Chapter 1
Introduction
Background of the Study:
Commercial banks are one of the major financial intermediaries whose primary function is the transfer of monetary resources from the savers to the users. Commercial bank missions, goals, objectives, and policies are similar to those of other financial, institution so that commercial bank is business firms. All business organization look for long run profits by lending and investing funds at their disposal at as high a rate of return as is consistent with an appropriate degree of safety of principal.
Bank deposits are relatively the easily accessible from of financial asset while the more sophisticated financial assets are yet to gain universal popularity. The total liabilities of banks comprise of their liabilities to depositor, shareholder, lenders and the Central banks- the lender of t6eh last resort. The creditors are largely the households sector and to some sector and to some extent the corporate sector. Banking legislations in some countries stipulate the size of capital bases to be adopted by the new banking companies before license to carry on banking business his granted. It is also made obligation to transfer a fixed percentage of the annual profit before declaring dividends to the special reserves. Bank in many countries have the unique privilege of building up fund undisclosed reserves by valuing their assets conservatively. This practices being prevented to enable them to absorb the fluctuations in profit likely to occur over the years. Deposits gathered by the bank may be classified broadly on the basis of their maturity pattern and the ownership pattern. The former classification of important from the profitability angle while the other classification is useful for the strategy deposits mobilization the demand liabilities and the time liabilities are the classification user in the Nepalese context. The assets management in at the bank is essentially the allocation of the funds into loan and investments with the consideration for maintenance of liquidity. While optimization of the total ear4nings of the financial assets is the prime objectives, it has it be condition by the investment norms prescribe by the Central bank. Commercial banks are one of the major financial intermediaries whose primary function is the transfer of the monetary resource from the saver to the user. The transfer is made at certain price and condition governs by the board policy parameters stipulated by the central bank authorities. Bank managers must be cash conscious for the simple logic that cash if kept idle has a cost borne. A continental banks cash management expert is of the opinion that cash management is more than just collection. Commercial banks or Corporation have to maintain an appropriate cash balance to accomplish given set of motive.
Today’s market is separated in international wide. It is very competitive so, different types of financial institutions come today and goes out from the market tomorrow. Financial institution is the organization which are mainly establish with profit motive. So to run an organization for the long run it is necessary to increase their profit in geometric order. So to find out whether the organization is running satisfactory or not it is necessary to evaluate their financial performance which is the main theme of this research.
Here, this research is based on ratio analysis to know the financial performance of Commercial Banking. For this purpose we have taken the financial statement of Bank of Kathmandu.
In public view, Bank of Kathmandu is a successful Commercial bank among the Commercial bank of the Nepal. In this research ratio analysis is applied to analyzed financial performance of the bank of Kathmandu. This research have tried to define as the systematic way of ratio analysis and tried to interpret the financial statements of Bank of Kathmandu. This research has tried to analyzed the strength and weakness of Bank of Kathmandu as well as its historical performance and current financial situation of BOK
Statement of Problem:
Examine of the financial performance of the financial institution is not an easy task and also to evaluate about their strengths and weakness. This research try to identified to whether the banking sector of Nepal are running successfully or not but due to limited time this report can not take all the banks of Nepal under it so the selection on random basis has selected BOK.
Profitability is the crucial factor in making the stay of the bank in the market for the long run because profit is the measuring rod of the bank’s long-term sustainability and the survival. Only by being profitable a bank can compete efficiently in the market to generate value and the return to the investors or shareholders. So this research tries to identify financial analysis of the Bank of Kathmandu by applying tools of ratio analysis.
Objectives of the study:
The objective of this study is analysis the financial performance of BOK. The basic objective can be defined as:
- Examine the financial performance
- To identify the long term financial position
- To identify the strength and weakness.
Limitation of the study:
The major limitation of this research is directly related with the limitations of the ratio analysis because this research is based upon the tools ratio analysis. The main limitation of this report is pointed as below:
1) The ratio analysis being a quantitative nature ignores the qualitative factors which in certain cases may over take the quantitative factors.
2) This analysis can be accurately interpreted only if the effect of change in prices which may have been taken place is adjusted in the figures used in the ratio, for instance, fixed assets turnover ratio would not give a brighter picture than that justified by the circumstances unless the fixed assets are revalued at their replacement costs.
3) Ratio analysis is basically historical in nature since the financial statements on the basis of which the ratios are established, are historical in nature unless the ratio analysis is based on the projected financial statements prepare to plan for the future.
4) Only two year’s observation is covering from fiscal year 060/061 to 061/062.
5) The quality ratios very much depend upon the quality of the accounts on the basis of which these are established. For example, if the closing stock is overvalued, not only the profitability will be overstated but also the financial positions will appear to be better. Thus, ratio is as accurate as the accounts.
Organization of the study:
This study has been divided in to five chapters.
Chapter – I Introduction
Chapter – II Research Methodology
Chapter – III Review of literature
Chapter – IV Data presentation and analysis
Chapter – V Summary, conclusion and recommendation.
Chapter – I
This chapter covers the general background of the general performance analysis, statement of problem, objective of the financial analysis, limitation of the financial analysis, statement of problem, and organization of the research study of BOK.
Chapter – II
This chapter focuses the research design, sample data analysis tools and their using technique.
Chapter – III
This chapter focuses all the financial aspect of the study like the review of literature, importance of financial analysis, user of financial statements, limitation of financial analysis, types of ratios and importance of ratio analysis.
Chapter – IV
This chapter concern with measurement of financial performance using ratio analysis tools and their trend analysis.
Chapter – V
This chapter gives the summary conclusion and recommendation of the study.
Chapter 2: Review of literature
Concept of financial analysis:
Financial analysis is that work which is to be giving right and wrong decision to the management about their performance activities. Financial analysis is not only the basic tools to evaluate the financial performance of any organization also financial statements are the mirrors to evaluate financial performance. It also gives clear view regarding the capital structure of the organization.
By applying the tools of financial analyses this report try to identified strength and weakness of the bank of Kathmandu. Result of the good performance is the reward of the effective planning and control.
Importance of the financial analysis:
The important of the financial analyses are pointed out as follows:
It calculates the set of financial ratios of every sector.
It reveals the relative strength and weakness of the financial institution.
It gives idea about whether the financial positions of the organization has been improving or deteriorating.
It shows the combined effects of liquidity, assets management and debt management on operating results.
User of financial analyses:
Ratio analyses are performed from the point of view of the firms, creditors, owners, investors, management, consumer, and the government etc.
Short term creditor: They are particularly interested in liquidity ratio.
Long term creditor: They are interested in debt ratio, interested coverage and profitability ratio.
Equity holders: They are mainly concerned with profitability, growth and valuation.
Management: Management interested in all ratios.
Limitation of the financial ratio:
Limitation of the financial ratio is pointed as follows:
Ratio should be used with judgment as they are based on accounting data, which are prepared on different assumption.
It ignores qualities aspects.
Average ratios are generally provided with quartiles values of the ratio.
Types of ratio:
Liquidity Ratios:
1. Current ratio: Current assets/ Current liabilities
2. Investments maturing in less than one year:
Investment maturing less than one year/ total assets
3. Loan to total assets: Loans / total assets
4. Purchased liabilities to total assets:
Purchased liabilities / Total assets
Profitability ratio:
a) ROE: Net income /Equity
b) ROTA: Net income/ Total assets
c) Equity capital ratio: Equity/ total assets
d) Spread: Net interest revenue / total assets
e) Net operating cost ratio: net operating cost /total assets
f) Net interest margin ratio: net interest income / interest – earning assets
Leverage ratio:
a) Debt to total assets ratio: total debt / total assets
b) Debt equity ratio: total debt /equity
c) Equity multiplier ratio: total assets/ equity
Importance of ratio analysis:
The importance of the ratio analyses are as follows:
I. To predict future guidelines.
II. It is helpful for the effective management control.
III. It is the powerful tools of the financial analyses.
IV. It provides good technique for assessing financial performance of the organization.
V. Assessment of liquidity, profitability, solvency and efficiency Position of the company, the ratio is very useful.
Standards for Comparisons:
The comparison for the ratio is depending upon with the nature of the business though in the comparison of the performance of a company. The standards for comparisons are as given below:
Liquidity Ratio:
Under this ratio, current ratio, Investment maturing less than one year, Purchased liabilities to total assets, and Loan to total assets is calculated. And the standard of comparison for the above ratio tools are as follows:
Current ratio:
Standard of comparison for the current ratio is 2:1.
Investment maturing less than one year:
Standard of comparison for the investment maturing less than one year is divided by the total assets of the organization and as the value is higher the performance also said to be satisfactory because there is not any specified standard.
Purchased liabilities to total assets:
As the calculated ratio give the low percentage then the liquidity position of the organization is said to good. So the low value of this ratio is good.
Loan to total assets:
Loan is the investment made by the financial organization for long term. So higher this ratio means higher the investment made by the company so the higher value of this ratio is good for any financial organization.
Profitability ratio:
Profitability ratio gives idea about the profit condition of the organization. Here to measure the financial performance of the BOK. Here this report also include some tools of the profitability ratio which are ROE, ROTA, spread ratio, net operating cost ratio, net interest margin ratio and equity capital ratio.
ROE:
As the return is the main function for any profit motive organization. So it plays the vital role for the financial institution. There is not any specified value for the return on equity so as the return on equity is higher it will be better for the organization. So higher this ratio indicates better financial position of the organization.
ROTA:
For ROTA also there is not any specified value. As the higher the value of this ratio will indicates the better financial position of then organization
Spread ratio:
As spread is the difference between interest income and interest expenses so as the higher this value higher will be this ratio so higher value of this ratio indicates better financial position of the organization.
Net operating cost ratio:
Net operating cost is the expenses made by the company after deducting other sources of income so as the value of this ratio is lower then this will indicates the strong financial position of the organization.
Net interest margin Ratio:
Higher this ratio indicates strong financial position of the organization.
Equity capital Ratio:
The standard of comparison for this ratio is 5%.
Leverage Ratio:
Financial leverage is the magnification of the risk and return introduced through the use of fixed cost financing such as debt and referred stock. In order to know the long term financial positions here applied ratio tools are debt to total assets, debt equity ratio, and equity multiplier.
Debt to total assets:
As debt increases the risk factor for the organization so as the value of this ratio is lower then it minimizes the risk for the organization. So lower the value will indicates low risk for the organization.
Debt to equity:
As the value of this ratio is higher then it indicates that the paid up capital is colleted through equity so as the ratio is lower will decrease the risk for the organization.
Equity multiplier ratio:
It is the proportion between the equity and the total assets when total assets are divided by the equity the outcome is known as equity multiplier ratio. Higher value of this ratio indicates low level of equity that means funds is collected through bond so higher value of this ratio indicates high level of risk for any financial institution.
Chapter 3
Research methodology:
Research design:
This research try to analysis the relationship between dependent and independent variables which are profit, Total assets, revenue generated, equity, loans provided etc. And these variables are necessary for this analytical research. Correlation is done in the quantitative analysis where quantitative data is sufficiently available.
Populations and sample:
This report is based upon the financial report published by the BOK in fiscal years 2060/2061, 2061/2062 &.2062\063. And the sample covers these two financial reports.
Sources of Data:
For every research there are two types of sources of the data which are primary and secondary. This report is based upon the secondary data, which are collected from published financial report by BOK.
Data analysis tools:
In this study, the following analytical tools are applied to analysis the financial performance of the bank .Applied ratio analysis tools are as follows:
Profitability Ratio:
Profitability is ultimately measured in terms of the rate of return earned by the equity investors who are the owners of the business. Profitability is the final results of the commercial bank. There are five measures of profitability, namely profit margin, the net interest margin, the spread, the return on assets, and the return on equity. This ratio tools helps to analyzed income relation to resources committed is used to measure profitability from the financial statements.
Liquidity ratio:
Liquidity refers to the ability to meet cash obligations as they come due. Liquidity is the probably the most difficult aspect of the financial performances of the financial institution to measures from the published financial statements. This report gives out the accurate comparison of the maturities of assets and liabilities.
Leverage ratio:
Financial leverage is the magnification of the risk and return introduced through the use of fixed cost financing such as debt and referred stock. In order to know the long term financial positions, leverage ratio is calculated. These ratios also called capital structure ratios. This ratio indicates the proportion of debt and equity in the capital structure of a bank.
Chapter: 4
Presentation and analysis of Data
Analysis of Data:
Bank of Kathmandu ltd
Performance analysis
Terms Definition Fiscal year
062\63 Fiscal year
061\62 Fiscal year
060\61
A. Liquidity Ratios
1.Current ratio
Current assets\Current liabilities 0.782381767 0.78407818 0.78404071
2.Investment maturing less than one year Investment maturing less than one year\ total assets 0.216509021 .211777327 .024975663
3.Loan to total assets Loan\ Total assets 0.609912044 0.62716478 0.63269733
4.Purchased liabilities to total assets Purchased liabilities\ Total assets Nil Nil Nil
B. Profitability Ratio:
1.ROTA Net Income\Total assets 0.016487636 .014155207 0.013423395
2.ROE Net income\ Equity 0.436689 0.30098426 0.274975067
3.Spread Ratio Spread\ Total assets 0.033389374 0.03707534 0.02956919
4.Net interest margin ratio Net interest income\ Interest earning assets 0.04133781 0.0453465 0.03501903
5.Net operating cost ratio Net operating cost\ Total assets 0.014392088 0.01552303
0.01406361
4.Equity capital ratio Equity\ Total assets 0.037756024 0.04703001 0.04881677
C. Leverage Ratio:
1.Debt to total assets
ratio Long term debt\ Total assets Nil Nil Nil
2.Debt to Equity ratio Long term debt \ Equity Nil Nil Nil
3.Equity Multiplier ratio Total assets\Equity 26.48583948 21.26302111 20.48476258
Trend analysis:
Profitability Ratio:
Return on total assets:
Return on total assets of the BOK is .013423395 in financial year 060\61 and increasing pattern in the financial year 061\62 and 062\63 and rich up to .01648736.
Return on equity:
Return on equity of the Bank of Kathmandu is seems to be in increasing condition.
Spread ratio:
Spread ratio for the bank of Kathmandu is in increasing pattern which is good sign for the bank of Kathmandu.
Net operating cost ratio:
Net operating cost ratio for the Bank of Kathmandu is in increasing pattern from the financial year 061 to 063 which means that as the time passes the financial activity of the Bank increases which ultimately leads to increase in operating cost of the Bank.
Interest margin ratio:
Interest margin ratio of the Bank is also in increasing pattern from the financial year 060 to 063 which ultimately tells that is financial activity also increasing with respect to time.
Equity capital ratio:
Equity capital ratio for the bank is in decreasing pattern because the equity share published by the bank is constants up to the financial year062\063 and the value of total assets is in increasing pattern.
Liquidity ratio:
Current ratio:
Current ratio for the Bank is fluctuated in little value because the value of current assets and the current liabilities is fluctuated in little value.
Investment maturing less than one year:
Investment maturing less than one year is decease in 061\062 than in financial year 060\61 and increase in financial year 062\63.
Loan to total assets:
Value of loan to total assets ratio of the Bank of Kathmandu is seems to be in decreasing pattern as on past three financial years.
Purchase liabilities to total assets:
As the purchase liabilities for the Bank of Kathmandu is nil. So the value of this ratio is zero for all three financial year.
Leverage ratio:
Debt to total assets:
Till now a days debt is not published by the Bank of Kathmandu so the value of debt of total assets remain zero.
Debt to equity:
The value of this ratio also remains zero for all three years.
Equity multiplier ratio:
The value of this ratio is in increasing pattern from financial year 061 to 063.
Liquidity Ratio
Year CR IMLOY LT PT
2060\61 0.784041 0.249757 0.63269733 0
2061\62 0.784078 0.211777 0.62716478 0
2062\63 0.782382 0.216509 0.609912044 0
Where:
CR=Current Ratio
IMLOY=Investment maturing less than one year
LT=Loan to total assets
PT=Purchase Liabilities to total assets
Profitability Ratio
Year ROE ROTA ECR NOCR NIMR SR
2060\61 1.56 0.0765 0.048817 0.0141 0.035 0.0296
2061\62 1.631 0.0767 0.04703 0.0155 0.0453 0.0371
2062\63 0.4367 0.0165 0.037756 0.0144 0.0413 0.0334
Where:
ROE=Return on equity
ROTA=Return on total assets
ECR=Equity capital ratio
NOCR=Net operating cost ratio
NIMR=Net interest margin ratio
SR=Spread ratio
Leverage ratio:
Year DTA DER EMR
2060\61 0 0 20.48476258
2061\62 0 0 21.26302111
2062\63 0 0 26.48583948
Where;
DTA=Debt to total assets
DER=Debt to equity ratio
EMR=Equity multiplier ratio
CHAPTER 5
SUMMARY CONCLUSION AND RECOMMENDATION
“Performance analysis is that work which is to be give right and wrong decision to the management about their performance activities”
In this study, this research has tried to analyzing the financial performance of BOK. This report used different types of ratios to measure the performance of the organization. By the help of the tools of ratio analysis it is conclude that financial performance of the Bank is said to be in good situation. That the financial performance of the Bank is in satisfactory manner.
So at last by the help of applied tools of the ratio analysis this ratio concludes that the financial performance of the Bank is in good condition. And its financial performance is in satisfactory matter.
Reference:
Agrawal, Govinda Ram (2000); Project Management in Nepal: M.K. publisher and distributors
Pant, Prem Raj (2005); Social science research and thesis writing, Buddha Academic enterprises Pvt. ltd.
M K Shrestha and D B Bhandari (2004); Financial markets and Institutions, Asmita Books publishers and Distributors.
Financial report published by BOK.
www.bokltd.com
Appendixes:
BOK= Bank of Kathmandu
ROE= Return on equity
ROTA= Return on total assets
CR= Current ratio
ECR= Equity capital ratio
EMR= Equity multiplier ratio
No comments:
Post a Comment