financial management strategy final

8/7/2019 financial management strategy final

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Financial Management Strategies of HSBC

Introduction

Financial management is a specialized functional field, dealing with the management of

finance right from estimation and procurement till its effective utilization in the business.

Financial Management is the process of managing the financial resources, including

accounting and financial reporting, budgeting, collecting accounts receivable, risk

management, and insurance for a business.

Importance of Financial Management

Financial management entails planning for the future of a person or a business enterprise to

ensure a positive cash flow. It includes the administration and maintenance of financial

assets. Besides, financial management covers the process of identifying and managing risks.

The primary concern of financial management is the assessment rather than the techniques of

financial quantification. A financial manager looks at the available data to judge theperformance of enterprises. Managerial finance is an interdisciplinary approach that borrows

from both managerial accounting and corporate finance. Some experts refer to financial

management as the science of money management.

The primary usage of this term is in the world of financing business activities. However,

financial management is important at all levels of human existence because every entity

needs to look after its finances

It is an area looked after by the finance manager who deals with the following issues:

i) Which new proposals for employing capital should be accepted by the firm?

ii) How much working capital will be needed to support the firm's operations?

iii) Where should the firm go to raise long term capital and how much will it cost?iv) Should the firm declare dividend on its equity capital and if so, how large a

dividend should be declared?

v) What steps can be taken to increase the value of firm's equity capital?

The above issues are solved by taking three major decisions (1) Investment decision (2)

Financing decision (3) Dividend decision. As objective of the Financial Management is to

maximize the value (i.e. wealth of shareholders) of the firm should strive for an optimal

combination of the there interrelated decisions solved jointly .

Decisions taken by financial managers

The basic message behind the statement Financial Management is concerned with the

solutions of the three major decisions a firm must make the investment decision, the

financing decision and the dividend decision " is self evident.

1) Investment Decisions :These involve the allocation of resources among various types of assets. What portion of

the firm's fund should be invested in various current assets such as cash, marketable


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Fi i t tr t i s

securities and recei able and what portion in fi ed assets, such as inventories and plant and

equipment The assets mi affects the amount ofincome the firm can earn. For example, a

manufactureris in business to earn income with fixed assets such as machinery and not

with current assets. However, placing too high a percentage ofits assets in new building or

new machinery may leave the firm short of cash to meet an unexpected need or exploit

sudden opportunity.

2) Fi a i g i iItis the next step in financial management for executing the investment decisions once

taken a look atthe balance sheet of a company indicates thatit obtains finance from

shareholders ordinary, preference, debenture holders, orlong - term loans from the

institutions, bank and other sources. There are variations in the provisions contained in

preference shares, debentures, loans papers etc. Thus financing decisions i.e. the financing

mix of capital structure. Efforts are made to obtain an optimal financing mix for a

particular company.

3) Di id d Deci iThe third major decision of financial managementis the decision relating to the

dividend policy. Two alternatives are available in dealing with the profits of a firm;

they can be retained in the business. One significant factoris thatthe dividends pay

out ratio i.e. what proportion of net profits should be paid outto the shareholders. The

decision will depend upon the preference ofthe shareholders and investment

opportunities available within the firm. The second major aspect ofthe dividend

decision is the factors determining dividend policy of a firm in practice Allthe above

decision of finance are inter - related with one another.

Criti

l O

rati

A

tiviti

i Fi ancial Management:

ManagingaBudget

ManagingaCash Flow

CreditandCollections

BudgetDeviation

Analysis


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Fi i t tr t i s

Allapplicati ns available in the financialstatement

Applications that are used rapidly in any organi ation can be discussed underthe three

decision criteria of financial management.

Investmentdecisi n:

Underinvestment decision these applications are available

Capi al Budgeti g or Capital Investment

CapitalInvestment DecisionsorCapitalBudgetinginvolves companys long term investment

decision. Itincludes evaluation ofthe firms expenditure decisions thatinvolve current

outlays but are likely to produce benefits or returns over a long period oftime.

CapitalBudgeting is the process of evaluating and selecting long-term investments in fixed orcapital assets that are consistent with the firms goal of maximi ing owners wealth.

Applications

Features or Characteristics of Capital InvestmentDecision

Purchaseof fixed

assets

echaniz

ation ofproductio

n method

Selectionfrom

alternative

equipmen

tsIntroduction ofnew

products

Expansion of

business

oderniza

tionand

replaceme

nt


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Long term investment decision (future profitability of firm).

Returns or benefits are expected over number of years

Investment involves huge amount of cash outflow (determines the destiny of the

firm)

Investment decision is generally irreversible (once made can not be changed)

Relatively high degree of risk

Relatively long time period between the initial outlay and the anticipated return

Techniques of C it l Bu etin

The techniques of capital budgeting are divided into two broad groups

1) Non discounted cash flow techniques i.e. techniques that do not consider time value of

money as such do not discount the future cash flows.

Non-DCF techniques include the following:

i) Payback Period Method

ii) Average Accounting Return or Accounting Rate of Return

2)Discount cash flow (DCF) techniques i.e. techniques that do not consider time value of

money as such do not discount the future cash flows

DCF techniques include the following:

i) Net Present Value (NPV)

ii) Internal Rate of Return (IRR)

iii) Profitability Index (PI) or Benefit-Cost Ratio (BCR)

iv) Discounted Payback Period Method

The P yb ck Perio Metho

One of the most popular alternatives to NPV is payback. Payback answers the question How

long does it take the project to pay back its initial investment? The payback period rule for

making investment decisions is simple. A particular cut-off date, say two years, selected.


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Payback Period = number of years to recover initial costs.

The Discounte P yb ck Perio Metho :

Aware of the pitfalls of payback, some decision makers use a variant called the discountedpayback period method. Under this approach, we find discount the cash flows. Then we ask

how long it takes for the discounted cash flows to equal the initial investment.

Although discounted payback looks a bit like NPV, it is just a poor compromise between the

payback method and NPV.

The Aver e Accountin Return Metho :

Another attractive, but fatally flawed, approach to financial decision-making is the average

accounting return. The average accounting return is the average project earnings after taxes

and depreciation, divided by the average book value of the investment during its life.

To compute the average accounting return (ARR) on the project, we divide the average net

income by the average amount invested. This can be done in three steps.

1) Determining Average Net Income

2) Determining Average Investment

3) Determining AAR

So, AAR =

If the firm had a targeted accounting rate of return greater than AAR, the project would be

rejected, and if its targeted return were less than AAR, it would be accepted.

NPV

NPV returns the net value of the cash flows represented in today's dollars. Because of the

time value of money, receiving a dollar today is worth more than receiving a dollar

tomorrow. NPV calculates that present value for each of the series of cash flows and adds

them together to get the net present value.

Net Present Value (NPV) = Total PV of future CIs - Initial Investment

PV ofCash Inflows PV ofCash Outflows

Minimum Acceptance Criteria: Accept if NPV > 0

We would choose the highest NPV


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Fi i t tr t i s

IRR

IRRis the discount rate that sets NPV to zero orthe rate of return available from investing in

a project.

We can use the following equation to solve IRR

NPV=

= 0

We would acceptifthe IRRexceeds the required return and select alternative with the

highestIRR.

When all negative cash flows occur earlierin the sequence than all positive cash flows, or

when a project s sequence of cash flows contains only one negative cash flow, IRRreturns a

unique value. Most capitalinvestment projects begin with a large negative cash flow (the up-

frontinvestment followed by a sequence of positive cash flows, and, therefore, have a

unique IRR. However, sometimes there can be more than one acceptable IRR, or sometimes

none at all.

Profita ility Index

The profitability index is defined as:

The rule says to accept projects that have:

Among mutually exclusive projects, acceptthe project with the highestindex which is greater

than one. There are no problems in using this rule forindependent projects.


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Fi i t tr t i s

which is just another way to express net present value:

Riskand Return

Expected Rate of Return:

The expected rate of return for any assetis the weighted average rate of each return using

probability of each rate or actual rate under each circumstance as the weight. Thatis the rate

of return expected to be realized from an investment. We denote expected rate of return as0

If an investmentis made in the security of any individual firm ( firm A) then return of single

asset:

0

0

Where,

Ki actual return ofindividual asset under each event.

Pi probability of happening actual event.

Expected Return on Portfolio:

If any investorinvests in more than one securities then itis called portfolio investment. The

expected return from that portfolio is called expected return on portfolio. The objective to

have portfolio investmentis to diversify risk and minimize risk.

0

0

Where,

W= weight ofindividual assetin totalinvestment

Risk:


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Its a hazard or exposure to loss or injury. So, it refers to the chance that some unfavorable

event will occur.

Investment Risk:

Uncertainty to the variability of return associated with a given asset i.e. the probability of

actual return less than the expected return. The higher the chance of negative return, the

riskier is the investment.

In an uncertain world, investors cannot exactly or precisely tell what rate of return an

investment will yield. They can quantify the rate of return by imposing probability

distribution of the possible rate of return.

Investment risk is also analyzed by attaching probability to each possible rate of return. So

the wider the probability distribution of return, the riskier is the investment. Risk of an

particular investment is denoted as W. So the formula is-

W 0

Portfolio Risk:

Portfolio risk occurs for portfolio investments. The formula for portfolio risk (two assets) is-

Where,

W= weight of each asset in portfolio

R1,2 = coefficient of sorrelations between asset 1 & 2.

Risk-Return Rel tionshi :

An investments risk is measured by the variability if its possible return. Greater variability in

returns indicates greater risk. Investors are by nature risk averse. So they require higher

returns to take on greater risks. That is return is a factor of risk [ return=].To show the relationship between risk-return this formula will be helpful

0

By nature risks are classified by unsystematic risk and systematic risk.


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Bet coefficient (me surin system tic risk):

Because systematic risk is the crucial determinant of an assets expected return, some way of

measuring the level of systematic risk for different investments is needed. The specific

measure that is used for this purpose is called beta coefficient. A beta coefficient tells how

much systematic risk a particular asset has relative to an average asset. An average asset has a

beta of 1.0 relative to itself.

C it l Asset Pricin Mo el (CAPM):

A model used to determine the required return on an asset, which is based on the proposition

that any assets return should be equal the risk free rate and risk premium. The formula is

0

Here,

0= expected rate of return on a specific investment (j)

risk free rate required rate of return on a portfolio consisting of all stocks, market portfolio return. market risk premium beta coefficient of the jth stockThe CAPM shows that the expected return for a particular asset depends on three things-

1. The time value of money: As measured by the risk free rate2. The reward for bearing systematic risk: As measured by the market risk premium3. The amount of systematic risk: As measured by the

C sh flow st tement

Cash flow is one of the most important pieces of financial information that can be gleaned

from financial statements. By cash flow we simply mean he difference between the number

of taka that came in and the number of taka that went out.

C sh flow i entity

The cash flow identity says that the cash flow from the firms assets is equal to the cash flow

paid to the suppliers of capital ( creditors & shareholders ) to the firm.

C sh flow from ssets = c sh flow to cre itors + c sh flow to stockhol ers


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Fi i t tr t i s

Cash flow to creditorsis interest paid less net new borrowing; cash flow to stockholders is

dividends paid less net new equity raised.

Cash flow to stockholders

Cash flow to stockholders is dividends paid out y a firm less net new equity raised. To get

new equity raised, we need to look atthe common stock and paid-in surplus account. Thisaccounttells us how much stockthe company has sold.

FinancialDecisi n:

Application available under financial decision is

Capitalstructure

In finance, capital structure refers to the way a corporation finances its assets through some

combination of equity, debt, or hybrid securities. A firm's capital structure is then the

composition or 'structure' ofits liabilities.

Debt comes in the form of bond issues orlong-term notes payable, while equity is classified

as common stock, preferred stock or retained earnings. Short-term debt such as working

capital requirements is also considered to be part ofthe capital structure.

There are three types of agency costs which can help explain the relevance of capital

structure.

Target Capital StructureThe target (optimal) capital structure is simply defined as the mix of debt, preferred stock and

common equity that will optimize the company's stock price. As a company raises newcapitalit will focus on maintaining this target (optimal) capital structure.

Itis importantto note is that while the target structure is the capital structure that will

optimize the company's stock price, itis also the capital structure that minimizes the

company's weighted-average cost of capital (WACC).

Business riskand financial risk

Asset

substitution effect

Underinv

estmentproblem

Free cash

flow


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Fi i t tr t i s

Business risk:the risk associated with projections of a firms future returns on assets(ROA)

or reurns on equity(ROE) ifthe firm uses no debt.

Business risk varies from one industry to another and also among firms in a given industry.

Further business risk can change overtime. Business risk depends on a number of factors, the

more important of which include the followings-

y Sales variability(volume and price)y Input price variabilityy Ability to adjust output prices for changes in input pricesy The extentto which costs are fixed: operating leverage

Operatingleverage:if a high percentage of a firms operating costs are fixed and hence do

not decline when demand falls off, this increases the companys business risk. This factoris

called operating leverage.

Financial risk: the portion of stock-holders risk, over and above basic business risk, that

results from the mannerin which the firm is financed.

Financialleverage:the extentto which fixed income securities such as debt, preferred stocks

are used in a firms capital structure.

Degree ofleverage

Leverage is created when a firm has a fixed costs associated either with its sales and

production operations or with the types of financing it uses. These two types ofleverage,

called operating leverage and financialleverage are interrelated.

Degree ofOperating Leverage - DOL

A type ofleverage ratio summarizing the effect a particular amount of operating leverage hason a company's earnings before interest and taxes (EBIT). Operating leverage involves using

a large proportion of fixed costs to variable costs in the operations ofthe firm. The formula isas follows:

We can measure it by

tfixedtiablesales

tiablesales

coscosvar

cosvar


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both debt and equity capital, this overall cost of capital will be a mixture of the returns

needed to compensate its creditors and those needed to compensate its stockholders.

The cost of equity: The return that equity investors require on their investment in the firm.

There is two approach to determining the cost of equity: The dividend growth model

approach and security market line (SML) approach.

The ivi en rowth mo el ro ch: The easiest way to estimate the cost of equity

capital is to use the dividend growth model. It can be written as:

Po=

=

Where Do is the dividend just paid and D1 is the next periods projected dividend.And RE (E

stands for equity) for the required return on the stock.

Now we can rearrange this to solve for RE as follows: RE

Because, RE is the return that the shareholders require on the stock, it can be interpreted as

the firms cost of equity capital.

The costs of ebt: The cost of debt is the return that the firms creditors demand on new

borrowing. The cost of debt is simply the interest rate the firm must pay on new borrowing

and we can observe interest rates in the financial markets.

In perpetual debt,

Here, C=coupon rate, Bo= Current bond price, f=Floatation cost per bond, tc= Corporate tax.

The cost of referre stock: Determining the cost of preferred stock is quite

straightforward. Preferred stock has a fixed dividend paid every period forever. So, a share of

preferred stock is essentially a perpetuity. The cost of preferred stock RP, is thus:

Where D is the fixed dividend and Po is the current price per share of the preferred stock.

Notice that the cost of preferred stock is simply equal to the dividend yield on the preferred

stock.

The wei hte ver e cost of c it l:

We will use the symbol E (equity) to stand for the market value of the firms equity. We

calculate this by taking the number of shares outstanding and multiplying it by the price per


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share. Similarly we will use the symbol D (debt) to stand for the market value of the firms

debt. For long term debt, we calculate this by multiplying the market price of a single bond

by the number of bonds outstanding. If there are multiple bonds issues this calculation of D

for each and then add up the results. For short term debt, the book values and market values

should be somewhat similar. Finally we will use the symbol V (for value) to stand for the

combined market value of the debt and equity:

If we divide both sides by V, we can calculate the percentages of the total capital represented

by the debt and equity:

These percentages can be interpreted just like portfolio weights and they are often called the

capital structure weights.

Taxes and weighted average cost of capital: Business firms are always concerned with aftertax cash flows. If we are determining the discount rate appropriate to those cash flows, then

the discount rate also needs to be expressed on an after-tax basis. The interest paid by a

corporation is deductible for tax purpose. Payments to stockholders such as dividends are not.

This means that the government pays some of the interest. Thus in determining an after tax

discount rate , we need to distinguish between the pretax and after tax cost of debt. To

calculate the firms overall cost of capital ,we multiply the capital structure weights by the

associated costs and add up them up. The total is the weighted average cost of capital

(WACC).

This WACC has a very straightforward interpretation. It is the overall return the firm must

earn on its existing assets to maintain the value of its stock. It is also the required return on

any investments by the firm that have essentially the same risk as existing operations.

Di idend decision

Divi en Policy

Company profile

In Bangladesh, the HSBC Group's history dates back to 1996 when The Hongkong and

Shanghai Banking Corporation (HSBC) Ltd opened its first branch. Today, the HSBC Group

offers a comprehensive range of financial services in Bangladesh including commercial


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banking, consumer banking, payments and cash management, trade services, treasury, andcustody & clearing.

Gener l Back roun

y Opened first Bangladesh branch in December 1996y Network of 13 offices: 12 branches, 1 sub-branch and an offshore banking unity 922 employees as of June 2010

Key business areas:

y Personal Financial Servicesy Commercial bankingy Corporate and institutional bankingy Global Markets

Contact Details

The Hon kon an Shan hai Bankin Cor oration Limite

Dhaka Main Office:

Anchor Tower, 108 Bir Uttam C. R. Dutta Road, Dhaka 1205, Bangladesh

Tel: (880-2) 9660536-43Facsimile: (880-2) 9660554

Web: www.hsbc.com.bd

Acti ities of company

Personal Bankin : With 12 branches and 1 sub-branch, 33 ATMs and 8 Customer

Service Centres in Dhaka, Chittagong and Sylhet and Business Development offices

in 7 Export Processing Zones. HSBC offers a full range of personal banking and

related financial services including current and savings accounts, personal loans,

time deposits, travelers cheques and inward and outward remittances.

Commercial bankin : Commercial banking is a traditional strength of the HSBC

Group. In Bangladesh, HSBC is a popular choice for customers because of the

Group's international reach and a wide range of financial services and products.

HSBC has an offshore banking unit (OBU) licence and can therefore also provide

foreign currency financing to qualifying customers. In addition, there are 7 business

development centres in the country's major 7 EPZ areas including Dhaka,

Chittagong, Adamjee, Mongla, Comilla, Karnaphuli and Ishwardi.

Cor orate an institutional bankin : Corporate and institutional banking provides

dedicated relationship management services to HSBC's clients in major corporate

and financial institutions. The Bank's focus is on fostering long-term relationship

based on its international connections and extensive knowledge of Asia and Asian

business.


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HSBCnet

HSBCnet, a proprietary computer-based software package, provides

customer with an instant link into the HSBC Group's international computer

network, allowing them to perform transactions and obtain a diverse range of up-to-

date information 24 hours a day, 365 days a year.

Trade & Su ly Chains: Trade finance and related services are a long-standing

core business of HSBC based on the depth and spread of its corporate customerbase, highly automated trade processing systems and extensive geographic reach.

Payments and cash management: HSBC is one of the leading providers of

payments and related services to financial institutions, corporate and personal

customers in Bangladesh. Underpinned by the Group's extensive network of offices

and capabilities, payments and cash management assists companies in efficient cash

management through the provision of payments, collections, liquidity and account

services.

Custody and clearing: HSBC is a leader in custody and clearing in the Asia Pacific

region and the Middle East. The network uses advanced securities clearing system,

which was developed in-house and provides round-the-clock online real-time access

to clients' securities portfolios.

Investment bankingand markets: This division brings together the advisory,

financing, asset management, equity securities, private banking, trustee, private

equity, and treasury and capital market activities of the HSBC Groups.

Treasury and capital markets: HSBC's treasury and capital markets business ranks

among the largest in the world and serves the requirements of supranational, central

banks, international and local corporations, institutional investors, and financial

institutions as well as other market participants.

Amanah: HSBC Amanah is the global Islamic financial services division of the

HSBC Group, responsible for the development of Islamic financial products for

distribution to customers of the HSBC Group. It was established in 1998 and is now

based in Dubai, UAE with regional offices in the UK, USA, Saudi Arabia,

Malaysia, Indonesia, Bangladesh, Singapore and Brunei. HSBC Bangladesh

currently offers Amanah Current Account and Amanah Import Finance.

Financial Statement Analysis- HSBC

Applications related to investment decisions

NPV is widely used for project evaluation. However, in the top team meeting, a positive NPV is not

the only indicator to accept a project, so IRR is also need to be considered. So that the management

and investors will get idea that how much the return would be. But MIRR should also be considered

as it gives more clearer idea. So it basically varies from project to project & meeting to meeting. It

uses both the techniques. It basically prepares all sorts of information so that top management can

take decision easily.


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1. Longt in st nt:Investment in long term assets includes investments held to maturity (HTM) for differenttime period, held for trading securities (HFT) for different time period, prize bonds and

Government securities (HTM, HFT, prize bond). HSBC normally invests in risk free

securities. It invested in shares ofCentral Depository Bangladesh. Other than investments it

also has investment in loans and advances.

Investments

Year-1 Taka Year-2 Taka Change

2005 2,407,064900 2006 3,782,311,201 57.13%

2006 3,782,311,201 2007 2,459,646,041 -34.97%

2007 2,459,646,041 2008 10,341,763,923 320.46%2008 10,341,763,923 2009 18,390,089,048 77.82%

Loans and Advances

Year-1 Taka Year-2 Taka Change

2005 21,436,487,527 2006 26,105,280,882 21.78%

2006 26,105,280,882 2007 33,807,700,861 29.51%

2007 33,807,700,861 2008 34,302,744,271 1.46%

2008 34,302,744,271 2009 31,668,316,582 -7.68%

From the above two graphs it can be seen that in 2006 investment in govt. and other sectors

increased by 57.13%. But in 2007 the investment decreased by 34.97%. After that in 2008 the

investment increased drastically to 320.46%. This increase was mostly the result of

investment in government sectors. After that in 2009 investment increased by 77.82%. It is

clear that though investment was decreased in year 2007, but HSBC managed to increase

their investments very well.

Loans and advances increased by 21.78% in 2006 compared to 2005. After that it increased

by 29.51% in 2007. In 2008 their loans and advances activities ceased and loans and

advances increased by only 1.46%. In 2009 their loans and advances decreased by 7.68%

compared to 2008.

The changes above presented can be demonstrated more precisely in a chart.


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Fi i t tr t i s

The returns on these investments are also significant. The totalincome from investmentto the

totalinvestmentin a particular year gives the return. The return on investment for HSBC can

be shown in a table.

Return on Investment

Year-1 Return (%) Year-2 Return (%) Change

2005 4.37 2006 5.62 77.83

2006 5.62 2007 15.85% 182.00%

2007 15.85% 2008 4.06% -74.39%

2008 4.06% 2009 4.86% 19.72%

Return on investmentindicates the earnings thatthe organization can gain by investing in a

particular project orinvestment. HSBC most ofthe cases investin treasury bills, govt. bills,

govt. bonds, and shares. But most ofthe cases itinvests in risk free securities.

Return on investment for HSBC was changed by more than 100%in year2007 butitreduced by 74%in 2008. In 2009itincreased again by 19.72%.

2. Workin! Capital Mana! ement:(cash flow analysis)

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

2006 2007 2008 2009

Investments

Loansand Advances


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Fi i t tr t i s

Cash flow from operatin"

activities

Year-1 Taka Year-2 Taka Change(%)

2005 (55228379) 2006 1727414849 3227.77%

2006 1727414849 2007 61724202 -96.43%

2007 61724202 2008 8497000891 13666.08%

2008 8497000891 2009 10287280194 21.07%

Cash flow frominvestingactivities


2005 (759291007) 2006 (736187377) -3.04%

2006 (736

187377

)2007

(598227580

)-18.74%

2007 (598227580) 2008 (2778331931) 364.43%

2008 (2778331931) 2009 (5121813830) 84.35%

Cash flow from financingactivities


2005 1162050000 2006 (368381578) -131.70%

2006 (36838

1578

)2007

--100.00%

2007 - 2008 (794927381) 0.00%

2008 (794927381) 2009 (1014083340) 27.57%

4000.00%

6000.00%

8000.00%

10000.00%

12000.00%

14000.00%

16000.00%

operatingactivities

investingactivities

financingactivities


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Applications related to Financial decisions

Capital structure

As HSBC does not use any long term debt, it uses only equity portion to finance its projects.

That means its debt equity ratio is 0% debt and 100% equity.

Total equity increased in 2006 by 23.27%, in 2007 by 33.96%, in 2008 by 17.66% and in

2009 by 18.22%.

As HSBC is a multinational corporation and it does not have any debt, the only cost of capitalis its cost of equity which is 13%. Every year 13% of the total profit transferred to its head

office except in 2008.

Impact on leverage

The leverage influences the financial decision, so operating and financial leverage is

important. As HSBC uses no long term debt, there is no financial leverage. The degree of

operating leverage is

Degree of operating Leverage:

Gross Profit

Devide:Earnings before interestand tax

Impact on turnover

For a bank most of the income comes from its interest income. So it is a very important

segment of earning and making profit. That is why in banking sector interest income is

considered as their turnover.

Net income and their changes from year to year are stated below

year Leverage

2005 1.51058

2006 1.442822

2007 1.446025

2008 1.459422

2009 1.348488


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Fi i t tr t i s

Year-1 Taka Year-2 Taka Changein %

2005 1,370,390,923 2006 1,656,207,876 20.86%

2006 1,656,207,876 2007 2,177,241,180 31.46%

2007 2,177,241,180 2008 2,711,661,614 24.55%2008 2,711,661,614 2009 2,379,688,100 -12.24%

As HSBCis a banking institution, almost50% ofits income comes from interestincome. So

ifit wants to improve its operations in Bangladesh, it has to increase loans and getinterest

income. So change in netinterestincome can affectits decision a lot.

From 2005to 2006 netinterestincome of HSBCincreased by 20.86%. In year2006to 2007

netinterestincome increased by 31.46%. That means their netinterestincome increased at a

increasing rate from year2005to 2007. In year2008interestincome increased by 24.55%.

Butin year2009 netinterestincome decreased by 12.24%.

Changes in the leverage and turnover can be shown in a chart.

Applications relatedto dividenddecision

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2006 2007 2008 2009

interestincome

operating le#erage


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financial management strategy final

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