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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)

Risk Management and Performance Analysis of

HSBC Group: Case Study (115-087-1)
Bayes Business School, MSc Banking & International Finance, Group 7: Sihao Huang, Han Lu, Pruthvi Telikicherla, Zhuorui Zhang

Abstract: Banks are critical players in the financial system and serve as financial
intermediation and linkers between individuals, companies, and financial institutions in
the financial market. Evaluating banks’ performance is an essential part of regulatory and
supervisory. HSBC is one of the leading international banks in the world. As one of the
Global Systemically Important Banks (G-SIBs) identified by the Basel Committee on
Banking Supervision, HSBC is required to meet higher bank performance and risk
management expectations. This research briefly demonstrates the risk management and
performance analysis of HSBC Holding plc. and focuses mainly on the CAMELS rating
and peer analysis of HSBC. The strengths and weaknesses of HSBC are identified based
on the above results. This case study also discusses the current situation of HSBC and
illustrates business strategies that HSBC will possibly follow.

1 INTRODUCTION
A Brief History of HSBC
After decades of expansions, the HSBC Group, formed by the Hongkong and Shanghai Banking
Corporation, has been operating for over 150 years. The Hongkong and Shanghai Banking
Corporation was founded in Hong Kong and dated back to March 1865, followed by branches opened
in Shanghai and London in the same year. Until the 1980s, HSBC had been a major Asian bank, and
its transformation into a global bank began with the Marine Midland Bank acquisition. From 1980
to 1992, globalisation was the top trend in the global economy, during which period HSBC developed
and became an essential international bank. The late 20th century witnessed the foundation of HSBC
Holding plc. and its headquarters moving from Hongkong to London. HSBC increasingly expanded
through acquisitions with banks in the global market, adopting a unified HSBC brand worldwide. In
2002, HSBC Group raised the slogan “The World’s Local Bank” and continued to acquire banks from
Mexico, the USA, Argentina, Poland, the UK, China, India, and the Middle East in years to come. In
the first decade of the 21st century, HSBC dominated the UK banking sector and successfully became
one member of the first Global-Systemically Important Banks identified by FSB1.

However, the development of HSBC as a global bank was not always favourable, in which problems
generally showed up during the 2007-2009 global financial crisis. In 2007, HSBC wrote down
subprime mortgage securities by $10.5 billion, becoming the first international bank to report losses
due to the subprime mortgage crisis. Fortunately, the HSBC group did not go through state
assistance and could continue reporting pre-tax profits throughout the crisis. Despite its survival,
HSBC faced a series of government failures in the post-crisis stage, decreasing profits and cutting
business lines. In 2011, HSBC sold 195 branches in New York and sold the general insurance
business. From 2012 to 2013, HSBC involved in the “anti-money laundering controls” scandal, paid
more than £1.2 billion in fines and entered a five-year deferred prosecution agreement. During the
same period, HSBC was caught in a mis-selling scandal and set aside hundreds of millions to
recompense customers. The following exchange rate rigging event further reflected that HSBC

1 The Lion Wakes: A Modern History of HSBC (2015).

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)
would subsequently receive dissatisfaction from regulators and investors2.

HSBC reported a tough year in 2014, with increasing operating costs leading to lower profits than
the market expected, and the return on equity ratio fell from 9.2% in 2013 to 7.3% in 2014. From
2015 to 2016, HSBC cut its Brazil and India business after years of disappointing results. HSBC also
shrunk its investment bank by a third because of slow economic growth and tighter global risk
regulation. From 2017 to 2018, revenues and profits increased, which attenuated the former
depression. The profit before tax decreased by 69% for the first half of 2020 as the coronavirus crisis
seriously impacted businesses. In 2021, HSBC closed more branches because of the pandemic and
economic recession. However, the reported profit before tax of $18.9bn increased by 115% in 2021
because of recovery from the pandemic3. Although the progression of HSBC is not favourable, HSBC
has a stable and irreplaceable position in the global financial market and is still a member of G-SIBs.

Evolution of HSBC’s Business Model

Bank business model (BBM) is a complex concept about how banks “do business” and “create
valuation.” BBM is identified through various aspects, such as activities, funding sources, ownership
structures, objectives, and financial and risk implications. Typical indicators are balance sheet
indicators, ownership, income statement performance, riskiness, and regulation4. Based on these
indicators, most banks fall into these BBM types: focused retail bank, diversified retail bank,
wholesale bank, and investment bank. Banks with different business models counter various kinds
of risks. Retail banks, for example, absorbing deposits and providing loans, are more resilient to
market changes. Wholesale banks are more active in trading between banks, whilst investment
banks have higher leverage, trading assets and derivatives, which are riskier and have more exposure
to market risk and credit risk. When the economic environment and global market change, banks
may shift to other business models that are more acclimated to their strategies and the market5.

HSBC was founded and developed as a retail bank in the early stage. After the acquisition in the
1990s, HSBC had several wholesale financial businesses. These business lines were divided into two
streams: treasury and capital markets and investment banking, which combined to become
Investment Banking and Markets (IB&M). The asset management business and private banking
group were founded during this period. HSBC had been a good retailer before 2001, but the
reorganisation from 2001 to 2002 made it outstanding. HSBC clarified its strategies that emphasise
personal financial services through diversified streams, segment customers through flexible pricing,
and reposition the branch network to reduce costs. These aspects set the tune of HSBC as a
diversified retail bank6.

According to the research “Banking Business Models Monitor 2019: Europe” released by CEPS,
HSBC was a diversified retail bank from 2005 to 2017. Based on this result, we explored HSBC’s
annual financial reports and accountings from 2007 to 2021 to understand its business model
further. In general, the entire business model of HSBC has not changed during these years: a
diversified retail bank business model. Nevertheless, HSBC’s business model and strategies have

2 Adam B. (2019) UK Banks and the Lessons of the Great Financial Crisis, Palgrave Macmillan Cham
3 2014-2021 Annual reports of HSBC
4 Ayadi, R. (2019) ‘Banking Business Models’, Palgrave Macmillan Studies in Banking and Financial Institutions
5 Ayadi, R., Cucinelli, D. and D.W.P. (2019) Banking Business Models Monitor 2019: Europe. Centre for European Policy Studies.
6 The Lion Wakes: A Modern History of HSBC (2015).

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)
been adjusted according to the market7. There are three primary changes:

First, the keywords they stressed in their business strategy changed from “universal banking” to
“diversified business model.” In 2013, HSBC announced that their success lay in their network and
universal banking model for the first time. In 2017, HSBC emphasised that they “operate a balanced
universal banking model across wholesale and retail businesses.” However, the word “universal
banking model” was replaced by “maintain a strong capital, funding, and liquidity position with a
diversified business model” in the later reports.

Second, there were several reorganisations of HSBC’s global business lines. In 2011, HSBC
transferred its country-based businesses into an integrated. In the same year, previously known as
Personal Financial Services (‘PFS’) was reformed into Retailing Banking and Wealth Management
(RBWM), and RBWM was still used until 2020. From 2011 to 2019, HSBC’s global business units
were RBWM, Commercial Banking (CMB), Global Banking (GBM), and Global Private Banking
(GPB) until RBWM and GPB were combined to form Wealth and Personal Banking (WPB) in 2020.
HSBC conducted these reorganisations to reduce costs and improve management efficiency.

Third, there are apparent changes in business lines from 2013 to 2021. RBWM in 2013 made up
26.9% of profit-before-tax and increased to 41% in 2019, whilst the proportion of CMB decreased
from 41.8% in 2014 to 27% in 2021. Retailing business is taking more weight during these years.
Besides, in 2019, HSBC changed how it calculated global businesses from adjusted profit tax to
adjusted revenue, implying a drop in profit. It is the same for 2020 and 2021, which both show
unpleasant profits and poor performance in earnings. This point is coherent with the analysis later
that the performance of HSBC is not satisfactory.

In summary, the focus of HSBC’s business model is more on retail banking than in the past,
indicating the volatility of the market and HSBC’s increasingly conservative risk appetite. Banks that
expand into more non-traditional activities bear more risks than those in more traditional sectors.
Retailers have almost the best robustness regardless of the turbulent market and changing global
economic environment.

CAMELS Rating System and Bank Performance

Barker and Holdsworth founded CAMEL rating system in 1993. The Federal Financial Institution
Examination Council first used it in 1979 as a supervisory system in the US. In 1990, CAMEL was
changed to CAMELS with an extra letter” S”, owing to the importance of market risk sensitivity.
After several years of practice, CAMELS has become a concise tool for regulators to review different
aspects of financial institutions, especially banks. It helps to analyse banks’ qualitative and
quantitative performance and provides supervisors and investors with crucial ratios based on
reliable information sources8.

CAMELS consists of capital adequacy (C), asset quality (A), management efficiency (M), earnings
quality (E), liquidity position (L), and sensitivity to market risk(S). CAMELS works on a scale of 1-
5: ‘1’ stands for the best, and ‘5’ stands for the worst rating of each factor. Researchers define the

7 2007-2021 Annual Reports of HSBC

8 Babu, M.R. and Dr.M., A.K. (2017) ‘Adequacy of CAMELS Rating System in Measuring the Efficiency of Banking Industry: A Retrospect’,
International Journal of Research in Arts and Science, 3(Special Issue, 2017), pp. 03–06.

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)
weights of each factor and combine these factors to calculate a final score. Scores below 2.4 are
considered satisfactory, and scores above 3.5 are considered deficient and have serious weaknesses.

Capital adequacy is one of the fundamental indicators to balance bank position when bearing
exposure to market risk, credit risk, and operational risk. A sufficient capital ratio is a sign of healthy
finance and protects stakeholders. There are various ratios to measure capital adequacies, such as
Capital-to-Risk Weighted Assets Ratio (CRAR), Tier 1 Ratio, Total Equity/Total Assets (TE/TA), and
Leverage Ratio (Tier 1 Capital/Total Exposure). The case study focuses mainly on the capital-to-
RWA ratio.

Asset quality reflects the quality of investment policies and practices of financial institutions. Banks
with higher asset quality are operating better and have fewer bad debts and credit risk exposures
compared with banks of lower asset quality. One popular parameter for measuring asset quality is
Non-Performing-Loans/Total Assets (NPL/TA) because high NPL concentrations are a warning
signal of asset exposures, especially to commercial banks.

Management efficiency is another critical parameter of CAMELS rating model that illustrates banks’
operational performance. Sound management ensures that the organisation reacts quickly and
precisely to the changing market and environment. Cost/Income ratio (CI) and Profit Per Employee
(PPE) are commonly used sub-parameters to measure the management efficiency of banks.

Earnings quality is the ability that a financial institution makes use of its assets and takes profits
from its operating activities. Generally, good earnings quality is the pre-request that a bank will
successfully support its present and future operations. It also builds a stable and adequate capital
base for further development. Net Interest Income to Assets (ROA), Net Interest Income to Equity
(ROE), and Net Income Margin (NIM) are widely used to assess banks and are key performance
indicators even in their annual reports9.

Liquidity measures the ability that a bank fulfils its financial obligations. Basel III introduced two
key ratios to ensure banks manage liquidity carefully. Liquidity Coverage Ratio (LCR) is the ratio of
high-quality liquid assets to net cash outflows over 30 days, and it allows the bank to convert assets
into cash to meet liquidity needs under a stress scenario. Net Stable Funding Ratio (NSFR) focuses
on liquidity management for one year, requiring long-term financial resources must exceed long-
term commitments. These two factors reflect financial institutions’ short-term and long-term
liquidity and will be further discussed.

Sensitivity to market risk is the degree to which market movements adversely affect a bank’s
earnings and financial situation. For banks, interest rate risk is the primary market risk they face.
Non-Interest Income/Total Assets Ratio and Total Deposits/Total Loans Ratio are used to measure
the sensitivity to the market risk of the bank10.

9 Rahman, Md.Z. and Islam, Md.S. (2017) ‘Use of CAMEL Rating Framework: A Comparative Performance Evaluation of Selected
Bangladeshi Private Commercial Banks’, International Journal of Economics and Finance, 10(1), p. 120.
10 Rahman, Md.Z. and Islam, Md.S. (2017) ‘Use of CAMEL Rating Framework: A Comparative Performance Evaluation of Selected
Bangladeshi Private Commercial Banks’, International Journal of Economics and Finance, 10(1), p. 120.

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)

2 CAMELS RATING OF HSBC in 2014

The profit-before-tax of HSBC was reported to have decreased by 17% in 2014 from the prior year,
which was principally due to reduced business disposal and reclassification gains and the adverse
impact of other critical items, such as penalties, settlements, UK customer redress, and associated
contingencies, on revenue and costs. However, this reduction in profits was enough to attract
management’s attention. From a prudential supervisory philosophy, the CAMELS model was
introduced to assess the quality of the bank’s operations.

Regarding Basel III requirements, the ratio of Common Equity Tier 1 Capital divided by RWA should
be at least 4.5%. The Tier 1 capital ratio divided by RWA should be more than 6.0%. The total capital
ratio divided by RWA should be at least 8.0%. In addition, capital buffers are introduced by Basel
III. The capital conservation buffer (CCB) is a capital buffer to strengthen banks’ defences against
the build-up of systemic vulnerabilities, amounting to 2.5% of a bank’s total exposures. The
Countercyclical Capital Buffer (CCyB) aims to counter pro-cyclicality in the financial system, which
strengthens banks’ resilience and contributes to a healthy financial system, and mandates that banks
have an extra capital cushion to withstand losses. CCyB is initiated during a credit cycle upturn. In
2014, the UK economy was in a recovery phase. In this period, credit availability is typically limited.
The likelihood of banks having trouble again is lower than average, with the CCyB rate set as 0%.
Basel III sets special requirements for G-SIBs to maintain an additional capital buffer to reduce the
likelihood and impact of its failure. The size of the capital buffer depends on its systemic importance.
HSBC was rated as a level 3 systemic risk bank in 2014, and Basel III set an additional capital
requirement of 2.5% for HSBC (Table S1).

Calculation
CAMEL Parameters Sub-Parameters Ratio
Amount($Bn)
Capital adequacy Common Equity Tier 1 Capital/ RWA 133.20 / 1219.77 10.92%
Tier 1 / RWA (133.20 + 19.54) / 1219.77 12.52%
Total Capital / RWA 190.73 /1219.77 15.64%
Assets quality NPLs / Total Assets 29.33 / 2634.14 1.11%
Allowance for Loans Losses / NPLs 3.85 / 29.33 13.13%
Highly Liquidity Financial Assets / Total Assets 162.59 / 2634.14 6.00%
C/I Ratio=Non-interest Expenses / (Net Interest Income
Management Quality 41.25 / 74.59 55.30%
+Non-Interest Income)
Earnings ROA = Net Income / Total Assets 14.71 / 2634.14 0.56%
NIM = Net Interest Income / Earning Assets 34.71 / 2394.04 1.45%
ROE = Net income / Total Equity 14.71 / 199.45 7.38%
Liquidity Core Deposit /Total Assets (77.423 +1350.64)/2634.14 54.21%
LCR = Highly Liquid Assets / Expected Cash Outflows in
(130+4.92+27.67) / 2.35 69.18
30-days

NSFR=Available stable funding/Required stable funding - 114

Sensitivity to Market
Non-interest Income / Total Assets (74.59 - 34.71) / 2634.14 1.51%
Risk
Total Deposits / Total Loans 1350.64 / (112.14 + 974.66) 124.28%
Table 1 CAMELS ratios of HSBC in 2014

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)
The key financial ratios11 of HSBC are shown in Table 1. These important capital ratios indicate
that HSBC can withstand asset risk in line with regulatory requirements. HSBC can ensure that risky
assets will not be overstretched, which protects the interests of depositors and other creditors. In
addition, a higher capital ratio will increase confidence in HSBC and reduce the likelihood of a bank
run. HSBC’s NPL ratio is only 1.11%, well below the industry average, compared to G-SIBs’ NPL ratio
of 3.51% in 2014. The proportion of highly liquid assets was 6%, meaning that HSBC has immediate
solvency. HSBC’s asset quality is relatively high based on its excellent credit quality and appropriate
diversification. HSBC’s C/I ratio is 55.3%, meaning that the management system identifies profit
opportunities and generates revenue for the bank with reasonable risks. HSBC’s ROE of 7.38% is
smaller than the 12-15% set by Basel III. HSBC has a net profit margin of 1.45%, resulting in the
ability of its deposit and loan business to drive profitability not being well utilised. HSBC has
struggled to expand the size of the bank and increase capital through retained earnings.

LCR and NSFR are financial ratios used to express liquidity. Basel III sets a minimum target of 100%
for these two ratios. HSBC’s LCR is 69.18, and its NSFR is 11412 (Table S2 illustrates cash flows,
and Table S3 shows the calculation of NSFR). The ratios imply that HSBC has significant liquid
assets with substantial short-term and long-term liquidity to cope with unexpected withdrawal
requirements. The ratio of non-interest income divided by the total assets of HSBC is 1.51%, which
indicates that HSBC is in a good financial position to ensure stable income through service charges
even in times of interest rate fluctuations. The ratio of total deposits to total loans of HSBC is
124.28%, which implies that the bank will rely on its deposits to lend to customers without any
external borrowing and has a relatively good risk tolerance.

Based on the above qualitative and quantitative analysis, HSBC has good capital adequacy, assets
quality, management quality, liquidity, sensitivity to market risk, and unsatisfactory earnings. As
HSBC’s primary business is commercial banking, its main assets and liabilities are loans and
deposits. Bank liquidity is the primary source of lending activity to support banks. The bank’s
liquidity is essential and is therefore given a weighting of 20%. The mismatching between the assets
side and liabilities side will create credit risk. Assets quality and management quality are the main
sources to control credit risk. Asset quality and management quality are each given a weighting of
20%. HSBC is in G-SIBs and has a role in financial stability. A 20% weight is given to capital
adequacy. It is not objective to judge a bank’s performance based on low earnings alone, so the
weight of earnings is 10%. Finally, a weighting of 10% is assigned to sensitivity to market risk. (The
weighting and scoring of each indicator are shown in Table S4.)

The final CAMELS score of HSBC is 1.90, which is considered satisfactory. Overall, HSBC’s capital
adequacy ratio and asset quality are at a high-quality level. The capital ratio of HSBC meets the Basel
III requirements, the non-performing loan ratio of HSBC is below the industry average, and the
financial structure of HSBC is functioning correctly. However, the lower overall profitability of
HSBC in 2014 was impacted by the reductions in business disposal and reclassification gains and
the adverse impact of other vital items. It cannot be ruled out that HSBC gave up some of its earnings
to maintain a high level of liquidity. Finally, HSBC is insensitive to market changes as it has a good
debt structure and risk tolerance13.

11 https://ift.world/concept1/level-ii-concept-28-the-camels-approach-to-analyzing-a-bank/
12 HSBC started using the LCR in 2015 and the NSFR in 2017. The LCR and NSFR from this section is estimated by the author.
13 Munir M. B. B. and Bustamam U. S. A. (2017) CAMEL ratio on profitability banking performance (Malaysia versus Indonesia)
International Journal of Management, Innovation & Entrepreneurial Research 3(1), 30-39

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)

3 PEER COMPARISON BASED ON CAMELS RATIOS

Peer Comparisons

Although HSBC’s profits in 2014 were well below expectations, its CAMELS score remained within
acceptable limits. Since 2014, HSBC has made several strategic changes. Moreover, influenced by
the 2020 pandemic and recession, HSBC has introduced a series of measures to deal with the
recession. This section analyses the operating performance of HSBC and its peer banks based on
banking data to 2021, exploring whether HSBC’s management and strategic adjustments in 2014
will lead HSBC to cope with the impact of the pandemic and the highly competitive environment
posed by its peer banks.

HSBC’s main revenue business is commercial banking, as shown in Graph 1. We will focus on the
strengths and weaknesses of HSBC’s commercial banking business. Barclays bank, Lloyds bank, and
NatWest were selected as the peer comparison group because Barclays bank, like HSBC, is a
universal bank with its main revenue business in commercial banking. NatWest and Lloyds bank
are commercial banks in the UK, and the size of profits from commercial banking for these two banks
is similar to that of HSBC. This report divides commercial banking into public and private businesses
based on the peer group’s annual report data. Private business includes private banking and retail
banking, while public business contains corporate banking and wholesale banking.

Business Distrubution of Peer Group

Lloyds 5.14 1.85 1.05

NatWest 5.27 3.88 1.38

Barclays 8.5 3.7 6.4 3.7 0

HSBC 6.27 8.48 4.75 0

0 5 10 15 20 25
$Bn

Private business in commercial banking Public business in commercial banking

Global markets Investing banking
Others

Graph 1 Business Distribution of Peer Group

The key CAMELS ratios for 2021 are used as indicators to measure the performance of different
banks to make comparisons more intuitive and easier to make. In addition, the weighted average of
the CAMELS ratios of the peer group is used as a benchmark in this piece of reporting to facilitate
further comparisons (Table 2).

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)

CAMEL Ratios
Sub-Parameters
Parameters HSBC Barclay NatWest Lloyds Average
Capital
CET1 ratio 12.10% 15.10% 18.20% 17.30% 15.68%
Adequacy
Tier 1 Ratio 13.70% 18.60% 20.70% 19.70% 18.18%
Total Capital Ratio 16.60% 21.70% 24.10% 22.60% 21.25%

Assets Quality NPLs / Total Assets 0.39% 0.06% 0.35% 0.08% 0.22%

Loans and advances / total

35.36% 26.11% 46.89% 51.39% 39.94%
assets14
Management Loans and advances/ total
Quality 35.36% 26.11% 46.89% 51.39% 39.94%
assets15

TER Ratio16 0.52% 1.04% 0.99% 1.22% 0.94%

Cost-to-income ratio 69.90% 66.00% 73.40% 56.70% 66.50%

Earnings Return on tangible equity (ROTE)
17
8.30% 13.40% 9.40% 13.80% 11.23%

Net interest margin 1.20% 2.93% 2.39% 2.54% 2.27%

ROA 0.50% 0.46% 0.38% 0.66% 0.50%

Liquidity Core deposit / Total assets 67.35% 37.52% 61.36% 53.71% 54.99%

LCR = Highly liquid assets /

138.00% 168.00% 172.00% 135.00% 153.25%
Expected cash outflows

NSFR 141% -- 157% -- --

Sensitivity to Non-interest income / Total

1.27% 1.00% 0.37% 0.57% 0.80%
Market Risk assets

Total deposits / Total loans 163.56% 143.77% 133.33% 106.38% 136.76%

Table 2 CAMELS ratios of peer group

The average amounts of the CET1 ratio, Tier 1 ratio and total capital ratio in the peer comparison
group were 15.58%, 18.18%, and 21.25%, respectively. HSBC has the lowest of all capital ratios in the
peer comparison group. HSBC’s NPL ratio of 0.39% was the highest value in the peer comparison
group and well above the average ratio of 0.22%. Barclays’ NPL ratio of 0.06% was the lowest in the

14 This ratio is intended to show the composition of assets and to reflect credit quality, with a higher ratio indicating a higher volume of
lending and lower liquidity for the bank. The bank's risk increases as this ratio rises, as does the default rate.
15 This indicator can be used as an indicator of both asset quality and management quality.
16 The Total Expense Ratio (TER) measures how much a bank spends on operations relative to its assets. The management fee rate is
another name for it. Customers can use this ratio to assess whether a bank's management and operations are cost effective.
17 The return on tangible equity (ROTE)measures the amount of equity capital generated for equity investors after deducting
intangible assets, which can be applied to predict how much money a company will make in the future.

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)
peer group. As for the ratio of loans and advances to total assets, HSBC’s ratio was 35.36%, compared
to the average ratio of 39.94%. In the peer comparison group, Lloyds Bank had the highest ratio,
with a value of 51.39%. HSBC’s TER ratio was the lowest, 0.52%, compared to the peer group average
of 0.94%. In 2021, HSBC’s cost-to-income ratio was 69.9% compared to the peer group average of
66.5%. NatWest has the highest cost-to-income ratio, with a value of 73.4r0%. HSBC’s return on
tangible equity was 8.3%, the lowest in the peer group, with an average of 11.23%. HSBC’s net
interest margin was 1.2%, less than the average 2.27% and the highest 2.93% of Barclays. HSBC’s
return on investment was the same as average. HSBC’s core deposits to total assets ratio was 67.35%,
compared to the peer group average of 54.99%. HSBC’s LCR was 138%, above 100 but below the
average LCR (153.25%). HSBC’s NSFR was 141%. HSBC’s ratio of non-interest income divided by
total assets was 1.27%, the highest value in the industry. HSBC’s total deposit-to-loan ratio was the
highest in the industry, 163.56%, compared to the industry average of 136.76%.

Comparative advantages and disadvantages

Overall, as shown in Graph 2, HSBC’s capital adequacy ratio is below the peer group average but
still meets the capital requirements of the G-SIBs and Basel III, keeping the bank afloat even in an
economic downturn. HSBC’s credit quality is at an industry average with moderate loan volumes,
and the bank’s risk and default rates are within manageable limits, noting that the bank’s credit
management is in line with industry average standards. HSBC’s ability to operate businesses at a
low cost is practical and indicates that HSBC has excellent cost control capabilities. HSBC’s earnings
performance was poor, and its net interest margin continued subdued. Indicators show that HSBC’s
future expected earnings are also 1.07% below the industry average. HSBC’s liquidity position is
good. HSBC has satisfactory long-term and short-term liquidity as measured by liquidity metrics.
Therefore, HSBC’s financial performance is robust and meets the best risk management standards.
These ratios demonstrate that HSBC’s overall risk appetite is above the average of its peers.

HSBC’s most obvious comparative advantage is its low sensitivity to changes in market risk.
Compared to its peer banks, HSBC generates more of its revenue from service fees, which can
generate stable cash flows. In addition, the total deposits to total loans ratio of HSBC is 163.56%,
which is well above the average ratio of its peers, indicating a high-risk tolerance as HSBC can lend
against its bank deposits rather than relying on external borrowing.

HSBC’s earnings are disadvantaged as it has a lower ROTE and NIM than its peer group, indicating
poor current and long-term profitability. Low profitability may create a wait-and-see mentality
among some investors or potential customers and harm HSBC’s business development. HSBC’s low
profitability is due to its recent change in investment strategy. HSBC has chosen to exit the US
market in favour of developing its business in Asia, and the necessary expenditure will also result in
lower levels of profitability but may lead to potential future gains.

Besides, HSBC’s capital adequacy ratio is in line with Basel III capital requirements and ensures that
HSBC has sufficient reserves to cope with future financial crises without a government bailout.
HSBC has more liquidity to invest in its business and support operations than the other three banks,
meaning it can use capital more efficiently and create more value. In 2014, HSBC was rated 4 with
an additional buffer of 2.5%, while Barclays was rated 3 with an additional buffer of 2%. In 2021,
HSBC was rated 3 with a corresponding additional buffer of 2% and Barclays as 1 with a
corresponding additional buffer of 1%. The downward revision of the G-SIBs’ capital requirements
for these two international banks from 2014 to 2021 is a testament to their businesses’ gradual

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)
stabilisation and increasing risk tolerance. However, lower capital adequacy ratios mean that
commercial banks need a relatively small amount of capital to support their asset-based business,
and the cost of funding should be correspondingly higher. It can constrain the scope of the bank’s
business and reduce the bank’s business mix18.

Excellent
Good
Fair
Poor

HSBC Barclays NatWest Lloyds

Graph 2 Comparison between HSBC, Barclays, NatWest, and Lloyds.

4 BUSINESS STRATEGIES OF THE HSBC GROUP

After looking at the HSBC CAMELS analysis, we also notice how across CAMELS’ verticals, Earnings
management can be better for HSBC as that pulls their overall average down. In the sections that
follow, we look at what CAMELS variables indicate with respect to competitors, the market outlook,
expected economic events and focus on areas that can improve HSBC’s overall presence.

New forecasts by the UK fiscal watchdog due to be published alongside the Autumn Statement are
expected to cut economic growth because of several reasons. High energy prices make a country like
the UK, which imports fossil fuels, poorer. High inflation and interest rate rises increase the cost of
government borrowing and welfare benefit payments compared with the March forecasts by the
Office for Budget Responsibility. The third issue is the government’s decision to spend tens of
billions of pounds more on support for households’ energy bills, putting further pressure on the
public finances. That means that households and firms will continue to feel the weight through rising
domestic prices, wages outpacing rampant inflation, and even higher mortgage repayments, despite
Threadneedle Street’s attempt to widen the borrowing pool through less restrictive mortgage rules.
UK inflation reached 9.9% in the 12 months to August, down from the 40-year high of 10.1% in July,
but it was still up on the 9.4% in June. According to credit broker TotalMoney and personal finance
website Moneycomms for the average UK house costing £270,708, with a 75% loan-to-value, a 75bps
hike could see mortgage repayments cost £274 per month more than in November 2021.

We have several suggestions for HSBC’s path ahead based on the previous discussions and our
online research, as shown in Graph 3. First, protecting banking financial strength is vital. One of
the biggest challenges for the UK banking sector is balancing their losses, while continuing to
provide loans, debt-moratoria, and intervention schemes to support financial stability. Under IFRS

18 Shar AH., Shah M.a., and Jamali H. (2010) Performance Evaluation of Banking Sector in Pakistan: An Application of Bankometer
International Journal of Business and Management 5(9), 81-86

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)
9, loans that look more likely to default will trigger loss provisioning upfront, potentially reducing
the ability to offer credit.

Second, building business resilience into operating models is a long-term improvement. Banking
institutions need agility and business resilience to evolving customer needs. Actioning lessons
learned from the last few months, particularly around burst capacity processing and operational
resilience, will improve customer service and responsiveness. They will also inform recovery,
resolution and wind-down plans, operational continuity in resolution, and stress-testing scenarios,
which will all strengthen financial stability in the long term.

Moreover, HSBC should develop new location and workforce strategies. Working from home has
become a bigger part of many business models, leading to a more distributed workforce and greater
workspace rotation. While this will reduce overheads, banking institutions need to review customer
access points and establish the right balance between digital and face-to-face service delivery options.

Finally, increasing digital adoption and innovation has been an irreplaceable trend among financial
institutions. With growing digitalisation across payment channels, increasing dependency over
online transfers and a cashless society approach, it is crucial to innovate through R&D and provide
digital infrastructure that will enhance HSBC’s ability to target greater market share.

Graph 3 Strategies suggested by Capgemini Financial Services Analysis19

19 Capgemini financial services analysis 2021 world retail banking report 2021 executive survey

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BIF Group 7 – SMM108 Global Banking – Risk Management and Performance Analysis of HSBC Group: Case Study (115-087-1)

APPENDIX
Table S1 Basel III capital requirements
Basic requirement CCB CCyB G-SIB Total Ratio Ratio of HSBC
CET 1 Ratio 4.50% 2.50% 0% 2.50% 9.50% 10.92%
Tier 1 Ratio 6% 2.50% 0% 2.50% 11% 12.52%
Total Capital
8% 2.50% 0% 2.50% 13% 15.64%
Ratio

($Bn) Over 12-mth

NSFR of HSBC

Operating CashFlow £ (21.37)

2018 113

Investing Cashflow £ (49.61)

2019 106

Financial Cashflow £ (18.68)

2020 124
Net Cashflow £ (28.20)

Expected 1-month Cashflow (28.20)/12=(2.35)

Avg. NSFR 114.33

Table S2 Expected Cash flows in one month Table S3 NSFR of HSBC

2014 Weight
CAMELS
Score Weight
Score
Table S4 CAMELS rating of HSBC in 2014
Capital
1 20% 0.2
adequacy
Assets
2 20% 0.4
quality
Management
2 20% 0.4
quality
Earnings 4 10% 0.4
Liquidity 2 20% 0.4
Sensitivity to
1 10% 0.1
market risk
Final Score 1.90

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