator = Government Securities / Total Asset

It contrasts the most marketable securities an institution is able to clutch through the whole

volume of its asset portfolio. The superior the section of government securities, the more

liquid the depository institution’s situation is likely to be in attendance.

pg. 11

3. Capacity ratio:

Capacity ratio is stimulated from the result of net loans and leases are divided by total assets.

Capacity Ratio = Net Loans and Losses / Total Asset.

It is a negative liquidity indicator and tells proportion of net loans and losses in relation to

total assets.

4. Hot money ratio: Hot money ratio is calculated from money market (short term) assets

divided money market liabilities.

Hot money ratio = money market assets / money market liabilities

It reveals whether the bank has approximately balanced the volatile liabilities it has issued

with the money market assets it clasps that could be sold swiftly to face those liabilities.

5. Core deposit ratio: Core deposit ratio is derived from dividing core deposits by time

deposits.

Core deposit ratio = core deposits / total assets.

Core deposits are principally small-denomination checking and saving accounts that are

considered unlikely to be withdrawn on short notice and so carry lower liquidity

requirements.” (Gitman)

6. Deposit composition ratio: Deposit composition ratio is obtained by dividing demand

deposit by time deposit. Demand deposits are subject to immediate withdrawal via check

writing while time deposits have fixed maturities for early withdrawal.

Deposit composition ratio = demand deposits / time deposits

This ratio measures how stable a funding base the bank propose, a decline suggest greater

deposit stability and lesser need for liquidity.

pg. 12

b. Financial Leverage Ratio:

Financial leverage ratio identifies the magnification of risk and return introduced through the

use of fixed cost financing, such as debt and preferred stock. These ratios are intended to

address the bank’s long term ability to meet its obligations. The more fixed cost debt a firm

uses, the greater will be its expected return and risk. Now-a-days banks prefer much debt as

debt financing less costly and more profitable than equity capital. These ratios are also known

as debt ratio or long term solvency measures ratio.

1. Debt Ratio:

The debt ratio measures the proportion of total assets financed by the bank’s creditors.

Debt Ratio = Total liabilities / Total assets

It shows the dependence on debt financing. The higher the ratio, the greater the amount of

assets financed by the bank’s creditors. It does not point out any absolute excellent or poor

measure. If the bank is capable of paying all the interest payment related with debts within

payable time, debt is not a trouble. It is also known as the debt to capital ratio, debt to equity

ratio, total debt ratio or financial leverage ratio.

2. Debt to equity Ratio:

It is the most admired leverage ratio and it endows with feature approximately the amount of

leverage (liabilities assumed) that a bank has relative to the capital afforded by shareholders.

Debt Equity Ratio = Total debt / Shareholders’ Equity

Or Debt Equity Ratio = Total long term debt / Shareholders’ Equity

The lower the ratio, the less leverage that a bank is using. It presents the percentage of a

bank’s assets that are financed by debt versus equity. It is a widespread quantify of the long-

term capability of a company's business and, along with current ratio, a measure of its

liquidity, or its ability to cover its expenses. As a result, debt to equity estimates often just

takes in long-term debt instead of a company's total liabilities.” (Gitman)

3. Long term debt ratio:

It is long term debt divided by long term debt and total equity.

Long term debt ratio =Long term debt / (Long term debt + Total equity)

pg. 13

Long term debt and total equity is sometimes called as total capitalization. Bank’s long term

debt is matter of more concern than its short term debt. The higher the ratio, the greater the

firms degree of long term indebt-ness and the more financial leverage it has.

4. Cash Flow to Debt Ratio:

It is to compare the operating cash flow to its total debt. It is characterized as the sum of

short-term borrowings, the current portion of long-term debt and long-term debt. This ratio

provides an indication of a company's ability to cover total debt with its yearly cash flow

from operations.

Cash Flow to Debt Ratio =Total operating cash flow /total debt.

The higher the percentage ratio, the better the company's ability to carry its total debt.

5. Financial Leverage Multiplier:

It is also known as equity multiplier (EM) financial leverage ratio or leverage ratio. It is total

assets divided by common stockholder's equity. This is a judge of leverage. It reflects the

leverage or financing police, the sources chosen to fund the debt or equity portion of the

bank.

Bank’s Equity Multiplier (EM) or financial leverage multiplier (FLM)

= Total Asset/ Total Equity Capital

The superior the ratio is, the more the company is depending on debt to finance its

asset base. It is a way of examining how a company uses debt to finance its assets. It shows a

company's total assets per taka of stockholders' equity.

C. Activity (efficiency ratio):

Activity ratio measures the speed with which various accounts are converted into sales or

cash –inflows or out flows. In other words, it indicates the efficiency to generate income and

effectiveness different activates required conduct bank’s operations.

1. Operating Efficiency Ratio:

It provides a measure of how effectively a bank is operating and an indication bank’s ability

to manage its expense compared to total operating revenues.

Operating Efficiency Ratio = Total Operating Expense / Total Operating Revenue

pg. 14

Declining operating efficiency designates better performance. As it evaluates the overhead

structure of a financial institution, it is also referred as the "overhead burden" or "overhead

efficiency ratio".

D. Profitability ratio:

Profitability ratios are intended to measure how efficiently the bank uses its assets and how

efficiently the bank manages its operations.

1. Net Interest Margin:

Net Interest Margin (NIM) measures the difference between the interest income generated by

bank’s interest sensitive asset such as loans and investments and the amount of interest paid

out to the deposits and non deposit borrowings which are known as interest expense. The

theoretical formula is given below-

Net Interest Margin = (Interest Income from loans and security investments- Interest

expenses on deposits and on other deposits) / Total Assets

Not all assets generate interest income .so in the real world; the assets which are sensitive to

changes in interest rate and generate interest income are used to calculate NIM. These assets

are called interest sensitive asset. Then the formula is –

Net Interest Margin = (Interest Income from loans and security investments- Interest

expenses on deposits and on other deposits) / Total Earning Assets

In this report, the later formula of NIM has been worn. Increased NIM indicates improved

performance .It is considered equivalent to the gross margin of non-financial companies.”

(Gitman)

2. Net Non Interest margin:

Net Non Interest margin explains how proficiently assets are utilized to make net non interest

margin. It computes the quantity of non-interest revenues stemming from deposit service

charges and other service fees the financial firm has been able to collect (fee income) relative

pg. 15

to the amount of non-interest costs incurred (counting salaries and wages, repairs and

maintenance cost of services and loan loss expenses).

Net Non- interest Margin = (Non-Interest Revenues – Non-interest Expansés) / Total Asset

Enlarged value of NNIM indicates better performance. Most often of the banks net non-

interest margin is negative since non-interest costs commonly exceed the fee income.

3. Net Profit Margin (NPM):

It is calculated using a formula and written as a percentage or a number. Margin is mostly

used for internal comparison.

Net Profit Margin (NPM) = Net Income/ Total Operating revenues

It measures the parentage of each taka remaining after all costs and expenses, including taxes

and preferred stock dividends, have been deducted. It other words reflects the effectiveness of

expense management (cost control) and service pricing policies. The higher the net profit

margin ratio will be the better.

4. Return on Assets (ROA):

Return on total Assets, often called the return on investment (ROI), measures the overall

effectiveness of management in generating profits with its available assets. It indicates how

well financial management utilizes the average taka invested in the bank's assets, whether the

taka came from investors or creditors. It equal to a fiscal year's earnings divided by its total

assets, expressed as a percentage.

Return on assets (ROA) = Net Income after Tax/ Total Assets

Increased ROA indicates improved performance. The higher the ROA ratio will be the

better.” (Gitman)

5. Return on Equity (ROE):

ROE is equal to a fiscal year's net income (after preferred stock dividends but before

common stock dividends) divided by total equity (excluding preferred shares), expressed

as a percentage.

Return on Equity (ROE) = Net Income after Tax/ Total equity Capital

pg. 16

It is measure of how the stock holders fared during the year. It measures the rate of return on

the ownership interest (shareholders' equity) of the common stock owners. It also shows the

management efficiency. It measures a firm's efficiency at generating profits from every

taka of equity capital Increased ROE indicates improved performance.. In accounting sense,

it is a true bottom line of measure of performance.

6. Earnings per Share:

The EPS represents the number of taka earned during the period on behalf of each

outstanding share of common stock.

Earnings per Share = Net Income after Tax / Common Equity Shares Outstanding

Earnings per share serve as a major indicator of a company's profitability and performance

improvement. The higher the EPS will be the bank will be considered the more profitable.

E. Market position ratios

1. Book value per share:

Book value per share is the accounting value of each share recorded. To get the M/B ratio it

is the first requirement.

Book value per share = (Assets – Liabilities) / Number of shares Outstanding

= total equity/ Number of shares Outstanding” (Gitman)

pg. 17

HSBC, at a glance

Headquartered in London, HSBC is one of the largest banking and financial services

organizations in the world. HSBC's international network comprises around 8,000 offices in

87 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East

and Africa.

With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges,

shares in HSBC Holdings plc are held by around 220,000 shareholders in 124 countries and

territories. The shares are traded on the New York Stock Exchange in the form of American

Depositary Receipts.

HSBC provides a comprehensive range of financial services to around 100 million customers

through four customer groups and global businesses: Personal Financial Services (including

consumer finance); Commercial Banking; Global Banking and Markets; and Private Banking.

pg. 18

NCC Bank, at a Glance

National Credit and Commerce Bank limited primarily appeared as the “National Credit

limited”. Preceding to alteration into a listed commercial bank, National Credit Limited

(NCL) was integrated as an investment company in 1985 at Motijheel Commercial Area in

Dhaka with preliminary authorized capital of taka 30 cores. The intention of the company

was to assemble resources from within and invest them in such manner so as to grow

country's Industrial and Trade Sector. It played a significant role to develop the capital

market of Bangladesh. However within a small phase of time this investment company turned

into a listed commercial bank

By means of the authorization from the government and Bangladesh Bank, NCL was

transformed in a full fledged commercial bank and began its banking functions on in 1993, in

the name of National Credit and Commerce Bank Limited. It has been registered under the

company act-1913, as a private commercial bank with paid up capital of Tk.39crores to serve

the nation in conjunction with 16 branches.

The bank offers a diversified category of products and services, among those the vital

services and products are: deposits, loans, card and remittance facilities, brokerage services,

treasury services and so on.

pg. 19

Reasons of Financial Recession

The collapse of the housing bubble, which peaked in the U.S. in 2006, caused the values of

securities tied to real estate pricing to plummet thereafter, damaging financial institutions

globally. Questions regarding bank solvency, declines in credit availability, and damaged

investor confidence had an impact on global stock markets, where securities suffered large

losses during late 2008 and early 2009. Economies worldwide slowed during this period as

credit tightened and international trade declined. Critics argued that credit rating agencies and

investors failed to accurately price the risk involved with mortgage-related financial products,

and that governments did not adjust their regulatory practices to address 21st century

financial markets.

The U.S. housing bubble and foreclosures

“Between 1997 and 2006, the price of the typical American house increased by 124%. During

the two decades ending in 2001, the national median home price ranged from 2.9 to 3.1 times

median household income. This ratio rose to 4.0 in 2004 and 4.6 in 2006. This housing

bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or

financing consumer spending by taking out second mortgages secured by the price

appreciation.” (Wikipedia)

By September 2008, average U.S. housing prices had declined by over 20% from their mid-

2006 peak. Easy credit, and a belief that house prices would continue to appreciate, had

encouraged many subprime borrowers to obtain adjustable-rate mortgages. These mortgages

enticed borrowers with a below market interest rate for some predetermined period, followed

by market interest rates for the remainder of the mortgage's term. Borrowers who could not

make the higher payments once the initial grace period ended would try to refinance their

mortgages. Refinancing became more difficult, once house prices began to decline in many

parts of the USA. Borrowers who found themselves unable to escape higher monthly

payments by refinancing began to default. During 2007, lenders had begun foreclosure

proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3

pg. 20

million in 2008, an 81% increase vs. 2007. As of August 2008, 9.2% of all mortgages

outstanding were either delinquent or in foreclosure. (Wikipedia) See: Appendix # 2, Fig-1

Sub-prime lending

The term subprime refers to the credit quality of particular borrowers, who have weakened

credit histories and a greater risk of loan default than prime borrowers. The value of U.S.

subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million

first-lien subprime mortgages outstanding.

Subprime mortgages remained below 10% of all mortgage originations until 2004, when they

spiked to nearly 20% and remained there through the 2005-2006 peak of the United States

housing bubble. A proximate event to this increase was the April 2004 decision by the U.S.

Securities and Exchange Commission (SEC) to relax the net capital rule, which encouraged

the largest five investment banks to dramatically increase their financial leverage and

aggressively expand their issuance of mortgage-backed securities. Subprime mortgage

payment delinquency rates remained in the 10-15% range from 1998 to 2006, then began to

increase rapidly, rising to 25% by early 2008. (Wikipedia)

See: Appendix#2, Fig-2

Mortgage underwriting

Mortgage underwriting standards declined gradually during the boom period. The use of

automated loan approvals allowed loans to be made without appropriate review and

documentation. In 2007, 40% of all subprime loans resulted from automated underwriting.

The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while

profiting from the home loan boom, did not do enough to examine whether borrowers could

repay.

A study by analysts at the Federal Reserve Bank of Cleveland found that the average

difference between subprime and prime mortgage interest rates (the "subprime markup")

declined significantly between 2001 and 2007. The quality of loans originated also worsened

gradually during that period. The combination of declining risk premium and credit standards

is common to boom and bust credit cycles. The authors also concluded that the decline in

underwriting standards did not directly trigger the crisis, because the gradual changes in

standards did not statistically account for the large difference in default rates for subprime

mortgages issued between 2001-2005 (which had a 10% default rate within one year of

origination) and 2006-2007 (which had a 20% rate). In other words, standards gradually

declined but defaults suddenly jumped. Further, the authors argued that the trend in

pg. 21

worsening loan quality was harder to detect with rising housing prices, as more refinancing

options were available, keeping the default rate lower. (Wikipedia)

Down payments and negative equity

A down payment refers to the cash paid to the lender for the home and represents the initial

homeowners’ equity or financial interest in the home. A low down payment means that a

home represents a highly leveraged investment for the homeowner, with little equity relative

to debt. In such circumstances, only small declines in the value of the home result in negative

equity, a situation in which the value of the home is less than the mortgage amount owed. In

2005, the median down payment for first-time home buyers was 2%, with 43% of those

buyers making no down payment whatsoever. By comparison, China has down payment

requirements that exceed 20%, with higher amounts for non-primary residences. (Wikipedia)

Housing speculation

Speculative borrowing in residential real estate has been cited as a contributing factor to the

subprime mortgage crisis. During 2006, 22% of homes purchased (1.65 million units) were

for investment purposes, with an additional 14% (1.07 million units) purchased as vacation

homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record

level of nearly 40% of homes purchases were not intended as primary residences. Housing

prices nearly doubled between 2000 and 2006, a vastly different trend from the historical

appreciation at roughly the rate of inflation. While homes had not traditionally been treated as

investments subject to speculation, this behavior changed during the housing boom. Media

widely reported condominiums being purchased while under construction, then being

"flipped" (sold) for a profit without the seller ever having lived in them. Some mortgage

companies identified risks inherent in this activity as early as 2005, after identifying investors

assuming highly leveraged positions in multiple properties. (Wikipedia)

Corporate risk-taking and leverage

Debt taken on by financial institutions increased from 63.8% of U.S. gross domestic product

in 1997 to 113.8% in 2007. A 2004 SEC decision related to the net capital rule allowed USA

investment banks to issue substantially more debt, which was then used to help fund the

housing bubble through purchases of mortgage-backed securities. From 2004-07, the top five

U.S. investment banks each significantly increased their financial leverage which increased

pg. 22

their vulnerability to a financial shock. These five institutions reported over $4.1 trillion in

debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. (Wikipedia)

See: Appendix#2, Fig-3

Why HSBC was affected?HSBC was also affected at the recent financial recession. Now we will try to find out some of

the reasons behind that.

Cash position indicator:

2005 2006 2007 2008 20090.00

0.01

0.02

0.03

Cash position indicator


The ratio indicates a bank’s ability to handle immediate cash needs. The higher the ratio the

better the liquidity position of the bank. From 2005 to 2007 we are observing a decreasing

trend initially and then an increasing trend in the cash position indicator ratio. The year 2009

had the most cash position. Which implies, during 2009 HSBC has increased its cash and

deposit from other banks. A large cash position is often a powerful signal of a bank’s

liquidity, while a small cash position is a potential warning sign.

pg. 23

Liquid Securities indicator:

2005 2006 2007 2008 20090.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Liquid securities indicator


Government securities are the second most liquid assets after cash. This ratio compares the

most marketable securities an institution can hold with the overall size of its asset portfolio;

the greater the proportion of govt. securities, the more liquid the bank. Among all other years

year 2007 had the lowest one .That means HSBC has reduced its Government Securities in

its’ asset portfolio.

Hot money ratio:

2005 2006 2007 2008 20090.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58

0.60

0.62

Hot money ratio

Hot money ratio

pg. 24

We can see that the Hot Money Ratio of HSBC is showing a mixed trend from the graph,

where 2008 has seen the lowest one and 2006 was the highest one.

Deposit composition ratio:

2005 2006 2007 2008 20090.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Deposit composition ratio

Deposit composition ratio

The Deposit Composition ratio is fluctuating during the respective study periods. In the year

2005 it has the lowest one but after that it increased. From the year 2007 to 2008 it has stable

position.

Debt ratio:

2005 2006 2007 2008 20090.92

0.93

0.94

0.95

0.96

0.97

Debt ratio

Debt ratio

This ratio measures the percentage of funds that are borrowed. The higher the debt the more

an institution exposed to risk.

HSBC has also been able to maintain a steady debt ratio .90(average) from the year 2006 to

2008. So it is upholding its leverage position which is a good sign for the bank. The

pg. 25

management should keep a close look in this ratio as we that leverage also contributes to risk

and the expected return for the bank.

Debt-equity ratio:

2005 2006 2007 2008 20090.00

5.00

10.00

15.00

20.00

25.00

30.00

Debt-equity ratio

Debt-equity ratio

This ratio compares the amount funds supplied and the amount of funds supplied by the

owners. We know that equity is the most expensive source of funds a so an optimum debt to

equity ratio is needed to maximize income.

HSBC moves form equity to debt than debt to equity at a very low rate. Moreover, from the

graph we can see on the year 2005 to year 2007 their debt equity portion of financing

becomes more stable. Company has increased its equity.

Long-term debt ratio:

pg. 26

2005 2006 2007 2008 20090.91

0.92

0.93

0.94

0.95

0.96

0.97

Long-term debt ratio


As the percentage gets higher, this means that a higher proportion of debt is used for the

permanent financing for the firm as opposed to investor funds. In the year 2005 as the

proportion of debt got higher, so HSBC had the chance of bankruptcy.

Cash flow- debt ratio:

2005 2006 2007 2008 20090.00

0.01

0.02

0.03

0.04

0.05

Cash flow-debt ratio

Cash flow-debt ratio

This ratio compares a bank's operating cash flow to its total debt, which, for purposes of this

ratio, is defined as the sum of short-term borrowings, the current portion of long-term debt

and long-term debt. The higher the percentage ratio, the better the bank's ability to carry its

total debt. For HSBC in the year 2005 and 2009 had the lowest one that indicates HSBC had

the less ability to carry its total debt during those years.

pg. 27

http://www.investopedia.com/terms/c/cashflow.asp

Financial leverage multiplier:

2005 2006 2007 2008 20090.00

5.00

10.00

15.00

20.00

25.00

30.00

Financial Leverage multiplier

Financial Leverage multiplier

This ratio shows a Bank's total assets per dollar of stockholders' equity. A higher equity

multiplier indicates higher financial leverage, which means the bank is relying more on debt

to finance its assets. In the year 2008 HSBC had the highest trend then a decreasing path in

2009.

Operating efficiency ratio:

2005 2006 2007 2008 20090.00

0.10

0.20

0.30

0.40

0.50

0.60

Operating efficiency ratio


The operating efficiency ratio was consistent throughout the six years. This implies that the

bank has been successfully managed to generate adequate amount of operating revenues to

cover the operating expenses. Although HSBC’s operating efficiency is almost steady, it is

showing a slightly increasing trend.

pg. 28

Net interest margin:

2005 2006 2007 2008 20090.00

0.01

0.02

0.03

Net interest margin

Net interest margin

The Net interest margin of HSBC has gone down continuously from 2005 to 2009, which

means that either the net interest income decreased consistently over the period or HSBC

could not manage its assets efficiently.

ROA:

2005 2006 2007 2008 20090.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

ROA

ROA

The ROA of HSBC is fluctuating during the respective study periods. The total asset of the

bank is decreasing from the year 2005 to year 2008 then it become stable, but the variations

in ROA are mainly because of variations in the level of net profit after tax. Thus, the

management is finding difficulties in managing their investments in assets and generating

profit from these assets.

pg. 29

ROE:

2005 2006 2007 2008 20090.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

ROE

ROE

We can see that the ROE of HSBC is showing a mixed trend, where 2009 has seen the lowest

ROE. The main difference between 2008 and 2009 is that they have significantly reduced

their provision for loans and advances/investments which affected their net income.

EPS:

2005 2006 2007 2008 20090.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

EPS

EPS

The EPS of HSBC was also quite fluctuating but it experienced less sharp ups and downs.

Except a fall in 2005 and 2006 the EPS of HSBC was more or less stable. For HSBC the

maximum EPS was in 2007 and the minimum was in 2005. The EPS of HSBC increased

consistently from 2007 to 2009, as the net profit after tax has increased consistently during

these years.

pg. 30

Securitization-asset:

2005 2006 2007 2008 20090

100

200

300

400

500

600

700

Securitization-asset

Securitization-asset

Here there is mix trend; in 2006 and 2007 HSBC has the stable path. And in the year 2009

has the lowest path.

Securitization-liability:

2005 2006 2007 2008 20090

50

100

150

200

250

300

350

Securitazion-liabilities

Securitazion-liabilities

The graph shows that in the year 2006 and 2007 it has stable position and then decreasing

path initially.

Asset-backed securities:

2005 2006 2007 2008 20090

5000

10000

15000

20000

25000

Asset backed securities

Asset backed securities

An Asset-backed securities is essentially the same thing as a mortgage-backed security,

except that the securities backing it are assets such as loans, leases, credit card debt, a

company's receivables, royalties and so on, and not mortgage-based securities. In the year

2007 HSBC had the highest path among all others.

pg. 31

Comparison between HSBC and NCC Bank:


2005 2006 2007 2008 2009 -

0.02

0.04

0.06

0.08

0.10

0.12


Trend analysis:

From 2005 to 2006, NCC bank’s CPI enhanced from 0.07 to 0.10. Again in 2007 to 2008 the

ratio deteriorated from 0.06 to 0.05. If the ratio of year 2006 is considerd as an specail

ocaurance NCC bank’c CPI is stable around .05 to .07 ,which indicates to grip the adequate

immediate cash requirements NCC Bank maintains a stable CPI most often.

Alternatively, HSBC usa had a continuous growing CPI over the four years from 2006 to

2009. The CPI arrived at 0.03 from .01 in these time period. There is only one exception from

2005 to 2006 in which the CPI decreases.

Cross sectional analysis:

While comparing NCC Bank’s CPI with HSBC usa’s CPI ,it becomes visible that NCC Bank

has better CPI position in all the years. In additon,it also establish that NCC Bank maintain a

bettet cash position to control its on the spot cash obligation than HSBC usa.

pg. 32

Liquid Securities Indicator:

2005 2006 2007 2008 2009 -

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16


Trend analysis:

NCC Bank’s Total asset and Governments securities both increased during the time period

interval but governments’ securities had increased at much lower rate than total assets and

that is reflected in the deterioration of Liquid securities indicator ratio from year 2004 to

2006.

In 2007, again it rose to 0.14, with a drop to 0.11 in 2008, it remained 0.14 in 2009. So the

liquid securities indicators were in the range of 0.11 to 0.14 in the mentioned last five year.


EBL’s governement securites were falled slighlty upto 2006. Finaly In 2008 and 2009, NCC

Bank is much ahead than HSBC usa by holding more government securities. As the superior

the section of government securities, the more liquid NCC Bank’s situation is likely to be in

attendance.

pg. 33

Debt Ratio:

2005 2006 2007 2008 20090.880.890.900.910.920.930.940.950.960.97

Debt ratio

Trend analysis:

NCC Bank had a significantly high debt ratio in 2005 which was 0.93 that means less of its

funds are generated from borrowing and that causes fewer obligations. If the bank is capable

of paying all the interest payment related with debts within payable time, debt is not a

trouble.

Increase in Total Asset was little bit higher than increase in liability which has kept the ratio

stable. Since this is a negative security so Eastern bank has less and almost stable liability

over last six year. Position of EBL is appreciable.


Though debt ratio is not a good indicator of performance, but for less risk associated lesser

debt, it can be said NCC Bank is probably considered to be in a good position by most of the

investors.

pg. 34

Debt-equity ratio:

Trend analysis:

NCC banks stock holders equity and debt both have increased from 2005 to 2009 and total

debt is increasing at a rate relatively lower than stock holders equity. That gives a positive to

its performance.

Stock holders’ equity of HSBC usa has increased from 2005 to 2008 and debt of it has been

fluctuating till 2008. In 2008 debt increased at a higher rate that equity so HSBC usa needs to

decrease their debt.


Debt to equity is a negative ratio so it is clear that HSBC USA is doing well comparing to

NCC bank. In addition, NCC bank’s debt to equity ratio is deteriorating day by day. So it is

improving its performance and has future potential.

pg. 35

2005 2006 2007 2008 20090.00

5.00

10.00

15.00

20.00

25.00

30.00

Debt equity ratio

Long-term debt ratio:

2005 2006 2007 2008 20090.00

0.20

0.40

0.60

0.80

1.00

1.20


Trend analysis:

NCC bank’s was increasing in 2005 to 2006 from 0.16 to 0.266, but in 2007 it dropped to

0.22 then it decreased to 0.20 till 2008, yet again increased to 0.22 in 2009.


HSBC had a stable data in this regard.

Cash flow-debt ratio:

2005 2006 2007 2008 20090.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Cash flow to debt ratio

Trend analysis:

Cash flow to Debt ratio of NCC bank has been stable as increase in cash flow percentage was

nearly equal to increase in debt. Which means bank maintain almost same percentage of cash

against its debt. HSBC USA has to improve from this position.

pg. 36

HSBC has been fluctuating hugely from 2005 to 2009 in terms of Cash flow to Debt ratio.

The ratio increased a lot in the year 2006 and then suddenly falls down to zero which means

the company has insufficient cash to match its debt.


NCC bank has been the stable performer between this two and where as HSBC is in a worse

position.

Financial Leverage Multiplier:

2005 2006 2007 2008 20090.00

5.00

10.00

15.00

20.00

25.00

30.00

Financial leverage multiplier

Trend analysis:

NCC Bank’s FLM has improved from 2005 to 2006 from 14.04 to 15.28. In 2007, again it

decreased to 12.78. Then again rose to 14.15 in 2008, followed by a fall to 10.93 in 2009.

There is instability in FLM.

HSBCs FLM continuously increased till 2008 and then suddenly it just dropped to 18.43 in

2009.


Between the two banks ,HSBC usa is in better position , yet it is deteriorating and needs to be

stable or to be growing.

pg. 37

Operating efficiency ratio:

2005 2006 2007 2008 2009 -

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90


Trend analysis:

The operating efficiency ratio was almost stale for HSBC USA from 2005 to 2009 with a

decrease in 2009 compared to 2008.

Similar thing happened to NCC Bank as well. Its operating efficiency ratio was stable with a

slight decrease in 2009 compared to 2008.


It seems HSBC was performing consistently better than NCC Bank but in recent years the

operating efficiency of both the banks decreased compared to that of the previous year.

Net Interest Margin:

2005 2006 2007 2008 20090.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Net Interest Margin

Trend analysis:

NCC bank’s net interest margin was in fluctuating position around 2.96% to 3.91% from year

2005 to 2009. From 2007 to 2008 it slightly decreased from 3.44% to 2.91% following an

increase to 3.03% in 2009.

pg. 38

Net Interest Margin of HSBC is nearly stable. In 2005-2006 NIM decreased and remain

constant from 2006 to 2009.


Here, for investors NCC is showing a better performance than HSBC USA is if we consider

Net Interest Margin.

Return on Asset:

2005 2006 2007 2008 20090.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Return on Assets

Trend analysis:

ROA of NCC Bank was almost fixed thorugh year 2005 to 2008 which was 1.35% to 1.50%.

There was a dramatic improvement in 2009, signifying that the bank performed well. In 2009

ROA of 2.61% means Tk. 100 worth of asset had generated Tk. 2.61 of return in the year

2009.

ROA of HSBC decreased from 2005 to 2008 and on 2008 to 2009 the bank showed some

brightness as it showed an upward curve. Because of continuous decrease it can be said that

company did not perform too well and need to improve their performance. Although the

ROA in 2008 increased, they need to increase it further.


So, according to ROA, NCC bank is in a better position than HSBC usa because of their

excellent improvement.

pg. 39

Return on Equity:

2005 2006 2007 2008 20090.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Return on Equity

Trend analysis:

In 2005-2009, more or less stable ROE of NCC Bank up to 2008 which was averagely 22%

and in 2009 it soared to 28.50%. This means for last years, around Tk. 28.50 was flowing to

shareholders by Tk. 100 worth of assets where as previously on average it was Tk. 22. The

ratio improved as change in Net Income after Tax was higher than change in Total Equity

From 2005 to 2008 HSBC showed downward curve with an exception in 2007. But in 2008

to 2009 it raised from 4.70% to 5.10%.


So, according to ROE, NCC Bank is far better and safer for investors to invest because of its

high and upward return on Equity.

pg. 40

Earning per share:

2005 2006 2007 2008 2009 -

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Earnings per Share

Trend analysis:

EPS was almost stable for NCC throughout the year 2005 to 2008. In 2009 it increased a bit

thanks to the booming capital market. On the other hand, in 2007 HSBC experienced a stiff

increase in earning because of the rising credit demand for housing bubble, but then it starts

falling.


NCC is in a better position in terms of EPS because it has a stable increase. But HSBC had a

sharp increase and then started falling.

pg. 41

Conclusion:

• HSBC was affected due subprime (low quality) loan, mortgage backed securities, off

balance sheet financing. These made their profitably ratios down sizing.

• However in Bangladesh, NCC does not use these instruments in large manner. In

reality they are not introduced here.

• More over NCC is not globalized in that manner.

• Recently NCC is investing a huge portion of its deposits in Capital market. If the

market collapse NCC will affected.

pg. 42

BIBLIOGRAPHY

Gitman, Lawrence J. Principles of Managerial finance. San Diego State University: Pearson

Education, 2007-2008.

Wikipedia. 17 12 2010 <http://en.wikipedia.org/wiki/Housing_bubble>.

Wikipedia. 17 12 2010 <http://en.wikipedia.org/wiki/Causes_of_the_financial_crisis_of_2007-

2010#cite_note-7>.


2010#cite_note-19>.


2010#cite_note-24>.


2010#cite_note-33>.


2010#cite_note-54>.


2010#cite_note-http-62>.

pg. 43

Appendix # 1 (Financial Statement)

pg. 44

pg. 45

pg. 46

pg. 47

pg. 48

pg. 49

pg. 50

pg. 51

pg. 52

pg. 53

pg. 54

pg. 55

pg. 56

pg. 57

pg. 58

pg. 59

pg. 60

pg. 61

pg. 62

pg. 63

pg. 64

pg. 65

pg. 66

pg. 67

pg. 68

pg. 69

pg. 70

pg. 71

pg. 72

pg. 73

pg. 74

pg. 75

Appendix # 2

Figure # 1

Figure # 2

pg. 76

Figure # 3

pg. 77

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