Introduction
Loans comprise the most important asset as well as the primary source of earning for the
banking financial institutions On the other hand, this (loan) is also the major source of risk
for the bank management. A prudent bank management should always try to make an
appropriate balance between its return and risk involved with the loan portfolio. An
unregulated banking financial institution might be fraught with unmanageable risks for the
purpose of maximizing its potential return. In such a situation, the banking financial
institutions might find itself in serious financial distress instead of improving its financial
health. Consequently, not only the depositors but also the general shareholders will be
deprived of their money from the bank. The deterioration of loan quality will also affect the
intermediation efficiency of the financial institutions and thus the economic growth process
of the country. This establishes the fact that banks should provide increasing emphasis on
various analytical tools and techniques for screening proposals and loan decision taking.
Credit Worthiness Analysis is one of the most important activities before sanctioning any
credit to a new borrower as well as existing borrower to avoid any default risk and for
improving the operational efficiency of nationalized and private sector commercial banks.
Rationale of the Study
In an economy banks play the crucial role of an intermediary that channel funds from the
surplus units to the deficit economic units. Banks can lend up to 81% of its total deposit. The
rest 19% is kept as Statutory Liquidity Reserve (SLR) out of which 6% is kept for Cash
Reserve Requirement (CRR).Obviously the fundamental and most important task of any
commercial bank is to sanction credit to the borrowers as per requirement of safeguarding the
interests of its depositors.
South East Bank Limited (SEBL) is one of the most reputed Non-government Commercial
Banks in Bangladesh. It falls in satisfactory or B class bank according to CAMELS rating
in Bangladesh. This rating has been done in consideration with good fundamentals, such asgood profitability, best asset quality, diversified product line, experienced top management
etc. financial institutions rated in this category are judged to offer adequate safety for timely
payment of financial obligations.
In this study the main focal points were the credit appraisal & credit management procedure,
monitoring of credit and to identify different quantitative and qualitative aspects of the Credit
Risk Grading System of South East Bank Limited. Though the bank falls in satisfactory or B
class banks according to CAMELS rating but it does not necessarily mean that credit
management is not prudent in this bank. A sudden shift in non performing loan in the year
2010 may have contributed to this problem. However treasury was told to take proper action
to improve this situation.
Origin of the Study
Internship Program is a prerequisite for acquiring BBA degree. For the completion of the
degree a student must undergo internship program. Internship Program is a perfect blend of
the theoretical and practical knowledge. It gives the opportunity to handle the real business
situation and to work in the organizational framework. This report is prepared on the basis of
the authors experience of Internship Program in South East Bank Limited (SEBL),
Mohammadpur Brach.
The report on Performance Analysis of SEBL with an emphasis on credit has been
prepared under the supervision and guidance of Ms. Nadira Sultana, Department of Banking,
Faculty of Business Studies, University of Dhaka.
Objectives of the Study
Main Objective
The main objective of the study is to find out the trend in SEBLs performance over the last 5
years.
Specific Objectives
The usual practices of the Bank for sanction of a credit, management of credit and to
monitor them have been identified.
A comparative analysis has been done to find out the competitive position of the Bank
with consideration of its peer group.
To find out the associations of the Numeric grade assigned to a borrower with the
different Risk Scores for identifying which Risks factors dominate over other risk factors
influencing the Numeric Grade of the CRG.
The factors that have greater influence on the aggregate score of CRG and the nature &
extent of the relationship of the persuasive factors on the aggregate score have also been
identified
Sources of Data & Methodology of the Study
Sources of Data:
Sources of Primary Data
Primary data has been collected from SEBLs Mohammadpur branch officials under whom I
completed my internship program. Primary data sources used are very few as it is very hard
to find primary data.
Sources of Secondary Data
Different statements and documents of the South East Bank Limited, Mohammadpur
branch.
Annual Reports of mutual trust bank
However this study was done for the banks in Pakistan only. The research paper that helped
me most in completing this paper is the Comparative Analysis of Korean Banks
Performance by Hong S. Pak & Sung-Kyoo Huh which compared the performance of
Korean Banks with American Banks and also with the average performance of other Asian
banks based on different performance measurement tool like Ratio of core capital to total
assets, Interest spreads, Ratio of noninterest income to average assets, Ratio of overhead
expenses to average assets, Domestic loan growth ratio, Ratio of domestic loans to deposits,
Ratio of net charge-offs to average loans, Ratio of nonperforming loans to gross loans etc.
Some performance measurement technique used for banks are described in the research paper
which was written by August Aarma, Jaan Vainu (2002).
Performance Analysis Techniques For A bank:
In this chapter some performance analysis techniques has been described which are helpful in
evaluating the banks performance. These techniques have been used in the analysis part to
evaluate the performance especially credit performance of SEBL. Most of the techniques
used here were learnt through the completion of my B.B.A program. The purpose of this
chapter is to give a clearer idea about why those techniques are useful in evaluating a banks
performance.
Trend analysis:
Trend analysis is the most commonly used technique in evaluating performance over a
specific period of time for any type of business organization. The most attractive part of trend
analysis is that it is very easy to understand and it gives an actual picture of a banks
performance which has changed over a period of time. Another attractive feature of trend
analysis is that you can evaluate a banks performance based on virtually any variable because
there is no preset formula for analyzing the trend and trend analysis can also be presented in
graph which will present the data more attractively. To evaluate a banks performance trend in
different sectors may be used, like
Trend in loan
Trend in sector wise loan disbursement
Trend in loan for NPL
Trend in loss loan, etc.
Different types of statutory requirement compliance:
Banks being a large financial institution are subject to different statutory requirement as
required by the superior authority. By analyzing if the bank had compliance with the
statutory requirement the performance of the bank can be measured because most of these
requirement are designed to improve the banks overall performance and to reduce the banks
performance. Some of the statutory requirement that the banks in Bangladesh are required to
maintained are as follows:
CRR: Cash reserve requirement are set by the central bank to maintain liquidity. Scheduled
bank are required to keep a certain percentage of their total deposit in cash with the account
in Bangladesh Bank to maintain a strong position in liquidity. So by analyzing how bank has
maintained their CRR we can have an idea about how the banks liquidity position. However
this is not a perfect measurement of the banks liquidity. At present the CRR rate is 6%.
SLR: Statutory Liquidity Requirement is total statutory reserve that a bank has to maintain
with Bangladesh Bank. Some portion of the SLR is to be kept in cash (CRR) and some
portion of the SLR is kept by buying govt. securities and bonds. SLR gives us a clearer
picture of a banks liquidity position because it indicates the maximum amount that bank can
use out of its deposit. at present SLR is 19%.
CAR: Capital Adequacy Ratio is a ratio that regulators in the banking system use to watch
banks health, specifically banks capital to its risk. CAR ratio is set by Bangladesh Bank
CAR ratio calculates how much capital a bank have relative to banks risk weighted assets.
So it will tell us about how prudently the banks fund are managed,
These are the main types statutory requirement. These data are published in a timely manner
in the balance sheet.
Repricing Gap Analysis:
In repricing gap analysis measures the difference between assets whose interest rate will be
changed or repriced over some future period and liabilities whose interest rate will be
repriced or changed over some future period. A negative gap explains that the bank is
exposed to refinancing risk and a positive gap indicates that the bank is exposed to
reinvestment risk.repricing gap are calculated as follows
Repricing gap = rate sensitive assets rate sensitive liabilities.
Ret sensitive assets are those assets which could be repriced or changed over a one year
horizon and which are not fixed in nature.
Rate sensitive liabilities are those liabilities which can be repriced or changed over the next
one year horizon and which are not fixed in nature.
If, the repricing gap are positive then it is assumed that a decrease in interest rate will reduce
the value of the holding of the bank. So if the manager thinks that interest rate will decrease
while repricing gap is positive he should increase the rate sensitive liabilities or decrease the
risk sensitive assets so that the repricing gap be positive or vice versa.. Similarly if the
manager thinks that the interest rate will increase in the future he will either increase the risk
sensitive assets or reduce the rate sensitive liabilities. Repricing graph can also be analyzed as
a percentage of total loans. It will tell us what percent of the total asset are exposed to
repricing gap.
GAP ratio =
Du Pont Analyses:
Du Pont analysis is one of the most effective predictor of a banks performance. Du Pont
analysis starts with rate of return on equity, ROE.
ROE =
This consists of three components
Pull-through, U
AU =
Financial leverage, LEV
LEV =
Return on total assets, ROA
ROA =
All these financial ratios are widely used for a bank performance analysis. Pull-through (U)
shows success of the bank tax management policy as it may be interpreted as one minus the
average corporate tax rate. The financial leverage ratio (LEV) measures how many Estonian
crowns (EEK) of assets the bank has per EEK of equity and may be interpreted as a banks
gearing. Return on total assets (ROA) is one of the most frequently used financial ratios by
financial analysts. ROA measures the ability of bank management to generate income after all
financial and non- financial costs and expenses for owners.
Changes in ROA are usually the cause of the most important changes in banks performance
and need a more detailed analysis. The other financial ratios such as components of ROE,
pull through (U) and financial leverage (LEV), reflect tax treatment and capitalization rate,
and they usually change less. ROA may be divided into the following components:
Bank burden =
Earning assets ratio, EAR
Earning assets ratio, EAR =
Net interest margin, NIM
NIM =
Burden (B) measures a bank managements control of operating expenses. The burden for
banks is negative to show the fact that non- interest revenue (fees, earned commissions, other
operating income) does not cover labor and other administrative or non- interest expenses.
Earning assets ratio (EAR) is usually not an important factor of changes in ROA but it may
be interesting to make comparisons between various banks because EAR characterizes
different development strategies. Net interest margin (NIM) is a more important and widely
used financial ratio in the factor ROA. NIM reflects the interest spread between assets and
liabilities. For a more detailed analysis, NIM may be divided into three following
components like
Different types of statistical tools cam also be used to evaluate a banks performance.
However correlation and regression analysis are one of the most commonly used statistical
tool because of their ability to present the result in a usefull maneer.
Correlation: Correlation shows the degree of relationship within two variables. The
correlation model can be used to statically prove the relationship between various factors like
loan to operating profit, total loan to total nonperforming loan etc. And by analyzing the
statistical software like SPSS we can determine if the correlation is really significant between
the variables.
Regression analysis: Regression analysis shows the relation of a dependent variable with
two or more independent variables. This analysis can be used in evaluating a banks
performance like how total income is affected by other types of income or how total
provision for losses is affected by total amount of nonperforming loan etc. By using SPSS
some more data can be inferred which may be useful in determining the banks actual
performance.
Risk Index:
Risk index was originally developed by Hannan and Hanweck and later it was renewed by
various economists. Risk index are used to analyze the big picture effect of credit risk on
overall banks risk. Risk Index gauges the thickness of a book value cushion a bank has
available to absorb accounting losses. Risk index is used using following formula
RI = [ E(ROA) + CAP ] / SROA
The resulting risk index is a measure, expressed in units of standard deviations of ROA about
how much a banks accounting earning can decline until it has a negative book value. The
higher the value of ri is the less likely is the chance that the bank will become financially
unstable.
Risk index can also be expressed as a percentage probability of book value insolvency. In
many instances it significantly differs from market value insolvency. This model was also
develpoped by Hannan and Hanweck. The probability of book value insolvency is computed
by the following formula
P ( B.V <0 ) = 1/[2(RI ^2)]
Peer Group Analysis:
Peer group analysis is more useful when a comparison is done with some ratio analysis.
However any other type of performance analysis technique described before or any formula
developed by the analyst can be used for peer group analysis. Peer group analysis gives the
banks policy makers a clear picture about the actual position of banks because all the
competitor banks re compared on a same platform.
There is no specific format for analyzing a banks performance. different nonbels has used
different types of performjance analysis technique. however when selecting the performance
analysis tool it should be cinsidered that the objective of the analysis is served.
Core Strengths
Transparent and quick decision
making
Efficient team of performers
Satisfied customers
Internal control
Skilled risk management
Diversification
Core Competencies
Knowledge
Experience and Expertise
Customer Orientation/
Focus
Transparency
Determination
Zeal of Improvement
Pursuit of Disciplined
Growth Strategy
Reliability
The Lending Guidelines should provide the key foundations for account officers/relationship
managers (RM) to formulate their recommendations for approval. Some of the important
guidelines are as follows:
Industry and business segment focus:
Bangladesh banks guideline: The Lending Guidelines should clearly identify the
business/industry sectors that should constitute the majority of the banks loan portfolio. For
each sector, a clear indication of the banks appetite for growth should be indicated (as an
example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide
necessary direction to the banks marketing staff.
SEBLs policy: As a general practice Southeast Bank Limited concentrates its business in
trade finance /Export-Import business and all types of commercial loans, industrial / project
finance except otherwise restricted by the Government or indicated as unethical and banned
items. The bank also has specific table [Appendix 1] indicating the banks appetite for
growth according to BBs guideline. For example SEBLs policy is to expand in Textiles /
Spinning/ Sweater / Knitting Denims & Garment, Construction/Real estate/ House building,
Telecommunication, Agro based Industry etc. Likewise on Leather, Plastic/packaging ETC.
Single Borrower/Group Limits/Syndication:
Bangladesh banks guideline: Details of the banks Single Borrower/Group limits should be
included as per Bangladesh Bank guidelines. Banks may wish to establish more conservative
criteria in this regard.
SEBLs policy: The Bank gives loan to a single client as per the BRPD Circulars on the
following criteria:
Total outstanding financing facilities to any single person or enterprise or organization of a
group shall not at any point of time exceed 35% of the banks total capital.
The maximum outstanding against funded facilities do not exceed 15% of the total capital.
In case of export sector, single borrower exposure limit would be 50% of the Banks total
capital
Total Large Loan portfolio of the Bank must not exceed 56% of total LDOs
Loan sanctioned to any individual or enterprise or any organization of a group amounting
to 10% or more of the Banks total capital are considered as large loan.
Banks policy is to arrange syndicated loan and
syndicated/consortium loan arrangement or in a club finance basis.
participated
in
the
Bangladesh banks guideline: Banks should outline industries or lending activities that are
discouraged. As a minimum, the following should be discouraged
Military Equipment/Weapons Finance
Highly Leveraged Transactions
Finance of Speculative Investments
Logging, Mineral Extraction/Mining, or other activity that is Ethically or
Environmentally Sensitive
Lending to companies listed on CIB black list or known defaulters
Counterparties in countries subject to UN sanctions
Share Lending
SEBLs policy: SEBL also discourage to lend in those sector which are discouraged by B.B
as described before.
Loan Facility Parameters:
Bangladesh banks guideline: As a minimum, the following parameters should be adopted:
Banks should not grant facilities where the banks security position is inferior to that of
any other financial institution.
Assets pledged as security should be properly insured.
Valuations of property taken as security should be performed prior to loans being granted.
A recognized 3rd party professional valuation firm should be appointed to conduct
valuations.
SEBLs policy: The loan facility parameters for the Bank have been set as under:
The Bank in general will approve/ renew the OD facility for 01 (one) year period from the
date of approval/ last expiry date.
The Bank will extend medium term loan for 3-years period.
Above all, any exception would be specifically approved by the competent authority of the
Bank.
The grace period for repayment would be maximum of two years for the project finance.
Repayment of term loan would be preferably fixed on monthly & quarterly basis.
Insure Policy covering the risks (based on nature & limit of loan) with Banks mortgage
clause.
A valuation of the property/ machinery/ stocks must be obtained (to be assessed by HOB
as well as by Banks enlisted surveyor.)
Any exception of those parameters must be approved by the competent authority as per
delegated power.
Credit assessment and risk grading:
All financial activities involve a certain degree of risk and particularly, the financial
institutions of the modern era are engaged in various complex financial activities requiring
them to put proper attention to every detail.
(a) Credit Assessment :
Bangladesh banks guideline: Credit Applications should summaries the results of the RMs
risk assessment and include, as a minimum, the following details:
-
Purpose of loans.
Security Arrangements
In addition the following risk areas should be addressed
Borrower Analysis.
Supplier/Buyer Analysis.
Account Conduct.
Industry Analysis.
Loan Structure.
Security
Name Lending.
SEBLs policy: SEBL follow the same guideline as prescribed by Bangladesh Bank.
However in case of risk analysis they consider some more factors besides the factors
prescribed by B.B. Such as
-
Market risk
Technological risk
A thorough credit and risk assessment are conducted prior to granting of loans, and at least
annually thereafter for all facilities. The results of this assessment are presented in risk grade
sheet.
Risk Grade
Borrower / Group:
95+
65-74
45-54
< 35
Aggregate Score:
..
Risk Grade:
Completed by:
..
Approval Authorities:
The authority to sanction/approve loans must be clearly delegated to senior credit executives
by the Managing Director/CEO & Board based on the executives knowledge and experience.
Approval authority should be delegated to individual executives and not to committees to
ensure accountability in the approval process.
Bangladesh banks guideline:
approval/sanctioning of loans:
The
following
guidelines
should
apply in
the
Credit approval authority must be delegated in writing from the MD/CEO & Board (as
appropriate), acknowledged by recipients, and records of all delegation retained in CRM.
Delegated approval authorities must be reviewed annually by MD/CEO/Board.
The credit approval function should be separate from the marketing/relationship
management (RM) function.
The role of Credit Committee may be restricted to only review of proposals i.e.
recommendations or review of banks loan portfolios.
Approvals must be evidenced in writing, or by electronic signature. Approval records must
be kept on file with the Credit Applications.
Any credit proposal that does not comply with Lending Guidelines, regardless of amount,
should be referred to Head Office for Approval
MD/Head of Credit Risk Management must approve and monitor any cross border
exposure risk.
SEBLs policy: SEBL follows the guideline proposed by Bangladesh Bank. Their policy
regarding approval authority shows their compliance with B.Bs guideline. Some major
points of their approval authority are:
Head of Branch through Branch Credit Committee:
-
All types of facilities up to Tk.50.00 lac against 100% cash and cash collateral
All types of facilities up to Tk.10.00 lac against Land / building within Municipal /
City Corporation area with minimum distress value double to the limit.
-
All types of facilities up to Tk.1.00 crore against cash and cash collateral.
Loans under Credit Card up to Tk.20.00 lac against cash and cash collateral and up to
Tk.50.00 thousand against partial/ nil security
Executive Committee of Directors:
Bangladesh banks guideline: An Early Alert Account is one that has risks or potential
weaknesses of a material nature requiring monitoring, supervision, or close attention by
management. If these weaknesses are left uncorrected, they may result in deterioration of the
repayment prospects for the asset or in the Banks credit position at some future date with a
likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next
twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts
are prime credit responsibilities of all Relationship Managers.
An Early Alert report should be completed by the RM and sent to the approving authority
in CRM for any account that is showing signs of deterioration within seven days from the
identification of weaknesses
Despite a prudent credit approval process, loans may still become troubled and a early
identification and prompt reporting of deteriorating credit signs will ensure swift action to
protect the Banks interest
Regular contact with customers is to be maintained to enhance the likelihood of
developing strategies mutually acceptable to both the customer and the Bank.
An account may be reclassified as a Regular Account from Early Alert Account status
when the symptom, or symptoms, causing the Early Alert classification have been regularized
or no longer exist.
SEBLs policy: SEBLs policy regarding the early alert process is exactly the same as
prescribed by Bangladesh Banks credit risk grading manual. No other precautionary measure
was not seen to be taken by SEBL except the guideline prescribed by Bangladesh Bank as
described in the credit manual of SEBL
Classification of Loans:
A Classified Loan or Commitment is one which is classified as Substandard, Doubtful or
Loss as per policy of Loan classification set by the appropriate authority.
Bangladesh banks guideline: As per Bangladesh Bank circular the classified loans are
defined as follows
Special Mention account: Sustained deterioration in financial condition is noted
(consecutive losses, negative net worth, excessive leverage), if loan payments remain past
due for 30-60 days, or if a significant petition or claim is lodged against the borrower Full
repayment of facilities is still expected and interest can still be taken into profits.
Substandard loan: Loan payments remain past due for 60-90 days, if the customer
intends to create a lender group for debt restructuring purposes, the operation has ceased
trading or any indication suggesting the winding up or closure of the borrower is discovered.
Doubtful and Bad: Full repayment of principal and interest is unlikely and the possibility of
loss is extremely high
Loss loan: long outstanding with no progress in obtaining repayment (in excess of 180 days
past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and
legal options have been pursued. The proceeds expected from the liquidation or realization of
security may be awaited. The continuance of the loan as a bankable asset is not warranted,
and the anticipated loss should have been provided for.
SEBLs policy: SEBLs policy regarding the loan classification is almost same except the
fact that their classification model is more specific. They are described below:
Special Mention account: Continuous credit, Demand loan or a Term Loan which will
remain overdue for a period of 90 days or more.
Substandard loan: A well defined financial weakness is present in loans of this category,
which could affect the ability of the borrower to repay. This is clearly a troubled situation, for
one reason or another that requires immediate and intensive effort to correct and reduce the
possibility of loss.
Doubtful (DF): A serious doubt must exist that full repayment will not be forthcoming
but the exact amount of the loss cannot be ascertained at the time of classification.
Bad / Loss (BL): Advances, or portions of advances which are determined to be
uncollectible, based on presently known factors.
It is expected that each classified advance will have an action strategy developed by
Brach/Regional Office/Head Office with detailed programme, to get the advance paid or
restored to acceptable credit standards
Recovery of NPL loans and advances:
Bangladesh banks guideline: The Recovery Unit (RU) of CRM should directly manage
accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Banks
may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on
recommendation of CRM and Corporate Banking. A process should be established to share
the lessons learned from the experience of credit losses in order to update the lending
guidelines. the main function of recovery unit are described in the next page
Determine Account Action Plan/Recovery Strategy
Pursue all options to maximize recovery, including placing customers into receivership or
liquidation as appropriate.
Ensure adequate and timely loan loss provisions are made based on actual and expected
losses.
Regular review of grade 6 or worse accounts.
SEBLs policy: SEBL has a detailed policy for recovering non performing loan and
advances. Some of the main policies are described as below:
The Branch Managers (HOBs) should, therefore, keep a close and constant watch on all
their loans and advances to ensure that timely action is initiated in each case for adjustment of
the account or its renewal, if it is decided to continue the facility.
Each Branch should maintain a diary/card in prescribed format in which the due date of
expiry of credit facility
All out efforts should be made to recover the advance on its expiry.
If in spite of vigorous persuasion the borrower fails to adjust the liability within the date of
expiry of the facility, the liability should be downgraded to Special Mention (Grade-E) to
facilitate monitoring and further follow up.
The branches should however, still make constant efforts to recover the advance if
necessary, through legal process.
There is to be a recovery unit (RU) for managing non performing loan. The functions of RU
are as same as prescribed by Bangladesh Bank which has been discussed before.
NPL provisioning:
Bangladesh banks guideline:
Regardless of the length of time a loan is past due, provisions should be raised against the
actual and expected losses at the time they are estimated.
The approval to take provisions, write offs, or release of provisions/upgrade of an account
should be restricted to the Head of Credit or MD/CEO based on recommendation from the
Recovery Unit
The RU Account Manager should determine the Force Sale Value (FSV) for accounts
grade 6 or worse.
Any shortfall of the Force Sale Value compared to total loan outstanding should be fully
provided for once an account is downgraded to grade 7.
SEBLs policy: SEBLs policy for maintaining provision for loan is much more classified
then the minimum requirement prescribed by Bangladesh bank. SEBL keeps a provision for
loans which are not classified based on the exposure to risks. SEBLs policy for maintaining
loan losses are as follows
Type of Loan
Unclassified General provision
Small and medium enterprise financing
Loan to BHs/MBs/SDs against shares
Housing and loan for professional
Consumer finance
Special Mention Account (SMA)
Provision
1%
1%
2%
2%
5%
5%
Sub-standard
Doubtful
Bad/loss
20%
50%
100%
Short Term
High Grade
ST-2
High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection
factors. Risk factors are very small.
Outlook
Stable
Date of Rating
June 02, 2011
The same rating was assigned to the bank in the year 2009. CRISL affirmed that during the
year under surveillance, the bank maintained strong capital base, good operating efficiency,
good corporate management, diversified ownership pattern, diversified product line, sound
MIS, good franchise value and considerable
% change
improvement in non funded exposure etc. However,
Year
Loan
above factors are moderated, to some extent, by
decline in asset quality, high loan to deposit ratio, high
( in million)
dependency on term deposit, sectoral concentration in
textile and garments and recovery from rescheduled
assets not up to satisfaction etc.
2010
92,452.6
19%
Total loan and advances:
2009
77,497.57
29%
2008
60,281.26
25%
2007
48,164.60
17%
2006
41,147.28
The loan disbursed to agricultural sector was highest in the year 2008 as a percentage of total
loans disbursed in that particular year. Loan to industrial sector was highest in the year 2007.
The reason may be that due to high increase in textile export in that year the bank felt
encourage to hive advance in that sector. Commercial credit was highest in the year 2006 but
in the next year it fell by 11.56 % it was only 31.27%. And SME loan gradually increased
in almost every year. The following graphs shows the year wise loan to different sectors
[Appendix 6]
Industry wise loan disbursement trend: Loan to textile and garments industries is the highest
in every year which is very normal for any banks in Bangladesh, as it is one of the major
industry in industrial sector in Bangladesh. Among other types of industries loans to
Pharmaceutical Industries & Chemical, Cosmetics industries have decreased significantly in
recent years. Among other type of industry no major variation was seen in loan disbursement
trend. Following graph will clear the idea [appendix 7]
Trend in NPL for last 5 years:
Among the year compared nonperforming loan as a percentage of total loan was highest in
the year 2010. In the year 2009 the provision for loan losses were very high compared to
other years which indicates that classified loan was high in that year. So the next year 2010
some of those classified loan may have become as nonperforming loan and have contributed
to this high percentage of non performing loan in this year. The risk grading system was
proposed to modify in that year. However in the other years that were compared it did not
vary that significantly except in the year 2008 where it became 4.12%.
Year
*NPL
**% change
2006
3.97%
2007
3.77%
-5.04%
2008
4.12%
9.28%
2009
3.73%
-9.47%
2010
4.26%
14.21%
Year
2006
2007
2008
2009
2010
1,511,681,051
1,648,056,656
1,565,649,503
1,889,449,495
1,500,774,888
% of total
loan
3.67%
3.42%
2.60%
2.44%
1.62%
Total bad / loss loan has decreased every year which indicates that banks risk grading and
risk management capability have improved over years and the banks recovery of classified
loan has also increased.
Trend
years:
in
provision
for
loan
looses
for
Year
provision
*% in total
loans
**% change
2006
220,000,000
0.59%
2007
415,000,000
0.91%
53.88%
2008
497,165,000
0.88%
-2.98%
2009
1,110,185,000
1.51%
70.89%
2010
1,644,200,000
1.86%
23.07%
last
were a very inconsistent movement among different years. In the year 2009 it increased by
almost 70% from the previous year which means that in that year many of the loans were
classified as non compliance or classified loan.
CRR and SLR maintenance trend:
A required percentage is required to keep as per Bangladesh bank order. However banks may
keep more then the stipulated required reserve if they wish. If banks keep more than the SLR
required to keep it sometimes mean that the yield from government securities is high or the
banks feel that investing in the private sector is not profitable. Usually all the banks keep a
slightly higher rate of SLR then stipulated.
SEBLs trend in SLR maintenance of the last 5 years is as follows
Year
SLR kept
SLR required
CRR required
CRR kept
2006
19.98%
18%
5%
5.0002%
2007
21.81%
18%
5%
5.73%
2008
20.94%
18%
5%
5.53%
2009
31.04%
18%
CAR ratio
5.5%
YEAR 24.30%
2010
19%
Required
Maintained
2006
9%
11.50%
2007
10%
13%
2008
10%
11.12%
2009
10%
11.72%
2010
9%
11.25%
6%
6.17%
CAR ratio
6.57%
CAR ratio is a ratio that regulators in the banking system use to watch banks health,
specifically banks capital to its risk. Regulators in the banking system track a banks CAR to
ensure that it can absorb a reasonable amount of loss. SEBL has maintained a higher CAR
than it was required every year which indicates that the bank had adequate capital to absorb
its loss which may arise from various type of risk specially credit risk.
Loan to deposit ratio trend:
YEAR
Actual
acceptable
[appendix 8]
ceiling
2006
89.34%
85%
2007
86.82%
85%
2008
87.73%
85%
2009
80.17%
85%
2010
85.82%
85%
SEBLs loan to deposit ratio has always ranged between 80% 90%. Any ratio above 85% is
considered as risky position. Bangladesh bank has given order to bring back the loan to
deposit ratio by 85% by june,2011.
5.2.11 Average spread between lending and deposit rate:
Year
Lending rate
[appendix 8]
Spread
[appendix 8]
2006
11.69%
8.56%
3.14%
2007
12.39%
8.65%
3.74%
2008
11.53%
8.80%
2.73%
2009
10.82%
7.76%
3.06%
2010
10.34%
6.95%
3.39%
The banks average spread between lending rate and deposit rate has varied between 3% 4%
over the last 5 years. It is a normal lending spread according to bank practices in Bangladesh.
In the year 2009 it was the spread between lending rate and deposit rate was highest and in
the year it was lowest when compared within year 2005 2010. The spread maintained can
be thought as quite satisfactory.
Average spread
Repricing GAP analysis:
Year
CGAP
GAP ratio
[ Appendix 9]
[ Appendix 9]
2006
-2,362,810,730
-4.31%
2007
-7,846,377,873
-12.19%
2008
-8,435,123,790
-10.39%
2009
-13,316,590,781
-11.82%
2010
-6,791,425,944
-5.15%
GAP ratio
The bank had negative CGAP in all of the years that were compared which means the bank
has had more rate sensitive liabilities than rate sensitive assets which have maturity within 1
year. A negative CGAP means that the bank is exposed to interest rate risk if the interest rate
increases. A trend of negative CGAP of SEBL may also mean that the banks treasury believes
that the interest rate will decrease or it may also mean that the banks short term liabilities
were higher compared to its short term assets. Its gap ratio was between 10% 12% in the
year 2007 2009. And in the year 2006 and 2010 it was 4.31% and 5.15% respectively.
Which means that in the year 2007 2009 SEBLs 10% 12% assets were exposed to
interest rate risk and in the year 2010 SEBLs 5.15% assets were exposed to interest rate risk.
The lower the GAP ratio is the better it is thought to be.
ROE decomposition analysis of last 5 years:
ROE = NET INCOME / OWNERS EQUITY
Year
Net income
Owners Equity
ROE
[ appendix 10 ]
[ appendix 10 ]
[ appendix 10 ]
2006
909,880,784
5,059,294,638
17.98%
2007
1,222,969,037
6,144,469,101
19.90%
2008
887,235,037
7,357,274,431
12.06%
2009
1,870,185,240
11,329,177,287
16.51%
2010
2,763,933,028
17,145,997,491
16.12%
SEBLs return on equity has been very consistent among the year compared. Return on
equity actually represents the return from the perspective of the owners. SEBLs ROE has
varied between 12% 20%, which means that the SEBLs equity holder has earned between
12% 20% on their equity investment. SEBLs average ROE of the last 5 years is 16.51%
which means that SEBLs equity holder has earned 16.51% on their investment over the last 5
years on an average. However, its lowest ROE over the last 5 years was in the year 2008
(12.08%) and its highest ROE was in the year 2007 (19.90%).
ROE & AVERAGE ROE
Again, ROE = RETURN ON ASSETS * EQUITY MULTIPLIER
ROE
ROA
% change
EM
% change
2006
1.66%
10.84
17.98%
2007
1.90%
14.48%
10.48
-3.32%
19.90%
2008
1.09%
-42.48%
11.03
5.33%
12.06%
2009
1.66%
51.87%
9.95
-9.86%
16.51%
2010
2.10%
26.36%
7.69
-22.72%
16.12%
EQUITY MULTIPLIER
SEBLs equity multiplier has been decreasing in almost every year. Equity multiplier
normally indicates that how much a bank has assets in taka against per taka of equity. Banks
decreasing EM may indicates that the banks equity financing is increasing the bank is
issuing share in almost every year to get finance from the capital market The banks
decreasing EM may also indicates that the firms leverage is increasing.
Again, ROA = PROFIT MARGIN *ASSETS UTILIZATION
PM * AU [appendix 10]
YEAR
ROA
PM
% change
AU
% change
2006
1.92%
86.48%
1.66%
2007
2.16%
12.54%
87.97%
1.72%
1.90%
2008
1.22%
-43.40%
89.41%
1.63%
1.09%
2009
1.89%
54.78%
87.73%
-1.88%
1.66%
2010
2.45%
29.45%
85.63%
-2.39%
2.10%
ASSETS UTILIZATIUON
Correlation analysis:
For correlation analysis some variables were chosen which are usually correlated with each
other. Then by analyzing the data of year 2006 2010 I tried infer how much correlated they
are. The variables chosen for this correlation analysis are
TOTAL LOAN
TOTAL INCOME
NONPERFORMONG LOAN
TOTAL LOSS LOAN
TOTAL LOAN IN TEXTILE AND GERMANTS INDUSTRIES
Then by using SPSS 12 the correlation were calculated among all of them and the
significance of relationship was also calculated. The result fond are shown below. The table
may seem very hard to understand at first but an explanation will clear the idea:
TEXTILE
NONPERF TOTAL
AND
TOTAL TOTAL O -RMONG LOSS GERMANTS
LOAN INCOME
LOAN
LOAN INDUSTRIES
Correlation
.917(*)
.990(**)
.166
.999(**)
.029
.001
.790
.000
.917(*)
.854
.075
.909(*)
.029
.065
.905
.033
.854
.160
.993(**)
TOTAL LOAN
Sig. (2tailed)
Correlation
TOTAL INCOME
Sig. (2tailed)
Correlation .990(**)
NONPERFORMON
G LOAN
Sig. (2tailed)
.001
.065
.797
.001
Correlation
.166
.075
.160
.150
Sig. (2tailed)
.790
.905
.797
.809
.993(**)
.150
.001
.809
LOAN IN TEXTILE
AND GERMANTS Correlation .999(**) .909(*)
INDUSTRIES
Sig. (2tailed)
.000
.033
Total classified loan and total loss loan: Total classified loan and total loss loan were found
to be highly negatively correlated .160 almost perfectly negatively correlated. This result
may seem surprising at first but actually it is not. Because over the year SEBLs loan
classification model has improved and the same time total loan disbursed has also increased.
So banks total classified loan has increased every year. But during the year banks loan
recovery efficiency has also increased. So banks loss loan has decreased while at the same
time banks classified loan has increased.
Total lending and total lending in textile and garments industries: Lending in textile
and garments sector is one of the most profitable loan affiliations for any bank in Bangladesh.
SEBL disburses more than 50% of the total loan disbursed industrial sector in textile and
garment industries. The correlation found here is 1.00. It means that whenever total loan
increases total loan to textile and garments sector also increases and vice versa.
Total non performing loan and total income: total non performing loan and total
income were found to be highly correlated (.854) it seem absurd but the analysis shows that
whenever total non performing loan increased total income also increased.
Total loan to textile and garments industry and total income: total loan to textile and
garments industry and total income were also found to be highly positively correlated (.909).
it indicates that whenever the bank increased their lending to textile and garments industry
their total income also increased.
STATISTICAL HYPOTHESIS:
However the significance of R value can also be used to determine whether we are confident
about their correlation.
Lets assume that,
Null hypothesis: H0: p = 0 [There is NO actual correlation]
Alternative hypothesis: HA: p 0 [There is a correlation]
Now the rule is that if p (the 2nd number in the table) drops below .05, we REJECT the
Ho. We want to reject the null hypothesis because it means we have evidence that we found a
true relationship.
If we look at the table we will see that (*) and (**) marks signed variables has true
relationship among them because their p value is lower than .05. However (*) signs means
that we are 95% confident that the variables had actual correlation and (*) sign means that we
are 95% confident that the variables had actual correlation. So we can summarize the data as
follows:
CORRELATION CONFIDENCE
PARTICULARS
Total lending and total operating profit
.917
95%
99%
.999
100%
.909
95%
.993
99%
Other variables were not significantly related with each other although the correlation value
of some of them was very high.
Ratio analysis:
Financial ratios are one of the main indicators of a banks performance. Here I am comparing
SEBLs performance from year 2008 2010 based on some key indicator and ratios which
are related to banks credit performance
Category
[Appendix 11]
1. 1.
2008
2009
2010
0.51
0.51
0.60
1. 3.
0.10
0.07
0.10
0.95
0.94
0.94
0.02
0.01
0.02
1.67
1.88
1.07
8%
7%
11%
Investment risk:
1. 7.
7.26
1. 6.
11.14
1. 5.
10.72
6.
Investment risk: The ratio indicates Banks investment in Government approved
securities and other shares and bonds in respect to its capital. It expresses about how much
investment a bank has against banks total capital which in turn indicates a banks exposure to
investment risk. Investment risk ratio for SEBL was 1.67, 1.88 and 1.07 in the tear 2008,
2009 and 2010 respectively. It shows that the bank had more investment relative to its capital
base. So it can be said that the bank were exposed to investment risk in al the year that were
considered. However in the year 2010 the ratio decreased from year 2009.
7. Core capital / total assets: Core capital to total assets indicates how much equity is in
stake against the banks total assets. This ratio gives a more detailed picture of the banks
leverage. SEBLs core capital to total assets was highest in the year 2010 and it was lowest in
the year 2009. The higher the ratio is the higher wil be assets financed by equity issuing.
Risk Index (RI) calculation:
Risk index has been calculated according to unaudited financial data published for the period
ended 31 march, 2011.
Risk index are used to analyze the big picture effect of credit risk on overall banks risk.
Risk Index gauges the thickness of a book value cushion a bank has available to absorb
accounting losses. The greater the risk index is the safer the bank is from credit risk. Risk
index can also be expressed as a percentage probability of book value insolvency. In many
instances it significantly differs from market value insolvency.
Here,
Average ROA = 1.68% [from year 2006 2010]
Assuming that ROA will increase by 1 percentage point in the next year expected ROA was
calculated.
Expected ROA = (1.68 + .01) % = 1.69%
CAP = (Equity Capital / Assets) = 0.130107
And, Standard deviation of ROA = 0.003787
The following result was found [Appendix 12]
Interpretation of the result:
E(ROA)
1.69%
CAP
.130107
SROA
.003787
RI
38.81788
0.0332%
Here the percentage is very low so it can be said that the bank had a very low probability of
becoming book value insolvent. It also indicate that SEBLs credit risk were much moderate
in that year.
Regression analysis:
For regression analysis total provisions for loan losses were considered against total
substandard loan, total doubtful loan, and total loss loan. These variables are of course
dependent on each other but this regression analysis was done to statically prove their
dependency on each other. SPSS 12 has been used for this calculation for presenting data
more interestingly. [Appendix 13]
Dependent Variable:
i.
Independent variable:
i.
ii.
iii.
From Multiple Regression Analysis by using the above dependent and independent variables
the following regression equation can be found [Appendix 13]
Y= 62087178.530 + 5.441 x1 + 1.868 x2 + 1.322 x3
Interpretation of the regression equation: [Appendix 13]
Here the value of constant is tk. 62087178.530 which can be assumed as no matter
whatever the amount of total substandard, doubtful and loss loan is, it is the least amount of
provision for loan losses that are kept by the bank.
B1= 5.441 which indicates that on an average total provision for loan losses increases by
5.441 unit for every 1 unit change in total substandard loan.
B2 = 1.868 - which indicates that total provision for loan losses will increase by 1.868 % if
total doubtful loan increase by 1%
B3 = 1.322, this value indicates that if loss loan increases by 1 unit total provision for loan
losses will increase by 1.322 unit.
ANOVA (F-test): [Appendix 13]
We use F value to determine if there is actual relation between dependent and independent
variables. We use a hypothesis analysis to prove this
H0: p = 0 [There is NO actual correlation between dependant and independent variables]
F value
Table value
Significance
479.657
215.70
.034
Here at 95% (.05% significance level) confidence level table value of F is less than the
calculated F value and significance level is also lower than .5 which means that we will reject
the null hypothesis. This result indicates that we are 95% confident that total provision for
loan losses are dependent on total substandard, doubtful and loss loan.
Model summary table:
In the model summary table following data was found
Value of R is 1. Value of R indicates the degree of correlation between independent and
dependent variable. An R value of 1 indicates that the amount total provision for loan losses
are 100% related with the amount of total substandard, doubtful and loss loan.
Value of R2 : R2 coefficient of determination is a statistical measure of how well the
regression line approximates the real data points. An R2 of 1.0 indicates that the regression
line perfectly fits the data. Here the value of R2 is .999 which indicates that the regression
line calculates 99% of the amount of total provision for loan losses correctly.
Adjusted R2is .997 which indicates that if we add another independent variables beside total
substandard, doubtful and loss loan the total provision for loan losses will change for .997
unit for every 1 unit change in that independent variable.
Findings of the Regression Analysis
As the value of ANOVA is indicating statistically very significant relationship between
dependent and independent variable so it can be statistically proved that total provision for
loan losses depends on total substandard loan, total doubtful loan and total loss loan.
The positive value of all the dependent variables statistically prove that if total classified
loan (substandard, doubtful and loss loan) increases total provision for loan losses also
increases.
the positive value of constant (62087178.530) indicates that the bank always keep a
certain amount of provision for loan losses even though it does not have classified loan and it
also means that banks always keep more provision for loan losses then actually required.
Category
[ Appendix 14 ]
1. 1.
SEBL
MTBL
PBL
0.382%
0.343%
1.407%
6.47%
3.34%
1.81%
0.42%
0.18%
0.35%
1. 2.
x100
1. 3.
x100
1. 4.
Financial leverage :
8.32
13.93
8.77
SEBL
MTBL
PBL
3.47%
2.49%
3.08%
0.48%
0.21%
0.44%
86.03%
84.44%
79.09%
CONTINUED
Category
[ Appendix 14 ]
1. 5.
x100
1. 6.
Profit margin:
x100
1. 7.
x100
1.
Net interest margin indicates a banks total interest income relative to banks total interest
earning assets. It indicates the profitability of a bank as interest is one of the main source of income for banks. Net interest margin ratio was highest for Pubali Bank
Limited which indicates that Pubali bank was able to generate more interest income from its
interest earning assets than South East Bank Limited and Mutual Trust Bank Limited.
Operating profitability ratio for other two banks was almost the same 0.382% and 0.342%
respectively.
2.
Net non interest margin indicates the banks non interest income relative to banks non interest
income earning assets. Net non interest margin is also one of the main indicator of a banks
operating performance.Net non interest earning assets include investments in different sector
by banks, cash in hands, fixed assets etc.
Net non interest margin was highest for South East Bank Limited and it was lowest for Pubali
Bank Limited. The graph shows that net non interest margin was much lower for PBL
compared to SEBL and PBL.
3.
This ratio helps to understand how much profit a Bank can earn for each taka invested in
asset. For banks the main asset is the loans and advances that it extends to its borrowers. That
is the ROA of a Bank actually indicates how efficient the bank is in managing its loans and
advances for earning profit.
ROA was highest for SEBL and it was lowest for MTBL. This indicates that SEBL was able
to generate more income on its assets compared to MTBL and PBL.
4.
Financial leverage :
Financial Leverage indicates how many monetary units worth of assets the Bank is able to
deploy for each monetary unit invested by its shareholders. It shows how big the Banks asset
base is compared to its shareholders equity. The Financial Leverages for SEBL, MTBL and
PBL are presented in the following graphThe financial leverage was highest for MTBL and for SEBL and PBL it was almost the same.
The lower financial leverage indicates that SEBL had less asset on per unit of equity
compared to MTBL and PBL.
5.
The banks ROE indicates how much return the banks equity holder are getting. The higher
the ratio is the better the banks performance is. The following graph presents the ROE of
SEBL, MTBL and PBL are presented below
ROE was highest for SEBL and it was lowest for MTBL. The ROE for SEBL, MTBL and
PBL were 3.47%, 2.49% and 3.08% respectively. The higher level of ROE of SEBL gives it a
competitive edge over its peer group competitors.
6.
Profit margin:
Profit margin indicates a banks ability to generate income from its sales (investments and
loans and advances). It indicates the banks operating efficiency. Profit margin for the three
banks compared is as such
Profit margin was highest for SEBL. it indicates that SEBL was able to generate more
income from its business activities than MTBL and PBL. However the profit margin was
almost same for SEBL and PBL.
7.
Asset utilization shows how much a bank can generate sales from its total assets. Asset
utilization for SEBL, MTBL and PBL are shown below
Asset utilization was highest for SEBL and it was lowest for PBL. It indicates that SEBL
were able to use its assets more efficiently than MTBL and PBL.
Comparison base on Credit Performance:
To analyze the credit performance of the banks the year 2010 was considered and different
indicator of credit performance was for this purpose. The result are shown below
[appendix 15]
1. Cost of Fund: cost of fund indicates how much interest the bank paid for per 100 tk. of
fund. It is expressed as a percentage. The cost of fund was highest for Pubali Bank Limired
and it was lowest for SEBL.
It shows that SEBLs cost of fund was 8.25%, MTBLs cost of fund was 8.58% and PBLs
cost of fund was 9.17%. It indicates that SEBL was more effective in collecting their fund.
2. Loan To Deposit Ratio: Loan to deposit ratio was highest for PBL and it was lowest for
MTBL. a higher value of loan to deposit ratio indicates that either the bank was too efficient
in managing their fund or the bank took a very risky position in loan disbursement. Loan to
deposit ratio was too high for Pubali Bank Limited and South East Bank Limited and it was
low for Mutual Trust Bank Limited.
3. Loss loan to total loan: loss loan to total loan was highest for MTBL and it was lowest
for SEBL. The lowest the ratio is the better the banks credit performance is. A lower loss laon
ratio for SEBL indicates that SEBL was able to grade its loans more efficiently than other
banks compared.
4.
Average Spread between Lending rate and borrowing rate: the spread between
lending rate and borrowing rate indicates the banks profitability. The spread was highest for
SEBL.
Findings:
It was found that profitability ratios were better for SEBL than MTBL and PBL except net
interest margin and financial leverage. So, it can be said that SEBLs operating efficiency
were much better than its peer group competitors in most of the operating profitability
indicators. And in case of credit performance ratio SEBLs performance was better in almost
every variables that was used.
Findings of the Study
In recent years it was seen that the banks asset utilization has decreased so the bank should
try to improve its operational efficiency to improve this asset utilization ratio.
In the year 2009 and 2010 it was seen that the banks return on equity has decreased
compared to previous year. So the bank should try to increase its ROE for the betterment of
its equity holder.
Conclusion:
Despite fierce competition in the baking industry, highly volatile money & foreign exchange
market and intensified political unrest; South East Bank Limited was able to achieve
substantial growth in all business segments in the year 2006 2010. Credit Rating &
Information Services Limited (CRISL) rated the Bank as ST -2 for short term (6 month)
considering its good profitability, best asset quality and diversified product lines. The Bank is
very successful in management of its credit risk. The bank follows its self developed Credit
Risk Grading Model, by fulfilling the requirement of the guideline of Bangladesh Bank.
From the year 2006 to year 20010, there is a gradual decrease in the Banks percentage of
Loss Loan Loans compared to total outstanding Loans & Advances. The Banks performance
regarding to credit recovery is the best compared to its peer group. The Bank has to try very
hard to hold on this competitive advantage, because a banks ultimate success depends on the
selection of appropriate borrower. A few changes in the Credit Risk Grading system and more
consciousness in selecting the potential borrowers will help the Bank to achieve the goal of
becoming a market leader in banking industry.
REFERENCES:
Banks profitability indexes , by Thomas and Rivard - 1997.
Bank Performance Analysis: Methodology and Empirical Evidence, by Vainu Jaan and
Aarma August, 2002.
Comparative Analysis of Korean Banks Performance by Huh Kyoo-Sung and Pak S.
Hong 2005.
Commercial Bank Financial Management in the financial services industry, by JR,
Sinkey F. Joseph 2006
Efficiency and Performance of Islamic Banking: The Case of Pakistan, by Akram
Muhammad, Orangzab, Raza Ali, Akhter Waheed February 2011.
Islamic Banking A Performance Analysis, by Movassaghi Hormoz (Ithaca College) and
M. Zaman Raquibuz 2011.
Performance analysis of banks in developing country : A case study of Bangladesh, by
Shah Muzafar, Habibullah, Sufian September-1- 2009
The Link between Default and Recovery Rates: Theory, Empirical Evidence and
Implications, by Sironi Andrea, Resti Andrea, Brady Brooks and Altman I. Edward
March 2003
www.investopedia.com
Websites of Bangladesh Bank, South East Bank Limited, Pubali Bank Limited, Mutual
Trust Bank Limited.