Evaluate Financial Performance of the Banking Sector

Evaluate Financial Performance of the Banking Sector

NRB Bank is one of the fourth generation private sector banks to have begun operations in 2013, where local meet global. Bringing together a passionate and entrepreneurial group of NRB investors from all over the world, NRB Bank aims to be the leading dedicated financial institution for NRB’s to invest in Bangladesh and for Bangladeshi individuals and corporate to access international market.

NRB Bank offering Corporate, SME, Retail banking, NRB and Premium banking to meet the needs of a broad customer base. With a mission on building long term commitment with our clients, NRB Bank will be providing the right solutions that combine professionalism, expertise and financial strength, and aims to be the preferred provider of financial services. We demonstrate our bank with the motto “Not just another Bank” through our Values Dynamic, Innovative, Global, Integrity and Techno- Centric to create distinct financial Bank locally and internationally

This paper is intended to provide an improved analytical framework to present the different aspects of performance. The framework divides the analysis into five different but interrelated ratios of the health of the institution, and uses a time-series to analyze any positive or negative trends. The different types of ratios are:

• Profitability
• Growth
• Efficiency and return
• NPL ratio

Objective of the report

The purpose of this report reflects the internship purpose. The internship’s objective is to gather practical knowledge and experience in the corporate working environment with the close association to the business firm and the experts who are leading and making strategic decisions to enhance the growth of a financial institution. This report is contemplating the knowledge and experience accumulated from internship program. With the set guidelines and proposal provided by BRAC Business School of BRAC University and with the kind advice of both the Organization and Internship Supervisor this report comprise of an organization part and a report part.

The prime objective of organization part is to present an overview and brief introduction of NRB Bank.

The prime objectives of project part are:

• To know about the current situation of Banks in Bangladesh
• To provide an idea about how profitable this business is
• To analyze the other products and services offered by the competing bank
• To find the reason and relationship of different factors of the ratios.

Methodology

Both the primary as well as the secondary form of information was used to prepare the report.

The details of these sources are highlighted in the following.

Secondary Sources

Sources of secondary data can be defined as:

Internal Sources

• Bank’s Annual Manual
• Bank’s Website
• Brochures
• Prior research report and any information and literature regarding the banking sector

External Sources

• Different books and periodicals related to the banking sector
• Bangladesh Bank Report
• Newspapers
• Website information

NRB Bank

On April 4, 2012, the Bangladesh Bank (BB) approved three new banks, the sponsors of all of which are Non-resident Bangladeshis. Following this six more banks were approved on April 8, 2012. The six most recently approved were drawn from a short-list of 16, of a total of 37 applications. Meanwhile, the three approved Non-resident Bangladeshi bank applications were drawn from a pool of five Non-resident Bangladeshis bank applicants.

NRB Bank is one of the fourth generation private sector banks to have begun operations in 2013, where local meet global. Bringing together a passionate and entrepreneurial group of NRB investors from all over the world, NRB Bank Ltd aims to be the leading dedicated financial institution for NRB’s to invest in Bangladesh and for Bangladeshi individuals and corporate to access international market.

NRB Bank is a financial institution currently offering corporate and consumer banking, SME banking, NRB and Premium banking to meet the needs of a broad customer based. With a mission on building long term commitment with our clients, NRB Bank will be providing the right solutions that combine professionalism, expertise and financial strength, and aims to be the preferred provider of financial services, Glocally. We demonstrate our bank with the motto “Not just another Bank” through our values, Dynamic, Integrity, Global customer centric, Innovative, and Technology oriented to create distinct financial bank locally and internationally.

NRB Bank’s vision

To be the leading dedicated financial institution for NRBs to invest in Bangladesh and for Bangladeshi individuals and corporate to access international markets.

NRB Bank’s Mission

NRB Bank aims to be the preferred provider of targeted financial services as a conduit for investment to and from Bangladesh for our Bangladeshi communities both domestically and internationally, to accelerate the industrialization of Bangladesh.

We will strengthen these relationships by providing the right solutions that combine professionalism, expertise and financial strength.

NRB Bank’s Values

We demonstrate our bank with the motto “Not just another Bank” through our values, Dynamic, Integrity, Global, Innovative, and Technology oriented to create distinct financial bank locally and internationally

Dynamic- We shall perform better than our competitors.“Dynamic Performance” is not only about the outcome we achieve but how we accomplish them.

Integrity – Sincerity, Reliability and transparency is important to us since we believe in creating a sustainable relationship with our customers.

Global- we are a strong partner giving our customers access to the world’s financial community.

Innovative- We promote an innovative culture and attitude. We think differently and strive to apply innovative thinking and creativity to everything we do. We believe that Innovation is the key driver for our growth

Techno- centric – In view of the fast changes, the continuous introduction of new technologies and changes in customers’ expectations, NRB Bank states that advanced technologies shall rule our service delivery

Management

The goal of NRB Bank is “To be your trusted Financial Advisor”. Towards that goal of helping customers balance their risk and opportunities so that they can add value, the Management Committee (MANCOM) does the overall planning in the organization in the headquarters level in Dhaka, headed by CEO and consisting of the business heads of Corporate Banking, Consumer Banking, the heads of Human Resource, Operations, Brand and Communication Finance and Legal & compliances. They meet once a month, or when special issues arise, to plan the strategic decisions.

SWOT Analysis of NRB Bank

Strengths

• Experienced top management & personnel.
• Global connection

Weakness

• Fierce competition in the industry as three banks are already in the market in the same category (NRB)
• New rule of Bangladesh Bank of ratio of branches in rural : urban being 1:1, which was 5:1
• Time constraint in launching branches
• Board of Directors are not always available since most of them are NRB’s

Opportunities

• Growth rate of Remittance is very high
• Non-resident Bangladeshi have easier access to Non-resident Bangladeshi communities and associations, than do local private banks operating in Bangladesh.
• At least 40% of money sent back home by Bangladeshi overseas travels is through the hundi channel. This is a USD 10 billion dollar plus market – the potential market for Nonresident Bangladeshis Banks. Source: BRAC EPL Research ; April 09, 2012

Threats

World economy is facing a crisis and the bank is also exposed to the crisis

The banking sector becoming more and more competitive and emergence of new banks

The recent increased rate of default loans in the banking sector shows that a group of borrowers have been practicing high level of defaults

Increase marketing and branding cost because of high competition

Project Introduction

Banking is one of the most sensitive businesses all over the world. Banks play an important role in the economy and are considered as the backbone of an economy in every country and Bangladesh is no exemption. Banks are custodian to the assets of the general masses. The banking sector plays a significant role in a contemporary world of money and economy. It influences and facilitates many different but integrated economic activities like resources mobilization, poverty elimination, production and distribution of public finance.

Monetary policy and banking system play an important role in the development of all economic fields of the country because necessary finances for completion of economic plans are provided by them. Therefore an organized banking system and the financial institutions play an active role in this matter. In Bangladesh, the banking sector dominates the financial sector and it contributes to economic growth by efficiently allocating investment funds among competing alternative uses, by raising the rate of capital formation by separating the act of saving from the act of investment, as well as by providing incentives for increased savings and investment1. The overall performance of bank does not merely depend upon the banking industry itself but also on the performance of economy wherever it is operating. The banking sector in Bangladesh is disparate from the banking sector as seen in developed countries. This is one of the foremost service sectors in Bangladesh economy. To know more about this sector an analysis has been done on 5Banks to have better overview of the banking industry. They are:

Mercantile Bank – Mercantile Bank Limited emerged as a new commercial bank to provide efficient banking services and to contribute socio-economic development of the country. The Bank commenced its operation on June 2, 1999. MBL focused on core banking business, made good growth in profitability and maintained a sound asset quality. The Bank remained financially strong by dint of its resolute focus on the vision of becoming country’s finest corporate citizen and also emphasizing its’ focus on commercial banking and financing business, SME, Retail Consumer and relentless pursuit of providing excellent and need-based customer service.

Al Arafah Islami Bank- Al-Arafah Islami Bank started its journey in 1995 with the said principles in mind and to introduce a modern banking system based on Al-Qur’an and Sunnah. A group of established, dedicated and pious personalities of Bangladesh are the architects and directors of the Bank. Among them a noted Islamic scholar, economist, writer and ex-bureaucrat of Bangladesh government Mr. A.Z.M Shamsul Alam is the founder chairman of the bank. His progressive leadership and continuous inspiration provided a boost for the bank in getting a foothold in the financial market of Bangladesh. A group of 20 dedicated and noted Islamic personalities of Bangladesh are the member of Board of Directors of the bank. They are also noted for their business acumen. Al-Arafah Islami Bank Ltd. has 78 branches and a total of 1711 employees. Its authorized capital is Taka 5000 millions and the paid-up capital is Taka 4677.28 millions

Bank Asia – Bank Asia has been launched by a group of successful entrepreneurs with recognized standing in the society. The management of the Bank consists of a team led by senior bankers with decades of experience in national and international markets. The senior management team is ably supported by a group of professionals many of whom have exposure in the international market. The asset and liability growth has been remarkable. Bank Asia has been actively participating in the local money market as well as foreign currency market without exposing the Bank to vulnerable positions. The Bank’s investment in Treasury Bills and other securities went up noticeably opening up opportunities for enhancing income in the context of a regime of gradual interest rate decline.

Bank Asia Limited started its service with a vision to serve people with modern and innovative banking products and services at affordable charge. Being parallel to the cutting edge technology the Bank is offering online banking with added delivery channels like ATM, Tele banking, SMS and Net Banking. And as part of the bank’s commitment to provide all modern and value added banking service in keeping with the very best standard in a globalize world.

Dutch Bangla Bank Limited- Dutch-Bangla Bank started operation is Bangladesh’s first joint venture bank. The bank was an effort by local shareholders spearheaded by M Sahabuddin Ahmed (founder chairman) and the Dutch company FMO.

DBBL was the first bank in Bangladesh to be fully automated. The Electronic-Banking Division was established in 2002 to undertake rapid automation and bring modern banking services into this field. Full automation was completed in 2003 and hereby introduced plastic money to the Bangladeshi masses. DBBL also operates the nation’s largest ATM fleet and in the process drastically cut consumer costs and fees by 80%. Moreover, DBBL choosing the low profitability route for this sector has surprised many critics. DBBL had pursued the mass automation in Banking as a CSR activity and never intended profitability from this sector. As a result it now provides unrivaled banking technology offerings to all its customers. Because of this mindset, most local banks have joined DBBL’s banking infrastructure instead of pursuing their own.

Trust Bank- Trust Bank Limited is one of the leading private commercial banks having a spread network of 73 branches, 7 SME centers, 109 ATM Booths and 60 POS in 50 Branches across Bangladesh and plans to open more branches to cover the important commercial areas in Dhaka, Chittagong, Sylhet and other areas in 2012. The bank, sponsored by the Army Welfare Trust (AWT), is first of its kind in the country. With a wide range of modern corporate and consumer financial products Trust Bank has been operating in Bangladesh since 1999 and has achieved public confidence as a sound and stable bank.

Trust Bank is a customer oriented financial institution. It remains dedicated to meet up with the ever growing expectations of the customer because at Trust Bank, customer is always at the center.

Objective

NRB Bank is one of the new Banks in the industry and therefore has to face alot of challenges. The Non residential Bangladeshi is a very lucrative section, and if the company can Brand it properly and understand the fruits such a division can provide it will be profitable for them. . In Bangladesh, the banking sector dominates the financial sector and it contributes to economic growth by efficiently allocating investment funds among competing alternative uses, as well as by providing incentives for increased savings and investment. Thus the objective of the study is to understand the the profitability of this industry. By learning through other Bank’s success and mistakes what strategic decision this bank can make. Apart from this, some broad objectives of this report are as follows:

• To have a better idea about the profitability and efficiency of the banks in this industry.
• To learn from the mistakes of other banks, and to have a an overview of how the whole industry is performing.
• To understand the operations and need for a Non- Residential Bank in the country

Significance of the Study

The banking sector is increasingly becoming competitive in Bangladesh. Every bank has to be on top of what they are doing and thus maximize the share of this sector (also known as share of wallet in the industry). To be proactive in every decision, information is the key to be on top to forecast future business conditions. As a result, before getting into the industry it is better to gather information to present a view of future prospects and risks.

Part of being competitive is expansion of branches, placing branches in the right location, branding one bank properly, or setting the target customer correctly and this is another key role where doing a research plays in providing the best possible combination of solution. Proper presentation and exploitation of information is the key and the basis for providing valuable decision that ultimately determines whether the company will add or lose value. The heads of the managing and executing committee of the bank always needs to be updated with the performance of the bank and new emerging competition. And this research will give them a bird’s eye view of the whole industry, along with a better understanding of the whole industry. It will help in deciding which sector is currently performing well and what the bank should do to minimize risk.

Analysis

Study on Financial Markets

Annual business guideline

Performance and benchmark study of the bank with other competitive banks of the same generation/category

Business trend analysis and forecasting

Guideline for investment

Identify areas of core risk management

Mercantile Bank

Profitability

Interest income and non- interest income was BDT 5106.01 million and BDT 1771.51 million respectively in 2008. MBL’s total income’s (interest and non interest income) 74.2% consisted of interest income and 25.8% from non interest income. However at 2009 the percentage of interest income decreased to 0.7% and non interest income increased by 0.7%, though, the Bank’s non interest income’s growth was 42.7% for this year, the interest income growth decreased to 6.1%. As a result, Interest income as a percentage of total income has decreased to 68.7% in 2010 from 74.2% in 2008.This can explained by the fact that non-interest income has increased by a higher percentage during the two years. Non- interest income mainly consists of commission, exchange, brokerage and other operating income. At 2010, the Bank decreased its interest income further to a negative 4.8% and increased non- interest income by 4.78%. The bank was giving more importance to its non interest income than interest income in these years.

Although, Non- interest income increased during the years of 2008-2010, it holds a lower percentage of total income in 2011 and 2012. In the year 2011, the interest and non-interest income, both increased by 42%, and the percentage of interest income and non- interest income to total income remained constant like the previous year. However at the year 2012, they had a negative growth of non interest income and a moderate growth at interest income. In the following year the bank gave more preference to its interest income than non interest income, due to higher growth in asset.

Al Arafah Islami Bank Ltd.

Profitability

Interest income and non- interest income was BDT 3,456.34 million and BDT 936.81 million respectively in 2008. AIBL’s total income’s (interest income and non- interest income) 78.68% consisted of interest income and only 21.32% from other income. However, in 2009 interest income percentage decreased by 3.21% and non- interest percentage increased by 3.18%. This may be a positive side for AIBL, as they are trying to keep their income consistent by keeping a balance between interest and non- interest income. In 2010 interest income grew at a very low rate the amount being BDT 4,243.93 million a growth on only 5.97%. On the other hand noninterest income increased significantly in 2010 with a growth of 159 %. So, their low revenue growth from interest income was offset by the high growth in their non- interest income.

Therefore, a steady growth in profit was still maintained with a net interest margin of 3.73%. In the following years, however, in 2011 and 2012 AIBL achieved a growth of 111.45% and 57.33% respectively in their interest income, with a decrease in their non- interest income in these years. Their high growth was due to the amount of loans given by AIBL. In 2011 the amount was BDT 73,433.81 million and in 2012 it stood at BDT 101,567.01 million.

Trust Bank

Profitability

Interest income and interest income was BDT 3634.65 million and BDT 833.69. Trust Bank’s percentage of interest income was increasing at a higher rate than non interest income. From the year 2011 Trust Bank started giving more importance to non interest income than interest income. Non- interest income mainly consists of commission, exchange, brokerage and other operating income. Income from these is volatile and probably that’s why they preferred noninterest income more in these years.

Bank Asia

Profitability

Interest income and noninterest income was BDT 4973.11 million and BDT 1658.44 million respectively in 2008. Bank Asia’s total income (interest and non interest income) 75% consisted of interest income and only 25% from other income. Over the years the percentage of interest income and noninterest income increased consistently. At 2012 there was a high growth of 22% of interest income. This high growth was due to high loans given by Bank Asia. At 2011 the loan amount was 82,000 million and at 2012 the loan amount increased to 92,000 million.

However the amount of interest income was very steady and didn’t show that much of growth compare to interest income.

Dutch Bangla Bank Limited

Profitability

Interest income and non- interest income was BDT 5453.92 million and BDT 1821.83 million respectively in 2008. DBBL’s total income (interest and non interest income) 75% consisted of interest income and only 25% from other income. Over the years the percentage of interest income and non- interest income increased consistently. At 2012 there was a high growth of 40% of interest income. This high growth was due to high loans given by DBBL. However the amount of interest income was very steady and didn’t show that much of growth compare to interest income.

Findings

1. Most of the Banks Loan- deposit ratio was fluctuating, which caused a lower growth in assets and earnings. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be. However, it’s better to have a high loan to deposit ratio than a lower one. According to a recent new published at Financial Express the credit deposit ratio in the overall banking sector declined to 72% in April last against 85 percent a year back. The ratio is likely to go down further in the coming months, if the slow trend about credit flows to the private sector continues and the political situation takes a turn towards further worse course again.
2. Demand of bank credit has declined which can be seen in the growth in asset section of all the banks. Not only that the rate of credit growth of the private sector has decreased to 12.72% in March.
3. The NPL to loan ratio was high for all the banks at the year 2012. If the volume of it goes beyond the tolerate limit (almost 3.5), it can erode the strength of financial institutions by cutting the capacity of further lending. It even lessens the income and wear down the confidence of depositors.
4. To maintain the interest income and non- interest income ratio of the bank. Interest income is earned on deposits at banks and on money market funds, loans. Whereas, non interest income comes mainly from bank charges, penalty from sales and property leasing, etc. for a bank its better to rely more on interest income than on non interest income because non- interest income is more volatile. Since the growth from loans was low most of the banks interest income decreased from the year 2010 and the bank were more relying on non interest income than interest income.
5. When Bank opens new Branches the operating efficiency increases, as expense increase at a higher rate than income. However, Al Arafah Bank maintained a good efficiency ratio over the 5 years compared to others, managing its expenses and income capably.
6. The CAR has to go up to 14 percent under Basel-II requirement. Whereas most of the banks CAR ratio was below 14. Among all the banks Al Arafah islami Bank and Bank Asia maintained a better CAR ratio than other.

The capital adequacy ratio (CAR), which sets the minimum cushion of capital a bank, must keep absorbing losses and promoting stability, was 9.3 percent in Bangladesh at the end of 2010. The CAR of Indian banking industry was 14.6 percent as of end-March 2010, 14 percent in Pakistan and 14.9 percent in Sri Lanka

Recommendation and Conclusion

Recommendation

1. As seen in the analysis part the credit demand from the private sector is falling continuously due to the ongoing political violence, shortage of gas and electricity and high rate of interest on banks’ lending. Excess liquidity has caused mainly due to the low level of demand of credit by the private sector. To overcome this crisis NRB Bank can put emphasis on medium and retail deposit and invest on government securities like treasury bills and treasury bonds with lower rate of interest. However, most of the investors are waiting for the political unrest to be over and probably after the election they are hoping that the scenario would change.
2. The negative growth in loans for banks is due to a negative investment scenario in the country’s business sector, especially after the Hallmark and Basic bank’s Scandal. However, according to Bangladesh Bank’s rules the credit deposit ratio should be less than 85%, and for most of the banks it was higher than that. Therefore, being a new bank in the industry, NRB Bank should be careful while investing or giving loan to any company.
3. Since the non Performing Loan for most of the Banks are higher than the industry medium and since the demand for credit has declined. NRB Bank can put extra effort to organize more medium and retail deposits that are low cost on nature, which the general public might be interested in.
4. Retail-oriented banks should increase their share of non-interest income to become more stable. Investment-oriented banks, in contrast, should decrease it. Banks are significantly less risky if they have a more balanced income structure and neither depend heavily on interest nor on non-interest income. Furthermore, they indicate that the impact of non-interest income on risk significantly depends on the activities used to generate non-interest income with retail-oriented activities being significantly less risky than investment-oriented activities such as those investing to capital markets activities. Therefore, NRB Bank should decide whether they would want to be a retail oriented bank or an investment oriented bank and depending on that they should maintain their interest and non- interest income ratio.
5. AIBl’s operating efficiency has been really good over the years. And as a new bank NRB Bank should keep their operating efficiency as stable as theirs.
6. The CAR has to go up to 14 percent under Basel-II requirements, so being anew bank NRB Bank should keep it to14 percent to be on the safe side.
7. Being a new bank NRB Bank should provide better quality of service than the existing banks. This would increase competition in the Banking sector and they will also be able to meet the unfulfilled demand for credit by the private sector which has been growing day by day.
8. The banks should introduce new and innovative services and should scale up their product to make themselves more competitive in the market.
9. The government wants the new banks to serve the rural population extensively. Consequently NRB Bank should target those rural areas where there is demand for banking operation, so that it is profitable for the bank and for the people living there.
10. The existing banks have been sufferings from liquidity crisis and the new banks entering in the market will deepen this crisis. So initially being a new bank NRB Bank should give more emphasis to its liquidity situation