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The United Kingdom’s banking sector is the third largest in the world after that of the US and Japan. The sector is credited for its efficiency, return on capital and dynamism. The sector serves 95% of the population. It has witnessed good times and bad times during the economic slowdown. The sector holds more than $12,000 billion in assets and has more than $10,000 billion in lending and deposits. The financial sector has continuously increased its contribution to the economy, its services are global and it handles more than a third of the world’s foreign exchange business.

The banking sector is highly competitive, products and services offered are similar with differences noted in interest rates offered. The industry has over the year’s undergone radical transformation by incorporating technology. The banking sector was severely affected by the financial crisis. In 2012 the sector began with some uncertainties. As a result, banks incorporated policy models that enable the institutions to strengthen their balance sheets and change their business models in line with the global challenges.  

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SME Lending Policies of British Banks

Various regulations have been proposed to make sure that the sector is competitive locally and internationally. Among the major policies proposed is ensuring that the domestic retail and commercial banking sectors remain stable and profitable. Attention has therefore been given to small businesses whose contribution to the economy is significant. Small businesses are also vital in enhancing economic recovery. United Kingdom has more than 4.52 million small retail and commercial businesses, they employee 61% of the country’s work force. In the year 2010 the sector contributed $ 3T to the economy. As such the SMEs form an exceedingly valuable part of the country’s economy. Consequently, the banking sector has made significant progress to facilitate growth and stability of the SMEs. This has been possible through the provision of credit services which have enabled the sector to face harsh economic times. In 2011, the Banking Sectors lend $ 214.94 billion with $74.96 billion being directed to the Small and Medium enterprises. This was remarkable considering the economic slowdown and risks involved in lending to small businesses or start ups. The credit demand was low during this period but the banking sector was able to encourage clients to take up credit. The banks were able to meet most of the credit worth customer’s requirements. However, there was unmet demand due to existence of risky business proposals. This limited the credit flowing to SMEs. There are suggestions that the regulatory should find ways of unblocking credit and reducing the risk weights of small business. Small and medium enterprises are affected by various issues including the cost of credit provided; the small businesses require quality advice on how to manage their business. These benefits are possible but only through close relationships with the banks.

The banking sector is faced by various challenges among them is how to meet the expectations of the stakeholders, customers and the public.  However, the policies adopted by banks should be able to address these challenges through good governance and risk management. The banks should be transparent and fair enough to its customers. In addition, banks should change their policies to ensure that they met new regulatory requirements. The regulations aim to have a stable financial sector. The stability and success of British banks is important to the growth of UK’s economy, thus the sector needs to have innovative business models that will ensure there is balance between profitability, risks and stability of the financial sector.

Latest reports show that lending to small and medium enterprises has contracted since 2009. The economic environment has continued to influence issuance of credit facilities to employees. The cost of lending has decreased over the years despite the fact that the level of lending has contracted. According to the results given by Bank of England over a period of five years, there was a great dip in lending to SMEs. The lending improved after 2009 although the growth of the lending has remained negative.

The first two years of the financial crisis were composed of two phases. The first face was the beginning of the crisis when the banks started experiencing liquidity problems. That was in early 2007, at this point the banks were not willing to lend among themselves because of the fact that risks of default were very high. The second and the most severe stage involved the issue of insolvency. At this point, inter-bank lending had virtually stopped and the governments stepped in to prevent further collapse of the financial sector. Small businesses were at the risk of collapsing because of heavy reliance on external financing from the institutions. The graphical evidence below shows the trend in lending given the changes in percentage growth. In 2007 when the crisis began the growth rate was at 15%. However, since then it declined to a negative growth rate in 2009.

There is evidence that, during and after the financial crises, external financing for small businesses became difficult to acquire given the status of the banking sector. The high interest rates increased the cost of borrowing. During this time, the rejection rate of the loans increased. Most of the SMEs credit rating reduced and banks were faced with higher risk rates in giving credit. The period before the financial crisis represents an era of credit loss supply while the period during the financial crisis involved tighter credit supply. From 2001 to 2004 the banking sector enjoyed huge economic growth and therefore it easily gave out credit. The policies discussed below were applied by the banking sector during each economic period:

(a) Rejection Rates

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The small and medium enterprises which applied for credit in the period 2007 to 2009 needed to have a higher credit rating than in the period 2001-2004. This is because of the risks that faced the banking sector during the recession. However, UK lending statistics indicate that lending of small businesses continued to rise. During this period, the companies were tightening their lending practices. The period between 2005 and 2007 was characterized by a boom in the availability of credit.

(b) Margins

Small and medium enterprises paid higher margins on the debts during the recession period. That was between 2001 and 2004. The period 2005 to 2007 had lower margins because of the economic boom.

(c) Arrangement Fees

Small and medium enterprises paid higher arrangement fees for the loans from banks during the recession than during other calm periods.

(d) Collateral

During the recession, banks required small and medium enterprises to have collateral and such collateral had to be evaluated. On the other hand, banks provided unsecure loans to the SMEs during normal periods.

(e) Collateral Ratios

This is the value of the ratio of collateral to the whole amount of loan awarded. The collateral value was higher during the recession compared to other periods. This is because banks were facing more risks.

After the financial crisis, the banking sector started maintaining a relatively tight credit supply policy to the SMEs. The government has tried to intervene by enabling access to credit. The guarantee offered by the government has enabled the accessibility of loans by a majority of the employees. The banks have lowered their interest rates enabling the reduction of costs of borrowing.

Comparison between Barclays and HSBC Bank Groups

Barclays plc is a multinational company which provides banking and financial services in over 51 countries in the world. The bank has around 50 million customers. It is the fourth largest bank in the world. HSBC holdings plc is a multinational company that provides banking and financial services. The company is the third largest bank. It has operations in more than 84 countries with more than 90 million customers. Both of these companies are British multinationals which are listed in the London Stock Exchange. When comparing the two, HSBC has focused less on Africa.

Comparison of the Companies Using the Income Statement

As noted above, HSBC is larger than Barclays bank and as a result the bank earns more interest income from its operations. This can easily be related to a larger customer base of around 90 million. The above table notes that both companies experienced a decrease in the value of interest between 2007 and 2008. HSBC reduced by 3.08% while Barclays reduced by 6.098%. In 2009 Barclays Bank had reduced its net interest income by 13.35% in contrast to HSBC which increased the value of its income by 3.2%. In 2010 HSBC increased its net interest income by a further 4.84%, Barclays bank bounced back from a two year low and managed to increase its interest value by 19.98 % (Ghosh 2010). These results were achieved after the severe effects of the recession were over. Last year Barclays bank did not maintain the rapid rise in net interest income, the income reduced by 3.72%, while HSBC fell to a five year low, the interest income reduced by 11%. A graphical analysis reveals the following trend;

Changes that have occurred to both companies in net revenue. HSBC has a higher level of net revenue over the years. In 2008, Barclays saw an increase in the value of its revenue by 4.42%, in the same year HSBC recorded a decrease of 0.26%.  In 2009 both companies net revenue increased, HSBC saw a 5.39% increase while Barclays recorded a 1.07% increase. In 2010 Barclays net revenue rapidly reduced by 24.91%, this was a five year low.  In the same year HSBC increased its revenue by 1.4 %.  Last year Barclays recovered from the previous year’s fall to rise to rise by 25.607%. Over the four year period HSBC has seen rapid growth in the value of its net revenues while those of Barclays have stagnated.  A graphical analysis reveals the following trend;

The changes that occur on the pretax profit of both companies. As such the companies have undergone different changes in their pretax income. During the year 2008 and 2009, both companies had a fall in there pretax income. This can well be associated with the effects of recession. HSBC reduced its value by 61.56% in 2008, while that of Barclays reduced by 32.81%.  In the year 2009 HSBC pretax profits reduced by 23.93% while those of Barclays reduced by 24.51%. In 2010 both companies recovered from the economic slowdown and raised their pretax profits. HSBC pretax profit increased by a remarkable 168.92% while that of Barclays increased by 30.57%. Last year HSBC recorded an increase in pretax profits of 14.89%, while Barclays recorded a 0.58% increase.

HSBC pays dividends to its preference shareholders whose priority is higher than that of common stockholders. The value of the dividends paid amount has increased from 90 in 2007 to 573 in 2011.

The earnings per share of both companies have gradually reduced. This is because of the effects in the economic growth of different countries.  As previously noted the value of the earnings per share for HSBC is greater than that of Barclays. This is expected given the value of earnings of the two different companies. HSBC has a higher number of shares compared those of Barclays and thus for it to have a higher value in earning per share it must have a considerable higher level of income.

Barclays employees are more productive than those of HSBC this because over the period of five years they have made sales that are higher than those of HSBC. The value of divided per share differs for both company.

  The value of dividend per share for HSBC is higher than that of the Barclays for each of the five years. This indicates that HSBC give more value to its shareholders than Barclays and as such the company offer better returns. Investors will therefore be attracted to HSBC for they gain more returns from their investments.

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