Financial Analysis Intro
Financial Analysis Intro
Financial Analysis Intro
financial institution. Its also help to evaluate and decision making for business operation. In
financial analysis process ratio analysis is the most dominant and logical structure to help
business related stakeholder. Under the financial ratio analysis process there are few categories to
identical area of financial institution. So business stakeholders try to concentrate to get overall
business overview from profitability, liquidity, assets management and solvency ratio analysis.
These ratios not only help to decision making process also emphasized on risk avoiding and
profit raising related factors. To calculate this ratio need to take quantitative data from bank
trading activity and other sources.
Investopedia Describe about ratio analysis as Quantitative analysis of information contained in a
companys financial statements. Ratio analysis is based on line items in financial statements like
the balance sheet, income statement and cash flow statement; the ratios of one item or a
combination of items - to another item or combination are then calculated. Ratio analysis is used
to evaluate various aspects of a companys operating and financial performance such as its
efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to
check whether they are improving or deteriorating. Ratios are also compared across different
companies in the same sector to see how they stack up, and to get an idea of comparative
valuations. Ratio analysis is a cornerstone of fundamental analysis (Investopedia).
This study evaluates bank performance for the period 2008-2013 using financial ratio analysis
(hereafter FRA). Financial ratio analysis has wide range advantage to show the bank financial
position compare to past year performance. To analyse the ratio I am take data from National
Bank Limited annual report. Thats help me to understand the financial position of this bank and
purpose of the study. The study has been used Financial Ratio analysis (FRA) method and for
hypothesis testing Students T-test. The bread and butter of statistical data analysis are the
Students t-test. It was named after a statistician who called himself Student but whose real name
was William Gossett. As an employee of Guinness Brewery in Dublin, Ireland, he tackled a
number of practical statistical problems related to the operation of the brewery. Since he was
discouraged from publishing under his own name, he adopted the Student moniker.
Data of this study collected from secondary source in annual report of National bank ltd. This
data research helps to evaluate the overall bank financial position. To evaluate data make
descriptive statistical analysis these contain Mean, Standard deviation, Minimum, Maximum.
From this descriptive statistics we analyse the financial performance of National Bank. For
descriptive statistics and students T-test I used SPSS and MS excel program to calculate data
and find difference between two periods. This bank financial ratio enable us to identify unique
bank strengths and weaknesses achieve over the six year period, which in itself inform bank
profitability, liquidity and credit quality.
The era of globalization modern free market economy introduce a window of banking acidity
that has huge impact on any countries trade and overall development. To complete the process of
banking or trading financial intermediaries and institution act like as safe gateway between two
sides. As an institution, bank has been contributing towards the development of any economy for
a long time and at the moment it is treated as an important banking industry in modern world.
Now days the functioning area of bank not limited within same geographical limit of any
country. Therefore bank has to manage large volume transaction. Industry related stakeholder
need to know about the financial performance of the bank. To analyse financial performance
ratio analysis is the most logical way to show the bank financial position. So this study has
conduct to expose restriction of the function area and process of Financial performance through
ratio analysis of National bank limited by comparing banks past year balance sheet, Income
statement and cash flow by generating ratio that conduct how much financial stability can be
achieve. A general belief is that a firms financial performance depends on certain key financial
factors i.e. turnover, profit and the variables which are found in the balance sheet of a firm, have
a direct and indirect relation with each other. By establishing a close relationship between the
variables, a firm can analyze its financial performance in terms of liquidity, profitability and
viability (M.S.Ramaratnam & R.Jayaraman, 2010). To evaluate financial ratio I used various
instrument for analysis like Descriptive analysis, FRA method, Students T-test for finding
difference between variable.
The problem statement is to Analysis the financial performance of NBL Using Financial ratio.
4. The Variables
cost against income generate from operation. The lower the C/I ratio, the better the performance
of the bank.
4.2. Liquidity Performance
Liquidity indicates the ability of the bank to meet its financial obligations in a timely and
effective manner. Samad (2004:36) states that liquidity is the life and blood of a commercial
bank. Financial liabilities are attracted through retail and wholesale distribution channels. Retail
generated funding is considered less interest elastic and more reliable than deposits attracted
from wholesale distribution channels (Thygerson, 1995). The following ratios are used to
measure liquidity.
1. Cash & Portfolio Investment to Deposit Ratio (CPIDR) = Cash & Portfolio Investment /
Deposits. This ratio indicates the percentage of short term obligations that could be met with the
banks liquid assets in the case of sudden withdrawals. The measure of liquidity of the bank is
the cash and portfolio investments to deposit ratio. The higher the ratio the better is the liquidity
position of the bank, therefore, the more is the confidence and trust of the depositors in the bank
as compared to the bank with lower CPIDR. This ratio serves two purposes. First, it boosts the
trust of the depositors in the bank as the depositors know that bank is not only having enough
cash but also made some investments in securities portfolio and supposedly earning some
positive returns on those portfolio investments. Secondly, they feel confident that in need of cash
bank may sell these portfolio investments at any time in the secondary market which is readily
available for this purpose.
2. Net Loans to total asset ratio (NLTA) = Net loans/total assets NLTA measures the
percentage of assets that is tied up in loans. Net loan to total assets ratio (NLTA) is also another
important ratio that measures the liquidity condition of the bank. Whereas Loan to Deposits is a
ratio in which liquidity of the bank is measured in terms of its deposits, NLTA measures liquidity
of the bank in terms of its total assets. That is, it gauges the percentage of total assets the bank
has invested in loans (or financings). The higher is the ratio the less the liquidity is of the bank.
Similar to LDR, the bank with low NLTA is also considered to be more liquid as compared to the
bank with higher NLTA. However, high NLTA is an indication of potentially higher profitability
and hence more risk. The higher the ratio, the less liquid the bank is.
3. Loans to deposit Ratio (LDR) = Loans/total deposits. Loan to deposit is the most important
ratio to measure the liquidity condition of the bank. Here, loan means the advances for the
conventional banks. Bank with Low LDR is considered to have excessive liquidity, potentially
lower profits, and hence less risk as compared to the bank with high LDR. However, high LDR
indicates that a bank has taken more financial stress by making excessive loans and also shows
risk that to meet depositors claims bank may have to sell some loans at loss. A high figure
denotes lower liquidity.
4.3. Asset Credit Quality (Credit Performance)
Credit risk is one of the major risks faced by bank. This can be described as potential loss arising
from the failure of counter party to perform according to contractual arrangement with the bank.
The failure may arise due to unwillingness of the counter party or decline in economic condition
etc. banks risk management has been designed to address all these issues. While it is expected
that banks would bear some bad loans and losses in their lending activities, one of the key
objectives of the bank is to minimize such losses (Casu et al, 2006). Credit performance
evaluates the risks associated with the banks asset portfolio i.e. the quality of loans issued by the
bank. Several ratios can be used for measuring credit quality however, not all information on the
loans is always available. Non-performing loans is available for National banks Limited
therefore this paper use the following ratio:
Nonperforming Loans to Total Loan (NPLTL) = Nonperforming Loans /Total loans. This
ratio indicates the proportion of the total loans that has been set aside but not charged off. It is
percentage of total loan that has been either in default or close to being in default. Once a loan is
nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If
the debtor starts making payments again on a nonperforming loan, it becomes a reperforming
loan, even if the debtor has not caught up on all the missed payments (Investopedia). Institutions
holding nonperforming loans in their portfolios may choose to sell them to other investors in
order to get rid of risky assets and clean up their balance sheets. Sales of nonperforming loans
must be carefully considered since they can have numerous financial implications, including
affecting the company's profit and loss, and tax situations.