1

Bank Performance

 Ultimate measure of Performance –

Value of Common Shares
 Maximization of shareholders wealth
 Complex
 Involves internal and external management

factors
 Need to allocate scarce resources to
different performance dimensions

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Bank Performance
 Internal Performance
 Bank Planning
 Objective, Budget and Strategy
 Technology
 Computer and Communication
 Personal Development
 Training and Incentives
 Bank Condition
 CAMELS

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Bank Performance
 External Performance
 Market Share
 Equity / Earning, Technology
 Regulatory Compliance
 Capital, Lending, Other
 Public Confidence
 Deposit Insurance, Public Image

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 Difference between financial institutions

and other business?

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Financial statements of a bank

 More disclosure
 Corporate Governance
 Guided by
 International Accounting Standards
 Nepal Accounting Standards
 Basel II Disclosure Requirements
 NRB / Central Bank Directives
 Tax Laws

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Balance Sheet
 Capital
 Paid up Capital
 Reserve and Surplus
 Liabilities
 Debenture and Bond
 Borrowings
 Deposits
 Income Tax Liability
 Other Liabilities

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 Assets
 Cash and Bank Balance
 Money at Call and Short Notice
 Investments
 Loan and Advances
 Fixed Assets
 Non Banking Assets
 Other Assets

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Income Expense Statement

 Normal P&L A/c

 Turnover
 Gross Profit (Turnover – COGS)
 Operating Profit (GP – Operating Expenses)
 PBIT (Operating – Depreciation /
Amortization)
 Profit before Bonus and Tax
 Net Income

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Income Expense Statement

 Net Interest Income
 Add Non Interest Income and FX Income
 Total Operating Income
 Less Operating / Staff Expense
 Operating Profit before Provision
 Less Provision for possible loss
 Operating Profit
 Add Non operating income and prov. write back
 Profit from Regular Activities
 Add Extra Ordinary Income
 Profit before Bonus and Tax
 Net Profit / Loss

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 Income
 Interest Income
 Fees / Commission Income
 Exchange Income
 Expense
 Interest Expense
 Staff Expense
 Operating Expense

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Contingent Liabilities

 Letter of Credit
 Bank Guarantee
 Acceptance Payments
 Delivery Orders

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CAMELS Rating

 Capital Adequacy
 Asset Quality
 Management
 Earnings
 Liquidity
 Sensitivity to Market Risk

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Capital Adequacy

 Capital = Total Assets – External Liability

 Commercial Banks: NPR 2 Bio (Paid Up
Capital) by FY 2011/12

 Leverage Ratio: Equity Capital / Average

Total Assets

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Minimum Capital
Requirements

 The minimum capital requirement under

Basel II Framework:
Core Capital: 6% of Total RWE
Capital Fund: 10% of Total RWE

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Capital Adequacy Ratio

Core Capital + Supplementary Capital / RWE

 Core Capital / Tier I Capital

 Supplementary Capital / Tier II Capital
 Risk Weighted Exposure:
 Credit Risk
 Market Risk
 Operational Risk

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Asset Quality

 Assets include Loans, Investment, Fixed

assets and others
 Concentrated on Risk Assets

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Asset Quality

 NPA (Non performing Loan to Total

Loan) – Expressed in percentage
 Provisioning (Total LLP to Total NPL) –
Coverage Ratio
 Sector Concentration
 Group Concentration
 Single Obligor Limit

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Loan Category

 Performing Loans
 Pass (1% Provisioning)
 Non – Performing Loan
 Sub-standard (25% Provisioning)
 Doubtful (50% Provisioning)
 Bad (100% Provisioning)
 Restructured / Reschedules
(12.5% Provisioning)

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Ratios

 Texas Ratio: Delinquent Loans + NPA / Capital

+ Loan Loss Reserve
 Should be less than 100%; if higher than 50%, additional
capital could be required

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Concentration of Loans
Sectors Number Principal Interest
1. Agriculture
2 Mines
3 About Productions
4 Construction
5 Metal Productions, Machinery & Electrical Tools & fitting
6 Transportation Equipment Production & Fitting
7 Transportation, Communications & Public Services
8 Wholesaler & Retailers
9 Finance, Insurance & Fixed Assets
10 Service Industries
11 Consumable Loan
12 Local Government
13 Others
Total

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Management

 Quality of Management
 Management Stability
 Subjective Analysis
 Knowledge / Experience/ Effectiveness
 Board Members
 Senior Management Team
 Operating Staffs

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Earning

 Interest Income / Interest Spread

 Spread through intermediation between
savers and users of funds.
 Bank is a financial intermediary
 Commission Income
 Exchange Income

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 Staff Cost
 Other Operating Cost
 Provisions

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 Weighted Average Interest Spread

Rate %

Average Yield on Loans /Advances and Investment 8.6

Average Rate on Deposits & Borrowings 5.5
Net Interest Spread 3.1

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Profitability Ratios

 Return on Equity (ROE)

 Return on Assets (ROA)
 Return on Earning Assets
 Gross Yield: Interest Income / Average
Earning Assets
 Net Interest Margin: NII / Average Earning
Assets

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Profitability Ratios

 Cost to Income
 NII to Total Income
 Income per staff

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Profitability Ratios

 Burden Ratio: Non interest Expense /

Non interest income
 Overhead Ratio: Non interest Expense /
Total Average Assets
 Efficiency Ratio: Non interest Expense /
Operating Income

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Liquidity

 CRR – 5%
 SLR - 15% (CRR+TB/GB+ Cash at Vault)
 Liquid Assets / Total Deposits – Min 20%
 CD Ratio
 Asset Liability Management
 FOREX Management (Manage Position
Risks)

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Liquid Assets

 NRB Balances
 Cash Balances
 Gold / other liquid assets
 Balances with other financial institutions
(local / foreign)
 Investment in Treasury Bills / Short term
government securities
 Inter-bank lending
 Other short term investment

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Asset Liability Management

 ALCO
 Overall Fund Position (Long / Short)
 Cost of Fund / Money Market Rate
(Treasury Bills / IB Rate)
 Deposit Concentration
 Deposit Mix
 Maturity Profile
 Liquidity Profile / Gap Analysis

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Sensitivity

 Not covered by Financial Statements

 Banks are sensitive to Changes in
Market Scenarios
 Will real estate price and share price affect health of
banks in Nepal?
 What will be the effect of Global Financial Crisis in
Nepalese Bank’s Financial Health?
 Will changes in government policies affect health of
banks?

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Ratio Analysis

 Various ratios can be calculated to check

financial health of financial institutions
 Ratios can check:
 Strength in few of CAMELS broad areas like
Capital Adequacy, Asset Quality, Earnings
and Liquidity

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Financials of Nepali
Commercial Banks

 Quarterly Results and Comparison

 Annual Financial Statements

Health Assessment of Banks