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5 Bank Analysis

5 Bank Analysis

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Published by Nur Md Al Hossain

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Published by: Nur Md Al Hossain on Oct 30, 2011
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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 year’s 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.

96% 2.26% 2.90% -0.11% 10.30% 44.62% 7.66% 16.27% 12.92% -2.64% 9.19% 3.10% 8.01% 28.74% 82.71% 3.23% 2.68% 20.59% 42.57% 2.62% 6.09% 28.41% -10.27% -18.95% 62.79% 39.51% 30.31% 22.80% 5.13% 10.84% 2.90 0.41% 5.11% 10.35% 39.89% -8.10% 3.58% 2.26% 301.26% 76.22% 2.38% 5.25 2007 29.06% 2.71% 82.00 % change -5.44% -15.65% 7.45% 70.71% 16.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 27.68% 2.30% -5.09% 37.97% 3.18 15.61% -27.00.57% 19.10% 34.43% 16.65% 32.16 12.62% 2.25% Growth in PAT Growth in equity Growth in Deposits Growth in borrowing 807 256.32% 7.56% 3. 15%B 9.58% 59.22% -58.70% 5.72 0.76% 71.80% 64.22% 19.1 200%B 10.66% 2.49 103.14% 35.14 .03% 28.69% 4.03% 17.84% 69.90% 28.00% 76.86% 49.90% 5.91% 22.86% 20.75% 2.

0%. Profitability: Net Interest Margin indicates management could not employ the earning asset base. which is due to slower growth of net interest income. Operating Profit Margin This lower ratio indicates the percent of net operating revenues consumed by operating expenses. providing the remaining operating profit. the saving & demand deposits have decreasing trend. Return on Assets (ROA) The last two years’ ranges of PCBs are 1. a relatively lower concentration on interest income and the higher percentage of more expensive wholesale funds available.2% in 2007. However. The above table shows that liquidity ratio is decreasing for the bank though AB Bank maintained higher ratio than industry of 22. AB bank places considerable importance on the FDRs which form 60% of its total deposits.2% in 2006 and 16. Liquidity The principal mechanism for implementing the Bank’s liquidity policy is to maintain liquid assets to deposit ratio above the regulatory defined ratio of 18%. and non-interest revenues and increasing operating expenses.7% in 2007. total classified loans have been decreased. Asset Quality As the provision against loan declined. which indicates that the outstanding loans are completely funded by deposits the average ratio is 80%. Moreover. The scenario of the term deposits reveals an increasing trend. on the other hand. The coverage ration indicates loan loss reserve provides the sufficient cushion against the substandard due loans.19%. Efficiency slightly distorted as the Efficiency Ratio increases. Historically in Bangladesh the benchmark was on average of 1. the lower the net interest margin is reflective of the bank with a large volume of non-earning or lowyielding assets. The increasing trend indicates bank invest more in assets other than liquid assets. that is. . the borrowing fund to total asset ratio is increased. the capital adequacy has been increased.the return on the stockholder's investment were decreased to 34. Therefore. Return on Equity (ROE). Moreover. The Loan to Deposit ratio of the Bank is demonstrated on the liquidity ratio table. but the bank still outperforms the benchmark of 15. 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.3%.1% to 1.22% from 42.Capital Adequacy: While Equity growth rate outperform asset growth rate. the bank outperforms the benchmark. Moreover. It may come under pressure from offering preferential rates to customer base. the loan loss reserve has also been decreased. for every taka the bank is earning it gets to keep 70 paisa and has to spend 30 paisa to earn that taka. The Overhead Ratio indicates the bank’s non-interest expenses rose faster than income due to inflation.

96 20%B 17.86 17.58% 1.34% 18.94% 81.41% 44.88% 11.93% 13.36% 2.84% 20.42% 2.00% 26.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 30.81% 2007 39.18% -14.28 10%B.31% 7.72% 21.16% 7.00% 39.76 17.62% 2.97 .44% 21.1R:5 32.20% 83.41% 64.90% 132.64% 68.31% 62.80% 79.56% 35.64% 93.81% 26.13% 1.57% 14.93% 27.34% 83.39% 17.57 31.86% -2.62% 15.97% 7.24% 3.09% 10.19% 37.79% 68.84% 1.43% 2.39% 2.10% 0.46% 67.53% 4.43% 40.15 2.28% 2.66% 10.08% 9.47% 362.06% 11.12% 10.70% 0.69% 1.21% -23.68% 37.65 28.97% 21.22% 5.62 0.36% 26.34% 14.79% 4.97% 202.91% 2.31% 265.68% 12.34% -2.30% 20.17 1.86% -78.88% -7.45% 41.99% 28.93% 0.72% 11.52% 12.19% 33.17% 1.28% 194.78% 52.

Capital Adequacy: While Equity growth rate outperform asset growth rate.1%.the return on the stockholder's investment were increased to 14. Liquidity Trust Bank places considerable importance on the FDRs which form 79% of its total deposits. Return on Equity (ROE).84% from 11. Moreover. Profitability: Though Net Interest Margin indicates better performance of management considering employment of higher yield earning asset base. Asset Quality Current year’s declining provision result in a slight decline in the ratio.7% in 2007. Though reserve cover 14 times of substandard loans this has also decreased from 2007. However. The scenario of the term deposits reveals an increasing trend. which is due to slower growth of net interest income. that is. Efficiency also slightly distorted as the Efficiency Ratio increases.2% in 2006 and 16. that is. the Overhead Ratio of the bank rose due to inflation and expanding by the purchase or construction of new branches. The Loan to Deposit ratio of the Bank indicates that the outstanding loans are completely funded by deposits the average ratio is 76%. for every taka the bank is earning it gets to keep 62 paisa and has to spend 38 paisa to earn that taka. Bad loan scenario has severely deteriorated and hence total amount of nonperforming loan has been increased. but the bank did poor compared to the benchmark of 15. the saving & demand deposits have decreasing trend. Operating Profit Margin This lower ratio indicates the percent of net operating revenues consumed by operating expenses. The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22. the lower Non-interest Income to Average Assets Ratio is regular with the higher share of interest income in the bank's total revenue. the capital adequacy has been increased. However. the borrowing fund to total asset ratio is increased. . higher yielding and less liquid loans could generate such flattering end result. The increasing trend indicates bank prefer investing in assets other than liquid assets. and noninterest revenues and increasing operating expenses. the result of a favorable interest rate environment. on the other hand. and the result of moving out of safe but low-yielding securities into higher-risk. Return on Assets (ROA) The bank could not outperform the benchmark.2% in 2007. the higher the net interest margin is reflective of the bank with a large volume of high-yielding assets. Moreover.

95 34.40% 22.24% 3.73% 2.66% -2.67% 14.90% 0.72 168.85% 17.09% 22.16% #DIV/0! 0.28% -20.80% 9.57% 13.85% 15.68% 1.20 0.18% -14.03% 14.16% 43.03% 28.77% -14.65% -19.42% -0.19 .42% 80.81% 13.24% 1.49% 0.39% 61.42% 1.85% 1.77% -1.14% 9.27% 23.17% 1.51% 26.81% 90.45% 82.85% -1.00% 0.14% 90.11% 19.15% 3.57 20%B 10.33% 59.21% 2.58 2007 30.23% 5.15% 18.47% 24. 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 28.53 36.26% 15.15% 5.80% 12.64% -3.81% 1.18% 77.43 11.58% 160.15% 19.23% 3.14% 29.33% -18.13% -6.50% 31.10% 3.30% 58.01% -0.47% 51.71% #DIV/0! -100.46% 91.00% 206.38% 90.91% 2.SHAHAJALAL ISLAMI BANK LTD.59% -3.37% 16.41 22%B 10.39% 26.41% 42.05% 1.60% -15.01% -17.28% 91.83% 15.96% 80.

as the loan to deposit ratio is higher with a ratio 91%.2% in 2007. The unpredictability of substandard loans cannot produce meaningful results. Moreover. higher yielding and less liquid loans could generate such flattering end result.68% from 23.the return on the stockholder’s investment was decreased to 22. Moreover. and non-interest revenues and increasing operating expenses. but the bank did poor compared to the benchmark of 15.7% in 2007.Capital Adequacy: Asset growth is almost two times of the growth rate of equity. The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22. 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. Liquidity Shahajalal Bank places considerable importance on the term deposits and Mudaraba Other Deposits which form 86% of its total deposits. maintained same percentage of loan loss reserve to total loan. However. the saving & demand deposits have decreasing trend. . However. the result of a favorable interest rate environment. There exist significant amount of bad loans in the loan portfolio. Return on Assets (ROA) of 1. which is due to slower growth of net interest income.2% in 2006 and 16. for every taka the bank is earning it gets to keep 78 paisa and has to spend only 22 paisa to earn that taka. the bank used high amount of borrowing fund to maintain the liquid requirement of deposit. the higher the net interest margin is reflective of higher weight of high-yielding assets.57% indicates outstanding performance of management considering employment of higher yield earning asset base. Asset Quality Though bank increased loan provision notably. and the result of moving out of safe but low-yielding securities into higher-risk. hence the ratio declined in 2008. The increasing trend indicates bank prefer investing in assets other than liquid assets. that is. on the other hand. Profitability: Average Net Interest Margin of 3. The scenario of the term deposits reveals an increasing trend. Return on Equity (ROE) .13% in 2007. the lower Non-interest Income to Average Assets Ratio is regular with the higher share of interest income in the bank's total revenue.81% the bank broke the benchmark figures of 1.21%.

37% . the result of a favorable interest rate environment.59% 13.09% 4. Profitability Interest Income/Total Income (%) Non Interest Income/Total Income 2008 64.33% 2007 3.52% 10.18% Profitability: Average Net Interest Margin of 3.05% 16.83% 2.70% 13. The hike in substandard loans deteriorated the ratio in great extent.15% 8. higher portion of demand & saving deposits place the bank to have low cost which could generate such profitability. hence the percentage to total loan amount.56 0. 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 3.08% 10.19% indicates great performance of management considering employment of higher yield earning asset base. Moreover. though the weight of loan in the asset formation is only 65%-69%.68% 14.52% 16. Alternatively speaking. All categories of classified loans increased.11% Almost parallel growth in equity and asset leads to a slight increase in ratio.40% 3. and the result of moving out of safe but low-yielding securities into higher-risk.41% 2. Ratio has reduced.63% 40.85% 9. 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.21% 4.10% 2007 59.42% 2007 76.55 0.90% 35.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. Asset Quality The current year provision has been increased in significant (mostly against unclassified loan). higher yielding and less liquid loans could generate such flattering end result. However.

12% 2.17% 27.42% 58.11% 17. The increasing trend indicates bank prefer investing in assets other than liquid assets.2% in 2007. and non-interest revenues and increasing operating expenses. Liquidity Liquid Assets to Total Deposits Customer loans/deposits (%) Borrowed Fund to Total Asset 32. Moreover.86% 3. which is due to slower growth of net interest income.50% 164.24% 2.79% 49.19% Return on Assets (ROA) of 2. Return on Equity (ROE) .the return on the stockholder’s investment was decreased to 24. 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. on the other hand.09% 24.05% 0. the saving & demand deposits have decreasing trend. However.17% 24.7% in 2007.19% the bank broke the benchmark figures of 1.99% 82.52% 1. The scenario of the term deposits reveals an increasing trend.83% 4.96% 50. the bank used high amount of borrowing fund to maintain the liquid requirement of deposit. Liquidity NBL places considerable importance on the term FDR which form 61% of its total deposits.14% 3.40% 41.22% 20. expansion of branches and higher employment. . 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.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 (%) 17.2% in 2006 and 16.85%.83% 5.53% The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22.86% 2. as the loan to deposit ratio is higher with a ratio 82.95% 76.13% in 2007.23% 8.59% 3. The bank outperformed the benchmark of 15.74% 35.12%. Efficiency also slightly distorted as the Efficiency Ratio increases.86% from 27.66% -8.

79% -20.07% -7.13% 39.40% 15.25% 22.82% 49.52% 3.29% 24.19% 76.17 50%B 52.82% 4.51% 1.54% 71.91% 4.24% 1154.80% 3.76% % Change -28.05 82.32% 74.88 237.84% -52.28% -18.5 Half year EPS: 33.04% 0 0.44% 6.74% 50.48% 20.60% -6.23% 4.29% 2.7%B 28.87% 33.79% -25. 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 28.38% 69.96% 25.18% 322.27% 24.85% 3.16 4.69% 2.05% 10.68% -2.57% 11.26% 7.82% 14.61% 0 366.01% 2.98% 3.85% 10.37% 7.10% 3.92% 80.46 36.96% 22.45% 1.14% 49.63% 23.84% 13.53% 53.DUTCH BANGLA BANK LT.03% 7.77% -1.31% 3.19% 3.04% 11.89 .59% -4.44% 29.43% -10.41% 9.37 394.52 0.33% 15.48% -6.91% 37.97% 69.55% 0.53% 11.10% 46.18% 7.54% 18.69% 25.35% 80.96% 2007 40.81% 25.

Profitability: Average Net Interest Margin of 3.13% in 2007. However. Liquidity DBBL places considerable importance on the term FDR which form 60% of its total deposits. and the result of moving out of safe but lowyielding securities into higher-risk. The bank outperformed the benchmark of 15.17% indicates great performance of management considering employment of higher yield earning asset base.51% from 20. as the loan to deposit ratio is higher with a ratio 81%. However. and non-interest revenues and increasing operating expenses. The increasing trend indicates bank prefer investing in assets other than liquid assets. .7% in 2007.52 times of this particular classified loans.55%. 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. the saving & demand deposits have decreasing trend. higher portion of demand & saving deposits place the bank to have low cost which could generate such profitability.2% in 2007. which is due to slower growth of net interest income. Return on Equity (ROE) . Return on Assets (ROA) of 0.2% in 2006 and 16. the result of a favorable interest rate environment.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. higher yielding and less liquid loans could generate such flattering end result. Alternatively speaking. around 3. 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. though the weight of loan in the asset formation is increased from 57.the return on the stockholder’s investment was increased to 25.97% the bank underperformed the benchmark figures of 1. The scenario of the term deposits reveals an increasing trend. the ratio has been decreased due to poor earnings growth of the bank.59%. However. on the other hand.Capital Adequacy: Though equity grew faster than asset. The figures show that liquidity ratio is decreasing for the bank though it maintained a way higher ratio than industry of 22. Moreover. the bank used high amount of borrowing fund to maintain the liquid requirement of deposit. 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. in 2008 it decreased at great amount which is consistent with the higher loan to deposit ratio. If all substandard loans become bad loans and charge against the loan loss reserve. expansion of branches and higher employment. reserve would provide cushion of 2. Moreover.46% to 67. Efficiency also slightly distorted as the Efficiency Ratio increases.

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