Analysis of banks’ performance

Generally considered as the biggest financial crisis since the Great Depression, the Global fiscal Crisis (SGF) was fol wretcheded by the European sovereign debt crisis, which heavily affected nigh European nations in early 2010. This report will analyses the electric shock of the crisis on the transaction and put on the line photograph of two major commits Alpha Bank (ABA) and Deutsche Bank (DB).. Alpha Bank, the second largest Greece desireing company, locates in oneness of the fin Euro-zone nations which suffered the most(prenominal) sideline the global crisis.At the same time, Deutsche Bank (DB) is a German avow which operates in twain investment and commercial edgeing sectors. In particular, this report will study the addition and financial obligation structure, the performance as well as the mart and off-balance sheet luck. Also, the annual performance of 2008 to 2010 will be analyses in parliamentary law of battle to fully capture the impact of the financi al crisis on these selected deposes. 1. 1 Asset, Liability Structure and danger Exposures 1. 1. abridgment of Lloyd Banking Group ( cast away) Table 1 Capital Raising Activities (Liability Structure) Figure 1 Figure 2 The jargon operates in both commercial and investment sections which contents in detail, wholesale, amends and investment as its briny business activities. Deposit is the principal(prenominal) source of brothing, given that the analogyal ways system above 50%during these 6 days. Generally speaking, Deposits ar much reliable compargon to other majuscule raising activities.Noticing that eventide during 2008 to 2010, the Deposits were lightly way out by SGF, which means retail deposits argon less volatile and less bare-assed to shocks. In addition, the cuss was voted by Readers Digest the most trusted patois of Britain in the 2008. drop off as a function of commercial bank, a large and versified customer base kept the bank practiced during the SGF and European debt crisis. Wholesale is the second major part of their business. Figure 2 has shown that, Debt securities take around 20% during 2007 to 2012, which implies that, put away ski lifts not enough funds from deposits.However, wholesale is medium to channelises in the market. As the wholesale depositors are able to transfer the fund if others bank provides better offer to them. LAG have to undertake high draw and quarter risk. LAG introduced new pricing management of saving products from 2011 in frame to minimize withdraw risk. The benefit for this new plan is increase deposit balances and reducing the proportion of wholesale. Further to a greater extent(prenominal), because of LB is a change bank in British, restitution division is the third mainly bodily process for the bank to posit fund.However, insurance may exposures liquidity risk, if constitutionholder who is seeking to bills in their financial claims immediately or some run-of-the-mine accident occurs, the bank has to get huge fund to turn over for them. According to Lags annual report, the liabilities of insurance remains around 13% from 2007 to 2012, which took up high proportion of amount liabilities. However, since the flood happened in late 2007 and indeed the bank had to pay the claims, the bank had a highest percentage of insurance obligation compare to other 5 divisions.Besides, overimputable to SGF and European debt crisis during 2009 to 2012, higher unemployment rates shrink the Auks economy, the proportion of liability of insurance policy too affected. Finally, basing on the Figure 2 we open fire find that, derivative financial insurance only has exquisite proportion in this structure, ascribable to LAG is able to posit enough fund from deposit, wholesale and insurance sections. Table 2 Portfolio Asset Allocation (Asset Structure) Figure 3 As a largest commercial bank in K, the main source of investment of LAG is Loans, which take up over half proportion of its amount of money summation.This type of assets was allocated to households, firms and public sectors. According the annual report of the bank, personal mortgages play an important affair in loan. However, these assets are exposed to character reference risk and default risk. Therefore, LB engages reverse repurchase agreements for col later(prenominal)alized loans in order to reduce risks. The second main source of investment of LAG is Trading and other financial Asset at fair tax by means of scratch or loss.Comparing to loans, debt securities are more raw(a) and exposed to the credit risk. However, government and corporate securities are taking larger proportion in add up Trading and other financial Asset at fair assess through bread or loss. As these types of securities are more stable and reliable, this credit risk is mostly mitigated. 1. 1. 2 Analysts of stack away genus Paris ( hive away) Table 3 Capital Raising Activities (Liability Structure) Figure 4 BIN Paris is a public bank which participates in retail and investment sectors.According to the chart shown above, the main source of Buns chief city embossed by raiding derivative instruments in financial liabilities at fair value through mesh or loss from 2007 and took a Jumped up approximately 25% in 2008 referable to Global Financial Crisis(SGF). Generally speaking, derivatives trading are carrying higher risks than other syllabus of liabilities, such as credit risk, market risk, currency risk and interest rate risk. Because they are sensitive to the market changes and lenders are less trusty to the bank, exactly singly this source of funds buns generate high returns to make the bank take profitable.However, the liability structure of BIN was not constantly unchanged. In the following near two years 2009 and 2010, the main component shifted to deposits imputable to SGF which brought an unfavorable economy ceding lynchpin all over the world. This strategy of the bank intende d to reduce the risk exposures via decreasing trading of risky financial instruments and more relying on deposits to raise capital in order keep the bank in a safer base during the worse recession time.The capital raising structure changed back again from 2011, noticing that unlike 2007 and 2008, the proportions of deposits and financial liabilities at fair value through profit or loss became approximately close amounts. However, derivatives trading are motionlessness playing an important role in Buns capital raising activities. Another capacious segment of liability structure is debt securities, which mainly content in government bonds, given that the amounts of turn upd had been change magnitude from ?157,mom to ?211 ,mom from 2008 to 2009.Due to the bank changed the major capital raising body process to deposits in 2009 and 2010, meanwhile it had increased issue in debt securities in order to raise more efficient funds. This behavior can be explained that the bank was worry ing about only relied on deposits as not enough and trying to diversified risks via shifting liquidity risk (from deposits) to default and credit risk. Table 4 Portfolio Asset Allocation (Asset Structure) Figure 5 The main source of investment of BIN is financial assets at fair value through profit or loss, which accounted more than 50% of total assets through 2007 to 2008.Again, this type of assets mainly consists in trading of derivative instruments, repurchase agreements subsequentlywards and other securities transactions. In practice, derivatives trading can generate higher returns but will carry more risks because they should eave to meet what the customers demand and generally they are sensitive to the change of market. Therefore, the risk exposures not only content credit risk, but in addition rank the bank faces interest rate risk and currency risk. L The second considerable segment of investment is loans which mainly comprised of loans to customers.Noticing that the amo unts started increase from 2009, which accounted up to 40% of total assets (compared to 2008 was only 25%), the portions are getting close to the main component, trading of financial assets. Throwing back to SGF and debt crisis, increased in loans and decreased in trading risky assets might be considered as a strategy for BIN to diversify its some(prenominal) risks as we mentioned previously but this time default risk would as well be raised. However, derivatives trading are still playing an important role over these six years.In addition, available-for-sale financial assets have been significantly increased in 2009, the following year after SGF. It major contents bonds particularly in government bonds. The main reason could be government bonds are the safest investment way, however, default risk may be considered in this expression. . 1. 3 Differences in asset, liability structure and risk exposure Comparing the asset and liability structure betwixt LAG and BIN, the significant difference is the main source of the capital raising activities and asset allocations in the midst of these two banks are different.LAG is much more relying on customers deposits, a safer way to raise funds which allows LAG has a reliable capital base and confident level to go through the SGF in 2008 also the European debt crisis in 2010. In contrast, BIN changed its capital raising structure twice from changing the portions between derivatives raiding to raise funds on deposits in response to the impacts of SGF and debt crisis. Additionally, the core functions of these two banks are different.LAG is rivet on customers deposits and making loans to them. However, BIN is much more concentrating on derivatives trading in both asset and liability parts (even though it shifted the main component of capital raising activity from financial liabilities to deposits between 2009 and 2010 but derivatives transactions still played an important role during those two years. ) Overall, BIN is m uch more sensitive to the economy and surely it carries more risks than LAG. . 1. Impacts of SGF and Debt Crisis on Asset and Liability Structure Lloyd Banking Group (LAG) For the asset structure, repayable to the financial hardships that many households and businesses are experiencing, as a result of the recent economic settle in the UK. LAG committed to help customers in these challenging times, which reflective of our relationship-based approach. In Retail segment, we maintained rigid level of mortgage alter to new lending, and helped thousands of customers to buy new homes. As shown in the plot above, we can see that the total asset has increased room IEEE,mom to El ,027,mom in two years time.An increasing of 57. 55% reflects that with a 61. 25% increase in loans and advances to customers. There are strong levels of customer lending flexth in commercial banks, corporate markets and mortgages. For the Liability side, the percentage of total liability has greater changed in 2009, which given that increased up to 56. 64%. After the SGF, the total liabilities still stand at a higher level in the following years as long as the European debt crisis occurred in 2010. Deposit, debt securities in issue and the liabilities of insurance are he three main components be affected.As LAG is the largest bank in I-J, it provides more confident for their customers. Even The bank experienced SGF and European debt crisis, deposit still claim positive effect for the group. Compare 2008 to sasss deposits can be found that, there is 51. 46% shapely increasing during 2008-2009, due to more customers lose confident for others investment companies, also getting less plenty put the money for investment during such abstemiousen economic period. That is the reason explains that why does deposit endlessly grow during this period as en of the good reputation banks in British.Table 5 Besides, according to the table shown above, the issue of debt securities have greater increas ed due to the medium name notes issues changed, which implies that even LAG has sufficient fund to overcome the challenge during SGF, but they still restrained funds through issuing medium term notes in order to provide more fund to help their customers, Furthermore, the higher unemployment rate in UK due to SGF and European debt crisis, more people were getting to claim their insurance compensations, therefore the liability of insurance policy had also been affected.According to the balance sheet has shown, the liability of insurance policy has 60. 8% increased from 2008 to 2009. Also from 2009 to 2012, the liability of insurance still maintain in higher level. Overall, as LAG is reliable and stable bank in I-J, the main structure of asset and liability did not changed by the Crisis. BIN Paris (BIN) In regards of Buns capital raising structure had been changed twice during 2007 to 2012. The eldest change was in the year after 2008 SGF, the bank shifted its major capital raising a ctivity from trading on derivatives (financial liabilities at fair value wrought profit or loss) to deposits.Considering the increased in trading financial instruments, which was the core activity to raise both total liabilities and total assets to archives high respectively ?2,016,mom and ?2,075,mom in 2008. It leaded the bank with higher risk exposures as well as the leverage level had been increased due to derivatives trading is sensitive to the market and risky. Therefore the bank changed the major component of liability structure to deposits in 2009 in order to reduce risking tried to keep the bank in a safer base during the worse recession time.At the meantime, the bank increased issue in debt securities that attempted to raise more efficient funds in case of relying on deposits was not enough. In 2011 after the European debt crisis, the bank changed its core capital raising activity back to trading on financial instruments again. As an investment bank is a function of BIN Pa ris, the second changed of its capital structure indicated that the bank already passed the hard time and everything went back on the pay off track. The major component of the asset structure was financial assets at fair value through profit or loss from 2007 to 2012.In 2009 it had been decreased from 60% to 40%,but the bank increased the portions loaned to Global Financial Crisis,and this class of asset kept stable in the next following 3 years. However, trading on derivatives is still playing an important role overall. In addition, according to the increase in issue of debt securities especially in bonds had been increased in its liability structure, therefore, the available-for-sale financial assets had a greater Jumped up during the same year and gradually went down later on. Overall, the impacts of SGF on BIN were far worse than the European debt crisis. 2 PERFORMANCE Analysts 1. 2. 1 Return on Equity ( roe) Definition See footnoted Figure 6 According to the chart, the ROE o f LAG deceased seriously from 2007. In 2010 to 2012, it appeared a little withholding signal but still display a declining pattern over these six years. During 2007 to 2008 both of the sack income and total equity were decreased some, therefore, ROE decreased. However, even though the net income only had a little increased in 2009, but due to the total equity greatly Jumped up, the ROE decreased further. After 2010, ROE already deceased to history low given at 5. 4%, because of the negative net income as well as the total equity still stayed at higher level. The falling net income was primary to fewer increased in total direct income but greater increased in the disablement cost. The main reason could be the bank need to increase impairment cost to recover credit risk during SGF and European debt crisis. On the other hand, the size of total equity getting larger, this fact implied that, LAG was seeking more capital fund its financial activities in order to go through the poor economic period.Therefore, the symmetry shown the bank experienced unfavorable profitability during those two recession periods Regarding to BIN Paris, the Return on Equity ratio dramatically decreased from 19. 6% to 6. 6% in 2008. It gradually recovered back in the next following years after SGF but it slightly dropped gain after the 2010 European debt crisis. Due to the banks main source of finance is making money via trading derivatives, this pattern of changing exactly responds to the market conditions due to financial and debt crisis, also explains that the bank is very sensitive to the market.However, compare to the regenerates drop off in SGF, the impact of debt crisis was not significant through looking at the chart. Compare these two patterns of ROE LAG is present a declining figure which indicates that the bank had a deeper impact by the financial and the debt crisis. On the other hand, the effect on BIN was significant only shown at the SGF period, therefore, BIN seems to has a better performance overall. 1. 2. echo ON ASSET ( hollo) Definition see footnoted Figure 7 In term of Labs performance can be shown that, the greater decline in roar consists in declining of net income and total assets. The central bank cut the interest rate again and again in this recession period that encouraged more people to borrow money from bank to fund their mortgages or businesses. According to the balance sheet, the total assets precipitously increased from IEEE,mom to El ,027,mom in 2008 to 2009, and then kept staying at a higher level in the following years.However, as we have analyses in the ROE part, net income decreased dramatically to negative percentages, due to total operating(a) income did not change as lower interest rate, but the impairment cost has greater increasing in order to recover the credit risk. As a result, the net income becomes negative. Similarly, ROAR was deceasing dramatically during 2009-2011. According to the ROAR ratios of BIN, it h as shown a similar pattern of trend as ROE. The ROAR sagaciously dropped 0. 32% in 2008 and recovered back in the next two years but slightly went down after the debt crisis.Considering that the net income of BIN in 2008 was incredibly dropped down over 60% from ?8,311 millions to ?3,millions. No matter how the total assets had a greater increased in the same year, the fluctuation of net income was the most important reason determinate the hanged in ROAR. Again, due to the bank is sensitive to the change of market parameters, we can clearly see that the worse market condition due to SGF brought a negative impact to the bank and it was far more worse than the time during the European debt crisis.In conclusion, both of two banks were decreasing in ROAR during the weak economic period in 2008. The main reason was both of them had greater increased in total asset but the net income stayed at a relatively lower level. In the following years, BIN started to recover back and maintained in a stable level, UT LAG was continuously decreasing to negative due to total asset was maintain in higher level in debt crisis period. 1. 2. PROFIT MARGIN (PM) Definition see footnoted Figure 8 According to the graph above, LAG had strong profitability in 2007 but it declined to 22. 43% due to SGF then slightly recovered in 2009. However, as the European debt crisis developed in late 2009, the PM continuing dropped out to the lowest, shown at -59. 62% in 2011. The reason is during this weaken economic period, interest and similar income decreasing as lower interest rate, and impairment increasing. This unfavorable decreasing during debt crisis period implies that LAG undertake loss.While the PM drives the ROAR to decline in this period. The European debt crisis shrink the bank much more than during the SGF. Comparing to LAG, BIN Paris keeps its ability steady to pay expenses and generates stable net income from 2007 2012. According to the main capital raising activity of BIN is t rading on derivatives and other financial instruments, even though the amounts of financial liabilities and assets at fair value through profit or loss were Jumped up during the year of SGF 2008.However, the net income and total operating income were historically low through 2007 to 2012, the main reason was due to both the net gains on trading financial instruments and on available-for-sale financial assets had been dramatically decreased, respectively from ?7,mom to ?2,mom and ?2,mom to ?mom, which means, even though the trading went up, but net gains were limited by the smite market condition during Global Financial Crisis. Overall, BIN is good at lordly on its expenses and net income generation compare to the performance of LAG. . 2. 4 ASSET UTILIZATION (AU) Definition see footnoted Figure 9 The AU ratio of LAG fluctuated seriously from 2007 to 2012. Due to given the negative impact of SGF, the AU dropped continuously to 0. 71% in 2009. As we mentioned previously, the central bank cut the interest rate to encourage people to take loan from the bank. Therefore, the total asset stayed at a higher level from 2009 to 2012. However, according to low interest rate and also some of customers were default to pay back, the total operating income did not change much.From 2009 to 2010, AU starts to recover to higher level. Unfortunately, the AU decreased sharply again from . 17% to 0. 47% due to the European debt crisis. The AU still maintained at lower level during 2010 to 2012, because the pound was depreciated in this weak economic period, LAG faced loss in their oversea investment property and securities, consequently, the total operating income decreased to about E,mom during the debt crisis. LAG provided a declining pattern over 2007 to 2012, but again, the impact of debt crisis to the bank was greater than the impact of SGF.In term of Buns AU, it had been dropped down to 0. 46% in regards to the history low total operating income, given only ?3,mom in 2008. It recovered quickly afterwards and went back to 0. 63% in 2010. The AU ratio fluctuated by the European debt crisis again in later 2011 and 2012, however, as we mentioned above in the PM part, the Global Financial Crisis affected the bank much more than the effect on debt crisis. Comparing LAG and Buns Alls, both of them had greater effects by SGF but the impact of debt crisis was not significant on BIN. . 2. 5 EQUITY MULTIPLIER (ME) Definition see footnoted Figure 10 In term of Lags ME, The figure increased nearly half of ME from 28. 4 to 44. 96 in 2008. The higher ME indicated that LAG used more debt to finance its assets which in turn increased the leverage level and risk exposure during SGF 2008. In order to reduce its leverage level, ME quickly dropped down to 23. 29 in 2009 even lower than in 2007 and gradually went down in the following years, noticed that the ME only shown at 20. 69 in 2012.As LAG is one of the reliable and stable banks in British, even though they experien ced SGF and European debt crisis, they are able to recover quickly. Regarding to the ME of BIN, it had been increased to 35. In 2008 but had a greater decreased of 10 in the following year and still gradually went down in continuous years. Considering BIN changed its liability structure twice respectively in 2009 and 2011, in which shifted the major capital raising activity between derivatives trading and deposits.BIN attempted the first change in order to minimize the risks and reduce the leverage level due to the high ME in the previous year. In 2011, after the European debt crisis, the bank again changed its major capital raising activity back to trading on financial instruments instead of relying on posits. This change had been reduced its ME ratio continuously which given that only around 20 in 2012 (the lowest from 2007 to 2012) It explains that BIN is good at controlling its leverage level and managing risks very well via adjusting the Banks structure. In conclusion, LAG and BIN have similar performance from 2007 to 2012.The ME of these two banks both had a greater Jump up in 2008 and respectively increased their risk exposures and the leverage ratios. However, the EMUS dropped quickly in later years due to both banks managed the risk via reduce their debt to elicit its assets or maintaining capital structure in order to reduce risks and leverage level. 1. 2. 6 Market Indicators look at Prices LAG Regarding LAG, the share price stays at EYE per share in 2007 to late 2008. However, due to the SGF happen at the end of 2008, the share price decreasing dramatically to around E per shares.Furthermore, the European debt crisis also happen flow the SGF, the share price decreasing further around E per share. swinish on the data shows that, over these six years, the share price of LAG is decreasing around 89. 1 BIN The highest share price of BIN Paris was up to ?94. 7 per share during mid-2007, it collapsed in later 2008 and down to history low ?21. 39 per sh are in early 2009. However, the share price went back on track quickly in the same year, given that volatile at the range around ?50 per share until mid-2011.According to the share price pattern of BIN, the impact of SGF on the share price was dramatically huge, but the bank effectively reacted on the massive change of market, it adjusted its capital structure in 2009, such as reduced the risk exposure via decreasing the risky derivatives trading and relying more on deposits, meanwhile increased the issue of bet securities particularly in bonds, which indicated to generate more efficient cash flows in case of the deposits was not enough to rely on. Project 2 2. 2 Market Risk 2. . 1 Introduction of market risk Market risk is defined as a risk for those investors to experience economic losses of value from the affected market performances, whether its treatable or not. It is the risk that cannot be diversified. somewhat of risk factors could be observed, such as interest rates, excha nge rates there are also some factors may not be observed such as correlations which are based on statistical analysis. It includes interest rate risks, currency risks, and equity risks, see footnotes.