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CHAPTER 3

3.1 FINANCIAL PERFORMANCE ANALYSIS

Financial analysis is one of the important tools for every organization, which helps
to determine the financial position, earning and cash flow of the organization. It
plays the major roles in smooth functioning of the business. Financial analysis is
such a tool that helps to determine the economic status of the organization.

Ratio analysis stands for the process of determining and presenting the relationship
of items and group of items in the financial statements, to evaluate financial
condition and performance of the bank.

A. Profitability Ratios:

The profitability of the bank is the attraction of to investor and motivation to

the management. Therefore, the profitability is a must for the future growth
of a bank. Profit is the objectives of the bank because it measures the
efficiency of the bank.

B. Liquidity Ratios:

Liquidity refers to the ability to meet current obligation or claims within a

short period of time.

C. Credit Quality Ratio:

Credit quality ratio measures the provision that the banks keep to face the
default risk.
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1. Return on Equity (ROE):
RETURN ON EQUITY

Year Net Profit Equity Capital Return On Equity

2010/011 232.15 587.74 39.50%

2011/012 350.54 590.59 59.35%
2012/013 501.4 801.35 62.57%
2013/014 696.73 1203.92 57.87%

Table3.1: Calculation of Return on Equity

Fig 3.1: Showing ratio of return on equity

ROE is calculated as follows:

ROE = NET PROFIT / EQUITY

Higher ROE is preferred as higher ROE is measure of high profitability. Here we

can see that the ROE is increasing in 2nd and 3rd year. And decreasing trend, however
we can see that the capital and profit is steadily in an increasing trend.
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2. Return on Assets (ROA):

NET PROFIT
Year TOTAL ASSETS Return On Assets
AFTER TAX

2010/011 232.15 16063.54 1.45%

2011/012 350.54 21330.14 1.64%

2012/013 501.4 27590.84 1.82%

2013/014 696.73 38873.31 1.79%

Table 3.2: Calculation of ROA.

Fig3.2: Showing ratio of ROA

ROA is calculated as follows:

ROA = NET PROFIT \ TOTAL ASSETS

Higher ROA is preferred as higher ROA is measure of high profitability. Here we

can see that the ROA has increased in the second and third year and is decreasing
trend.
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3. Equity capital Ratio (ECR):

Year Total Equity Total Capital Equity Capital Ratio

2010/011 587.74 1180.17 49.80%

2011/012 590.59 1415.44 41.72%

2012/013 801.35 1878.12 42.67%

2013/014 1203.92 2686.79 44.81%

Table 3.3: calculation of equity capital ratio

Fig 3.3: Showing ratio of equity capital

ECR = TOTAL EQUITY \TOTAL CAPITAL

Higher the equity capital ratio lower will be the risk and lower will be the return.
The above table shows increase in the Equity Capital ratio which shows lower will
be risk and lower return of the BOK.
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4. Interest spread Ratio (ISR):

Interest Interest Interest

Year Total Assets
Income Expense Spread Ratio
2010/011 886.8 354.55 16063.54 3.31%
2011/012 1172.74 490.95 21330.14 3.20%
2012/013 1584.99 685.53 27590.84 3.26%
2013/014 2194.28 992.16 38873.31 3.09%
Table 3.4: Calculation of interest spread ratio

Fig 3.4: Showing ratio of interest spread

ISR = (INTEREST INCOME- INTEREST EXPENSE) \ TOTAL ASSETS

Higher spread is measure of higher profitability. Since the interest spread ratio is
decreasing which represent lower profitability.
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5. Net operating Cost Ratio (NOCR):

Net Operating Net Operating

Year Total Assets
Cost Cost Ratio

2010/011 182.92 16063.54 1.14%

2011/012 200.22 21330.14 0.94%

2012/013 243.43 27590.84 0.88%

2013/014 313.15 38873.31 0.81%

Table 3.5: Calculation of Net Operating Cost Ratio

Fig 3.5: Showing ratio of net operating cost

NOCR is calculated as follows:

NOCR = NET OPERATING COST \ TOTAL ASSETS

Finding from above fig shows decreasing net operating cost ratio that indicates the
higher profitability of the BOK.
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6. Loan to Total Assets Ratio (LTAR):

Loan to Total Asset

Year Loan Total Asset
Ratio

2010/011 10126.06 16063.54 63.04%

2011/012 12776.21 21330.14 59.90%

2012/013 17286.43 27590.84 62.65%

2013/014 26996.65 38873.31 69.45%

Table 3.6: Calculation of Loan to Total Assets Ratio

Fig 3.6: Showing Ratio of Loan to Total Assets

LATR is calculated as follows:

LATR = TOTAL LOAN \ TOTAL ASSETS

Higher ratio shows lower liquidity position. Loan to total assets is increasing that
indicates lower liquidity.
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7. Provision for Credit Losses to Total Assets Ratio (PCLTAR):

Provision for Provision for Credit

Year Total Asset
Credit Losses Losses to Total Assets

2010/011 140.41 16063.54 0.87%

2011/012 103.81 21330.14 0.49%
2012/013 129.72 27590.84 0.47%
2013/014 135.99 38873.31 0.35%
Table 3.7: Calculation of Provision for Credit Losses to Total Assets Ratio

Provision for Credit Losses to Total Assets

0.90%
0.80%
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
2010 /011 2011 / 012 2012 / 013 2013 / 014
Provision for Credit 0.87% 0.49% 0.47% 0.35%
Losses to Total Assets

Fig 3.7: Showing Ratio of Provision for Credit Losses to Total Assets

PCLTAR = PROVISION FOR CREDIT LOSSES \ TOTAL ASSETS

Higher the ratio, higher the risk on lending. The provision to credit losses to total
assets is decreasing it indicates the lower the risk on lending.

8. Provision for Loan Losses to Total Loan Ratio (PLLTLR):

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Provision for Loan

Provision for
Year Total Loan Losses to Total Loan
Loan Losses
Ratio
2010/011 140.41 10126.06 1.39%
2011/012 103.81 12776.21 0.81%
2012/013 129.72 17286.43 0.75%
2013/014 135.99 26996.65 0.50%
Table 3.8: calculation of provision for loan losses to total loan

Provision for Loan Losses to Total Loan Ratio

1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
2010/011 2011/012 2012/013 2013/014
Provision for Loan 1.39% 0.81% 0.75% 0.50%
Losses to Total Loan
Ratio

Fig 3.8: Showing ratio of provision for loan losses to total loans

PLLTAR is calculated as follows:

PLLTLR = PROVISION FOR LOAN LOSES \ TOTAL LOAN

Higher the ratio, higher is the risk on lending. The ratio of the bank is decreasing
which shows that the risk on lending is decreasing but lower ratio means that the
return is also lower.

9. Credit Loss Coverage Ratio (CLCR):

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Credit Loss Coverage
Earnings Before Provision for Loan
Year Ratio
Tax Losses

2010/011 333.68 140.41 2.376468912

2011/012 504.91 103.81 4.863789616
2012/013 723.38 129.72 5.576472402
2013/014 1019.96 135.99 7.500257372
Table 3.9: Calculation of credit loss coverage ratio

Credit Loss Coverage Ratio

0
2010/011 2011/012 2012/013 2013/014
Credit Loss Coverage 2.3764689124.8637896165.5764724027.500257372
Ratio

Fig 3.9: Showing ratio of credit loss coverage

CLCR is calculated as follows:

CLCR = EBT + PROVISION FOR LOAN LOSS \ PROVISION FOR LOAN

LOSS

Higher is the credit loss coverage ratio, higher is the loss bearing capacity. The
coverage ratio of the BOK is increasing it indicates the higher loss bearing capacity.

10. Loan to Deposit Ratio (LTDR):

Year Total Loan Total Deposit Loan to Deposit Ratio

2010/011 10126.06 14254.57 71.04%
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2011/012 12776.21 18927.31 67.50%

2012/013 17286.43 24488.86 70.59%
2013/014 26996.65 34451.73 78.36%
Table 3.10: Calculation of loan to deposit ratio

Loan to Deposit Ratio

80.00%
78.00%
76.00%
74.00%
72.00%
70.00%
68.00%
66.00%
64.00%
62.00%
2010/011 2011/012 2012/013 2013/014
Loan to Deposit Ratio 71.04% 67.50% 70.59% 78.36%

Fig 3.10: Showing ratio of loan to deposit

LTDR is calculated as follows:

LTDR = TOTAL LOAN / TOTAL DEPOSIT

Higher ratio shows the greater availability of capital to the firm. Data shows that the
bank’s ratio is decreased in the second year and increasing in the following year. It
is strength of the bank that able to manage its capital availability consistant.

11. Cash to Total Assets Ratio (CTAR):

Cash to Total Assets

Year Total Cash Total Assets
Ratio
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2010/011 1154.51 16063.54 7.19%
2011/012 2088.63 21330.14 9.79%
2012/013 2145.34 27590.84 7.78%
2013/014 3284.49 38873.31 8.45%

Table 3.11: Calculation of cash to total assets ratio

Cash to Total Assets Ratio

10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%

2010/011 2011/012 2012/013 2013/014

Cash to Total Assets 7.19% 9.79% 7.78% 8.45%
Ratio

Fig 3.11: Showing ratio of cash to total assets

CTAR is calculated as follows:

CTAR = TOTAL CASH \ TOTAL ASSETS

Higher ratio shows higher liquidity. The total cash and total assets of the bank are
increasing. It shows the liquidity position of the bank is getting higher.

3.3 SWOT Analysis

A scan of the internal and external environment is an important part of the strategic
planning process. Environmental factors internal to the firm usually can be classified
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as strengths (S) or weaknesses (W), and those external to the firm can be classified
as opportunities (O) or threats (T). Such an analysis of the strategic environment is
referred to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm's
resources and capabilities to the competitive environment in which it operates. As
such, it is instrumental in strategy formulation and selection. 

Strengths:

A firm's strengths are its resources and capabilities that can be used as a basis for
developing competitive advantage. Strengths of BOK are,

 The bank has been running in profit since its establishment.

 Compare to other banks in Nepal, BOK has the strongest overall financial
performance with a strong equity base and adequate financial ratio.

 It provides higher interest rate.

 BOK has incorporates many services like ATM, credit cards, Internet
Banking Services, LCs.

 patents

 strong brand names

 Good reputation among customers.

 favorable access to distribution networks

 International network services.

Weaknesses:

The absence of certain strengths may be viewed as a weakness. In some cases, a

weakness may be the flip side of strength. Take the case in which a firm has a large
amount of mechanized capacity. While this capacity may be considered a strength
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that competitors do not share, it also may be a considered a weakness if the large
investment in mechanized capacity prevents the bank from reacting quickly to
changes in the strategic environment. Each of the following may be considered
weaknesses:

 The branches of the bank are not expanded in the rural area.

Opportunities:

The external environmental analysis may reveal certain new opportunities for profit
and growth. Some opportunities include:

 Increasing no of customer.

 arrival of new technologies

 removal of international trade barriers

Threats:

Changes in the external environmental also may present threats to the firm. Some
examples of such threats include:

 Asian economic recession.

 Down economic growth of the country.

 emergence of substitute products

 new regulations

 increased trade barriers