HSBC ANALYSIS.docx

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1. OVERVIEW OF HSBC
Headquartered in London, HSBC is known as one of the largest banking and financial
services organisations in the world. . With more than 6300 offices in both established and
emerging markets along with 254000 employees, HSBC aims to be where the growth is,
connecting customers to opportunities, enabling businesses to thrive and economies to
prosper, and, ultimately, helping people to fulfil their hopes and realise their ambitions.
As of December 31, 2012, it provided a range of financial services for approximately
54 million customers through four global businesses: Retail Banking and Wealth
Management, Commercial Banking, Global Banking and Markets, and Global Private
Banking. Listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges,
shares in HSBC Holdings plc are held by about 216,000 in 131 countries and territories.
History of HSBC
Soon after its foundation, the bank started opening a lot of branches to expand the
services it could provided for customers. Although that network expanded as far as Europe
and North America, the bank still put an emphasis on building up presence in China and the
rest of the Asia-Pacific region. HSBC was a pioneer of modern banking practices in a
number of countries. For example, in 1888 it was the first bank to be established in
Thailand, where it printed the country's first banknotes. By the end of the century, after a
strong period of growth and success under the leadership of Thomas Jackson (chief manager
for most of that period from 1876 to 1902), the bank was the foremost financial institution
in Asia.
HSBC had to experience the big challenges and change in the 20th century. In the
early years of the 20th century, HSBC extended the scope of its activities in the East. It
participated increasingly in the issue of loans to national governments, particularly in China,
to finance domestic infrastructure and modernization proposals such as railway building.
The First World War resulted in disruption and dislocation of many enterprises, but the
prosperity was seen in the East at that time since new industries were developed and trade in
commodities such as rubber and tin soared. The bank's new head office in Hong Kong
(1935) and the new buildings at major branches such as Bangkok (1921), Manila (1922) and
Shanghai (1923) reflected clearly its expectations of growth in the future.
The 1930s are characterized by economic recession and political turmoil deriving
from the Second World War. In this period, the bank survived thanks to the new leadership

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of Arthur Morse, and through its prudent policy of building up large reserves in peace time.
At the end of the war, HSBC took on a significant part in reconstructing the Hong Kong
economy.
In the 1980s, the purchase of Marine Midland Bank in the USA represented the
acquisition of the second leg of the stool. HSBC then sought a similar purchase in the UK.
The initial target was the Royal Bank of Scotland but after this acquisition failed, attention
turned to Midland Bank and a 14.9 per cent stake was taken in 1987. After creating a new
holding company, HSBC Holdings plc in 1991, HSBC then made a recommended offer for
full ownership of Midland in July 1992. The third leg was in place. As a result of the
formation of the new holding company and the acquisition of Midland Bank, HSBC became
headquartered in London.
HSBC continued to grow through a number of acquisitions across the globe. In
November 1998, HSBC announced the adoption of a unified brand, using HSBC and the
hexagon symbol everywhere it operated, with the aim of enhancing recognition of HSBC by
customers, shareholders and staff throughout the world.
In the 21st century, HSBC has become one of the world’s largest banking and
financial service firms that have great influence on the financial system on the global.
Competitive advantages
For many past years, HSBC has been successful in taking advantage in its competitive
advantages deriving from market share, financial strengths as well as business model in order
to become one of the most prominent banking and financial service firms in the world. More
specifically, HSBC has obtained great benefits from continuously increasing the presence in
the key emerging markets, especially in Asia. Thanks to its large business model, HSBC has
covered more than 90% of global trade and capital flows. Its advantages in competition also
come from the local balance sheet strength and trading capabilities in the most relevant
financial hubs. In addition, it has a stable funding base, with around US $1.5 trillion of
customer accounts of which 73% has been advanced to customers. Moreover, its strong ability
to expand its capital base while still offering competitive rewards to its staff and good returns
to its shareholders is also one of the important factors which strengthen HSBC’s competitive
capability on the market.
HSBC’ strategy in the long term

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HSBC’s strategy is in tight relation with its forecast on two long term market trends.
Firstly, the global economy is increasingly becoming more connected. The growth in world
trade and cross-border capital flows will stimulate the manufacturing activities, increase the
consumption and develop the overall economy. Hence, in the next decade, HSBC expects 35
markets to generate 90% of world trade growth with a similar degree of concentration in cross
border capital flows. Secondly, of the world’s top economies, those of Asia-Pacific, Latin
America, the Middle East and Africa are predicted to rise by about four-fold in size by 2050.
According to HSBC, the dramatic growth of these economies mostly derives from the
demographics and urbanization. Furthermore, it hopes that 18 of the 30 largest economies will
be come from Asia-Pacific, Latin America, the Middle East and Africa.
Relying on these trends and its competitive strengths, HSBC has proposed a two-part
strategy. The first part focuses on developing a business network connecting the world and the
second part is about wealth management and retail with local sale. HSBC’s large presence on
the global along with various services entirely allows the firm to serve clients when they grow
form small businesses into large multi-nationals through its Commercial Banking, Global
Banking and Market Businesses. In terms of wealth management and retail, HSBC will make
investment in full scale retail businesses only in markets where it can gain profitable scale,
particularly in the markets of Hong Kong and the United Kingdom.
2. FINANCIAL RATIOS ANALYSIS OF HSBC
Profitability ratios
The profitability ratios are the most significant ratios in financial analysis to the firm’s
investors. These ratios are useful tools to determine the business's bottom line and its return to
its investors. They are commonly divided into two types: margins and returns. Ratios that
indicate margins represent the company's ability to translate revenues into profits at various
stages of measurement. Ratios that indicate returns reflect the company's ability to measure
the overall efficiency of the firm in generating returns for its shareholders. The table below
shows some important profitability ratios of HSBC in five recent years.
Ratios 2009-12 2010-12 2011-12 2012-12 2013-12
Gross margin - - - - -

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Operating profit
margin
6.74 20.65 22.30 20.71 25.84
Net profit margin 8.51 17.74 21.5 18.58 22.72
ROA (%) 0.28 0.58 0.70 0.57 1.05
ROE (%) 4.93 9.16 10.80 8.37 9.35
Table 1: HSBC’s profitability ratios
Operating profit, also known as earnings before interest and tax (EBIT) is presented
on the firm’s income statement or comprehensive income. The operating profit margin shows
EBIT as a percentage of revenues. The ratio measures overall operating efficiency after taking
into account all the expenses that are unrelated to the direct production progress of the
products or services, such as overheads and administrative expenses. In the case of HSBC,
there is a positive tendency for this ratio from 2009. Although the firm’s ratio has dropped
slightly to 20.71% (2012) from 22.3% (2011), it continues to rise in 2013. In general, HSBC’s
operating profit margin has increased rapidly in the time horizon of five years, from 6.74%
(2009) to 25.84% (2013). The reasons behind these figures have derived from strong growth
in total operating income from US $78,631 million in 2009 to US $83,461 million in 2011
while there is a very slight increase in the operating expense. In 2013, HSBC’s operating
income is at the lowest level in five years; however, its operating expense has decreased
significantly to US $38,556 million from US $42,927 million (2012). As a result, HSBC has
generated a higher figure of operating profit margin than of last year. It is clear that the
figures of HSBC about the operating margin are much higher than these of its big competitor,
Barclays. In fact, Barclays has not achieved optimistic results in operating profit margin in
two recent years. In 2012, the Barclays’s ratio is very bad, falls dramatically to -5.7% from
17.8% in 2011 and subsequently rises slightly to 3.8% in 2013, which shows a big difference
from the HSBC’s ratio.
In terms of net profit margin, it indicates how much of each sales dollar shows up as
net income after deducting all expenses involved. It is the most commonly used tool in simple
financial analysis. In five recent years, this ratio of HSBC has the same trend as the operating
profit margin. It means that overall efficiency of the firm has been improved significantly.
Specifically, in 2013, HSBC obtained a net profit margin of 22.72%, a very good result when
compared with the figure 1.79% of Barclays.

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Figure 1: net profit margin of HSBC and Barclays
The return on assets ratio, also called the return on investment, reflects the net income
produced by total assets during a certain period by comparing net income to the average total
assets of the firm. As primary purpose of the firm’s assets is to generate sales and produce
profits, this ratio is an important measure for the management and investors to evaluate how
well the firm convert its investment in assets into profits. In other words, the ratio indicates
how profitable a company’ assets are. Based on the data on its Annual Report and Accounts
from 2009 to 2013, we can go into conclusion that HSBC’s return on asset is very low, almost
below 1%. However, this ratio has been improved gradually over time. The return on assets
has increased to 1.05% (2013) from 0.28% (2009), which is considered a positive sign for the
firm’s development in the future in spite of the bad effects of the world economic crisis.
Moreover, it is worth noting that this ratio of Barclays has deteriorated year by year. Apart
from 2009, Barclays’s asset return has become very low, almost below 0.3% and at the lowest
level of 0.01% in 2012. These figures proves that HSBC’ asset management is more efficient
than Barclays’s.
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2009 2010 2011 2012 2013
HSBC
Barclays

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Figure 2: ROA of HSBC and Barclays
Perhaps, the return on equity ratio is the most significant of all the financial ratios to
the firm’s investors. ROE represents the return on each dollar the investors have put into the
company. It is one of the most potential criteria for the investors to evaluate whether or not
they should make investment into the company. In five years, it can be seen that the return on
equity of HSBC has risen dramatically to 4.93% (2009) from 9.35% (2013). HSBC achieved
a highest rate of return on its equity in 2011 (10.8%). This result mostly comes from the
firm’s big efforts to control operating expenses and thereby gain higher growth in operating
profit despite slight increase in equity. Specifically, in this period, HSBC’s equity has been
continuously decreasing while its liabilities have been increasing dramatically.
Figure 3: ROA of HSBC and Barclays
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
2009 2010 2011 2012 2013
HSBC
BARCLAYS
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
2009 2010 2011 2012 2013
HSBC
BARCLAYS

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Compared with Barclays, HSBC has shown a better performance and become more
attractive to investors. Regardless of obtaining an extremely high rate of return on equity in
2009 (16.52%-much higher than HSBC’s), Barclays has failed to remain such appealing
figures in years later. Like the return on asset ratio, there is a sudden fall in ROE (at the
lowest level of 0.3% in 2012). Until 2013, Barclays’s return on equity was very low-2.03%.
Efficiency ratios
Efficiency ratios which are also known as activity ratios figure out how efficiently the
businesses utilize their assets to generate income as well as how well they manage their
liabilities. Efficiency ratios commonly take into account the amount of time it takes
companies to collect cash from customer or the time it takes companies to convert inventory
into cash. These ratios are the often used tools for management to improve the efficiency of
asset utilization. There are various efficiency ratios, but the ratios that are regularly paid
attention to include: receivables turnover, inventory turnover, payables turnover, days of sales
outstanding, days of inventory on hand, payable period, cash conversion cycle, fixed asset
turnover and total asset turnover.
Ratios 2009-12 2010-12 2011-12 2012-12 2013-12
Days Sales Outstanding - - - - -
Days Inventory - - - - -
Payables period - - - - -
Cash Conversion Cycle - - - - -
Receivables Turnover - - - - -
Inventory Turnover - - - - -
Fixed Asset Turnover 5.92 6.32 7.46 8.04 6.36
Asset Turnover 0.03 0.03 0.03 0.03 0.05
Table 2: Efficiency ratios of HSBC
The fixed-asset turnover ratio is an efficiency measure to assess a firm's ability to
generate net revenues or income from fixed-asset investments, particularly property, plant and
equipment (PP&E). Based on the figures of fixed asset turnover during five years, it can be
found out that HSBC has utilized its fixed assets efficiently. Fixed asset turnover has

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increased to 8 times (2012) from approximately 6 times (2009). In 2013, this ratio decreased
but still high (about 6.4 times). In addition, this ratio of HSBC is mostly higher than
Barclays’s in each year apart from 2013. Barclays’s fixed asset turnover has dropped to 4.8
times (2012) from about 6 times (2009). Particularly in 2013, this ratio has been improved
significantly (7.3 times-higher than HSBC).
Total asset turnover is a catch-all efficiency ratio that highlights how effective
management is at utilizing both short-term and long-term assets. It can be calculated by
dividing revenues by the average total assets. The results indicate that total assets of HSBC
have not yet been used in an efficient way since its asset turnover is very low and almost
remain unchanged over time. Compared with Barclays, it can be realized that there is no
significant difference in this ratio of both firms. Specifically, the ratio of Barclays has been
always 0.2 times while this of HSBC has been 0.3 times except 2013.
Leverage ratios
Leverage ratios are often used to evaluate the firm’s ability to meet its obligations,
especially in the long term as well as to determine the firm’s financing method. There are a lot
of ratios to reflect the level of leverage but the important factors include liabilities, equity and
debt. These ratios also indicate the level of financial risks that investors have to bear if they
put money into company. There is a fact that leverage ratios tend to find the debt a firm has
on its balance sheet or its financial health. For a shareholder the first claim he has is against
the firm’s assets, hence a firm might not be left with nothing in the event of bankruptcy after
satisfying the debt holders besides the assets. This explains why for investors the leverage
ratios are very important.
Ratios
2009-12 2010-12 2011-12 2012-12 2013-12
HSBC BCS HSBC BCS HSBC BCS HSBC BCS HSBC BCS
Debt/Equity 16.43 22.9 14.8 23 14.4 23.8 13.6 23.8 7.9 19.5
Debt ratio 0.94 0.96 0.94 0.96 0.94 0.96 0.93 0.96 0.89 0.95
Table 3: Leverage ratios of HSBC
Debt to equity ratio is one of the top leverage ratios that all investors have to take into
account when making investment decisions. The debt to equity ratio of HSBC has been very
high for five years. This derives from the fund raising activities of the firm to enable a strong

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capital base for investment. It is also worth noting that this ratio of HSBC tends to decrease
over time. At the end of 2013, its debt to equity ratio felt down 7.9 while this figure was 16.43
in 2009. The tendency shows HSBC’ big efforts in cutting down on the bad debts when it has
to face up with the problems of the economic crisis occurring in 2008. Clearly, this is a
positive sign for investors since risks of the investment are lower due to the lower level of
leverage. In this period, although the debt to equity ratio of Barclays has the same tendency as
HSBC, it is still much higher than HSBC’s. This ratio of HSBC in 2013 was 7.9; meanwhile,
that of Barclays was 19.5.
The debt ratio is defined as the ratio of total debt to total assets, expressed in
percentage, and can be interpreted as the proportion of a company’s assets that are financed
by debt. The higher the ratio is, the greater the firm’s financial risks are. HSBC’s debt ratio
has remained very high and shown a little change for five recent years. Its ratio has been
always above 90%, which means that most of its assets are financed by debts and the firm has
a very high leverage but also bears lots of financial risks. Like HSBC, Barclays has an
extremely debt ratio which is mostly more than 95%.
Investor ratios
Price-earnings ratio, also known as P/E ratio, is an equity valuation multiple. It is a
very useful tool for the investors to decide whether or not they should purchase a share. The
P/E ratio tells investors how much they have to pay for every $1 of earnings they can earn
from the stock. The price to earnings ratio of HSBC’s stock was very high in 2009; however,
this ratio has decreased dramatically for two subsequent years. Specially, at the end of 2012,
its P/E was 8.1-the lowest level in five years. In two recent years, this ratio became better and
it was predicted to continue to increase in the next year since the investors have become more
optimistic about the market. In general, HSBC stock’s P/E is higher than that of Barclays in
each year apart from 2013.
Ratios 2009-12 2010-12 2011-12 2012-12 2013-12
Dividend per share
(USD)
0.34 0.34 0.39 0.41 0.48
Earnings per share
(USD)
0.34 0.73 0.92 0.74 0.84

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P/E 32.2 9.9 8.1 13.8 12.7
Price/Book 1.5 1.2 0.9 1.1 1.1
Table 4: Investor ratios of HSBC

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Beside the price to earnings ratio, the price to book ratio is also an important criterion
for investors to make investment decision in any stocks. This measurement looks at the value
the market places on the book value of a stock. This ratio of HSBC’s stock dropped from 1.5
in 2009 to 0.9 in 2011 and then remained unchanged during two subsequent years (1.1 in
2012 and 2013). Meanwhile, P/E ratio of Barclays is clearly lower than that of HSBC.
Specifically, in 2013, this ratio of Barclays was 0.7 while HSBC’s figure was 1.1, which
means that the markets appear to undervalue Barclays’s stock.
3.
In the calculation of profitability ratios, we can realize that the gross profit margin is
an irrelevant ratio to assess the firm’s ability to generate profits for the investors. Thanks to
this ratio, the investors are able to have a look at cost of goods sold. In other words, it shows
how well a firm can control its cost of inventory and the production progress of its products
and then pass on these costs to its customers. Therefore, this ratio is actually appropriate for
the manufacturing firms, not for service ones like HSBC.
Due to be a firm operating in the banking industry, inventory account does not appear
on the firm’s balance sheet. Therefore, we are not able to evaluate how well the firm utilizes
their assets by using such ratios as inventory turnover and days of inventory on hand. In fact,
these ratios do not work in the case of HSBC. Since we have difficulty in distinguish between
the firm’s current and non-current liabilities if using only its financial statements, we are not
likely to determine the efficiency ratios related to current debts. Moreover, this results in an
issue that we are not able to make assessments about whether or not the firms can meet the
short term obligations through liquidity ratios.
4.
In my opinion, most of the management and financial accounting concepts are very
appropriate for the service firms to apply in their daily accounting works. For instance, in
terms of material concept, according to IFRS Conceptual Framework for financial reporting,
information is material if its omission or misstatement could influence the economic decisions
of users taken on the basis of the financial statements. Therefore, materiality clearly relates to
significance of the transactions or accounts and the value of items that are reflected on the
firm’s financial statement as well as other accounting papers involved. To follow the material
principle, information contained in the financial statements must be complete in all material

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respects in order for them to represent a true and fair view of the entity’s overall business
activities. More specifically, if the firm is planning to close one of its main factories then this
information should be disclosed on the financial statements to ensure the materiality. There is
a fact that this concept, in practice, does work efficiently whether the firm is manufacturing or
service one. Another example is about prudence concept, also known as conservation concept
which is considered as one of the most important principles in accounting. This concept is
understood that revenues and incomes are recognized in the balance sheet only when they are
realized, which means that there is reasonable 'certainty' of realizing them but liabilities or
expenses are included when there is reasonable possibility of incurring them. In other words,
the firms are required to not overestimate the amount of revenues or income as well as not
underestimate the amount of expenses that they may have to pay for. Hence, if a firm which
may be a manufacturer or service provider, estimates the amount of receivables or sales that
they are unable to collect, they are required to make a contra account and simultaneously to
recognize a bad debt expense on the income statement.
In conclusion, financial statement analysis, particularly financial ratios analysis brings
great benefits for both the investors and the management. To the investors, the analysis of
financial ratios, compared with the figures of industry or competitors, will help them to find
out the good investment opportunities as well as to make reasonable decisions. To
management, financial ratios tell them how efficiently the firm manages its assets and thereby
seek out the appropriate solutions to improve its own performance.

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REFERENCE
HSBC HOLDING PLC. (2013) Annual Report and Accounts. [Online]. Available from:
http://www.hsbc.com/~/media/HSBC-com/InvestorRelationsAssets/annual-results-
2013/annual-reports-accounts-2013.pdf [Accessed: 5th September 2014]
http://www.hsbc.com/~/media/HSBC-com/InvestorRelationsAssets/annual-
results/pdfs/hsbc2012ara0.ashx [Accessed: 5th September 2014]
http://www.hsbc.com/~/media/HSBCcom/InvestorRelationsAssets/FinancialResults/2011/hsb
c2011ara0.ashx [Accessed: 5th September 2014]
http://www.bsx.com/AllCompanyDocuments/2010%20Financials/HSBC%20Hldg%20FYE%
2031Dec10.pdf [Accessed: 5th September 2014]
BARCLAYS. (2013) Barclays plc Annual Report. [Online]. Available from:
http://www.barclays.com/content/dam/barclayspublic/docs/InvestorRelations/AnnualReports/
AR2013/2013-barclays-annual-report-final.pdf [Accessed: 5th September 2014]
BARCLAYS. (2012) Barclays plc Annual Report. [Online]. Available from: http://www.rns-
pdf.londonstockexchange.com/rns/4481N_-2013-9-6.pdf [Accessed: 5th September 2014]
BARCLAYS. (2010) Barclays plc Annual Report. [Online]. Available from:
https://bib.kuleuven.be/files/ebib/jaarverslagen/Barclays_2010.pdf [Accessed: 5th September
2014]

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