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Annual Results Glossary

A - E

Title Description
Adjusted Earnings Per Share (See also ‘Earnings per Share’) Companies are required to publish statutory or basic earnings per share (EPS), but there are also a number of adjusted EPS numbers that are useful to investors.

The most usual adjustment is to remove the affect of one off profits from the figures that will make it more difficult to compare the numbers from previous years or estimate future figures.
Average Risk The assets of a business are the items that help it make a profit. In the case of a bank the majority of the assets are the loans it makes to its customers, who then pay interest income, to the bank. When lending money the risk is that the customer will not be able to pay either the interest or the principal back.
Combined Ratio The combined ratio is an important measure of profitability used in the insurance industry. It is used to relate premium income to claims, administration and dividend expenses.

A ratio below 100% indicates that an insurance company is making a profit, while a ratio above 100% means that it is paying too much in claims.
Cost:Income Ratio The cost:income ratio is a way of measuring the efficiency of a company or bank. The goal of the bank is to improve profitability whilst managing or reducing costs. The lower the cost:income ratio, the more efficiently the bank is being managed.
Credit Rating A credit rating is a formal assessment of a company's credit risk and financial status. Credit ratings are generated by specialist agencies, such as Moody's, Fitch and Standard and Poor's (S & P). The function of a rating agency is to assess the creditworthiness of a borrower or its debts, which is done by making an independent assessment of the borrower's ability to fulfill its financial obligations.

The credit rating of a company’s debt is important to investors as it:

  • provides a standardised measure of relative credit quality
  • provides an impartial view of the credit quality of the debt
  • allows the investor to compare debt issues of similar credit quality
    		•
    CreditMetrics CreditMetrics is a way of assessing the risks associated with lending money to the bank’s clients and its counter parties.

    Traditional ways of assessing risks associated with lending money work best for individual customers or loans.

    CreditMetrics allows the bank to assess many loans, known as loan books, quickly. CreditMetrics also helps the bank understand the impact of changes in the market that might make it less likely that the banks clients can pay the interest on their debts.
    DRIP (Dividend Reinvestment Plan) Some companies offer their shareholders the choice of either taking their dividend in cash or to reinvest their dividend in shares in the company.

    Dividend Reinvestment Plans (DRIPs) reinvest all dividends paid into more stock at specific times of the year when the purchase of shares by shareholders in the DRIP programme is permitted.

    DRIP programmes programmes are generally run by a company’s registrar on behalf of the company.
    Earnings Per Share Earnings per share (EPS) is a measure of the profit generated by the bank, but shown per equity share. It is calculated by dividing net profit by the number of common shares issued.

    EPS is widely used in company accounts and EPS multiples are used by investors and financial analysts as a common measure for comparing companies.
    Ex-Dividend The ex-dividend date is a specific date, occurring after the dividend has been announced, after which buyers of the shares which have gone ex-dividend are no longer entitled to receive that particular dividend. This is known as going 'ex-dividend'; before this date, the shares are said to be 'cum-dividend'.

    If you buy shares before the ex-dividend date, you are entitled to the recently declared dividend. If you buy shares on or after that date, the previous owner of the shares (and not you) is entitled to the dividend.

    When a share goes ex-dividend you may see the price of that share fall by roughly the same amount as the dividend. This is because the stock market adjusts the price to reflect the fact that a buyer is no longer entitled to the dividend. Bear in mind though that other market factors may drive the price lower than the amount of the dividend or, alternatively, drive the share price up to such an extent that the fall caused by going ex-dividend is reduced or eliminated.

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    F - N

    Title Description
    Impairment Losses Impairment loss is an accounting term that refers to the difference between the value shown in the banks report and accounts and the actual amount the bank can recover from the customer.
    Intangibles Amortisation An intangible asset is an asset that does not exist in physical form, but still has a value. Examples include trademarks, patents and copyrights. It also includes brands such as The Royal Bank of Scotland. Customers view the reputation of the brand as an important part of the purchasing decision.

    When the asset has a physical form it is known as a tangible asset. Examples of tangible assets are computers and cars. These items reduce in value over time. This is known as depreciation.
    Interest-Bearing Asset These comprise cash, balances and placements with banks; loans and advances to banks and non-bank customers.
    Interest-Earning Asset These assets are generally interest-bearing accounts, bonds, and securities available for sale.
    Interim Dividend The dividend is a cash payment made to shareholders of a company when it makes a profit. It is a way of rewarding the shareholder for investing in the company. Rather than make a single payment when the final results are released, many companies pay two dividends – a ‘final dividend’ based on a company’s year end or ‘final’ results and a smaller payment six months into the year based on the company’s half-year or ‘interim’ results. This smaller payment is called an interim dividend.
    Net Income Net income is an accounting term used to refer to income minus all the costs associated with running the business, such as interest, taxes and depreciation.

    Net income is often referred to as the ”bottom line” as it is typically found on the last line of a company's income / Profit & Loss statement.
    Net Interest Margin Net interest margin is the difference between interest received from loans and interest paid out to depositors. It is usually expressed as a percentage and is an important measure of bank profitability.
    Non Interest-Bearing Asset Non-interest bearing liabilities include operating expenses, creditors, balances arising from revaluation of financial instruments and interest and other income received in advance.
    Non Interest-Earning Asset These assets are generally non interest-bearing accounts, bonds, and securities available for sale.
    Non-Interest Income Non-interest income refers to revenue that does not come from traditional banking activities (such as lending). Non-interest income arises from many ‘non-traditional’ banking activities that generate fee income, for instance service charges, trading revenue.
    Non-Performing Assets Non-performing assets (NPAs) are assets such as loans or leases where the customer is not paying the interest due to the lender and therefore not producing income for the lender. Assets are generally regarded as non-performing when the interest is over due by 90 days or more.

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    O - R

    Title Description
    Operating Lease Depreciation An operating lease contract gives the person or company the use of an asset, but does not convey rights similar to ownership of the asset. Operating leases tend to be relatively short term, covering only a portion of the asset’s useful life. Equipment leased varies hugely in value from computers to aircraft.

    Under accounting rules the value of the leased item must be included in the banks accounts. As the value decreases the change in value is shown in the accounts as depreciation.
    Ordinary Shares Ordinary shares represent an investment in the ownership (equity) of a company. It is the most common form of equity issued by companies (hence it is known as ‘common stock’ in the US).

    Ordinary shareholders are entitled to receive dividends on their holdings, assuming a dividend is declared. They also have a right to the surplus assets of the company on winding up, and to vote at general meetings of the company.
    Pay Date The pay (or payment) date refers to the day on which dividend payments are actually sent to shareholders, that is, dividend cheques are posted or bank accounts are credited.
    Payout Ratio The payout ratio measures the percentage of a company’s earnings paid out to shareholders in the form of dividends. It can be calculated by dividing the annual dividends per share by earnings per share.

    A similar concept to the payout ratio is “dividend cover”, which is commonly used in the UK and refers to the ability of a company to meet payments of dividends out of earnings. Dividend cover is calculated by dividing earnings per share by the annual dividends per share.
    Preference Shares Preferred shares (or preferred stock in the US) are shares in a company that give their holders an entitlement to a specified fixed dividend.

    Preferred shareholders take priority over ordinary shareholders when it comes to the payment of dividends. In the event of bankruptcy, the claims of preferred shareholders rank ahead of those of ordinary shareholders. However, preferred shareholders are not usually entitled to any voting rights (although this may vary depending on the company issuing the shares).
    Record Date A record date is a date on which it is decided who is entitled to receive a dividend payment. The record date usually follows a couple of days after the ex-dividend date. To be eligible to receive a dividend a shareholder must be ‘recorded’ on a company’s register of members (or shareholders) on or before the record date.
    Return on Equity Return on equity (ROE) is a measure of a company’s profitability. It shows how much profit a company generates with the money shareholders have invested.

    It provides an indication of how efficiently a company is using its assets to produce earnings. ROE can be a useful tool for comparing a company’s profitability with that of others in the same industry.
    Risk-Weighted Assets When lending money to customers there is always a possibility that the customer will not repay the money. This risk is known as credit risk.

    Different types of lending have differing levels of credit risk.
    A risk weight is an estimate of the amount of credit risk associated with a given type of lending. For example mortgage lending is less risky than credit card lending

    Risk weighting assigns a higher risk weight to a higher risk. For example, assets such as cash, gold, and many government bonds have 0% risk weighting, while claims on corporations are assigned varying risk weights from 20% to 150%.

    The bank and the banks regulators look at the risk weighted assets to see how much risk the bank is taking.

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    S - Z

    Title Description
    Securitisation Securitisation is the process by which a financial institution, the bank, can sell some of its assets to other financial markets counterparties so that the bank can transfer the risk and some of the interest income to other counterparties. Assets that can be securitised include mortgages, credit card receivables, auto loans and other forms of consumer installment loans.

    Securitisation provides a way to convert individual financial assets into liquid, tradable capital market instruments. The benefit to the bank, also known as the issuer, is that the assets no longer need to be included in the banks accounts, also known as its balance sheet. They are off balance sheet.
    Share Buyback When a company is making a profit, the company can choose to retain the money, for investment, or it may want to return the money lent to it by its shareholders.

    A share buyback is a way of returning money to a company’s shareholders. It involves the repurchase of its own shares in order to reduce the number of shares on the market. There are several types of share buyback schemes. Two of the more common types are:

  • an equal access scheme – the issuer buys back the same proportion of each shareholder's shares
  • a selective buyback – the issuer buys back shares from only one or some of its shareholders


    • There are a number of reasons why companies might undertake a share buyback, including:

  • to distribute profits back to shareholders
  • to reduce administrative costs by buying out small shareholders
    		•
    Shareholders’ Equity Shareholders' equity is the net worth of a company after all liabilities have been deducted from all assets. It is also referred to as “net worth”.
    Subordinated Liabilities When a company is dissolved or goes bankrupt the creditors each have rights to any assets of the company. There is a hierarchy of creditors. A subordinated liability is paid after the claims of all other creditors have been satisfied.
    Tier 1 Capital Ratio Financial regulators want to ensure that the bank has enough capital to operate in all circumstances. The regulators set a number of criteria which the bank should meet to show them that the bank is stable, one of which is Tier 1 Capital ratio.

    Tier 1 capital is often referred to as ‘core capital’. The only elements that can be included in Tier 1 capital are those deemed to have the highest capacity for absorbing losses while still allowing a bank to continue to operate on an ongoing basis.

    The minimum Tier 1 capital ratio is:

    Tier 1 capital Formula
    Total/FY Dividend Full year (FY) dividend is calculated by adding the interim and proposed final dividends together.
    Weighted Average Shares Weighted average shares refers to the number of shares used in the calculation for EPS. It is used because the volume of shares outstanding can change over time for a number of reasons, such as the issuance of new shares, the repurchase of existing shares or the exercise of employee share (or stock) options.

    For example, if a company had 4 million shares for one half of the reporting year and 5 million shares for the other half, then a weighted average is taken to find the number of shares outstanding for the reporting year (0.5 x 4 million + 0.5 x 5 million = 4.5 million).
    Yield Curve A yield curve is the graphical representation of interest rates for different time periods but similar risks.

    The yield curve is important to financial markets participants because it shows the expected growth rate and inflation rate in the economy and the risks associated with lending money to customers.

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