Executive summaryThis term paper is the based on the performance analysis of a bank operating in Bangladesh that is being listed in the Dhaka stock exchange. There are currently 29 banks listed in Dhaka stock exchange. Based on the past stable performance I decided to work on Prime Bank Ltd and chose Eastern Bank Ltd for comparisons since they are close competitors. I evaluated the performance of both banks during the years 2004-2008 and used both companies annual report. I used the following kinds of ratio to analyze the performance. Liquidity ratios: Prime bank is in better position of liquidity management compared to eastern bank derived from conclusions using liquid security indicator, cash position indicator and capacity ratio. Leverage ratios: both prime and eastern bank is highly leveraged as they are financial institutions Efficiency ratios: eastern bank was superior to prime bank in terms of efficiency of tax management, asset utilization and operating efficiency. Profitability ratios: The overall profitability of eastern bank is better than prime bank ltd. Market Position ratios: Eastern bank is in superior position compared to prime bank in terms of EPS, Price earning ratio and market to book value ratio. At the beginning of the project, I gave a brief introduction about the company and methodology, limitations and description of all the ratios that is used in this project. 1 I used as many effective ratios as possible to evaluate the bank from every angle. After calculating the ratios, I showed a time series, cross sectional graph to show the change over five years and compare it with the other bank, and decided which one is comparatively doing well. At the end of this project, I showed the final decision about the financial condition of both bank and my recommendation. Included are calculations, extract from balance sheet and income statement. 2 Introduction The main purpose of this assignment was to use the skill in strategic financial ratio analysis. I had to demonstrate analytical abilities in explaining the implications of different ratios and provide general assessment of a chosen company versus its competitor in the market. I tried to complement my study of the absolute numbers by using ratios to ascertain trends, identify areas of concern and identify areas of strength. I tried to provide the ‘Trend Analysis’ of the ratios which graphically shows the likelihood of improvement and deterioration in financial conditions of the firms. This project was about comparing two different public limited companies from the banking industry. I choose “Prime Bank Limited” as my main company and “Eastern Bank Ltd.” for comparisons for the following year 2004-2008. The reasons behind choosing the companies were simple. Prime bank limited is one of the banks that follows international standard in Banking and Finance and its sheer size and stature as a Bank company is outstanding. As of early march 2010, their stock prices were very good in the bank industry and the company’s performance reflected in the stock prices. Its stock was listed as Category ‘A’ stocks on the Dhaka Stock Exchange. Given the basic information about the company and its stock market performances, I was convinced that Prime bank Limited would be a great company to work with. The financial reports turned out to be straight forward, very well explained and user friendly. To go put up against Prime bank Limited, I had to choose a company that was its close competitor. Eastern Bank Limited is one of the modern banks in Bangladesh. As of early march 2010, their stock prices were excellent among the bank industry. Both the companies were trying to increase market share and profitability. 3 then the company is on track. By preparing this report. When making investments. Ratio analysis will identify whether the company is actually doing it or not. That is why the objective of a company is to maximize shareholder’s wealth. This report also includes all the graphical data and calculation that helped me to improve my performance to analyze banks and have some practical experience. Investment decisions are critical decisions and need thorough analysis. investors look for dividend paid by a company and the capital gain. Sometimes they also compare their performance with the industry average. companies use ratio analysis to compare their own performance with their expectation. to find out whether they are lacking behind or not.Objective The main objective of the project was to find out all the financial condition of Prime bank and compare it with its closest competitor. If the company is performing in line with expectation. In real world. It will help me in the future. Ratio analysis is very important because it helps identify whether a company is on track. 4 . This evaluation will be very beneficial for the investors to make a choice about the banks and it will help them to decide which company to invest. which is a major part of the course FIN 464. I used ratio and stock price analysis from 2004 to 2008 to analyze the financial condition of the bank so that the financial vicissitudes of the bank compared to its competitor can be analyzed. I was able to show my grasp of ratio analysis. Data are collected from different sources. I used the ratio analysis of five year in a time series and cross sectional graph to analyze all the difficulties of both banks. There are different types of ratio that can be used to analyze the financial condition of the bank. I mainly used the income statement and balance sheet to analyze the ratios. I compared both of them and made my recommendation. the performance of the banks was very low or very high. Finally. The data about the companies are found from the website of the both company.Methodology This report is based on ratio analysis of Prime Bank ltd and Eastern bank limited of the year 2004 to 2008. Different types of data are used to complete this report. The mathematical data are found from the annual report of the both banks. In some ratios. Since the balance sheet and income statement of banks are very different from any other company so I had to choose all the ratios very carefully. I tried to find out the reasons behind this problem and necessary solution. I collected the financial data from the annual report that was necessary for the ratio analysis. I used the dividend growth model to find out the intrinsic value of the company to compare it with the current market price to see if the stock is over or under priced. 5 . The ratio does not reflect the true financial condition of a bank all the time. In the balance sheet the yearly report are sometimes wrong and sometimes value of same data in different annual report is different. Therefore. Inflation or deflation in economy does not affect the ratio analysis. Therefore. 6 . I found some difficulties and problem at the time of preparing the report. it is hard to find out the validity. Ratio analysis may find the problem but it does not provide any solution of the problem. Annual report of both company are not perfect. it does not always show the true condition of a company.Limitation Like any other analyzing process. The limitations are given below. 88 percent and a Tier-1 of 8.15349 million as at the end of 2008. Prime Bank ranked 15th in Bangladesh by market capitalization.437 million. Prime Bank is a top-tier bank in Bangladesh. The Prime Bank Group has a strong capital base with a risk-weighted capital adequacy ratio of 10. retail & SME asset management. Known for its superior service quality.83 and 30. which include commercial banking. 110. Ltd. merchant banking and card business. The Prime Bank Group has a large and well-distributed branch network of 70 full fledged branches and 3 Off shore Banking Unit & Booths in Bangladesh with a strong tradition of service excellence. strong corporate Governance and a corporate culture committed to excellence. Prime Bank is a market leader in corporate to consumer banking and retail lending to SMEs in Bangladesh. The Prime Bank Group focuses on a wide range of banking and financial services. For facilitating inward foreign remittance to Bangladesh. The Prime Bank Group is the second largest banking group in Bangladesh by asset size. The Group has one of the most 7 . investment banking.67 percent at the end of 2008. brand Image. which stood at Tk. The Bank’s deposits and lending growth were 24. with total assets of Tk. DSE-20 Index has ranked it as fourth company as per performance. Islamic banking.Overview of the bank A group of visionary entrepreneurs established Prime Bank in April 1995. The Bank has also made its presence in Singapore through its fully owned subsidiary Prime Exchange Co.29 respectively in 2008. bd) provide a wide range of information about the bank’s corporate information. investors and the public in general has access to various sources of information on the Prime Bank Group. Prime Bank continues to earn recognition and trust for its strong and sustained financial performance and product management. The Bank also has good asset quality in the banking industry and very strong financial ratings. 2008 Short Term ST-2 ST-2 Literature Review 8 . financial information. corporate vision mission. In 2008. To its shareholders and investors.com) and (www.com. Prime Bank’s website at (www. Stakeholders in the Prime Bank Group. Board of Directors. including shareholders. To its customers.prime-bank. the Group will continue to enhance shareholder value through consistent financial performance and efficient capital management. customers. the Group will continue to provide effective and competitive financial solutions and services. the Group will continue to foster a strong performance and learning culture that allows the development of the best talents for the Group. The Prime Bank Group is committed to deliver value to its stakeholders. senior management. Credit Rating on Prime Bank Limited by CRISL Long Term Surveillance Rating (2007) Entity Rating (2006) Outlook Date of Rating AA AA Stable 29th June.primebank.efficient capital structures in Bangladesh. ICAB and SAFA Bronze Award in the region honored Prime Bank with best bank award in Bangladesh. To its employees. corporate philosophy products and services and awards and recognition of the bank. the Report of Income and the stock price in over the period of assessment. Cross sectional analysis or benchmarking involves the comparison of financial ratios at the same point of time with their competitors. The technique used for performance appraisal is financial ratio analysis. net noninterest margin. Time series analysis evaluates performance over time. It indicates the net benefit that the stockholder has received from investing their capital in the financial firm. 9 . return on assets. Profitability measure return. activity and debt ratios primarily measure risk. earning per share. Two types of ratio comparisons can be made: cross sectional and time series. One key objective of a commercial bank is to maximize the value of the firm or stock. Return on equity is a measure of the rate of return flowing to shareholders. Liquidity. We need to find out the key objectives of the company and using various techniques evaluate the performance of the company. It indicates how capable management has been in converting assets into net earnings. Market ratios capture both risk and return. Financial ratios are divided into five basic categories: liquidity. earning spread. profitability.To analyze the performance of any commercial bank we need the published financial statements of the institution notably the Report of Condition. Return on assets is primarily an indicator of managerial efficiency. which enables to assess the firm’s progress. net interest margin. net operating margin. leverage. • PROFITABILITY AND EFFICIENCY RATIOS Financial analysts use profitability ratios as surrogates for indicators of stock values. Some of these ratios are return on equity. efficiency and market position. especially the mix and yield on assets. Banks tend to breakdown ROE and ROA into their key component. when any of these four ratios begins to drop. Net profit margin (NPM) can be split further into two parts. Equity multiplier or asset to equity ratio reflects the leverage or financing policies of the bank. Net profit margin or ratio of net income to total revenue reflects the effectiveness of expense management and service pricing.However. Clearly. Bank can increase their earning and the return to shareholder by controlling expense and maximize revenue. The relationship between ROE-ROA illustrates clearly the fundamental trade off the manager faces between risk and return. management can raise average yield on asset. so the larger the multiplier. The breakdown is ROE = (Net profit margin) X (Asset Utilization) X (Equity Multiplier). the higher the risk and potential for high return. 10 . Expense control efficiency or pretax net operating income to total operating revenue is a measure of operating efficiency and expense control and therefore indicates how many dollars of revenue survive after operating expenses are removed. Tax management efficiency or net income to pretax net operating income reflects the use of security gains or losses and other tax management tools to minimize tax exposure. The breakdown is NPM = (tax management efficiency) X (expense control efficiency). Equity must absorb profit or loss on assets. By allocating asset to highest yield loan and investment while avoiding excessive risk. management needs to reevaluate the financial firm’s efficiency in that area. tax management efficiency and expense control efficiency. It shows how many dollars of assets must be supported by each dollar of equity and how much of the firms resources must rest on debt. Asset utilization or operating revenue to total assets reflects the portfolio management policies. Net interest margin (NIM) or net interest income to total assets is an indication of managements efficiency in achieving a positive spread between interest revenue and interest cost by close control over earning assets and pursuit of the cheapest source of funding. Earning spread is another traditional measure of earning efficiency. Net noninterest margin or net non-interest income to total assets measures the amount of noninterest revenue stemming from service fees the financial firm has been able to collect relative to noninterest expenses such as salaries. 11 . the more liquid the depository institutions position tends to be. The greater the proportion of government security. maintenance and loan loss expenses. • LIQUIDITY RATIOS Cash position indicator or cash and deposit due from depository institution / total assets indicates the percentage of total assets in cash in vault and other depository institution. It indicates how well management and staff have been able to keep growth of revenue ahead of rising costs. Liquid security indicator or government security / total assets compares the most marketable securities an institution can hold with the overall size of its asset portfolio. The spread measures the effectiveness of a financial firms intermediation function in borrowing and lending money and the intensity of competition in the firm’s market area. EPS represents the number of dollars earned during the period on behalf of each outstanding share of common stock. Earning per share is generally of interest to present or prospective stockholders and management. The greater the ratio the stronger the position to handle immediate cash needs. Net operating margin or net operating income to total assets is also a measurement of profitability and efficiency just like the previous two ratios. Greater competition other factors held constant will squeeze the difference between average asset yield and average liability cost. To calculate the firms M/B ratio we need to calculate book value per share of common stock. the greater the confidence. Findings and Analysis o PROFITABILITY AND EFFICIENCY RATIO 12 . The P/E ratio measures the amount that investors are willing to pay for each dollar of a firm’s earnings. the greater the amount of other people’s money being used to generate profits. Book value per share of common stock = common stock equity / no of outstanding common stock Market / book ratio = market price per share of stock/ book value per share of common stock • LEVERAGE Debt ratio measures the proportion of total assets financed by the firm’s creditors.Capacity ratio or net loans and leases / total assets are really a negative liquidity indicator because loans and leases are often the most illiquid of assets. Market to book value ratio provides an assessment of how investors view the firm’s performance. The higher this ratio. • Market ratios Price earning ratio is commonly used to assess the owner’s appraisal of share value. The higher the P/E ratio. The level of this ratio indicates the confidence that investors have in the firm’s future performance. It relates the market value of the firms shares to their book strict accounting value. TAX MANAGEMENT EF INCOME/PRETAX NET Figure 1: Return on equity EXPENSE CONTROL EFFI NET OP. INCOME/TOTA 13 . Efficiency fell by 10% in 2008 for prime bank but rose by 11% for eastern bank. Figure 2: Tax Management Efficiency Tax management efficiency indicates how efficiently company is earning pretax income. The reasons maybe low pretax income.ROE indicates the return on equity earned on stockholders investment. Prime banks return was steady during 2006-07 (27%) but dropped in 2008 (19%). Eastern banks return improved in 2008 (17%) from previous year (11%). 14 . So eastern bank is in a better position. lack of efficient control of expenses and unable to allocate assets to high yielding loan and investment. Although the ROE of prime bank is higher than eastern bank but the return on equity of prime bank has declined significantly over the year. Figure 3: expense control efficiency Expense control efficiency shows how efficiently company can control its expenses. Prime bank ratio fell by 1% and eastern bank increased by 1%. 15 . Prime bank is not allocating its assets to highest yield loan and investment. Prime bank efficiency fell over the last five years and eastern bank ratio fell in 2008. Figure 4: Asset Utilization Efficiency Asset utilization ratio measures the asset management efficiency. This ratio has been constantly rising for both prime and eastern bank. It indicates higher risk and potential for high returns. 16 .Figure 5: Equity Multiplier Equity multiplier is a direct measure of financial leverage. RETURN ON ASSET (ROA Figure 6: Return on Asset NET INTEREST MARGIN( INEREST INCOME – INTE TOTAL ASSETS 17 . Another traditional measure of earning efficiency is earning spread. It measures the effectiveness of a financial firms intermediation function in borrowing and lending money and also the intensity of competition. On the other hand eastern bank is showing increasing ROA obviously because of better management of assets.Figure 7: Net Interest Margin Ratio Return on assets indicates the capability of management to convert assets into net earnings. This could be due to falling net interest income (from 2. We can see that the earning spread of prime bank has squeezed over the years so did for eastern bank. The observation on ROA of prime bank shows that it has achieved constant return over 2006-07 but a sharp fall in 2008.79% in 2008). 18 . The major portion of a banks income is derived from interest income so a fall in this ratio is hazardous for prime bank. This shows that the market is becoming increasingly competitive.39% in 2007 to 1. Therefore both banks need to find new ways to generate income to make up for the eroding spread. 1 (from 0.Figure 8: Operating Efficiency Ratio Operating efficiency ratio indicates how well management and staff have been able to keep OPERATING EFFICI OPERATING EXP OPERATING growth of revenue ahead of rising costs. Prime bank managed to reduce efficiency by .16 in 2007 to . Eastern bank managed to have a stable efficiency. Employee productivity also rose for eastern bank but declined for prime bank.15 in 2008) due to rising costs of borrowing. EM PLOYEE PRODU 19 . o LIQUIDITY POSITION Figure 9: Liquid Security Indicator LIQUID SECURITIES IND GOVERNMENT SECURI ASSETS 20 CASH POSITION INDICA . 02% maybe because of investment in government security.68% but lower than previous years 9. Figure 11: Capacity Ratio 21 .19% which means the bank has enough government security (convertible in short period of time) to meet liquidity requirements. Cash position indicator has been quite constant for prime bank at 7.Figure 10: Cash Position Indicator Liquid security indicator is very good for prime bank at 18.83% compared to previous years 15. This is good for liquidity because loans and leases are the most illiquid of all assets. On the other hand.Rising liquid security indicator proves the lower capacity ratio.57% to 64. liquidity position of eastern bank is not better than prime bank in terms of liquid security indicator and cash position indicator and the capacity ratio do not show greater investment in loans and leases. Maybe they are holding too much cash in vault or other depository institution or invested in capital expenditure. Therefore. 22 . The liquidity position of prime is very good and in a confident position not to disrupt the reputation of the company. Company has been investing in government and private interest bearing security rather than increasing loans and leases. However. capacity ratio fell from previous year 69.92%. it may indicate opportunity cost of greater earning capacity. Debt to equity ratio was high in 2005 but dropped and improved in 2008 to 18% for prime bank. Eastern bank was constant during 2006-07 and rose by 1% in 2008. The debt ratio of prime bank and eastern bank reflect the same thing.DEBT RATIO: TO LIABILITIES/ TOTAL Figure 12: Debt ratio Usually financial institutions such as banks and non-bank institutions are highly leveraged. Eastern is in a better position. o MARKET RATIO DEBT TO EQUITY: 23 . 3 for each taka earned by the bank. The investors of prime bank are willing to pay 12.DIVIDEND YIELD: (D M ARKET PRIC Figure 13: Price earning ratio Price earning ratio is commonly used to assess the owner’s appraisal of share value. The decline of DIVIDEND PAYOUT R X 100 24 . 3 for prime bank.24 for eastern bank and 12. Calculations derived from Microsoft excel Prime Bank Ltd 25 . Figure 14: Earning per share Earning per share declined for prime bank in 2008 but increased for eastern bank. Eastern bank faced similar loss of confidence from investors as their P/E ratio also declined amid increased earning per share. But in the investors point of view lower P/E ratio is better because they are paying less for each taka earned.this ratio proves the falling confidence of investors in the firm’s future performance. This ratio is 10. In investors point of view eastern ratio is preferred. 56 = 3.539. The market to D iv id e n d p e r S h a re 26 .25 = 1.25 / 341.32 Eastern.Discounted Cash Flow Analysis 31-Dec-08 Valuation Assumptions Valuation Date Cost_of_Equity Terminal_Growth_Rate Tax Rate 1-Dec 27.73 2 D iv id e n d The equity value per share is (Tk.539.75 / 162.589.162. The closing price of prime bank share in the secondary market at 31 December 2008 is (Tk.00% 42.00% Market/Book Value Prime.28% 2.56) according to my above calculation.75). 25 according to some calculations. The market to book value is 1. 589. the equity value of eastern bank is 341. The ratio is lower for eastern bank so this stock is preferred over the other.32. The closing price is Tk. Recommendation 27 .25 as at 31 December 2008. It means if the market reaches a position of correctness than the price of share might fall. The market price of the share is overpriced.73. On the other hand.book value ratio suggests 3. On the other hand. Prime bank is in better position of liquidity management compared to eastern bank derived from conclusions using liquid security indicator. cash position indicator and capacity ratio. yet it is declining in 2008 so it is not reflective of good earnings this year.The overall profitability of eastern bank is better than prime bank ltd. T XMA A E N E F A N G ME T F I E PE S C N R LE F X N E O T O F IC A S TU IL A IO S E T IZ T N E U YMU T IE Q IT L IPL R R E O R A O N T IN E E TMA G ( E TRS R IN N TN NIN E E TMA E O TRS R Profitability Liquidity 28 . The ROA of prime bank is falling due to falling net interest income. The average ROE of prime bank shows favorable than eastern bank. Eastern bank has a stable operating efficiency compared to prime banks declining ratio. eastern bank is showing increasing trend. The market price of the share is overpriced. The ratio is lower for eastern bank so this stock is preferred over the other. The investors of prime bank are willing to pay 12. In investors. Market The P/E ratio is 10.24 for eastern bank. It means if the market reaches a position of correctness than the price of share might fall. the market to book value of eastern bank is 1. Rising liquid security indicator proves the lower capacity ratio. However. it may indicate opportunity cost of greater earning capacity.19% which means the bank has enough government security (convertible in short period of time) to meet liquidity requirements.24 for eastern bank and 12. Nevertheless. The market to book value ratio suggests 3.Liquid security indicator is very good for prime bank at 18.3 for each taka earned by the bank and 10. in the investor’s point of view lower P/E ratio is better because they are paying less for each taka earned.83% compared to previous years 15. point of view eastern ratio is preferred. I recommend the existing investors to sell of the stock of prime bank now to avoid eroding profits and encourage the potential investors to invest in eastern bank shares to add value to their portfolio. Conclusion 29 .3 for prime bank.73. Cash position indicator has been quite constant for prime bank. On the other hand. Earning per share declined for prime bank in 2008 but increased for eastern bank.32 for prime bank . Both the companies are first generation banks and have achieved considerable amount of growth since their inception. Sometimes the fundamentals of a company does not reflect actual price of the share in the market. The markets for secondary shares are always risky in Bangladesh because the stock market here is what is known as ‘inefficient market’. However. The advice to prospective investors is to utilize their money by investing in eastern bank shares because the prospects are rewarding.The outcome of this report suggests that an investor holding prime bank shares at the time should sell off their shares to avoid depletion of their wealth. Bibliography 30 . I tried my best to get a picture from my viewpoint and present a recommendation. com.primebank. http://ebl.bd/ 4. 5. 3. 2008. 7th edition. Hudgins. Annual Reports of Eastern Bank Ltd (2004-2008). 31 . www.bd 2. Bank Management & Financial Services. McGraw-Hill publications.1. Peter S. Rose & Sylvia C.com. Annual Reports of Prime Bank Limited (2004-2008). Appendix 1 Profitability ratio and efficiency ratio 32 . YEAR NET INCOM E INEREST INCOM E INTEREST EXPENSE NON INTEREST REVENUE NON INTEREST EXPENSE TAX MANAGEMENT EF PRETAX NET OP. INCOM E INCOME/PRETAX NET TOTAL OPERATING EXPE TOTAL OPERATING REVE 33 . RETURN ON ASSET (ROA) NET INTEREST MARGIN(N INEREST INCOME – INTER OPERATING EFFICIE TOTAL ASSETS Leverage Ratio 34 . YEAR TOTAL ASSE TOTAL EQUITY C Liquidity Ratio DEBT RATIO: T TOTAL LIABILI LIABILITIES/ TOTA 35 . YEAR TOTAL ASSET GOVERNM ENT SECUR CASH & DEPOSIT DUE LIQUID SECURITIES IN INSTITUTION GOVERNM ENT SECUR NET LOANS AND LEAS Market Ratio 36 . YEA R N ET IN CO M E CO M M O N EQ U ITY DIVIDEND YIELD: (D M A RKETARKET PRIC P RICE P ER M 37 . Appendix 2 38 .