Final analysis


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Final analysis

  1. 1. Chapter one-Introduction1.1 Background of the StudyIn the world of modern ages importance of banking business is immeasurable. Agricultural andindustrial prosperity cannot be imagined without the existence of an expedient banking system inthe country. Absence of a fair banking system is identified as a prime cause of backwardness ofany country in respect of its commerce and industry. Banks have been playing effective role inthe capitalistic as well as socialistic countries of the world in their internal distribution of wealth.The financial sector in Bangladesh is continuously evolving towards a more modern andefficient system of finance which is supportive of greater investment and inclusiveeconomic growth. The financial system of Bangladesh consists of The Bangladesh Bank,scheduled banks, non-bank financial institutions, micro finance institutions, insurancecompanies, co-operative banks, credit rating agencies and stock exchange. At presentBangladesh has 4 state owned banks, 10 foreign banks, 9 specialized banks, 32 commercialbanks and 6 more commercial banks are on their way to commencement.To get an overview of any company in a very short period, financial analysis is the mosteffective way. Financial analysis give the actual probable profitability is a short and convincingway. It also shows which company is good for general people for their investment. In short wecan say that it gives a clear understanding of the financial position of the company to any person.While doing the financial analysis it was tough to analyze all the banks. So a sample of fivebanks was taken to analyze the whole banking industry. As there are diversified bankingpractices in Bangladesh, thinks analysis was done on diversified origin bank. Three commercialbanks are analyzed since there are more commercial banks, one government owned and onespecialized bank are analyzed here. This diversification was done so that we can get a good viewof overall banking sector of Bangladesh. 1
  2. 2. 1.2 Objective:The general objective of the study is to know how to calculate these ratios and implement themin real life in banking sector. While doing this term paper our specific objective was on  To calculate financial ratios of five banks.  To analyze the ratios.1.3 Scope:Since there are about 55 banks in Bangladesh, it is almost impossible to analyze the financialdata of all these banks in this short time span. So we decided to limit our study to five banks.Among them three are commercial banks, one specialized bank and one is government ownedbank. All these banks were selected randomly.1.4 Limitation:  Time span was so short that analyzing all the banks were not possible. So a sample of five banks was selected  Annual reports of all banks were not available so a sample of five was selected  Since bank is a service rendering organization, it was not possible to calculate some of the ratios that are applicable for merchandising organization 2
  3. 3. Chapter Two-MethodologyThis paper uses a financial ratio analysis to measure, describe and analyze the performance offive banks of Bangladesh during the period of 2009-2012. The whole process has been done inthree steps: data collection, analysis and drawing conclusion.2.1 Data Collection: The annual report of two years which contain the necessary information such as balance sheet, income statement etc. of three years (2009, 2010, 2011) have been collected from our five respective banks.2.2 Analysis: Using the required information from the annual report the analysis has been done. In the analysis part, we have calculated the ratios (the applicable ones) of three years for our five selected banks. And then we have compared the ratios and their effects on the respective banks over the three years. The ratios that we calculated in our analysis are given below with corresponding formulas: Current Ratio = Current Asset / Current Liability Net Profit Margin = Net Income / Total Operating Revenue Asset Utilization = Total Operating Revenue / Total Asset Return on Asset (ROA) = Net Income After Tax / Average Assets Return on Equity (ROE) = Net Income After Tax / Total Shareholder’s Equity Earnings Per Share (EPS) = Net Income / Weighted Average Common Shares Outstanding 3
  4. 4. Price Earning Ratio = Market Price Per Share of Stock / Earning Per Share Net Interest Margin = (Invested Returns – Interest Expense)/Avg Earning Assets Debt to Total Asset Ratio = Total Liability / Total Asset Times Interest Earned = Income Before Income Tax & Interest Expense / Interest Expense2.3 Drawing Conclusion: Comparing the ratios of three years for the five banks we concluded about the focus, dependency, degree of profit orientation and some others factors about the five banks. We also tried to figure out how the shareholders can take decisions regarding buying the shares seeing the financial ratios of the banks. 4
  5. 5. Chapter Three: Ratio Analysis and Major Findings3.1 Ratio AnalysisRatio Analysis can be very much helpful to understand the condition of a financial institution.But some of the ratios cannot be calculated for Banking Institutions, like, Receivable Turnover,Inventory Turnover etc. as Banks do not have Inventories. These ratios are more applicable forMerchandizing Industry. Profitability and Solvency Ratios are more important measures forbanks. Moreover, some ratios require internal data, which are generally not provided in annualreports. Considering all these factors the following ratios are calculated to understand thescenario in Banking industries.3.1.1 Current Ratio: Figure3.1: Current Ratio of Banks in 2011 and 2010In 2011, industry average of current ratio is 1.22 and all the banks have ratios around this value.Only data of BDBL bank (2.377) shows somewhat of a variation. All other banks have value ofbelow 1.2. So, it indicates that BDBL holds more cash and other liquid assets than other banks.BDBL is more focused on investing in development banking than on commercial business andhence holds more cash than other banks. 5
  6. 6. Similarly, in 2010 BDBL also had the highest current ratio and its variation with industrialaverage was even more prominent. Among the five banks, National bank had the lowest currentratio in 2011 and UCBL had the lowest ratio in 2010. So these two banks had comparative lesscash than other banks during the respective years. It is also evident that though industrial averageof current ratio decreased from 2010 to 2011 but it increased for most of the banks except forBDBL.BDBL being the highest data resulted in decrease of industrial average data from 2010 to2011. This occurred because current liability of BDBL increased in 2011even more than twice asmuch of the liability in 2010. So, BDBL holds more cash than other banks and at the same timehas significant amount of current liability. Due to data unavailability current ratio for 2009 couldnot be calculated for all the banks and thus could not be included in the analysis.3.1.2 Times Interest Earned: Times Interest Earned 2011 Times Interest Earned 2010 4 10 3 8 6 2 Ratio Ratio 4 1 2 0 0 BDBL Bank National UCBLJanata Industry BDBL Bank National UCBLJanata Industry Asia Bank BankAverage Asia Bank BankAverage Banking Institution Banking Institution Times Interest Earned 2009 2 1.5 1 Ratio 0.5 0 BankNati onal UCBL Janata Indus try As i a Bank Bank Average Banking Institution Figure 3.2: Times Interest Earned for Banks in 2011,2010 and 2009 6
  7. 7. In 2011, the industrial average of Times Interest Earned ratio was 2.04. The lowest Times Interest Earned was of Bank Asia, that was 1.41 and the highest was of BDBL which was 3.77. The rest of the 3 banks had approximately same Times Interest Earned ratio.Form the ratio,we can say that BDBL earned enough during the period to pay its interest expense almost 4 times over.Bank Asia has a lower ratio than industrial average that suggests that the bank would default on required interest payments.3.1.3 Debt to Asset Ratio: Debt to Total Asset Ratio 2011 Debt to Total Asset Ratio 2010 1 1 0.8 0.8 0.6 0.6 Ratio Ratio 0.4 0.4 0.2 0.2 0 0 BDBL Bank National UCBLJanata Industry BDBL Bank National UCBLJanata Industry Asia Bank BankAverage Asia Bank BankAverage Banking Institution Banking Institution Debt to Total Asset Ratio 2009 1 0.8 0.6 Ratio 0.4 0.2 0 BDBL Bank Nati onal UCBLJanata Indus try As i a Bank BankAverage Banking Institution Figure 3.3: Debt to Asset Ratio of Banks in 2011,2010 and 2009In 2011, the industry average of Debt to Total Asset ratio was 0.817.The highest Debt to TotalAsset ratio was of Janata Bank which was 0.93 and the lowest was of BDBL, which was0.48.Bank Asia and National Bank have approximately same ratio. So, it is seen that from all the5 banks, Janata Bank is at highest risk that it may be unable to meet its maturing obligation.BDBL has the highest ability among all 5 banks to withstand losses without impairing theinterest of creditors. Bank Asia, UCBL and National Bank have their Debt to Total Asset ratio 7
  8. 8. around industrial average. We can also see that the Debt toTotal Asset ratio of BDBLsignificantly decreased from the year 2009 to 2010(from 0.62 to 0.43) and the ratio of JanataBank has always been approximately same and the highest of all five banks.3.1.4 Net Profit Margin: Figure3.4: Net Profit Margin of Banks in 2011, 2010 and 2009Comparatively the highest profit earning bank both in 2011 and 2010 was National Bank.Industrial average was around 0.34 there was not much variation in net profit margin among thebanks. Janata Bank being a government bank imposes low interest rate and thus earns less profitand consequently has the lowest value of net profit margin. BDBL was not incorporated prior to2009 and so there is no profit margin for BDBL in 2009. Industrial average remained similar in2010 and 2011. 8
  9. 9. 3.1.5 Asset Utilization: Figure3.5: Asset Utilization of Banks in 2011, 2010 and 2009All the banks except National Bank have value around the industrial average in 2011. All banksare utilizing their assets in a sound manner. National bank utilizes its assets more as it earns morethan other banks. In 2010 and 2009, the pattern was similar. National bank earned even moreprofit in 2010 utilizing its assets. In 2010 overall asset utilization of banks was higher i.e. moreoperating income was generated. Overall the ratio is lowest for Janata Bank. 9
  10. 10. 3.1.6 Return on Asset (ROA): Figure3.6: Return of Asset Ratio of Banks in 2011 and 2010In 2011, industry average of ROA is 0.023 and all the banks have ratios around this value. Onlydata of National Bank shows somewhat of a variation. National Bank shows the highest ROAand also has the highest value in Asset utilization. So, National Bank is using its assets well andearning more than other banks. So, National Bank is more focused on earning profits than otherbanks.In 2010 ROA of banks show a similar pattern. Janata Bank being a government bank hasthe lowest ROA ratio in both the years. Overall Industry average of ROA decreased from 2010 to2011 due to a decrease in ROA of National Bank and Bank Asia. 10
  11. 11. 3.1.7 Return on Equity (ROE): Figure3.7: Return on Equity of Banks in 2011 and 2010In 2011, industry average of ROE is 0.193 and National Bank, UCBL and Bank Asia have higherROE than industrial average. So there is more scope of investment in these three banks. All thethree banks are commercial banks. Janata Bank has a close enough value of ROE with industrialaverage, but there is huge variation in case of ROE ratio of BDBL. BDBL is a specialized bankand is more development sector oriented. All the shares are under government control and hencehave less scope of investment. The pattern was again similar in 2010 and overall Return onEquity decreased on an average. The value of industrial average decreased from 0.294 to 0.193from 2010 to 2011. 11
  12. 12. 3.1.8 Earning per Share (EPS): Earning Per Share 2011 Earning Per Share 2010 100 70 Ratio 50 60 50 40 30 0 20 10 0 Banking Institution Earning Per Share 2009 8 6 4 2 0 BDBL Bank Asia National Bank UCBL Banking Institution Figure 3.8:Earning per Share of Banks in 2011, 2010 and 2009In 2011, industry average of EPS is about 18.5. Whereas most of the bank has EPS far lowerthan this. Only the data of BDBL (17.15) is close to it, where Janata Bank Ltd (60.45) has farhigher ratio than the industry. So, it indicates that Janata Bank Ltd either has low number ofshares or it shows a huge probable profitability. So as a result more people will be interested toinvest in Janata Bank Ltd. 12
  13. 13. 3.1.9 Price Earning Ratio (P-E Ratio): P-E Ratio 2011 P-E Ratio 2010 16 40 Ratio 14 12 10 Ratio 8 20 6 4 2 0 0 Banking Institution Banking Institution P-E Ratio 2009 Figure 3.7:Price-Earning Ratio (P-E Ratio)of Banks in 2011, 2010 and 2009 15 10 Ratio 5 0 BDBL Bank Asia National UCBL JBL Industry Bank Average Banking Institution Figure 3.9 :P-E Ratio of Banks in 2011, 2010 and 2009In 2011, industry average of P-E ratio is 12.143. And we can see that most of the bank’s P-Eratios are around this point. So, it indicates that all the banks take almost same time to returnpeople’s investment. And since the time is low enough, investors will be more interested toinvest in the banking sector of Bangladesh. 13
  14. 14. 3.1.10 Net Interest Margin: Net Interest Margin 2010 Net Interest Margin 2011 0.03 0.025 0.04 0.02 0.03 0.015 Ratio 0.01 0.02 Ratio 0.005 0.01 0 BDBL Bank National UCBLJanata Industry 0 BDBL Bank National UCBLJanata Industry Asia Bank BankAverage Asia Bank BankAverage Banking Institution Banking Institution Net Interest Margin 2009 0.03 0.02 Ratio 0.01 0 BankNationalUCBL Janata Industry Asia Bank Bank Average Banking Institution Figure3.10: Net Interest Margin Ratio of Banks in 2011,2010 and 2009In 2011, the industrial average of net interest margin was 0.02.BDBL, UCBL and National Bankhad the highest net interest margin. Bank Asia and Janata Bank had the lowest net interestmargin. It suggests that Bank Asia and Janata Bank earned lowest interest income out of totalassets. 14
  15. 15. 3.2 Overall Findings from the DataOverall the ratios show that BDBL has highest amount of liquid assets in comparison with itscurrent liability. It is not focused on commercial banking and hence does not exchange cash andother liquid assets like commercial banks and holds more liquid assets. In terms of profitability,National Bank shows the best performance. It has the highest Net Profit Margin,it utilizes itsassets well and has high Return on Asset and high Return on Equity. Earning per Share forcommercial banks is below 10 and more or less similar. P-E ratio varies from 10 to 15 and banksdo not vary much from industrial average. Among the banks, Janata Bank has lowest interestincome against its assets. None of the bank’s share is undervalued in comparison with industrialaverage value. Janata Bank, National Bank and Bank Asia depends more on debt finance andBDBL is more inclined towards equity finance. Bank Asia had the lowest earningsagainst itsexpenses in 2011. BDBL earns higher than other banks against the interest expenses it has tobear. So, overall in terms of profitability, National Bank performs better. 15
  16. 16. Chapter Four-Conclusion4.0 Conclusion:Ratio Analysis of the banks shows that the commercial banks focus on increasing theirprofitability. Majority of the banks depend on debt finance. Whether a bank is running profitablyand fruitfully managing its assets can be understood from Ratio Analysis. Ratio analysis is alsoimportant for shareholders on taking up their investment decision. 16