3. INTRODUCTION
The underlying objective of financial and business analysis is
the comparative measurement of risk and return useful for
making investment, credit or regulatory decisions.
Usually these decisions require a very good understanding of
the past events and the macro-economic environment
3
the past events and the macro-economic environment
prevailing. This understanding represents the basis for
estimating the future, be it a month, six months or several
years. Information on the past, provide a basis for assessing
and projecting the future earnings and cash flows of an
enterprise.
4. A FRAMEWORK FOR EVALUATING BANK PERFORMANCE
Outline:
− Basis for internal assessment
− Industry performance assessment and PEST analysis
− How do I conduct a PEST analysis for a bank?
− Benchmarking as a business analysis tool
4
− Benchmarking as a business analysis tool
− Laws and Regulation in business analysis
− Financial statements analysis
6. BASIS FOR INTERNAL ASSESSMENT
Bank planning (policy formulation):
− Goals:
This is articulated and communicated by the group
directorate via our vision and mission statements.
− Budgets:
6
A budget is a quantitative expression of a plan for a
defined period of time. Budget helps to aid the planning
of actual operations by forcing managers to consider how
the conditions might change and what steps should be
taken now and by encouraging managers to consider
problems before they arise.
9. INDUSTRY PERFORMANCE ASSESSMENT AND PEST ANALYSIS
The banking industry is the dominant
segment of the financial sector in most
economies of the world. It is constantly
under the scrutiny of the regulators
and its performance or otherwise is
affected by the economic trajectory of a
nation.
Central bank’s regular intervention
through monetary policies and the
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through monetary policies and the
Ministry of Finance and related
government and financial sector
regulatory entities have made several
notable efforts to improve regulation in
the sector.
10. INDUSTRY PERFORMANCE ASSESSMENT AND PEST ANALYSIS
The advent of e-banking has further
increased the dependence of the
sector on ever-changing
technological solutions . Technology
has shaped the demands of
customers and helped to classify
them into defined buckets and age
groups.
10
The analysis can help a bank to
determine how to position itself
strategically as it determines the best
methods for approaching marketing,
opportunities, and the development
of the business. A PEST analysis for a
bank may also be useful in helping to
determine whether it is advisable to
enter a new market or geographical
location.
11. HOW DO I CONDUCT A PEST ANALYSIS FOR A BANK?
Political
The first step of a PEST analysis for a bank
is an examination of the political
environment.
One of the key elements of this task is to
determine the overall restrictions and
support that can be expected from the
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support that can be expected from the
government.
By studying other banks in the same sector,
it can be possible to get an idea of what the
current environment is for financial
institutions.
This is a particularly important step for a
foreign bank, as government regulations
can vary widely among different countries.
12. HOW DO I CONDUCT A PEST ANALYSIS FOR A BANK?
Economical
PEST analysis for a bank will typically be
used to determine the economic climate.
Important elements to consider include the
overall health of the market, interest rates,
and inflation.
12
A bank may also find it useful to make
projections as to the long-term stability of the
economy. The goal is to determine whether
another financial institution could thrive in
the current and developing economy.
A bank is unlikely to grow above the growth
of the economy. Hence the need to validate
GDP growth.
13. HOW DO I CONDUCT A PEST ANALYSIS FOR A BANK?
Social
It is important to determine the cultural
attitude towards money-related issues
when analyzing a bank.
This can include things such as overall
feeling about banks, how savings are
13
feeling about banks, how savings are
approached, and general attitudes about
loans. A foreign bank may wish to
determine whether it would be welcomed
and trusted by the citizens in the targeted
area.
Perception of banking technology is of key
importance in knowing whether or not to
channel resources in that direction in some
locations.
14. HOW DO I CONDUCT A PEST ANALYSIS FOR A BANK?
Technological
The final step of a PEST analysis is the
technological aspect. It is advisable for the
bank to determine whether it has the
technical resources to effectively serve its
customers.
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customers.
This includes having the capacity to upgrade
systems and adopt new technologies that are
efficient and effective. It is also important
that technology enable the bank to serve the
customers as they find it most convenient.
This means ensuring that systems are not
only appropriately updated, but easy for the
target customer to use.
15. DOWNSIDES TO PEST ANALYSIS
Access to quality external data sources,
this can be time consuming and Costly.
The pace of change makes it increasingly
difficult to anticipate developments that may
affect an organization in the future.
15
The risk of capturing too much data is that
it may make it difficult to analyze.
The data used in the analysis may be based
on assumptions that subsequently prove to
be unfounded.
17. BENCHMARKING AS A BUSINESS ANALYSIS TOOL
What is Benchmarking?
Benchmarking is the
practice of a business
comparing key metrics of
their operations to other
similar companies.
17
similar companies.
The search for industry
best practice that lead to
superior performance.
18. Market share:
Understanding our share of the
market provides insights on our
present standing and gives an idea of
the market potential and the
opportunities we need to convert to
become market leaders.
BENCHMARKING AS A BUSINESS ANALYSIS TOOL
18
Peer comparison is essential together
with industry norms especially as it
relates to significant issues such as
profitability, structure of the balance
sheet and capital adequacy.
19. BENCHMARKING AS A BUSINESS ANALYSIS TOOL
Why Do Companies Benchmark?
1. Companies use benchmarking as a way
to help become more competitive.
2. By looking at how other companies are
doing, they can identify areas where
they are underperforming.
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they are underperforming.
3. Companies are also able to identify
ways that can improve their own
operations without having to recreate
the wheel.
4. They are able to accelerate the process
of change because they have models
from other companies in their industry
to help guide their changes.
20. BENCHMARKING AS A BUSINESS ANALYSIS TOOL
1. Determine what you want to
benchmark. This is be based on
the key performance metrics of
the UBA. e.g.: Quarterly review of
market share in Customer
deposits, CASA, loans, NIM,
Six-step approach to benchmarking:
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deposits, CASA, loans, NIM,
profitability e.t.c
2. Select the banks that will be used
as the benchmark. This may be
based on: balance sheet size, best
in class, competitive edge etc
3. Measure the performance of the
benchmark using the measures
identified in step one above.
21. BENCHMARKING AS A BUSINESS ANALYSIS TOOL
4. Measure your own performance, and
compare it to the benchmark to
identify the gaps.
5. Specify actions to close the gap. This
involves analyzing how the
Six-step approach to benchmarking:
21
involves analyzing how the
benchmark achieves superior
performance, and identifying
similar practices that could be
adopted.
6. Implement and monitor the actions
and programmes. Monitoring should
not be a one-off process, but should
continue for a longer period after
the benchmarking exercise.
23. LAWS AND REGULATION IN BUSINESS ANALYSIS
Regulatory compliance
Regulators release new circulars on
existing laws and issue new laws which
affect our operations from time to time.
As finance professionals, we should be
aware of the new rules, assess the impact
and comply early to avoid penalty.
We request for update on regulations
23
We request for update on regulations
using the regulatory dashboard monthly.
Questions to ask are:
Which local laws apply to our operations?
Have we complied with the law?
What is the risk of non-compliance?
Key areas of focus are: Capital , Credit,
Liquidity and Tax.
24. LAWS AND REGULATION IN BUSINESS ANALYSIS
Prudential Financial ratios Minimum requirements
Capital
Capital Adequacy ratio
Minimum capital base
Long term equity investments
Liquidity
THE REGULATORS
DETERMINE THE
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Liquidity requirement
Maximum loan to deposit ratio
Cash reserve requirements
Credit exposures
Single obligor limit
Insider Credit/Shareholder Funds
Credit concentration
DETERMINE THE
MINIMUM THRESHOLD
25. QUICK RECAP ON JOURNEY SO FAR
QUESTION DASHBOARD:
The
competitiveness of
the market
Where do we rank based on PBT, Deposits, Loans, NIM and other
financial and non financial measures?
Peer comparison is essential together with industry norms
especially as it relates to significant issues such as profitability,
structure of the balance sheet and capital adequacy.
Stability of the
financial systems
and markets
Are key financial institutions and the financial markets in which
we operate stable?
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Adequacy of
financial sector
infrastructure
Are financial intermediaries such as payment systems, credit
information bureaus and collateral registries available?
Are there existing legal and regulatory framework for financial
sector operations?
Level of market
discipline
Do banks and financial institutions manage their stakeholders'
risk in the course of their day-to-day operations.
Sufficiency of the
safety net
Do we have sufficient protection for unforeseen shock?
Are we liquid enough to meet our obligations as they fall due?
Are we diversified in our operations to avoid portfolio risk?
27. − measures the profitability of a business;
− indicates the trend of achievement;
− assesses the growth potential of the business;
− provides comparative position in relation to other banks
− assesses the overall financial strength of the business
FINANCIAL STATEMENTS ANALYSIS
Why is financial statements analysis important ?
IT
27
− assesses the overall financial strength of the business
Financial analysis provides a mirror through which the survival
or otherwise of a business is assessed. To lead competition, you
need to be aware of your strength and leverage on it, convert
opportunities and reduce the threats while eliminating your
weaknesses.
29. FINANCIAL STATEMENTS ANALYSIS: ASSETS
Minimum Liquid Assets
They consists of cash (both local and foreign
currency) in the vault and unrestricted funds
with local banks including the Central Bank
and tradable instruments held such as
Treasury bills/certificates, etc. This represents
Review each asset category
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Core Risk Assets:
These are core assets held for the
business of banking. They include all the
assets held for intermediation business,
funds in offshore
bank accounts, restricted funds with
banks both local and foreign. They
represent a bank’s main sources of
income.
Treasury bills/certificates, etc. This represents
a bank’s total holding towards meeting
immediate withdrawal needs of its customers.
Non-banking assets
Such assets held are ancillary to the
core business of banking. They
represent items such as fixed assets,
prepayments, etc
30. “Hot” or Purchased Funds are borrowings from the money market
from financial institutions such as discount house, other banks to
cover short-term shortfall in the liquidity needs of a bank. Always
review inter-bank positions on a net basis i.e.. deduct takings from
placements. They are funding that are quick to disappear once there is
a change in the money market. They are therefore not to be depended
upon long-term hence the need to ensure they are lower than the
holding of liquid assets.
Review each liability category
FINANCIAL STATEMENTS ANALYSIS: LIABILITIES OR FUNDING
30
Other liabilities :
They are payables i.e.. funds held by the
bank on behalf of customers as a result of
pending transactions e.g. draft issued,
cheques in course of clearing, payables, etc.
They represent free funds with which the
bank can invest short-term pending when
those instruments are presented for
payment. It is also important to ensure
deposits have not been
intentionally misclassified to avoid
liquidity ratio computations or deposit
insurance premium payment.
Deposits
Represent the core funding for a bank
and affects both profitability and long-
term solvency.
It is also important to review deposits
in terms of their currency i.e.. what
proportion are in local versus foreign
currency denominated. This will give a
an insight to the extent of foreign
exchange risk being taken.
32. It is a calculation of percentage changes in financial
statement items for a number of successive years.
Trend analysis evaluates an organization’s financial
information over a period of time. Periods may be
measured in months, quarters, or years, depending on
FINANCIAL STATEMENTS ANALYSIS: TREND ANALYSIS
32
the circumstances. The goal is to calculate and analyze
the amount change and percent change from one period
to the next.
Amount 2010
Amount
2009
Amount
Change
Percent
Change
Operating income $8,449 $8,231 $218 3%
33. FINANCIAL STATEMENTS ANALYSIS: CASH – FLOW STATEMENT
A cash – flow statement is a
statement showing inflows
(receipts) and outflows
(payments) of cash during a
particular period. In other
words, it is a summary of
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sources and applications of
each during a particular
period.
Cash flow statement will unveil the bank’s ability to
generate cash to meet its short-term obligations,
thereby assessing if the bank’s liquidity and solvency
position is sound.
34. FINANCIAL STATEMENTS ANALYSIS: CASH – FLOW STATEMENT
i. Cash flow statement is
significant to management for
proper cash planning and
maintaining a proper matching
between cash inflows and
iii. Cash flow statement helps
for appraisal of various
capital investment
programmes to determine
their profitability and
Why is it important?
34
outflows.
ii. It shows efficiency of a bank
in generating cash inflows from
its regular operations.
viability.
35. FINANCIAL STATEMENTS ANALYSIS: COMMON SIZE ANALYSIS
A company financial statement that displays all items as
percentages of a common base figure. This type of financial
statement allows for easy analysis between banks or between time
periods of a bank.
While most banks don't report their statements in common size, it is
beneficial to compute if you want to analyze two or more banks of
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differing size against each other.
Formatting financial statements in this way reduces the bias that
can occur when analyzing companies of differing sizes. It also
allows for the analysis of a company over various time periods,
revealing, for example, what percentage of gross income is
operating expense and how that value has changed over time.
It can be done vertically and horizontally. For example:>>>>
36. FINANCIAL STATEMENTS ANALYSIS: COMMON SIZE ANALYSIS
Statement of Financial
position (All figuresin
N'million)
JAN 2015 FEB 2015 MAR 2015
Loans and Advances to
Customers
29,224 27,834 25,760
Placements 42,707 36,089 38,042
Government securities 46,532 55,579 12,120
Non interest earning assets 7,758 5,675 6,708
Total Assets 126,222 125,176 82,630
ABC Bank Statement of financial position
Statement of Financial
position (All figures in
N'million)
JAN 2015 FEB 2015 MAR 2015
Loans and Advances to
Customers
23% 22% 31%
Placements 34% 29% 46%
Government securities 37% 44% 15%
Non interest earning assets 6% 5% 8%
Total Assets 100% 100% 100%
Vertical common-size analysis for ABC Bank assets
Horizonal common-size analysis for ABC Bank assets
36
Demand deposit 31,141 33,948 31,831
Savings 3,388 3,348 3,058
Termdeposit 14,805 8,550 7,084
Total Deposit 49,333 45,846 41,973
Takings - 128 115
Other Liabilities 62,267 64,015 26,421
Total liabilities 111,600 109,989 68,509
Share holders' fund 14,621 15,187 14,121
Statement of Financial
position (All figures in
N'million)
JAN 2015 FEB 2015 MAR 2015
Loans and Advances to
Customers
100% 95% 88%
Placements 100% 85% 89%
Government securities 100% 119% 26%
Non interest earning assets 100% 73% 86%
Total Assets 100% 99% 65%
Horizonal common-size analysis for ABC Bank assets
37. WHY FINANCIAL RATIOS IN BANKS?
Financial ratios are useful tools used by management, regulators and potential
investors for the following:
To gauge the overall financial condition of a bank, viability, liabilities and
future performance.
To compare the performance of bank to other banks in the industry and
companies in other sectors at different time periods.
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
37
companies in other sectors at different time periods.
To benchmark the financial performance and condition of a bank against a
regulatory standard.
To make investment decisions, performance assessments and prediction of
growth. Also used by creditors and lenders to assess the borrower and ability
to meet future obligations.
Usually enforced by regulators to ensure effective supervision and
compliance with minimum standards, both locally and internationally.
38. RATIO CATEGORY USING CAMEL
Capital adequacy
Asset quality
Management
Earnings/Profitability
Liquidity
Ratios
Ability to meet
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
38
Liquidity.
Capital
Adequacy
It reflects
whether the bank
has enough capital
to bear unexpected
losses arising in
the future.
Management
It describes
leadership and
administrative
capability of the
bank to respond to
changing
environment.
Asset quality
Earning/Profi
tability Ratios
Describes the
profitability of a
bank and
explains its
sustainability
and growth of
future earnings
Ability to meet
short-term,
immediate
obligations
Assesses the
earning
capacity of
assets as a
basis for
profitability
39. C IN CAMEL: CAPITAL ADEQUACY
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
“The Capital of a Bank
protects the Bank against
unexpected future losses”.
Capital adequacy reflects the
overall financial position of a
bank and also the ability of
39
bank and also the ability of
the management to meet the
need for additional capital
requirement.
Capital Adequacy Ratio
Debt Equity Ratio
Loans to Assets Ratio
Equity to Assets ratio
40. C IN CAMEL: CAPITAL ADEQUACY RATIOS
Financial
ratios
Relevant financial ratios/measures
Capital
Adequacy
Ratio
Also known as Capital to Risk Weighted Assets Ratio (CRAR), this
ratio is used to protect depositors and promote the stability and
efficiency of financial systems around the world. It represents the
margin by which creditors are covered if the bank has to liquidate
assets.
= total qualifying capital (i.e. tier one capital + tier two capital )
total risk weighted assets
This ratio represents the degree of leverage of a bank. It shows how
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
40
Debt-Equity
Ratio
This ratio represents the degree of leverage of a bank. It shows how
much proportion of the bank business is financed through equity
and how much through debt. Higher ratio is an indication of less
protection for the depositors and creditors and vice-versa
Loans to
Assets
This is a ratio indicates the relationship between the total advances
and total assets. This ratio indicates a bank’s aggressiveness in
lending which ultimately produces better profitability. Higher ratio
is preferred to a lower one.
Government
Securities to
Total
Investments
This ratio reflects the risk involved in a bank’s investment.. Since
government securities are risk-free, higher the proportion of
government securities in total investment, lower will be the risk
involved in a bank’s investment and vice versa.
41. A IN CAMEL: ASSET QUALITY
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
The asset quality is to ascertain
the proportion of non-performing
assets as a percentage of the total
assets . It also ascertains the Non
performing asset movement and
the amount locked up in
investments as a percentage of
the total assets.
41
the total assets.
Percentage change in Non
Performing loans
NPL to gross loan ratio
Provision as a percentage of
gross loans
Growth in NPL
42. A IN CAMEL: ASSET QUALITY
Financial ratios Relevant financial ratios/measures
NPL to Gross
loan ratio
NPL ratio measures the proportion of total loans that are
classified as bad or non-performing due to the failure of the
borrower to meet interest or principal repayments according
to contract terms. High NPL ratio exposes the bank to
significant loss, hence the lower the better
NPL Ratio = Non performing loans
Total Loans
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
42
Total Loans
Provision as a
percentage of
gross loans
An expense set aside as an allowance for bad loans (customer
defaults, or if terms of a loan have to be renegotiated, etc).
Growth in NPL
ratio
This is an indication of asset deterioration and weak credit
administration and monitoring. Measures should be taken to
reduce the ratio over time through proper and more detailed
credit business process .
43. M IN CAMEL: CAPITAL ADEQUACY RATIOS
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
It refers to the efficiency of the
Management in managing the
bank, in all the ratios higher the
better.
43
Total Advances to Total
Deposits
Operating income per
Employee
Deposit/ branch
Marketing staff/ Total staff
44. E IN CAMEL: CAPITAL ADEQUACY RATIOS
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
“A Bank with no profit is like
a human body with no blood”.
Much of a bank's income is
earned through non-core
activities like investments,
treasury operations, and
corporate advisory services
and so on.
44
and so on.
Percentage Growth in Profit
after tax
Net Interest Margin
Return on equity
Return on assets
CIR
45. E IN CAMEL: CAPITAL ADEQUACY RATIOS
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
Financial ratios Relevant financial ratios/measures
Return on Assets
(ROA)
ROA basically measures managerial efficiency. It shows
management’s ability at using banks’ resources to generate
revenue. It is calculated as:
ROA = Profit After Tax x 100 / Total Assets
Generally, a high ratio is an indication of efficient use of
company’s assets and vice versa in any given financial year
45
company’s assets and vice versa in any given financial year
Return on Equity
(ROE)
ROE indicates how much was earned for each unit of equity
invested by the owners. It is used as benchmark for investors
to compare the company‘s use of its equity against other
investments
ROE = Profit after Tax x 100/ Total Shareholders’ Funds
Cost income ratio Measures cost efficiency of a bank. The CIR ratio shows the
amount of resources spent to generate a unit of income. An
increase in the ratio shows less efficiency in managing the
business. We expect this ratio to decline over time.
46. Ratio Implications
Dividend payout
ratio
It is the percentage of net income paid to shareholders in
dividends. The payout ratio provides an idea of how well
earnings support the dividend payments. Shareholders
and investors are specifically interested in this ratio
= dividends /net income or (Profit after tax)
E IN CAMEL: CAPITAL ADEQUACY RATIOS
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
46
= dividends /net income or (Profit after tax)
Cost of funds Ratio This measures the costs of interest paid for funds made
available to the bank in carrying out its lending business.
The lower the rate the better for the bank.
= interest and fee expenses on funding liabilities / average
deposit and other funding liabilities
47. L IN CAMEL: CAPITAL ADEQUACY RATIOS
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
“Inadequate Liquidity of a Bank may
cause an accident similar to an
airplane crash.”
Liquidity is the ability of the bank to
meet its financial obligations.
A high liquidity ratio indicates a
bank's comfort level vis-à-vis its
47
A high liquidity ratio indicates a
bank's comfort level vis-à-vis its
ability to manage its obligations, both
short-term as well as long-term.
Liquidity of a bank can be measured
using metrics such as Liquid Assets
(LA) to Demand Deposits (DD) and LA
to Total Assets (TA).
Loans / Deposits ratio
Liquid Assets/Total Assets
LCD/ Total deposit
48. L IN CAMEL: LIQUIDITY
Financial
ratios
Relevant financial ratios/measures
LCD to
Total
deposit
The LCD ratio shows how much deposit a bank has in the form of
current and saving account deposits (CASA) in the total deposit.
A higher LCD ratio means higher portion of the deposits of the bank
has come from CASA, which is generally a cheaper source of fund.
Higher the CASA ratio, better the net interest margin, which means
better operating efficiency of the bank.
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
48
Loans to
Deposit
Ratio
LDR measures the percentage of deposits that is employed in funding
the risk asset of the bank. Interested parties are regulators,
creditors/depositors, shareholders, investors and management.
L/D ratio = loans and advances/deposit liabilities
The higher the ratio, the more depositors/short term lenders are
exposed to higher risk in case of default on loan repayment by
borrowers. A higher ratio indicates that a bank is loaned up and its
liquidity is low. The ratio can be compared to industry ratios to
determine the short term viability of the bank.
49. L IN CAMEL: LIQUIDITY
Financial
ratios
Relevant financial ratios/measures
Liquidity
Ratio
Measures how well a bank matches the maturities of its assets and
liabilities. Short term assets or liabilities means assets or liabilities
or any portion thereof that have a due date, maturity date, or may be
readily converted into cash within 12 months.
These ratios are of special interest to the lenders of the bank
(depositors and other credit providers), regulators and shareholders.
FINANCIAL STATEMENTS ANALYSIS: RATIO ANALYSIS
49
(depositors and other credit providers), regulators and shareholders.
It measures the ability of the bank to meet its short term obligations.
= total specified liquid assets/ total current liabilities
50. MAKING THE RATIOS MEANINGFUL
Annualization:
Annualization is the process of converting a ratio to an
estimated annual rate by multiplying a ratio generated during
the March, June, or September quarters by an annualization
factor (4, 2, or 1.33, respectively).
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A ratio value is annualized when it relates an income account,
expense account, or loan loss/recovery item to a balance sheet
item e.g. NIM, COF, Lending rate
The purpose of annualization is to facilitate trend analysis and
to make the comparison of interim period data consistent with
annual data.
51. CONCLUSION
Keeping one eye on the present and one eye on the
future is the key paradigm defined for next
generation banking.
You are the pilots of the planes (subsidiaries), UBA
is depending on you to fly high with full
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is depending on you to fly high with full
understanding of the terrain you ply.
