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Banking and Financial Structure

Profitability ratios are extremely helpful in order to perform critical analysis over a company’s financial health. Return on Equity Capital (ROE) is one of the many profitability ratios and it helps determine the amount of net income returned as a percentage of the shareholders equity. For the Royal Bank of Scotland the ROE for 2007 is 8% which is by far the best compared to 2010, 2009 and 2008. For 2010 the ROE is -2%, for 2009 the figure is again the same as 2010 but in 2008 the percentage is the frightening -43.

This is because of the huge losses that the bank had for the last 3 years unable to generate enough profit of the shareholders investments. The next ratios is Return on Assets (ROA) which gives an idea of how much profits are generated using the assets of a company. For RBS the ROA for the four years are: 2010 is -0. 1%, 2009 is again -0. 1%, 2008 is again negative with -1% and for the last year 2007 ROA is 0. 4 which is again the best compared to the last 3 years.

This shows that the bank did relatively poor in the last years not able

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to produce enough profit in order to get good results that can be presented to the investors. Risk Measures: The Risk Measures are ratios which show how the bank is able to manage their loans and deposits without heading for a bank failure. Credit Risk Measures are ratios that include Total Loans divided by Total Deposits and Provision for Loan Losses divided by Total Loans. For the first ratio Loans-to-Deposits RBS is performing relatively well for the four years.

This results show that the bank is consistent in keeping the loans to deposits in a fair state. The results show that RBS is making an effort to increase their provision for loan losses in order to cover any bad debts and they are making huge improvements over the course of the four year period. Interest Rate Risk measures include several ratios such as Gap Analysis and Interest Sensitive Assets/ Interest Sensitive Liabilities. The gap is the difference between the interest sensitive assets and the interest sensitive liabilities.

The best option is to have a zero gap but there might be a positive gap and a negative gap. The positive is when sensitive assets are more than the sensitive liabilities and the negative is the other way around. For RBS the Interest Sensitive Gap for the four year period is 2010: 46295$, 2009: 63800$, 2008:115363$, 2007:53341$ showing that the bank has a positive gap. The relative interest sensitive gap for RBS equals interest sensitive gap divided by the Total Assets of the bank. The figure for 2010 is 3%, for 2009 is 4%, for 2008 5% and for 2007 it is again 3%.

Those figures show that the bank is keeping their interest sensitive gap stable. Showing that there is an improvement compared to 2007 allowing them to have more cash and reserves and lower chance to hit a liquidity crunch. Solvency Risk Measures are ratios that help investor decide whether they want to invest or they want to stay out of the bank/company. One of the solvency ratios is the Equity Capital/ Total assets. The results for RBS for 2010 is 5%, for 2009 is 6%, for 2008 is 3% and finally for 2007 is 5%.

Those figures show that there is not a big difference between the different years showing that the bank keeps stable the equity funding to total assets. Any decline in this ratio put to a risk the shareholders and debt-holders. Lloyds TSB bank is a big UK bank much similar to the Royal Bank of Scotland. The bank’s Return on Equity Capital for the same period of four years are: ROE for 2010 is -0. 5%, for 2009 is 7%, for 2008 is 8% and for 2007 is 3%. The results show that Lloyds managed to profit for the first 3 years but in 2010 they had lost and the outcome was a negative ROE.

For 2009 and 2008 the percentages are quite good compared to the rest of the years because of the fair profit that the bank accomplished. The next ratio is the Return on Assets (ROA) and the results are: for 2010 is negative 0. 03%, for 2009 is 0. 03% , for 2008 is 0. 2% and for 2007 is 0. 1%. Again we can observe that because of the loss in 2010 there is a negative percentage in the ration but for the rest 3 years the bank manages to return profit so they do not descend below zero.

Never the less the performance according to the profitability is not the greatest. This show that since 2007 they started setting aside more money for bad debts because of the financial crisis and many of the debtors cannot afford to pay off their debt and also the results are comparatively even among other banks. The Gap analysis and the interest sensitive assets/ interest sensitive liabilities are very important ratios in order to determine which bank is better.

For Lloyds TSB the results for the interest sensitive gap are 2010: 204608$, 2009: 205789$, 2008: 46014$, 2007: 48913$ which means that for the four years the bank has a positive gap but still this is not a good thing because the bank could lose huge amount of money. The relative interest sensitive gap for the four years is: 2010 is 20%, for 2009 is again 20% , for 2008 is 10. 4% and for 2007 is 13. 8%. Those results are quite bad because of the high percentage meaning that more money could be lost in the future because those assets depend on interest.

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