Financial Analysis: Santander UK Plc and New York Life Insurance Company

Answer

1. Financial Analysis: Santander UK Plc and New York Life Insurance Company

   Introduction

               The financial sector is one of the most important sections in national, regional, and global economies, and its performance usually has a significant impact on the state of an entire economy. Fundamentally, this sector comprises of various actors including banks, insurance companies, and investment companies. Inasmuch as these organizations operate as money management entities, each of them has distinctive features that deem them convenient for their respective markets. The present paper advances this discourse by offering a detailed analysis of leading financial institutions in the United Kingdom and the United States of America: these organizations include Santander UK Plc, and New York Life Insurance Company. Santander UK is a leading British retail bank located in London. The company boasts of around 800 branches that serve up to 14 million active customers. Some of its services include mortgages, investments, accounts (personal and corporate), and debts among others. On the other hand, the New York Life Insurance Company operates a mutual fund which safeguards its members’ health (individual and family) and businesses throughout their life by offering access to insurance claims during drastic events and annual dividends. It is important to understand that unlike other insurance organizations, this one offers members benefits since they are its shareholders. A recent annual report by the company indicates that it serves millions of members who collectively own over 1 trillion dollars. At this juncture, a critical analysis of these organizations is highly warranted.

   Assets

               In its 2019 annual report, Santander highlights that it owns assets worth 281,702 million pounds, which is approximately 380,160 million dollars. These figures represent various fixed and non-fixed assets including cash and balances ($28,582M), financial assets (336,813M), interest rates in other entities ($158M), intangible assets ($2,383M), current tax assets ($270M), retirement benefit taxes ($844M), property, plant, and equipment ($2,654M), and other assets ($3,400M). Meanwhile, New York Life Insurance Company reported a total of 330,806 million dollars. This amount comprised of cash and invested assets, accrued investment income, separate account assets, and other assets worth approximately 267,973, 2,411, 56,145, and 4,277 million dollars respectively.

   Graph 1 – This pie chart offers a graphical representation of the asset difference between both companies.

    

    

    

    

   When placed into perspective, the total value of the Santander UK bank’s assets is 13 percent higher than the New York Life Insurance Company. The fact that this gap is low is quite mind blowing considering the disparities evidenced in the types of assets held by each institution. Santander has a diverse portfolio which is characterized by massive investments in short-term fluid assets rather than long-term ones. Noteworthy is the significant investment in financial assets at amortized costs (323,659 million dollars): this asset mainly involves the credit it offers its members. This option is usually common among banks as it allows them to maintain accessible funds in case of bank runs. The same cannot be said of New York Life, particularly since it has over 81 percent of its assets on long-term investments such as stocks, bonds, and equities. Unlike Santander UK, this insurance company is highly unlikely to experience a scenario whereby a majority of its members make claims on their premiums, so it is wise to invest in long-term solid assets. The following graphs offer visual portrayal of the two organizations asset portfolios: noteworthy is their contrasting focus with respect to long-term and short-term investments

   Graph 2 – Santander UK Asset Portfolio

    

   Graph 3 – New York Life Insurance Company Asset Portfolio

    

   Liabilities

               Santander UK Plc’s 2019 annual report shows that the company has total liabilities of around 265,685 million pounds, which reflect approximately 351,247 million dollars. This amount incorporates various liabilities including financial liabilities (amortized and fair cost), other liabilities, provisions, deferred tax liabilities, and retirement benefit obligations: these liabilities account for around 346,825, 3,098, 756, 196, and 370 million dollars respectively. On the other hand, New York Life Insurance Company’s 2019 annual report shows liabilities worth 303,841 million dollars. According to this report, the company’s liabilities include policy benefit reserves (234,909M), dividends payable to policy owners (1,980M), other liabilities (12,310M), and separate account liabilities (54,642M). The total liabilities of both organizations are portrayed in the graph below: it is important to note that the total liabilities for Santander UK are 13.5 percent higher than those of its American counterpart.

   Graph 4 – This pie chart offers a graphical representation of the liability difference between both companies.

               It seems wise to highlight that there is a concurrent pattern in the liability section of both organizations’ balance sheets with respect to the largest share of the same. Both organizations are obligated to protect the financial status of the owners of the monies under management. In the case of Santander UK, this amount reflects under Financial liabilities at fair value and amortized cost. Meanwhile, the New York Life Insurance’s policy benefit reserves reflect the maximum amount of funds allocated to claims within a specific financial period. The graphs below highlight the various liabilities (in percentage) for both organizations.

    

   Graph 5 – Santander UK Plc Liabilities

    

    

   Graph 6 – New York Life Insurance Company Liabilities

    

   How the Different Roles of Banks and Insurance Companies are reflected in these Organizations’ Balance Sheets

               As much as both insurance and banking institutions operate as financial intermediaries, their business models are grounded on different principles. Banks are money managers that create a bridge between savers and borrowers. These institutions usually generate a pool of funds through trust-based relationships with savers who deposit their money into their bank accounts. The value offered to these savers involves a security for their finances and periodical increment through the banks’ interest rates. Once the money is entrusted to them, banks offer loans at higher interest rates to facilitate profit-making. Such a procedure demands effective coordination to ensure that both parties access money when they need it. In their phenomenal piece, Raina and Shahnawaz (2017) comment that banks operate under the ‘maturity transformation’ hypothesis, which holds that depositors are highly unlikely to request their money at the same time inasmuch as they are inclined to spend the same eventually. This theoretical framework compels banks to focus on highly liquid assets and strict liability measures.

               Unlike banks, insurance companies collect funds from their members in exchange for guaranteed access to financial relief in case a particular event occurs. It is important to clarify that these funds are usually collected in the form of premiums, and the relief is usually known as a claim, which is accessible only if the event in question is insured/indemnified. Both the insurers and the insured benefit from this relationship since it offers them access to a pool of funds. For insurance holders, this pool of resources implies that the compensation is likely to be high even if their premiums are low. On the other hand, insurers utilize this money to engage in huge long-term investments such as stocks, bonds, equities, and real estate in the pursuit of profits (Gründl & Gal, 2017). Since most covers, especially in life insurance companies, become active in lengthy periods, the goal of insurers is to ensure that their investments yield profits within that period so that the assets can be liquid when need arises.

               The described roles usually result in unique balance sheet structures for both banks and insurance companies. Bankers rely on callable deposits to facilitate long-term loans in their attempt to maximize profits. This technique usually applies the maturity principle by ensuring that the fixed deposit accounts mature right when the long-term loans are completely resolved. Insurers use the matching principle to ensure that investments, mainly in bonds, yield profits by the time life liabilities are due (Gründl & Gal, 2017). A clear picture at this point is crucial in explaining the difference in Santander UK Plc and New York Life Insurance Company balance sheets. The graph below offers a detailed perspective of the impacts of these principles in the balance sheets of these institutions.

   Graph 7 – Conventional Differences in Bankers and Insurers Balance Sheets

   (Insurance Europe, 2014)

               When placed into perspective, these differences are accurately displayed in the balance sheets of Santander UK and New York Life Insurance. In Santander’ case, financial assets at amortized cost account for the lion share of its total assets. This type of asset usually comprises of long-term loans, which are backed by equally large deposits listed in the balance sheet as financial liabilities at amortized cost. It is also important to note that all of the assets held by Santander are highly liquid, except for property, plant, and equipment. This kind of liquidity is necessary for banks since the demand for cash by both depositors and lenders is usually consistent. The New York Life Insurance invests mainly in long-term assets, which mainly include bonds. This asset is included in the balance sheet under cash and invested assets, and it has been matched with the policy benefit reserves. Other assets in this institution’s balance sheet are fundamental for the periodical operations such as dividend payouts to its members.

   Santander UK Plc Profitability Calculations

   Profitability Ratios

               Banking is an interesting business model that yields immense profits during sound economic times. While most investors tend to look at earnings per share to determine a bank’s profitability, this measure offers little insight. For this reason, profitability ratios such as return on assets (ROA), return on equity (ROE), and net interest margin (NIM) are recommended for further clarity on this matter (Husain & Sunardi, 2020). As far as the Santander UK Plc is concerned, ROA and ROE are the most appropriate ratios to measure its profitability. A positive percentage outcome in each ratio offers a greenlight for investment.

   ROA

   Return on assets can be calculated as long as the information on the bank’s net income and the total assets are accessible. Santander’s recent income statement and balance sheet shows that the company has a net income of 968.18 million dollars and total assets worth 380,160 million dollars.

    

   The standard ROA calculation formula is :- (Net Income/Total Assets) x 100

   Therefore, Santander’s ROA for FY 2019 = (968.18/380,160) x 100

   ROA = 0.25%

    

   ROE

   In the meantime, return on equity calculation demands the net income and the total shareholders’ equity, which are usually recorded in the income statement and the balance sheet respectively. Its formula differs slightly from ROA since the net income is now divided by the total shareholders’ equity, then multiplied by 100 for the percentage outcome. Santander’s net income for FY 2019 is $ 968.18 million while its total shareholder’s equity is $20,944.56 million.

    

   ROE = (Net Income/Equity) x 100

               (968.18/20,944.56) x 100

   Based on the preceding formula, ROE = 4.62%

    

   Profitability over the Last Five Years

               At this point, it is fair to highlight that the company recorded net incomes of 1,513.68, 1,719.73, 1,742.19, and 1,273.29 million dollars for financial years 2018, 2017, 2016, and 2015 respectively. The total assets for these years were 374,289.07, 415,754.20, 399,568.63, and 370,858.85 million dollars respectively. Using the ROA formula, the company’s profitability for the same years is 0.40%, 0.41%, 0.44%, and 0.34% respectively. A similar trend is evidenced when calculating the ROE based on total shareholders’ equity values of 20,813.80, 21,203.44, 20,212.81, and 19,671.27 million dollars for the stated years respectively. The percentage return on equity 7.27%, 8.11%, 8.62%, and 6.47% respectively. Together with the ROA and ROE findings for FY 2019, these figures show that the bank’s profitability has been on a steady decline since 2016. This decline began right after the company’s performance surged from a significant low in 2015.

   Conclusion

               After a thoughtful analysis of the financial records of United Kingdom’s Santander Plc and United States’ New York Life Insurance Company, it is fair to allude that these institutions apply distinct investment approaches inasmuch as they both operate as financial intermediaries. Their unique operations in the money markets allows them to maintain profitability while serving their clients effectively. An in-depth exploration of Santander’s profitability shows that the company has been experiencing a steady decline for the past four years. Noteworthy is the fact that this analysis is grounded on ROA and ROE values for the past five financial years.

    

    

    

    

    

Answer

Assessing Risk and Reward

The Nissan Motor Company is one of the leading automobile makers in the world. The Japanese carmaker has primarily enjoyed a successful run, allowing it to enter various regional and international markets such as the United States. However, the changing business environment was not favorable to the company in 2019. Notably, the cooperation recorded losses amounting to 7.8%. The experience pushed the management into making tough decisions, requiring almost all of its North American workforce to go for unpaid leaves.

In late 2019, the company announced that the decline in sales necessitated a two-day unpaid leave for the North American workers. The stated days for the vacation were January 2 and 3^rd    (Chicago Tribune, 2019).  Notably, this move was a crucial decision for the company because of its conflicting impacts. Whereas on the positive side, it could help the firm minimize expenses, it threatened to affect the public perception of the company regarding employee welfare.

The rewards for the decision involved cutting expenses by not paying the workers on leave, which eventually would translate into reduced expenses. Another reward was that the decision could allow the company to optimize performance by evaluating employee performances then developing new milestones. However, on the low side, the company risked affecting its public image and brand name, especially in the North American market. As per Chakravorti (2010), the way an organization treats its employees influences the firm's public perception. Thus, Nissan risked eliciting a negative public perception. With a distorted public image, the company could fail to revive its declining sales.

I would have advised the management of Nissan to utilize the Predictive Analytic perspective in determining the right decision to take. Ideally, the approach tries to predict what might happen in the future if particular decisions or actions are undertaken at the moment (Traymbak & Aggarwal, 2019). Looking at the situation at Nissan, the company needed to develop a goal such as increasing sales. After that, they would have made decisions aimed at realizing the set goal. In this regard, the predicted outcome could give the management an overview of whether more risks existed or significant rewards could be realized.

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