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National University of Modern Languages

Sector H-9 ISLAMABAD

Department of Management Science

Frm Project

SUBMITTED TO: Sir Zubair ahmed

SUBMITTED BY: Adeel Azher

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“Banking is an art of striking a balance between Risk and Revenue.’’

What is RISK ?

 It is the potential that events expected or unexpected, may have an

adverse effect on a financial institution’s capital or earnings.
 Risk is inherent in all business and financial activities.
 The greater the RISK associated with an activity the greater potential to
generate a high return.
 Banks do take RISKS – The biggest RISK is not taking A RISK.

Definition of Risk Management

 Risk Management is the process of identifying, measuring, monitoring

and controlling risks

Where Risks should be Identified

 Institution-wide
 Business lines
 Products
 Transactions

Banking Risk

Taking risks can almost be said to be the business of bank management. A

bank that is run on the principle of avoiding all risks or as many of them as
possible, will be a stagnant institution, and will not adequately serves the
legitimate credit needs of its society. On the other hand a bank that takes
excessive risks or credit is more likely, takes them without recognizing their
extent or their existence will surely run into difficulty.

Serving the Needs of Depositor Borrowers and Banks

 Commercial Bank lending/Investment involves three parties :

1. The suppliers of funds (The depositor)
2. The users of funds (The borrowers)
3. A financial intermediary (Bank) s

Supplier Bank Borrower

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Financial Aspect of the

HBL:
“An index that relates two accounting numbers and is obtained by dividing one
number by other”
Ratio Analysis is an important and age-old technique of financial
analysis. It simplifies the comprehension of financial statements. Ratios tell the
whole story of changes in the financial condition of business. It provides data fro
inter firm comparison. Ratios highlight the factors associated with successful
and unsuccessful firm. They also reveal strong firms and weak firms, over-
valued and under valued firms. It helps in Planning and forecasting. Ratios can
assist management, in its basic functions of forecasting, planning, co-ordination,
control and communication. Ratio analysis also makes possible comparison of
the performance of different divisions of the firm. The ratios are helpful in
decision about their efficiency of otherwise in the past and likely performance in
future. Ratios also help in Investment decisions in the investors and lending
decisions in the case of bankers etc.
Following are the main types of ratios that I am going to calculate in this report
to compare and highlight the financial performance of Habib bank in 2008 with
2007.

 Return on Equity Ratio

 Return on Assets

 Loan to Assets ratio

 Net Profit Ratio

 Loan to Deposit

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Return on Equity Ratio

2008 2007
Return on Equity Ratio
Net Profit after tax
15,614,020 10,084,037
Owner Equity
75,180,436 63,237,429

Return on equity
20.76 15.94

Interpretation:

The past two years data shows an improvement in the return on equity which is
a positive sign. The Bank should have to continue its policies. By observing
the audited account I found that this improvement is due to increase in the Net
profit which is good sign.

Return on Assets Ratio

2008 2007
Return on Assets

Net Profit after tax 15,614,020 10,084,037

Total Assets
757,928,389 691,991,521
Return on Assets
2.06 1.45

Interpretation:
Return on assets ratio shows an improving trend. This ratio shows that the both
the Net profit and Total Assets has improved in 2008 than 2007. But net profit
has increased more rapidly.

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2008 2007
Loan to Assets ratio
Advances
456,355,507 382,172,734
Assets
757,928,389 691,991,521
Loan to Assets ratio 55.22
60.21

Loan to Assets ratio

Interpretation:
Loan to Asset Ratio is showing increasing trend in 2008. This is because
advances are increasing more rapidly than assets of the bank.

2008 2007
Net Profit Ratio
Net profit 15,614,020 10,084,037

Interest Income 43,970,884 33,250,937

Net profit ratio

35.50 30.32

Net Profit Ratio

Interpretation:
Net profit Ratio is giving upward trend. This trend is observed due to
increase in Net profit but on the other hand the expenses decreases
which shows an efficient management.

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Loan to Deposit Ratio

Loan to Deposit 2008 2007

456,355,507 382,172,734
Advances

Deposits 597,090,545 531,298,127

Loan to deposit ratio 76.43 71.93

Interpretation:
Loans to deposit ratio show an increasing trend in 2008 as compare to 2007.
This trend is observed as the advances and deposits both are increasing but
advances are increasing more rapidly than deposits.

Net Intrest income

Net Intrest income = Net intrest income/earning asset

Net Intrest income / Margin 2008 2007

36,779,477 31,327,064
Net Intrest income

Earning asset 594,501,199 560,064,985

Loan to deposit ratio 0.0619 0.0560

Spread
Intrest income/eaning Asset - intrest expense/intest bearing liabilty

Net Intrest income / Margin 2008 2007

Intrest income/eaning Asset 2.9821 1.2197

0.00333 0.0297
intrest expense/intest bearing liab.
Spread 2.97877 1.1902

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Overall Efficiency

Overall Efficiency= non intrest income/non intrest expense

Overall Efficiency 2008 2007

Non Intrest income 43,970,884 33,250,937

21,936,505 18,106,320
Non intrest expense
Overall Efficiency 2.0045 1.8364

Risk Faced by comercial banks in pakistan

Following are the risk which is faced by HBL

 CREDIT RISK
 MARKET RISK
 INTEREST RISK
 LIQUIDITY RISK
 OPERATIONAL RISK
 COUNTRY RISK
 OWNERSIP / MANAGEMENT RISK

And i identify 3 major risk which hbl was facing now a days

 CREDIT RISK
 FINANCIAL RISK
 OPERATIONAL RISK

Credit Risk

Credit risk is major category of risk of the bank.It occurs whenever

there is a possibility that is the customer cannot meet contractual
obligations to the bank in term of :
- The delivery of documents or commodities where the bank bear
the whole risk OR
- The payment of principal ,interest ,fees orcommissions.

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Operational & financial risk

The best way to reach this objective is to understand the full risk
environment within which you operate...

External Internal
Environment Environment

Economic Expansion/ Financial Risk

Conditions Diversification
Asset
Culture Risk
Social/Legal
Trends Liability
Distribution Risk

Natural Catastrophes Risk Appetite

People Business Risk

Competition
Event
Processes Risk
Political/
Regulatory
Climate Technology Operational Risk

That is the internal and external environment in which hbl do their

opeartion external variable are related with the financial risk. It can effect
the asset and liability of the bank. And internal enviornment can effect the
operation of the bank

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…and the complete set of strategies that are available to you...

Financial Operational
Strategies Strategies

Financial Risk Hiring/Training

Capital
Structure
Incentive Programs
Asset Risk
Asset
Allocation Internal Controls
Liability Risk
Products
Pricing
Technology
Business Risk
Product Mix Customer Service
Event Risk
Market Strategy

Operational Risk Securitisation

Distribution

That is the complete strategy for financial risk and operational

risk and be mitigated bay applying financial and operational strategyif we apply
the following strategy to the bank thenn these losses can be decrease to some
certain extend.

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