Mba Thesis

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School of Management

Bleking Institute of Technology

INVESTIGATING SHAREHOLDERS’ ECONOMIC CREATION IN THE BANKING INDUSTRY: -

VALUE

The case of the HSBC and Barclays plc, UK

MBA Thesis by: Isaac Tettey ID: 760831-P499 Isaac Takyi Baffoe ID: 770627-P173

Supervisor: Professor Ian Robson

THESIS FOR THE MASTER’S DEGREE IN BUSINESS ADMINISTRATION JUNE 2008

EXECUTIVE SUMMARY This paper analyses shareholders’ economic value creation using two major banks; HSBC and Barclays plc of UK within a five-year period (2003-2007). We use both internal and external information such as auditors’ annual financial reports, designed control variables, stock market data, etc to analyse business activities and practices of the banks and how they influence shareholders value on the stock market. We applied both the innovative (EVA) and traditional accounting (ROA and ROE) methods to measure their respective performances, regress it against stock market returns and other control values to understand their explanatory power especially to shareholders’ economic value. Our empirical results were mix: Though both innovative and traditional accounting methods do explain the variations of the stock returns for both HSBC and Barclays, the information content of EVA per equity is superior to the variations of Barclays’ stock market returns whiles return on asset (ROA) provides more explanation power to variations in the stock market returns for HSBC. At the comparative level both banks are creating values but Barclays provides higher average EVA per equity compare to HSBC. However Barclays operates under higher internal volatility which affects it performances measurements including stock market reactions and returns hence HSBC prove to be superior when shareholders measure them on risk-adjusted level.

II

TABLE OF CONTENT Acknowledgement Glossary of Terms and Abbreviations Definition of Terms CHAPTER 1 INTRODUCTION 1.1 1.2 1.3 1.4 1.5 1.6 Introduction Statement of the Problem Objective of the Study Motivation of the Study Scope and Limitations Empirical Studies 9 9 9 9 10 10 11 VI VII VIII

CHAPTER 2 REVIEW OF RELEVANT LITERATURE 2.1 2.2 Introduction Banking Industry, The Overview 14 14 14 14 14 16 18 20 20 20 22 22 23 24 24

2.2.1 2.2.2
2.3 2.4 2.5

Banking, what is it? The activities of the UK banking firms

Economics of banking Critical factors of market structure of the banking Industry Creating Shareholder Value

2.5.1 2.5.2 2.5.3 2.5.4 2.5.5

What is Shareholder Value Value Drivers What is Value Creation Facts about Shareholder Value Creation Creating Shareholder Value – The Strategy 2.5.5.1 2.5.5.2 Superiority in operations Right financial Structure

III

2.5.5.3 2.5.5.4 2.5.5.5 2.5.5.6

Being focused Grow the Earnings Quality Information Stock repurchase

25 26 27 27 28 29 29 30 30 30 31

2.5.6 2.5.7

Value Based Management Measuring Shareholder Value – The Metrics 2.5.7.1 2.5.7.2 2.5.7.3 2.5.7.4 Shareholder value analysis (SVA) Economic profit (EP) Cash flow return on investment Total business returns (TBR)

2.6 2.7 2.8

Technology and Value Creation in Banking

Information Technology and Competitive Strategy to increase shareholder value 33 Performance and efficiency measures in banking 35 35 38 38

2.8.1 2.8.2 2.8.3

The performance measurement application in Banking Industry Capital allocation and banking performance Stock market value and banking operation performance

CHAPTER 3 METHODOLOGY 3.1 3.2 Introduction Calculation of Economic-Value-Added (EVA) for banks 41 41 41 42 42

3.2.1 Calculation of NOPAT 3.2.2 Calculation of cost of Equity 3.3 Calculations of Traditional Accounting Performance Measurement and Control Variables 3.4 3.5 Calculation of Stock Market Performance Measurement Data, Sample Calculation and Regression Construction

44 45 46

IV

CHAPTER 4 EMPIRICAL RESULTS, DISCUSSION AND CONCLUSION 4.1 4.2 4.3 4.4 4.5 Introduction Analysis of Barclays Plc...
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