CHAPTER NO 7
FINANCIAL ANAYLSIS
INTRODUCTION
As discussed in earlier chapter, this chapter with the various analyses, i.e. TOWS and financial analysis to know the worth of the bank TOWS analysis deals with pure operation and management while the financial analysis represented its financial position of the bank. From this process we know the overall position of the bank.
7.1 TREND ANALYSIS:
The trend analysis of the bank shows counties improvement in every aspect i.e. capital and reserves, deposit, advances, investment, income and also expenditure. This trend shows a positive improvement of the bank but as the bank made improve in every aspect of the business, similar they also increased their expenditure which I s not so good. The bank has made gradually increased in the last decade but still they have a long way to go and compete with its competitors.1
For the trend analysis of VM the following data of the last decade has been used.
1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
Capital and reserve | 418 | 451 | 566 | 645 | 733 | 1219 | 1398 | 1515 | 3002 | 3012 |
Deposits | 19825 | 25041 | 33757 | 37121 | 41445 | 51124 | 55897 | 63430 | 76541 | 93107 |
Advance | 11115 | 11870 | 15734 | 18037 | 19901 | 29552 | 32766 | 36231 | 42719 | 55264 |
Investment | 7268 | 9981 | 14586 | 14948 | 16549 | 15610 | 15553 | 20193 | 25605 | 26775 |
Income | 2044 | 2349 | 3435 | 4453 | 5010 | 6102 | 7056 | 8397 | 8984 | 10925 |
Expenditure | 1983 | 2249 | 3080 | 4038 | 4665 | 5571 | 9822 | 9368 | 8814 | 10854 |
Total assets (less contra account) | 23319 | 28342 | 37973 | 41759 | 47390 | 58480 | 63439 | 72404 | 89358 | 106926 |
7.1.1 Capital And Reserves
VM s improved its capital and reserve in the last decades of 19th century. Its capital and reserve rise from 418 million in 1996 to 3012 million in 2005 which is 13.87% rise. In last year in 2004 it is 3002 and in 2005 it is 3012 which is increase in 10 million.
7.1.2 Deposit
It was anticipated in the beginning of the year under review that soon there would be improved investment climate and revival of economic activities as a result of measures initiated by the government. The bank, there, went in a big way for resources mobilization to met the future credit demand from the pervious sector. As a result, the deposit of the bank rose to Rs. 104 billion in June 1996 i.e. increases of Rs 29 billion and 37.7% over the December 2004 position.
However, in the meantime, the central bank took various measures which flooded banking sector in with surplus liquidity. The bank also reduced its return on treasury bills resulting in reducing the lending rates. The political instability in the second half of 2005 culminated in the change of government. The expectations for improvement investment climate and revival of economy did not materialize.
7.1.3 Advance
Advance has increased from Rs 43 billion in 2004 to Rs 5 billion in 2005, thus increasing by 29.37% during the year. Thought the advance to private sector has declined country wide, yet in case of VASTMEDIA BANK OF PAKSITAN LTD, the share of credit to private sector has improved marginally as compared to previous year.
During the yare there has been a cautioned emphasis on the recovery or regularization of Non- performing loans (NPL) and consequently over Rs 5 billion were recovered. This includes as cash recovery of Rs 1.87 billion and Rs 3.13 billion in regularization i.e. 37.4% and 62.6% respectively. 2
In spite of huge recoveries as affected the quantum of classified status of rescheduled and restructured loans which is requirement of prudential regulations. The fresh increase in mainly (51%) in the other assets especially mentioned (OAEM) classification which dose not requires provisioning against principal amount. However, the non-crediting of accrued mark-up to income account has adversely effected the profitability of the bank.
The bank, however, remains fully provided against bad and doubtful debts as prescribed under prudential regulations advised by the STATE BANK OF PAKISTAN.
7.1.4 Investment
The investments have increased from Rs. 25 billion in 2005 thus increasing by 4.78% during the years under review.
In order to concentrate on the core business of the bank, it were decided to close down the operations of three subsidiaries namely vastmedia investment services (pvt) ltd. Panex international (pvt.) ltd and Vastmedia Arab International (pvt.) ltd.
The equity investment of the bank in the above companies has been fully recovered, thus reducing the investment in subsidiary companies from Rs.113 million in 2004 to Es 62 million in 2005 or we can say that its has 51%. This has been favorable for the capital adequacy of the bank.
7.1.5 Expenditure
The expenditure analysis of VASTMEDIA BANK OF PAKISTAN is almost the same as all of the other areas. The expenditures are continuously increasingly but they increased remarkably in the financial year 2005
7.1.6 Income
The income of vastmedia bank of Pakistan
7.1.7 Total Assets
Total assets of the bank increased from Rs 89 billion in 2004 to Rs 107 billion in 2005, thereby increasing at the rate of 19.66% over the last year.
FINANCIAL HIGHLIGHTS
VASTMEDIA BANK OF PAKISTAN LIMITED
BALANCE SHEET
AS AT DECEMBER 31, 2005
PARTICULARS | 2005 (Rs. In 000 ) | 2004 (Rs. In 000) |
ASSETS | ||
Cash | 8601193 | 764937 |
Balance with other banks | 1757510 | 1878796 |
Money at call & short notice | 300000 | 100000 |
Investments | 26774766 | 25605470 |
Advance net of provision | 55263762 | 42719179 |
Operating fixed assets | 3062045 | 2488619 |
Capital work-in-progress | 44246 | 37472 |
Net investment in finance lease | 34415 | 53707 |
Other assets | 11088394 | 8827987 |
Total assets | 106926331 | 89358167 |
LIABILITIES | ||
Deposits & other accounts | 93107291 | 76541153 |
Borrowings from other banks, agents, etc. | 7144163 | 6243517 |
Bills payable | 1073491 | 1084151 |
Other liabilities | 2588936 | 2487440 |
Net liabilities | 103913881 | 86356261 |
Net assets | 3012450 | 3001906 |
PRESENTED BY | ||
Share capital | 1063156 | 1063156 |
Reserve fund & other reserves | 480760 | 455760 |
Inappropriate profit | 1638 | 16094 |
Shareholders equity | 1545554 | 1535010 |
Surplus on revaluation of fixed assets | 1466896 | 1466896 |
Balance | 3012450 | 3001906 |
Source: VM Annual Report 2006
\
VASTMEDIA BANK OF PAKSITAN LIMITED
PROFIT & LOSS ACCOUNT
FOR THE YEAR ENDED ON DECEMBER 31, 2005.
PARTICULAR | 2005 (Rs. In 000) | 2004 (Rs. In 000) |
Markup / Interest & Discount & /or Return Earned | 7287432 | 6059060 |
Less: Cost / Return on deposits, Borrowings, etc. | 6953006 | 5289971 |
Gross Profit / Net Markup | 334426 | 769089 |
NON MARKUP / INTREST INCOME : | ||
Fees, Commission & Brokerages etc. | 358426 | 426229 |
Profit from dealing securities | 1172024 | 1033310 |
Profit from investment in securities | 971956 | 755170 |
Dividend Income | 21791 | 14401 |
Other operating Income | 995310 | 607820 |
Net Non Markup | 3519507 | 2836930 |
Net Markup | 3854504 | 3606019 |
OPERATING EXPENESE : | ||
Administration Expenses Non- Performing Advances | (53131) | (254985) |
Loss for diminution in the value of investments | ----- | ---- |
Other provision | 3719758 | 3396 |
134746 | 209579 | |
Other income | 64356 | 88017 |
199102 | 297596 | |
Other income | 128004 | 128004 |
Profit before taxation | 71098 | 169592 |
Taxation | 60554 | 455760 |
Profit after taxation. | 10544 | 19592 |
Inappropriate profit | 16094 | 502 |
Transfer to statutory reserve | 25000 | 4000 |
Inappropriate profit carried forward | 1638 | 16094 |
Source: VM Annual Report 2005
7.3 RATIO ANALYSIS
To evaluate a firm’s financial condition and performance, the financial analyst needs to perform check ups on various aspects of a firm’s financial health. A tool frequently used during these check is financial ratio or index, which relates two pieces of financial data by dividing one quantity by the other for the ratio analysis of the bank the data for the year 2004 and 2005 has been used which is the last publish data available.
A few financial ratios have been calculated which are as follows:
7.3.1 Profitability Ratios
· Net Profit Margin (Or Net Return On Sales)
We apply the formula for net profit margin:
Net profit margin = profit after taxation X 100
Markup
Net profit margin 2004 = 19592 X 100
6059060
= 0.32%
Net profit margin 2005 = 10544 X 100
7287432
= 0.14%
It shows the after taxation the profit margin per dollar of markup. Its shows as the VM decrees its par dolor profit by 0.18%. This indicates VM has been failed to control its operational expresses during the year 2005.
· Gross Profit Margin
We apply the formula for gross profit margin.
Gross profit margin = markup - cost
Markup
Gross profit margin 2004 = 6059060 – 5289971
6059060
= 0.126 = 12.6%
Gross profit margin 2005 = 72877432 – 6953006
72877432
= 0.046 = 4.6%
The gross profit margin indicates the total margin available to cover operating expenses. Thus it’s indicating VM decrease its gross profit by 8% and its expenses is more then its earning.
· Return On Total Assets
We apply the formula for return on total assets:
Return on assets = profit after taxation X 100
Total assets
Return on total assets = 19592 X 100
89358167
= 0.022%
Return on total assets = 10544 X 100
106926331
= 0.0098%
The return on asset of bank has been dropped from .022% in 2005 to 0.0098% in 2006. This show management fails to utilize the assets of the bank efficiently.
· Return On Stockholder’s Equity (Return On Net Worth)
We apply the formula for return on net worth:
Return on equity = profit after taxation X 100
Shareholder equity
Return on equity 2004 = 19592 X 100
1535010
= 1.28%
Return on equity 2005 = 10544 X 100
1545544
= 0.68%
The return on equity of bank had declined to .68 % in 2005 as compare to 1.28% in 2004, due to lower profit after taxation of the bank in 2005.
7.3.2 Liquidity Ratio
· Current Ratio
We apply the formula for current ratio:
Current ratio = _Current assets___
Current liabilities
Current ratio 2004 = __7925733__
83868821
= 0.094
Current ratio 2005 = __10658703__
101324945
= 0.105
Current ratio of bank has been increased to 0.105 in 2005 as compare to 0.094 in 2004. This means that the bank has more current assets reserve then its current liabilities.
· Cash Ratio
We apply the formula for cash ratio:
Cash ratio = ___cash_________
Current liabilities
Cash ratio 2004 = ___7646937_
83868821
= 0.091
Cash ratio 2005 = __8601193_
101324945
= 0.085
The current ratio of the bank has been reduces to 0.085 in 2005 from 0.091 in 2004 This means that the bank has now less cash on hand to ret6ire the current liabilities.
7.3.3 Leverage Ratio
· Debt-To-Assets Ratio
We apply the formula for debt-to-asset-ratio:
Debt-to-asset ratio = _Total debt__
Total assets
Debt-to-assets ratio 2004 = __86356261_
89358167
= 0.966
Debt-to-asset ratio 2005 = __103913881__
106926331
= 0.972
The debt-to-asset ratio of the bank has been increased to 0.972 in 2005 from 0.996 in 2004. This means that the bank borrowed fund more the in pervious year. This debt includes both long term and short term debt.
· Debt-To-Equity Ratio
We apply the formula for debt-to-equity ratio:
Debt-to-equity ratio = _____total debt_______
Stock holder equity
Debt-to-equity ratio 2004 = __86356261_
1535010
= 56.25
Debt-to-equity ratio 2005 = _103913881_
1545554
= 67.23
The debt equity ratio of bank has increased to 67.23 in 2005. As compare to 56.25 in 2004. This means that liabilities of bank have increased in 2005 as compared to the bank’s liabilities in 2004.
· Long-Term Debt-To-Equity Ratio
We apply the formula for long-term debt-to-equity ratio:
Long term debt-to-equity ratio = _____long term debt_____
Total stockholder equity
Long term debt-to-equity ratio 2004 = __42719179___
1535010
= 27.83
Long term debt-to-equity ratio 2005 = __55263762__
1545554
= 35.76
The long term debt-to-equity ratio of the bank has increased to 35.76 in 2005 as compare to 35.76 in 2004. This mean that bank have 7.93 more then pervious year which show strong capital structure.
· Times Interest Earned ( Or Coverage ) Ratio
We apply the formula of times interest earned ratio:
Times interest earned ratio = __profit before interest & taxation_
Total interest charges
Times interest earned ratio 2004 = __169592__
455760
= 0.373
Times interest earned ratio 2005 = __71098__
60554
= 1.174
The time interest earned ratio of the bank has increased to 1.174 in 2005 as compare to 0.337 in 2004. This mean that bank have 0.801 earnings which can decline without the firm becoming unable to meet its annual interest cost.
7.3.4 Activity Ratio
· Fixed Assets Turnover
We apply the formula of fixed assets ratio turnover:
Fixed assets turnover = ___markup____
Fixed assets
Fixed assets turnover 2004 = __6059060__
81432434
= 0.0744 = 7.44%
Fixed assets turnover 2005 = __7287432__
96267628
= 0.0757 = 7.57%
The fixed assets turnover ratio of the bank has increased to 7.75% in 2005 as compare to 7.44% in 2004. This mean that bank have 0.13% more markup productivity of its fixed assets.
· Total Assets Turnover
We apply the formula for total asset turnover:
Total assets turnover = ___markup__
Total assets
Total assets turnover 2004 = _6059060__
89358167
= 0.678 = 6.78%
Total assets turnover 2005 = _7287432___
106926331
= 0.0682 = 6.82%
The total asset turnover ratio of the bank has increased to 6.82% in 2005 as compare to 6.78% in 2004. This mean that bank have 0.045 more assets; the bank is not generating a sufficient use of its assets as compare to its volume of its business.
7.3.5 Other Ratios
· Interest Margin Ratio
We apply the formula for interest ratio:
Interest margin ratio = __gross profit X 100__
Interest profit
Interest margin profit 2004 = __769089 X 100__
6059060
= 12.69%
Interest margin ratio 2005 = __334426 X 100__
7287432
= 4.59%
The interest margin of the bank has been dropped from 12.96% in 2004 to 4.59% in 2005. This means that the interest of the bank has increased resulting in a lower gross profit margin in 2005.
· Loan Deposit Ratio
We apply the formula of loan deposit ratio:
Loan deposit ratio = ___loan__
Deposit
Loan deposit ratio 2004 = __42719179__
76541153
= 0.56
Loan deposit ratio 2005 = __55263762__
93107291
= 0.59
The loan deposit of the bank has slightly increased. This sign towards more lending of the bank in 2005 as compare to the pervious year.
7.4 GENERAL ANALYSIS OF VM
Critical analysis is the essential part of the report, for the purpose of evaluation of the branch. Acquaintance with the branch for a period of two months provided an opportunity to understand the setup and procedures in detail and identify the problems existing. It is a portion in which problems are examined for the purpose of reporting finding. Putting forward ideas and making recommendations. Some of the problems in the current setup are highlighted as follow;
7.4.1 Employees Problem
i. Promotion
Employees, particularly officers are not satisfied from promotion policies. There are no clear cut policies about the promotion of employees, particularly for the offices and they must be aware of it i.e. policies must be communicated to them, when polices are communicated to the employees they can perform their task more efficiently and will utilize their full efforts. And employees promotion not only emphasis on NCR of any person but also VM introduce some other performance examination policies for promotion.
ii. Staff Shortage
The staff in VM is very short i.e. the staff posted in the branch can does work hard to finish their daily work.
Staff should be increased in the branch to the extent, so that, they can met their customer requirements. Specialty the cashier’s number should be in creased in each in the branch so that the customer get maximum benefit and the customer do not feel any problem in depositing and getting their amounts and also in their utility services.
iii. Recruitment Policy
The top level management of Vastmedia bank of Pakistan , specially the main office of Peshawar
iv. Special Training
VM dose not provide the facility of specialized training to its staff, training is provided on the basis of centralization.
v. Transportation Facility
VM does not provide the facility of pick and drop to its staff, it’s the big problem for the staff specially whose who live in for distance to come on time.
vi. Improper Support Of Manager’s Decision
The decision of the manger are not properly supported and backed up by the higher level management.
vii. Turn Over
Turn over means the movement of the organization employees from the organization. The turn over rates in VASTMEDIA BANK OF PAKISTAN is very low but still propel leaves their job because;
¨ The salaries are not good enough; they are not in accordance with the qualifications of the employees and their working hours.
¨ There is no job security in the since that people are transferred from branches with more business to branches with less business. When they so not generate income as they are told to do, because of this reason many employees leave their jobs.
¨ Less number of opportunities to go hire and hire position or get promotion or gets bonus.
viii. Over Load Of Work On Employees
In the branch, there is over load of work on every employee. There is more then two department works do an every single employee. For example the operational manager not only look after manage the branch operation but also work as the accountant and responsible for same day clearing cheques. Same as the manger not only manger the branch also work on online department which damage the over all performance of the branch as well as the bank.
ix. Inconsiderate Attitude Towards Internees
The internship program requires student to spend a specific time period in an organization, in order to get first hand knowledge in practical life. The internees join as organization with the aim of learning through observation and expected cooperation from the staff members. Though the staff of vastmedia bank of Pakistan check center is friendly but the problem that their main head office not cooperate with internees in term of giving data such as financial data, their internship certificates, and other related material for writing report.
x. Manual System In Cash Department
In the branch the computer system is not available to the cash department; all function of ash department is manual, which is more risky and time consuming
xi. Branch Capacity
The VASTMEDIA BANK OF PAKISTAN check center branch is very small in term of capacity. In the branch have only one main room and one store room which create problem not only for staff but also for customer especially female customer.
7.4.2 Customer Problems
i. Foreign Banks In The Country
The foreign banks in the private sectors are trying to provide best services to the people and they are equipped with modern, sophisticated equipment due to which they are leading the local; banks. To manage all these problems VASTMEDIA BANK OF PAKISTAN needs to be more sophisticated to survive in the new millennium.
ii. Lack Of Proper Information
For public, dealing, client some to get some information but they refer them to zonal office. This creates a lot of tension and dissatisfaction in the mind of the customers.
iii. Networking Problem
Vastmedia bank of Pakistan
iv. Long Queuing Out Side The Branches
In the branch, there is long queuing problem, which is adversely effecting the operation of the branches. This is because of the overload upon cashiers.
v. No Cash Deposit Facility After Working Hour
In the vastmedia bank of Pakistan
7.4.3 Political Interference
i. Political Issue
There is political pressure on the bank, who ever come in power tried to pressurize the bank so that they should write off their loans.
ii. Government Policies
The political instability in the country adversely affects the performance of banking institution in the country. However last 7 year, Pakistan’s policies are stable but government new policy in which every bank must having more then 1 billion reserve shelter the banks confidence on government. This is a big problem, which is faced by today banking sector.
7.5 TOWS ANALYSIS OF THE VASTMEDIA BANK OF PAKISTAN
TOWS analysis of branch is as follows:
7.5.4 Thread
¨ The branch has staff shortage therefore there is always a chance that the staff cannot satisfy there customer and they might lose their customers.
¨ There are a number of completion mainly MCB BOK HBL etc there for people out for others when they are not satisfied with services of the branch.
7.5.3 Opportunity
¨ The branch is situated on main bazaar therefore it has chances that in future more and more people will open their accounts in this branch and thus the branch will have more funds to provide loan and generate revenue for themselves.
7.5.2 Weakness
¨ This branch of VASTMEDIA BANK OF PAKISTAN has staff shortage therefore the customers of VASTMEDIA BANK OF PAKISTAN sometime have to face problem, such as they have to wait for a longer time, this is not good in term of reputation.
¨ This branch lacks database therefore there are always chances of losing data which is very dangerous for any branch. Since this branch of VASTMEDIA BANK OF PAKISTAN have the facility of internet but usually remote branches are not down loaded therefore the customer in Pakistan
¨ The VASTMEDIA BANK OF PAKISTAN not provide pick and drop facility to is employees therefore living long distant employees not arrival on the time.
¨ In the branches of vastmedia bank of Pakistan
¨ The branches situated in the heart of bazaar but its capacity is not enough for branches daily work. Therefore all time full with people and noises which disturb the employee’s consternation on work.
7.5.1 Strength
¨ The VASTMEDIA BANK OF PAKISTAN check center branch is situated on main FAWARA CHOWK bazaar. Therefore it has more than seven thousand customers and hopefully in near future this number will definitely increase.
¨ The branch manager and the staff are very cooperative
Summary
Financial analysis involves the use of various financial statements. These statements do several things. First the balance sheet summarized the assets liabilities and owner’s equity of the business at a movement in time, usually the end of year or a quarter. The SWOT and financial analysis is made to evaluate the organization and know the finding & recommendation are given in next chapter.
REFERENCE:
1. James Van Horne, John M. Wahoo Wizen 11th Edition, Fundamentals of Financial Management pp # 125.
2. Vastmedia Bank, (2005) .annual report, Peshawar
3. Vastmedia bank wed side, http://www.abl.com.pk/
4. Vastmedia Bank (2005), manual Peshawar
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