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Free Essay Sample On HSBC Holdings Plc


HSBC Holdings Plc is British multinational financial services and investment bank. The company came into existence in 1985 and traced its origin to British Hong Kong. Besides, it is the second-largest bank in the European Union and holds total assets of $2.984 trillion as of 2020. HSBC operates in four different business groups: retail banking and wealth management, commercial banking, global private banking, and global banking. Furthermore, The bank is listed on Hong Kong Stock Exchange and London Stock Exchange. HSBC was listed on Hong Kong Stock Exchange in 1865.

 On the other hand, the company was listed on London Stock Exchange in 2002. HSBC is one of the give big banks in Britain that hold more deposits than loans. This makes the bank to be a less risky proposition. However, it is a disadvantage because it limits its growth and development. This means that it underutilizes its financial resources, something that limits its growth and development.

The purpose of this paper is to analyze the operational and financial performance of HSBC. The analysis will be divided into different sections, as discussed below. The paper will discuss the two issues affecting the operations of the business currently. The two major issues identified to be discussed BREXIT and COVID-19 pandemic. Additionally, the paper will also discuss the bank’s dividend policy by focusing on two major theories, namely M&M and a bird in the hand. It will also discuss the business’s capital structure by focusing on both relevant and irrelevant theories. Furthermore, it will also perform a financial analysis of the bank. It will consider the major financial ratios, namely the profitability, liquidity, investment, and efficiency ratios. The analysis will provide rich information about the bank’s operational and financial performance. As a result, this information will guide in formulating the recommendations to the bank for future improvements.


Two major issues have to impact the operation of HSBC currently. These two issues are the Brexit and COVID-19 pandemic. Since the Brexit announcement, the business has been facing losses on loans. Many of its customers are afraid to loan with the bank because of the future uncertainties of Brexit. The reduced loans by the clients of the company have further led to decreased profitability of the business. It is important to note the China and the UK are the two largest markets for HSBC. However, these two markets are facing slow growth following the Brexit announcement. Investment risks continue to increase as people develop more fear about the impacts of Brexit. For instance, the UK is leaving the EU as per the Brexit provisions. Such a move will affect the future trading relationship between the UK and other members of the bloc. As a result, this may increase the cost of loans for the bank’s customers outside the UK. This is a major issue for the bank’s clients outside the UK.  

Additionally, the company also draws its employees from different parts of the EU and world. The exit from the EU means that these employees will be affected by the tax policies formulated. Such a move will compel some of its employees to leave, thus making the bank lose talent. It is also anticipated that some of the customers will migrate from the UK to their home countries, which will affect the company’s market share. As a result, the bank is taking the initiative to expand its operations in Netherlands and Ireland, as Rees (2019) revealed.

On the other hand, the emergence of COVID-19 is another issue that has affected the operation of HSBC. COVID-19 has a damaging effect on the banking sector due to the measures taken to curb its spread and the fall in disposable income of the customers. Governments across the world implemented lockdowns in the move to contain the virus. People were made to work from home, something that reduced the disposable income among bank clients.

Generally, the COVID-19 pandemic has affected the revenues that come from the global operations of HSBC. According to Wilson & Liu (2020), the loan losses of HSBC are anticipated to fall by more than $13 billion this year. One of the markets for the company facing a great challenge in growing loans revenues is the Asia market. This has seen its profit decreased by half following the high loan losses. The bank has also suffered losses from bad debt ranging between $8 billion to $13 billion in 2020. Besides, the business has also experienced a fall in shares by 4.2 percent in London.

The poor performance during the COVID-19 pandemic has compelled the bank’s management to take various measures to ease the loss. For instance, the management has decided to cut its costs to increase revenues. Additionally, the bank is also focusing on expanding its business to a fast-growing Chinese market to improve its financial performance during the pandemic. 

b) Dividend policy- theory 

 HSBC is a firm that offers dividends to its stakeholders every quarter. However, the fall in its profits has seen the bank change its dividend policy. The bank’s management has decided to pay an interim dividend at a rate of 15 cents per share. It is important to focus on M&M dividend theory and a bird in the hand theory to better understand HSBC dividend theory.

M&M is an irrelevant dividend theory which argues that dividend is the irrelevant source of return to the stockholders. The implication is that the business’s share price will remain unaffected if it does not distribute dividends. The implication is that the company should encourage its stakeholders to invest their earnings other than receiving a cash dividend. Doing so would help them gain capital gains other than dividends that attract tax charges. Besides, such a move also plays a role in strengthening the capital structure of the company. HSBC does not apply this dividend policy theory because it pays cash dividends.

On the other hand, the birds in hand is another dividend theory that reveals that investors want stock dividends other than potential capital gains. It is a relevant dividend theory that reveals that it’s better to receive dividends in stock other than reinvesting them to receive uncertain capital gains. It counters Modigliani-Miller dividend theory. This is the dividend policy theory that HSBC applies in its operations. The focus is to help the investors enjoy dividends other than capital gains which attract tax.

ii) Capital structure (2 theories) (400-500)

The capital structure of a firm is the composition of its debt and equity finances. The balancing of these finances is key in assisting a business to promote its success. Two important theories can guide in discussing the capital structure of HSBC. The capital structure theories play a role in determining the relationship between the capital structure of a firm and its value. This paper will focus on two important theories: the Pecking order theory and M&M theory.

Relevant Theory

The pecking order theory is a relevant theory capital structure that a business should consider when financing its operations. This means that a firm should choose those sources with low cost of issuance first and then finish with those sources that attract high issuance costs. For instance, it encourages the firm’s management to prefer retained earnings to all the other sources of finances. However, it advises the management to finance its operations through debt. Finally, if the debt finance is not enough, the business can raise finance through issuing equity to potential investors. The order to choose the source of finance for a business based on the pecking order theory is presented in the diagram below.

Based on the balance sheet indicates that HSBC utilizes more debt financing to fund its operations. Its retained earnings and equity are very low, so the business uses more debt finance.

Irrelevancy theory- MM’s

M&M is another important capital structure theory also referred to as a traditional capital theory. This is counter of pecking order theory. This theory argues that the company’s capital structure is not part of its value. The idea behind this theory is that the value of the firm grows a given debt capital level. This means that it remains constant at a certain point. It assumes that the cost of capital (WACC) will always remain constant when the Ke rises. This may be the reason why HSBC utilizes too much debt finance. This information can be summarized using the diagram below.

Financial Analysis

As discussed earlier, the financial analysis will involve calculating and interpreting profitability, liquidity, efficiency, and investment ratios of HSBC.

Profitability Ratios

The profitability ratios are key financial instruments used by a company to evaluate its ability to generate profits using its resources. In the banking sector, the profitability ratios are important in helping the business determine its ability to use its resources such as loans and deposits to make profits. It also measures the ability of the management to control the costs and expenses of the business.

The calculated ratios for the company indicate that there was a fall in its profitability when comparing 2020 and 2019. There was a significant drop in both the operating profit and net profit of the bank. The operating profit decreased from 19.60% in 2019 to 14.24% in 2020. On the other hand, the bank’s net profit also decreased from 15.52% in 2019 to 12.09 in 2020. The fall in these two ratios can be attributed to a fall in the total income from the business sources. The drop in the income of the company is due to a decrease in revenues from loans. This is due to the harsh economic conditions that faced the bank in 2020. For instance, the emergence of the COVID-19 pandemic is one of the key economic issues that led to a fall in the bank’s demand for loans.

Many people have lost jobs while others are getting half their salary. Besides, the debt for the business has also increased. Consequently, this has reduced the income of HSBC. Additionally, the Brexit move is another major condition that has also increased loan losses of the business. Many people fear the uncertainty presented by Brexit, which has led to reduced demand for the company’s bank products. There is a great need for the bank to expand its operations to other nations across the world. Such a move will help the bank to maintain its clients and attract more when Brexit is implemented.

Investment Ratios

Investment ratios are key financial metrics that assist a business in evaluating the returns that the business yield from its operations. The focus is to establish whether a firm is efficient in using its resources to generate profit from its operations. This assignment will analyze the return on assets and equity of HSBC for 2019 and 2020. The calculation of the two ratios indicates that HSBC is inefficient in using its assets and equity to generate profit from its operations.

The return on assets and return on equity for the company were very low for the two years. For instance, the bank’s return on assets decreased from 0.32 percent in 2019 to 0.20 percent in 2020. The fall in this ratio was due to a fall in the bank’s profitability and increased assets. The low return on assets indicates that HSBC is inefficient in using the deposits. The company cannot offer high loans despite having huge financial resources to offer, yet it underutilizes them. Consequently, this has led to low profits from its available assets. On the other hand, the bank’s return on equity also decreased from 4.52% in 2019 to 2.98 percent in 2020. The equity of the business increased while its profit decreased. This can contribute to the fall of return on equity for the business. The implication is that HSBC is inefficient in using its equity to yield high profits. Based on the analysis, the bank should focus on making its loans attractive.

Liquidity Ratios

Liquidity ratios are important financial metrics used by a firm to measure its ability to meet its cash needs. It is important in assisting the business to determine if it has enough cash resources to pay its current debts. This assignment will focus on analyzing the current ratio of HSBC. The current ratio of the company fell from 0.90 in 2019 to 0.88 in 2020. The fall in this ratio indicates a weakness in generating cash resources to meet its cash needs. The decreasing trend also signifies the weakening liquidity position of the bank. Additionally, the ratio was below one for the two years. This shows that the bank had a weak liquidity position. As a result, it faced a challenge in meeting its cash needs. All this can be attributed to growth in the business’s current liabilities faster than its current debt.

Efficiency ratios

Efficiency ratios are important in assisting a business in evaluating the management’s efficiency to use available to generate revenues and profits. In the banking sector, efficiency ratios also help the bank measure its ability to collect loan repayments effectively. The efficiency ratio of the bank is computed by dividing its expenses by its net revenues. The efficiency ratio of HSBC fell from 75 percent in 2019 to 68 percent in 2020. The falling efficiency ratio indicates the improved ability of the management to control the expenses of the bank. Additionally, it also shows that its net revenues continue to grow as the expenses decrease. However, the bank is yet to reach a sufficient efficiency ratio of 50 percent.

On the other hand, the asset turnover of the business was very low for the two years. The calculations indicate that the bank maintained its asset turnover at 0.2 in both 2019 and 2020. The ratio was below one, which means that the management was inefficient in utilizing the available company assets to generate revenues. The bank can improve this by selling idle assets to generate more revenues.

Conclusions and Recommendations

The analysis indicates that HSBC is facing challenges from the harsh economic times brought by both the COVID-19 Pandemic and the announcement of Brexit. The COVID-19 has affected the demand for loans by banks clients. Most people have lost their jobs during the pandemic. Others are receiving a low salary or returns from their operations. Additionally, the announcement of Brexit has also developed fear among many clients of the bank. Therefore, reducing the attractiveness of its banking products. This has led to a fall in the revenues and profitability of the bank. It is recommendable for HSBC to expand its business across Europe and Asia. This will assist the bank in growing its market share in a new market hence increasing its revenues and profitability.

On the other hand, the ratio analysis indicates that HSBC is a profitable business. However, the profitability of the business has been decreasing over time. The decrease is due to a fall in demand for its products. This is due to the harsh economic conditions facing the world. The best recommendation for the bank will be to focus on growing its global marketing. Such a move will be key in increasing its profitability.

Besides, HSBC has weak liquidity, as indicated by its current ratio. This means that the bank faces challenges in meeting its cash needs. The current liabilities of the business are higher than the current assets. As a result, it is recommendable for the bank to focus on using its assets to generate more cash to meet its cash needs.

Finally, HBSC is efficient in reducing its operating expenses while increasing revenues. However, its asset turnover is very low. This means that the bank is inefficient in utilizing its assets to make revenues. Therefore, the management should think of disposing of unproductive assets to generate revenues. Such a move will also assist the bank in reducing costs and increase profitability.


Rees, J. (2019). Banking Essentials Newsletter: July Edition – Part 2. Retrieved 26 July 2021, from

Wilson, H., & Liu, A. (2020). Covid-19 impact: HSBC warns loan losses may reach $13 billion this year. Retrieved 26 July 2021, from

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