Internship Report on Financial Statement Analysis of First Security Islami Bank Limited

Transcription

1 Daffodil International University Institutional Repository Business Administration Project Report of BBA Internship Report on Financial Statement Analysis of First Security Islami Bank Limited Sharker, Mukta Rani Daffodil International University Downloaded from Copyright Daffodil International University Library

2 Daffodil International University Internship Report on Financial Statement Analysis of First Security Islami Bank Limited Submitted to the Department of Business Administration Daffodil International University in Partial Fulfillment of the Requirements for the Award of BBA degree Major in Finance Under the Supervision of: Professor Dr. Md. Abul Hossain Department of Business Administration Faculty of Business and Economics Daffodil International University Prepared By: Mukta Rani Sharker ID No: Major in Finance Program: BBA Daffodil International University Date of Submission: June 2015

3 Letter of Transmittal June 6, 2015 Professor Dr. Md. Abul Hossain Department of Business Administration Faculty of Business and Economics Daffodil International University Subject: Submission of Internship Report Financial Statement Analysis of First Security Islami Bank Limited Dear Sir, I have prepared my internship report on the topic of Financial Statement Analysis of First Security Islami Bank Limited under your kind supervision as a requirement of completing the degree of BBA program. I have tried my best to prepare the report in consistence with the optimal standard under your valuable direction. I made every effort to reveal greater insight in this report. I hope that this will meet the standard of your judgment. Thanking you for your kind supervision. Sincerely yours (Mukta Rani Sharker) ID No: Major in Finance Department of Business Administration Daffodil International University i

4 Certificate of Supervisor This is to certify that the work entitled Financial Statement Analysis of First Security Islami Bank Limited is an original work by Mukta Rani Sharker, ID # , Major Finance, Department of Business Administration, Daffodil International University, Uttara Campus, completed her internship report under my supervision and submitted for the partial fulfillment of the requirement for award of Bachelor of Business Administration (BBA) from Daffodil International University (Uttara Campus).... (Professor Dr. Md. Abul Hossain) Coordinator (MBA Program) Department of Business Administration Faculty of Business and Economics Daffodil International University ii

5 Student Declaration I do hereby solemnly declare that the work presented in this Internship Report has been carried out by me and has not been previously submitted to any other University/ College/ Organization for an academic certificate/degree. I, Mukta Rani Saker, ID: BBA , declare that the presented internship report on Financial Statement Analysis of First Security Islami Bank Limited submitted as a course requirement for the award of the degree of Bachelor of Business Administration at Daffodil International University was prepared by me. The work I have presented does not breach any existing copyright and no portion of this report is copied from any work done earlier for a degree or otherwise. I further undertake to indemnify the damage arising from breach of the foregoing obligations. (Mukta Rani Sharker) ID No: Major in Finance Department of Business Administration Daffodil international University iii

6 Acknowledgement First, I would like to express my gratitude to almighty ALLAH to give me the strength to complete the study within the stipulated time. I deeply thank to my honorable internship supervisor Prof. Dr. Md. Abul Hossain, Department of Business Administration, and Daffodil International University for assigning me the report and for all his kind support to accomplish it. His valuable suggestions and guidance helped me a lot to prepare the report in a well-organized manner. I would like to thank our whole Department of Business Administration for facilitating me to do internship and preparing this report. I also wish to thank and give the due respect to my family and friends for their cordial support and help they offered throughout the process of performing the whole report. Finally, my heartfelt gratitude goes to Mr. Mahabub Ali Khan (Branch Manager and AVP), Mr. Md. Abu Naim (SPO and Operation Manager), Mr. Md. Ishtiaque Uddin (Probationary Officer), Mr. Iftekher Ahmed (Investment Officer), Mr. Imran Ahmed (Senior Cash Officer), Mr. Rajib Biswas (Assistant Officer) Mr. Shahanawaz (Senior Officer) and all the co-workers of First Security Islami Bank Limited, City University Branch, for their keenness in giving me training and valuable information, which was very helpful to complete my internship report. iv

7 Acronyms L/C- Letter of credit GB- General Banking FDBC- Foreign Document Bill for Cash FDBP- Foreign Document Bill for Purchase FATF- Financial Action Task Force ML- Money Laundering EFT- Electronic Fund Transfer NBFI- Non-Bank Financial Institutions ATM- Automated Teller Machine Bank A/C- Bank Account KYC- Know Your Customer BB- Bangladesh Bank PFS- Personal Financial Service TP- Transaction Profiling TT- Telegraph Transfer E-Banking- Electronic-Banking CD- Current Deposit v

8 List of Figures Figure No. Topic Page No. 4.1 Current Ratio Net Working Capital Cost Income Ratio Total Asset Turnovers Investment to Deposit ratio Net Profit Margins Returns on Asset Returns on Equity Earnings per Share Debt Ratio Time Interest Earned Ratio Time Interest Earned Ratio vi

9 Abstract Banks are the most important financial institutions in modern economy. They are an integral part of modern economic activities. In a developing country like Bangladesh, the Islamic banking system as a whole has a vital role play in the process of economic development. First Security Islami Bank Limited (FSIBL) has started its journey on 29th August 1999 with the said principles in mind and conduct banking system according to Shariah based policy. This report mainly deals with the financial statements analysis of an Islami bank in Bangladesh a study on First Security Islami Bank Limited. The horizontal analysis, vertical analysis and ratio analysis are essential technique for financial statements analysis. Different users such as investors, management, bankers and creditors use the financial statements analysis of a company for their decision making purpose. In this report, the financial statements of First Security Islami Bank Limited have been studied for five years from 2010 to 2014 and also different types of financial ratios of the bank are calculated. The clear concept on bank, Islamic banking and different types of financial analysis are given in the report. The liquidity, profitability, financial position and the financial trend of First Security Islami Bank Limited are the main focus of this report which have been analyzed and used for comparing different years. By analyzing the financial statements of the bank, it has been traced the financial strengths and weakness of the bank. Finally some comments are shown regarding the changes of this bank s financial performance for the last five years. By analyzing the horizontal, vertical and different ratios like liquidity ratios, efficiency ratios, profitability ratios, solvency ratios and market prospect ratios, and cash flow analysis, it can be said that FSIBL has been improving and doing well in the last five years except in few years. So the bank should be concern about the types of financial analysis especially the types of ratios. However, FSIBL s overall earnings performance was satisfactory, but it should be improved. vii

10 Contents Letter of Transmittal Certificate of Supervisor Student Declaration Acknowledgement Acronyms List of Figures Executive Summery Table of Contents Page No I II III IV V VI VII Chapter One: Introduction of the Study 1.1 Introduction of the study Origin of the study Significance of the Study Objectives of the study Scope of the Study Methodology of the study Source of Data Limitations of the study 4 Chapter Two: An Overview of First Security Islami bank Limited and SWOT Analysis 2.1 Background of the FSIBL Company Vision Company Mission Company Objective Company Strategies Organizational Structure of FSIBL Function of FSIBL Features of FSIBL Principal Products & Services of FSIBL Society for Worldwide Interbank Financial Telecommunication Financial Highlights SWOT Analysis of First Security Islami Bank Limited 12-14

11 Chapter Three: Theoretical Aspects 3.1 Financial performance analysis Balance sheet Income statement Ratio Analysis Groups of Financial Ratios Liquidity Ratio A Current Ratio B Quick Ratio C Net Working Capital Activity Ratio A Total Asset Turnover B Investment to Deposit Ratio Debt Ratio A Debt Ratio B Equity Capital Ratio C Time Interest Earned Ratio Profitability Ratio A Operating Profit Margin B Net profit Margin C Return on Equity (ROE) D Price/ Earnings ratio (PE ratio): E Earnings per share (EPS) 19 Chapter Four: Financial Statement Analysis of First Security Islami Bank Limited 4.1 Introduction Financial Statement Reconstruction of Financial Statements of FSIBL Horizontal Analysis 20-22

12 4.4 Vertical Analysis Common Size Analysis Ratio and Trend Analysis Current ratio Net Working capital Cost Income Ratio Total Asset Turnover Ratio Investment to Deposit ratio Net Profit Margin Return on Asset (ROA) Return on Equity (ROE) Earnings per Share Price Earnings Ratio Debt Ratio Time Interest Earned Ratio Chapter Five: Findings and Recommendations 5.1 Findings Recommendations 40 Chapter Six: Conclusion and Bibliography 6.1 Conclusion 41 Bibliography 42 Appendices-1 43 Appendices-2 44 Appendices-3 45

13 1.1 Introduction of the study: Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions. These statements include the income statement, balance sheet, statement of cash flows, and statement of retained earnings. Financial statement analysis is required for evaluating risks, performance, financial health, and future prospects of an organization. In this study, the financial statements of First Security Islami Bank Limited (FSIBL) are analyzed. FSIBL is one of the reputed banks in Bangladesh. It conducts its banking activities according to Islami Shariah. 1.2 Origin of the study: Bachelor of Business Administration (BBA) Program requires a three months attachment with an organization followed by a study assigned by the supervisor of the university. I was attached with City University branch of (FSIBL) as an internee. My supervisor has asked me to make a study on General Banking Activities of City University branch of FSIBL as part of the fulfillment of BBA degree. 1.3 Significance of the study: First Security Islami Bank Ltd. is one of the leading private banks in Bangladesh. It provides highest benefits to it are among clients the Islami Banks in Bangladesh. There are few private banks provide those profits or interest to their clients as high as FSIBL banking. FSIBL system is aiming to attain the goal of Islamic Economy through setting designed us Islamic Monitory System. Islam has clear-cut guidelines to interest avoid (Riba) regarding use of money. So, Islamic Banking System strongly follows the Islamic Shariah in its business. Islamic Shariah appreciates risk and profit sharing. As an Islami bank FSIBL has to take risk when doing banking business and share profit to its stakeholders and customers. So, to know about the ability of the bank to take risk and making profits, its financial strength and performance should be understood. Therefore, the financial statements of the bank should be analyzed for understanding the financial strength and performance of the bank. 1.4 Objectives of the study: General Objective: To analyze the financial statements of First Security Islami Bank Ltd. with the key focus of its overall financial performance 1

14 Specific Objectives: To know the current financial position of First Security Islami Bank Ltd To know the five years financial performance of FSIBL by calculating and analyzing different types of ratio. To know the financial trend of FSIBL focusing the five years financial performance. To give some recommendation for the development of First Security Islami Bank Ltd. 1.5 Scope of the Study: This study is based on my observation and studies during my internship period in First Security Islami Bank Limited, at City University Branch. The prime focus was on financial statement analysis of First Security Islami Bank Limited for giving some concepts about the financial position and financial performance of the bank over at least five years. The scope of my study is limited to the First Security Islami Bank Limited. During the three months internship program almost all sections I have been observed. However, in this study the financial statements of FSIBL are analyzed from different viewpoint including ratio analysis. This repost may help those people who want to know about the financial performance of First Security Islami Bank Limited. 1.6 Methodology of the Study: Several types of research methods are used in studies depending on the field or research. As this research is on financial statement analysis, certain methods were followed to fulfill the objectives of the study, making the maximum utilization of the scopes and to avoid the limitations as much as possible to prepare the final outcome of the study. There are four types of research methods were used to complete this study. These methods are Qualitative Method: Qualitative method is concerned with the quality or kind and describing meaning. In this study I have used qualitative research method to provide a clear concept about my research topic and to maintain the standards of my research I have analyzed the financial statements from different viewpoint. Quantitative Method: Quantitative research is based on the quantitative measurements of some characters. It is applicable to phenomena that can be expressed in terms of quantities. I have used the quantitative approaches in this study for some statistical content analysis and to determine the significance of findings. 2

15 Analytical Method: In analytical research, the researcher has to use facts or information those already available, and analyze these to make a critical evaluation of the material. In this study, I have used analytical method for ratio analysis and to evaluate the financial performance of FSIBL. Descriptive Method: Descriptive research includes surveys and fact finding enquiries of different kinds. The major purpose of descriptive research is description of the state of affairs as it exists at present. In this repost, I have used the descriptive approach to explain the financial statements, graphs, ratios, financial trend, financial performance and current financial condition of FSIBL. Financial statement analysis needs the combination of mathematical equations, graphical presentation and explanation. So, I have used above four types of research methods to get proper and successful outcome from my research. 1.7 Sources of Data: Data have been collected from two sources such as primary sources of data and secondary sources of data. Primary sources of data are those sources from which the researcher collects data directly by field work. And secondary sources of data are those sources which provide data that are already collected by another researcher. From this point of view data are two types among them one is primary data and another is secondary data. The data directly collected by the researchers are called primary data. The data that has been already collected by another researcher or person for his/her work purpose are called secondary data. I have collected the both types of data from primary and secondary sources. Primary Sources of Data: Face to face conversation with the employees, senior officers, SPO and the Manager. Studying different relevant files like register books, statement of affairs, financial statements etc. Practical work at FSIBL during my internship program to increase my knowledge. Secondary Sources of Data: Annual Studys including financial studys of FSIBL. Website of FSIBL. Journals and prospectus of FSIBL. Different books, magazines and journals related to the finance and banking. Different websites and blogs. 3

16 1.8 Limitation of the Study: I did my best and there has no dearth of sincerity on my part to make the study. But there are some limitations which I have faced while reaching the objectives of this study, because it is very difficult to analyze the financial statements over five years of a Bank. Some of these following limitations are apparent in this study: The time limit of the internship is only 3 months which is very short period of time to learn about whole banking activities. As annual studys need 3-4 months to be published after end of the period, I cannot collect the recent annual financial study (2013) of FSIBL. As final financial statements are prepared in head office, it becomes difficult to understand the elements of the statements from branch office. When I have prepared the classified financial statement from unclassified one then I faced problem to replacement of the items of the statement, because the duration of all items are not properly mentioned. There were lack of proper secondary information about First Security Islami Bank Limited and its products. Annual studys, policy guidelines, website and other related documents do not cover full and sufficient information. As the bank officials are so much busy that it was difficult for them to co-operate with me, which is also a constraint for this study are requested to consider these limitations while reading and justifying any part of my study. 4

17 2.1 Background of the FSIBL: First Security Islami Bank Limited (FSIBL) was formed in Bangladesh on 29th August 1999 under Companies Act 1994 to start banking business. It obtained permission from Bangladesh Bank on 22 September 1999 to begin its business. The Bank carries banking activities through its 136 branches in the country. Their commercial banking activities include a wide range of services including accepting deposits, discounting bills, conducting money transfer and foreign exchange transactions, and performing other related services such as safe keeping, collections and issuing guarantees, acceptances and letter of credit. FSIBL started their business with traditional commercial banking services as First Security Bank Ltd. However, from January 01, 2009 they converted their business to Islamic Banking with Islamic Shariah Act and the bank changed its name and mode of business and incorporated as First Security Islami Bank Ltd. It started with 14 branches in 1999 but now has 136 branches in Bangladesh which shows the impact they have had in the economy. The bank maintains a friendly relationship with the top ranking banks. They have online, SMS and ATM banking facilities for their clients. The company philosophy A step ahead in time has been exactly the spirit for Asian success; the bank has been operating with talented and brilliant personnel, equipment with modern technology so as to make it most efficient to meet the challenges of 21st century and to fulfill the needs and wants of its customers. 2.2 Company Vision: To be the premier financial institution in the country by providing high quality products and services backed by latest technology and a team of highly motivated personnel to deliver excellence in Banking. 2.3 Company Mission: To be the most caring and customer friendly and service oriented bank. To create a technology based most efficient banking environment for its customers. To contribute to the socio-economic development of the country. To attain the highest level of satisfaction through the extension of services by dedicated and motivated professionals. To maintain continuous growth of market share by ensuring quality. To ensure ethics and transparency in all levels. To ensure sustainable growth and establish full value of the honorable shareholders and Above all, to contribute effectively to the national economy 5

18 2.4 Company Objective: To conduct banking service according to Islamic Shariah. To provide efficient computerized banking system. To ensure foreign exchange operations. To accept deposit on profit-loss sharing basis. To establish a welfare-oriented banking system. To play a vital role in human development and employment generation. To contribute toward balanced growth and development of the country through investment operations particularly in the less developed areas. 2.5 Company Strategies: To achieve our customers best satisfaction & win their confidence. To manage & operate the bank in the most effective manner. To identify customers need & monitor their perception towards meeting those requirements. To review & update policies, procedures & practices to enhance the ability to extend better customer services. To train & develop all employees & provide them adequate resources so that customers needs can reasonably addressed. To promote organizational efficiency by disclosing companies plans policies & procedures openly to the employees in a timely fashion. To ensure a congenial working environment. To diversify portfolio in both retail & wholesale market. 2.6 Organizational Structure of FSIBL: Board of Director: Mohammed Saiful Alam Chairman Alhaj Mohammed Abdul Maleque Vice-Chairman 6

19 2.6.2 Management of FSIBL: Organogram: Managing Director Deputy Managing Director Executive Vice President Senior Vice President Vice President First Vice President Assistant Vice President Senior Executive Officer Executive Officer Principal Officer Senior Officer Officer Assistant Officer Junior Officer Trainee Officer 7

20 2.7 Functions of FSIBL: First Security Islami Bank is performing the following functions: Collection of deposit Maintaining all types of deposit accounts To make investment To handle foreign remittance Collection of utility bills payment To provides locker service Providing Inland/Online Transaction Service Handling Foreign Exchange Business Transaction Smart Banking To conduct social welfare activities 2.8 Features of FSIBL: The bank is committed to run all its activities as per Islami Shariah. FSIBL achieves the customers satisfactions through its fast and excellent service. The distinguishing features of FSIBL are as follows: All its activities are conducted on interest-free banking system according to Ialami Shariah. Establishment of participatory banking system instead of banking on debtor-creditor relationship. Investment is made in different modes permitted by Islami Shariah. Investment income of the Bank is shared to the Mudarabah Depositors according to a ratio to ensure a fair rate of return on their deposits. The bank ensures life insurance of Tk to its clients against their MMPS and MMDS accounts without taking additional installment from the clients for the insurance. Its aims are to introduce a welfare-oriented banking system and also to establish equity and justice in the field of all economic activities. It extends Socio-economic and financial services to the poor, helpless and low-income group of people. The bank provides scholarship to the talent students as a part of Corporate Social Responsibility. According to the needs and demands of society and the country as a whole the Bank invests money to different Halal business. 8

21 2.9 Principal Products & Services of FSIBL: Deposit Products: Al-Wadiah Current Deposit Mudarabah Savings Deposit Mudarabah Short Term Deposit Mudarabah Term Deposit : 1. One Month 2. Three Months 3. Six Months 4. Twelve Months 5. Twenty Four Months 6. Thirty Six Months Foreign Currency Deposit Mudarabah Savings Scheme: 1. Monthly Savings Scheme 2. Monthly Profit Scheme 3. Mudaraba Double Benefit Deposits Scheme in 6 years 4. Mudaraba Triple Times Deposit Scheme in 10 years 5. Mudaraba Four Times Deposit Scheme in 12 years Investment Products: Investment / Utilization of the funds: 1. Bai-Murabaha (Deferred Lump Sum/ Installment Sale) 2. Bai-Muajjal (Deferred Installment / Lump Sum Sale) 3. Ijara (Leasing) 4. Musharaka (Joint-Venture, Profit-Sharing) 5. Mudaraba (Trustee Profit-Sharing) 6. Bai-Salam (Advance Sale and Purchase) 7. Hire-Purchase 8. Direct Investments 9. Ijara (Leasing) 10. Post Import Investment 11. Purchase and Negotiation of Export Bills 12. Inland Bills Purchased 9

22 13. Murabaha Import Bills 14. Bai-Muajjal Import Bills 15. Pre-Shipment Investment 16. Quard-ul-Hasan (Benevolent Investment) Letter of Guarantee 1. Tender Guarantee 2. Performance Guarantee 3. Guarantee for Sub-Contracts 4. Shipping Guarantee 5. Advance Payment Guarantee 6. Guarantee in lieu of Security Deposits 7. Guarantee for exemption of Customs Duties 8. Others Letter of Credit (L/C) / Back to Back Letter of Credit (L/C) Specialized Schemes 1. Tender Guarantee 2. Consumer Investment Scheme 3. SME Investment Scheme, 4. Lease Investment Scheme, 5. Hire Purchase, 6. Earnest Money Investment Scheme, 7. Mortgage Investment, 8. Employees House Building Scheme, 9. ATM, VISA Investment Card, EEF, etc. Locker Service 1. Personalized service 2. Facilities to access outside scheduled time 3. Parcel handling 4. Safe custody of goods and bonds/shares 5. Lockers available in various sizes. For example: Small, Medium and Large. 10

23 2.10 Society for Worldwide Interbank Financial Telecommunication Head Office Dilkusha Branch Motijheel Branch Bangshal Branch Dhanmondi Branch Gulshan Branch Mohakhali Branch Banani Branch Agrabad Branch Khatungonj Branch Jubilee Road Branch Sylhet Branch FSEBBDDH FSEBBDDHDIL FSEBBDDHMOT FSEBBDDHBNG FSEBBDDHDHA FSEBBDDHGUL FSEBBDDHMKH FSEBBDDHBAN FSEBBDDHAGR FSEBBDDHKTG FSEBBDDHJUB FSEBBDDHSYL 2.11 Financial Highlights: Year 2010 Tk in 2011 Tk in 2012 Tk in 2013 Tk in 2014 Tk in Particulars million million million million million Paid up capital Total Loans & Advances Price ratio earning 9 times 12 times 10 times 11 times 14 time Earning share per Income from investment Total asset Total deposit

24 2.12 SWOT Analysis of First Security Islami Bank Limited: 1. Strengths: Bank reputation: FSIBL has already established a favourable reputation in the banking industry of the country. Within a period of 9 years, bank has already established a firm footing in the banking sector having tremendous growth in the profits and deposits. All these have leaded them to earn a reputation in the banking field. Islamic banking Concept: As we are an Islamic Nation our major deals want to follow the Islamic rules and regulations. FSIBL always follows the Islamic rules. And it always helps the bank to attract the new and existing clients. Sponsors: FSIBL was founded by a group of well-known entrepreneurs of the country having sufficient financial strength. The sponsor directors belong to prominent resources persons of the country. The Board of Directors headed by its Chairman Alhaj Md. Saiful Alam. Therefore, FSIBL has a strong financial strength and it built upon a strong foundation. Top Management: The top management of the bank is also major strength. The top management officials have all worked in reputed banks and they are very experienced in the banking sector, skills, expertise will continue to contribute towards further expansion of the bank. At FSIBL the top management is the driving force and the planning of the organization where policies are crafted and often cascaded down. Facilities and equipment: FSIBL has adequate physical facilities and equipments to provide better services to the customers. The bank has computerized and online banking operations under a software. Counting machines in the teller counters have been installed for speedy service and the cash counters. Computerized statements for the customers as well as for the internal use of the banks are also available. 12

25 Modern branches: This creates a positive image in the minds of the potential customers and many people get attracted to the bank. This is also an indirect marketing campaign for the bank for attracting customers. All branches of the bank are impressive and are compatible to foreign banks. Team work at mid-level and lower level: At FSIBL have mid level and lower level management, there are often team works. Many jobs are performed in groups of two or three in order to reduce the burden of the workload and enhance the process of completion of the job. People are eager to help each other and people in general are devoted to work. Interactive corporate culture: FSIBL has an interactive corporate culture. Unlike other local organization, its work environment is very friendly, interactive and informal. There are no hidden barriers or boundaries while interacting among the superior or the subordinate. The environment is also lively and since the nature of the banking job itself is monotonous and routine, FSIBL. is likely work environment boosts up the spirit and motivation of the employees. 2. Weaknesses: Advertising and promotion of their new product: This is a major setback for FSIBL and one of its weakest areas. Banks advertising and promotional activities are satisfactory but it SME loan is not advertised well. It does not expose its SME product to general public and are not in lime light. FSIBL does not have any sign or any advertisement for SME loan in the city. As a result people are not aware of the existence of this bank. Low reward package: The reward package for the entry and the mid level management is considerably low. The compensation package for FSIBL. Entry level positions are even lower than the modern banks. Under the existing low payment structure, it will be very difficult to attract and retain higher educated employees in FSIBL. Time wastage: More time taking for approving loan that discourages the customer for taking loan. 13

26 3. Opportunities: Diversification: FSIBL can pursue a diversification strategy in expanding its current line of business. The management can consider options of starting merchant banking or diversify in to leasing and insurance. By expanding their business portfolio, FSIBL can reduce their business risk. Promotion of new Products: In this competitive environment FSIBL must expand its new product promotion to enhance its sustainable competitive advantage. Market share: It s very important to FSIBL, to increase market share through growth of loan portfolio. Other Opportunities: Enhanced business development in all product areas and promotion of those products. More experienced & managerial know-how. Countrywide network. Increased new sector loan facilities. Reduced overdue through strong recovery system. 4. Threats: There are many competitors in the marker. The growth rate of competitors in the market. Many of the competitor banks are well equipped & also providing better online services. Regulatory requirements. Govt. pressures to reduce interest rate. Changing customers needs. 14

27 3.1 Financial performance analysis: Financial performance analysis of a company is very important to get an overall view about an organization. It generally consists of interpretation of balance sheet and interpretation of income statement. By using these two sources one can perform the ratio analysis and trend analysis which are the major tools for analyzing the financial performance of a bank. 3.2 Balance sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. 3.3 Income statement: Income statement also referred as profit and loss statement, earnings statement, operating statement or statement of operations is a company's financial statement that indicates how the revenue is transformed into the net income. It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being studied. 3.4 Ratio Analysis: Ratio is a method of interpreting the financial statement of a company. The purpose of ratio analysis is identifying the risk of business firm and the financial statement of a business firm, performance evaluation, compare income analysis Groups of Financial Ratios: Financial ratios can be divided into four basic groups or categories: i. Liquidity ratios ii. Activity ratios 15

28 iii. iv. Debt ratios & Profitability ratios Liquidity, activity, and debt ratios primarily measure risk, profitability ratios measure return. In the near term, the important categories are liquidity, activity, and profitability, because these provide the information that is critical to the short-run operation of the firm. Debt ratios are useful primarily when the analyst is sure that the firm will successfully weather the short run Liquidity Ratio: The liquidity of a business firm is measured by its ability to satisfy its short term obligations as they come due. Liquidity refers to the solvency of the firm s overall financial position. The three basic measures of liquidity are A Current Ratio: One of the most general and frequently used of these liquidity ratios is the current ratio. Organizations use current ratio to measure the firm s ability to meet short-term obligations. It shows the bank s ability to cover its current liabilities with its current assets. Current Ratio = Current Asset/Current Liabilities B Quick Ratio: The quick ratio is a much more exacting measure than current ratio. This ratio shows a firm s ability to meet current liabilities with its most liquid assets. Quick Ratio=Total Current Asset - Inventory / Total Current Liabilities C Net Working Capital: Net Working Capital, although not actually a ratio is a common measure of a firm s overall liquidity. A measure of liquidity is calculated by subtracting total current liabilities from total current assets. Net Working Capital =Total Current Assets Total Current Liabilities 16

29 Activity Ratio: Activity ratios measure the speed with which accounts are converted into sale or cash. With regard to current accounts measures of liquidity are generally inadequate because differences in the composition of a firm s current accounts can significantly affects its true liquidity. A number of ratios are available for measuring the activity of the important current accounts which includes inventory, accounts receivable, and account payable. The activity (efficiency of utilization) of total assets can also be assessed A Total Asset Turnover: The total asset turnover indicates the efficiency with which the firm is able to use all its assets to generate sales. Total Asset Turnover = Sales/ Total Asset B Investment to Deposit Ratio: Investment to Deposit Ratio shows the operating efficiency of a particular Bank in promoting its investment product by measuring the percentage of the total deposit disbursed by the Bank as long & advance or as investment. The ratio is calculated as follows: Investment to Deposit Ratio = Total Investments / Total Deposits Debt Ratio: The debt position of that indicates the amount of other people s money being used in attempting to generate profits. In general, the more debt a firm uses in relation to its total assets, the greater its financial leverage, a term use to describe the magnification of risk and return introduced through the use of fixed-cost financing such as debt and preferred stock A Debt Ratio: The debt ratio measures the proportion of total assets provided by the firm s creditors. Debt Ratio = Total Liabilities / Total Assets 17

30 B Equity Capital Ratio: The ratio shows the position of the Bank s owner s equity by measuring the portion of total asset financed by the shareholders invested funds and it is calculated as follows: Equity Capital Ratio = Total Shareholder s Equity / Total Assets C Time Interest Earned Ratio: This ratio measures the ability to meet contractual interest payment that means how much the company able to pay interest from their income. Time Interest Earned Ratio=EBIT/ Interest Expense Profitability Ratio: These measures evaluate the bank s earnings with respect to a given level of sales, a certain level of assets, the owner s investment, or share value. Without profits, a firm could not attract outside capital. Moreover, present owners and creditors would become concerned about the company s future and attempt to recover their funds. Owners, creditors, and Management pay close attention to boosting profits due to the great importance placed on earnings in the marketplace A Operating Profit Margin: The Operating Profit Margin represents what are often called the pure profits earned on each sales dollar. A high operating profit margin is preferred. The operating profit margin is calculated as follows: Operating Profit Margin = Operating Profit / Sales B Net profit Margin: The net profit margin measures the percentage of each sales dollar remaining after all expenses, including taxes, have deducted. The higher the net profit margin is better. The net profit margin is calculated as follows: Net profit Margin = Net profit after Taxes / Sales 18

31 C Return on Equity (ROE): The Return on Equity (ROE) measures the return earned on the owners (both preferred and common stockholders) investment. Generally, the higher this return, the better off the owners. Return on Equity (ROE) = Net profit after Taxes / Average stockholder s Equity D Price/ Earnings ratio (PE ratio): The Price/ Earnings ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the income or profit earned by the firm per share. P/E ratio - Stock price per share / earnings per share E Earnings per share (EPS): EPS represents the dollar amount earned behalf of each outstanding share of common stock. EPS= Net income/no. of share outstanding 19

32 4.1 Financial Statement: A bank is a financial institution whose main job is to collect fund from surplus units and invest in deficit units and making profits. Owners, depositors and shareholders of a bank invest to a bank to get profit or interest as a reward in return. But their profit is depends on the banks financial performance. It depends on how a bank operates itself, how efficiently management operates the operations of a bank. To understand the financial performance of a bank, the investor should analyze the financial statements of that bank. They may use different financial ratios to analyze the financial performance of a bank. By analyzing the financial performance of a bank investors and management can know the strengths and weakness of the bank, and can take proper policy making decisions for future. To analyze the financial performance of First Security Islami Bank Limited (FSIBL), different financial ratios are used to determine the strengths and weakness of FSIBL. Actually, to understand the overall financial position and performance of FSIBL is the main aim of this chapter. 4.2 Reconstruction of Financial Statements of FSIBL: The all core financial statements of FSIBL are obtained. These statements include Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Equity, Statement of Liquidity and their notes for five years. But, these are not in the format which is required for different financial ratio analysis. So, some of these financial statements are reconstructed in various format for the interest of the analysis. The renovated statements are mainly concerned based on the duration of the accounts which is very important for ratio analysis. For preparing these financial statements no fictional data are used, only the real financial data from notes of statements are used according their duration and types. 4.3 Horizontal Analysis: Horizontal analysis is the comparison of historical financial information over a series of studying periods, or of the ratios derived from this financial information. The intent is to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reason for the difference. The analysis is most commonly a simple grouping of information that is sorted by period, but the numbers in each succeeding period can also be expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. 20

33 4.3.1 Horizontal Analysis of the Income Statement: Horizontal analysis of the income statement is usually in a two-year format, such as the one shown below, with a variance also shown that states the difference between the two years for each line item. An alternative format is to simply add as many years as will fit on the page, without showing a variance, so that you can see general changes by account over multiple years Variance Sales Tk.1,000,000 Tk.1,500,000 Tk.500,000 Cost of goods sold 400, ,000 (200,000) Gross margin 600, , ,000 Salaries and wages 250, ,000 (125,000) Office rent 50,000 80,000 (30,000) Supplies 10,000 20,000 (10,000) Utilities 20,000 30,000 (10,000) Other expenses 90, ,000 (20,000) Total expenses 420, ,000 (195,000) Net profit Tk.180,000 Tk.285,000 Tk.105, Horizontal Analysis of the Balance Sheet: Horizontal analysis of the balance sheet is also usually in a two-year format, such as the one shown below, with a variance showing the difference between the two years for each line item. An alternative format is to add as many years as will fit on the page, without showing a variance, so that you can see general changes by account over multiple years. A less-used format is to include a vertical analysis of each year in the study, so that each year shows each line item as a percentage of the total assets in that year. 21

34 Variance Cash Tk.100,000 Tk.80,000 Tk.(20,000) Accounts receivable 350, , ,000 Inventory 150, , ,000 Total current assets 600, , ,000 Fixed assets 400, , ,000 Total assets Tk.1,000,000 Tk.1,680,000 Tk.680,000 Accounts payable Tk.180,000 Tk.300,000 Tk.120,000 Accrued liabilities 70, ,000 50,000 Total current liabilities 250, , ,000 Notes payable 300, , ,000 Total liabilities 550, , ,000 Capital stock 200, ,000 0 Retained earnings 250, , ,000 Total equity 450, , ,000 Total liabilities and equity Tk.1,000,000 Tk.1,680,000 Tk.680, Vertical Analysis: Vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item. Typically, this means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets. The most common use of vertical analysis is within a financial statement for a single time period, so that one can see the relative proportions of account balances. Vertical analysis is also useful for timeline analysis, to see relative changes in accounts over time, such as on a comparative basis over a five-year period. For example, if the cost of goods sold has a history of being 40% of sales in each of the past four years, then a new percentage of 48% would be a cause for alarm Vertical Analysis of the Income Statement: The most common use of vertical analysis in an income statement is to show the various expense line items as a percentage of sales, though it can also be used to show the percentage of different revenue line items that make up total sales. An example of vertical analysis for an income statement is shown in the far right column of the following condensed income statement: 22

35 Tk. Totals Percent Sales Tk.1,000, % Cost of goods sold 400,000 40% Gross margin 600,000 60% Salaries and wages 250,000 25% Office rent 50,000 5% Supplies 10,000 1% Utilities 20,000 2% Other expenses 90,000 9% Total expenses 420,000 42% Net profit 180,000 18% Vertical Analysis of the Balance Sheet: The central issue when creating a vertical analysis of a balance sheet is what to use as the denominator in the percentage calculation. The usual denominator is the asset total, but one can also use the total of all liabilities when calculating all liability line item percentages, and the total of all equity accounts when calculating all equity line item percentages. An example of vertical analysis for a balance sheet is shown in the far right column of the following condensed balance sheet. The information provided by this balance sheet format is useful for noting changes in a company's investment in working capital and fixed assets over time, which may indicate an altered business model that requires a different amount of ongoing funding. Tk. Totals Percent Cash Tk.100,000 10% Accounts receivable 350,000 35% Inventory 150,000 15% Total current assets 600,000 60% Fixed assets 400,000 40% Total assets Tk.1,000, % Accounts payable Tk.180,000 18% Accrued liabilities 70,000 7% Total current liabilities 250,000 25% Notes payable 300,000 30% Total liabilities 550,000 55% 23

36 Capital stock 200,000 20% Retained earnings 250,000 25% Total equity 450,000 45% Total liabilities and equity Tk.1,000, % 4.5 Common Size Analysis: First Security Islami Bank Limited Common-Size Balance Sheet Analysis Common Size Asset Title Change 2012 Change 2013 Change 2014 Change Current Assets Cash Balance with other bank and financial institution. Money at call and short notice investment. Loans and Advances 7.82%.59% 11.20% 77.63% 7.24% 1.54% 14.61% 73.75% % + 95% % % 5.59% 1.04% 12.55% 76.18% % - 50% % % 5.96% 5.52% 21.15% 66.64% % % % % 6.51% 5.13% 21.24% 60.34% % % % % Fixed Assets Other Assets 1.22% 1.53% 1.56% 2.06% % % 1.90% 2.74% + 0.3% % 2.33% 1.38% % % 2.87% 3.67% % % Common Size Asset CA OT SO L/A FA OA

37 First Security Islami Bank Limited Common-Size Balance Sheet Analysis Common Size Liabilities and Capital Title Change 2012 Change 2013 Change 2014 Change Liabilities Borrowing from other Deposit and other A/C Other Liabilities 4.43% 88.41% 7.16% 2.97% 89.80% 7.23% % % % 1.08% 92.12% 6.09% % % % 5.59% 88.03% 6.37% % % % 5.89% 86.56% 7.55% % % % Common Size Liabilities B/O D/AC O/L First Security Islami Bank Limited Common-Size Balance Sheet Analysis Common Size Share Holder Equity Title Share Holder equity Change 2012 Change 2013 Change 2014 Change 6.20% 6.49% + 29% 8.25% %` 8.29% % 8.56% % Share Holder Equity SHE 25

38 4.6 Ratio and Trend Analysis: Current ratio: The current ratio, one of the most commonly cited financial ratios, measures the firm s ability to meet its short term obligations. The higher the current ratio, the better the liquidity position of the firm. It is expressed as: Current Ratio=Current Asset/Current Liabilities Year Current Ratio Graphical Presentation: CURRENT RATIO CR Figure 4.1: Current Ratio Interpretation: The graph shows an upward trend in FSIBL s current ratio. This indicates that FSIBL s has increased its liquidity position and thereby it has reduced the change of being technically insolvent. 26

39 4.6.2 Net Working capital: Net working capital, although not actually a ratio is a common measure of a firm s overall Liquidity a measure of liquidity ratio calculated by: Net Working capital=current Asset-Current Liabilities Year Net Working Capital (Tk) Tk Tk T.k T.k Tk Graphical Presentation: NET WORKING CAPITAL NWC Figure 4.2: Net Working Capital Interpretation: Net working capital measures the liquidity position of the firm. In 2010 the net working capital was Tk million which was gradually increased to Tk million in The graph shows that increase trend of FSIBLs liquidity position this indicates that FSIBL has increased its ability to pay short term obligation out of its currents assets. 27