About the report
The core objective of this report is to analyze the financial performance of the four leading banking organizations operating in France, namely, Dexia SA, Credit Agricole SA, Societe Generale Group and Euler Hermes Group SA. For this purpose we will be analyzing the financial statements of all the above-named organization for the past four(4) yeas from 2010 to 2013 where we will be calculating the profitability ratios and risk ratios for each of them to compare their performance over the years.
These ratios carries great importance for all the stakeholders of the organization as they directly indicate the profit margins being earned by them from their business activities. Under this section, we will be discussing three profitability ratios, namely, Return on Equity, Return on Assets and Earning per Share of each organization for the period of four years:
i)Return on Equity
Formula: Net Income/ Total Shareholder Equity
An important profitability ratio that indicate the profit margins earned by the company for its shareholder equity base. Most of all, it is the shareholders that are concerned with this ratio and any negative trend can turn down their confidence in the company. Below presented is the ROE multiple for each of the organization:
ii)Return on Assets
Formula: Net Income/ Total Assets
Another profitability ratio that indicates how much profit margins that company was able to earn from its asset base. Many academicians have called ROA as a perfect multiple to access the level of profitability of a company (Mellen & Evans, 2010). Below presented is the ROA multiple for each of the organization:
iii)Earnings per Share (EPS)
Formula: Net Income- Pref Dividend/ Weighted Average Common Shares Outstanding
An earnings per share (EPS) is a vital tool that analyzes the total amount of generated money through the issued shares of the company (Peters, 2007). In other words, this profitability multiple indicates what proportion of net income is available for the shareholders on per share basis. Both, the analysts and the shareholders gaze at this multiple with an eagle-eye view and critically decide their ratings and future participation in the company, respectively. Below presented is the EPS multiple for each organization:
Referring to the ratio multiples and the graphical figures above, we can easily witness that the profitability margins of Euler Hermes is well above its peer. Beginning with ROE multiple, we find that while all the other three banks were having uneven trend, primarily Credit Agricole and Societe Generale, Euler Hermes indicated highest ROE multiple over the years with latest multiple for the year 2013 at 65.41% preceded by Societe Generale at 10.38%.
Similar trend was also noticed in the ROA multiple of each organization where once again Euler Hermes indicated a high profitability on its asset base with consistently higher ROA multiple in comparison to its competitor. Important to note, while other banks such as Dexia SA were having ROA multiple as low as -1.94%, Euler Hermes ended the year 2013 with ROA multiple of 5.17 preceded by Societe Generale with 0.18%.
Our preliminary conclusion related to high profitability margins of Euler Hermes was concreted through our calculation of EPS multiple of each organization where once again Euler Hermes courtesy its high net income produced EPS of €53.22/ share unlike other companies with EPS in the range of -0.01 to 1.01.
Thus, overall, our profitability analysis indicated that of all the banks we analyzed, Euler Hermes came up with the positive trends of high profitability margins in comparison to its industry peers.
This is another aspect of a financial organization where we will be discussing the level of risk under which each of the above discussed banking institution is operating. Below discussed are some of the popular ratio used to access the risk levels in a banking institution:
i)Capital Adequacy Ratio
Formula: (Tier 1 Capital + Tier 2 Capital)/ Risk Weighted Assets
This metric measures the capital level in the bank and is disclosed so as to protect the depositors and the financial system. Below presented is the CAR multiple for each of the four organizations:
Formula: Non-Performing Loans/ Total Loans disbursed
Another important metric that indicates as what proportion of the loans disbursed by the bank have turned non-effective or the one who are not paying their principal or interest obligations from a period of time. Higher the proportion, more will be the loss of the efficiency, capital and profitability for the bank. Below discussed is the NPL proportion for each of the banking institution:
iii) Reserve to Total Assets (RAR)
Formula: Total Reserves/ Total Assets
Another risk measurement ratio, that indicates the proportion of reserves the organization have against its total assets. Important to note, the companies which have high reserves in terms of their total assets are more productive and effective for the companies (Weil, Schipper & Francis, 2014). Below presented is the RAR multiple for each of the organization:
Although the results for above risk ratio multiples did not indicated a one directional trend, but still we can rate Euler Hermes as the most effective on managing the risk levels. Important to note, although the bank lags behind Dexia in terms of Capital Adequacy but the latter bank also has higher non-performing loans(5%) in comparison to Euler Hermes with only 4.5% non-performing loans.
Our analysis relating high risk efficiency of Euler Hermes was concluded on witnessing the trend in the Reserve-to-Assets Ratio where despite of significant fall in the ratio multiple the organization still have highest ratio multiple in comparison to its peers.
At the end of this report, courtesy the trends in the profitability and the risk ratios, we can conclude that of all the banking institutions we analyzed, Euler Hermes has the highest profitability margins and that too under appraisable risk environment. Higher ROE
Capital Adequacy Ratio. (n.d.), from Investopedia: http://www.investopedia.com/terms/c/capitaladequacyratio.asp
Non performing loan. (n.d.), from Investopedia: http://www.investopedia.com/terms/n/nonperformingloan.asp
Peters, J. (2007). Financial Analysis. Lexington: University Press of Kentucky
Weil, R., Schipper, K., & Francis, J. (2014). Financial accounting. Mason, OH: South-Western, Cengage Learning.