Term Paper on Performance Evaluation of Commercial Bank: AB Bank

Table of Contents

TopicPage Number

Executive Summaryi

Methodology1

Cash Position Indicator2

Liquid Security Indicator3

Capacity Ratio4

Hot Money Ratio5

Core Deposit Ratio6

Deposit Composition Ratio7

Book Value of Bank Capital8

RAP Capital9

Market Value of Capital10

Leverage Ratio11

Tier I Capital12

Tier II Capital13

Ratio of Tier I Capital to Total Risk14

Ratio of Tier I + Tier II Capital to Total Risk15

Internal Capital Growth16

Conclusion17

Data Used for Ratio Calculation18

Executive Summary

The commercial banking system dominates Bangladesh's financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of four state-owned commercial banks, five specialized banks and a number of private commercial banks and foreign commercial banks. In this report our objective was to evaluate performance of a private commercial bank using various ratios. For this purpose, we have chosen AB Bank Ltd. to carry out various analyses.Ratios are useful tools that can be used to evaluate the financial position and the operations of a company. It helps to compare changes in financial data from previous years to current year and also to compare with other companies as well. In our report we have calculated a total of twenty one (21) ratios and based on those results we have tried to measure performance of AB Bank.Our ratio analysis reveals that AB Bank has well managed its liquidity needs through balanced liquidity strategy. The banks hot money ratio during the period of our concern shows that its short term assets were well balanced with its short term liabilities which indicate that the bank put almost equal weight in its short term assets and liabilities to meet its liquidity needs for cash withdrawal, loan sanction, loan repayment, and other expenses. Another liquidity indicator named Deposit Composition Ratio shows gradual decline in value which implies the banks reduced dependency on its short term borrowings and increased greater reliance on long term deposits. However, the core deposit ratio was in a declining trend. The bank should focus on attracting more of this sort of funds which will provide additional cushion in encountering the liquidity crunch.In an effort of measuring the banks capital base from various perspectives, we see that the most commonly used indicator Book value of bank capital gained a significant amount each year. The principal rational behind this increment is the growth of the banks paid up capital, retained earnings, & general provision for loan losses. The bank was also safe from regulators perspective which is clearly indicated by its Capital Adequacy Ratio. This ratio was well above the regulatory requirement of 8% in each year. Moreover, the ratio of Tier I capital to risk weighted asset and the ratio of Tier I capital to Tier II capital were constantly aligned with the set benchmark. The drastic fall in the most volatile indicator of bank capital, the market value of bank capital can be explained by the irrational movement of our capital market which experienced an unusual hike in almost all stock prices in 2010 and then a continuous decline in stock prices thereafter and the market value of the bank capital was impacted accordingly.In the overall study, we tried to apply our learning of Financial Information Analysis course. The study was very much helpful for us to understand the market dynamics by applying theoretical knowledge.i

Methodology

Core objective of the project was to carry out performance evaluation of a commercial bank based on a number of ratios.All data collected for the project was from Secondary source, namely from Annual Reports of AB Bank Ltd. Based on data gathered from our secondary sources we have calculated a number of ratios and interpreted them as well to have clear picture of the Banks performance in the industry. We have only carried out time series analysis as comparison with other banks or with industry standard wasnt executed.The whole report has been segregated into two broad segments with first segment having more focus on efficiency ratios and second portion focusing more on ratios pertaining to Banks Cash position and Capital.

Ratio Interpretation1. Cash Position Indicator: Its a liquidity indicator which assesses the banks position in handling immediate cash needs. The formula for this ratio is:

(Cash+ Deposits due from other depository institutions)/ Total Assets

The higher the ratio, the stronger the banks position is.

The above graph for Cash Position Indicator for AB Bank shows relatively steady growth in its stronger liquidity position except the last year. This fall in the last year was due to a drastic fall in the amount of Money at call and short notice. It is also noticeable that the cash in hand amount was highest in the last year among the last five years. This value is in the usual range of industry average (6%-8%).

2. Liquid Security Indicator: This ratio implies the most marketable securities a bank can hold with overall size of its asset portfolio; the greater the proportion of short term securities, the more liquid the position tends to be. The formula for this ratio is:

(Short Term Securities)/ Total Assets

AB Banks liquid securities indicator for the last five years is graphed below:

The above graph shows a dramatic and gradual fall in the banks holdings of liquid securities (with maturity within one year) relative to its assets. Since at the same time Banks asset portfolio grows at a steady rate, we can say that AB Banks reduced its second line of defense against deposit withdrawals and other cash needs and focused more on earning higher income through investment in lease-loans and other higher yielding assets.

Another perspective of this trend is that the cash position indicator has grown in these years. So the bank has taken decision to reduce the portion of liquid securities. So if we think of the overall strength of handling immediate cash needs, it has remained almost the same.

3. Capacity Ratio: It is calculated by dividing the loans, leases and advances amount by the total Assets. Therefore, it is a negative liquidity indicator because loans and leases are often among the most illiquid assets a bank can hold. AB Banks capacity ratio for the last five years is depicted in graph:

The above graph indicates almost a stable ratio of lease-loans to assets in 2009, 2010, & 2013 with little decline in the same in 2011 & 2012. Although the absolute value of lease-loan portfolio of AB bank experienced a stable growth in each of these years, in 2011 & 2012 the growth of total asset portfolio superseded the growth of lease-loan portfolio by a greater percentage in these two years. It has remained near the industry average (around 60%).

4. Hot Money Ratio: This ratio reflects whether the bank has balanced its short term borrowings with increases in its short term assets that could be sold quickly to cover those liabilities. The formula for this ratio is:

Hot Money ratio=Money Market Asset/ Money Market Liability

AB Banks hot money ratio for the individual years from 2009 to 2013 is graphed below:

From the graph we see that the hot money ratio for AB Bank declined for the first four years and then bounced back and gained a huge percentage in 2013. This ratio should be greater or equal to 100%. The bank was significantly lower than the benchmark in 2011 & 2012. A greater jump in short term lease-loan, investment & cash balances relative to the increase in short term liabilities explain this sudden hike in this ratio in 2013.

5. Core Deposit Ratio: Core deposits are primarily small-denomination accounts from local customers that are considered unlikely to be withdrawn on short notice & so carry lower liquidity requirements. Core deposit includes small denominated deposit account, deposit pension schemes etc. The formula for core deposit ratio is as follows:

Core Deposit Ratio= Core Deposits/Total Assets

From the above graph we see that the core deposit ratio for AB Bank has declined over time. This is not a good indicator for the bank. The ratio declined because the increment in total asset was much higher than the increment of core deposits. The bank might offer lucrative deposit schemes to the customer to increase its core deposit ratio.

N.B. Since pension schemes were not separated in annual report, total savings deposit was considered as core deposit.

6. Deposit Composition Ratio: It is calculated by dividing demand deposits by time deposits, where demand deposits are subject to immediate withdrawal via check writing, while time deposits have fixed maturities with penalties for early withdrawal. This ratio measures how stable a funding base each bank possess; a decline in this ratio suggests greater deposit stability and, therefore, a lessened need for liquidity.

We see from the above graph that demand deposit gained a positive growth in 2010 but after then declined gradually in the next three years and reached to a level of 12.8% of time deposit which implies a stronger liquidity position of the bank.

7. Book Value of Bank Capital: This is calculated by adding all the shareholders equity item of a bank and the general reserve amount as per BASEL II requirement. The formula for GAAP capital is:

GAAP capital = Par value of share + Surplus + Retained Earning + General Reserve for loan losses

All the values of items included in it are calculated at its historical value. For AB Bank this value of capital increased every year and reached from BDT 11,363 million in 2009 to BDT 19,457 million in 2013. This rise can be explained by the growth of both equity capital in first four years and general reserve value in each year. However, the decline in equity capital in 2013 from last year was more than offset by the increase in general reserve value as per Basel II requirement.

8. RAP Capital: It is calculated by adding stockholders equity, general provision, subordinated bonds & debentures, minority interests, & preferred stock value. The higher the RAP capital the safer the bank is.

We see that for AB Bank the RAP capital and the Book value capital figures are same since AB bank doesnt hold minority interest, preferred stock, & subordinated bonds (solo basis). Therefore, the graph captured the same growth of RAP capital as that the Book value capital.

9. Market Value of Capital: Market value of capital is calculated by multiplying the number of outstanding shares by the market price at a cut-off date. We have used the market price of 31-December.

This value was highest in 2010 since market price of AB Bank shares was highest (BDT 158) during that period. After that though number of outstanding shares increased each year, declining market price pulled the market value down.

10. Leverage Ratio: Leverage ratio is calculated by core capital by total assets of the bank where core capital is comprised of Book value of common equity capital, cumulative perpetual preferred stock, & minority interest in the equity accounts of consolidated subsidiaries.

If any bank has leverage ratio more than 5%, the bank is well capitalized. So the AB Bank was well capitalized in all five years.

11. Tier I capital: Tier capital is alternatively named as Core Capital and includes common stock & surplus, retained earnings, noncumulative perpetual preferred stock, minority interest in the equity accounts of subsidiaries, and selected identifiable tangible assets less goodwill and other intangible assets.

AB Banks Tier I capital rose each year in the last five year because of the growth of its paid up capital & retained earnings in each year.

12. Tier II Capital: Tier II capital alternatively named as supplemental capital includes the allowance (reserves) for loan & lease losses, subordinated debt capital instruments, mandatory convertible debt, intermediate term preferred stock, cumulative perpetual preferred stock with unpaid dividends, and equity notes and other long-term capital instruments that combine both debt and equity features.

The above graph shows that AB Banks Tier II capital rose each year from 2009 to 2011 but declined slightly in 2012 and then rose again in 2013. The main component of this capital for AB bank is general provision for unclassified loan which rose from 2009 to 2011 and then declined in 2012 and increased again in 2013 which explains the fluctuations of AB Banks Tier II capital during this period.

Also Tier II capital has to be less than or equal to Tier I capital. As evident from following graph AB Bank has always maintained this requirement.

13. Ratio of Tier 1 Capital to Total Risk: It is the ratio of the Tier I capital to total risk weighted assets.

This ratio must be more than 4%. As evident from the above graph AB Bank has maintained this ratio above the requirement. So the bank was well capitalized in all five years.

14. Ratio of Tier1+Tier2 Capital to Total Risk Assets: It is the ratio of Tier I + Tier II capital to total risky weighted assets. This is also called capital adequacy ratio.

This ratio must have to be more than 8%. As evident from the above graph AB Bank has maintained this ratio above the requirement. So the bank was well capitalized in all five years.

15. Internal Capital Growth: It is calculated by dividing retained earnings by equity capital of the bank. It indicates how fast the banks earnings must grow to keep its capital to asset ratio protected if the bank continues paying the same dividend rate to its shareholders.

The graph shows a massive declining trend in the internal capital growth rate of AB Bank for the last five years. The main rational behind this drastic fall is the continuous decline of the banks retained earnings and a positive growth pattern of the banks equity capital. In the year of 2012 & 2013 the banks retained earnings shifted to a negative territory.

Conclusion

As stated earlier, we only compared year to year data of AB Bank Ltd. So, we cant draw any conclusive comment on AB Banks position with respect to industry standard or compared to other banks in the market.However, as our findings suggest, AB Bank has made steady progress over the last few years as most of the ratios related to efficiency showed positive trend.So, simply based on this findings, it seems like its management has been able to guide the bank towards right direction.

Data used for Ratio CalculationTypeYr-2009Yr-2010Yr-2011Yr-2012Yr-2013

Total Asset 106,912,312,382 132,691,204,729 152,962,836,671 173,842,427,786 208,005,543,737

Cash5,354,881,5766,615,119,9699,361,445,7699,622,840,53011,359,517,250

Balance with other banks and financial institutions3,494,118,1466,299,137,8698,162,327,4768,877,073,9557,238,990,059

Money at call and on short notice600,000,000380,180,000665,830,0003,671,790,000991,387,500

Investments16,369,303,22614,562,671,61321,556,049,15826,114,787,64728,675,696,033

Loans, cash credits, overdrafts, etc./Investments69,732,552,19485,597,797,26393,411,192,735105,373,785,000139,067,739,439

Bills purchased and discounted1,147,381,2512,403,972,3541,227,025,629691,973,9231,053,558,066

Fixed assets including premises, furniture and fixtures2,440,962,6573,926,340,6693,854,272,7884,229,520,5604,172,564,367

Other assets7,773,113,33212,905,984,99214,724,693,11615,260,656,17115,446,091,023

Non-banking assets00000

Liabilities 96,754,672,565 119,121,750,376 138,110,136,164 157,808,621,914 191,065,494,673

Borrowings from other banks, financial institutions6,125,161,33914,200,436,48110,248,189,5723,649,261,7829,987,492,033

Deposits and other accounts83,087,129,11395,701,894,525116,151,864,140140,025,953,891161,846,275,315

Other liabilities7,542,382,1139,219,419,37011,710,082,45214,133,406,24119,231,727,325

Capital/Shareholders' Equity 10,157,639,818 13,866,508,216 14,852,700,506 16,033,805,870 16,940,049,065

Paid-up capital2,564,253,2003,205,316,5003,686,113,9004,423,336,6804,976,253,760

Statutory reserve3,101,206,0924,395,603,8694,390,197,2755,005,314,8015,564,799,391

Other reserve950,211,3911,497,389,9841,485,273,7941,446,253,5611,412,629,267

Retained earnings (accumulated)3,541,969,1354,768,197,8635,291,115,5375,158,900,8284,986,366,647

Maturity groupings of balance with other banks

on demand2,160,164,3922,559,669,3392,834,208,6073,443,145,577 3,119,318,559

up to 3 months304,213,7551,239,468,5311,858,697,4702,374,216,779 1,119,450,250

over 3 months but below 1 year1,029,740,0002,500,000,0003,469,421,3993,059,711,599 3,000,221,250

over 1 year but below 5 years00000

over 5 years00000

Maturity Grouping of Investments

Repayable on demand2,170,889,2061,631,471,5691,591,091,117347,148,201227,620,107

upto 3 months1,874,202,385963,482,6542,313,294,6926,318,747,6211,496,146,238

over 3 months but below 1 year5,285,382,9252,838,737,985805,832,286778,522,7506,004,105,500

over 1 year but below 5 years1,724,668,8432,332,097,8892,309,980,1106,582,170,9044,049,530,324

over 5 years5,314,159,8676,796,881,51714,535,850,95414,620,838,75014,365,653,285

Maturity Grouping of Loans & Leases

Repayable on demand7,743,428,37213,485,188,89125,737,169,606775,758,6432,133,556,712

upto 3 months13,972,816,77419,342,545,34426,831,701,32743,158,153,20954,989,812,944

over 3 months but below 1 year28,046,756,80026,151,531,96413,585,273,28625,841,675,47956,676,768,431

over 1 year but below 5 years19,424,963,80027,170,000,00024,671,862,82828,885,806,27122,858,233,012

over 5 years1,691,967,7001,852,503,4193,812,211,3187,404,307,7853,462,926,405

Maturity Grouping of Borrowings from other banks,financial institutions and agents

Repayable on demand5,049,885,1419,473,806,9306,740,997,648386,513,4415,035,547,017

Repayable on maturity1,075,276,1984,726,629,5513,507,191,9233,262,748,3414,951,945,016

Maturity analysis of inter-bank deposits

Repayable on demand109,255,000716,447,400396,766,800244,935,907337,310,488

within 1 month1,026,222,8121,791,118,5001,983,834,0002,204,358,8142,343,721,850

over 1 month but within 3 months341,145,678501,513,1801,190,300,400734,807,7221,011,931,465

over 3 months but within 1 year721,490,510573,157,920396,766,800244,935,907337,310,488

over 1 year but within 5 years00000

over 5 years but within 10 years00000

over 10 years00000

Maturity analysis of other deposits

Repayable on demand0002,026,259,2011,935,942,496

within 1 month9,148,576,13914,833,066,86321,633,266,03021,291,051,23919,437,674,463

over 1 month but within 3 months19,342,150,74027,848,717,02930,350,788,90745,049,083,40533,776,922,098

over 3 months but within 1 year31,096,620,20523,677,653,13337,750,251,61446,346,615,50067,025,189,928

over 1 year but within 5 years19,878,740,47725,751,701,67121,974,758,58219,739,825,04734,252,352,458

over 5 years1,422,927,5528,518,829475,131,0082,144,081,1501,387,919,580

Maturity analysis of other deposits

Demand Deposit11,355,134,72514,832,605,99715,014,831,01116,292,283,48918,420,611,485

Time Deposit71,731,994,38880,869,288,528101,137,033,129123,733,670,403143,425,663,830

General Provision as per BASEL II1,205,596,0131,521,372,2131,812,161,7561,849,634,3132,517,425,313

General Provision for Unclassified Loans825,596,0131,041,372,2131,302,161,7561,269,634,3131,707,425,313

General Provision for off Balance Sheet exposure380,000,000480,000,000510,000,000580,000,000810,000,000

Subordianted Bonds& Debentures00000

Minority Interest00000

Value of Preferred Stock00000

Number of shares outstanding256,425,320320,531,650368,611,390442,333,668497,625,376

Market Price as of 31-Dec117.6158.068.333.726.2

Tier-I capital as per Annual Report9,249,627,62712,411,317,43213,409,625,91314,629,751,50915,569,618,999

Tier-II capital as per Annual Report1,668,218,5032,248,967,6052,533,699,0542,551,661,4943,202,640,347

Total Risk Weighted Asset as per Annual Report98,459,637,700147,948,633,851140,235,887,391146,492,197,160173,871,198,712

Retained Earning (This Year)1,752,199,6951,226,228,728522,917,674-132,214,709-172,534,181

Core Deposit11,900,897,48913,061,751,52713,949,303,79914,860,539,42717,093,460,022

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