EXECUTIVE SUMMARY

In this assignment, I have analyzed five banks financial statements to provide recommendation on investment decision of these five banks. The stocks are AB Bank Ltd, National Bank Ltd, Shahjalal Islami Bank Ltd, Trust Bank Ltd and Dutch Bangla Bank Ltd. I, mainly, follow the CAMEL approach, developed by bank regulators, to measure financial performance and condition of a bank. Moreover, the P/E ratio also provides another benchmark to rank the investment on interested banking stocks. However, before mentioning the recommendation, there are few future uncertainties of the banking business. This may include: Bangladesh Bank impose strict capital adequacy and liquidity requirement which may decline the profitability of the banking business. The new government issued pay scale will increase the operating expenses specially the salary expenses. The rising inflation may also follow increased salary, huge unused foreign reserve maintained by BB. The negative growth of import of capital machinery indicates the sloth of national investment which gives the unenthusiastic signal of investment opportunities and lowering non interest earning source for the banks. The recent recession, increase in unemployment, local corporate layoffs and plant closings, low farm prices, and so on suggest rising numbers of delinquent loans therefore, banks must maintain sufficient reserves and provisions may be taken against earnings leading to decline in revenues. Conversely, if economic conditions are deteriorating and the bank is not provisioning for anticipated losses in order to maintain profitability then problems may develop during the next fiscal period. The low interest rate may decline the next half years EPS relative to prior periods. On the basis of the profitability and asset quality measures the first ranking goes to Shahajalal Islami Bank Ltd. The low percentage of bad loans, higher operating profit margin and the lower current P/E relative to industry average of 25.75x provide such ranking, though the half year EPS could not gain half of the previous years annual EPS and the ROA is not the best among these five securities. Next ranking goes to AB Bank Ltd. Its Operating profit margin and ROA staggeringly positioned at high ranking, while the bad loans to total loan stay at medium range. The half year EPS is 59.14 tk and the current P/E is only 12.25. 3rd position rest to Trust Bank Ltd. on the basis of operating profit margin criterion. This is also backed by the better asset quality measures criteria, i.e; loan loss reserve to loan ratio, bad loan to total loan ratio. Though the ROA of the bank is the lowest the earning potentiality will increase the chance of increasing profitability. The increased bad loans amount and the lowered operating profit margin drives this stock at this position, though the bank generate a good return to assets. Lastly, the lower efficiency ratio, low earning growth and asset growth, higher P/E leads to the last ranking position for Dutch Bangla Bank Ltd.

AB BANK LTD
As on Liquidity Liquid Assets to Total Deposits Customer loans/deposits (%) Borrowed Fund to Total Asset Profitability Interest Income/Total Income (%) Non Interest Income/Total Income (%) Reported Net Profit/Total Income (%) Net Interest Income/Total Income (%) Net Interest Margin (%) Operating Profit Margin Non-interest Income to Average Assets Ratio Overhead Ratio Efficiency Ratio ROE (%) ROA (%) Leverage & Capital Measures Customer loans/deposits (%) Investments/Deposits (%) Equity Capital Tier-1 capital adequacy ratio Tier-2 capital adequacy ratio Total Capital Adequacy ratio Asset Quality Measures Loan Loss Reserves to Total Loans Ratio Coverage Ratio Doubtful Loans to Total Loan Ratio (9 -12 month) Bad/loss Loans to Total Loan Ratio (12 month or above) Growth (%) Growth in Interest Income Growth in Interest Expenses Growth in Employee cost Growth in assets Per Share Book Value Per Share (Rs) Earnings Per Share (Rs) Dividend Per Share (Rs) Trailing P/E Current P/E 2008 27.71% 82.71% 3.80% 64.14% 35.86% 20.03% 17.68% 2.84% 69.90% 5.58% 2.51% 30.10% 34.22% 2.74% 82.71% 16.64% 9.11% 10.57% 2.27% 12.84% 2.38% 5.90 0.23% 2.35% 39.79% 39.30% 44.65% 32.26% 301.49 103.18 15.00, 15%B 9.16 12.25 2007 29.26% 76.66% 2.95% 62.09% 37.91% 22.43% 16.96% 2.76% 71.41% 5.06% 2.09% 28.59% 42.19% 3.00% 76.66% 16.65% 7.10% 8.62% 2.13% 10.75% 2.80% 5.72 0.56% 3.25% Growth in PAT Growth in equity Growth in Deposits Growth in borrowing 807 256.1 200%B 10.00 % change -5.32% 7.90% 28.97% 3.30% -5.41% -10.69% 4.26% 2.92% -2.11% 10.22% 19.70% 5.27% -18.89% -8.62% 7.90% -0.03% 28.31% 22.62% 6.57% 19.44% -15.10% 3.22% -58.61% -27.68% 20.86% 49.01% 28.45% 70.58%

59.14

Capital Adequacy: While Equity growth rate outperform asset growth rate, the capital adequacy has been increased. Asset Quality As the provision against loan declined, the loan loss reserve has also been decreased. Moreover, total classified loans have been decreased. The coverage ration indicates loan loss reserve provides the sufficient cushion against the substandard due loans. Profitability: Net Interest Margin indicates management could not employ the earning asset base, that is, the lower the net interest margin is reflective of the bank with a large volume of non-earning or lowyielding assets. It may come under pressure from offering preferential rates to customer base, a relatively lower concentration on interest income and the higher percentage of more expensive wholesale funds available. Moreover, the higher Non-interest Income to Average Assets Ratio is consistent with the higher share of non-interest income in the bank's total revenue. Return on Assets (ROA) The last two years ranges of PCBs are 1.1% to 1.3%. Historically in Bangladesh the benchmark was on average of 1.0%. Therefore, the bank outperforms the benchmark. Return on Equity (ROE)- the return on the stockholder's investment were decreased to 34.22% from 42.19%, but the bank still outperforms the benchmark of 15.2% in 2006 and 16.7% in 2007. Operating Profit Margin This lower ratio indicates the percent of net operating revenues consumed by operating expenses, providing the remaining operating profit. The Overhead Ratio indicates the banks non-interest expenses rose faster than income due to inflation. Efficiency slightly distorted as the Efficiency Ratio increases, which is due to slower growth of net interest income, and non-interest revenues and increasing operating expenses. However, for every taka the bank is earning it gets to keep 70 paisa and has to spend 30 paisa to earn that taka. Liquidity The principal mechanism for implementing the Banks liquidity policy is to maintain liquid assets to deposit ratio above the regulatory defined ratio of 18%. AB bank places considerable importance on the FDRs which form 60% of its total deposits. The scenario of the term deposits reveals an increasing trend, on the other hand, the saving & demand deposits have decreasing trend. Moreover, the borrowing fund to total asset ratio is increased. The above table shows that liquidity ratio is decreasing for the bank though AB Bank maintained higher ratio than industry of 22.2% in 2007. The Loan to Deposit ratio of the Bank is demonstrated on the liquidity ratio table, which indicates that the outstanding loans are completely funded by deposits the average ratio is 80%. The increasing trend indicates bank invest more in assets other than liquid assets.

TRUST BANK LTD

Ratio Analysis As on Liquidity Liquid Assets to Total Deposits Customer loans/deposits (%) Borrowed Fund to Total Asset Profitability Interest Income/Total Income Non Interest Income/Total Income Reported Net Profit/Total Income Net Interest Income/Total Income Net Interest Margin (%) Operating Profit Margin Non-interest Income to Average Assets Ratio Overhead Ratio Efficiency Ratio ROE (%) ROA (%) Leverage & Capital Measures Customer loans/deposits (%) Investments/Deposits (%) Equity Capital Tier-1 capital adequacy ratio Tier-2 capital adequacy ratio Total Capital Adequacy ratio Asset Quality Measures Loan Loss Reserves to Total Loans Ratio Coverage Ratio Doubtful Loans to Total Loan Ratio (9 -12 month) Bad/loss Loans to Total Loan Ratio (12 month or above) Growth (%) Growth in Interest Income Growth in Interest Expenses Growth in Employee cost Growth in equity Growth in assets Growth in PAT Growth in Deposits Growth in Borrowings Per Share Book Value Per Share (Rs) Earnings Per Share (Rs) Dividend Per Share (Rs) Trailing P/E Current P/E 2008 30.34% 83.62% 2.94% 81.34% 18.66% 10.36% 26.24% 3.31% 62.43% 2.42% 2.19% 37.57% 14.84% 1.20% 83.62% 15.08% 9.06% 11.13% 1.68% 12.81% 2007 39.64% 68.93% 0.80% 79.84% 20.16% 7.30% 20.39% 2.41% 64.28% 2.17% 1.56% 35.72% 11.10% 0.79% 68.93% 13.97% 7.09% 10.69% 1.52% 12.21% -23.44% 21.31% 265.58% 1.88% -7.45% 41.99% 28.68% 37.34% -2.88% 11.43% 40.22% 5.19% 33.78% 52.97% 21.31% 7.93% 27.79% 4.12% 10.53% 4.91%

2.34% 14.62 0.36% 2.00% 39.00% 26.46% 67.41% 44.81% 26.64% 93.72% 21.47% 362.97% 202.57 31.96 20%B 17.76 17.15

2.39% 17.17 1.70% 0.86%

-2.18% -14.86% -78.90% 132.28%

194.65 28.28 10%B,1R:5 32.86

17.97

Capital Adequacy: While Equity growth rate outperform asset growth rate, the capital adequacy has been increased. Asset Quality Current years declining provision result in a slight decline in the ratio. Bad loan scenario has severely deteriorated and hence total amount of nonperforming loan has been increased. Though reserve cover 14 times of substandard loans this has also decreased from 2007. Profitability: Though Net Interest Margin indicates better performance of management considering employment of higher yield earning asset base, that is, the higher the net interest margin is reflective of the bank with a large volume of high-yielding assets. However, the result of a favorable interest rate environment, and the result of moving out of safe but low-yielding securities into higher-risk, higher yielding and less liquid loans could generate such flattering end result. Moreover, the lower Non-interest Income to Average Assets Ratio is regular with the higher share of interest income in the bank's total revenue. Return on Assets (ROA) The bank could not outperform the benchmark. Return on Equity (ROE)- the return on the stockholder's investment were increased to 14.84% from 11.1%, but the bank did poor compared to the benchmark of 15.2% in 2006 and 16.7% in 2007. Operating Profit Margin This lower ratio indicates the percent of net operating revenues consumed by operating expenses, that is, the Overhead Ratio of the bank rose due to inflation and expanding by the purchase or construction of new branches. Efficiency also slightly distorted as the Efficiency Ratio increases, which is due to slower growth of net interest income, and noninterest revenues and increasing operating expenses. However, for every taka the bank is earning it gets to keep 62 paisa and has to spend 38 paisa to earn that taka. Liquidity Trust Bank places considerable importance on the FDRs which form 79% of its total deposits. The scenario of the term deposits reveals an increasing trend, on the other hand, the saving & demand deposits have decreasing trend. Moreover, the borrowing fund to total asset ratio is increased. The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22.2% in 2007. The Loan to Deposit ratio of the Bank indicates that the outstanding loans are completely funded by deposits the average ratio is 76%. The increasing trend indicates bank prefer investing in assets other than liquid assets.

SHAHAJALAL ISLAMI BANK LTD.

Ratio Analysis As on Liquidity Liquid Assets to Total Deposits Customer loans/deposits (%) Borrowed Fund to Total Asset Profitability Interest Income/Total Income (%) Non Interest Income/Total Income Reported Net Profit/Total Income (%) Net Interest Income/Total Income Net Interest Margin (%) Operating Profit Margin Non-interest Income to Average Assets Ratio Overhead Ratio Efficiency Ratio Return Related ROE (%) ROA (%) Leverage & Capital Measures Customer loans/deposits (%) Investments/Deposits (%) Equity Capital Tier-1 capital adequacy ratio Tier-2 capital adequacy ratio Total Capital Adequacy ratio Asset Quality Measures Loan Loss Reserves to Total Loans Ratio Coverage Ratio Doubtful Loans to Total Loan Ratio (9 -12 month) Bad/loss Loans to Total Loan Ratio (12 month or above) Growth (%) Growth in Interest Income Growth in Interest Expenses Growth in Employee cost Growth in equity Growth in assets Growth in PAT Growth in Deposits Growth in Borrowings Per Share Book Value Per Share (Rs) Earnings Per Share (Rs) Dividend Per Share (Rs) Trailing P/E Current P/E 2008 28.38% 90.23% 5.42% 80.15% 19.85% 15.47% 24.10% 3.18% 77.91% 2.85% 1.40% 22.09% 22.68% 1.81% 90.23% 3.14% 9.80% 12.24% 1.57% 13.81% 1.16% 43.20 0.00% 0.41% 42.47% 51.14% 90.14% 29.33% 59.51% 26.39% 61.30% 58.58% 160.53 36.41 22%B 10.43 11.72 168.95 34.57 20%B 10.58 2007 30.46% 91.15% 5.45% 82.85% 17.15% 18.03% 28.24% 3.96% 80.73% 2.17% 1.11% 19.27% 23.21% 2.28% 91.15% 3.80% 9.83% 15.05% 1.37% 16.42% 1.16% #DIV/0! 0.49% 0.13% -6.85% -1.01% -0.59% -3.26% 15.77% -14.18% -14.65% -19.64% -3.50% 31.39% 26.03% 14.66% -2.28% -20.77% -1.01% -17.42% -0.33% -18.67% 14.60% -15.90% 0.71% #DIV/0! -100.00% 206.81%

13.19

Capital Adequacy: Asset growth is almost two times of the growth rate of equity, hence the ratio declined in 2008. Asset Quality Though bank increased loan provision notably, maintained same percentage of loan loss reserve to total loan. There exist significant amount of bad loans in the loan portfolio. The unpredictability of substandard loans cannot produce meaningful results. Profitability: Average Net Interest Margin of 3.57% indicates outstanding performance of management considering employment of higher yield earning asset base, that is, the higher the net interest margin is reflective of higher weight of high-yielding assets. However, the result of a favorable interest rate environment, and the result of moving out of safe but low-yielding securities into higher-risk, higher yielding and less liquid loans could generate such flattering end result. Moreover, the lower Non-interest Income to Average Assets Ratio is regular with the higher share of interest income in the bank's total revenue. Return on Assets (ROA) of 1.81% the bank broke the benchmark figures of 1.13% in 2007. Return on Equity (ROE) - the return on the stockholders investment was decreased to 22.68% from 23.21%, but the bank did poor compared to the benchmark of 15.2% in 2006 and 16.7% in 2007. Operating Profit Margin The staggering higher ratio indicates the bank managed its operating costs at complimentary level which is consistent with the lower Overhead Ratio of the bank though there was inflation. Efficiency also slightly distorted as the Efficiency Ratio increases, which is due to slower growth of net interest income, and non-interest revenues and increasing operating expenses. However, for every taka the bank is earning it gets to keep 78 paisa and has to spend only 22 paisa to earn that taka. Liquidity Shahajalal Bank places considerable importance on the term deposits and Mudaraba Other Deposits which form 86% of its total deposits. The scenario of the term deposits reveals an increasing trend, on the other hand, the saving & demand deposits have decreasing trend. Moreover, the bank used high amount of borrowing fund to maintain the liquid requirement of deposit, as the loan to deposit ratio is higher with a ratio 91%. The increasing trend indicates bank prefer investing in assets other than liquid assets. The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22.2% in 2007.

NATIONAL BANK LIMITED

Capital Adequacy:
Leverage & Capital Measures Customer loans/deposits (%) Investments/Deposits (%) Equity Capital Tier-1 capital adequacy ratio Tier-2 capital adequacy ratio Total Capital Adequacy ratio 2008 82.52% 16.85% 9.52% 10.83% 2.59% 13.42% 2007 76.05% 16.15% 8.08% 10.41% 2.70% 13.11%

Almost parallel growth in equity and asset leads to a slight increase in ratio. Asset Quality The current year provision has been increased in significant (mostly against unclassified loan). Ratio has reduced. All categories of classified loans increased, hence the percentage to total loan amount. The hike in substandard loans deteriorated the ratio in great extent.
Asset Quality Measures Loan Loss Reserves to Total Loans Ratio Coverage Ratio Doubtful Loans to Total Loan Ratio (9 -12 month) Bad/loss Loans to Total Loan Ratio (12 month or above) 2008 3.40% 3.55 0.21% 4.33% 2007 3.68% 14.56 0.09% 4.18%

Profitability: Average Net Interest Margin of 3.19% indicates great performance of management considering employment of higher yield earning asset base, though the weight of loan in the asset formation is only 65%-69%. Alternatively speaking, higher portion of demand & saving deposits place the bank to have low cost which could generate such profitability. However, the result of a favorable interest rate environment, and the result of moving out of safe but low-yielding securities into higher-risk, higher yielding and less liquid loans could generate such flattering end result. Moreover, around 5% Non-interest Income to Average Assets Ratio reflects that management put importance on non interest income which brings the diversification income to the bank.
Profitability Interest Income/Total Income (%) Non Interest Income/Total Income 2008 64.90% 35.10% 2007 59.63% 40.37%

Reported Net Profit/Total Income (%) Net Interest Income/Total Income (%) Net Interest Margin (%) Operating Profit Margin Non-interest Income to Average Assets Ratio Overhead Ratio Efficiency Ratio ROE (%) ROA (%)

17.09% 24.59% 3.42% 58.83% 4.86% 3.40% 41.17% 24.86% 2.11%

17.22% 20.24% 2.96% 50.83% 5.14% 3.79% 49.17% 27.12% 2.19%

Return on Assets (ROA) of 2.19% the bank broke the benchmark figures of 1.13% in 2007. Return on Equity (ROE) - the return on the stockholders investment was decreased to 24.86% from 27.12%. The bank outperformed the benchmark of 15.2% in 2006 and 16.7% in 2007. Operating Profit Margin The lower ratio indicates the bank could not managed its operating costs at complimentary level which is consistent with the higher Overhead Ratio followed by inflation, expansion of branches and higher employment. Efficiency also slightly distorted as the Efficiency Ratio increases, which is due to slower growth of net interest income, and non-interest revenues and increasing operating expenses. However, for every taka the bank is earning it gets to keep only 59 paisa and has to spend only 41 paisa to earn that taka. Liquidity NBL places considerable importance on the term FDR which form 61% of its total deposits. The scenario of the term deposits reveals an increasing trend, on the other hand, the saving & demand deposits have decreasing trend. Moreover, the bank used high amount of borrowing fund to maintain the liquid requirement of deposit, as the loan to deposit ratio is higher with a ratio 82.85%. The increasing trend indicates bank prefer investing in assets other than liquid assets.
Liquidity Liquid Assets to Total Deposits Customer loans/deposits (%) Borrowed Fund to Total Asset 32.99% 82.52% 1.74% 35.95% 76.05% 0.66% -8.23% 8.50% 164.53%

The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22.2% in 2007.

DUTCH BANGLA BANK LT.

As on Liquidity Liquid Assets to Total Deposits Customer loans/deposits (%) Borrowed Fund to Total Asset Profitability Interest Income/Total Income (%) Non Interest Income/Total Income Reported Net Profit/Total Income (%) Net Interest Income/Total Income Net Interest Margin (%) Operating Profit Margin Non-interest Income to Average Assets Ratio Overhead Ratio Efficiency Ratio Return Related ROE (%) ROA (%) Leverage & Capital Measures Customer loans/deposits (%) Investments/Deposits (%) Tier-1 capital adequacy ratio Tier-2 capital adequacy ratio Total Capital Adequacy ratio Asset Quality Measures Loan Loss Reserves to Total Loans Ratio Coverage Ratio Doubtful Loans to Total Loan Ratio (9 -12 month) Bad/loss Loans to Total Loan Ratio (12 month or above) Growth (%) Growth in Interest Income Growth in Interest Expenses Growth in Employee cost Growth in PAT Growth in assets Growth in equity Growth in Deposits Growth in Borrowings Per Share Book Value Per Share (Rs) Earnings Per Share (Rs) Dividend Per Share (Rs) Trailing P/E Current P/E 2008 28.92% 80.85% 3.32% 74.96% 25.04% 11.29% 24.98% 3.53% 53.19% 3.31% 3.10% 46.81% 25.51% 1.35% 80.85% 10.44% 6.91% 4.05% 10.96% 2007 40.38% 69.82% 4.19% 76.63% 23.37% 7.54% 18.69% 2.82% 49.52% 3.01% 2.74% 50.48% 20.55% 0.97% 69.82% 14.03% 7.23% 4.53% 11.76% % Change -28.40% 15.79% -20.68% -2.18% 7.14% 49.87% 33.69% 25.26% 7.41% 9.84% 13.07% -7.27% 24.13% 39.33% 15.79% -25.59% -4.43% -10.60% -6.80%

3.29% 2.52 0.45% 1.57% 11.77% -1.44% 29.54% 71.25% 22.91% 37.96% 22.48% -6.18% 322.05 82.17 50%B 52.46 36.16

4.04% 0 0.10% 3.28%

-18.61% 0 366.84% -52.24%

1154.88 237.37 394.7%B 28.5 Half year EPS: 33.89

Capital Adequacy: Though equity grew faster than asset, the ratio has been decreased due to poor earnings growth of the bank. Asset Quality Parallel decline in bad loan and provision against both unclassified and classified loans leads to decrease in loan loss reserve to loan ratio. If all substandard loans become bad loans and charge against the loan loss reserve, reserve would provide cushion of 2.52 times of this particular classified loans. Profitability: Average Net Interest Margin of 3.17% indicates great performance of management considering employment of higher yield earning asset base, though the weight of loan in the asset formation is increased from 57.46% to 67.59%. Alternatively speaking, higher portion of demand & saving deposits place the bank to have low cost which could generate such profitability. However, the result of a favorable interest rate environment, and the result of moving out of safe but lowyielding securities into higher-risk, higher yielding and less liquid loans could generate such flattering end result. Moreover, around 3.15% Non-interest Income to Average Assets Ratio reflects that management put importance on non interest income which brings the diversification income to the bank. Return on Assets (ROA) of 0.97% the bank underperformed the benchmark figures of 1.13% in 2007. Return on Equity (ROE) - the return on the stockholders investment was increased to 25.51% from 20.55%. The bank outperformed the benchmark of 15.2% in 2006 and 16.7% in 2007. Operating Profit Margin The lower ratio indicates the bank could not managed its operating costs at complimentary level which is consistent with the higher Overhead Ratio followed by inflation, expansion of branches and higher employment. Efficiency also slightly distorted as the Efficiency Ratio increases, which is due to slower growth of net interest income, and non-interest revenues and increasing operating expenses. However, for every taka the bank is earning it gets to keep only 53 paisa and has to spend only 47 paisa to earn that taka. Liquidity DBBL places considerable importance on the term FDR which form 60% of its total deposits. The scenario of the term deposits reveals an increasing trend, on the other hand, the saving & demand deposits have decreasing trend. Moreover, the bank used high amount of borrowing fund to maintain the liquid requirement of deposit, as the loan to deposit ratio is higher with a ratio 81%. The increasing trend indicates bank prefer investing in assets other than liquid assets. The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22.2% in 2007. However, in 2008 it decreased at great amount which is consistent with the higher loan to deposit ratio.