Financial Risk Management Analysis In Uk During Covid 19

Financial Risk Management Analysis In Uk During Covid 19

Introduction: Financial Risk Management Analysis In Uk During Covid 19

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Financial institutions or banks play a huge role in an economy and also help to manage and sustain in the competitive market. It is very much difficult these days to sustain in the market especially after the covid 19 people are more obsessed with their savings and less interested in investing in other companies or banking funds. These funds or investments are the main source of Income for the bank. That is why the banking sector has been hugely hit by the covid 19. This report consists of risk management of five important banks of the UK which are Barclays bank, HSBC bank, Lloyds bank, NatWest Bank and Santander Bank, during the covid 19 period. This report will clearly explain the risk management strategies and techniques by these banks.  

Credit risk Management

Credit risk management is one of the main risks which could affect any institution, especially banking sectors. The banking sector mainly manages the loan and takes deposits from customers. There should be the balance to maintain these two things. The bank can give a loan to an extinct. During the covid 19 people focused more on savings because they needed the medical expenses to treat themselves which affected banks in a way that they could not generate any kind of loans and this made a gap in the banking sectors (Serwadda, 2018). This will also make sure that the pandemic affected them in a way that the customer has lost buying power, which affected the bank to sell their products like credit card or loan to the customers. This created problems because a huge amount of revenue generation which was coming from the interest has been stopped. This made the bank adopt some strategies which could manage this credit risk.

Ratio analysis

Credit risk could be analyzed by the company analyzing the ratios which define the solvency positions of the company. The solvency means if the company is going to declare insolvency in the future. These five banks have a presentable debt equity ratio (Campiglio et al. 2018). This ratio shows the debt in comparison with their equity. These banks have long term debts in their balance sheet. This could create debt for them. In all five banks HSBC and NatWest managed their long term loans in a way that loans are less than their equity which is a very good sign for the company. They keep paying their debt to the market (Aziz and Dowling, 2019). The Barclays bank could make sure of a strategy to pay their loans because the way their long term loan is increasing it could be a problem for the company. The company showed the debt equity ratio over 7. This could give them credit risk in the future. All the companies take deposits from their clients and which they invest into other funds to increase the money. But after covid 19 the fund raising rate is slow and also there could be risk arising for that. This year the total income to deposit ratio has a figure of 0.05 at the Barclays bank (Elamer et al. 2019). This bank should think about more promotions which could remove their risk. They will try to mitigate this risk by promoting their products at a cheap price. This will give the customers some opportunity to buy the products and also could be hugely interesting for the company. They could get back the deposit rate which they were getting before the covid 19.    

Particulars	Barclays Bank	HSBC Bank	Lyods Bank	Natwest Bank	Santander Bank
2021	2020	2019	2018	2017	2021	2020	2019	2018	2017	2021	2020	2019	2018	2017	2021	2020	2019	2018	2017	2021	2020	2019	2018	2017
Income to Deposit ratio	0.05	0.03	0.05	0.05	0.06	0.18	0.14	0.22	0.22	0.19	0.17	0.16	0.25	0.16	0.23	0.08	0.06	0.09	0.11	0.09	0.98	1.73	1.06	1.12	1.03
Current asset to Total asset ratio	0.50	0.47	0.50	0.36	0.51	0.70	0.65	0.66	0.68	0.68	0.83	0.87	0.86	0.88	0.86	0.79	0.70	0.68	0.69	0.76	0.21	0.18	0.18	0.18	0.81
Debt Equity ratio	7.10	6.56	5.81	6.69	5.29	0.48	0.57	0.67	0.55	0.47	1.59	2.06	2.40	2.17	1.84	0.20	0.29	0.23	0.23	0.88	2.82	4.89	3.75	4.05	3.82
Debt to Income Ratio	22.07	25.93	19.35	21.70	18.63	1.59	1.77	1.56	1.43	1.39	2.05	3.11	2.34	4.35	2.30	0.69	0.96	0.57	0.67	2.85	4.60	7.70	5.87	6.35	5.82
Long term debt to total asset ratio	0.36	0.33	0.33	0.38	0.31	0.03	0.04	0.05	0.04	0.04	0.10	0.12	0.14	0.14	0.11	0.01	0.02	0.01	0.02	0.06	0.17	0.30	0.27	0.30	0.28
Return on Equity	0.12	0.05	0.07	0.05	0.05	0.09	0.04	0.07	0.10	0.09	0.10	0.02	0.05	0.08	0.07	0.07	-0.02	0.07	0.03	0.02	0.08	-0.10	0.05	0.07	0.06
Net Profit Ratio	0.37	0.18	0.22	0.18	0.19	0.30	0.13	0.16	0.26	0.26	0.13	0.03	0.05	0.15	0.09	0.24	-0.06	0.18	0.10	0.05	0.14	-0.16	0.08	0.11	0.09

Table 1: Financial Ratios

Liquidity risk Management

Gap Analysis

This is a method to manage the liquidity risk for any banks. The bank when they have a difficult level in liquidity position then they apply this method to inspect how this risk can be removed from the company. This explains the difference between the assets which earn interest for the company and also the liabilities which bear the interest for the company. The interest which comes to the banking companies is income for them. This interest comes as a liquid asset to the companies. The bearable interest liabilities are also payable through the company and also paid as a liquid assets mode. The more payable of interest means the company has liquidity risk. At the time of covid the banking sectors were surrendering these interest bearable liabilities to reduce the risk. This is a method of managing the risk in the company (Akomea-Frimpong et al. 2022). The bank could manage the assets which earn interest which can give more income to the company and also they will increase more revenue to the company. The more liquid assets will be increased the liquidity position for the company will also revive its position and could be back on to the same position. 

Liquidity ratios 

The liquidity ratio also explains the liquidity position of the company in some numbers which gives more clarity about the liquidity positions for the company. They maintain their current assets at a good number. Current assets means they collect the money from their customers at a normal time and also their clients pay them within that time (Mbama et al. 2018). This maintains the liquidity for the company in a way that the company could manage their liquid assets level. The more prominent collection of their interest can be made sure that the company could make more liquidity for their company. The current asset to total asset presented more than 50% in all the companies. This is a very good sign for all the companies and also it will give many benefits for the company. The deposits also maintain the liquidity position for the company. The more deposits from customers will be received by the company that will help to improve the liquidity position (Elamer et al. 2020). The deposit will only increase if the consumer wants to invest in that bank. These five banks are more popular in the UK and also one of the most secured banks of the UK. That is why these banks will get more deposits for the consumers. The consumers after covid makes a very short. That is why in 2020 the liquidity position of all banks will be affected but due to some strategies made by the banks which affected the position of liquidity in a great way and make sure that the liquidity position of the company never deteriorates.  

Market risk management 

Market risk is also an important risk for the companies like Barclays, Lloyd or NatWest who maintain their business operations mainly in the UK. Market risk mainly arises from the low investment of consumers in the market. The customers who were buying stocks regularly stopped buying (Azarenkova et al. 2018). This mainly happened due to more concentration in savings. During the covid 19 the people try to save money because of the medical treatment and managing their necessary requirements of the day. This lowered huge investments in the market, and also banking sectors were unable to generate more funds and loans.

CAPM model 

The banking sectors adopted some strategies to avoid these risks and also to maintain their funds to continue their business operation and sustain in the market. The capital asset pricing model helps the companies to manage their independent operations and also the risk which they go through in the market. This model establishes the relationship between systematic risk and also expected return. This could make sure what the regular or guaranteed risk in an investment is. This risk presented in a way that it could build a relationship with the expected return and also could manage this return in a great and suitable way (Monasterolo, 2020). This will make sure of the risk assessment of the company and also help them to manage their risk and issue new shares and bonds in the market. The banks should definitely reduce the risks after covid 19 that is why they are increasing the value of equity. Banks like HSBC or Barclays have lesser long term debts. The more capital asset pricing model could make sure that the banks could maintain their percentages of the long term debts in their company. This would maintain a balance in the company and also could be important to mitigating the risks. The more own funds will also make dividends expenses huge which will reduce the profits percentages. These five banks in the last five years maintained a good amount of profit and also maintained deposit balance in proper balance.

The banks also have a risk for returning the money which they collected from the market regarding stocks or shares. They should maintain a plan or strategy to evaluate the adequate level of risk at which they could sustain or keep their business operation in a risk free mode. The market risk can be assessed by keeping a level of investments in the market and also creating more opportunities for customers to make these investments which could maintain the balance of market risk for the company.  

Interest rate risk management

Gap analysis

The gap analysis also helps to manage the interest risk for the company. This method helps to increase the interest earning assets in the company which will remove the risk of interest in the company. The company could maintain a huge amount of liabilities which bears interest. This is an expense for the company and also there will be huge interest expenses for the company. This expense could decrease the profit (Zetzsche et al. 2020). That is why in covid period the assets which can earn interest have been acquired by the bank. The bank could maintain the profit of the organization by reducing interest expenses and also earn huge interest from the assets. This also makes sure that the company will earn more in interest rather than giving interest to other companies.

Value at risk 

This is a risk analysis method which calculates the value of risk in a way that the company managers or decision makers could understand the risk of the companies. This method explains the risk value of the company and also analyzes the risk to make sure that the company could maintain its business operations (Dikau and Volz, 2018). The business value of the risks in some methods and also some methods which will guarantee some of the major risks for the company. The banks have a strong customer base that is why they look to give away more loans to the customers. This can help the company in a way that the company could manage their interest earning assets. At the time of the pandemic the people were not taking loans because they did not have sufficient money to maintain their necessary things and also loans. This could make sure that the company could help the firm and manage to figure out the difference between the interest earning ways from the customers (Anagnostopoulos, 2018). This will give advantage to the banks that they will properly know the resources and also make sure that the company could manage these interests and also keep paying the interest to the customers who deposited the balance or made any investments. This balance is required to mitigate risk of the concern and also helps the firm to maintain the balance of interest in the company. The banks should make sure that the earning of interest will always be higher than paying the interest. This is the way to manage the interest risks. 

Conclusion

This report helps to make sure to give more clarity about the risk management during the covid 19. The covid 19 brought huge amounts of risk to all the sectors and these risks should be maintained in a proper strategy otherwise the company could be in pressure and could stop their business. The banking sector can be hugely important for any country’s economy. After covid 19 people needed the money and there was no real source so the UK managed their economy by changing policies. But after covid 19 this will be more important to serve the banks because they are also getting out of money. Banks are the pillars of the economy so if the banks lose huge amounts could be a problem for the economy.  

References 

Journal

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Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G. and Tanaka, M., 2018. Climate change challenges for central banks and financial regulators. Nature climate change, 8(6), pp.462-468.

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