University of Dhaka

Department of Management Studies MBA (Evening Program) Spring, 2012 Term Paper on PERFORMANCE EVALUATION OF DUTCH BANGLA BANK LTD.

Course Title Course code Course Teacher Topic

Bank Management

Term Paper on “Performance Evaluation of Dutch Bangla Bank Ltd.” 18/04/2012


Submitted by Name Nahid Rijwan Roll 3-09-17-033 033

Table of Contents

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Introduction Banking Scenario in Bangladesh Bangladesh Bank Review of Literature Objectives of the Study Scope & Methodology of the Study An Overview of Dutch Bangla Bank Ltd. Performance Evaluation of Dutch Bangla Bank Ltd. Findings and Conclusion

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1. INTRODUCTION In a developing country like Bangladesh, the banking system as a whole, play a vital role in the progress of economic development. In this paper it has been tried to analyze the development and growth of Dutch Bangla Bank Ltd. of Bangladesh and evaluate its performance. It is observed that the DBBL bank has been playing a vital role in economic development as well as in development of banking industry in Bangladesh. Eleven trend equations have been tested for different activities of the bank. Among them the trend value of branches, total deposits and net income are the main parameters concerning the performance of the bank. Square of correlation coefficient (r2) has also been tested for all trend equations. The r2 of branches, deposits and net income is more than 0.90. It indicates the prospect of Dutch Bangla bank in Bangladesh is very bright. 1.1 BANKING SCENARIO IN BANGLADESH Banking system plays a very important role in the economic life of the nation. The health of the economy is closely related to the soundness of its banking system. In a developing country like Bangladesh the banking system as a whole play a vital role in the progress of economic development. A bank as a matter of fact is just like a heart in the economic structure and the Capital provided by it is like blood in it. As long as blood is in circulation the organs will remain sound and healthy. If the blood is not supplied to any organ then that part would become useless. So if the finance is not provided to agriculture sector or industrial sector, it will be destroyed. Loan facility provided by banks works as an incentive to the producer to increase the production. Banking is now an essential part of our economic system. Modern trade and commerce would almost be impossible without the availability of suitable banking services. First of all, banking promotes savings. All manner of people, from the ordinary laborers and workers to the rich land owners and businessmen, can keep their money safely in banks and saving centers. Secondly, banking promotes investments. Banks easily invest the money they get in industry, agriculture and trade. They either invest it directly or advance loans to other investors. Thirdly, it is most through banks that foreign trade is carried on. Whether we export or import, it is through banks that money is transferred from one country to another.

For example, bills of exchange and letters of credit are the regular ways banks use to transfer money. A number of recent studies, however, indicate that the banking sector plays a more important role than it was believed earlier (World Bank, 1996; Almeyda) In Bangladesh Sonali Bank is the largest among the Nationalized Commercial Banks (NCBs) while Pubali is leading in the private ones. Among the 12 foreign banks, Standard Chartered has become the largest in the country. Besides thescheduled banks, Samabai (Cooperative) Bank, Ansar-VDP Bank, Karmasansthan

(Employment) Bank and Grameen bank are functioning in the financial sector. In Bangladesh the number of total branches of all scheduled banks is 6,038 as of June 2000. Of the branches, 39.95 per cent (2,412) are located in the urban areas and 60.05 per cent (3,626) in the rural areas. Of the branches NCBs hold 3,616, private commercial banks 1,214, foreign banks 31 and specialized banks 1,177. 1.2 BANGLADESH BANK Bangladesh Bank (BB) has been working as the central bank since the country's independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. Bangladesh Bank (BB) regulates and supervises the activities of all banks. BB is also responsible for planning the government's monetary policy and implementing it thereby. The BB has a governing body comprising of nine members with the Governor as its chief. Apart from the head office in Dhaka, it has nine more branches, of which two in Dhaka and one each in Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Rangpur and Barisal. Category NCBs Private Banks Foreign Banks Development Banks 2. REVIEW OF LITERATURE With respect to the Performances of Bangladeshi Commercial Banking sector, foreign and national experts undertook number of studies. Some of the notable ones are: Number of Banks 4 28 12 5 Number of Branches 3616 1214 31 1177

Bhattacharya (2007) pointed out that six major recent policy measures include: reduction of bank rate and lending rate, linking classified loans to large loan sanctioning; rationalization and merger of bank branches, measures for loan recovery, and demarcation of responsibilities between the management and the board and decision on cash reserve ratio. Chowdhury and Islam (2007) stated that deposits and loan advances of Nationalized Commercial Banks (NCBs) are less sensitive to interest changes than those of Specialized Banks (SBs). So SBs should not make abrupt change in lending or deposit rates by following the NCBs. If NCBs change their lending or deposit rates, their deposits or loans and advances will be affected less than those of SBs. Moreover, deposits of NCBs have higher volume and higher volatility than those of SBs. On the other hand, loans advances of NCBs show a higher volume and higher volatility than those of SBs. However, SBs offer higher deposit rates and charge higher lending rates than NCBs. That is why the interest rate spread of SBs was higher than that of NCBs. Jahangir, Shill and Haque (2007) stated that the traditional measure of profitability through stockholder’s equity is quite different in banking industry from any other sector of business, where loan-to-deposit ratio works as a very good indicator of banks' profitability as it depicts the status of asset-liability management of banks. But banks' risk is not only associated with this asset liability management but also related to growth opportunity. Smooth growth ensures higher future returns to holders and there lies the profitability which means not only current profits but future returns as well. So, market size and market concentration index along with return to equity and loanto-deposit ratio grab the attention of analyzing the banks’ profitability. Chowdhury (2002) observed that the banking industry of Bangladesh is a mixed one comprising nationalized, private and foreign commercial banks. Many efforts have been made to explain the performance of these banks. Understanding the performance of banks requires knowledge about the profitability and the relationships between variables like market size, bank's risk and bank's market size with profitability. Indeed, the performance evaluation of commercial banks is especially important today because of the fierce competition. The banking industry is experiencing major transition for the last two decades. It is becoming imperative for banks to endure the pressure arising from both internal and external factors and prove to be profitable.

Siddique and Islam (2001) pointed out that the Commercial Banks, as a whole, are performing well and contributing to the economic development of the country. The average profitability of all Bangladeshi banks collectively was 0.09% during 1980 to 1995 which means that a profit of TK 0.09 was earned by utilizing assets of TK 100. In every aspect of profit, banking sector contributes the national economy as well as to the individual organization. Despite overall growth of the banking sector being positive, the performances of different categories of banks were not equally attractive. According to Al-Shamrnari and Salirni (1998) profitability ratio especially return on equity (ROE) signals the earning capability of the organization. They also suggest that higher return on equity (ROE) ratio is appreciable as it is the primary indicator of bank's profitability and functional efficiency. Avkiran (1997) stated that the details the process whereby multivariate

interdisciplinary measures of potential to perform are integrated with performance measures to develop models of retail performance for bank branches. The predictive models use the key business drivers of a major trading bank as dependent variables. Independent variables explaining business drivers are the theorized potential variables that measure the capacity to generate retail business. The models allow a comparison between the predicted and actual levels of key business diverts, thus measuring unrealized performance. Findings can assist decision making during restructuring, branch closures or downsizing. The variables presented should be regarded as examples rather than universally accepted measures of branch performance. Bhatt & Ghosh (1992), observed that the profitability of commercial banks depend on several factors some of them are endogenous and some exogenous. The endogenous factors represent control of expenditure, expansion of banking business, timely recovery of loans and productivity. The exogenous factors consist of direct investments such as SLR (Statutory Liquidity Ratio), CRR (Cash Reserve Ratio) and directed credit programs such as region wise, population wise guidelines on lending to priority sectors. The regulated and restricted regime in the operation of banking system in terms of investment, credit allocation, branch expansion, interest rate determination and internal management eroded the productivity and profitability of commercial banks. Hossain and Bhuiyan (1990) stated that there is no universally accepted operational definition of performance measures. In broad sense performance level of an enterprise

can be measured by the extent of its organizational effectiveness. In the context of services rendered towards public the performance of an organization can be viewed as ‘the extent to which its work is carried out within established specifications for goods and services produced, to the general satisfaction of the clientele served, within given cost and time constraints, and in such a manner as to support or contribute to the achievement of the organization objectives. In measuring performance level of a bank Swamy and Vasudevan (1985) used per employee, deposits, advances, profits, etc. 3. OBJECTIVES OF THE STUDY The specific objectives of the study are as follows; 1) To present an overview of a Private Commercial Bank (Dutch Bangla Bank Ltd.) of Bangladesh. 2) To appraise the performance of selected Private Commercial Bank of Bangladesh. 4. SCOPE & METHODOLOGY OF THE STUDY The present study has been carried out to evaluate the performance of selected private commercial banks of Bangladesh. The selected bank is Dutch Bangla Bank Ltd. (DBBL). This study has been based mainly on data from secondary sources. The relevant data and information were collected from Stock Exchanges, Annual Reports of the commercial bank, Bangladesh Bank, Securities and Exchange Commission (SEC) and web sites of relevant commercial bank of Bangladesh etc. Relevant articles and literature in this context have also been consulted. In this article we analyzed last five years data of selected private commercial bank. For evaluating the performance of selected private commercial bank, the following performance variables of the selected private commercial bank have been used: 1. Number of branches 2. Total deposit 3. Total loans and advances 4. Classified loans 5. Percentage of classified loan to total loan 6. Net profit after taxation & provision 7. Cost of fund

8. Return on asset (ROA) 9. Earning per share (EPS) 10. Return on equity (ROE) Data has been analyzed through the various statistical measures like growth percentage, trend equation, square of correlation coefficient, etc. Among the various straight line Trend Methods of Time Series Analysis the method of Least Square is most popular and widely used in practice. The method of least square can be used either to fit a straight-line trend or a parabolic trend. The straight line trend is represented by the equation Yc = a + bX. Where, Yc denotes the trend values to distinguish them from the actual Y values. ‘a’ is the Y intercept or the

value of the Y variable when X = 0. ‘b’ represents the slope of the line of the amount of change in Y variable that if associated with a change of one unit in X variable. ‘X’ variable in time series analysis represents time. The square of correlation coefficient (r2) is called the multiple determinations or squared multiple correlation coefficients. The coefficient of correlation is denoted by r. The value of r lies between 0 and 1.

The higher the r2 the greater the percentage of the variation of Y explained by the regression model, that is, the better the “goodness of fit” of the regression model to the sample observations and r2 closer to zero, the worse the fit.

5. AN OVERVIEW OF DUTCH BANGLA BANK LTD: Dutch-Bangla Bank started operation is Bangladesh's first joint venture bank. The bank was an effort by local shareholders spearheaded by M Sahabuddin Ahmed (founder chairman) and the Dutch company FMO. From the onset, the focus of the bank has been financing high-growth manufacturing industries in Bangladesh. The rationale being that the manufacturing sector exports Bangladeshi products worldwide. Thereby financing and concentrating on this sector allows Bangladesh to achieve the desired growth. DBBL's other focus is Corporate Social Responsibility (CSR). Even though CSR is now a cliché, DBBL is the pioneer in this sector and termed the contribution simply as 'social responsibility'. Due to its investment in this sector, DBBL has become one of the largest donors and the largest bank donor in Bangladesh. The bank has won numerous international awards because of its unique approach as a socially conscious bank.

DBBL was the first bank in Bangladesh to be fully automated. The ElectronicBanking Division was established in 2002 to undertake rapid automation and bring modern banking services into this field. Full automation was completed in 2003 and hereby introduced plastic money to the Bangladeshi masses. DBBL also operates the nation's largest ATM fleet and in the process drastically cut consumer costs and fees by 80%. Moreover, DBBL choosing the low profitability route for this sector has surprised many critics. DBBL had pursued the mass automation in Banking as a CSR activity and never intended profitability from this sector. As a result it now provides unrivaled banking technology offerings to all its customers. Because of this mindset, most local banks have joined DBBL's banking infrastructure instead of pursuing their own. Even with a history of hefty technological investments and an even larger donations, consumer and investor confidence has never waned. Dutch-Bangla Bank stock set the record for the highest share price in the Dhaka Stock Exchange in 2008. Mission: Dutch-Bangla Bank engineers enterprise and creativity in business and industry with a commitment to social responsibility. "Profits alone" do not hold a central focus in the Bank’s operation; because "man does not live by bread and butter alone". Vision: Dutch-Bangla Bank dreams of better Bangladesh, where arts and letters, sports and athletics, music and entertainment, science and education, health and hygiene, clean and pollution free environment and above all a society based on morality and ethics make all our lives worth living. DBBL’s essence and ethos rest on a cosmos of creativity and the marvel magic of a charmed life that abounds with spirit of life and adventures that contributes towards human development. Core-objectives: Dutch-Bangla Bank believes in its uncompromising commitment to fulfill its customer needs and satisfaction and to become their first choice in banking. Taking cue from its pool of esteemed clientele, Dutch-Bangla Bank intends to pave the way for a new era in banking that upholds and epitomizes its vaunted marquees "YOUR TRUSTED PARTNER." 6. PERFORMANCE EVALUATION OF DUTCH BANGLA BANK LTD.: 6.1 Growth of Branches of DBBL

Table1. shows the growth pattern of number of branches along with its growth of ATM network and Fast Track of DBBL bank. Table1: Number of Branches of DBBL DUTCH BANGLA SL BANK LTD. 2007 1 Branches Growth 2 ATM units Growth 3 Fast Track Growth 207 49 2008 64 30.60% 350 YEAR 2009 78 21.88% 700 2010 96 23.08% 1100 2011 111 15.63% 1940 76.36% 153 206.00%

69.08% 100.00% 57.14% 50

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd.

6.2 Growth of Total Deposit of DBBL Bank Table2. Shows growth pattern of deposits of Dutch Bangla Bank Ltd. It is observed from the table that the deposit has grown steadily over the years from 2007 to 2011, but the growth is highest in year 2009 of 31.44%. So it is reflected from the table that the total deposit of the bank has showed an increasing trend during the period of 2007-2011. Table 2: Total Deposit of Dutch Bangla Bank Ltd.


DBBL 2007 2008

YEAR 2009 67,788,533,035 31.44% 2010 2011

1 Total Deposit Growth

42,110,147,036 51,575,667,260 22.48%

83,244,772,836 100,711,010,944 22.80% 20.98%

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd. 6.3 Growth of Total Loans & Advances of DBBL The growth pattern of total loan and advances of Dutch Bangla Bank Ltd. is reflected from Table-3. It is reflected from the table that almost every year’s loan and advances of DBBL has increased from the previous year. The growth of loan and advances is

highest in 2008 & 2010, whereas in 2009 & 2011 the bank has the lowest growth observed. Table 3: Total Loans & Advances of Dutch Bangla Bank Ltd. S L DBBL 2007 Total Loans 1 and Advances Growth 29,303,123,212 41,698,321,269 42.30% 48,410,989,619 16.10% 67,657,666,378 39.76% 79,660,698,143 17.74% 2008 YEAR 2009 2010 2011

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd. 6.4 Classified Loans of DBBL It is observed from table-4 that the classified loan of DBBL is very low compared to its total amount of loans & advancements i.e. about 3%. It seems that DBBL is able to manage credit efficiently; as a result recovery is quite good. Table 4: Classified Loans & % of classified loan to total loan of Dutch Bangla Bank Ltd. SL DBBL 2007 Amount of 1 Classified Loans Growth % of Classified 2 Loan to Total Loan 3.26% 3.27% 2.46% 2.46% 2.75% 958,028,734 1,363,174,636 42.29% 1,193,317,209 -12.50% 1,665,670,064 39.58% 2,186,797,123 31.29% 2008 YEAR 2009 2010 2011

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd. 6.5 Growth of Net Profit of DBBL It is observed from the table-5 that the net income of DBBL has almost increased during 2007 to 2011. It is also reflected that DBBL bank has earned a drastic increase in its net profit in the year 2008 & 2010 but failed to maintain the growth rate in the year 2011. So the growth rate of net income is not quite stable. Table 5: Net profit after taxation & provision of Dutch Bangla Bank Ltd. SL DBBL 2007 2008 YEAR 2009 2010 2011


Net Profit After Taxation & Provision Growth

479,810,510 821,665,049 1,137,698,057 2,002,315,963 2,154,888,510





Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd.

6.6 Growth of Cost of Fund of DBBL From Table-6, it is stated that the cost of fund of DBBL bank has been gradually decreasing over the years from 2007 to 2010. But in 2011 the bank incurred cost of fund to increase up to 124%. And there was no possible explanation shown for this abnormal change in the related documents. Table 6: Growth of Cost of fund of Dutch Bangla Bank Ltd. SL DBBL 2007 1 Cost of Fund Growth 8.44% 2008 7.66% -9.24% YEAR 2009 6.53% -14.75% 2010 4.41% -32.47% 2011 9.89% 124.26%

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd.

6.7 Growth of Return on Assets (ROA) of DBBL The Return on Asset (ROA) of DBBL has increased gradually and has a positive growth from the year 2007 to 2010. The growth rate achieved its peak in 2010 of 37.5%. In 2011, the ROA of DBBL faced a downfall to 1.92% from 2.2% of the previous year. In spite of negative growth though it continued increasing. Table 7: Growth of Return on Asset (ROA) DUTCH BANGLA SL BANK LTD. 2007 1 Return on Asset (ROA) Growth 1.01% 2008 1.49% 47.52% YEAR 2009 1.60% 7.38% 2010 2.20% 37.50% 2011 1.92% -12.72%

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd.

6.8 Growth of Earning Per Share (EPS) of DBBL

It is reflected from the table 8 that the EPS of DBBL was very high during 2007. It is observed that the average EPS of DBBL was more than 100% to the year 2007. In year 2008, the bank incurred a change in its accounting principle and asset evaluation. In the year 2009, the bank also reevaluated its share value under the regulation of Security & Exchange Commission (SEC) and its face value stated BDT 10 from BDT 100. Table 8: Growth of Earning Per Share (EPS) SL DBBL 2007 1 Earning per Share (EPS) Growth * 237.37 2008 54.78 -76.92% YEAR 2009 75.85 38.46% 2010 10.01* 31.97% 2011 10.77* 7.59%

Face value of share revised from Tk. 100 to Tk. 10 per share

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd. 6.9 Growth of Return on Equity (ROE) of DBBL From Table-9 it is stated that, first of all, return on equity data from all the examined years were not available. Data of ROE of DBBL was available up to the year 2009. From the concerning data we found that DBBL has a good average return on equity. The growth hit the pick in the year 2008 of 24.44%. Table 9: Growth of Return on Equity (ROE) DUTCH BANGLA SL BANK LTD. 2007 1 Return on Equity (ROE) Growth 24.02% 2008 29.89% 24.44% YEAR 2009 30.28% 1.30% 2010 2011 -

Source: Compiled from different issues of Annual Report of Dutch Bangla Bank Ltd. 6.10 Trend Equations and r2 of the Performance Variables of DBBL SL 1 2 3 4 Dutch Bangla Bank Ltd. Number of Branches ATM Network Total Deposit (in million BDT) Total Loans and Advances (in million YC = a + bx 79.6+15.6x 859.4+421.6x 69085.6+14887.1x 53345.6+12667.3x r2 0.998 0.912 0.990 0.981

BDT) 5 6 7 Classified Loan (in million BDT) % of Classified Loan to Total Loan Net Profit After Taxation (in million BDT) 8 9 10 11 Cost of Fund Return on Asset (ROA) Earning per Share (EPS) Return on Equity (ROE) 7.386-0.035x 1.644+0.253x 115.16-21.402x 28.063+3.13x 0.007 0.787 0.224 0.796 1473+275.8x 2.84-0.183x 1318.6+453.1x 0.844 0.508 0.954

7. FINDINGS AND CONCLUSION The journey of Private commercial banks has started in Bangladesh in the year 19821983. After commencement the private commercial play a vital role in the economic development of the country. Dutch Bangla Bank Ltd. creates employment opportunities for a large number of people in our country. The bank also been concentrating on its corporate social responsibility. The bank has disbursed more than one billion BDT for the educational development of Bangladesh. It has been observed that the net income of DBBL have increased from the previous year during 2007 to 2011. It is also reflected from the analysis that the EPS of DBBL is very high during 2006 to 2010. It indicates the profitability of the bank is quite satisfactory. Loans recovery rate indicated that the banks are able to manage their credit efficiently. Every year these banks open new branches and they are expanding their online banking network nationwide providing the ATM booths, Fast Track & mobile banking. It is observed that the classified loan of DBBL is very low i.e. about 3%. It seems that DBBL is able to manage credit efficiently as a result recovery is quite good. Eleven trend equations have been tested for different activities of the Dutch Bangla Bank Ltd. Square of correlation coefficient (r2) has also been tested for all trend equations. The r2 of branches, deposits and net income is more than 0.95. It indicates the prospect of the DBBL bank in Bangladesh is very bright. DBBL need to increase its net income by increasing deposits, decreasing cost and expanding more branches. As the growth of net income of the bank is fluctuating, the bank should try to keep it at a stable point.

We are quite optimistic that if the given suggestions of this paper are implemented then the Dutch Bangla Bank Ltd. may be able to overcome its minor problems and may contribute in the rapid development of the economy of Bangladesh.

1. Al Shammari, M., and Salimi, M. (1998). Modeling the operating efficiency of banks, A parametric methodology. Journal of Logistic Information Management, Vol. 11. 2. Siddique, S. H., and Islam, A. F. M. M. Bangladesh: Its Contribution and Performance. Journal of Business Research, Jahangirnagar University, Vol. 3. 3. Chowdhury, T. A., (2010). Performance Evaluation of Private Commercial Banks in Bangladesh. International Journal of Business & Management, Vol. 4. 4. Gupta, S.P., Business Statistics, New Edition. 5. Khan, A.R., Bank Management: A Fund Emphasis. (2001). Banking Sector in

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