Financial Analysis Essay

HSBC & Abu Dhabi Islamic Bank

Company Profiles

HSBC:

Founded in 1836 in England, it is one of the largest banking institutions across the globe that operates under HSBC Holdings (HSBC, 2014). It has a presence in more than 80 countries that cuts across Europe, Africa, Middle East and America. It operates in areas that range from commercial and private banking to consumer finance. The firm’s headquarter is in London. It is headed by Stuart Gulliver as the immediate group CEO and Brian Robertson; the bank’s CEO (HSBC, 2014).

Abu Dhabi Islamic Bank:

This bank was founded in 1997 in Abu Dhabi city in the United Arab Emirates. The bank’s founders hold about 29 per cent of equity while the rest is held by at least 100,000 shareholders that include; prominent UAE nationals as well as members of the ruling family (ABCB, 2013).  H.E Tirad Al Sheikh Mahmoud is the current immediate CEO of the institution. All of the bank’s operations and transactions are carried out in accordance with the Islamic Sharia laws (ABCB, 2013).

Ratio Analysis

Enterprise Value:

HSBC’s total debt-to-total capital ratio increases significantly from 22.01 to 31.81 in the period between 2010 and 2012 respectively while Abu Dhabi Bank’s ratios decrease significantly within the same period from 37.66 to 22.07. This means that Abu Dhabi Bank is making intensive efforts to reduce the level of debt funds that constitutes the overall capital while HSBC seems to be increasing the debt funds (Benninga and Oded, 1997).

HSBC free cash flows decreases significantly in the three year period from 90,927 to 72,859 and later to -10,981 in 2010, 2011 and 2012 respectively. On the other hand, Abu Dhabi Bank’s ratio increases slightly from -136.02 to 2,562.48 in the periods between 2010 and 2011 before falling again to -1,319.32 in 2012. This means that both of these firms lack the capacity to generate cash needed for daily operations (Benninga and Oded, 1997).

Growth:

HSBC book value per share decreases significantly in the three year period between 2010 and 2012 from 13.58 to 6.94 respectively. On the other hand, Abu Dhabi Bank’s ratios al decreases from 24.64 to 18.69 and later to 12.09 in the three years period. However, Abu Dhabi Bank is able to depict a higher ratio meaning that it possesses a higher capacity to pay off common stockholders in the event of liquidation of the firm (Graham, 2000).

HSBC’s working capital increases significantly from 154,900 to 166,100 and later to 183,100 in the periods between 2010, 2011 and 2012 respectively. On the other hand, Abu Dhabi Bank’s ratio decreases from 27.12 to 4.51 in the period between 2010 and 2011 and later improves slightly to 34.21. The improvement depicted by HSBC, as opposed to Abu Dhabi Bank, is an indication that it is fairly positioned to repay all of its current liabilities using the current assets on its portfolio (Graham, 2000).

Credit Ratios:

HSBC total debt to EBIT ratio increases from 17.64 to 22.21 in the three year period. On the other hand, Abu Dhabi Bank’s ratio also increases slightly in the three year period between 2010 and 2012 from 6.28 to 6.44 respectively. The relatively higher ratio that is depicted by HSBC postulates that it might not be able to repay its incurred debt in an appropriate way hence, a low credit rating (Fisher, Heinkel and Zechner, 1989). 

HSBC total debt-to-equity ratio reduces significantly from 186.79 to 165.23 and later to 155.62 in the period between 2010, 2011 and 2012 respectively. Consequently, Abu Dhabi Bank’s ratio also decreases from 78.06 to 76.09 and later to 60.10 in the three year periods. This indicates that although both of these firms have a higher asset base that is financed by creditors in comparison to those provided by stockholders, HSBC is extremely dependent on creditors (Fisher, Heinkel and Zechner, 1989).

HSBC total debt to capital ratio decreases from 65.13 to 62.29 and later to 60.87 in the period between 2010, 2011 and 2012 respectively. The decrease is also postulated by Abu Dhabi Bank whose ratios also decrease from 43.83 to 43.21 and later to a low of 37.54. The decrease depicted by both of these banks postulates that they are putting more effort to reduce the level of debt funds in their capital structure only that Abu Dhabi is doing this at a relatively faster rate (Fisher, Heinkel and Zechner, 1989).

HSBC total debt to total assets reduces insignificantly from 11.79 to 10.74 and later to 10.58 in the period between 2010, 2011 and 2012 respectively. On the other hand, Abu Dhabi Bank’s ratio increases insignificantly from 8.41 to 8.77 and later to 8.88 in the same three year period. Although Abu Dhabi Bank’s ratio is perceived to have increased it still remains low in comparison to its counterpart hence an indication that both its leverage and financial risk remains favorable within the industry (Fisher, Heinkel and Zechner, 1989).

Liquidity Ratios:

HSBC current ratio remains relatively stable at 1.06 in the periods between 2010 and 2011 and later increases insignificantly to 1.07 in 2012. The increase is also depicted in Abu Dhabi Bank’s ratio that improves from 1.12 to 1.13 and later to 1.17 within the same period. The higher ratio values depicted by Abu Dhabi Bank as opposed to HSBC are indication that the firm is fairly positioned to meet its short term obligations as and whenever they fall due (Graham, 2000).

Profitability Ratios:

HSBC asset turnover ratio remains relatively stable at 0.03 in the three year period: 2010, 2011 and 2012. This pattern is also reflected in Abu Dhabi Bank’s ratio that remain stable at 0.06 within the same period. However, the higher ratio value of Abu Dhabi Bank postulates that it is fairly positioned to post a substantial amount of sales income from its asset base. 

HSBC’s ROE ratio falls from 9.53 to 8.19 in the three year period; 2010, 2011 and 2012.  The decrease is also noted in Abu Dhabi Bank where the ratio decreases from 13.42 to 11.34. Despite the decrease it can still be noted that Abu Dhabi Bank is fairly positioned in regards to its financial leverage working in favor of the existing common stockholders of the firm (Marshall, McManus and Viele, 2008).

HSBC return on assets ratio increases slightly from 0.54 to 0.67 in 2010 and 2011 and later drops again to 0.53 in 2013. The same pattern is noted with Abu Dhabi Bank’s ratio, which increases from 1.47 to 1.54 in 2010 and 2011 and later drops to 1.49 in 2012. Despite the similar pattern, it can be seen that Abu Dhabi Bank’s management has been effective in employing optimal assets to generate sufficient sales revenues (Marshall, McManus and Viele, 2008).

Yield:

HSBC FCF to yield drops significantly from 54.05 to -5.77 and later to 21.16 in the period between 2010, 2011 and 2013 respectively. A similar pattern is noted in Abu Dhabi Bank’s ratios that decrease from 43.10 to -1.82 and later to 34.08 within the same years.  By comparing the 2013 ratios, it can be said that Abu Dhabi Bank’s is attractive to potential investments since investors would prefer to pay less for stock price for future larger earnings (Marshall, McManus and Viele, 2008).

Du Pont:

HSBC’s payout ratio increases significantly from 49.10 to 61.40 in the three year period while Abu Dhabi Bank’s ratio remains relatively stable at 50.00 within the same periods. The higher ratio depicted by HSBC postulates that its pays lots of its earnings as dividends while Abu Dhabi reinvests a substantial portion back to the business (Marshall, McManus and Viele, 2008).

In conclusion, it is recommended that potential investors should invest with Abu Dhabi since it posits stronger ratio values as opposed to HSBC. It is also fairly positioned to use added investors to develop other projects that would facilitate larger earnings as opposed to HSBC, which is likely to use added funds to repay creditors and other short-term obligations.