Finance: HBSC Ratio Analysis
HSBC RATIO ANALYSIS
Net interest margin (NIM) ratio
The NIM ratio is important in determining the difference between the interest revenue
generated by financial organizations and the interest expense paid out to lenders relative to the
interest acquired from assets. In 2015, an average NIM of 3.03% was recorded by United States’
banks in the first quarter (HSBC.com, 2016). The NIM for US banks in the first quarter of 2005
Net Interest Margin= $689m -9.59bn/93.3bn
HSBC Net Interest Margin 2015-2016 = 9.5%
In the first quarter of 2010, a peak of 3.84% was reached. This implies that in the 21 st
century, a typical NIM ratio for US banks has an average of between 3 to 4%. HSBC NIM of
9.5% shows the strength of the bank and suitable for investment. HSBC Net Interest Margin is
HSBC RATIO ANALYSIS 2
favorable at 9.5%. The industry is performing poorly but it stands out to provide the best returns
to its shareholders.
Cost/capital to income ratio
The cost or capital to income ratio is obtained by dividing the operating costs (fixed costs
and administrative costs, such as property expenses and salaries however it does not include bad
debts written off in the financial period) by operating income for the season. The ratio provides
investors with a good perspective of how efficiently the firm is managed by those assigned with
responsibilities. The lower the cost to income ratio, the more profitable the firm or bank is
supposed to be.
Operating cost= $7950m
HSBC Cost to Income ratio 2015-2016=53.21%
HSBC capital to income ratio is average at around 53.21%. The managers are effectively
utilizing the capital but almost spending more than necessary to generate income for the
business. The ratio can be adjusted by ensuring more assets with less expenditure or costs are
utilized and not expensive assets that bring minimal income (HSBC.com, 2016).
Bad debt ratio
The formula involves taking bad debts ratio for the period added to accruals for doubtful
debts in the period. Then less any recovery made on old and doubtful debts for the period divided
by the turnover for the season (HSBC.com, 2016).
HSBC RATIO ANALYSIS 3
Bad debt ratio for HSBC 2015-2016= 91.80%
The ratio for bad debts for HSBC is extremely high at 91% for all the regions in which it
holds its operations. This is not appropriate as most of their revenues are written off hence
minimal profits. Measures need to be taken to ensure proper debt collection procedures are in
place and in return it will boost 2016 annual profits.
Capital adequacy ratio
Two forms of capita are measured, these are, the tier one capital which can stand losses
without a financial institution being asked to stop trading and the tier two capital that generates
losses in the case of closing down operations (HSBC.com, 2016). Therefore, tier two capital
offers a smaller extent protection to the depositors. Tier 1 (Core capital) consists of retained
earnings, minority interest, qualifying non-cumulative perpetual stock and intangible assets, and
common stock and surplus. Tier 2 capitals constitutes related non-controlling interests, allowable
collective impairment allowance, qualifying subordinated loan capital and unrealized gains from
fair valuation of equity instruments put as available for sale.
HSBC RATIO ANALYSIS 4
HSBC Capital adequacy ratio 2015-2016 is 139.6% which is favorable for the operations
of the business. The higher capital adequacy ratio help HSBC in competing in strong economies
hence the bank can provide huge lending to both private individuals and governments. HSBC
capital adequacy ratio proves its strength and does provides its investors the certainty of its
continued operations in the foreseeable future.
HSBC.com. (2016). HSBC Holdings plc Annual Report and Accounts 2015.