Performance analysis of Mutual Trust Bank Limited

Performance analysis of Mutual Trust Bank Limited[This Dissertation is submitted for the partial fulfillment of BBA program]

Guide Teacher :.Department of FinanceUniversity of Dhaka

Submitted by :Tamanna Tanvir Haque BBA program,16 th BatchID No.

Date of submission:

Date.To The Director Department of FinanceFaculty of Business StudiesUniversity of Dhaka

Subject: Submission of the dissertation paper on Performance analysis of Mutual Trust Bank LimitedDear Madam With due respect, I am submitting herewith mi dissertation paper on the above mentioned title for the partial fulfillment of the requirements of BBA program.

I have toiled hard in preparing this dissertation and tried to make the report clear and comprehensive within the constraints. I sincerely believe that it will serve the required purposes. I shall always be obliged to furnish any clarification regarding the dissertation, if required.

Sincerely yours,

Tamanna Tanvir HaqueBBA program,16 th batchID No. .

Guide Teachers Certificate

This is to certify that the Internship Report on Performance analysis of Mutual Trust Bank Limited (Based on Financial Ratio) in the bona fide record at the report is done by Tamanna Tanvir Haque as a partial fulfillment of the requirement of Bachelor of Business Administration (BBA) degree from the department of Finance, University of Dhaka.

The Report has been prepared under my guidance and is a record of the bona fide work carried out successfully.

...

Bank

Declaration

I do hereby solemnly declare that the work presented in this Internship Report has been carried out by me and has not been previously submitted to any other University/College/Organization for an academic qualification/certificate/diploma or degree.

The work I have presented does not breach any existing copyright and no portion of this report is copied from any work done earlier for a degree or otherwise.

I further undertake to indemnify the Department against any loss or damage arising from breach of the foregoing obligations.

Tamanna Tanvir HaqueBBA program,16th BatchID # Date:

Acknowledgement

First, I would like to express my gratitude to almighty ALLAH to give me the strength to complete the report within the stipulated time.

I would like to thank the Higher Authority of University of Dhaka for giving me every facility & opportunity to complete all necessary tasks to prepare the report on such a wonderful and learning issue.

I am deeply indebted to my guide teacher ., professor, Department of finance, University of Dhaka for his whole-hearted advice and guidance. Without his suggestions, comments and lucid discussion from time to time and also giving valuable instructions and suggestions to complete this paper in an appropriate manner, it would have never been possible on my part to make the report a good one. Actually he acted as a great source of spirit.

It will be very ungrateful if I dont say my gratitude to the Staff Member of Department of Finance, who helped me a lot during my whole research period.

Lastly, I would like to give many special thanks and inexpressible greets to Mr. head of Branch, Mutual Trust Bank, Branch,Dhaka,MR Financial administration Devision,Dhaka and othes for giving me advice, inspiration and support.

Thanks for all from the core of my heart.

Tamanna Tanvir HaqueBBA program,16th BatchID # Date:

Executive summary

CHAPTER ONE

Introduction

Introduction1.1. PreludeBanks are very old form of financial institution that channel excess funds from surplus unit to deficit unit in consideration of a price called Interest. Banking business definitely established on a relationship of Debtor-Creditor between the surplus unit called depositors and the bank and between the deficit unit called borrowers and the bank. Here, opportunity cost of money works as interest is considered the price of the credit. For the development of an economy, bank furnishes a huge contribution and modern economy can not be imagined without the service of bank. Economic development of a country requires a well organized, smooth, easy to reach and efficient saving-investment process. The function of a single bank is not limited to its geographical region only rather it has reached beyond the border of the country. So, banking business has been shaped as global business and the rest other business greatly depends on the strength of banking business performance.In a view of IMF, the recent financial crisis showed many weakness within the on hand financial system across the world, which triggers many issues linking to the protection of banking institutions against probable future non-expected risks associated with periods of insecurity. Banks regulatory authority are directly liable to evaluate the performance of each banking business to find out any flaw, regulatory authority should have to sense any upcoming difficulties regarding the performance of all banks. For this purpose, regulatory authority asked for specific statements highlighting the performance of financial operation on which the evaluation of performance is done. Regulatory required statements supplies most of the information reflecting the performance. Despite, onsite inspection is also required to find out the accuracy and to judge qualitative performance of the banking company. Banks soundness and performance can be summarized by the financial ratios.

1.2. Statement of the Problem A single bank is highly connected with other banks for payment system and other functions of bank. The failure of a single bank not only affects its shareholders and depositors rather it affects rest other banks and even all rest other business. The failure of a single bank creates an economic turmoil situation and is regarded as a disaster for the economy. The recent global recession is also an example of economic disaster that occurred for the failure of banking business. So, the government of any country must have a high concern about the performance of all banks. To supervise and regulate the performance of banking business, there is a supervisory authority called central bank in each country. The supervisory authority creates smooth and efficient atmosphere for fund flow and payment system. Supervisory authorities measure the performance and assess the strength and weakness of bank and tasks necessary actions.The banking sector of Bangladesh compared to its economic size is moderately bigger than many other economies of equal level of development and per capita income. There are fifty-two commercial banks operating in this small economy. Although over the last thirty years, the country achieved noticeable success regarding the access to banking services, in 1972 population per branch was 57,700 and in the year of 2010, it was 20,162 per branch. The statistics indicates that getting banking services is not a significant problem for the country. Bangladesh bank perform both onsite and offsite supervision of banking operation. For offsite supervision, Bangladesh Bank has to rely on various financial statements and other documents as specified by Bangladesh Bank sent by all the scheduled banks. Bangladesh Bank measures the performance of all individual banks based on CAMELS ratio.Financial ratios mainly indicate the adequacy of the risk based capital, credit growth, credit concentration, single borrower exposure, non-performing loan position, liquidity gap analysis, liquidity ratio, inter-bank dependency, return on asset (ROA), return on equity (ROE), net interest margin (NIM), forign exchange exposure, market risk and management questionnaire etc. But, no detailed study has yet been done for the ordinary people, students, researcher to confer the overall knowledge of CAMELS rating systems in the context of Bangladesh. This study use financial ratio and due to security aspect we can not find the weight of each components of CAMEL and qualitative measures depends on analyst so that we use here financial ratio to evaluate financial performance of the bank.Mutual Trust Bank Limited made adequate provision against classified loans. Specific provision made is significantly higher than last year. Adequate provision made the bank stronger than before. Tier- 1 Capital stood at BDT . Million at the end of 2011 compared to that of BDT million at the end of 2010. Tier-2 Capital reached to BDT ..million at the end of December 2011 as compares to that of BDT ... million at the end of 2010. Return on Assets (ROA) was % as on December 31,2011 and Return on Equity (ROE) was % as on December 31,2011. Consolidated Capital Adequacy Ratio (CAR) of the bank stood at % against minimum requirement of % as per Basel II capital Accord in December 2011. Net Interest Margin (NIM) stood at % at the end of 2011 suggesting a healthy growth in Net Interest Income.

1.3. Rational of the StudyBangladesh Bank(BB) as central bank of Bangladesh , has the statutory task of regulating and supervising the banking system of Bangladesh. To play this vital role, BB assesses the overall performance of the banking system to find out strength and weakness as a whole, as well as the safety and soundness of each individual banking company. Bangladesh bank conduct its offsite supervisory function mainly based on CAMELS rating. Presently Risk Based Supervisory activities are also executed from the end of the central bank with a view to helping the banks so that they might keep pace with the modern, diversified, most complicated, vulnerable and most competitive baking environment. Notable, the Risk Based Ratings derived from risk based supervisory activities and inspections are reflected in the management Component of CAMELS rating in order to focus on management Efficiency in managing multiple issues of the banking business.Financial ratios are use as a supervisory tools to find out the overall position of an individual bank so that Bangladesh Bank can take necessary actions where it is necessary. The study will present all the related issues with Financial ratio. All the ratios will be summarized so that anyone can have the clear concept about each component of CAMELS. Since CAMELS rating result is kept confidential, stakeholders of a bank are not aware about the actual performance of a banking company. So, a detailed discussion of financial ratio is required for the mass people.The performance of Mutual Trust Bank Limited need to be analysed to focus the strength and weakness which are to be done in this study. It will help the regulatory authority, stakeholders and mass people to think and to concentrate about the required strategy to safe guard their interest.

1.4. Objectives

The study will help to show how financial ratio is applied by bank to assess the performance of Mutual Trust Bank Limited in a complete format. Specific objectives of the study are: To measure the performance of bank based on financial ratios. To find the strength and weakness of the bank in financial aspect in particulars. To recommend some measure for better functioning of financial system of the bank.

1.5. MethodologyCollection of Data :This study has been undertaken on the basis of secondary data (i.e., published data or processed data). For this purposes, a good number of sources have been used.The sources include: Annual Report of the bank Insight Monthly Magazine of the bank Books and Web sitesProcessing of data Processing of data has been done carefully with a view to making comparison and doing ratio analysis and interpretations. This includes-i) Editing of Data: After collecting data from different sources, the relevant data have been scrutinized carefully. Data may differ from one source to another. Exact sources of data are cited in the footnotes of each table.ii) Classification and Tabulation of Data: after collecting and editing data, it becomes necessary to organize it in such a way that facilitates analysis and interpretation of data on the basis of different variables. Analysis and Interpretation:Processed data have been then been duly analyzed and interpreted as to achieve the desire objectives. For understanding the CAMEL of the bank, data have been analyzed to compare the financial condition of the bank. Some related ratios have also been used to indicate the financial health, degree of liberalization and the inspect on bank performance. All the data have been manipulated by standard computer packages like MS Excel and MS Word.

Final Repot Preparation:The final report hass been prepared on the basis of analysis and interpretation of data

1.6. Limitations of the StudyEvery research work needs high degree of involvement regarding collection of information, creation of database, review of literature and analysis of the data. In this study, utmost endeavor has been put to collect, organize, analyze, and interpret the related data and finally to attain the optimum outcome of the study. However, this study has suffered from certain constraints noted below: Primary and unpublished data have not considered for the study. Data accuracy can not be ensured as mainly secondary data collected from Annual Report. The depth of the analysis has been limited to the extent of information collected from different sources. CAMELS analysis can not used in this report because weight used by the bank for each component of CAMELS is secret for the bank qualitative measures are different from different analyst. So that we use financial ratio to evaluate the performance of the bank.

CHAPTER ONE

Key Financial RatiosUsed by Commercial Banks

Key Financial Ratios Used by Commercial Banks

2.1 Capital adequacy: A bank must have capital for three reasons:i) To absorb unexpected credit losses.ii) To provide safety for depositors and creditors, andiii) To satisfy regulatory authorities ongoing concern with depositors protection and a stable banking system.

2.1.1. Market approach: 1. Basic capital ratio = Equity/ Total asset 2. Equity multiplier = Total asset/ Equity3. Divided payout ratio = Dividends/ Net income

2.1.2. Regulatory approach1. capital adequacy ratio = Primary capital / total assets 2. Basel (or BIS ) ratio = capital ( tier 1 + tier 2 + tier 3 )/ Risk- weighted assets

2.2 Asset quality:Yet the assessment of asset quality is one of the most difficult aspects of bank analysis. Given that difficulty, the credit analyst must proceed in two directions:1) Examine the banks credit risk management strength and weakness, and 2) Try to evaluate the quality of the investment and loan portfolio using trend analysis and peer comparison.

2.3 Earnings:Bank earnings provide capital formation, and they are needed to attract new investor capital, which is essential if the institution is to grow. They serve both as a demonstration of managements effectiveness and as a barometer of the effects of macro-financial policies on banking institutions. Healthy profits are needed to absorb loan losses and to build adequate provisions. A consistent earnings performance builds public confidence in the bank.1.Net interest income:

2.Other income:

3.Operating expenses (overhead expenses)

4.Provision for loan losses:

5.Income before extraordinary items and taxes:

6. Net income:

2.4 Liquidity:Liquidity in bank management is needed for two reasons:

1.To satisfy demand for new loans without having to recall existing loans or realizing term investments such as bond holdings, and2. to meet both daily and seasonal swings in deposits so that withdrawals can be met in a timely and orderly fashion.

CHAPTER FOUR

Analysis and Interpretation

Analysis and Interpretation4.1 Capital adequacy A bank must have capital for three reasons:1. To absorb unexpected credit losses.2. To provide safety for depositors and creditors, and 3. To satisfy regulatory authorities ongoing concern with depositor protection and a stable banking system In effect, a banks capital acts as a safety net in the case of unfortunate events. A high level of capital permits management to pursue higher-risk business opportunities. A low level of capital restricts managements scope for moreover.

Capital adequacy refers to the amount of stockholders fund that are available to support the business of the bank. The amount depends on the size of the balance sheet and the types of activities in which the bank participates. Clearly, the riskier its loan portfolio, the more stockholders funds are required to support those activities. A bank that only purchases government securities or only makes short term loans on a secured or guaranteed basis will not require as much capital as a similar-sized bank that makes unsecured loans to small enterprises and commercial property developers. Since the second bank has more risk. It should be expected to have more capital to protect its other creditors against losses. However, the reward for the stockholders of the second bank is that higher risk normally generates higher profits, If managed properly.

Nevertheless, the question is what constitutes adequate capital? Here the banker is faced with a dilemma: Too much capital reduces leverage or the bankers ability to maximize return for shareholders; but Too little capital exposes the bank to a disproportionate level of risk of failure if misfortune strikes.

Banks generally prefer a lower level of capital to maximize return on equity (net income divided by equity), while the regulatory authorities prefer a higher level to safeguard the banking system and reinforce market stability.

The problem loan experiences of the 1970s and 1980s have shown that capital adequacy is important. Even the best capitalized bank can be overwhelmed by unfortunate events but the results are less catastrophic. A bank with a sound capital base has more time to consider problem and to deal with them effectively, while high capital does tend to impede high profits, the best capitalized banks are among the most profitable worldwide.

Two approaches help determine the adequate level of capital. One is the market approach, where the markets decide whether a bank has sound capital base; for example, requiring banks to be rated by a prominent rating agency; with low ratings (the result of low capital among other factors) the result additional risk premiums in the market. The second is the regulatory approach, whereby the central bank or bank supervisory authorities stipulate the level of capital. In view of concern by the authorities, the latter approach receives the most attention.

Capital adequacy: Principal ratiosWith either approach, capital ratios are the main technique for analyzing capital adequacy. Deviations of capital ratios for individual banks from national averages provide a warning signal to both management and analysts that a closer look at capital adequacy is required.

Market approach

Significance: This ratio is easy to use science it requires only a cursory glance at the banks balance sheet. Equity is simply assets minus liabilities, or the stockholders equity section of the balance sheet, which includes: Non-redeemable preferred stock; Common stock or sharp capital; Capital surplus (premium paid over stock par value); Permanent and statutory reserves; and Retained earnings.Total assets equal the total balance sheet. An average figure is technically preferable but not terribly important to arrive at a rough estimate of capital adequacy.Weakness: A ratio below the 5 per cent rule of thumb is not necessarily a sign of inadequate capital. Many state-owned banks exhibit low levels of capital but generally have back-up support from the Government, a Government agency, or even the central bank.This simplistic approach also ignores other sources of permanent funds a bank may have, such as subordinated debt, which generally is not listed among shareholder funds.