Chapter 1

Financial Performance Analysis

Financial position analysis involves a comparison on of a firm’s performance with that of other
firms in the same line of business, which usually is identified by the firm’s industry.
Ratio analysis is used to find out how the company is performing financially over the period of
time. The analysis also uncovers how the company is performing against the stated competitor in
various dimensions such as liquidity, vulnerability to bankruptcy (Risk), financial efficiency, and
profitability. The reasons for the changes in performance over the period of time are also
explained as different factors of the ratios change.
The main objective of this portion is to analyze the financial performance of a Bank in the recent
two years (2018-2019) by using ratio analysis. We have chosen Prime Bank Limited in this
regard. We have shown comparison of ratios from 2018 to 2019 in order to show the
comparative performance of our intended Prime Bank Ltd.

Comparing Bank Performance

1.1 PROFITABILITY RATIO:

Profitability ratios are a class of financial metrics that are used to assess a business's ability to
generate earnings relative to its associated expenses. For most of these ratios, having a higher
value relative to a competitor's ratio or relative to the same ratio from a previous period indicates
the company is doing well.

1.1.1) Return on Equity:

The ROE ratio is an important measure of a company's earnings performance. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested. It illustrates how effective the company is at turning the
cash put into the business into greater gains and growth for the company and investors. The
higher the return on equity, the more efficient the company's operations are making use of those
funds.
Return on Equity = Net Income/Equity

Prime Bank 2018 2019 Average

ROE 14.6% 7.4% 11%

Table 1.1.1 Return on Equity of Prime Bank

(Source of data: lankabangla Finance portal)

2019
2018.8
2018.6
2018.4
2018.2
2018
2017.8
2017.6
2017.4
2018 2019

Fig 1.1.1 ROE of Prime Bank

Interpretation:
In 2018 Return on Equity of Prime Bank Ltd. was 14.6% and it decreases in 2019 to 7.4%. This
may be the profitability failure due to a domestic turndown. This might suggest that the company
was not efficiently using the money from shareholders to generate profits and grow the company.

1.1.2) Return on Asset:

It is known as a profitability or productivity ratio, because it provides information about the
management's performance in using the assets of the business to generate income. ROA can be
used as a valuable tool to measure progress against predetermined internal goals, a certain
competitor, or the overall industry. ROA is also used by bankers, investors, and business analysts
to assess a company's use of resources and financial strength.

Return on Asset =Net Income / Total Asset

Prime Bank 2018 2019 Average

ROA 1% 0.62% 0.81%

Table 1.1.2 Return on Asset of Prime Bank

(Source of data: lankabangla Finance portal)

1%
1%
1%
1%
1%
1%
0%
0%
0%
0%
0%
2018 2019

Fig 1.1.2 ROA of Prime Bank

Interpretation:

In 2018 ROA of Prime Bank Ltd. was 1%. After that it decreases in 2019 and turns into 0.62%.
It has lessened in 2019 due to decrease in Net Income in that year. At the same time total asset
has increased in 2019. The decrease in ROA in 2019 might suggest that the company was not
effectively managing its assets to produce greater amounts of net income.
1.1.3) Net Interest Margin:
This ratio is a performance metric that examines how successful a firm's investment decisions are
compared to its debt situations. A negative value denotes that the firm did not make an optimal
decision, because interest expenses were greater than the amount of returns generated by
investments.

Net Interest Margin = (Interest Income−Interest Expense)/Total Asset

Prime Bank 2018 2019 Average

Net Interest Margin 4.1% 2.57% 3.34%

Table 1.1.3 Net Interest Margin of Prime Bank

(Source of data: lankabangla Finance portal)

4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2018 2019

Fig 1.1.3 NIM of Prime Bank

Interpretation:
Net interest margin is typically used for a bank or investment firm that invests depositors'
money, allowing for an interest margin between what is paid to the bank’s client and what is
made from the borrower of the funds. A positive net interest margin indicates that an entity has
invested its funds efficiently while a negative return implies that the bank or investment firm has
not invested efficiently. In a negative net interest margin scenario, the company would have been
better served by applying the investment funds toward outstanding debt or utilizing the funds for
more profitable revenue streams margin. Net Interest Margin of Prime Bank Ltd. is positive but
it is decreasing in 2019. So it can be said that Prime Bank Ltd. is not utilizing its find efficiently
rather it could make more profit.

1.1.4 Profit Margin:

Net profit margin is used to measure how much of each taka earned by the company is translated
into profits. A low profit margin indicates a low margin of safety as well as higher risk that a
decline in sales will erase profits and result in a net loss.

Profit Margin=Net profit/Operating Profit

Prime Bank 2018 2019 Average

Profit Margin 4.1% 2.57% 3.34%
Table 1.1.4 Profit Margin Ratio of Prime Bank

(Source of data: lankabangla Finance portal)

4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2018 2019

Fig 1.1.4 Profit margin of Prime Bank

Interpretation:
Prime Bank’s net profit margin of 2018 was 4.1% and in 2019 it lessened to 2.57%. The lower
the margin, the less effective the company is in converting revenue into actual profit. Prime
Bank’s performance has declined as indicated by the downward trend, which is mainly to the
company’s lack of control in expenses.

1.1.5 Asset Utilization Ratio:

Asset Utilization measures how efficient a company is to convert its asset into revenue. Low
asset utilization ratio means firm is unable to make money from its asset.

Asset Utilization = Revenue / Total Asset

Prime Bank 2018 2019 Average
Asset Utilization 0.74% 0.62% 0.68%
Table 1.1.5 Asset Utilization Ratio of Prime Bank

0.74%
0.72%
0.70%
0.68%
0.66%
0.64%
0.62%
0.60%
0.58%
0.56%
2018 2019

Fig 1.1.5 Asset Utilization Ratio of Prime Bank

Interpretation:
Prime Bank’s asset utilization ratio in 2018 was 0.74% which has lessened in 2019 to 0.62%
which means firm is moderately generating revenue by converting its assets.

1.2 Risk RATIO:

1.2.1 Equity Multiplier: (capital)
The equity multiplier is calculated by dividing a company's total asset value by total equity, and
it measures financial leverage. Companies finance their operations with equity or debt, so a high
equity multiplier indicates that a larger portion of asset financing is attributed to shareholders.
The equity multiplier is a variation of the debt ratio, and its definition of debt financing includes
all liabilities.
Equity Multiplier = Total Asset/Total equity

Prime Bank 2018 2019 Average

Equity Multiplier 11.23 12.04 11.64
Table 1.2.1 Equity Multiplier Ratio of Prime Bank

12.2

12

11.8

11.6

11.4

11.2

11

10.8
2018 2019

Fig 1.2.1 Equity Multiplier of Prime Bank

Interpretation:
From the figure 1.2.1 we can see that, the equity multiplier ratio of Prime Bank Ltd. has
increased from11.23 to 12.04 from 2018 to 2019 which is a good sign and indicates that the firm
is less dependent on debt financing and doesn’t have high debt servicing cost. When a firm’s
assets are primarily funded by debt, the firm is considered to be highly leveraged and more risky
for investors and creditors. So, therefore, the equity multiplier of Prime Bank Ltd. is considered
better than the previous years.

1.2.2 Loan Ratio: (Asset quality)

The loans to assets ratio measure the total loans outstanding as a percentage of total assets. The
higher this ratio indicates a bank is loaned up and its liquidity is low. The higher the ratio, the
more risky a bank may be to higher defaults. It is a common bank's liquidity by dividing the
banks total loans by its total assets.
Loan Ratio=Total Loan/Total Asset

Prime Bank 2018 2019 Average

Loan Ratio 11.55% 11.33% 11.44%
Table 1.2.2 Loan Ratio of Prime Bank

11.55%

11.50%

11.45%

11.40%

11.35%

11.30%

11.25%

11.20%
2018 2019

Fig 1.2.2 Loan Ratio of Prime Bank

Interpretation:
Loan Ratio of Prime Bank Ltd. decreased to 11.33% in 2019. The ratio in 2018 was 11.55%.
The higher the ratio, the higher the financial risk. So, we can say the firm has comparatively low
financial risk from the previous years. The total debt to total assets is a broad ratio that includes
long-term and short-term debt (borrowings maturing within one year), as well as all assets –
tangible and intangible. Investors use the ratio to not only evaluate whether the company has
enough funds to meet its current debt obligations, but to also assess whether the company can
pay a return on their investment. Creditors use the ratio to see how much debt the company
already has and if the company has the ability to repay its debt, which will determine whether
additional loans will be extended to the firm.

1.3 Operating Efficiency: (% of Total Asset)

A lower OER (Operating Efficiency Ratio) typically means the property is being managed
efficiently and is more profitable for investors, and that less of the property’s income is covering
operational and maintenance costs. If the business is scalable, the owner may increase the rent on
each unit without greatly increasing operating expenses.

1.3.1 Interest Ratio:

Interest expense is a non-operating expense shown on the income statement. It represents interest
payable on any borrowings – bonds, loans, convertible debt or lines of credit. It is essentially
calculated as the interest rate times the outstanding principal amount of the debt.

Interest Ratio (%) = Interest expense / Total Asset

Prime Bank 2018 2019 Average

Interest Ratio 3.59% 3.62% 3.61%

Table 1.3.1 Interest Ratio of Prime Bank

 3.62%
3.62%
3.61%
3.61%
3.60%
3.60%
3.59%
3.59%
3.58%
3.58%
2018 2019

Fig 1.3.1 Interest Ratio of Prime Bank

Interpretation:
After observing we can say that the Interest expense of Prime Bank Ltd. increased from year
2018 to 2019, which is not a good sign for the company. Higher expense always means lower
return.

1.3.2 Wages and Salary Ratio:

This ratio measures the portion of total asset the firm pays as wages and salary. Actually it
depicts the proportional cost of man power.

Wages and Salary Ratio (%) = Total wages & salary paid/ Total asset

Prime Bank 2018 2019 Average

Wages and Salary Ratio 1.41% 1.25% 1.33%

Table 1.3.2 Wages and Salary Ratio of Prime Bank

 1.45%

1.40%

1.35%

1.30%

1.25%

1.20%

1.15%
2018 2019

Fig 1.3.2 Wages and Salary Ratio of Prime Bank

Interpretation:
Wages and Salary expenses have lessened from 2018 to 2019 which is 1.41% to 1.25%. The
ratio says the bank is trying to lessen its operating expenses to increases efficiency.

1.3.3 Other Expense Ratio:

For the Fiscal years for 2018 to 2019 the other Expenses of the bank has decreased.

Other Expense Ratio= Other Expense/Total Asset

Prime Bank 2018 2019 Average

Other Expense Ratio 0.41% 0.40% 0.41%

Table 1.3.3 Other Expense Ratio of Prime Bank

 0.41%
0.41%
0.41%
0.40%
0.40%
0.40%
0.40%
0.40%
0.39%
2018 2019

Fig 1.3.3 Other Expense Ratio of Prime Bank

Interpretation:
Other expenses ratio of Prime Bank is less than the previous year which depicts operating
efficiency of the Bank.