Chapter - 8
FINANCIAL ANALYSIS
Financial analysis is an evaluation of a firm's past financial performance and its prospects for the future. It consists of applying analytical tools and technical statements and other relevant data to obtain useful information. The financial statement with the attached schedules and director report on past performance and future prospects give rather insufficient information. The interested parties need fuller information. It is why the financial analysis has been developed. Its main purpose is to give a clear picture of the financial position by studying the relationship and comparisons between the items in the statement. Keeping in view its importance in financial analysis, I have used three 'instruments to evaluate the financial wealth of MCB. They are:
- Common Size Analysis
- Ratio Analysis
- Critical Analysis
- Tows Analysis
8.1 Common size analysis
In common size analysis, for, a given time period, each item in the income statement is restated as percentage of revenue earned .And for the balance sheet, for a given point in time, each item in the balance sheet is restated as percentage of total assets.
COMMON SIZE ANALYSIS OF BALANCE SHEET
2007 2006
(Restated)
Rupees in '000
ASSETS
Cash and balances with treasury banks 9.66 9.49
Balances with other banks 0.93 1.92
Lendings to financial institutions 0.26 6.16
Investments 27.55 18.55
Advances 53.34 57.95
Other assets 4.35 3.22
Operating fixed assets 3.90 2.65
Deferred lax asset - 0.05
100 100
LIABILITIES
Bills payable 2.95 2.35
Borrowings from financial institutions 11.08 7.95
Deposits and other accounts 82.19 85.46
Sub - ordinaled loans 0.13 0.53
Liabilities against assets subject to finance lease - -
Other liabilities 3.30 3.71
Deferred lax liabilities 0.33 -
TOTAL LIABILITIES 100 100
REPRESENTED BY
Share capital 1.76 1.81
Reserves 9.56 8.18
Unappropriated profit 1.44 1.84
11.84
surplus on revaluation of assets-net of tax 2.73 1.72
15.51 13.56
COMMON SIZE ANALYSIS OF INCOME STATEMENTS
2007 2006
(Restated)
Rupees in '000
Mark-up / return / interest earned 100 100
Mark-up / return / interest expensed 24.74 17.56
Nel mark-up / interest income 75.26 82.44
Provision against non-performing loans and advances – n 0.33 0.47
Provision for diminution in the value of investments 9.31 3.94
Bad debts written off directly 0.0006 0.18
9.64 4.59
Net mark-up / interest income after provisions 69.61 77.86
NON MARK-UP/INTEREST INCOME
Fee, commission and brokerage income 8.29 8.97
Dividend income 1.99 3.15
Income from dealing in foreign currencies 2.18 2.68
Gain on sale of securities-net 4.72 2.30
Unrealized loss on revaluation of in vestments (0.04) -
Classified as held for trading 17.5 2.2
Other income -net 18.9 19.3
Total noil- mark up / interest income 84.5 97.21
15.8 25.14
NON MARK-UP/INTEREST EXPENSES
Administrative expenses (0.01) 0.04
(reversals) /Other provisions -net 1.7 0.2
Other charges
17.4 25.45
Total noil- mark up / interest expenses - -
Extraordinary / unusual item - -
PROFIT BEFORE TAXATION 67.03 71.76
Taxation
-current 17.94 22.11
-prior year (4.07) 2.30
-Deferred 2.81 0.24
19.0009 24.67
PROFIT AFTER TAXATION 48.02 47.10
Unappropriated profit brought forward 17.40 19.36
Transfer from surplus on revaluation of fixed assets –net of tax 0.03 0.12
17.44 19.48
Profit available for appropriation 65.46 66.59
8.2 RATIO ANALYSIS
A ratio is a quantitative relation between two magnitudes of the same kind. In ratio analysis, the financial ratios of the firm are compared to that of its competitors. This comparison allows the firm to detect major operating differences, which, if corrected, will increase its efficiency. Another very popular method of ratio analysis is to compare the firm's financial ratios to industry averages.
Before discussing the financial ratios, three cautions are in order:
- A single ratio does not generally provide sufficient in formations to judge the overall performance of the firm. Only if a group of ratios is used, a reasonable judgment concerning the firm’s overall financial state can be made.
- An analyst, when comparing financial statement, should ensure that predetermined uniform standards are used for this purpose.
- It must be insured that the data used in calculating financial ratios have been developed in the same manner and are sound and reliable.
There is no doubt that financial ratios are a useful guide for managerial decision-making but these are not exact and definite. Ratios only suggest the questions that need to be answered and provide no answers.
Let us now calculate some of the key financial ratios of MCB for the years 2006, and try to answer the questions that these ratios suggest.
These ratios are calculated from the "Balance Sheet" and "Profit & Loss Account" of Muslim Commercial Bank, 2007.
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8.1.1 CURRENT RATIO:
Current Assets
Current Ratio = Current Liabilities
Current Ratio (2007) = 157632035/341983955 = 0.46 times
Current Ratio (2006) = 123611109/288494993=0.428 Times
INTERPRETATION:
Current ratio of the Bank has increase 0.46 in 2007 as compared to 0.42 in 2006. This shows that liquidity of the Bank has increase. Although it increase the liquidity but it is favorable in the sense that it increase the profitability.
8.1.2 INTEREST MARGIN:
Int. Income = Int. Income - Int. Expense x 100
Int. Income
Interest Margin (2007) = 31786595-7865535 x 100 = 75.25%
31786595
Interest Margin (2006) = 25778061 –4525359 x 100 = 82.44%
25778061
NTERPRETATION:
The interest margin of the Bank has decreased from 82.44% percent in 2006 to 75.25% percent in 2007. This suggests management's efficiency to attract less costly deposits and make higher-yield investments.
8.1.3 NET PROFIT MARGIN:
Net Profit Margin = Profit After Taxation x 100
Interest Income
Net Profit Margin (2007) = 15265562x 100 =48.02%
31786595
Net Profit Margin (2006) = 12142398x 100/ = 47.10%
25778061
INTERPRETATION:
The net profit margin of MCB has also shown an improvement as it’s raised to 48.02% in 2007 as compared to 47.10% in 2006. This signals towards higher efficiency and lower administrative cost of the Bank during 2006.
8.1.4 RETURN ON EQUITY:
Return on Equity = Profit After Taxation x 100
Share holders Equity
Return on Equity (2007) = 15265562 x 100 = 33.61%
45414156
Return on Equity (2006) = 12142398x 100 = 34.05%
35656675
INTERPRETATION:
The return on equity has decreased to 33.61% in 2007 as compared to 34.05% in 2006. The return on equity replicates the net profit margin trends with the Bank registering good performance because of better efficiency. Due to increase in shares the ratio decreases in 2006.
8.1.5 RETURN ON ASSETS:
Return on Assets = Profit After Taxation x 100
Total Assets
Return on Assets (2007) = 15265562 x 100 = 3.72%
410485517
Return on Assets (2006) = 12142398 x 100 = 3.54%
342108243
INTERPRETATION:
The return on assets has improved to 3.72% in 2007 as compared to 3.54% in 2006. This indicates the success of management to utilize the assets of the Bank efficiently.
8.1.6 LOAN-DEPOSIT RATIO:
Loan Deposit Ratio = Loans x 100
Deposits
Loan Deposit Ratio (2007) = 218960598 x 100 = 74.96%
292098066
Loan Deposit Ratio (2006) = 198239155 x 100 =76.99%
257461838
INTERPRETATION:
The loan deposit ratio of the Bank has decreased to 74.96% in 2007 as compared to 76.99% in the 2006. This shows that the Bank has lent less compare to deposits.
8.1. 7 INVESTMENT-DEPOSIT RATIO:
Investment Deposit Ratio = Investments x 100
Deposits
Investment deposit Ratio (2007)= 113089261 x l 00 = 38.72%
292098066
Investment deposit Ratio (2006) = 63486316 x 100 = 24.65%
257461838
INTERPRETATION
The investment deposit ratio of the bank was 38.72% in 2007 and 24.65% in 2006. It shows that the investment of the bank has increased in 2007.
8.1.8 DEBT TO EQUITY RATIO:
Debt-Equity Ratio = Total Debt .
Stock Holder’s equity
Debt-Equity Ratio (2007) = 355365842 = 7.82
45414156
Debt-Equity Ratio (2006) = 301263929 = 8.44
35656675
INTERPRETATION:
The debt to equity ratio has been slightly declined in 2007. ,as compare to 2006.less than previous year.
8.1.9 OPERATING EXPENSE TO TOTAL EXPENSE RATIO:
Operating Expense to Total Expense Ratio = operating expense x 100
Total expense
Ratio for the year 2007 = 5559267 x100 = 81.00%
6863292
Ratio for the year 2006 = 7,317,945 x100 = 78.05%
9,375,585
INTERPRETATION:
Operating expenses of the bank has continuously increased during the time span of 2006-2007. Operating expenses of the bank has increased to 81.00% in 2007 from 78.05% in 2006.
8.1.10 Operating Expense to Total Assets Ratio:
Operating Expense to Total Asset Ratio = operating expense x 100
Total Asset
Ratio for the year 2007 = 5559267 x100 = 1.35%
410485517
Ratio for the year 2006 = 6560711 x100 = 1.91%
342108243
INTERPRETATION:
Operating expense to total asset ratio indicates the operating expense expenditure to generate the total assets of the bank. The ratio decreased from the figure of 1.91% in the year 2006, to 1.35% in the year 2007. It may be caused due to decrease in service expenditure.
Operating Expense to Deposit Ratio = Operating expense x 100
Deposit
Ratio for the year 2007= 5559267 x100 = 1.90%
292098066
Ratio for the year 2006 = 6560711 x100 = 2.54%
57461838
INTERPRETATION:
The ratio demonstrates the ability of operating expense to attract more and more deposits. Deposits have increased during 2005 tremendously but the increase in 2006-2007 is not up to the mark.
8.1.12 Cash Ratio:
cash ratio = . cash x 100
current liabilities
Ratio for the year 2007 = 39683883 x 100 = 11.60%
341983955
Ratio for the year 2006 = 32465976 x 100 = 11.25%
288494993
INTERPRETATION:
Cash ratio has increased during financial period of 2007 because the bank has decreased the lending to the people. This trend increase the ability of MCB in meeting its current obligations as they arise with cash.
8.3 CRITICAL ANALYSES:
Critical analyses is the most important part of the report, because it depends on the personal observation of the internee, only a good, keen and comprehensive analysis leads to good recommendations for the improvement of the existing conditions. Therefore in MCB, I have observed much of things and have analyzed them to the best of my effort and knowledge. MCB faces the following problems:
- Delegation of Authority:
Muslim Commercial Bank to great extant is a centralized bank. The manager and other officers of the branch have very limited authority, especially in the case of advances. They have to take approval of the chief manager even in the case of minor issues. Lack of delegation of authority creates problems and then the manager is not present in his office and costumers have to wait for long, some times. There is top to bottom flow of authority and lower level of employees cannot participate in the decision making process and only top level of authority take all the decisions. This completely centralized decision-making decreases the interest and loyalty of the employees toward organization.
- Seniority Vs Performance promotions:
Promotion in MCB is purely on seniority basis rather than on performance. This really de-motivate the employees because they know that it does not matter whether they perform will or not.
- Job Rotation:
Most of the employees work in a particular department and they specialize as well for the customer. In case of absence of an employee, other employee cannot perform his work. In this way bank not only losses the business but also results in dissatisfaction of the customer.
- Unequal Load of Work on Employees:
There is an unequal distribution of work on branch level. Some of the employees have to do a lot of work. There is a heavy load of work on remittance department and only one person is assigned to this department who has to do all the work. While other departments like credit and advance there is very little to do and person assigned to this department is killing the time.
- Lack of Theoretical Knowledge of Employees:
There is a deficiency of theoretical knowledge of the employees of MCB. Although their work is mostly routine and practical but some times lack of theory can be dangerous for tem. They have to consult the Regional Manager Office or General Manager Office, which is the wastage of time and resources. It also affects their efficiency.
- Discouragement of Small Depositors:
The stop members give proper attention and respect to those customers who have deposited huge amount of money while the small depositors mostly the salaried people are discouraged to open an account within the branch. In this way they discourage saving habits in the general public, depriving the county from needed savings.
- On the Job Training:
It has been analyzed that most of the employees are not been provided job training, which is very essential for better performance of employees.
- Lack of Discipline:
In MCB lack of discipline is observed in the way that some employees do not care about the office timings. They usually come late in the morning similarly employees take long leaves without any valid reason.
- Organizational Objectives:
Most of the employees of MCB are not aware of the basic mission, core values and objectives of the organization. So there is lack of coordination and integrated efforts toward the achievement of organization objectives.
- Excessive Paper Work:
There is an excessive paper work in MCB, which takes more time and reduces the effective banking performance.
- Lengthy Process of Loan:
To meet the immediate requirements of the business customers, there requires finances on emergency basis but due to centralization of decision-making there are unnecessary delay in sanctioning of loans, resulting in dissatisfaction of customers.
- Inadequate Fringe Benefits:
The main purpose of fringes benefits is to retain the employees in the organization on long-term basis. The employees always welcome the fringe benefits. It has been analyzed that the fringe benefits package offered by MCB is not much attractive as compared to other organizations. From the near past MCB has further more reduced the fringe benefits of the employees that may result in de-motivation and reeducation of existing employees.
- The Nature of Work:
Mostly of the bank employees are sticking to one seat only with the result that they become master of one particular job and loose their command on other banking.
- Low Rate of Return:
Due to low rate of return the depositors are drawing their money from the banks and depositing it with saving centers, which are offering a good rate of return as compared to the banks.
- Limited Application of Electric Media:
MCB is not utilizing the electric media for its promotional campaign. There is lack of awareness among the customers and general public about the scheme offered by MCB.
- Improper Working Condition:
Most of the branches of MCB are facing the problem of shortage of space. This creates hurdles in the free movement of the staff and customers and it is also risky from the security point of view. There is lack of furniture and improper arrangement for the customers.
- Limited Foreign Operations:
MCB is a large organization and has the required potential and resources for foreign operations. Presently there are five foreign branches, four in Sri Lanka and one in Bahrain. Large number of Pakistani living in USA, UK and Middle East and there is a need of extended foreign operations to provide banking services to these Pakistanis.
- Application of Technology in Banking:
Most of MCB branches are not fully computerized, which is very important cater the electronic needs of the customers and to provide the quick and quality services.
- Political Interference:
Banks are not free from political influences. Due to political pressure on the management for the sanctioning of the loan in favor of their own persons resulted in huge amount of bad debts because in this way the banks are unable to get a good security, which makes the recovery of the loan very difficult, and these loans are not used for productive purposes.
8.3 TOWS ANALYSES:
A TOWS analysis is an important tool to analyze the overall situation in which organization is conducting its affairs. Each issue remains relevant and useful for corporate strategy formulation.
The Threats, Opportunity, weakness and Strength. in summery can be stated for MCB as below:
Treats:
1. New competition in Domestic & Foreign Markets.
2. Political instability results in inconsistent bank policies.
3. Cutbacks in Compensations for the employees.
4. Demoralized staff.
5. Slower market growth.
6. Adverse govt. policies.
7. Recession in economy.
8. Changing customer needs.
Opportunities:
1. Exploring New Markets.
2. Diversification.
3. Growth of financial market in Pakistan.
4. Favorable govt. policies.
5. Introduction of new products.
6. Opening of Women Branches.
Weakness:
1. Centralized authority.
2. Less active Research and Development.
3. Political instability.
4. Lack of technology at branch level.
5. Weak marketing efforts.
6. Narrow Product Line.
7. Lack of sound corporate culture.
8. Not very attractive physical infrastructure of the branches.
Strength:
1. Adaptation of Islamic banking.
2. Adequate financial and human resources.
3. Capable top management.
4. Competitive skills of employees.
5. Acknowledge market leader.
6. Over 50 years of experience with excellent reputation.
7. Largest ATM network.
8. Good competitive and innovative skills.
TOWS ANALYSIS OF MCB:
Threats:
1. Competitors are increasing in the private sector banking in Pakistan due to privatization of the domestic bank.
2. Increasing number of competitors as in the form of foreign banks in Pakistan, whose services are mere advance due to modern techniques, and they provide highly specialized and attractive services to their customers.
3. Inconsistency in government policies due to political instability in the country, threats the business and economic sector.
4. Rapid growth of advanced global technologies.
5. Strict regulations by the government over credit facilities to the customers as well as to meet the prudential regulation.
6. Changing of customer needs.
7. Loss of confidence of overseas prospects and customers due to freezing of accounts.
After TOWS & Critical analysis the top management of the bank should make a committee for proper research and development to identify the customer needs and design some new schemes and strategies to overcome the stated weakness and use the opportunities. MCB should take some steps to face the threats and they have to properly plan for the growth of the bank and introduce some new schemes as Mal-a-Mall certificates, which was very effective. If MCB gives proper attention to their customers then in few years time this bank will be the leading bank in Pakistan.
Opportunities:
1. Due to efficient and experienced management group ,MCB can also improve well and expand its foreign operations successfully.
2. ATM network can be expanded its 24 hours cash facilities to other cities of the country in order to meet the growing market demand.
3. Increasing focus on different types of customers, MCB can open women branches especially in those areas where women class want to get involved but could not, due to environmental and cultural restrictions.
4. Foreign exchange department can be open in those cities branches where foreign exchange activates are developing.
5. Growing policies of government on business and commerce sector provides MCB an opportunity to efficiently meet with the business people’s requirement off instant cash and financing facilities.
6. Customer’s feed back on different products and accounts has really improved the bank performance and encouraged the atmosphere for other future policies.
7. MCB also has an opportunity to expand new technological advancement like: Tele bank and Internet banking facilities in order to serve customer more efficiently and according to the international or modern banking techni1ques.
Weaknesses:
1. Numbers of branches are decreasing every year, due to which, those employees at the low profitable branches feel unsecured about their jobs.
2. Slow down in advances growth in the short-term as MCB focuses on quality customers in the market.
3. New schemes are not introduced this year, due to which the attraction of the customers in slowing down.
4. Customers having accounts with small amounts are not given same services and dealing, which is given to those who have high accounts.
5. Management group is also having huge investments in other interest like: Textile and Cement industries, which may divide their attention and resources also.
6. Political or government influence or pressure from some interest groups.
7. System of recruitment and selection is not transparent and offering few training programmes to junior level officers.
Strengths:
1. MCB has adopted Islamic Banking System as well, as there is a growing need of Islamization in our economy.37
2. MCB’s emphasis on consumer banking by providing consumers with innovative saving schemes, products and services suit best as according to consumers life style.
3. The largest private sector bank in Pakistan with a network of 988 domestic and 5 foreign branches with 1 branch in the Export Processing Zone (EPZ)
4. Experience of operation as the bank was established in 1947.
5. First bank to privatized which has now become the leader in market with largest ATM 24 Hours online facility in the country.
6. Extension and improvement in services to domestic as well as foreign customers.
7. Attractive and higher interest rates and prizes on various accounts and products.
8. Increasing foreign operation by establishing branches in other countries.
9. Best optional po9licies for an employee, which has really improved their commitment dedication and hard work towards the accomplishment of bonus’s objectives.
10. Human resource development and employment of technology towards modern development.
11. 24 hours cash access and safe payment products for high value transaction.
12. MCB intends to finance products for customers wanting instant loan facilities at MCB’s branches.
13. Pioneer in introduction of MCB Master Card with photograph and Rupee Traveler Cheques (RTCs), which minimize the degree of risk.
14. Attention and sensitivity prevailing in the country.
15. An efficient and experienced private management group also involved in other interests like textile and cement industries.
16. Easy access for the customers through a high number of branches.
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