Introduction
Nowadays, banking segment is highly competitive, and the performance of the bank is strongly dependent on its financial stability. HSBC is one of the well-known banks with an international focus that covers an extended array of services including retail, commercial, and global banking (HSBC, 2017). In turn, Wells Fargo is the bank that operates in Canada, the USA, and Puerto Rico by providing services such as insurance, loans, investment, retirement, and wealth management (Wells Fargo, 2017). Its services are similar to the ones offered by HSBC, but its geographical coverage is rather limited, and this aspect can be discovered as a potential cause of differences in revenues of the companies. Consequently, the primary goal of this paper is to understand these aspects with the help of financial ratios.
Balance Sheet and Income Statement
In the first place, it is of paramount importance to evaluate Balance Sheet and Income Statement of each bank. For example, HSBC portrays that profits are relatively high with the values of $3,466 million in 2016, and this matter implies that company’s finances remain stable (HSBC, 2016). Thus, at the same time, Income Statement shows that the enterprise has different sources of revenue, and it assists it in ensuring its assets. As for Balance Sheet of HSBC, the company has very high values in assets. The total amount of assets covered liabilities and exceeded them by $182,578 million in 2016 (HSBC, 2016). They are represented in the form of cash, trading assets, derivatives, loans, and financial investments.
When referring to Wells Fargo, its Balance Sheet reflects that the company’s assets also consist out of different aspects including cash, funds, loans, goodwill, and derivative assets. Its total value accounted for $1,930,115 million in 2016 (Wells Fargo, 2016). It assists the company in staying financially stable and being one of the most attractive players in the banking industry, as it can always turn assets into monetary form. As for equity, it was $199,581 million in 2016 while the liabilities were $1,729,618 million in 2016 (Wells Fargo, 2016). This matter shows that the company’s assets exceed its liabilities, as, otherwise, assets deficiency may take place and question business continuity. Speaking of the Income Statement, Wells Fargo wisely divides it into interest income and expense and non-interest income and expense, and this aspect eases the overall calculations of financial ratios. Finally, its net income accounted for $22,045 million in 2016 (Wells Fargo, 2016). A combination of these factors implies that the company is financially stable.
Evaluating Performance of Each Bank
Apart from that, it is critical to describe the performance of each bank, and presents the table with all calculations for HBSC. Thus, it was not possible to calculate ALL to Total Loans and Non-Performing Loans ratio due to the lack of financial information. In this case, positive Net Interest Margin (2.52% in 2016) proved that the funds were invested wisely while this margin experienced positive dynamics implying a well-developed decision-making mechanism. Meanwhile, Non-Interest Margin mostly accounted for zero and remained neutral, but ROE and ROA were negative (-2% and -0.11% respectively) in 2016. Nonetheless, it did not mean that company’s performance was insufficient, and these negative numbers were mostly incurred due to being capital-intensive. In turn, an equity multiplier was high (13.54), and it stated that a high percentage of assets was financed by debt. Overall, apart from having some negative values, HSBC is still a profitable company, and some of them incur due to its active investment in assets that can be transformed into cash if necessary.
As for Wells Fargo, Net Interest Margin (2.47%), ROE (11%), and ROA (1.14%) for 2016 imply that the company spends its funds effectively. As for EM, its values tend to be high (9.67 in 2017), and Non-Interest Margin is relatively low and negative. Similarly to HSBC, these negative values do not necessarily show that Wells Fargo experiences financial losses, but it mostly reflects its capital structure and investment initiatives. Based on Dupont analysis, Net Profit Margins are key defines of ROEs for both companies, and it is a positive sign for investors.
A Breakdown of Return on Equity
Thus, to understand the concept of Return on Equity, it is necessary to break it down by using Dupont analysis. In this instance, Dupont analysis consisted out of Net Profit Margin*Asset Turnover Ratio*Equity Multiplier. When evaluating HSBC, the overall ROE decreased due to low values of Net Profit Margin. For instance, it was 3% in 2015 with ROE of 1%, and -6% in 2016 with negative ROE. Consequently, the company has to consider accumulating its net income while also decreasing the overall leverage. As for Wells Fargo, its ROE is not dependent on EM since its values remain relatively the same (9.23 on average) while it seems to have a positive correlation with Profit Margin since its increase causes a subsequent rise in ROE.
Comparison
Thus, to understand the financial performance of the banks, it is of high importance to compare their ratios of the recent year (2016). In this case, some of the ratios are rather similar. For example, Net and Non-Interest Margins have analogous values that are approximately 2.4% and -1%. This matter states that the effects of using certain financial strategies are similar. As for Equity Multiplier, it tends to be high for both companies, and this aspect exists due to their capital-intensive initiatives while the majority of assets are financed by using debt, as it is not possible to generate enough resources by relying on equity financing scheme solely. Thus, it seems that Wells Fargo shows positive results in ROE (11%), and this factor implies that the company has a high return on equity. Overall, HSBC and Wells Fargo have similarities in financial performance, but HSBC has some lower numbers due to its high focus on capital-intensive initiatives that derive from debt.
When reviewing Wells Fargo’s performance over five years, it was relatively stable. Its Net Interest Margin only slightly decreased from 3% in 2012 to 2.47% in 2016 while Non-Interest Margin also dropped from 0% in 2015 to -1% in 2016. As for other values such as ROE, ROA, and EM continued to be almost the same with the average values of 12.2%, 1.31%, and 9.23 respectively. A combination of these factors implies that the company was stable, but it might also mean that Wells Fargo did not heavily invest in its capital and pursued expansion strategy over past five years.
Conclusion
In the end, the analysis and comparison of two banks revealed that having negative values did not necessarily imply a destructive performance and lack of financial stability, as it might also incur due to a heavy focus on investments while being capital-intensive. With the help of Dupont analysis, it was possible to see that both companies’ ROEs were highly dependent on their Net Profit Margins, and it is a positive sign for investors. HSBC and Wells Fargo can be defined as financially stable, but it is necessary to revise their investment portfolios to generate higher Profit Margins. Overall, Wells Fargo can be considered as a profitable company with sufficient financial health.
References
HSBC. Annual report and accounts 2016. Web.
HSBC. (2017). About HSBC. Web.
MarketWatch. (2016a). HSBC Holdings PLC ADR. Web.
MarketWatch. (2016b). Wells Fargo & Co. Web.
Wells Fargo. (2016). Our commitment. Web.
Wells Fargo. (2017). Personal. Web.