Fin424: Financial Market

Final Report: Mercantile Bank Limited

Submitted By:
Maliha Tahsin Shafa
Id:19104153
Section:03

Submitted to:
Mr. Salim Afzal Shawon, CFA (BRAC Business School)

Date:
30 April 2022
1.Yield Curve relevant exercise:
Fixed Deposit Rate (Individual and Recognized Fund)

Year 6 Month 1 Year 2 year 3 Year 5 Year

Deposit rate 5.70% 5.70% 5.70% 5.70% 5.70%

Deposit rate
6.00%
5.70% 5.70% 5.70% 5.70% 5.70%
5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
6 Month 1 Year 2 year 3 Year 5 Year

As can be seen, the mercantile bank's deposit rate remained constant throughout the period,
resulting in a flat yield curve. The deposit rate for 6 months, 1 year, and 2 years is 5.70 %
given on the bank's website, but there is no data for more than 2 years, therefore I assumed
the deposit rate for 3 and 5 years is the same as the others. The flat yield curve suggests that
investing in longer-term accounts does not yield a higher return, implying that depositors who
store their money for a longer period of time are not rewarded.

2. Capital Adequacy:

BDT in Crore
Particulars 2021 2020
Core Capital (Tier I) 2,399.18 2,143.12
Supplementary Capital (Tier II) 1,188.73 1,213.50
Total Capital 3,587.92 3,356.62
 BDT in Crore
Particulars 2021 2020
Capital Requirement for Credit Risk 2,206.69 2,142.38
Capital Requirement for Market Risk 71.60 72.18
Capital Requirement for Operational Risk 281.59 255.16
Total risk weighted asset 25,591.44 24,699.19
Core Capital (Tier I) to RWA 9.37% 8.68%
Capital to Risk Weighted Assets Ratio (CRAR) 14.02% 13.59%

The bank is dedicated to maintaining a sufficient capital base in order to comply with Basel
III's risk-based capital adequacy framework. A capital adequacy assessment process is part of
the Bank's capital management structure, which ensures that it can mitigate current and future
risks while achieving its strategic goals. According to the risk-based adequacy standard, all
banks must maintain the following ratios: Tier 1 capital must be at least 6.0 % RWA, and
CRAR must be at least 10% of total RWA. As can be seen, Mercantile Bank's Tier capital
ratio is 9.37 % for 2021 and 8.68 % for 2020, while its CRAR is 14.02 % for 2021 and 13.59
% for 2020, both of which are higher than the regulatory minimum.
The Tier 1 capital ratio measures a bank's equity capital to its total risk-weighted assets, and
we can see that the risk weighted asset and tier capital 1 both increased in 2021 compared to
2020, indicating that the tier capital ratio in 2021 is higher than the tier capital ratio in 2020.
The capital adequacy ratio, on the other hand, is a percentage of a bank's risk-weighted credit
exposures that measures how much capital a bank has available. Since total capital increased
in 2021, the capital adequacy ratio raised in 2021 compared to 2020, indicating that banks
have adequate capital on reserve to handle a given number of losses before becoming
insolvent in 2021 compared to 2020.

3.Risk Management-
a. Managing interest Risk-
i.Net Interest Margin:

  Dec-21 Dec-20

Interest income/Profit on investment 18,344,442,857 19,470,821,039

Interest/Profit Paid on deposits, borrowings etc. 13,571,795,626 16,736,879,584

Net interest income 4,772,647,231 2,733,941,455
Net interest margin (Net interest income/ Rate
sensitive assets) 1.77% 1.08%
Since a positive net interest margin suggests that a bank is effectively investing, the
mercantile bank's NIM demonstrates that its investment is going well. In addition, the bank's
net interest margin improved in 2021 compared to 2020, implying that the bank's profitability
has increased. The reason for this is that an increase in net interest income in 2021. Although
the amount of interest received in 2021 is lower than in 2021, the amount of interest paid has
also reduced.

ii. GAP Analysis:

  Dec-21 Dec-20
Loans, Cash Credit, Overdraft etc/investments 253,993,052,150 241,890,767,377
Bills purchased and discounted 16,195,211,442 10,773,567,222
Loans and Advances/investments 270,188,263,592 252,664,334,599

Rate Sensitive Assets 270,188,263,592 252,664,334,599

  Dec-21 Dec-20
Borrowings from other banks, financial
institutions and agents 35,545,895,289 38,200,004,834
Non-convertible Subordinated Bond 2,400,000,000 3,600,000,000
Deposits and other Accounts    
Savings Bank/Mudaraba savings bank deposits 33,300,117,336 27,577,416,714
Bills Payable 3,597,853,578 4,071,078,095
Fixed deposits/Mudaraba fixed deposits 95,502,118,865 93,258,753,354
Deposit under schemes/Mudaraba deposit
schemes 58,844,610,829 60,745,941,739
Rate Sensitive Liabilities 229,190,595,897 227,453,194,736

  Dec-21 Dec-20
GAP (RSA-RSL) 40,997,667,695 25,211,139,863
GAP Ratio (RSA/RSL) 1.18 1.11

The Mercantile Bank's gap is positive in both 2021 and 2020, and the gap is bigger than one,
indicating that rate-sensitive assets exceed rate-sensitive liabilities. Because of the growth in
rate-sensitive assets in 2021, the gap has widened, implying that if rates rise, the bank's
profits or revenues will likely rise as well, and the bank's risk exposure is lower than 2020.

iii. Maturity Matching:

For year 2021

  Up to 1 month 1-3 months 3-12 months Total

Loans and
advances/investments 43,812,408,712 39,837,786,632 71,711,816,055 155,362,011,399
  Short term loan assets (1 year or less) 155,362,011,399

  Up to 1 month 1-3 months 3-12 months Total

Borrowing from
Bangladesh Bank, other
banks, financial
institutions and agents 858,000,000   34,687,895,289 35,545,895,289
Deposits 44,458,780,125 41,525,045,010 27,650,458,120 113,634,283,255
[deposits (CASA+ 1 year or less) and borrowing (1 year or
  less)] 149,180,178,544

For year 2020

  Up to 1 month 1-3 months 3-12 months Total

Loans and
advances/investments 44,925,055,321 36,994,088,807 70,069,132,315 151,988,276,443
Short term loan assets (1 year or less) 155,362,011,399

  Up to 1 month 1-3 months 3-12 months Total

Borrowing from
Bangladesh Bank, other
banks, financial
institutions and agents 4,250,000,000   33,950,004,834 38,200,004,834
Deposits 37,250,449,160 42,650,750,260 44,620,458,782 124,521,658,202
[deposits (CASA+ 1 year or less) and borrowing (1 year or less)] 162,721,663,036

It is evident that the bank has more short-term assets than short-term liabilities, indicating
that greater assets add value to the bank's overall value and enhance equity. Because the
bank's assets outnumber its liabilities, the bank's financial health is strong.
The short-term asset is same in both years; however, the short-term liabilities have dropped in
2021 compared to 2020, implying that the bank has paid back what it owes to its depositors.

b. Managing Credit Risk:

 The top 5 industries where loans were provided by the bank in last two years.
  Amount in lakh
Loans and Advances/investments: Sector wise Dec-21 Dec-20

Commodities (Sugar/ Edible Oil/ Wheat/ Rice/ Dal/ Peas/ Maize etc),
Food & Beverage 195,621 195,801
Trade Finance 325,513 353,021

Readymade Garments (RMG) [excluding IDBP 543,211 497,619

Iron & Steel 226,247 219,362
Textile (Excluding IDBP) 166,962 158,072

Loans and advancements:sector wise

Commodities (Sugar/ Edible Oil/

Wheat/ Rice/ Dal/ Peas/ Maize etc),
Food & Beverage

Trade Finance

Readymade Garments (RMG) [exclud-

ing IDBP

Iron & Steel

Textile (Excluding IDBP)

The credit portfolio of Mercantile Bank is diverse, having investments in a variety of

economic areas. It has an effective Credit Risk Management Process in place to handle this
credit portfolio. Their lending portfolio includes retail and business loans, both of which are
susceptible to economic risks, which have increased in light of the Covid-19 pandemic.
Credit risk management aims to increase a bank's risk-adjusted rate of return while keeping
credit risk exposure below permissible limits. Mercantile Bank has investments in a wide
range of industries, including education, health, and telecommunications, as well as trade,
shipping, chemicals, service, real estate, and many others, with commodities, trade finance,
readymade garments, iron and steel, and textiles ranking among the top five.
c. Managing Market Risk:

  2021 2020
Treasury securities 54,705,327,638 43,525,006,447
Corporate bonds 7,478,424,540 5,385,506,347
Stock market 10,332,170,270 9,840,162,170

In comparison to 2020, Mercantile Bank invested more in treasury securities, corporate

bonds, and the stock market in 2021. Changes in the yield curve and liquidity, according to my
analysis, play a direct and indirect impact on the bank's investment choice. Bond prices fall when
interest rates rise in the Bangladesh market; newly issued bonds, on the other hand, will have
higher coupon rates; rising interest rates will eventually make bonds with low coupons less
desirable, and their liquidity would be diminished. Interest rate changes have no direct impact
on the stock market, whereas they do on bonds. In some cases, though, Bangladesh Bank
initiatives may have a cascading effect on stock prices. When the Bangladesh Bank raises
interest rates, it is a signal that the country's economy is improving.

4. Earnings:

  Dec-21 Dec-20
Total Assets 361,308,536,392 332,463,279,263
Total Shareholders' Equity 24,705,988,049 22,248,531,394
Net Profit after Taxation 3,579,250,497 2,231,331,651
Leverage measure (Assets/ Equity) 14.62 14.94

  2021 2020
ROA (Return on Asset) 0.99% 0.67%
ROE (Return on Equity) 14.49% 10.03%

ROA

1.00%
0.90%
0.80%
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
2021 2020
 ROE

16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2021 2020

The usage of financial leverage can have a good – or negative – impact on a company's return on
equity as a result of the higher level of risk, as the bank's return on equity rises as stock volatility
rises. Though leverage has a greater impact on ROE in general, when comparing the two years' ROE,
leverage has somewhat decreased in 2021 compared to 2020 and ROA has grown compared to the
prior year. According to my assessment, leverage has dropped by 0.32 while ROA has increased by
0.32 percent, indicating that ROA is responsible for the increase in ROE in 2021 over 2020. As we all
know, the higher a company's return on equity (ROE) is better. This suggests that in 2021, the bank
got more efficient at earning profit from its existing assets.