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PIMS Analysis - Strategic Financial Management

BUSINESS OPERATIONS:

Lloyds Banking Group

Lloyds Banking Group is the leading financial services banking company in UK provides a wide range of banking and financial services, mainly in the UK, to the corporate and personal customers. The Group was formed in January 2009 with the acquisition of HBOS. The main business activities of Lloyds Banking Group are retail, commercial & corporate banking, general & life insurance, pension fund and investment provision. The banking Group also operates in international banking business which has branches over 30 countries around the globe.

In the very short time period the group has become the largest retail bank in UK and has large amount of diversified customer base. These financial services are being delivered through a number of well recognized brands of the group includes; Lloyds TSB, Bank of Scotland, Halifax, Clerical Medical Scottish Widows, and Cheltenham & Gloucester, and by the unique distribution capability comprised of largest branch network & intermediary channels in United Kingdom. Lloyds Banking Group is listed on both of the London Stock Exchange and the New York Stock Exchange and falls in one of the major companies in the FTSE 100 Index (Lloyds Group, 2010)8.

Barclays PLC Group

Barclays plc is also a British financial services company operating around the globe. It is a holding company which is listed on the London stock exchange and New York stock exchange, and was also listed on the Tokyo Stock Exchange until 2008. It is also falls in one of the companies of the FTSE 100 Index.

Barclays PLC Group is ranked as the 25th largest company around the globe by Forbes Global 2000. According to Datamonitor, Barclays PLC is globally, the largest financial services provider by market share with about $3.7 assets of trillion (Datamonitor, 2009)5. It is the second biggest bank in the United Kingdom after Lloyds Group. The share price of the company fell by 90% in a year until 23 January 2009, but has substantially recovered after the 2008-09 financial crises. The company has a hundred of years of history starting from the 1690. Major activities of the company’s business operations involve; the Retail banking, Commercial banking, Investment banking, Investment management and Private Equity. Barclays Group has more than 1800 UK high street branches and has a total of more than 4,750 worldwide in more tan 50 countries around the globe (Reuters, 2008)7.

PIMS Analysis:

In the PIMS analysis of both of the companies we will make comparison. Following are the PIMS analysis what SPI institution considers while making PIMS analyses:

Competitive Position

Market Environment

Market Share

Marketing/Sales

Relative Market Share

Customer Concentration

Relative Quality

Customer Purchase Amount

Relative Price

Industry Concentration

Capital and Operating Structure

Operating Effectiveness

Investment / Sales

Stage of Lifecycle

Investment / Value Added

New Products/Sales

Gross Book Value of P&E/Total Investment

R & D/Sales

Receivables / Investment

Real Market Growth

Capacity Utilization

 

Value Added / Sales

 

 

We have also used a lot of contents of above table in our report.

COMPETITIVE POSITION

In this section of the report we have analyzed the competitive position of our selected companies. To thoroughly understand the competitive position of both of the companies we have analyzed them with the help of Dyson Strategic Investment Decision model and analyses of their financial statement.

DYSON STRATEGIC INVESTMENT DECISION:

This is a model which helps us in selecting a right company to investing in. In this way we will make a comparison of both of our companies under discussion. Both of our companies share same business, same economy and almost the same products to their customers. Dyson Model is composed of some of things which create the value of a company’s product in the customer’s eye. On the basis of those concepts we have made comparison of both of the companies as under:

Products:

Both of the companies offer the retrial banking, wholesale banking, wealth and international financial services and insurance services to its customer.

Low Cost:

Lower cost increases the profits of a company and makes the company able to face the competition on the basis of lower price. We can see in the ratio analyses that Barclays has the lower cost comparing Lloyds. In this perspective Barclays is a better company. 

High Market Share:

Lloyds is the leading bank in UK and Barclays is the second largest bank in the home country. Lloyds has larger market share comparing the Barclays. It has 23% in mortgage & SME products and 31% market share in overall retail banking and Barclays claims only 7.4% of market share in UK markets. IN this perspective Lloyds is a better company but Barclay operates in 50 countries around the globe whereas Lloyds operates in 30 countries. Barclays has a better market share in the international or foreign markets but no in the home economy.

Marketing Strategy and tactics:

Although Barclays use a lot of marketing tactics in the international markets but the most prominent is sponsorships. Barclays sponsors the English premier league, Dubai Tennis championship, and Tennis Masters Cup and ATP tennis website.

Lloyds is a new company so it just has got a big sponsorship of London Olympics 2012 and also sponsors the Asian Jewel Awards. In marketing competition, we can’t declare that one of them is better than the other but at least Lloyds is better in 2012.  

Operations:

As discussed below that both of the companies have almost the similar business operations but Lloyds has the larger branch network and distribution system in UK.

Competitive advantage:

Lloyds has a clear competitive advantage of being the largest bank in UK and sponsoring the 2012 Olympics over Barclays. But at the moment, Barclays has a better image and recognition in the international markets. Locally, Lloyds has heavier competitive advantage.

In conclusion we can say that Lloyds is a strategically better company and better to invest in, which is prospering in a very high pace (Dyson, 1998)9.

ANALYSIS OF FINANCIAL STATEMENTS

PRELIMINARY RESEARCH:

All the analyses in this “Analyses of financial statements” section of the report are based on the annual reports and annual final accounts of Barclays Plc and Lloyds banking Group. The annual reports are collected form the official websites of both of the companies.

HORIZONTAL & VERTICAL ANALYSIS:

The analyses are based on the two years balance sheets of both of the companies. We will discuss only the core item of balance sheet and the rest of details about the analyses can be derived form the Appendix B.

Horizontal Analyses:

Horizontal analyses are based on the last year (2008) figures of balance sheet for each item. In these horizontal analyses we have measured that how many time each item has changed comparing 2009 by basing 2008. For Lloyds Banking Group cash and balances at central banks have increased 6.786 times.  The similar item for Barclays Bank has changed 1.714 times. Derivative financial instruments for Lloyds have changed 0.728569 times and -0.57675 times reduced for Barclays. Loans and advances for Barclays bank have been reduced by -0.087058 times and -0.13776 for Lloyds. Loans and advances to customers have changed positively for Lloyds Group 1.608632 times comparing last year and negatively -0.09006 times for Barclays.

Investments in properties by the Lloyds Group have increased by 0.808 times whereas Barclays doesn’t have any proper investments. Investments in associates and joint ventures for Barclays have Investments in associates and joint ventures changed to 0.237537 times and Lloyds Group 7.709 time increased for Lloyds Group. Tangible fixed assets for Lloyds have been increased by 2.110 times and 0.20368 only for Barclays. Total assets for Barclays Bank have been reduced by -0.341 times and changed by 1.355 times for Lloyds. Total liabilities for Lloyds Bank have been reduced by -0.341 times and increased by 1.306 times for Lloyds. Total share holder equity for the Barclays bank is changed by 0.233 times whereas 3.607 times for the Lloyds group.

All of these figures shows that Lloyds is keeping the prospering strategy and incasing its business and investment due to the growth phase of economic life cycle and whereas Barclays is reducing its investments due to the maturity phase of economic life cycle(Lee 2005)4.

Vertical Analyses:

Vertical analyses figures are derived by the difference of 2009 and 2008 balance sheet percentages of each item to the total assets of each individual company. Loans and advances to customers are increased 5.91% for Lloyds Group and 7.98% for Barclays Group. Tangible fixed assets are increased by 0.22% for Lloyds and 0.18% for Barclays. Total liabilities are reduced for Barclays for -1.93% and -2.07% for Lloyds Group. Total shares holder equity have been increased 1.93% for Barclays and 2.06% for Lloyds Group.

RATIO ANALYSIS:

These ratio analyses are banking industry specified ratio analyses (Schaeck & ─îihák, 2007)3. Every ratio is related to the banking sector for two years of 2008 and 2009. In these ratio analyses both of the companies’ position is thoroughly analyzed and compared with each other.

Return on Average Assets is our first ratio in which            Barclays Plc has 0.01% & 0.27% return on its total assets on the year 2009 and 2008. The return has decreased comparing the last year of 2008. The ratio is deriving the net operating income by total assets and we have got the results of Lloyds Baking group ratio of 0.10% and 0.17% for 2009 and 2008 respectively. It is also decreased comparing the last year but is still better than the Barclays Group’s ratio Because the interest expense for the banking industry is the regular expense of any banking company, so the income before tax is considered to be the operating income.

Return on Equity ratio for the Barclays Plc is 17.59% and 11.15% for the year 2009 and 2008. The ratio for the Barclays Plc is increased about 6.5% in 2009 comparing the last year of 2008. The similar ratio for the Lloyds Banking group is 6.53% and 8.22% for 2009 and 2008 respectively which is decreased comparing the last year performance of ratio for the company it self. If we compare it with the Barclays ratio we find that Barclay’s ratio is about 10% higher than the Lloyds Banking Group. This is a considerable difference that Barclays is earning much better on its common stock equity comparing the Lloyds Group1.

Rate Paid on Funds Ratio is an expense evaluation ratio. The ratio is determined by dividing total interest expense by total earning assets which is calculated for the Barclays Group as 0.85% and 1.54% for the year 2009 and 2008. It is reduced roughly by 0.7% which is good for the company that it is paying lesser percentage of interest comparing the last year. The same is calculated for Lloyds Banking Group which is 2.76% and 3.47% for the year 2008 and 2009. Comparing last year it is also reduced about 0.7% but comparing the latest 2009 results of Barclays Group, it is considerably higher about 2% which are not a good comparison. This is probably one of the reasons that Barclays has also better results in Profit to equity ratio.

Reserve as a percentage of loans is a ratio to calculate the possible losses on the loans issued to the customers and fellow & other banks. Barclays has pretty similar ratio for both of the years which is 0.66% & 0.60% for 2009 and 2008 respectively. Whereas, Lloyds has considerably higher ratio comparing the Barclays 2009 ratio for reserves to loans 19.95%.  It means that expected losses for the Lloyds are very high for the year 2009. 2008 ratio is negative for Lloyds -6.37%. This is because of additional reserves assumed in the previous year 2007.

Long Term Debt to Total Liabilities and Equity is a solvency ratio which lets us know the debt percentage in the total capital of the company. This ratio of the Barclays Plc is 7.87% & 24.81% for 2009 and 2009 respectively. We can see that it is extensively reduced comparing 2008 ratio results. This is because of reduction is debt and sizeable increase in the equity of the Barclays Plc whereas, similar ratio for the Lloyds Banking Group is increased in 2009 comparing 2008 ratio results 22.73% & 17.36% for 2009 & 2008 respectively. The solvency of Barclay has increased where is decreased for the Lloyds Group. Solvency position for the Barclays Plc is substantially better than the Lloyds Banking Group.

Loans to Assets Ratio let us know the percentage of loans issued to the customers and other banks to the total assets of the particular banking institution. Percentage of loans issued in the total assets of the Barclays Plc is 79.12% & 52.46% for the year 2009 and 2008 respectively. This is increased comparing last year. Similar ratio for the Lloyds Plc is 67.65% & 65.02% for 2009 & 2008 respectively.  Loans are the earning assets for the banking company. So, Barclays has more earnings assets comparing the Lloyds Group.

Equity to Assets for Barclays Group is 4.24% & 2.31% for year 2009 and 2008 and 4.21%            & 2.15% for Lloyds Group. The ratio result for the Barclays Plc and the Lloyds Banking Group is almost the same according to the latest records of 2009 (Morris, 1992)2.

PRODUCTION STRUCTURE

Productions structure is one of the most important elements of strategic financial management. We have analyzed the production structure of both of the companies with the help of model Strategy in Action.

STRATEGY IN ACTION:

As this is a report about the strategic financial management, we have analyzed the production structure of both of the companies by a strategic model STRATEGY IN ACTION.  This model evaluates and explores the current strategy of a company. It is based on few tactics to explore and improve the strategic business position of the company which are discussed as under (Hill & Jones, 2009)10:

Product Simplification:

Both of the companies need to simplify their products which are understandable to any common person to use the banking and financial services the banks provide. The product simplification is already is in the written strategy of the Lloyds bank and its one of the esteem priorities.

Acquisition and alliances:

Both of the companies are big name in the world markets and both of them are involved in acquisition and alliances type of activities. 

On September 16, 2008, Barclays announced to purchase Lehman Brothers (A USA financial conglomerate) which had filed the bankruptcy. The deal also includes acquiring the headquarters building of Lehman Brothers in New York. In March 2007 Barclays announced a plan to acquire the ABN AMRO (The largest bank in Netherlands) but abandoned its bid later on. The British government offered the Barclays to inject £40 billion into three banks which included Barclays but the company later rejected the Government’s offer and instead announced to raise £6.5 billion of new capital.

Lloyds TSB was come into existence in 1995, when the Lloyds Bank and TSB agreed to merge and created the second-largest bank of the time. Later on HSBC investments in the bank made it the largest bank in the UK.

Reduced Product and Process Cost:

From the above analysis, we know that Barclays has the more reduced cost but Lloyds is also working to reduce it product and process costs.

More revenues & margins, further opportunities:

Both of the companies have improved their market share in the UK markers and their revenues are increased in 2009 comparing year 2008. Return on equity is increased for the Barclays but reduced for the Lloyds Group in 2009 comparing its previous year. 

ATTRACTIVENESS OF SERVED MARKETS

This section of the report is composed of two parts one is about the UK markets and economy and the other part is about the Global markets. The first part is about the home market of both of the companies and the second part is about the global market served by our selected banking corporations.

Attractiveness of Home Markets

Both of our selected companies

There is a serious optimism about the trend higher in the UK markets despite the risks to the economic outlooks of the country. The recovery form recession is steadily taking hold of the UK economy. Monetary conditions has suffered some exceptionally looses and inventories are well below the historic norms these things are expected to be normalize very soon. Labor market are also stabilizing a fall in sterling is boosting net external trades. The United Kingdom now appears back on the road to recovery. There is a gradual improvement in the economy in the recent times.

There is a government plan of tightening in fiscal policy, , the ongoing weak of labor market, persistence of credit limitations all cause dreadful obstacles make a strong and sustained UK economic growth in the near future. Basing on these conditions UK GDP is expected return back pre-crisis level at least until late 2012.

Attractiveness in Global Markets

The global growth is being led by the emerging markets and economies are clustered around China. The global growth is getting higher, and most of that is coming from the emerging countries. The growth in the developed economies is also expected to be speeded up which is led by the USA. The growth in Europe and Australia is held back because high levels of debt. But now it reflects some deep cuts in interest rates. The growth also risks the higher inflation rates. The growth is expected to occur first in the emerging economies (TSB 2010)11.

Following chart explains the growth forecasts in the different parts of the world form 2010 to 2012.

PIMC

 

The following chart explains the forecasts of annual CPI growth form 2010 to 2012.

PIMC

 

 

 

CLICK HERE to check 

Appendix A,B & Barclays PLC

 
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