Professional Documents
Culture Documents
Guide Teacher :
………….
Department of Finance
University of Dhaka
Submitted by :
Tamanna Tanvir Haque
BBA program,16 th Batch
ID No.
Date of submission:
Date….
To
The Director
Department of Finance
Faculty of Business Studies
University of Dhaka
I have toiled hard in preparing this dissertation and tried to make the
report clear and comprehensive within the constraints. I sincerely
believe that it will serve the required purposes. I shall always be
obliged to furnish any clarification regarding the dissertation, if
required.
Sincerely yours,
The Report has been prepared under my guidance and is a record of the
bona fide work carried out successfully.
……….
………..
Bank
Declaration
The work I have presented does not breach any existing copyright and no
portion of this report is copied from any work done earlier for a degree or
otherwise.
Lastly, I would like to give many special thanks and inexpressible greets
to Mr……. head of Branch, Mutual Trust Bank,… Branch,Dhaka,MR…
Financial administration Devision,Dhaka and othes for giving me advice,
inspiration and support.
Executive summary
CHAPTER ONE
Introduction
Introduction
1.1. Prelude
Banks are very old form of financial institution that channel excess funds from
surplus unit to deficit unit in consideration of a price called Interest. Banking
business definitely established on a relationship of Debtor-Creditor between
the surplus unit called depositors and the bank and between the deficit unit
called borrowers and the bank. Here, opportunity cost of money works as
interest is considered the price of the credit. For the development of an
economy, bank furnishes a huge contribution and modern economy can not be
imagined without the service of bank. Economic development of a country
requires a well organized, smooth, easy to reach and efficient saving-
investment process. The function of a single bank is not limited to its
geographical region only rather it has reached beyond the border of the
country. So, banking business has been shaped as global business and the rest
other business greatly depends on the strength of banking business
performance.
In a view of IMF, “the recent financial crisis showed many weakness within
the on hand financial system across the world, which triggers many issues
linking to the protection of banking institutions against probable future non-
expected risks associated with periods of insecurity.
A single bank is highly connected with other banks for payment system and
other functions of bank. The failure of a single bank not only affects its
shareholders and depositors rather it affects rest other banks and even all rest
other business. The failure of a single bank creates an economic turmoil
situation and is regarded as a disaster for the economy. The recent global
recession is also an example of economic disaster that occurred for the failure of
banking business. So, the government of any country must have a high concern
about the performance of all banks. To supervise and regulate the performance
of banking business, there is a supervisory authority called central bank in each
country. The supervisory authority creates smooth and efficient atmosphere for
fund flow and payment system. Supervisory authorities measure the
performance and assess the strength and weakness of bank and tasks necessary
actions.
Financial ratios mainly indicate the adequacy of the risk based capital, credit
growth, credit concentration, single borrower exposure, non-performing loan
position, liquidity gap analysis, liquidity ratio, inter-bank dependency, return on
asset (ROA), return on equity (ROE), net interest margin (NIM), forign
exchange exposure, market risk and management questionnaire etc. But, no
detailed study has yet been done for the ordinary people, students, researcher to
confer the overall knowledge of CAMELS rating systems in the context of
Bangladesh. This study use financial ratio and due to security aspect we can not
find the weight of each components of CAMEL and qualitative measures
depends on analyst so that we use here financial ratio to evaluate financial
performance of the bank.
Mutual Trust Bank Limited made adequate provision against classified loans.
Specific provision made is significantly higher than last year. Adequate
provision made the bank stronger than before. Tier- 1 Capital stood at BDT ….
Million at the end of 2011 compared to that of BDT … million at the end of
2010. Tier-2 Capital reached to BDT …..million at the end of December 2011
as compares to that of BDT ... million at the end of 2010. Return on Assets
(ROA) was % as on December 31,2011 and Return on Equity (ROE) was % as
on December 31,2011. Consolidated Capital Adequacy Ratio (CAR) of the bank
stood at % against minimum requirement of % as per Basel II capital Accord in
December 2011. Net Interest Margin (NIM) stood at % at the end of 2011
suggesting a healthy growth in Net Interest Income.
Financial ratios are use as a supervisory tools to find out the overall position
of an individual bank so that Bangladesh Bank can take necessary actions
where it is necessary. The study will present all the related issues with
Financial ratio. All the ratios will be summarized so that anyone can have the
clear concept about each component of CAMELS. Since CAMELS rating
result is kept confidential, stakeholders of a bank are not aware about the
actual performance of a banking company. So, a detailed discussion of
financial ratio is required for the mass people.
1.4.Objectives
The study will help to show how financial ratio is applied by bank to assess
the performance of Mutual Trust Bank Limited in a complete format. Specific
objectives of the study are:
1.5.Methodology
Collection of Data :
This study has been undertaken on the basis of secondary data (i.e., published
data or processed data). For this purposes, a good number of sources have
been used.
Processing of data
Processing of data has been done carefully with a view to making
comparison and doing ratio analysis and interpretations. This includes-
Primary and unpublished data have not considered for the study.
Data accuracy can not be ensured as mainly secondary data collected
from Annual Report.
The depth of the analysis has been limited to the extent of information
collected from different sources.
CAMELS analysis can not used in this report because weight used by the
bank for each component of CAMELS is secret for the bank qualitative
measures are different from different analyst. So that we use financial
ratio to evaluate the performance of the bank.
CHAPTER ONE
Loanwrite−offs
Charge−off ratio(1):= Average loan portfolio
Loan write−offs
Charge−off ratio(2):= Net interest income
2.3 Earnings:
Bank earnings provide capital formation, and they are needed to attract new
investor capital, which is essential if the institution is to grow. They serve both
as a demonstration of management’s effectiveness and as a barometer of the
effects of macro-financial policies on banking institutions. Healthy profits are
needed to absorb loan losses and to build adequate provisions. A consistent
earnings performance builds public confidence in the bank.
1.Net interest income:
2.Other income:
Other income ( D)
Ratio=
Total operating income ( E)
overheads (F)
cost income ratio=
Total operating income( E)
net income ( K)
Ratio1=
Average total asseets
net income ( K )
Ratio2=
Average stockholders equity
2.4 Liquidity:
Liquidity in bank management is needed for two reasons:
1.To satisfy demand for new loans without having to recall existing loans or
realizing term investments such as bond holdings, and
2. to meet both daily and seasonal swings in deposits so that withdrawals can
be met in a timely and orderly fashion.
Liquid assets
Ratio1=
Total assets
Liquid assets
Ratio 2=
Total deposits
Loans
Ratio 3=
deposits
Loans
Ratio 4=
deposits+ borrowed funds
Loans
Ratio 5=
Total assets
CHAPTER FOUR
Analysis and Interpretation
Nevertheless, the question is what constitutes adequate capital? Here the banker
is faced with a dilemma:
Too much capital reduces leverage or the bankers ability to maximize return
for shareholders; but
Too little capital exposes the bank to a disproportionate level of risk of
failure if misfortune strikes.
Banks generally prefer a lower level of capital to maximize return on equity (net
income divided by equity), while the regulatory authorities prefer a higher level
to safeguard the banking system and reinforce market stability.
The problem loan experiences of the 1970s and 1980s have shown that capital
adequacy is important. Even the best capitalized bank can be overwhelmed by
unfortunate events but the results are less catastrophic. A bank with a sound
capital base has more time to consider problem and to deal with them
effectively, while high capital does tend to impede high profits, the best
capitalized banks are among the most profitable worldwide.
Two approaches help determine the ‘adequate’ level of capital. One is the
market approach, where the markets decide whether a bank has sound capital
base; for example, requiring banks to be rated by a prominent rating agency;
with low ratings (the result of low capital among other factors) the result
additional risk premiums in the market. The second is the regulatory approach,
whereby the central bank or bank supervisory authorities stipulate the level of
capital. In view of concern by the authorities, the latter approach receives the
most attention.
Market approach
Significance: This ratio is easy to use science it requires only a cursory glance at
the bank’s balance sheet. Equity is simply assets minus liabilities, or the
stockholders equity section of the balance sheet, which includes:
Non-redeemable preferred stock;
Common stock or sharp capital;
Capital surplus (premium paid over stock par value);
Permanent and statutory reserves; and
Retained earnings.
Total assets equal the total balance sheet. An average figure is technically
preferable but not terribly important to arrive at a rough estimate of capital
adequacy.
Weakness: A ratio below the 5 per cent rule of thumb is not necessarily a sign
of inadequate capital. Many state-owned banks exhibit low levels of capital but
generally have back-up support from the Government, a Government agency, or
even the central bank.
This simplistic approach also ignores other sources of permanent funds a bank
may have, such as subordinated debt, which generally is not listed among
shareholder funds.