KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT Financial Trend Analysis Of Everest Bank Ltd (EBL) (From FY 2009/10-2013/2014) Submitted By NikimaShahi (13756) ShreejanaPrajapati (13753) SajneeShrestha (13768) SophiyaDhungana (13716) Submitted To Mr. Mohan Joshi (Faculty of Commercial Bank Management) 29 th December, 2016 1
Table of contents Page Number Introduction 3 Asset Quality and Earnings Analysis 5 Liquidity Analysis 11 Capital Analysis 16 Conclusion26 Introduction 2
Everest Bank Limited (EBL) is a professionalized and efficient banking institution founded in 1994 that Caters services to more than 7.5 lakhs customers.the Bank has been one of the leading banks of the country and has been catering its services to various segments of the society. With clients from all walks of life, the Bank has helped develop the nation corporately, agriculturally & industrially. Everest Bank Limited (EBL) provides customer-friendly services through its wide Network connected through ABBS system, which enables customers for operational transactions from any branches. The bank has 61 Branches, 84 ATM Counters, 5 extension counter & 22 Revenue Collection Counters (as on 14 th January 2016) across the country making it a very efficient and accessible bank for its customers, anytime, anywhere. Vision statement The vision statement of this bank is To be a Leading Commercial Bank with Pan Nepal presence and become a household name, providing wide range of financial products and services under one roof. Mission Statement The mission statement Growth through Banking for ALL Deposit accounts available at the bank are as follows: 1. Current Account 2. Saving account 3. Fixed deposit account 4. Recurring Deposit Account 5. FCY deposit account 6. Retirement plan account Loansavailable at the bank are as follows: 3
1. Home Loan 2. Hire Purchase Loan 3. Financing Credit Services 4. Corporate Lending Retail 5. Consumer Lending Card 6. Debit Card 7. Credit Card 8. Prepaid Card, etc. Likewise this bank offers remittance services like remittance payout location, inward and outward remittance, and EBL representative abroad. In order to provide more enhanced and efficient services, Everest bank has introduced e banking services as well. Asset Quality and Earnings Analysis 4
Price/earnings ratio (Market Value per Share / Earnings per Share) The price/earnings (P/E) ratiois calculated by dividing price per share by earnings per share. This shows how much investors are willing to pay per rupee of reported profits. In order words, the price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. Fiscal year 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Market 1630 1094 1033 1591 2631 value per share EPS 100.16 83.18 88.55 91.88 86.04 P/E ratio 16.27 13.15 11.67 17.32 30.58 35 P/E ratio 30 30.58 25 20 15 10 16.27 13.15 11.67 17.32 P/E ratio 5 0 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 In the above chart, it can be seen that the P/E ratio of Everest bank has decreased from FY 2009/2010 to FY 2011/2012. The decrease in the ratio is due to the undervaluation of the stock price. In FY 2009/2010, market value per share was Rs. 1630 while in 2012/2013, the price dropped down to rs. 1033. Thus, declining P/E Ratio. However, in the FY 2012/2013 there was 5
slight increase in the ratio and in the year 2013/2014, we can see a steep increase in the ratio. The increment is due to the higher valuation of the stock which was Rs. 2631 in 2013/2014. Net Interest Income Margin (NIM) Net interest margin (NIM) is a measure of the difference between the interestincome generated by banks or other financial institutions and the amount of interestpaid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. Numerically: NIM= Interest income Interest expenses Total assets or total earning assets There are several reasons as to why changes happens in NII margin i.e. increase and decrease in the supply and demand of loanable funds and in deposits interests. (In this calculation, we have used investments, loans, advances and bills purchase to find out the value of total earning assets) Fiscal Year 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Interest 3102.45 4331.03 4960.00 4936.92 5177.55 Income Interest 1572.79 2535.88 2873.33 2179.18 2258.74 Expense Total earning 54076.21 52657.05 43774.6 38801.62 32564.67 assets NIM 2.83% 3.41% 4.77% 7.11% 8.96% 6
10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% NIM 8.96% 7.11% 4.77% 3.41% 2.83% 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 NIM From the above chart, it can be seen that NIM of Everest Bank Ltd. is showing an increasing trend from 2010 to 2014. NII reached its highest percentage in the year 2013/2014 with a steep rise from the previous year. In the first three years, both interest income and expense is increasing consecutively. However, interest income increased in last two years reaching its highest point in fifth year. Likewise, interest expense also shows increasing trend in the last two years. Earnings per share (EPS) EPS is a profitability ratio which provides a direct measure of the returns flowing to the bank s principal owners-its stockholders measured relative to the number of shares sold to the public. Earnings per share is also a calculation that shows how profitable a company is on a shareholder basis. Numerically, EPS= Net income after taxes Common equity shares outstanding 7
We have the following data: Fiscal Year 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Net profit 831.77 931.30 1090.56 1471.12 1549.70 Number of 8.3044 11.1962 12.3158 16.0113 18.0114 shares O/S EPS 100.16 83.18 88.55 91.88 86.04 EPS 120 100 80 100.16 83.18 88.55 91.88 86.04 60 EPS 40 20 0 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 The trend analysis in the above figure shows that EPS of Everest bank is highest in 2009/2010. The value of EPS is fluctuating each year. In 2010/2011, EPS shows a drastic declining trend while in 2011/2012 and 2012/2013, EPS is gradually increasing. In the final year, EPS once again drops to a value of Rs. 86.04/share. In the first year, EPS is the highest which is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders. Here, the stock price of the company also rises. In contrary, there is a steep decline in 2010/2011 implying that the company has fewer profits compared to last year to distribute to its shareholders causing the stock price to fall down. Thus, declining EPS is a matter of concern for the common stock investors as the bank is now less profitable. 8
Return on Asset (ROA) Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Numerically, ROA = Net Income/ Total Assets Fiscal Year 2009/10 2010/11 2011/12 2012/13 2013/14 Net Income 831.77 931.30 1090.56 1471.12 1549.70 Total Assets 41382.76 46236.21 55813.13 65741.15 70445.08 ROA 2.01% 2.01% 1.95% 2.24% 2.20 % By analyzing above chart, we can see that ROA of Everest Bank, in overall, has increased from FY 2009/10 to FY 2013/14 by 0.09%. There has been a major decrease in ROA in the FY 2011/12 9
where it has been decreased by 0.03% from the previous year. The decrease is due to extensive increase in expense ratio. It suggests that the bank s assets are not working efficiently. In FY 2012/13, it again increased to 2.24% which means the idle assets of the banks are being utilized properly. It again showed a slight decrease in FY 2013/14. Liquidity Analysis 10
CRR Ratio Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country. Fiscal year 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Balance with NRB 5625113849 4706320590 8159753523 8205090428 9446921621 deposits 36932310008 41127914339 50006100272 57720464632 62108135754 CRR (13%) 15.23% 11.44% 16.32% 14.21% 15.21% CRR (13%) 18.00% 16.00% 14.00% 15.23% 16.32% 14.21% 15.21% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 11.44% 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 CRR (13%) In Fiscal year 2009/2010, the CRR ratio was 15.23% which decreased to 11.44%.In year 2010/2011, because deposits increased but balance with NRB reduced. In the third year again the ratio rose by around 4% and in last two years ratio is more or less similar. 11
Liquid assets to deposit ratio The ratio of the value of liquid assets (easily converted to cash) to short-term funding plus total deposits is liquid assets to deposit ratio. Liquid assets include cash and due from banks, trading securities and at fair value through income, loans and advances to banks, reverse repos and cash collaterals. Liquid asset to deposit ratio 3.6% 4.093% 4.92% 4.957% 6.58% Deposit 3,6932310,008 41127914339 50006100272 62108135754 57720464632 Cash balance 1,091,500,407 1,048,998,721 1,700,991,770 1,723,208,985 2,050,029,487 Money at call 0 0 0 0 0 Treasury bills 144,197,378 266,872,539 257,502,294 68,451,858 72,456,398 Current account with other banks 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1,102,200,747 367,543,641 502,561,014 1,287,494,550 1,675,831,759 Liquid asset to deposit ratio 3.60% 4.09% 4.92% 4.96% 6.58% Liquid asset to deposit ratio This data shows that liquid asset to deposit ratio is in increasing trend. While comparing, the liquid assets to deposit is high in FY 2013/2014 which implies that the bank s liquidity position is somewhat stable. 12
Loan to Deposit Ratio The loan-to-deposit ratio (LTD) is a commonly used statistic for assessing a bank's liquidity by dividing the bank's total loans by its total deposits. This number is expressed as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements, and conversely, if the ratio is too low, the bank may not be earning as much as it could be. Fiscal year 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Loan to deposit ratio 76.23% 76.98% 73.22% 76.57% 78.009% Total loan (assets) 2815.64 3166.68 3661.68 4419.78 4845.03 Total deposit 3693.23 4112.79 5000.61 5772.05 6210.81 (liabilities) Loan to deposit ratio 79.00% 78.00% 78.01% 77.00% 76.00% 76.23% 76.98% 76.57% 75.00% 74.00% 73.00% 73.22% Loan to deposit ratio 72.00% 71.00% 70.00% The trend above shows that the loan to deposit ratio has drasticallyrisen in fiscal year 2013/2014 while it drastically declined in FY 2011/2012. A bank cannot lend more than 80% of its deposit and this bank is providing a profitable amount in year 2013/2014. 13
Loan Loss Provision Loan loss provision is an expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover a number of factors associated with potential loan losses including bad loans, customer defaults and renegotiated terms of a loan that incur lower than previously estimated payments. It is a non- cash expense for banks to account for future losses on loan defaults. Banksassumethat a certainpercentage of loanswilldefault or becomeslowpaying.banksenter a percentage as an expensewhencalculatingtheir pre-tax incomes.thisguarantees a bank'ssolvencyand capitalization if andwhenthedefaultsoccur. Fiscal Year 2009/10 2010/11 2011/12 2012/13 2013/14 Loan Loss 77.01 98.30 252.05 98.81 155.97 Provision Throughout out years, the bank has increased its loan loss provision except for the FY 2010/11. For the first three years, it has been increased drastically which means the bank has assumed a greater riskiness of the loan it has been providing. In the FY of 2012/13, since bank made a small number of risky loans, the amount in loan loss provision reduced. 14
Capital Analysis Capital Adequacy Ratio 15
The capital adequacy ratio (CAR) is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. Also known as capital-to-risk weighted assets ratio (CRAR), it is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Formula: CAR = (Tier one capital+ Tier Two Capital) / Risk weighted Assets Fiscal Year 2009/10 (%) 2010/11(%) 2011/12(%) 2012/13(%) 2013/14(%) Core Capital 8.39 8.46 9.61 9.31 9.35 Supplementary capital Total Capital Fund 2.38 1.96 1.41 2.28 1.80 10.77 10.42 11.02 11.59 11.15 16
An international standard which recommends minimum capital adequacy ratios has been developed to ensure banks can absorb a reasonable level of losses before becoming insolvent. In Nepal, the required CAR for banks to maintain is 11%. The CAR of 11% has been maintained by the bank after the third year. Slight fluctuations can be seen but the ratio has been maintained. The TIER I capital requirement of 6% has been maintained throughout the time period of 5 years. Leverage ratio A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a bank to meet financial obligations. The leverage ratio measures the leverage of the bank s TIER I capital. What is the capacity ofthe bank to take the blow in times of financial crisis, is what is measured by the Leverage ratio. Numerically, Leverage Ratio = Core Capital/ Total Assets Fiscal Year 2009/10 2010/11 2011/12 2012/13 2013/14 Core Capital 1273.61 1391.57 1761.13 1921.24 2137.39 Total Assets 41382.76 46236.21 55813.13 65741.15 70445.08 Leverage Ratio 3.08% 3.01% 3.16% 2.92% 3.03% 17
3.20% 3.15% Leverage Ratio 3.16% 3.10% 3.05% 3.00% 3.08% 3.01% 3.03% Leverage Ratio 2.95% 2.90% 2.92% 2.85% 2.80% 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 The leverage ratio of the bank is at an average of 3% for the first three years, but has fallen in the fourth year, while it again increased in the final year. The leverage ratio decreased as the total assets of the bank increased in a greater proportion as compared to the increase in core capital. It means that the bank has less capital reserve. But the ratio has been increased to 3.03% in the final year which means banks have now more capital reserves and can more easily survive a financial crisis. Return on Equity (ROE) Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Numerically, ROE = Net Income/ Total Equity 18
Fiscal Year 2009/10 2010/11 2011/12 2012/13 2013/14 Net Income 831.77 931.30 1090.56 1471.12 1549.70 Total Equity 2759.14 3113.55 4177.30 4827.84 5457.15 ROE 30.15% 29.91% 26.11% 30.47% 28.40% The ratio is affected by the net income and the level of capitalization of Everest Bank. It measures the increased net worth and ability to pay a dividend and particularly, the return on shareholders equity. From the above trend analysis, we can see that ROE of Everest Bank, in overall, has shown a slightly decreasing trend. In the fiscal year 2009/10, the ROE was 30.15% which decreased to 29.91% in the next year. Similarly, the overall decrease from the FY 2009/10 to FY 2013/14 is by 0.06%. So, there has been only a slight decrease. The decrease can be credited to the continuous increase in the total equity of the bank as compared to the net income. Earning Base 19
Earning base is affected by the amount of earning assets of the bank. It shows us the percentage of the assets in the bank which generates income for it. Fiscal Year 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Earning assets 54076.21 52657.05 43774.6 38801.62 32564.67 Total assets 41382.76 46236.21 55813.13 65741.15 70445.08 Earning base 130.67% 113.88% 78.43% 59.02% 46.22% 140.00% 120.00% 100.00% 130.67% Earning base 113.88% 80.00% 78.43% Earning base 60.00% 40.00% 20.00% 59.02% 46.22% 0.00% 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 This shows that in the total assets of the bank more than 80% is earning assets which are a good point for bank as they can generate income from those assets. Though the earning assets are above 80%, it has decreased in FY 2014/15 as banks hesitate to invest because they are getting opportunity to invest only in low return investments. The decreased investment in FY 2014//15 has decreased the earning base of the bank. Interest Income/Earning Assets 20
This ratio is affected by the changes in interest income and earning assets. It measures how much income is generated from the earning assets of the bank. Fiscal Year 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Interest Income Total earning assets Interest income/earning Assets 3102.45 4331.03 4960.00 4936.92 5177.55 54076.21 52657.05 43774.6 38801.62 32564.67 5.74% 8.22% 11.33% 12.72% 15.90% Interest income/earning Assets 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 5.74% 8.22% 11.33% 12.72% 15.90% Interest income/earning Assets The trend analysis of interest income divided by earning assets shows acontinuous increase in percentage from 2009/2010 to 2013/2014. The ratio reached highest in 2013/2014. The reason for its continuous increasecan be attributed to the availability of sufficient reinvestment opportunities. The bank has had surplus cash in the last five years causing the bank to use funds in high return investments. Spread 21
The spreads shows difference between the interest income and interest expenses. Numerically, Spread= (Interest income/earning assets)-(interest expenses/ Interest bearing liabilities) Fiscal Year 2009/10 2010/11 2011/12 2012/13 2013/14 Interest income/ea 10.30% 8.34% 10.25% 7.29% 6.60% Interest 5.54% 3.95% 5.8% 3.2% 2.79% expenses/interest bearing liabilities Spread 4.76% 4.39% 4.45% 4.09% 3.79% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Spread 4.76% 4.39% 4.45% 4.09% 3.79% 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Spread NRB has a regulation that the interest rate shouldn t exceed 5% but in case of Everest Bank, it has always kept the spread below 5%. The interest spread has been decreasing in five consecutive years based on our analysis. It shows that the bank has the possibility to increase the spread but it hasn t done so. If it could increase the spread it can gain more profit from the interest income. The decrease in the investment have decreased and also the borrowing (may be interbank borrowing) 22
has drastically increased in FY 2013/14 which has caused in the fluctuation of interest spread respectively affecting the interest income and interest expenses. Interest expenses/ Interest Bearing Liabilities This ratio highly depends on the interest expenses and interest bearing liabilities. Fiscal Year 2009/10 2010/11 2011/12 2012/13 2013/14 Interest 1572790306 2535875552 2873334682 2179182368 2258736810 expenses Interest 235800646 424059457 8116764646 681181990 740569446 bearing liabilities Interest expenses/ interest bearing liabilities 6.67% 5.98% 3.54% 3.2% 3.05% Interest expenses/ interest bearing liabilities 8.00% 7.00% 6.00% 5.00% 6.67% 5.98% 4.00% 3.00% 2.00% 1.00% 3.54% 3.20% 3.05% Interest expenses/ interest bearing liabilities 0.00% 23
The above figure shows an increasing trend in interest expenses in the FY 2009/10 to 2011/12 and then a decreasing trend. The interest bearing liabilities ismaximum on FY 2011/12. The percentage in interest expenses/ interest bearing liabilities has decreased from 6.67% in FY 2010/11 to 3.05% in 2014/15. The main reason behind this is the decrease in the interest expenses of the Everest Bank. Burden/TA (total assets) The ratio shows the % of net non-interest income in the total assets. Numerically:Burden/TA= (Noninterest expenses- Noninterest income)/ Total assets Fiscal Year 2009/10 2010/11 2011/12 2012/13 2013/14 Total Assets 41,382,760,71 1 46,236,212,26 2 55,813,129,05 7 65,741,150,457 70,445,082,8 45 Net interest 578875240 676242621 819342952 971297187 1056160460 expenses Burden/TA 1.40% 1.46% 1.46% 1.48% 1.50% 24
1.52% Burden/TA 1.50% 1.50% 1.48% 1.48% 1.46% 1.46% 1.46% 1.44% 1.42% Burden/TA 1.40% 1.40% 1.38% 1.36% 1.34% 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 The above chart shows an increasing trend in Everest Bank s Burden/TA ratio. The ratio is lowest in FY 2009/2010 while it is highest in the FY 2013/2014. From 2010/2011 to 2011/12, the trend is constant. 25
Conclusion From the above trend analysis of Everest Bank, we can conclude that the bank as overall is performing good in the various financial dimensions. The CAMEL rating of the bank shows a satisfactory performance. Starting with the capital analysis, the bank has been maintaining a CAR ratio of 11% since FY 2011/12. The ability to maintain this minimum requirement suggests that the bank is not exposed to risks and is well managed for it. The increasing leverage ratio indicates that the bank has been able to meet its financial obligations. The bank has also been performing quiet good in terms of ROE, Earnings Base, interest income/earning assets and interest expense/interest bearing liabilities. But the decrease in spread shows low interest income of the bank. Similarly, the bank s P/E ratio has also been increasing over the years indicating a good market performance of the company s shares. The growing Net Interest Margin also is a sign of good performance of the bank. The Return on Assets has also been increasing over the years. So, the bank seems to be doing good in most of the Assets Quality and Earnings ratio. As the CRR of the bank shows an increasing trend, it means that the bank has less money as the reserve balance it keeps has increased. However, the growing liquid asset to deposit ratio indicates that a good liquidity position of the bank. Moreover, Everest Bank has been maintaining higher loan loss provision guaranteeing the bank s solvency at times of default. Thus, all in all, the bank is performing good as per the CAMELS rating. 26