General Banking and Financial Performance of UCBL (Part-5)
Subject: Economics, Finance | Topics:

4.11 Corporate Governance

Accountability, Fairness, Transparency and Responsibility are the standard of Corporate Governance. UCB gives emphasis on the corporate governance in promoting an efficient and transparent management. The objective of the bank is to comply with all regulatory requirements, ensure equitable treatment of all stakeholders, confirm full and fair disclosure of financial and all other material information and show respect for norms of business ethics and social responsibility.

Most of the Members of the Board are renowned and respected persons in their respective fields of business. The Board of Directors, Executive Committee, Audit Committee and other committees of the management of UCB perform their part with accountability and transparency. The bank follows the guidelines stated below to ensure corporate governance:

  • In accordance with the guidelines of Bangladesh Bank the number of Directors in the Board is 13. Thus the bank also complied with the guidelines of Securities and Exchange Commission.
  • The Board of Directors has two committees, namely Executive Committee and Audit Committee.
  • The Board approves the Bank’s budget and reviews the policies and guidelines issued by Bangladesh Bank in order to establish effective risk management in credit and other key areas of operations.
  • At least one Board meeting is held every month.
  • The Board ensures the compliance with the rules and regulations of  Securities and Exchange Commission (SEC) and other regulatory bodies. The Compliance of Guidelines issued by Securities and Exchange Commission on Corporate Governance is given in Annexure – I.
  • The Audit Committee examines the implementation of the policies, manuals, instructions and Bangladesh Bank’s guidelines.

It also ensures the audit compliance of the bank. The Audit Committee discusses bank’s audit plan and risk management process with the management and external auditors.

  • The Management performs activities in the line with policies and limits as approved by the Board.
  • Information related to the bank’s risk management, capital adequacy, earning per share and other disclosures as requisites is provided in the Annual Report to facilitate the valued shareholders to get an overview of the bank.

4.12 Corporate Social Responsibility (CSR)

The CSR Centre, an innovative new establishment in Bangladesh to promote corporate social responsibly, defines it as “a set of business practices based on ethical norms and transparency that contributes to the sustainable development of internal and external stakeholders in the best interest of business society and environment.”

Profits are not the bottom line to United Commercial Bank Limited. Apart from earning profits, the bank lays emphasis on the sustainable development of itself as well as the country, the welfare of the society and the contribution to the humanity. With this end in view the bank responds to the clarion call of less privileged and handicapped people. Though the concept of CSR is nascent in our country, UCB is enlightened with the spirit of CSR. The bank has contributed to various charitable, educational and healthcare institutions across the country in the form of donation and sponsorship. The bank has formed UCB Foundation to serve the humanity. The philanthropic supports were extended both from the bank and from the UCB Foundation.

In 2007 Bangladesh sustained two floods and an unprecedented cyclone S1DR which made many hapless people helpless. United Commercial Bank donated Tk 50 lac to the Chief Adviser’s Relief and Welfare Fund in aid of the flood-affected people.

The bank also distributed dry food among the flood victims. In 2007 the bank distributed big umbrellas among the street hawkers.

Some were also distributed to traffic police at different traffic islands of the city. Last year the bank helped to raise funds for a cancer patient’s treatment by selling tickets of cultural evening through the bank’s branches. The bank handed over sixty two thousand taka to the victim. UCB participated in the ticket sale of the National ENT and Head-Neck cancer Foundation Lottery 2007 and handed over a substantial amount of proceeds to the foundation. The bank also turned out to help the SIDR-hit people with relief materials including clothes.

To discharge the corporate social responsibility, United Commercial Sank established United Commercial Bank Foundation. In 2007 Tk. 50,000 was donated to Centre for Rehabilitation of the Paralyzed (CRP), Tk. 10,000/- each to three destitute persons struck by different socio-economic and health problems.

Moreover, the bank printed the calendar of 2007 based en the subject matter of the Aesop’s Fables. All the twelve stories gave the viewer moral lessons. The bank has also oriented the stories in booklets in two sizes -the smaller one and the bigger one and the booklets have been distributed: different schools for distribution among the students. It is relieved that the stories will be able to create an impact in the mind of the kids. With a view to selecting artworks for the bank’s calendar of 2008, the bank organized art competition with school children in the six Divisional headquarters in 2007. Two best paintings from each Division and total twelve were chosen for printing in the twelve-leaf calendar with complimentary cover page. The bank also organized an exhibition with select artworks of the juvenile artists of the completion.

5.1 Vertical / Common size Analysis

Vertical/Common size statements came from the problems in comparing the financial statements of firms that differ in size. In the balance sheet, for example, the assets as well as the liabilities and equity are each expressed as a 100% and each item in these categories is expressed as a percentage of the respective totals. In the common size income statement, turnover is expressed as 100% and every item in the income statement is expressed as a percentage of turnover (sales). Here bank has no sales so that I have considered the operating as 100%.

Balance Sheet

As on December 31, 2009 & 2008

Common size

Balance sheet

Particulars

2009 (BDT)

2008 (BDT)

2009 (%)

2008 (%)

Property and assets Cash :

Cash in hand

Balance with Bangladesh

Bank & Agent Bank

346,750,709

2,757,203,068

278,725,815

1,723,580,565

0.66

5.22

0.72

4.42

 

3,103,953,777

2,002,306,380

5.88

5.14

Balance with other banks & financial Institutions :In Bangladesh

Outside Bangladesh

3,337,079,631

270,091,508

452,574,171

250,478,774

6.32

0.51

1.16

0.64

 

3,607,171,139

703,052,945

6.83

1.80

Money at call and sort notice

———-

 

510,000,000

———

1.31

Investments : Government

Others

8,961,988,755

575,984,773

5,366,331,230

240,160,708

16.98

1.09

13.77

0.62

 

9,537,973,528

5,606,491,938

18.07

14.39

Loan and advance : Loans, cash credit, overdrafts Bills purchase and discounts

31,493,607,971

2,390,315,734

25,502,004,876

3,027,340,743

59.68

4.53

65.45

7.77

33,883,923,705

28,529,345,619

64.21

73.22

Fixed assets including premises, furniture & fixture Other assets

445,576,880

2,196,167,040

367,190,769

1,246,586,472

0.84

4.16

0.94

3.20

Total Property and assets

52,774,766,068

38,964,974,123

100

100

Liabilities and Capital Borrowing  from other Banks, Financial Institutions & agents

Deposits and other accounts :

Current deposit & other accounts

Bills payable

Savings deposits

Fixed deposits

Deposits products

3,550,000,000

 

6,511,156,357

528,953,937

5,104,087,897

26,229,065,156

3,980,802,560

—————

 

5,419,895,459

447,472,338

2,943,076,237

22,360,677,789

2,649,285,683

6.73

 

12.34

1.00

9.67

49.70

7.54

————-

 

13.91

1.15

7.55

57.39

6.80

 

42,354,065,907

33,820,407,506

86.98

86.80

Other Liabilities

3,186,191,049

2,661,471,919

6.04

6.83

Total Liabilities

49,090,256,956

36,481,879,425

93.02

93.63

Capital/shareholders equity : Paid up capital

Share premium

Statutory reserve

General reserve

Retained earnings

1,766,318,400

980,325,611

383,866,189

161,777,324

392,221,588

1,496,880,000

701,941,901

3,057,073

87,891,054

193,324,670

3.35

1.86

0.73

0.31

0.74

3.84

1.80

.007

0.23

0.50

Total stockholder’s equity

3,684,509,112

2,483,094,698

6.99

6.37

Total liabilities and stockholder’s equity

52,774,766,068

38,964,974,123

100

100

Net Asset Value (NAV)

3,684,509,112

2,483,094,698

From the vertical analysis above, we can compare the percentage mark-up of asset items and how they have been financed. The strategies may include increase/decrease the holding of certain assets. The analyst may as well observe the trend of the increase in the assets and liabilities over several years. It can be observed that there is an increase in the holding of the current assets of the company. The management can seek the reasons of why the holding of these assets is continuously increasing. Though both the assets and liabilities are increasing but proportionately liabilities were a little higher than the assets, which may make some ratio lower. The above analysis also shows that total liabilities has increase but stock holder’s equity has decreased, which indicates that UCBL is more debt financed than the equity.

Profit and Loss Account

For the year ended December 31, 2009  & 2008  

Common size

Profit and Loss Account

Particulars

2009 (BDT)

2008 (BDT)

2009 (%)

2008 (%)

Interest IncomeLess Interest Paid on Deposits & Borrowing etc.

4,279,499,839

3,409,350,043

3,529,718,692

2,792,584,222

239.57%

192.90%

182.16%

132.95%

Net Interest Income

870,149,796

737,134,470

46.67%

49.21%

Income from investmentsCommission, exchange & brokerage

Other operating income

857,466,508

663,349,650

153,054,820

454,838,339

517,512,796

130,089,123

239.57%

192.90%

46.67%

14.35%

31.35%

5.20%

 

1,673,870,978

1,102,440,258

53.33%

50.79%

Total operation income

2,544,020,774

1,839,574,728

100%

100%

 Less : Operation expenditureSalary & allowances

Managing director’s remuneration

Director’s fees

Rent, tax, insurance, electricity

Legal expenses

Postage, stamps, telegram & telephone

Audit fee

Printing, stationary, advertising

Depreciation on & repairs to banks

property

Other expenditure

491,005,215

6,681,999

632,000

116,232,689

1,056,207

27,474,706

400,000

33,546,432

58,971,205

181,101,770

303,004,065

4,200,000

596,000

87,840,969

754,317

28,288,179

200,000

27,475,722

47,872,953

144,254,125

16.89%

0.30%

0.05%

4.69%

0.15%

1.47%

0.008%

1.39%

3.10%

7.67%

12.34%

0.18%

0.03%

3.12%

0.42%

0.98%

0.004%

1.02%

2.20%

4.60%

Total operating expenditure

917,102,223

644,486,330

35.72

24.54%

Profit Before provision

1,626,918,551

1,195,088,398

64.28

75.46%

Less : Provision against loans & advances

235,000,000

636,555,323

31.00%

7.39%

Profit before Tax

1391918551

558,533,075

33.28%

71.20%

Less : Provision for tax currentDeferred

594000000

(22686747)

251,339,884

2,161,906

15.76%

(0.21%)

30.62%

0.21%

 

571,313,253

253,501,790

15.55%

30.83%

Net Profit after tax

820,605,298

305,031,285

17.73%

37.24%

Add: Retained surplus, brought forward

193,324,670

131,691,609

25.53

16.45%

 

1,013,929,968

436,722,894

43.26

53.69%

A second method of common size analysis is a means of comparing figures within a single P & L. A common size profit and loss statement, for example, compares all components of the P & L to total operating income. In other words, Total operating income is defined as “100% and all other figures on the statement are expressed as a percentage of that. In this way, we not only get an automatic indication of approximate profit margin, we also can see the importance of all of your costs and expenses relative to operating income. Vertical analysis can also be done on these common size percentages in order to identify trends in the relative sizes of categories like costs, expenses, or margins. The above analysis shows that UCBL has higher net interest income than 2008 to 2009. But after tax net profit has decreased because they paid more provision against loan and advances. On the other hand they paid lower tax in 2009. In the year 2009 UCBL has comparatively higher expenditure, but marginally lower percentage, which was not good signal for the bank.

5.2     Horizontal/ Trend Analysis

It is conducted by setting consecutive balance sheet, income statement or statement of cash flow side-by-side and reviewing changes in individual categories on a year-to-year or multiyear basis. The most important item revealed by comparative financial statement analysis is trend. # Percentage change= (recent year-previous year)/previous year

UCBL performance for 2009 compared to 2008 & 2008 compared to 2007. 

ITEMS

2009

(Million)

Change

(%)

2008

(Million)

Change

(%)

2007

(Million)

Paid up Capital

1,766.32

18.00

1,496.88

50.00

997.92

Shareholder’s equity

3,684.51

48.38

2,483.09

21.46

2044.30

Total Capital

49,090.26

34.56

36,481.88

21.05

30,137.60

Total Assets

52,774.77

35.44

38,964.97

21.08

32181.90

Total Deposits

42,354.07

25.23

33,820.41

36.50

24776.92

Total Loans and Advances

33,883.92

18.77

28,529.35

25.77

22683.22

Total Investments

9,537.97

70.12

5,606.49

41.70

3956.53

Total Contingent liabilities

15,694.20

78.13

8,810.44

123.99

3933.34

Operating Income

2,544.02

38.29

1,839.57

54.80

1188.34

Operating Expenditure

917.10

42.30

644.49

51.83

424.49

Profit before provision and tax 

1,626.92

36.13

1,195.09

56.46

763.85

Net profit after provision and tax

820.61

169.03

305.03

44.70

210.80

Total provision maintained

806.31

-9.41

890.06

60.94

553.05

Earning Assets

44,638.75

40.32

31,811.55

24.11

25,631.62

Non-interest Earning Assets

8,136.01

13.74

7,153.42

9.21

6,550.28

A comparison of statements over several years reveals direction, speed and extent of a trend(s). The horizontal financial statements analysis is done by restating amount of each item or group of items as a percentage. Such percentages are calculated by selecting a base year and assign a weight of 100 to the amount of each item in the base year statement. Thereafter, the amounts of similar items or groups of items in prior or subsequent financial statements are expressed as a percentage of the base year amount. The resulting figures are called index numbers or trend ratios. The above analysis shows that UCBL performance trend is quite better in 2009, but somewhere it was not good. Their import was too higher, which is not good. Their capital was higher in 2009 but stockholders equity has decreased. As compared 2008 though their asset and deposit was higher but they had very low investment as well as UCBL was highly debt financed.

5.3    Ratio Analysis

Financial ratios are useful indicators of a firm’s performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm’s financials to those of other firms. Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. Financial ratios can be classified according to the information they provide.

The following types of ratios frequently are used:

1. Liquidity ratios

2. Debt management ratios

3. Profitability ratios

4.  Dividend policy ratios

Ratio Analysis of the UCBL:

Year

Ratio 2009Ratio 2008Ratio 2007Ratio 2006Ratio 2005

Ratio

Current Ratio

0.440895618

0.341261439

0.500052843

0.54879524

0.459192366

Quick Ratio

0.04925359

0.047504405

0.063418709

0.077786448

0.068547386

Debt to Equity

96.35%

142.97%

151.64%

162.75%

28.43%

TIE

6.923057664

1.877430531

2.073995493

10.20496963

23.7035

ROE

27.52%

17.59%

25.15%

36.20%

31.89%

ROA

1.92%

1.12%

1.60%

2.65%

2.56%

Dividend Payout

0.304019485

0.81788332

0.901698724

0.252906565

0.359812921

Debt-Equity

0.963493343

1.429667585

1.516413583

1.627463844

0.284332353

Debt to total asset

0.067266996

0.091107465

0.09632745

0.119304572

0.022789673

Dividend coverage

3.289262859

1.22266829

1.109017871

3.954029423

2.77922204

Gross profit margin

292%

250%

214%

203%

20%

Net profit margin

94%

41%

38%

76%

78%

1. Liquidity ratio

Liquidity ratios are the first ones to come in the picture. These ratios actually show the relationship of a firm’s cash and other current assets to its current liabilities. Two ratios are discussed under Liquidity ratios. They are:

Current ratio:

This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses.

Current Ratio=Current Assets/Current Liabilities

Year

2009

2008

2007

2006

2005

Current Ratio

0.44

0.34

0.54

0.55

0.46

From the analysis, we can see that in 2008 the current assets were 0.89 times than the current liabilities that has not fluctuated much through out these years. A minimal decrease is seen in 2009 The reason for such stability can be there not investing remarkably on assets and not making any huge financing from outside. If we take a closer look on the balance sheet, this assumption gets a more realistic touch. Year by year assets have gone slightly up and the liabilities as well, but proportionately liabilities were a littler higher than the assets, which actually reflected as a marginal decrease in the ratio.

Quick ratio:

This ratio indicates the firm’s liquidity position as well. It actually refers to the extent to which current liabilities are covered by those assets except inventories.

Quick Ratio= (Current Assets-Inventories)/Current Liabilities

Year

2009

2008

2007

2006

2005

Quick Ratio

0.049

0.047

0.063

0.077

0.068

This ratio portray the idea that UCBL has so far an almost constant liquidity position which is good at some point, but at the same token it can be said that they have not been able to improve them-selves. Standing at this point, we can make an assumption that may be their profit margin was not so high that they can make some investments paying off the liabilities that could result in an increase in assets and decrease in liabilities to make the liquidity position far better.

2. Debt management ratios

Debt management ratios reveal 1) the extent to which the firm is financed with debt and 2) its likelihood of defaulting on its debt obligations. These ratios include:

Debt to equity ratio:

This ratio indicates how much the company is leveraged (in debt) by comparing what is owed to what is owned. A high debt to equity ratio could indicate that the company may be over-leveraged, and should look for ways to reduce its debt.

Debt to equity ratio = Total Debt / Total equity

Year

2009

2008

2007

2006

2005

Debt to equity

96.35%

142.97%

151.64%

162.75%

28.43%

Equity and debt are two key figures on a financial statement, and lenders or investors often use the relationship of these two figures to evaluate risk. The ratio of the business’ equity to its long-term debt provides a window into how strong its finances are. Equity will include goods and property the business owns, plus any claims it has against other entities. Debts will include both current and long-term liabilities. The above analysis shows that UCBL has a strong finance.

Times-Interest-Earned (TIE) ratio:

This ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest cost.

TIE ratio = EBIT / Interest Charges

Year

2009

2008

2007

2006

2005

TIE

6.92

1.88

2.07

10.20

23.70

We can see from this ratio analysis that, this company has covered their interest expenses 11 times in 2009 14 times in 2008 It means they have performed pretty low in 2009. As in 2008 they issued a little high number of long-term loans and does not have good liquidity position, their EBIT became high thus making TIE a little high as well.

3. Profitability ratios

Profitability is the net result of a number of policies and decisions. Profitability ratios show the combined effects of liquidity, asset management and debt on operating results. This ratio includes:

Return on Asset:

This number tells how effective the business has been at putting its assets to work. The ROA is a test of capital utilization – how much profit (before interest and income tax) a business earned on the total capital used to make that profit. This ratio is most useful when compared with the interest rate paid on the company’s debt. For

example, if the ROA is 15 percent and the interest rate paid on its debt was 10 percent, the business’s profit is 5 percentage points more than it paid in interest.

Return on Total Assets (ROA) = Net income available to total common shareholders / Total assets

Year

2009

2008

2007

2006

2005

TIE

1.92%

1.12%

1.60%

2.65%

2.56%

Return on assets is an indicator of how profitable a company is. Use this ratio annually to compare the business performance to its norms. So, return on total assets increased gradually throughout the years. This may have occurred because UCBL did not used more debt financing in 2009 compared to 2008, which resulted in less Interest cost and brought the net income up.

Return on Equity:

Return on Equity measures the amount of Net Income earned by utilizing each dollar of Total common equity. It is the most important of the “Bottom line” ratio. By this, we can find out how much the shareholders are going to get for their shares.

Return on Equity (ROE) = Net income available to common shareholders / Total Common equity

Year

2009

2008

2007

2006

2005

TIE

27.52%

17.59%

25.15%

36.20%

31.89%

The Return on Equity increased in 2009 than 2008. This again may have happened due to the issue of more long-term debt in 2008.

Gross Profit Margin:

Year

2009

2008

2007

2006

2005

Gross Profit Margin

292%

250%

214%

203%

20%

Gross Profit Margin measures the profit of the company after deducting the cost of goods sold from the total profit.

Gross Profit Margin= Gross profit / Sales

Year

2009

2008

2007

2006

2005

Gross Profit Margin

292%

250%

214%

203%

20%

From the above analysis we can see that, UCBL has a higher Gross Profit Margin which indicates that they earning more that will be paid to its shareholders.

Net Profit Margin:

Year

2009

2008

2007

2006

2005

Net Profit Margin

94%

41%

38%

76%

78%

Net Profit Margin measures the profit of the company which is available to the common shareholders.

Net profit margin of UCBL is increasing day by day. In year 2009 the net profit margin is 94% which is good position for the Bank.

4. Dividend Policy Rations

It describes how a firm pays their divided as they earn. On the other hand it also shows that a firm may earn and provide the dividend to its shareholders.

Dividend payout ratio: it is equals the percentage of earnings paid out as individuals.

Dividend payout = Dividend/Net income

Year

2009

2008

2007

2006

2005

Dividend payout

0.30

0.82

0.90

0.25

0.36

Generally, growth firms have low dividend payout ratios as they retain most of their income to finance future expansion. Here UCBL has a high pay out rations, which indicates it is a well-established bank.

6.1 SWOT Analysis

Strengths

a.      UCBL has a strong Human resource.

b.      UCBL has a wide coverage all over the country.

c.      UCBL has widest product suits, which includes—various deposit, saving

Scheme, various loan etc.

  1. Experienced and well organized top and mid level management.
  2. Improvements in the performance in the recent years.
  3. Innovative products and services.

Weaknesses

a.      Lesser degree of flexibility in sales and service in compared to competition.

b.      HR policy not attractive enough to attract meritorious entries.

C.     Some Officers are not well trained.

d.      In UCBL there is lower marketing and promotional activities.

e.      UCBL has no own ATM booth.

f.   Bureaucratic complexities within the organization which leads to time consuming decision making process.

Opportunities

a.      UCBL can introduce more consumer banking products including credit cards.

b.      UCBL can provide service to all level of consumers through its branch

Network.

  1. UCBL can do Credit financing through its broad branch network.
  2. Using internet and e-commerce technologies to cut costs.
  3. Utilizing existing skills and know-how to enter new financial services.
  4. Opportunities in Information Technology.

Threats

a.      Envisaged currency devaluation and shortcomings in foreign currency availability may impact on foreign currency exposure of the bank

b.      Excessive competition from other private & government banks, use of modern concepts and technologies in banking by competitors.

c.     Technological changes that undermine the bank’s products and services.

d.    Government’s new rules and regulations.

e.    Pressure from govt. to reduce lending rates.

Conclusion 

Modern Commercial Banking is exacting business. The reward are modest, the penalties for bad looking are enormous. And Commercial banks are great monetary institutions, important to the general welfare of the economy more than any other financial institution. It has a vastly sobering and exacting responsibility. United Commercial Bank Ltd. (UCBL) playing a vital role in financing the people of the country. Without Bank’s co-operation, it is not possible to run any business or production activity in this age. So, The United Commercial Bank Limited (UCBL) has to clearly justify the customers from a neutral point and gather the current information about the market.

UCBL is regarded as a very reliable bank and the growing number of its customers indicates its increasing acceptance among clients. Since UCBL has been able to rapidly increase the total number of Account-holders, it now should focus the on the level of customer satisfaction. This is extremely important if UCBL wants to prevent loss of customers to numerous competing banks.

From the total analysis, we can summarize that United Commercial Bank Ltd. has been doing pretty good through out the years. It is true that last year there return did decline but it is still pretty much satisfactory. Therefore, we can conclude that, UCBL is a good enough company to invest on. One thing definitely worth mentioning is that all customers were highly satisfied at the attitude and product presentation and selling skills of all the officer of UCBL. This is a very good sign that all are very carefully trained. Since selling requires huge amounts of interpersonal skills, the responses of the customers show that UCBL has a competitive in terms of persuading the customers.

Recommendations

a.      UCBL can modify product features so that customer can easily get whatever they need.

b.      Some officers are not trained properly, which may become the cause of losing customer. So they need to train the officer efficiently.

c.      Consumer is easily convinced when they will know the bank. To reach the customer bank need to do more advertising, where UCBL is a bit week. So UCBL should increase their marketing and advertising policy

d.      If a perfect and hard working officer is recruited then bank may be able to proceed quickly. For that UCBL need to be more realistic on HR policy

e.      To earn more profit it is necessary to the entire customer over the country. So UCBL can introduce more branches to cover all over the country

f.       UCBL customer sometimes feels uneasy to use other bank booth. To keep the customer UCBL need to introduce own ATM booth.

g.      Sometimes customer does not want to take loan because of high interest rate. UCBL can consider the loan interest comparatively below then the competitors.

h.      UCBL return on Equity is increasing day by day due to more long-term debt. They should minimize their long-term debt.

i.       UCBL Price earning ratio is becoming lower due to fall of price per share. To protect that UCBL need to meet the market expectation properly.

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