Which Bank does perform better between UCB and EBL?

Nuzhat Nahrin

Maisha Nihal Ahmed

Sadia Rahman Chowdhury

Indronil Roy Chowdhury

Army Institute of Business Administration, Sylhet

Abstract
 Overview of Banks

United Commercial Bank Ltd is one of the largest private sector commercial bank in Bangladesh

which is listed in Dhaka Stock Exchange and Chittagong Stock Exchange. UCB started its

operation in mid-1983 and there are total 170 branches of United Commercial Bank Limited

situated in 42 districts in Bangladesh. The Bank, aiming to play a leading role in the economic

activities of the country, is firmly engaged in the development of trade, commerce and industry

thorough a creative credit policy.

Eastern Bank Limited is a private commercial bank headquartered in Dhaka, Bangladesh. It was

established on August 8, 1992, as a public limited company with limited liability under the Bank

Companies Act of 1991. Their shares are listed in the Dhaka Stock Exchange and the Chittagong

Stock Exchange. The bank provides products and services in retail banking, corporate finance,

asset management, equity brokerage and security. It has 85 branches and 214 ATMs in

Bangladesh and employs around 3000 employees.

Ratio Analysis

Liquidity ratio

1) Current ratio = current asset/ current liabilities

Year UCB EBL

2017 2 1.27
2018 2.7 1.28
2019 1.77 1.26
Interpretation: For UCB among three years they had better current ratio position and in 2018
they had highest current ratio compared to the other two years because they had more current
assets than current liabilities to cover their debts. Here the higher current ratio in 2018 indicates
that the bank isn’t efficiently using its cash.

For EBL among three years they had better current ratio position and in 2018 they had highest
current ratio compared to the other two years because they had more current assets than current
liabilities to cover their debts. Here the higher current ratio in 2018 indicates that the bank is
efficiently using its cash.

As in comparison, we noticed that between UCB and EBL both banks had higher current ratio in
2018 but as EBL is fluctuating less among selected years it means that the bank is more
consistent in managing its liabilities.

Financial leverage ratios:

1) Debt to equity = Total debt/ Shareholder’s equity

Year UCB EBL

2017 5.02 4.37
2018 5.13 4.62
2019 5.24 3.66
Interpretation: For UCB we can notice that it’s increasing from 2017 to 2019 which indicates
that bank has more leverage resulting in risky investment for the investors. So the investors may
seem less interested to invest.

For EBL we noticed that at first it increased from 2017 to 2018 because in 2018 they had more
debts against their shareholder’s equity and later it decreased from 2018 to 2019 because they
could control their debts

So in comparison investors will seem likely to invest in EBL as its less risky compared to UCB

2) Debt to total asset = Total debt/ Total asset

Year UCB EBL
2017 36.6% 36.8%
2018 38.1% 37.1%
2019 38.5% 27.6%
Interpretation:

For UCB we can notice that it’s increasing from 2017 to 2019 which indicates that debt is
increasing and asset is decreasing. As asset is decreasing, bank has less capability to provide
loans resulting less income.

For EBL we noticed that at first it increased from 2017 to 2018 because in 2018 they had more
debts against their assets and later it decreased from 2018 to 2019 because they tried to decrease
their debts and increase their assets which will increase their income.

So in comparison investors will seem likely to invest in EBL as they are trying to control their
risk by managing their debts.

3) Debt to capital = Total debt/ (total debt + equity)

Year UCB EBL

2017 0.83 0.81
2018 0.84 0.82
2019 0.84 0.78

Coverage ratio:

1) Interest coverage = EBIT/ Interest expense

Year UCB EBL

2017 0.657826 1.432882
2018 0.461184 1.066923
2019 0.410833 0.972840

Interpretation: For UCB we noticed that all the numbers are less than 1 so it means the bank isn’t
making enough money to pay its interest payments, forget paying back the principle payments on
the debt.
For EBL we noticed that in 2017 and 2018 the coverage measurement is above 1 so it means the
bank is making more than enough money to pay its interest obligations with some extra earnings
left over to make the principle payments. In 2019 bank is almost making enough money to pay
its interest payments.
From these three years scenario it can be said that EBL is managing their expense efficiently
which attracts potential investors to invest.

Market value ratio:

1) Book value per share = Total shareholder’s equity/ Common stock outstanding
Year UCB EBL
2017 25 29.248750
2018 28 31.119609
2019 31 31.494827
Interpretation: For UCB in 2017, 2018 and 2019 share price per share is 23.60, 17.60 and 13.30
respectively. By comparison we noticed that book value is much higher indicating that the stock
is considered undervalued. As investors will not be interested to invest due to higher price it will
negatively impact on bank.
For EBL in 2017, 2018 and 2019 share price per share is 51.10, 36 and 33.20 respectively. By
comparison we noticed that book value is less indicating that the stock is considered slightly
overvalued. As a result investors are more likely to invest in that bank.
In comparison investors are more likely to invest in EBL as their book value per share is lower
than market value per share.

2) Earnings per share = Net profit after tax / Common stock outstanding

Year UCB EBL

2017 2.308924 3.290340
2018 2.247299 4.215147
2019 2.629693 4.915490
Interpretation: For UCB EPS decreased from 2017 to 2018 because in 2018 net profit was less
compared to 2017 so decreasing EPS gives poor indication about the health of the bank and gives
lower return to the shareholders. So this trend can signal investors that the bank is in trouble
which can lead to a decline in the stock price. From 2018 to 2019 EPS increased shows that the
bank is trying to increase their earnings.
For EBL we noticed that EPS is constantly increasing, as we know the higher the EPS the better
it is, so the bank is more profitable and has more profits to distribute to its shareholders.
Investors will pay more for the shares if they think company has higher profit relative to its share
price.
So in comparison investors are more likely to invest in EBL as the investors may expect greater
value by seeing the higher EPS ratio.
3) Price Earnings ratio = Share price per share/ Earnings per share

Year UCB EBL

2017 10.221207 6.92421
2018 7.831621 4.87805
2019 5.057623 6.75415

Interpretation: For UCB P/E ratio is decreasing from 2017 to 2019 which shows that the bank
stock is trading at a lower price relative to earnings and might be undervalued. So, the reason
could be poor financial performance or decreased in earnings.
For EBL from 2017 to 2018 P/E ratio is decreasing shows poor financial performance and from
2018 to 2019 shows investors are willing to pay a higher share price today because of growth
expectations in the future.
So in comparison investors are more likely to invest in EBL because investors expect higher
growth from the bank compared to the overall market.
Efficiency ratios:
1) Tax management efficiency = Net income/ Pre-tax operating income

Year UCB EBL

2017 44.5655% 56.9085%
2018 48.2694% 65.8004%
2019 56.2042% 62.9066%

2) Expense control efficiency = Pre-tax operating income/ Total operating revenue

Year UCB EBL

2017 68.6847% 60.4751%
2018 66.4085% 64.0614%
2019 59.5757% 75.7147%

3) Asset management efficiency = Total operating revenue / Total asset

Year UCB EBL

2017 2.1885% 2.7554%
2018 1.8349% 2.5853%
2019 1.8530% 2.4774%

4) Funds management efficiency = Total asset/ Total equity capital

Year UCB EBL

2017 13.70468755x 11.862926x
2018 13.46975605x 12.429144x
2019 13.62779037x 13.226308x

5) Return on Asset = Net income/ total asset

Year UCB EBL

2017 0.67% 0.94%
2018 0.59% 1.08%
2019 0.62% 1.18%

6) Return on Equity = tax management efficiency*expense control efficiency*asset

management efficiency*funds management efficiency

Year UCB EBL

2017 9.1810% 11.2495%
2018 7.9228% 13.5449%
2019 8.4557% 15.6072%
 Interpretation: For both we used two different methods for calculating ROE. For the first method
we used ROE= ROA*EM. In UCB by calculation we found out that EM hasn’t changed over
three years so we predict that ROA was the reason for the change in percentage in ROE. So, we
can see that from 2017 to 2018 ROE has decreased and ROA also decreased because net income
also declined. From 2018 to 2019 ROE as well as ROA both increased because net income also
increased. But in EBL ROE has increased and we found out that both EM and ROA increased
from 2017 to 2019 which means total asset is increasing in terms of equity and net income is
increasing in respect of total asset. By using the first method we can say that EBL is in best
position in terms of ROE than UCB.
For the second method we used ROE= tax management efficiency*expense control
efficiency*asset management efficiency*funds management efficiency. In UCB ROE decreased
from 2017 to 2018 because of Expense control efficiency and Asset management efficiency. Pre-
tax operating income got decreased that shows that they could not control their expense and
Total operating revenue also decreased means they could not utilize their asset properly. From
2018 to 2019 ROE got increased for the consecutive reasons. That shows that they tried to
control their expense and also utilize their asset. In EBL, ROE increased from 2017 to 2019
because of increased in above four mentioned efficiency. Due to result of increase in net income,
Pre-tax operating income, total operating revenue and Total Asset. By using the second method,
we found out that EBL’s efficiency is in better position compared to UCB.
In Comparison, by using both methods we noticed that EBL is performing much better. So,
investors are more likely to invest in EBL as they will get higher return. For example, in 2019 if
an investor invests 100 taka in EBL, he/she will get 15.61 taka return.
Capital Adequacy Ratio:

CAR = (tire 1 capital + tire 2 capital)/ total risk weighted assets

Year UCB EBL

2017 12.07% 14.09%
2018 12.90% 12.16%
2019 14.68% 14.74%
Interpretation:

Profitability ratios:

1) net interest margin =net interest income/ total asset

Year UCB EBL

2017 0.024625 0.022243
2018 0.022948 0.026295
2019 0.024169 0.024126

2) net non-interest margin =

Year UCB EBL
2017
2018
2019

3) Net bank operating margin = (total operating income – total operating expense)/ total
asset

Year UCB EBL

2017 0.0218857 0.02
2018 0.0183495 0.02
2019 0.0185304 0.02