Role of fundamental determinant on company financial performance the case of lanka bangla finance


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How a company's performance is determined by its key fundamental variable. And company performance analysis of last 4 years (LankaBangla Finance)

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Role of fundamental determinant on company financial performance the case of lanka bangla finance

  1. 1. Internship Report On“The Role of Fundamental Determinants on Company Financial Performance: The Case of LankaBangla Finance.” Prepared By S. M. Galibur Rahman Id: 07882710 2nd Batch Department of Finance Jagannath University Faculty of Business Studies
  2. 2. Submitted To:Department of FinanceJagannath University, Dhaka Under the Supervision of Md. Sogir Hossain Khandoker Associate Professor Department of Finance Jagannath University Submitted By: S. M. Galibur Rahman ID: 07882703 Session: 2007-2008
  3. 3. DECLARATION OF SUPERVISORThis is to certify that the internship on “The Role of Fundamental Determinants on CompanyFinancial Performance: The Case of LankaBangla Finance.” has been submitted for the award ofthe degree of Bachelor of Business Administration (BBA) from Department of Finance,htannagaJ University, carried out by S. M. Galibur Rahman bearing ID.07882710 under mysupervision. To the best of my Knowledge and as per his declaration, any part of this report hasnot been submitted for any degree, diploma or certificate.He is permitted to submit the Internship Report.------------------------------------------Md. Sogir Hossain KhandokerAssociate ProfessorDepartment of FinanceJagannath University [i]
  4. 4. DECLARATION OF STUDENTI, S. M. Galibur Rahman, the student of Bachelor of Business Administration (BBA) 2nd Batch P Pbearing ID: 07882710 from Department of Finance, htannagaJ University would like to somberlydeclare here that an internship report on “The Role of Fundamental Determinants on CompanyFinancial Performance: The Case of LankaBangla Finance.” has been authentically prepared byme. While preparing this internship report, I didn’t breach any copyright act intentionally. I amfurther declaring that, I did not submit this report anywhere for awarding any degree, diploma orcertificate._______________________S. M. Galibur RahmanId no: 07882710Batch no.: 2nd P PDepartment of FinanceJagannath University [ii]
  5. 5. LETTER OF TRANSMITTALNovember 5, 2012Md. Sogir Hossain KhandokerAssociate ProfessorDepartment of FinanceJagannath University, DhakaSubject: Submission of Internship Report.Sir,It is my pleasure to submit the internship report, which is done as a part of academic curriculum,to you for your kind evaluation. The report is prepared on“The Role of FundamentalDeterminants on Company Financial Performance: The Case of Lanka Bangla Finance”.I have put my best effort in preparing this report and to make it a worthy one. Each aspect of theproblem is considered and studied as required.If any confusion arises or any further explanation is needed, I will be readily available to explainthe matter to you, as the situation required.Sincerely yours,______________________S. M. Galibur RahmanID: 078827102nd BatchSession: 2007-08Email: [iii]
  6. 6. ACKNOWLEDGEMENTFirst and foremost, I would like to pay my gratitude to the almighty Allah, the most Merciful, theBeneficent, for blessing me with good health and tenacity of mind to complete the requirementsfor the degree. I am also grateful to my parents who provided me with the basic necessities oflife since my early childhood.I earnestly thank Md. Sogir Hossain Khandoker, Associate Professor, Department of Finance,Jagannath University for acting as a mentor round-the-clock and showing me the right directionwhenever I started going off-track.Nevertheless, I must express my gratitude to the following people for being so accommodativethat I never felt left-out during my whole intern journey:1. Mr. Wali Ul Islam, Chief Executive Officer, LBSL2. Mr. Md. Ashaduzaman Riyadh, Research Analyst & In-Charge, Research & AnalysisDepartment, LBSL3. Md. Tareq Ibrahim, Research Analyst, Research & Analysis Department, LBSL4. Md. Mahmudul Hasan Khan, In-Charge, Human Resource Department, LBSLFinally, I thank all other LBSL staffs whose cooperation I found to be really kind and supportive. [iv]
  7. 7. ABSTRACTThis project examines the determinants of the profitability of firms in the Non Banking FinancialInstitution (NBFIs) industry of Bangladesh. Profitability of a financial institution basicallydepends on its some key financial determinants. Specially operating efficiency is maininfluencing factor which is calculated through operating income. Besides it capital Structurecomposite of equity and liability, operating expense, total asset significantly affect theprofitability of any NBFI company. In addition term deposit also affects the profitability thoughthat is statistically not significant. My research is an attempt to find out the key determinantsvariable and their level of influence over net profit.Here in this report there are 5 chapters. In 1st chapter report origin, data sources, methodology,limitation etc. have been given. In 2nd chapter the institution, where I did my internee has beendiscussed. Then literature review of different research has been given in chapter 3. And chapter 4is the main the part where I put both financial and statistical analysis have been given. And thenlastly findings and recommendation have been given in last and final chapter.In case of financial analysis I did two types of analysis. Firstly company analysis where I tookLankaBangla Finance Ltd. data of last 4 years to do my company analysis. And then I tookwhole NBFIs industry’s last 4 years data to do my industry analysis.And then for statistical Analysis, different Statistical techniques of simple and multipleregressions have been used to determine the relationships between variables. And before doingregression analysis I did normality distribution test by Run test, and K-W test for randomness.Also I did correlation analysis between dependent and different independent variables.As the result suggest operating revenue has the most significant impact on the net profit of anycompany so company should increase is operational efficiency. And also operational expensenegatively affects the net profit. So it should be controlled effectively. And all other fundamentaldeterminants significantly affect the company net profit. Only the term deposit impact isstatistically insignificant. [v]
  8. 8. Table of ContentsTopic PageCHAPTER 1: INTRODUCTION 01-031.1 Origin Of The Report 011.2 Objectives 011.3 Scope Of The Report 021.4 Sources Of Information 021.5 Methodology 031.6 Data Analysis & Presentation Technique 031.6 Limitation 03CHAPTER 2: LITERATURE REVIEW 04-062.1 Literature Review 04-062.2 Research Gap 06CHAPTER 3: INTRODUCTION TO LANKABANGLA SECURITIES 07-193.1 Company Profile with its History 07-083.2 Key Milestone 093.3 LBS Organogram 103.4 LBS Philosophy 113.5 Strategic Priorities 123.6 Unique Key Proposition 123.7 Services of LBS 13-143.8 Products of LBS 14-183.9 Financial Highlight of LBS 19CHAPTER 4: METHODOLOGY & ANALYSIS 20-884.1 Company Analysis (LBFL) 20-32 4.1.1 Background of LBFL 20 4.1.2 Shareholding Pattern Analysis 21 4.1.3 Business Growth Analysis 22-23 4.1.4 Detailed Analysis of Key Financials 24-30 4.1.5 Financial Statement Analysis 31 4.1.6 Common Size Statement 32
  9. 9. 4.2 Industry Analysis (NBFIs) 33-47 4.2.1 Industry Snap 33-34 4.2.2 Market Capitalization of NBFI 35 4.2.3 Composition of Income 35 4.2.4 Income Growth 36 4.2.5 Industry Growth 37-38 4.2.6 Ratio of NBFIs Industry 39 4.2.7 Key Information of NBFI Industry 40-41 4.2.8 CAGR of all Company under NBFI Industry 42-42 4.2.9 BETA of all Company under NBFI Industry 44 4.2.10 Common Size Statement of NBFI Industry 45-46 4.2.11 Cost of Fund of all Company under NBFI Industry 474.3 Statistical Research part 48-88 4.3.1 Descriptive Statistics 51 4.3.2 Graphical Representation of Data & Frequency 52-62 4.3.3 Test of Randomness of all variable (Run Test) 63-66 4.3.4 Goodness of Fit test (K-W Test) 67-70 4.3.5 Mean Test Analysis (T-Test) 71-73 4.3.6 Correlation Test Analysis 74-77 4.3.7 Multiple Regression Model (Including F test) 78-88 Final Multiple Regression Model 88CHAPTER 5: FINDINGS & CONCLUSION 89-915.1 Key Findings 895.2 Recommendation 905.3 Conclusion 91BIBLIOGRAPHY 92 - 93
  10. 10. TABLE NO TABLE DESCRIPTION PAGE NO Chapter 3: Introduction to Lanka Bangla SecuritiesTable 1 Company Glance (LBS) 07Table 2 Financial Highlight (LBS) 19 Chapter 4: Methodology & AnalysisTable 3 Company Snapshot (LBFL) 20Table 4 Share Outstanding Pattern of LBFL 21Table 5 Sponsor Details of LBFL 21Table 6 Growth Statistics 22Table 7 Industry Snap (NBFI) 33Table 8 Industry Growth Statistics (NBFI) 37Table 9 Industry Information (NBFI) 40-41Table 10 CAGR of all Company under NBFI Industry 42-43Table 11 BETA of all Company under NBFI Industry 44Table 12 Cost of Fund of all Company under NBFI Industry 47Table 13 Descriptive Statistics of all Variable 51Table 14-Table 20 Run Test of all Variable 63-66Table 21 – Table 27 K-W Test of all Variable 67-70Table 28 Mean Test of all Variable 71Table 29 – Table 34 Correlation Test 74-77Table 35 – Table 36 Multiple Regression Model Analysis 78-79Table 37- Table 38 F-test, T-Test 80-81Table 39 Multiple Regression Model at a glance 88
  11. 11. Chapter # 1Introduction
  12. 12. 1.1. ORIGIN OF THE REPORTThis report is prepared to fulfill the requirement for the completion of the Bachelor ofBusiness Administration (BBA), degree of the Jagannath University. The internship program iscarried on to provide the students an on the job exposure and to match up the theoreticalconcepts with the real life situation. I was placed at LankaBangla Securities, Bangladesh for theinternship program under the guidance of Moh. Sogir Hossain Khandoker, my faculty advisor. Ihave joined LankaBangla Finance Limited, Bangladesh for a period of 12 weeks starting fromSeptember 10, 2012. As a requirement of the completion of the internship program I need tosubmit the report, which includes an overview of the organization and both statistical andfinancial research. 1.2. OBJECTIVE OF THE STUDYThe objective of the study may be viewed as: General objective Specific objective 1. 2. 1 GENERAL OBJECTIVESThis internship report is prepared primarily to fulfill the Bachelor of Business Administrationdegree requirement under Department of Finance, Jagannath University and get an overall ideaof NBFIs sectors and its activity specially the performance of Lanka Bangla Finance. 1. 2. 2 SPECIFIC OBJECTIVESMore specifically, this study entails the following aspects: To make fundamental company analysis To analyze the profitability of LankaBangla Finance Limited with the help of different statistical tools To test the predetermined hypothesis relating to the financial performances of LankaBangla Finance Limited, only regarding profitability To make fundamental NBFIs industry analysis Impact of Industry Performance on Lanka Bangla Finance. 1|P a ge
  13. 13. 1.3. SCOPE OF THE REPORTThe study would focus on the following areas. Relationship of Net Profit with its fundamental determinants. Company Analysis (LBFL) and whole financial industry, Brief overview of Lanka Bangla Securities..Each of the above areas would be critically analyzed in order to determine the regression modeland to build predetermined hypothesis. 1.4. SOURCES OF DATAInformation collected to furnish this report is both from primary and secondary in nature. 1.4.1 PRIMARY SOURCES OF DATAThe primary data of this report were collected through:  Direct interview & Conversation with the research analyst of the Research Department.  Practical experiences obtained from the corporate office of LBSL  Expert’s opinion.  Official records. 1.4.2 SECONDARY SOURCES OF DATAI have gathered the secondary data via following sources:  Annual report of Lanka Bangla Finance ltd.  Printed outlines and documentation supplied by Lanka Bangla Finance ltd.  Annual Financial Statement of last 4 years of different NBFIs.  Analysis report of LBSL research and analysis department.  Website of Lankabangla Finance ( 2|P a ge
  14. 14. 1.5. METHODOLOGYThe data for this study was gathered from the annual financial statements published by theLankaBangla Finance Limited in some selected internal magazines to accomplish the aforesaidobjectives. The Quarterly and annual data for the selected NBFI during 2008 to 2012 are used inorder to assess the profitability of the bank. Any progress of LankaBangla Finance Limitedthereafter is thus out of the scope of the report. Help of other sources like annual report,magazines, brochures, journals, newspapers, websites, etc. have also been chosen wheneverfound necessary. This paper is based on secondary data collection.In processing the data, various methods of conventional statistics were deployed. Frequencydistribution, measures of central tendency and dispersion, time series analysis, simple correlationand multiple regression analysis, correlation matrix and ANOVA in some cases calculated dataare presented in graph to give the reader a better understanding of financial components.Kearl-Pearson correlation coefficient also used to investigate the correlation between thevariables at 5% level of significance according to the SPSS software package. Microsoft excelwas also used to produce some graphs and charts. 1.6. DATA ANALYSIS & PRESENTATION TECHNIQUEIn order to analyze gathered data, I plan to use statistical software like SPSS that will run z-test,t-test, regression and such. Besides SPSS I will use MS-Excel to generate charts and graph ofdifferent ratio analysis. The data will be presented through graphs for better visualunderstanding. 1.7. LIMITATIONI have faced some usual constrictions throughout my internship program to some extent that I arepresented as follows:  Primary data is always hard to work on because of authenticity.  Time is another hindrance to prepare a quality report.  Power failure is another main restraint to prepare this report  And scarcity of information is always a common hindrance to prepare any types of report. 3|P a ge
  15. 15. Chapter # 2Literature Review
  16. 16. 2.1. LITREARATURE REVIEWTo get an insight of profitability determinants, several studies have been executed up to till date.But the fact suggests that, most of the researches have been conducted on banking industry. So,the evident with regard to profitability is scarce in the NBFI sector.FadzlanSufian, and RoyfaizalRazali Chong (2008) examined the determinants of Philippinesbanks profitability during the period 1990–2005. Their empirical findings suggest that all thebank-specific determinant variables have a statistically significantly impact on bank profitability.They also found that size, credit risk, and expense preference behavior are negatively related tobanks profitability, while non-interest income and capitalization have a positive impact.According to their analysis inflation has a negative impact on bank profitability, while the impactof economic growth, money supply, and stock market capitalization have not significantlyexplained the variations in the profitability of the Philippines banks.Shah-Noor Rahman and Tazrina Farah (2012), in their research paper on “Non BankFinancial Institution’s Profitability Indicators: Evidence from Bangladesh” examined theindicators of the profitability of firms in the Non Banking Financial Institution (NBFIs) industryof Bangladesh. Their finding was profitability indicator variables have impact upon net profit.And there variable was Net profit as dependent variable and Current Asset, Financial Expense,Long term liability, Interest Income, and Operating revenue as independent variable. Accordingto their report among the independent variables the Liquidity Condition and Operating Efficiencyexert significant influence on Profitability of Non Bank sector in Bangladesh.Fadzlan Sufian (2009) in his research paper title “Determinants of non-bank financialinstitutions profitability: empirical evidence from Malaysia” analyzed the determinants ofprofitability on NBFIs in developed country. He found that “Malaysian NBFIs with a higher riskexhibits lower profitability level. On the other hand, the large Malaysian NBFIs with highoperational expenses exhibits higher profitability level, thus supporting the expense preferencebehavior hypothesis”. He also suggested that specialization has no significant relationship withMalaysian NBFIs profitability.James W. Scott and José Carlos Arias (2011) in their study” Banking profitabilitydeterminants” surveyed top five bank holding companies in the United and concluded thatprofitability determinants for the banking industry include positive relationship between thereturn of equity and capital to asset ratio as well as the annual percentage changes in the externalper capita income. There was also a virtual consensus identified concerning the effect that theinternal factor of size as measured by an organization’s total assets had on its ability to competemore effectively, even in times of economic downturns. 4|P a ge
  17. 17. Christos K. Staikouras & Geoffrey E. Wood (2011) examined the factors that that influencethe profitability of financial institution in their research paper “The Determinants of EuropeanBank Profitability”. Their main finding was “the rate of return earned by a financial institution isaffected by numerous factors. These factors include elements internal to each financial institutionand several important external forces shaping earnings performance. The type of explanationwould determine possible policy implications and ought to be taken seriously”. Their paperquantifies how internal determinants (“within effects” changes) and external factors (“dynamicreallocation” effects) contribute to the performance of the EU banking industry as a whole in1994-1998.Balchandher K. Guru, J. Staunton & B. Shanmugam (2009) in this research paper“Determinants of commercial bank profitability in Malaysia” examined to what extent are theprofitability performance disparities due to variations in management controllable internalfactors and external factors. He took net profit as his dependent variable and Asset Composition,Capital, Deposit Composition, Expenses Management, Liquidity, Firm Size, Inflation Rate,Market Growth, Market Interest, Market Share and Regulation as his independent variable. Hesuggested that all variable has significant relationship with net profit. And also he added that inorder to increase profitability the Expense Management should be proper as this variablesignificance is very high.Demirguc-Kunt & Huizinga (2001) and Bikker and Hu (2002) find a negative relationshipbetween stock market capitalization and banks’ profitability, it means that equity and bankfinancing acts as substitutes rather than complements. In case of the industry-specific factors, theStructure- Conduct-Performance premise point out that growing market power enhances theprofitability (income) of banks.Antonina Davydenko(2011) surveyed about 3236 bank-quarter observations and concluded thatUkrainian banks suffer from low quality of loans and do not manage to extract considerableprofits from the growing volume of deposits. Despite low profits from the core banking activitiesJames W. Scott and José Carlos Arias (2011) in their study” Banking profitabilitydeterminants” surveyed top five bank holding companies in the United and concluded thatprofitability determinants for the banking industry include positive relationship between thereturn of equity and capital to asset ratio as well as the annual percentage changes in the externalper capita income. There was also a virtual consensus identified concerning the effect that theinternal factor of size as measured by an organization’s total assets had on its ability to competemore effectively, even in times of economic downturns.Nadim Jahangir, Shubhankar Shill and Md. AmlanJahidHaque(2007) surveyed 15commercial banks in Bangladesh and found that market concentration and bank risk do little toexplain bank return on equity, whereas bank market size is the only variable providing anexplanation for banks return on equity in the context of Bangladesh. They found that market size 5|P a ge
  18. 18. and banks return on equity proved to have strong relationship. Also, a strong and significantrelationship was identified between market size and banks return on equity. It suggests thatcapital adequacy is important for a bank to be profitable. 2.2 RESEARCH GAPAfter reading several research papers I found that no one has yet made any research paper oneffect of internal determinants on company’s profitability in Bangladesh. In fulfilling that gapmy research paper will play a significant role. As my research paper deals with role offundamental determinants on company performance, so everyone will get an overall idea abouthow the fundamental determinants affect the company’s profitability. It never can be taken as theconclusion rather as the beginning of research topic. 6|P a ge
  19. 19. Chapter # 3Introduction to
  20. 20. 3.1 COMPANY PROFILE WITH ITS HISTORY Company At a Glance 1 Date Of Corporation 3rd July, 1997 2 Year of Commencement 3rd July, 1997 3 Registration No C 33276(22)/97 4 Authorized Capital Tk. 1,000 million (Pre IPO) 5 Paid up Capital Tk. 550 million 6 Financial Year January- DecemberTable #1: Company GlanceLankaBangla Securities Limited (LBSL) is a subsidiary of LankaBangla Finance Limited and aleading equity brokerage house in the country with a diverse clientele of institutions, high networth individuals, foreign funds and retail investors. The company commenced stock brokingactivities in 1997 and has over time become the largest stock broking company in the countryhaving developed a strong team of highly skilled and experienced professionals.LBSL (Formerly known as Vanik Bangladesh Securities Ltd) started its stock broking businessin 1997 trading on the Chittagong Stock Exchange (CSE) Ltd, while commencing trading on theDhaka Stock Exchange (DSE) in1998. The company was renamed LankaBangla Securities witheffect from 27 April 2005 following a restructuring of the company.Its scrupulous investment in time and labor to create a better investment pathway for investor inthe Bangladesh Stock Market has made it become the leading equity brokerage house in thecountry. It began as Vanik Bangladesh Securities Ltd in 1997 with its activities confined onlywithin the Chittagong Stock Exchange (CSE) Ltd.A year later, it made a step ahead and introduced itselves to the Dhaka Stock Exchange (DSE). Itrebranded itself as LankaBangla Securities Ltd. in 2005 following a restructuring of thecompany. At LankaBangla Securities Limited, it specializes in developing the country’s mostefficient stock brokerage workforce with unmatched skills and consummate perfectionism. Also, 7|P a ge
  21. 21. whichever corner of Bangladesh customers are in, it has got everyone covered as customer canfind its eleven branches spread in the leading cities and towns countrywide.It is the leader in terms of customer transactions. That’s why it was again crowned as the largestbrokerage house in terms of transaction value for the 6th consecutive time in DSE and 7thconsecutive time in CSE in 2011. Quality, convenience, and reliability are certain things that itprovides its customer at the highest level. Customer can expect from his broker and that is thekey to such a strong network of key clients all over the world. Furthermore, the local andinternational recognitions from financial institutions, custodian banks, corporations, internationalfund managers, and other fellow brokers for our professionalism has laid the foundation of itsfuture growth and further success.Its ability to meet the demands considering every client’s time horizon, goals, and risk tolerancehas made its settle relations with thousands of retail and institutional clients all over the globe. Itis a 90.91% owned subsidiary of LankaBangla Finance Limited (LBFL) which is one of theleading listed non banking financial institutions in Bangladesh engaged in Leasing, Credit CardServices, Merchant Banking, Corporate Financing, and Financial Consultancy. LBFL is ownedby a group of highly successful local business entrepreneurs of Bangladesh, the Sampath BankLimited of Sri Lanka, the One Bank Limited of Bangladesh, and the general public. With allthese on the back, our house LBSL is undoubtedly a global one which knows cusotomerspreferences and guarantees cusotomer the most comfortable investment environment whileanyone choose to invest in Bangladesh. 8|P a ge
  22. 22. 3.2 KEY MILESTONE1997 • Started Stock Broking Business through CSE • Started Stock Broking Business through DSE1998 • Renamed as LBSL from VBSL with effect from 27th April2005 • Inaugurate Integrated Back Office Software System first ever in Bangladesh2008 Capital Market in 2008 • Tagged with BDJOBS for stock market training as a part of CSR • Achieved “BEST IT USE AWARD-2009” from Bangladesh Association of2009 Software & Information Services (BASIS) • Converted from Private Limited to Public Limited Company • Taken Over Directorship of MIDAS Financing Limited • Tagged with BDJOBS for stock market training as a part of CSR2010 • Sponsor Shareholding of Financial Excellence Limited • Secured 1st position in DSE in the last consecutive five years and CSE in the last2009 consecutive six years2011 • Increased paid up capital • Introducing a full-fledged FinancialWeb Portal & OrderManagement Systemfor2012 the first timein Bangladesh 9|P a ge
  23. 23. 3.3 LBSL ORGANOGRAM 10 | P a g e
  24. 24. 3.4 LBSL PHILOSOPHYVision of LBSL:Growing together with our stakeholders by implementing the most comprehensive, efficientand state of the art brokerage platform to maintain the excellence and maximize the wealth ofshareholders.Mission of LBSL:  Providing Quality Product and Services  Ensuring the Use of State of the Art Technology  Being the Hub of International Investment  Demonstrating Comprehensive Integrity with Market  Maintaining Corporate Governance  Promoting Research and Analysis  Involving in Continuous Process ImprovementGoals of LBSL:“To lead by example through a commitment that empowers the organization at every level tostrive for the highest levels of quality, customer care and stakeholder value. To be the mostsought after facilitator in creating wealth. To optimize the value of being our Customer,Shareholder or Employee. To establish strong regional presence” 11 | P a g e
  25. 25. 3.5 STRATEGIC PRIORITIESLBSL has some strategic priorities which it believes to be maintained in operating theorganization. These are Offloading share to the equity market as soon as possible. Expand its business all over the country by opening new branches. Diversifying operation through strategic investment in other organization and in bond market. Further improvement of asset quality. Smooth penetration in the capital market. Updating back office software as well as develop new software to support internet trading and swift data processing. Arranging different business promotion program such as road show in side as well as outside of the country, international capital market investor conference etc. Train up employees through attending in national and international training program to enrich their competence. To become cost efficient organization. Increase intrinsic value of the company by strengthening internal controls through installation of clearly laid down policies, procedures and processes. Strengthen risk management. Increased and focused Corporate Social Responsibility (CSR). 3.6 UNIQUE KEY PROPOSITION OF LBSL Exceptional quality and professionalism in its service offering to clients An experienced and dedicated senior management team A trained and professional sales team A competent equity market research unit The widest network of local branches (Dhaka, Chittagong & Sylhet) Ability to provide a one stop service offering at all its branches State of the art technology utilized in trade execution and back office and reporting systems International affiliation 12 | P a g e
  26. 26. 3.7 SERVICES OF LBSLLankaBangla Securities Limited offers various kinds of services all over the country, whichincludes the followings:1. Brokerage Services “Trade Execution Service” for clients in Dhaka and Chittagong Stock Exchange Trading of portfolio accounts maintained with the Merchant Banking Division of LankaBangla Finance Limited and IDLC Finance Ltd. Custodial Services provided for clients for safe custody of securities. Extend credit facilities through Margin Trading.2. Trading Facility through NITA (Non Resident Investor’s Taka Account)LBSL has successfully launched services of NITA Trading through which Non-ResidentBangladeshis (NRBs) are able to transact under Non-resident Investors Taka Account (NITA).The Company is also dedicated to use extensive recourses to offer new products and services tothe existing clients and also to attract new clients. Our choice of an object oriented approach andusing the latest technology has given us the flexibility to extend our product & service range aswell as ensuring performance, security and scalability.3. Internet TradingSince CSE has introduced Internet Trading System in Bangladesh and simultaneously LBSL hasadopted this trading facilities for its distance clients for trade execution. In addition our stepstoward internet trading through CSE TWS not only enriching the door of potential clienteles butalso ensuring our participation in the development of Bangladesh Capital Market.4. CDBL Services Full Depository Participant (DP) Service. BO (Beneficial Owner) account opening and maintenance. Dematerialization and Re-materialization of securities. Transfers and transmission of securities through CDBL. 13 | P a g e
  27. 27. 5. Research Services:LankaBangla Securities Ltd is supported by a competent research team that provides servicesamong others included: Economic, market, sector and listed company research reports. A daily stock market report and market commentary. A monthly publication on the equity market. Customized economic and capital market related research. Designing of training & development sessions related to the capital markets.6. Trade Execution Service:LankaBangla Securities Limited provides Trade Execution Service to the clients in the bothDhaka Stock Exchanges & Chittagong Stock Exchanges. 3.8 PRODUCTSS OF LBSL1. CTA (Cash Trading Account)Definition:CTA (Cash Trading Account) is a facility that is provided to clients for trading with their ownfinance.Features:  Orders can be received through email, telephone or fax.  Trade execution confirmation is provided to client.  Regular emailing of Portfolio Statement.Eligibility:  Any citizen of Bangladesh.  Age must be above eighteen. 14 | P a g e
  28. 28. Document Requirement: Fo r Inst it ut ional Trading Acco unt :  Board Resolution.  Memorandum and Articles of association.  Specimen signature of account operators.  Letter of Authorization.  A valid photo ID of the Managing Director.  Valid photo ID of Account Operator(s). For Ind ividual Trad ing Account :  Acco unt Opening Form and S ignat ure Card duly filled up.  Valid passpo rt or nat ional ID card photocopy.  Two co pies passport size photograph of account holder.  One copy passport size photo graph o f aut horized p erso n ( if any).2. FTA(Foreign Trading Account)Definition:FTA ( Fo reign Trading Account ) is a facilit y t hat is provided to t he foreig ninst it ut io nal client s, compr ising o f d ifferent fu nds, int ernat io nal bro kers, bank set c, who are int erest ed in t rading Bangladeshi secur it ies.Features:  Dedicated booth for foreign trades with access to Bloomberg terminal on the trading desk.  Orders can be received through email, Bloomberg EMSX, IB, fax.  Trade execution confirmation can be provided through email, Bloomberg EMSX, IB, fax (according to client preference).  Settlement done through DvP – RvP basis.  Execution updates are provided time to timeEligibility:  Fo reign int uit ional client s only. 15 | P a g e
  29. 29. Document Requirement:  Board resolution authorizing the account opening and the signatories to sign on behalf of the company.  Specimen Signature (included separately or in attached account opening form).  Copy of the Memorandum and Articles of Association.  Copy of the Certificate of Incorporation.  One Copy of a valid photo ID of each account operator.  Valid photo ID of the CEO/Managing Director of the company3. MTA (Margin Trading Account)Definition:MTA (Margin Trading Account ) is a facilit y t hat is provided to client s fo rtrading wit h margin loan. The margin loan and int erest rat e can be var ied wit hrespect to market co nd it io n.Features:  Orders can be received through email, telephone or fax.  Trade execution confirmation is provided to client.  Regular emailing of Portfolio Statement.Eligibility:  Any cit izen of Bangladesh.  Age mu st be abo ve eig ht een.Document Requirement: Fo r Inst it ut ional Trading Acco unt :  Board Resolut ion.  Memorandum and Art icles o f asso ciat io n.  Specimen sig nat ure of account operators.  Lett er o f Aut horizat ion.  A valid p hoto ID of t he Managing Direct or.  Valid pho to ID of Account Operator(s). 16 | P a g e
  30. 30. For Ind ividual Trad ing Account :  Acco unt Opening Form and S ignat ure Card duly filled up.  Valid passpo rt or nat ional ID card photocopy.  Two co pies passport size photograph of account holder.  One co py passport size photograph of aut horized perso n ( if any).4. NITA (Non Resident Investors Taka Account)Definition:NITA (No n Resident Investo rs Taka Account) is a facilit y t hat is provided t ono n-resident ind ividuals/ inst it ut ions including non-resident Bangladesh inat io nals who are int erest ed in t rading Bangladeshi secur it ies against foreig nexchange remit t ed fro m abro ad.Features:  Non-resident portfolio investors have to open a Non-resident Investors Taka Account (NITA) with any authorized dealer in Bangladesh funding the purchase and easy repatriation of the sales and income proceeds.  Securities can be purchased only through a member/registered broker of the stock exchange. E.g. LankaBangla Securities Ltd. (LBSL). However, public issues not yet listed in a stock exchange can be bought directly from the issuing company.  For the purpose of trading securities, investors need to open a security account/trading account with stock broker listed with the exchanges. E.g. LBSL  Funds from NITA can be used to purchase shares and securities listed in a stock exchange.  The balances in this account are freely remittable abroad in foreign exchange.Eligibility:  Non-Resident individuals (Foreigners and NRBs).  Foreign intuitions.  Institutions located abroad which are owned by NRBs. 17 | P a g e
  31. 31. Document Requirement: For Institutional Trading Account:  Company NITA A/C number with custodial bank or A/C statement.  Board Resolution.  Memorandum and Articles of association.  Specimen signature of account operators.  Letter of Authorization.  A valid photo ID of the Managing Director.  Valid photo ID of Account Operator(s) For Individual Trading Account:  Account Opening Form and Signature Card duly filled up.  Individual NITA A/C Number with custodial bank or A/C statement.  Valid passport or national ID card photocopy.  Two copies passport size photograph of account holder.  One copy passport size photograph of authorized person(if any). 18 | P a g e
  32. 32. 3.9 FINANCIAL HIGHLIGHTS OF LBSL Million BDTParticulars 2011 2010 2009 2008 2007Revenue from brokerage 758.51 1886.9 842.74 376.28 204.10Capital gain from investment in share 11.94 86.38 9.92 5.37 0.00Interest Income 82.93 69.19 19.32 14.37 22.39Operating Income 1231.06 2,096.79 877.84 397.30 219.52Profit before tax 1066.57 1811.05 698.27 277.84 140.07Profit after tax 747.62 1,530.59 638.15 252.82 126.82Shareholders’ equity 4716.76 4,402.27 1612.64 481.09 228.27Total asset 7698.24 6,535.55 2012.44 602.93 291.98Return on Equity 15.85% 34.77% 39.58% 52.55% 55.56%Table #2: Financial Highlight of LBSLAnalysis:LankaBangla Securities Limited (LBSL) has lost its net profit in 2011. But it earn an astounding139.85% growth in Net Profit in 2010 to BDT 1530.58 million largely backed by a quantumgrowth of 123.91 percent of Brokerage Income. Further analysis of Net Profit in 2011 decreaseby 70% reveals that LBSL has been able to control its operating expenses which have decreasedby 8% percent only. The balance sheet of the company strengthened in 2011. Shareholders’Equity increased by 7% in 2011. Finally the Balance Sheet size of LBSL i.e. Net Total Assetincreased significantly by 15% and reached at BDT 7698.24 million as on 31 December, 2011. 19 | P a g e
  33. 33. Chapter # 4Methodology & Analysis
  34. 34. Research IntroductionIn this report I divided the research part in to two segments. First is financial analysis and secondis statistical analysis. 1. Financial Analysis: Here I include company and industry analysis. i. Under company analysis I did all sorts of fundamental analysis. And all sorts of graph, growth statistics, common size statement analysis etc. have been included in the company analysis. ii. Under industry analysis percentage of market capitalization, beta, industry growth, and financial statement analysis etc have been included. 2. Statistical Analysis: Here descriptive analysis of all variable, run test, goodness of fit test, correlation, and a multiple regression model have been included. 20 | P a g e
  35. 35. Chapter 4.1: Company AnalysisCompany in Focus: Lanka Bangla Finance Limited
  36. 36. 4.1.1. BACKGROUND OFLANKA BANGLA FINANCE LIMITED (LBFL) Company Snapshot Paid-up Capital (BDT mn) 1894.00 No of Securities (mn) 189.41 Float 61.23% Capitalization (BDT) 13978.34 Reserve and Surplust (BDT) 3558.71 rd Adjusted Price Range (3 Jan, 10 to 7 Oct, 12) 107.9 – 67.7 Face Value 10.00 rd Average Daily Turnover (3 Jan, 10 to 7 Oct, 12) 778507.5 Market Lot 500.00 Category A st Year End 31 DecemberTable #3: Company Snapshot (LBFL)LankaBangla Finance Limited (LBFL) a joint venture financial institution established withmultinational collaboration is in operation since 1997 having license from Bangladesh Bankunder Financial Institutions Act, 1993. With institutional shareholding structure, educated &motivated human resources, friendly working environment & dynamic corporate culture hasenabled LBFL to be a diversified financial services providing institution of the country.Technical support provided by Sampath Bank Limited, Sri Lanka has been working as a catalystto emerge LBFL as most innovative financial solution provider strictly in compliance with therules & regulations of Bangladesh Bank.Under the right direction of the resourceful management the company has emerged as one of theleading Financial Institutions in the country. Lanka Bangla is the lone Non-Banking FinancialInstitution who operates MasterCard & VISA card including third party processing business withother banks. The company is also involved in dealing with Securities as Broker in Capital Marketat both DSE & CSE through its Subsidiary named “Lanka Bangla Securities Limited” who is thebusiness leader in this arena. The Merchant Banking Department has been converted into anothersubsidiary of Lanka Bangla Finance to comply with the statutory regulations who is catering tothe premier investment banking services. 20 | P a g e
  37. 37. 4.1.2. SHARE-HOLDING PATTERN ANALYSIS Share-outstanding Pattern Share-OutstandingSponsor / Director 38.77Govt 0 PatternInstitute 0 Sponsor / Director GovtForeign 0 Institute ForeignPublic 61.23 PublicTable #4: Share-Outstanding Pattern (LBFL) 39%Out of 189408450 shares 38.77 percentages of 61% 0%shares which is equal to 73433657 numbers of 0% 0%shares is being held by the sponsor director ofthe company and rest 61.23% which is equal to 115974793 shares is being regularly tradedamong the general public people. The government holding and institute investors have no sharesin their name. Though it is not a good sign for the company that institutional investors arereluctant to invest in this company but the company is fundamentally very strong. Because of theexcessive public holding the share pricefluctuation is very high of LBFL. Sponsor Details Sponsor Details Foreign Sponsor Local Sponsor a. Foreign SponsorSampath Bank Ltd, Srilanka 9.47% 24% b. Local SponsorOne Bank Ltd. Bangladesh 4.86%SSC Holding Ltd. Bangladesh 1.07% 1.84% 76%Shanta Apparel Ltd.Individual 21.52%Table #5: Sponsor Details (LBFL)The shares were listed with Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd, on17 October, 2006 and 31 October, 2006 respectively and trading started in the both houses from1 November 2006. 250.0 200.0 150.0 100.0 50.0 0.0 3-Sep-12 3-Nov-11 3-Sep-11 3-Mar-12 3-Nov-10 3-May-12 3-Sep-10 3-Mar-11 3-Jul-12 3-May-11 3-Mar-10 3-Jul-11 3-Jan-12 3-May-10 3-Jul-10 3-Jan-11 3-Jan-10 AdjustP a g e 21 | price graph for LBFL
  38. 38. 4.1.3. BUSINESS GROWTH ANALYSIS Business Growth Statistics 2008 2009 2010 2011Net interest income 73.43% 34.06% 41.62% 64.44% -Investment income 36.99% 77.50% 155.79% 56.89% - -Commission and Brokerage income 98.09% 16.00% 101.37% 59.61% - -Operating income 11.80% 78.46% 112.02% 36.27% -Operating profit 91.69% 86.14% 150.06% 47.91% -Earnings Growth 80.33% 96.05% 147.19% 53.29%Assets Growth 39.13% 65.21% 43.74% 15.83%Equity Growth 54.43% 127.71% 128.04% 19.42%Deposits Growth 68.72% 2.87% 16.44%Loans & Advances Growth 37.70% 17.50% 10.19%Table #6: Growth Statistics (LBFL)Last 4 years Lanka Bangla Finance Ltd (LBFL) has seen continuous growth. Due to market fallin 2010, the company has experienced tremendous growth fall in the following year. But if wegive a closer look in the table it can be infer that company is growing company. It hassignificantly maintained a good acceleration rate. Despite world recession and liquidity crisiscompany has continuously maintained a growth rate which enumerated that managementefficiency of the company is excellent.Outlook for 2012As the market is running bearish so cost of fund is decreasing so the net interest income willincrease significantly. But investment income from investing in share market will decreasewhich is a big part of income composition. So overall income growth composing of all incomesources will decrease. And because of low cost of fund the amount of loan and deposit willincrease which will be good for the company. 22 | P a g e
  39. 39. By seeing all the graphical presentation it can be said that due to market crash all the growth isnegative in the year 2011 except net interest income and deposit. Which explains that for themarket crash or fall public tends to deposit more money which they found more secure thaninvesting in capital market. That ultimately increases the investable fund for the institution whichresults in increase in net interest income. 200.00% Net interest income 150.00% 100.00% Investment income 50.00% Commission and Brokerage 0.00% income -50.00% Operating income -100.00% -150.00% Operating profit 2008 2009 2010 2011 140.00% 120.00% 100.00% 80.00% Assets Growth Equity Growth 60.00% Deposits Growth 40.00% Loans & Advances Growth 20.00% 0.00% 2008 2009 2010 2011 Graphical Presentation of Growth Statistics 23 | P a g e
  40. 40. 4.1.4 DETAILED ANALYSIS OF KEY FINANCIALSOperating Income AnalysisLBFL Finance had robust operating income growth like most other NBFIs. It hadgenerated robust operating income growth of -11.80%, 78.46%, 112.02% and -36.27% inthe year of 20098, 2009, 2010and 2011. Major part of the operating income wascontributed from commission, exchange and brokerage. Second best contributor is netinterest income. Most of the operating income came from capital market segment. In total49.53% of the total operating income was directly contributed from capital marketoperation.Outlook for 2012Net interest income growth will remain slow due to increased cost of fund. Commissionexchange and brokerage income for LBFL finance is expected to increase slightly as theaverage turnover in DSE and CSE has started to increase after the drastic fall occurred inFY2010. There will some investment income as the key benchmark index has increased bymore than 25%.200.00%100.00% Operation Income Growth 0.00% 150.00% 2008 2009 2010 2011 112.02% 100.00% 78.46% 50.00% net interest income 0.00% -11.80% -50.00% -36.27% Income from investments 2008 2009 2010 2011 24 | P a g e
  41. 41. Net Interest Income AnalysisParadox in Leasing BusinessAll the leasing companies are facing setback in their once prime business afterbanks entry into this segment. Low cost of fund has enabled banks to charge lowinterest against lease and term loan financing. Leasing business of LBFL Financehas gone opposite of market trend. The interest earning of LBFL has increasedsignificantly at increasing growth rate, which is fully a paradox to the market.Robust Margin Loan GrowthDuring the last 4 years like most other NBFIs IDLC Finance disbursed significantamount of margin loan through its capital market wing. Till date IDLC has anaccumulated balance of 10,438 million margin loan.Interest income from other segmentsFinance companies are focusing their business to new interest income generatingsegments. They are increasing their exposure in SME segment, personal finance,and real estate finance. LBFL Finance trying to capture market share in SME andterm finance segments. 1200 Amount in ml 1000 net interest 800 income 600 400 Expon. (net 200 interest 0 income) 2008 2009 2010 2011 12000 Amount in ml 10000 8000 6000 Loans and 4000 advances/Investme nt 2000 0 2008 2009 2010 2011 25 | P a g e
  42. 42. Invest ment IncomeLBFL Finance has moderate contribution from investment income compared to otherleading NBFIs. Contribution of investment income is much higher in the after tax netincome. Most of the trading profits are shown in the income statement. This segmentrepresents the most volatile earning source. We expect this segments return to growor decline with the market movement. At 2011 the growth rate is negative due to thesignificant downfall in Bangladesh Capital Market.Outlook for 2012As 2012 is the year of getting back the position of Bangladesh capital market, weexpect LBFL finance will show increase amount of income from the proprietaryincome segment. Income from investments Others 90.69% 90.74% 88.83% 92.44% 9.31% 9.26% 11.17% 7.56% 2008 2009 2010 2011Commission Exchange and BrokerageBrokerage division of LBFL has started with large market share. Now it has passed 15 years of itsbrokerage business. It is in the top position for the last few years. And market share of its brokerageis pretty high. Though the market has faced its greatest fall ever in the year 2010-2011 which resultsnegative growth rate in commission and brokerage income and with its skilled dynamic researchdepartment it has achieved a distinct position in the market.Banks are making their entry into the equity brokerage market. So now a days it is very competitivefor all brokerage houses to perform its business and fro LBSL it will difficulty to retain its topposition of brokerage field.Outlook for 2012In 2012 its contribution of securities brokerage is expected to increase as market is recovering fromthe bearish trend. Though still it is hard to capture the bullish trend but market is now getting back itsnormal trend. So it is very much expected that the revenue from brokerage commission is expected toincrease. 26 | P a g e
  43. 43. 2000 1500 Amount in ml 1000 Commission, excha nge and brokerage 500 0 2009 2010 2011Loans and AdvancesOverall loan portfolio of LBFL Finance Ltd. has made robust growth during past few years. As theequity market is going on bearish trend the amount of loan disbursement is increasing. Though theacceleration rate is negative but the amount of loan disbursement is increasing at a decreasing rate. Andas the market goes well the acceleration rate will tend to be positive. That means the amount of loandisbursement will increase at an increasing rate.Outlook for 2012Margin loan growth will be positive or higher. Term finance and lease finance growth may revive in2012. 12000.00 40% Amount in ml 10000.00 35% 30% 8000.00 25% Loans and 6000.00 20% advances/Investment 4000.00 15% Growth Rate 10% 2000.00 5% 0.00 0% 2008 2009 2010 2011 27 | P a g e
  44. 44. Deposit G ro wth & Cost of FundLBFL is one of the largest public deposits holding NBFI in the industry. Deposit collection growthrate in 2009 was 68.72%, in 2010 it was 2.87% and in 2011 it was 16.44.Cost of fund on 2010 haddecline due to the ease of the money market and on 2011 it regain its past cost.Outlook 2012In the uncertain and volatile money market both the deposit collection cost and bank borrowingcost will rise significantly. Bank borrowing will be difficult to obtain. Amount in ml Deposit Amount With Growth 6000.00 1 0.9 5000.00 0.8 4000.00 0.7 0.6 3000.00 0.5 0.4 2000.00 0.3 1000.00 0.2 0.1 0.00 0 2008 2009 2010 2011 Deposits and other 2627.30 4432.90 4560.00 5309.62 accounts: Growth 68.72% 2.87% 16.44% Cost of deposit 16.00% As the market is gaining its bullish trend so the cost 14.00% of fund is raising. So we can infer there is a 12.00% positive correlation between cost of fund and 10.00% capital market index. As the market index going up 8.00% so the cost of deposit and vice-versa. 6.00% 4.00% 2.00% 0.00% 2008 2009 2010 2011 Cost of 13.83% 11.58% 11.28% 13.98% deposit 28 | P a g e
  45. 45. Asset QualityLBFL Finance has modest amount of non-performing loan in its portfolio compared to other NBFIs.Overall NPL ratio slightly declined to 6.51% from 7.90% in 2011. Provisioning coverage was alsovery poor compared to industry average and banking industry. Provisioning coverage was only1.45% compared to 1.41% in 2009. Though the absolute amount might have increased but relativepercentage increase was negative. 1000.00 9.00% Amount in ml 900.00 8.00% Non- 800.00 7.00% perfor ming 700.00 6.00% loan 600.00 (ml) 5.00% 500.00 4.00% 400.00 3.00% 300.00 NPL 200.00 2.00% Ratio 100.00 1.00% 0.00 0.00% 2008 2009 2010 2011 Amount in ml Composition of Capital 16000 0.8 Deposits and other accounts: 14000 0.7 By analyz ing t he growt h rat e 12000 0.6 it can be said t hat t he amo u nt 10000 0.5 of deposit is increasing but Borrowings from 8000 0.4 not at an increasing rat e. The other 6000 0.3 banks, financial growt h rat e was lo wer in 4000 0.2 institutions and 2010 due t o bullish mark et agents but as t he market go es to 2000 0.1 Growth of Deposit bear ish t rend deposit gro wt h 0 0 2008 2009 2010 2011 rat e increased. 29 | P a g e
  46. 46. Total Asset Analysis Total assets Total assets30000.00 Expon. (Total assets) By analyz ing t he growt h rat e25000.00 it can be said t hat t he amo u nt20000.00 of t ot al asset is increasing15000.00 but not at an increasing rat e. The growt h rat e was lower in10000.00 2010 due t o bullish mark et 5000.00 but as t he market goes to bear ish t rend t ot al asset 0.00 growt h rat e increased. 2008 2009 2010 2011 30 | P a g e
  47. 47. 4.1.5 RATIO ANALYSIS OF LBFL LBFl (company) Ratio 2008 2009 2010 2011Liquidity Ratios (Times)Current Ratio 1.46 1.32 1.18 1.15Quick Ratio 1.28 1.17 0.99 0.96Cash Ratio 0.06 0.26 0.25 0.34Liquid Assets to Total Deposits 0.32 0.25 0.41 0.40Loans (Gross)/ Total Deposits 2.23 1.82 2.08 1.97Asset Quality RatioNPL Ratio 6.13% 5.38% 7.90% 6.51%Provision Coverage 1.96 0.77 1.41 1.45Non-performing loan (ml) 375.81 496.40 897.56 925.61Growth IndicatorsNet interest income 34.06% 41.62% 64.44%Investment income 36.99% 77.50% 155.79% -56.89%Commission and Brokerage income -98.09% 16.00% 101.37% -59.61%Operating income -11.80% 78.46% 112.02% -36.27%Operating profit 91.69% 86.14% 150.06% -47.91%Earnings Growth 80.33% 96.05% 147.19% -53.29%Assets Growth 39.13% 65.21% 43.74% 15.83%Equity Growth 54.43% 127.71% 128.04% 19.42%Deposits Growth 68.72% 2.87% 16.44%Loans & Advances Growth 37.70% 17.50% 10.19%Efficiency RatiosInterest Expense/ Interest Income 74.81% 67.40% 63.46% 59.21%Investment Income to Investment Assets 31.71% 7.82% 15.34% 4.26%Interest Yield 14.17% 13.93% 14.25% 18.93%Cost of Funds 13.83% 11.58% 11.28% 13.98%Net Spread 0.34% 2.35% 2.97% 4.95%Net interest margin 3.85% 5.49% 6.01% 7.89%Profitability IndicatorsROA(Return on Assets) 4.66% 5.54% 8.80% 3.53%ROAA (Return on Average Asset) 25.34% 33.25% 33.16% 10.50%Price Earnings Ratio (times) 20.04 22.41 15.56 17.72ROE (Return on Equity) 40.94% 35.42% 35.49% 13.83%Net Profit Margin 45.44% 49.92% 58.21% 42.66%Gross Profit Margin 68.49% 71.43% 84.25% 68.87% 31 | P a g e
  48. 48. 4.1.6 COMMONSIZE STATEMENT OF LBFLLast 4 years common size statement of Lanka Bangla finance Limited: Common size Statement (percentage of Total Asset) Statement of financial Position 2008 2009 2010 2011 Property and assets Cash: 0.44% 0.40% 0.48% 0.53% Balance with other banks and financial institution 10.02 7.70 9.14 9.04 Money at call and short notice/Placement with banks & other financial institution 0.00 0.00 0.00 0.00 Investment in shares & securities 3.01 13.13 11.90 15.95 Loans and advances/Investment 71.95 59.97 49.02 46.64 Land, building, furniture and fixtures (including leased assets) 1.05 0.69 1.01 0.84 Other assets 13.54 18.11 28.45 27.00 Total assets 100.00% 100.00% 100.00% 100.00% Shareholders equity & Liability Borrowings from other banks, financial institutions and agents 39.47 37.82 32.87 37.78 Deposits and other accounts: 32.29 32.98 23.60 23.72 Other liabilities 16.90 13.58 16.96 11.27 Total liabilities 88.66% 84.37% 73.43% 72.78% Shareholders equity 11.34 15.63 24.79 25.56 Minority Interest 0.00 0.00 1.78 1.66 Total liabilities and shareholders equity 100.00% 100.00% 100.00% 100.00% Income Statement 2008 2009 2010 2011 Net interest income 2.93% 5.08% 7.19% 11.82% Income from investments 0.96 1.70 4.34 1.87 Commission, exchange and brokerage 0.00 11.55 23.25 9.39 Other operating income 6.38 0.00 4.06 1.67 Total operating income 10.26 18.32 38.84 24.75 Total operating expenses 3.23 5.23 6.12 7.70 Profit before provision against loans and advances 7.03 13.09 32.72 17.05 Total provision 1.21 1.92 4.07 1.02 Profit for the year before taxation 5.82 11.16 28.65 16.03 Provision for tax 1.16 2.02 6.04 5.47 Net profit after tax for the year 4.66 9.14 22.61 10.56Source: Annual Financial Statement 32 | P a g e
  49. 49. Chapter 4.2: Industry AnalysisIndustry in Focus: Financial Institutions
  50. 50. 4.2.1. INDUSTRY SNAP NON BANKING FINANCIAL INSTITUTION (NBFIs) Industry Snapshot Paid-up Capital (BDT mn) 20438.96 Number of listed Company 22 Capitalization (BDT) 163,911,375,872 Sector PE 19.1 Sertor Earning 8,714,468,569 Sector Beta 0.905396574Table #7: Industry SnapshotFinancial institution sector is the 4th highest sector in term of market capitalization. Non-BankFinancial Institutions (NBFIs) are those institutions that are licensed and controlled by theFinancial Institutions Act of 1993 (FIA 93). NBFIs give loans and advances for industry,commerce, agriculture or housing; carries on business of hire purchase transactions includingleasing of machinery or equipment; involves in business of the underwriting or acquisition of, orthe investment or re-investment in shares, stocks, bonds, debentures or debenture stock orsecurities issued by the government or any local authority; finances venture capital; gives loanfor house building and property purchases and uses its capital to invest in companies. The majordifferences of NBFIs with commercial banks are that the former cannot accept any deposit whichis payable on demand by cheques, drafts or orders drawn by the depositor and cannot deal inforeign exchange. Starting from the IPDC in 1981, a total of 29 NBFIs are now working in thecountry as of October, 2012. And out of 29 NBFI 22 companies are listed at DSE and CSE.The lease financing practices in Bangladesh have grown significantly within the last 10 years.Competition among the leasing companies has grown stronger with the growth of the NBFIs,besides entrance of commercial banks in the lease financing market who have the advantage oflower costs of fund compared to the NBFIs. Currently, out of 29 NBFI, 22 specialize in leasefinancing. As per central bank data released in May 2011, lease financing constituted 64.5% oftotal long term assets, with the rest consisting mainly of term financing.For NBFIs the prime sources of funding are loans from commercial banks and other financialinstitutions, term deposits from the public, funds from capital market by issuing shares,debentures, bonds etc. and loan facilities from the international agencies like ADB, IDA, IFCetc. NBFIs are mostly dependent on funds from the credit lines of the commercial banks at arelatively higher rate of interest ranging up to 15%. Moreover, they have to provide high andexpensive collateral securities like fixed deposits at the time of borrowing fund from thecommercial banks. Raising fund from capital market is a prospective way to reduce dependencyon borrowed funds and boost up the activities of NBFI’s in an efficient manner. 33 | P a g e
  51. 51. The financial system of Bangladesh is comprised of three broad fragmented sectors: 1. Formal Sector, 2. Semi-Formal Sector, 3. Informal Sector.The sectors have been categorized in accordance with their degree of regulation.The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions(NBFIs), Insurance Companies, Capital Market Intermediaries like Brokerage Houses, MerchantBanks etcThe semi formal sector includes those institutions which are regulated otherwise but do not fallunder the jurisdiction of Central Bank, Insurance Authority, Securities and ExchangeCommission or any other enacted financial regulator. This sector is mainly representedby Specialized Financial Institutions like House Building Finance Corporation (HBFC), PalliKarma Sahayak Foundation (PKSF), and Samabay Bank, Grameen Bank etc., NonGovernmental Organizations (NGOs and discrete government programs.The informal sector includes private intermediaries which are completely unregulated.Non Bank Financial Institutions (NBFIs) are those types of financial institutions which areregulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 31NBFIs are operating in Bangladesh while the maiden one was established in 1981. Out of thetotal, 2 is fully government owned, 1 is the subsidiary of a SOCB, 13 were initiated by privatedomestic initiative and 15 were initiated by joint venture initiative. Major sources of funds ofNBFIs are Term Deposit (at least six months tenure), Credit Facility from Banks and otherNBFIs, Call Money as well as Bond and Securitization.The major difference between banks and NBFIs are as follows: • NBFIs cannot issue cheques, pay-orders or demand drafts. • NBFIs cannot receive demand deposits, • NBFIs cannot be involved in foreign exchange financing, • NBFIs can conduct their business operations with diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc.If we consider the case of LankaBangla Finance Limited, it has started its operation in 1996.Since then, the NBFI is excelling in a rapid manner. The growth of capital and cliental base hasbeen tremendous. And LankaBangla not only established its reputation in the market, it is alsolooking into the other spheres of banking as well. It has already opened merchant banking wing,securities and asset management far. And it has a long term view to convert its total operationinto Investment banking system. 34 | P a g e
  52. 52. 4.2.2 MARKET CAPITALIZATION OF NBFI INDUSTRYOut of 100% market capitalization 8% is covered by NBFI sector (on 11th October, 2012). Thatis pretty high and ranks as number 4 in Bangladesh Capital Market.. 4.2.3 COMPOSITION OF INCOMEThe major source of income for any NBFI is interest income. Because every nbfis main businessis giving different terms loans. so the major portion of income comes from interest income. Andas the graph suggests the amount of interest income is increasing day by day. Then second majorsource is investment income is investment income. From the bar chart it can be clearly see theamount of investment income was high in the year 2010 due to rapid index growth in DSE andCSE. As the market was bearish in year 2011 we can see there is a acute fall of investmentincome in the year 2011. Almost every major NBFI has brokerage or security extension likelanka bangla finance has lanka bangla securities, IDLC has IDLC securities etc. So it is anotherbig source of income. Then also NBFI has income from dividend income and other operatingincome. 35 | P a g e
  53. 53. 30000.00 25000.00 Other Operating Inocme 20000.00 Dividend 15000.00 Commisssion, Exchange & Brokerage 10000.00 Income from Invesetment 5000.00 Interest Income 0.00 2008 2009 2010 2011Amount in ml 4.2.4 INCOME GROWTH 20000.00 1.5 15000.00 1 10000.00 0.5 5000.00 0 0.00 -0.5 2008 2009 2010 2011 Net profit after tax for the year Growth RateAmount in mlThe amount of industry income was highest in the year 2010 as the capital market was bullishbut as the market moved to bearish trend the amount of income tends to decrease. But thesituation might improve in the year 2012. Because slowly market is getting back its bullish trend.And also world economy is recovering from the recession. 36 | P a g e
  54. 54. 4.2.5 INDUSTRY GROWTH Industry Growth Statistics 2009 2010 2011Net interest income 14.64% 16.93% 26.72%Investment income -4.32% 170.29% -39.80%Commission and Brokerage income 174.76% 99.64% -38.57%Operating income 23.08% 91.71% -16.70%Operating profit 23.05% 104.10% -24.38%Earnings Growth 51.84% 127.15% -30.66%Assets Growth 128.42% 135.24% 112.46%Equity Growth 136.57% 245.89% 115.23%Deposits Growth 31.30% 20.09% 14.36%Loans & Advances Growth 24.52% 29.75% 15.84%Table #8: Industry GrowthSource: Annual Financial Statement analysis Growth Analysis 100% By analyzing t he growt h rat e it can be 80% st at ed t hat except 60% invest ment inco me 40% Commission and all o t her co mpo sit io n Brokerage income of inco me has 20% Investment income sig nificant ly fa l l 0% down due t o bear is h Net interest income t rend of mark et . -20% -40% -60% 2009 2010 2011 37 | P a g e
  55. 55. 260.00%240.00%220.00%200.00% Assets Growth180.00%160.00%140.00% Equity Growth120.00%100.00% Deposits Growth 80.00% 60.00% Loans & Advances 40.00% Growth 20.00% 0.00% 2009 2010 2011Growth Analysis ContinuesBy analyz ing t he gro wt h rat e it can be st at ed t hat all t he major co mponent so f balance sheet are in declining t rend. Though t he amount of Tot al asset ,depo sit , lo ans, equ it y are incr easing but at a decreasing rat e. As t he mark etgo es well and inco me st art s generat ing t he growt h rat e will be higher. 38 | P a g e
  56. 56. 4.2.6 RATIO ANALYSIS OF NBFI INDUSTRY 2008 2009 2010 2011 Liquidity Ratios (times) Current Ratio 3.35 3.42 3.54 3.53 Quick Ratio 2.80 2.91 3.01 3.07 Cash Ratio 0.46 0.42 0.30 0.21 Loans (Gross)/ Total Deposits 1.40 1.33 1.44 1.46 Growth Indicators Net interest income 23.98% 34.19% 24.88% Investment income -4.32% 170.29% -39.80% Commission and Brokerage income 174.76% 99.64% -38.57% Operating income 23.08% 91.71% -16.70% Operating profit 23.05% 104.10% -24.38% Earnings Growth 51.84% 127.15% -30.66% Assets Growth 28.42% 35.24% 12.46% Equity Growth 36.57% 145.89% 15.23% Deposits Growth 31.30% 20.09% 14.36% Loans & Advances Growth 24.52% 29.75% 15.84% Efficiency Ratios Interest Expense/ Interest Income 74.16% 72.05% 67.93% 68.40% Investment Income to Investment 30.76% 19.11% 23.06% 11.62% Assets Interest Yield 15.44% 14.13% 12.50% 14.04% Profitability Indicators Net Profit Margin 42.10% 51.94% 61.54% 51.23% Gross Profit Margin 81.31% 81.29% 86.54% 78.56%Source: Annual Financial Statement 39 | P a g e