Content table

Cover page…………………………….1

Content page…………………………..2

Executive Summary…………………...3

Balance sheet…………………………...3

Assets…………………………....3

Liabilities………………………...4

Income statement……………………....6

Operating Income……………......6

Operating Expense…………….....7

Profitability…………………………......9

ROA………………………….......9

ROE………………………….......9

E.M…………………………….....9

Strengths and Weakness…………..…....10

Recommendation and Conclusion…….....11

Part B…………………………………...12

1
References………………………………14

Reference Images………………………15

Executive summary:

This report is a 3-year performance analysis report for NBB, containing an analysis and

evaluation of the balance sheets and the income statements of NBB for the years 2017-2018 and

2019. The methods of analysis used includes both horizontal and vertical analysis as well as the

comparison of each year’s ROA,ROE and EM. The excel sheet attached has the calculations and

formulas used for the analysis.

Balance sheet

Assets:

Over the past few years, NBB gained a well diversified asset portfolio; with “cash and balance at

CBB weighing 3.4% of the total assets,

“treasury bills” at 13%, “placements

with banks and others” at 7%, “loans

and advances” at 38.3%, “investments

in security and associates” at 36.1%,

“interest receivable” at 1.6% and

“property and equipment” at 0.6%.

Loans and advances:

2
Loans and advances increased by 2% from 2018 to 2019 because of 2 main factors, the decrease

in the interest rates in 2019, which increased the willingness to take out loans and the partnership

made with Eskan bank, which increased its market visibility. However the loans and advances

were higher in 2017 with 1226.9m while it only increased to 1213.7m in 2019.

Treasury bills:

Investment in treasury bills increased by almost 10% between 2018 and 2019 (387.1m to

425.3m) as they increased their investment in the bonds and islamic sukuk issued by the Bahrain

government, and started investing in those issued by the UAE too.

Liabilities:

The total liabilities and equity consist of “due

to banks and other financial institutions” at

12.2%, “ borrowing under repurchase

agreements” at 3%, “customer deposits” at

68%, “interest payable and other liabilities” at

1.5% and equity at 15.3%.

Customer deposits:

To ensure liquidity, NBB has a balanced mix

of demand and time deposits. In 2017, customer deposits were the source for 94.3% of the loan

and investment portfolios, and so since then

NBB has tried to reduce its dependency on

them. Customer deposits were 69.8% of the

total liability and equity, which got reduced to

68.6% in 2018 and 65.6% in 2019. In 2018

3
NBB introduced cash deposit machines, increasing consumer deposits by 1.2% from 2165.2m in

2017 to 21960.6m in 2018. However in 2019 interest rates dropped and the economic growth

slowed, causing a decrease of 4.4% in the deposits.

In 2018 NBB adopted new accounting policies as it replaced IAS17 to IFRS16 (effective on

january 2019), which increased the values of “ property and equipments” and “ interest payable

and other liabilities” as it added “right-of-use asset” value of 5.5m to the property, and “lease

liability” of 5.5m to the other liabilities.

4
Income statement:

Operating Income:

The operating income consists of almost 80% interest income, 8% fees and commission income

and 12% of other income. As

evident, it mostly depends on

interest income; in 2017 interest

income was 76.4% of the total

income, however in 2019 it rose

up to 81.6%, despite the bank’s

best effort to diversify and

become less dependent on it.

Total operating income increased from 133.6m to 157m to 176.8m in 2019. The increase reflects

various effective strategies that took place within; in 2018 NBB embarked on segmenting

departmental portfolios, enabling

them to meet specific customer needs

thus expanding both the assets and

liabilities. The 2018 incomes also

increased because of the positive

volume and rate metrics within the

5
loan portfolios due to the new active internal management. The rise in 2019’s income was due to

the successful continuation of the 2018 strategy and the new partnership with Eskan bank, in

which their customer base broadened as they provided housing loans for mazaya scheme

benefits.

Other operating income:

In 2017, NBB’s “Other operating income” contributed to 18.1% of the total income, but

decreased to 11.7% in 2018 and 10.6% in 2019 despite the increase in its actual value as it went

from 17.4m in 2017, to 18.4m in 2018 and 18.8m in 2019.

Operating expenses:

The operating expenses mainly consist of 50% interest expenses,30% staff expenses and 20% of

other expenses.

Interest expenses remain

the largest portion of total

expenses and is

continuously growing as it

was only 46.8% of the total

expenses in 2017,

increasing to 48.6% in

2018 and 53% in 2019.

The Total operating expenses increased drastically over the course of 3 years. From 62m in 2017,

it increased by 31.3% to 81.4m in 2018 and then an extra 18.2% in 2019 reaching 96.2m.

6
Staff expense:

To meet the ever-growing demand, NBB’s work force increased by 13.9% from 670 employees

to 763 in a span of 3 years. In 2018, a new strategy was adopted, requiring a new management

team with new divisions, thus increasing the staff expenses by 22.1% from 2017 to 2018 only.

Other Operating expenses:

During 2018, NBB undertook major internal development investments; digitalizing the

infrastructure to ensure sustainability across its activities, thus reinforcing operations and IT

programmes that would help adapt to the rapidly-changing environment. The enhancements

would reduce expenses and increase revenue in the long-run, however currently, it has caused a

significant increase in the 2018-2019 “other operating expenses” as it rose by 35% from 11.7m

in 2017 to 15.8m in 2018 and a further 14% from 2018 to 2019 with 8m. However the rise in the

2019 expenses are not caused solely by the digitalization.

In line with the “ closer to you” 2019 brand vision, NBB tried to make its services more

convenient through launching various different services including the launch of both the “open

banking”, “tap-and-go payments”, and the re-launch of the “business online banking”, in which

40,000+ people are registered in. They also enhanced branch timings, installed self service

devices to reduce queue times and expanded their ATM network range by almost 60% as they

went from 64 ATMs in 2017 to 102 in 2019, all which further increased their expenses.

7
Profitability

Profit for the year:The total profit for the year increased by 14.6% from 61.1m in 2017 to 70m

in 2018 and a further 6% making a total of 74.2m in 2019 as a result of the increased efficiency,

market convenience and new strategies all which increased the total operating income, which in

turn increased the profit for the year.

ROA: NBB’s ROA is continuously increasing annually, from 2% in 2017 to 2.2% in 2018 and

2.3% in 2019 as a result of the increase in profit for the year and slight decrease in total assets.

ROE:The ROE rose by 8% between 2017 and 2018, but decreased in 2019 by 8%, dropping

from 14.7% to 13.9%, even though the percentage dropped, 13.9% is still higher than the average

ROE for the GCC banks in 2019 which was at 11.3%.

8
Equity Multiplier: is continuously decreased from 6.9 in 2017 to 6.7 in 2018 by 3% and then

to 6 in 2019 dropping by 10%, NBB has reduced its debts and is becoming more dependent on

its equity to fund its activities.

Strengths:

- The new strategies implied have increased efficiency and in turn profitability

- The Acquirement of controlling stakes in BiSB (from 29.1% shares to 78.8%) would give

access to a wider clientele base and would broaden the services offered, which would

further increase profitability, however the 78.8% are activated in 2020 and so did not

positively affect the 2017/2018/2019 financial statements

- The continuous rise in ROA highlights the increasing efficiency within the bank

- With the “closer to you” initiative, brand recognition and market visibility increased

- The EM. decreasing implies that NBB’s debt burden is lessening with time.

- Well diversified assets and liabilities

Weaknesses:

- The bank is too dependent on interest income, which is a very unreliable source as it is

easily affected by the interest rates and outer economic conditions.

- Even if just temporary and is due to the major internal investments, the operating

expenses are very high and should be revised.

- The ROE decrease in 2019 might not be significant as it is still higher than the GCC

average of that year, however a drop is still a drop and the causing factor should be

studied.

9
Recommendations:

I believe NBB is currently doing great given the major investments and re-implementation of

strategies, however I believe they should aim to further diversify their income sources, and

increase their marketing inorder to expand their brand exposure, as it is relatively lower than

other banks like the BBK.

Conclusion :

The annual profit increased along with increase in the ROA and ROE, reflecting the enhanced,

well diversified asset and liability management, along with the new implemented strategies that

gained them higher credibility and the “closer to you” initiative that increased their market

visibility, all which created more profitable opportunities for NBB, which has been steadily

growing and increasing in profitability over the 3 years (2017-2018-2019).

10
Part B

Credit risk represents the losses banks’ incur due to the customers inability to repay. Defaults

negatively harm a bank’s cash flow as it limits the inflow of cash into the bank and so, banks

usually take on more than just one measure to reduce the probability of credit risk. They first

assess the strengths of the borrower along with the borrower’s track record, external ratings,

financial position and performance projections. They also take into consideration all other

external forces that might affect the borrower’s ability to pay back the credit including the

current and future political status of the economy, the financial and economical state of the

global economy, along with the industry outlook on the market conditions of both the banking

sector and the sector in which the borrower gains income from. To further determine the level of

risk associated with the issuing of credit to a certain borrower, banks can establish different

committees in which all different areas of risk are addressed, reviewed and assessed, thus

creating a clearer picture of the risks associated with the borrower .

Once credit is approved, banks usually set a credit limit in line with the borrower’s current and

future financial ability. To further protect themselves from defaults, banks also include an “in

event of default” contract within the main contract, thus highlighting the consequences of

defaulting on the loan to the borrower.

To limit the effect of defaults on their cash flow, banks ensure the availability of repayment

sources whether through tangible and/or intangible securities, collaterals or counter guarantees

from third parties.

11
Once credit is issued and given, risk must still be assessed to be able to give a forecast of the

cash inflow related, thus enabling banks to plan ahead and strategize, and so they use internal

grading systems that identify any increase or decrease in possible risks associated with the

repayment of the loans they credited. They also review each borrower’s risk rate at least once a

year, or depending on the amount of credit; the larger the credit the more frequent the account is

reviewed, but all accounts are regularly monitored.

However, even with the tightest measures, defaults can happen and with their occurrence, there

are a few things banks can do to limit the damages incurred. Banks can demand full repayment

of the outstanding debt before due time, however defaults usually occur due to the lack or

shortage in the borrower’s money supply thus making him/her/them incapable of repaying, and

so, even if banks demand full repayments and take them to court, there would be a great chance

they come out receiving less money or even losing given the extra costs they would incur if they

went to court, and so banks rarely ask for that. However the banks can rewrite loan terms,

making them stricter and usually more expensive as they increase interest rates for defaulted

loans and add an amendment fee. Banks can also seize the collateral if available.

12
References:

NBB annual reports: 2017, 2018 and 2019

https://www.investopedia.com/terms/e/event-of-default.asp#:~:text=An%20event

%20of%20default%20is%20a%20pre%2Dspecified%20condition%20or,%2C%2

0or%20insolvency%2C%20among%20others.

13
14
15