CHAPTER NO 6

Financial Statement Analysis

6.1 Financial Analysis of Balance Sheet

For the Year Ended December 31, 2022

Balance Sheet of 2020 2021 2022

three Years
…………… Rupees in ‘000’ ……………
Assets
Cash and balances 142,957,386 175,922,469 110,275,163
with treasury banks
Balances with 21,371,753 225,543,29 261,628,49
another bank
Lending to financial 6,060,869 406,171,10 565,857,68
institutions
Investments-net 757,441,590 106,256,851,1 104,088,905,9
Advances-net 548,472,860 686,388,652 844,985,763
Operating Fixed 64,201,807 623,515,45 850,211,65
asset
Deferred tax asset 2,918,483 183,813,6 543,927,8
Other assts 698,807,27 103,291,437
Total Assets 1,543,423,748 2,122,121,479 2,274,333,153
Liabilities
Bills payable 12,795,325 26,486,445 42,874,366
Borrowings 92,859,968 282,898,882 356,016,610
Deposits and other 1,226,593,025 1,534,586,671 1,532,695,961
account
Sub-ordinated loan - - -
Liabilities against - - -
assets
Deferred tax 9,132,706 1,578,782 1,578,782
liabilities

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Other liabilities 102,405,513 99,002,039 148,268,469
Total Liabilities 1,443,786,537 1,944,552,819 149,847,251
Represented By:
Share capital 11,850,600 11,850,600 11,850,600
Reserves 77,894,829 81,060,051 85,043,592
Unappropriated 56,108,779 70,498,820 64,697,360
Profit
Surplus on 24,752,206 28,803,351 15,225,689
revaluation of
assets net tax
Total Liabilities & 170,606,414 192,212,822 176,817,241
share Capital 1,614,392,951 2,136,765,640 326,664,492

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6.2 Financial Analysis of Profit & Loss Accounts

For the Year Ended December 31, 2022

Years 2020 2021 2022

…………… Rupees in ‘000’ ……………
Mark-up/return/ 145,772,451 132,609,303 219,422,758
interest earned
Markup/return/interest 69,929,012 64,231,302 123,454,752
expensed
Net mark-up/interest 75,843,439 68,378,001 95,968,006
income
Non-Mark-up/ interest income
Fee and commission 11,971,491 13,691,432 15,573,910
income
Dividend income 969,322 1,955,213 2,130,363
Foreign exchange 2,735,228 3847755 9,588,551
income
Income from 4,087 14,035 33,148
derivatives
(Loss)/ gain on 3,396,296 262,835 (1,708,860)
securities
Other income 192,103 883,253 295,837
Total non-markup/ 19,268,527 20,654,523 25,912,949
interest income
Total income 95,111,966 89,032,524 121,880,955
Non-Mark-up/ interest Expenses
Operating expenses 37,763,917 40,589,732 48,075,386
Worker’s welfare 974,808 1,509,781 1,509,781
fund
other changes 297,987 525,339 267,536
Total non-markup/ 39,036,712 42,173,490 49,852,703
interest expanses

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Share of profit of 573,078 943,587 671,231
associates
Profit before 56,648,332 47,802,621 72,699,483
provisions
(Reversals)/ 7,330,044 (5,472,779) (2,641,001)
provisions and write
offs-net
Extra ordinary/ - - -
unusual items
Profit before 49,318,288 53,275,400 75,340,484
Taxation
Taxation 19,756,019 21,947,646 40,889,320
Profit after Taxation 29,562,269 31,327,754 34,451,164
Attributable to:
Equity shareholders of 29,410,227 31,179,708 34,365,061
bank
Non-controlling 152,042 148,046 86,103
interest
29,562,269 31,327,754 34,451,164

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6.3 Horizontal Analysis of Balance Sheet

For the Year Ended December 31, 2022

Balance Sheet of 2020 2021 2022

three Years
Assets
Cash and balances -8% 35% -41%
with treasury banks
Balances with 92% -22% 32%
another bank
Lending to financial 1472% 148% 19%
institutions
Investments-net 36% 2% -5%
Advances-net -7% 27% 28%
Operating Fixed 0% -1% 39%
asset
Deferred tax asset - - 100%
Other assts -12% 8% 53%
Total Assets 16% 12% 6%
Liabilities
Bills payable 103% 3% 59%
Borrowings 83% 64% 26%
Deposits and other 13% 9% -2%
account
Sub-ordinated loan - - -
Liabilities against - - -
assets
Deferred tax 19% -90% -100%
liabilities
Other liabilities -12% 8% 54%
Total Liabilities 16% 15% 6%
Represented By:
Share capital 0% 0% 0%

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Reserves 4% 5% 5%
Unappropriated 17% -49% 31%
Profit
Surplus on 25% -9% 11%
revaluation of
assets net tax
Total Liabilities & 13% -8% 9%
share Capital

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6.4 Vertical Analysis of Balance Sheet

For the Year Ended December 31, 2022

Balance Sheet of 2020 2021 2022

three Years
Assets
Cash and balances 5% 8% 7%
with treasury banks
Balances with 1% 1% 1%
another bank
Lending to financial 2% 2% 1%
institutions
Investments-net 47% 53% 58%
Advances-net 26% 30% 36%
Operating Fixed 4% 3% 3%
asset
Deferred tax asset - - 0%
Other assts 3% 3% 4%
Total Assets 100% 100% 100%
Liabilities
Bills payable 1% 1% 2%
Borrowings 9% 14% 16%
Deposits and other 73% 72% 66%
account
Sub-ordinated loan - - -
Liabilities against - - -
assets
Deferred tax 0% - -
liabilities
Other liabilities 5% 5% 7%
Total Liabilities 89% 91% 91%
Represented By:
Share capital 1% 1% 1%

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Reserves 5% 4% 4%
Unappropriated 2% 1% 1%
Profit
Surplus on 4% 3% 3%
revaluation of
assets net tax
Total Liabilities & 11% 9% 9%
share Capital

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6.5 Horizontal Analysis of Profit & Loss Accounts

For the Year Ended December 31, 2022

Years 2020 2021 2022

Mark-up earned -2% -9% 63%
Mark-up expensed -18% -8% 91%
Net mark-up income 20% -10% 36%
Non-Mark-up income 9% 11% 23%
Total income 17% -6% 33%
Non-Mark-up 1% 9% 17%
Expenses
Profit before 30% -15% 45%
provisions
provisions and write 194% -166% -42%
offs-net
Profit before Taxation 20% 8% 37%
Taxation 19% 10% 82%
Profit after Taxation 21% 6% 6%

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6.6 Vertical Analysis of Profit & Loss Accounts

For the Year Ended December 31, 2022

Years 2020 2021 2022

Mark-up earned 88% 86% 89%
Mark-up expensed -42% -41% -50%
Net mark-up income 46% 45% 39%
Non-Mark-up income 12% 14% 11%
Total income 58% 59% 50%
Non-Mark-up -22% -26% -19%
Expenses
Profit before 36% 33% 30%
provisions
provisions and write -5% 3% 1%
offs-net
Profit before Taxation 31% 36% 32%
Taxation -12% -15% -17%
Profit after Taxation 19% 21% 15%

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6.7 Ratio analysis

Abbreviation used in following calculations

Words Abbreviation
Earning after tax EAT
Net Markup income NMI
Gross markup income GMI
Total income T. I
Operating income OP
Market price per share MPS
Earnings per share EPS
Earning before tax EBT
Total outstanding shares TOS
Book Value BV
Dividend per share DPS
Total debt T. D
Total liabilities T. L
Operating expenses OE
Total shareholder Equity TSE
Net Sales N. S

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Calculation of Ratios

Ratio Type Formula 2020 2021 2022

Profitability Ratios
Profit before PBT/T. I 35.46% 42.15% 35.55%
tax ratio
Net profit tax EAT/IE 9.9% 7.53% 11.15%
Gross spread NIM/GMI 52.42% 51.88% 43.41%
ratio
Income expense T.I/O. P 36.49% 42.09% 37.13%
ratio
Return on EAT/TSE 18.88% 19.11% 19.78%
Equity ratio
(ROE)
Return on Asset EAT/T. A 1.77% 1.65% 1.61%
ratio (ROA)
Loan/deposit Loan/Deposit 15.93% 14.48% 16.23%
ratio
Activity Ratios
Total asset T.I/T. A 89.18 91.14 90.91
Turnover
Fixed Asset N.R/AFA 10.07 13.69 19.03
Turnover
Market Ratios
Earnings per PBT/TOS 40.71 43.87 60.22
share before tax
Earnings per EAT/TOS 24.50 26.00 27.63
share after tax
Book value per TSE/TOS 1.35 1.13 0.81
Share
Leverage Ratios
Debt-to-Equity T.L/TSE 10.64 11.56 12.25

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Ratio
Debt T.L/T. A 6.00 5.58 5.57
Ratio/Debt to
Total assets

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6.8 Explanation of Financial Ratios

 Profitability Ratios

Profitability ratios measure a company’s financial performance and its ability to

increase its shareholders value and generate profits. Profitability ratios provide insight
into the profits made by the company in relation to its size, assets, and sales and also
measure the company’s performance in relation to itself. Having past data as a
benchmark, the firm can start to make conclusions as to why profitability is increasing or
decreasing.

The net profit margin Net profit after tax measure profit remaining after deducting all
expenses including tax. It should be maximum. Markup/return/interest earned and non-
markup interest income increased throughout the period i.e., year 2020 up to year 2022.
While markup/return/interest expensed was increased throughout from 2020 as a result of
net profit after tax ratio decreasing. The income & expenses have direct relation, that’s
why it affects net profit ratio.

The gross spread ratio relationship between Net Markup income & Gross markup
income. Gross spread ratio is continuously increasing from 2020 to 2022.

Income expense ratio as shows the percentage of expenses it should be lower. In bank
income expense ratio has decreasing trend from 2020 to 2022.

Return on equity measures a corporation's profitability by revealing how much profit a

company generates with the money shareholders have invested. A company with high
return on equity is more successful to generate cash internally. But in this bank return on
equity is throughout decreasing trend (2020 to 2022) due to increase in borrowing /debt it
means the bank generate low profit with the money shareholder have invested So if the
firm takes on too much debt, the cost of debt rises as creditors demand a higher risk
premium, and ROE decreases. It is generally accepted that a company with a higher ROE
is a better investment than one with a lower ROE since it has a stronger ability to generate
cash flows internally; however, this is not completely accurate.

Return on assets (ROA) return on assets of commercial banks reflects the effectiveness
and efficiency of the use of resources is the embodiment of its operating efficiency and
management level of the important comprehensive index. In year 2021 ROA is higher in
all these years due to increase in earnings after tax so the bank is better at converting its

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investment into profit. But in the year 2022 return on asset is decrease because net income
in this year is also decrease.

Loan deposit ratio if the ratio is too high, it means that banks might not have enough
liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not
be earning as much as they could be. So, in this bank in year 2022 this ratio is decreased
as compared with previous year.

 Activity Ratios

These ratios also known as efficiency or turnover ratios, measure how effectively the
Organization is using its assets.

Total asset turnover represents the amount of revenue generated by a company as a

result of its assets on hand. One general rule of thumb is that the higher a company's asset
turnover, the lower the profit margins, since the company is able to sell more products at
a cheaper rate. In this bank total assets turnover ratio is increasing trend throughout (2020
to 2022) because total assets are increase in every year.

Fixed assets turnover ratio establishes a relationship between net sales and net fixed
assets. This ratio indicates how well the fixed assets are being utilized. This ratio
expresses the number to times the fixed assets are being turned over in a stated period. It
measures the efficiency with which fixed assets are employed. A high ratio means a high
rate of efficiency of utilization of fixed asset and low ratio means improper use of the
assets. In this bank fixed asset turnover ratio have increasing trend throughout in year
2021 this ratio is decrease means the bank have not utilized its fixed assert properly.

 Market Ratios

These ratios are calculated to analyze the market position of a business

Earnings per share (EPS) are the amount of earnings per each outstanding share of a
company's stock. In the bank earnings per share ratio are showing increasing trend from
2020 due to increase in earnings after tax. It is an accepted fact that earnings per share
ratio can help us know the financial strength of a company. The more the earnings per
share ratio, more would be the profitability of the company. Earnings per Share represent
the measurement, which is used to calculate earnings. The rise in prices of MCB shares

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and higher EPS calculates a stronger Price to Earnings (P/E) ratio Rs. 9.80, from 5.66 in
2021

Book value per share shows value of share as per books. It should be maximum. Book
value per share of the bank has increased due to increase in shareholders’ equity.

 Leverage Ratios

Debt to Total Asset measure of a firm assets financed by debt and, therefore, a measure
of its financial risk. The lower this ratio, generally the better off the firm. The higher the
ratio, the greater risk will be associated with the firm's operation. In addition, high debt to
assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the
firm's financial flexibility. Like all financial ratios, a company's debt ratio should be
compared with their industry average or other competing firms.

The debt/asset ratio shows the proportion of a company's assets which are financed
through debt. If the ratio is less than 1%, most of the company's assets are financed
through equity. If the ratio is greater than 1%, most of the company's assets are financed
through debt. In this bank years (2020 to 2022) this ratio has been less than 1% so this
bank assets are finance through equity.

Debt To Equity Ratio It indicate how much the company is leverage (in debt) by
comparing what is owned, if the ratio is greater than one the majority of assets are finance
through debt, if answer is smaller than one asset is primarily finance through equity This
ratio of bank throughout the years 2020 to 2022 greater than one.

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 CONCLUSION

MCB under the leadership of Mian Mohammad Mansha has made significant in building
of strengthening both the corporate and retail banking sectors in Pakistan.

MCB views specialization and service excellence as the cornerstone of its strategy. The
people of bank innovation, creativity, reliability, customized services and their execution
are the key ingredients for their future growth. Based on this approach, their Treasury
Division and the Structured Finance Unit have been geared to provide specialized
services to the corporate customers. Revenues from these activities have started yielding
dividends and they expect significant growth in these areas in the coming years. While
building on their in-depth familiarity with their customers’ needs and anticipated
developments in the banking industry, the Retail and Corporate areas of their operations
will continue to provide a strong and stable base to the business of the Bank.

They are aware that they have stepped into the 21st century and they must meet its
challenges by acquiring the highest levels of Technology. They will thus be accelerating
their enable them distribute their products and services through most efficient and high-
tech means. Their programmed to launch real time – on line Banking Services and
introduction of ATMs at strategic locations have been firmed up and it will be fully
operational during the year 2001.

Their focus would be to constantly seek out growth opportunities through increased
quality assets and by offering a wider range of products and services to their esteemed
customers. There are significant growth opportunities for MCB and they are confident in
their ability to grasp them. They are committed to enhancing the shareholder’s value and
look forward with greater optimism to a prosperous future for MCB.

Based on the profit of Rs.36.07 billion, the Board has proposed that a cash dividend at a
rate of Rs. 2.00 per share i.e., 20% of share capital be distributed among the shareholders.

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 RECOMMENDATIONS

Proper Planning

Bank should make a plan to gear up its recovery efforts on war footing and reorganize the
recovery function of global bases. In addition, bank should tighten up control on
expenditure.

Proper Guidance

Bank should adopt such an induction plan that when a customer opens his account with
the bank, he should be supplied with a booklet which enables him to know the procedure
of Filing the cheques, pay-in-slip etc. It will save a lot of time of the bank staff afterward
during the conduct of the account of that customer.

Division of Work

The billing system of MCB must be improved to facilitate the customers and workers.
The work should be divided among the staff e.g., collection of bills.

Countering of cash and then entry of these.

Checkoff Expenditures

Expenditure must be controlled. Which are very high and unnecessary?

Borrowing at Low Cost

Deposits must be taken at a lower cost and given at higher interest rates.

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 REFERENCES

All of the references and sources from where the data gathered for this report are
mentioned here with for your kind concern.

Organization

Annual Reports of MCB Bank Limited of Pakistan.

MCB Credit Policy

http://www.mcb.com.pk.

Web Portals

http://www.sbp.com.pk

http://www.ibp.org

http://www.thebankers.com

http://www.finance.gov.pk

Books

Practice and Law of Banking in Pakistan by Dr. Asrar H. Siddiqui.

Fundamentals of Financial Management by James C. van Horne & John M. Wachowicz

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