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 as- good 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 author’s 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
The main objective of the study is to find out the trend in SEBL’s performance over the last 5 years.
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 SEBL’s 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
Annual Reports of pubali bank limited
Different Newspapers and Journals published in the Internet.
Analysis of Data :
Different graph and charts has been used to analyze the data. And some ratios and different statistical measure has also been used where necessary.
In spite of the highest level of effort to prepare a well organized and comprehensive report some limitations were yet present there-
A period of only 6 weeks was not enough to collect and understand the insights of Credit Operations and Credit Management.
Bank’s policy did not permit to disclose various data and information related to credit operation in the bank.
Data for conducting analyses on the Credit Risk Grading system of South East Bank Limited has been collected from only Mohammadpur Branch. Concentration & portfolio of credit varies from branch to branch, as a result the conclusion drawn about the CRG of the Bank as a whole based on these analyses may differ from the real scenario.
Recent data was not published about many of the important indicator of credit management.
The performance of the banking sector is a subject that has received a lot of attention in recent years. However there are a very few studies that have been done on the performance analysis of banks of developing nations like Bangladesh. Sufian, Fadzlan, Habibullah, Muzafar Shah (September-1- 2009) measured the performance of commercial banks in Bangladesh from year 1997-2004 by analyzing return on average assets (ROAA), return on average equity (ROAE), and/or net interest margins (NIM) which is usually expressed as a function of internal and external determinants. Rivard and Thomas (1997) suggest that bank profitability is best measured by ROAA in that ROAA is not distorted by high equity multipliers and ROAA represents a better measure of the ability of the firm to generate returns on its portfolio of assets. Since returns on assets tend to be lower for financial intermediaries, most banks utilize financial leverage heavily to increase return on equity to a competitive level (Hassan and Bashir – 2003). Credit performance analysis is one of the main indicator the banks overall performance measurement. Edward I. Altman, Brooks Brady, Andrea Resti and Andrea Sironi (March 2003) showed empirical evidence of a banks performance with credit rating, capital requirements, credit risk, recovery rate, default, procyclicality etc. M. Raquibuz Zaman – Ithaca College and Hormoz Movassaghi – Ithaca College (2011) performed a detailed study of performance analysis of different islamic banks in world. A detailed study regarding the performance of Islamic banks and its difference with conventional banking was done by Dr. Waheed Akhter , Ali Raza , Orangzab, Muhammad Akram by using analysis tools like Ratios, Trend Analysis etc. 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 bank’s 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 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 bank’s 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 bank’s liquidity position. However this is not a perfect measurement of the bank’s 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 bank’s health, specifically bank’s capital to its risk. CAR ratio is set by Bangladesh Bank CAR ratio calculates how much capital a bank have relative to bank’s risk weighted assets. So it will tell us about how prudently the bank’s fund are managed,
These are the main type’s 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.
This consists of three components –
Financial leverage, LEV
Return on total assets, 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 bank’s “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
Burden (B) measures a bank management’s 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 –
- Return on earning assets
- Cost of liabilities and
- Liabilities to earning assets ratio.
Average Spread Between Lending and Deposit Rate:
Since lending is one of the main source of income for banks and deposit is one of the main source of fund for banks so the average spread may give a comprehensive picture of a banks performance. Moreover a banks average spread between the lending and deposit rate may be compared over the spread may be compared with the spread maintained by other competitor bank to complete a comparative analysis among them. Spread maintained by the banks in different years is also useful in determining the operating profitability of the bank in different years.
Ratios very smartly represent the data that can be used to reach to a judgment about the performance of a bank. Ratios are widely used by different analyst to reach to a judgments about a banks performance. Some of the important ratios that can be used to evaluate the bank’s performance are –
Snap Liquidity ratio: The snap liquidity ratio indicates a bank’s ability to meet up to its external liabilities from its liquid assets. It shows the bank’s ability to pay for liabilities over a short term period.
Short term Borrowing / liquid assets: The ratio indicates Bank’s dependency on short term borrowing in comparison to its liquid assets. A short term borrowing to liquid asset ratio which is more than 1 indicates that the bank had more short term borrowing than its assets which could be liquidated to pay of its debt
Volatility Liability/total assets: Banks volatility liability to total assets indicates banks volatile or rate sensitive liability against its total assets. There is no standard of this ratio rather it depends on the risk management policy of the bank.
Interest earning assets/ total assets: : This ratio indicates bank’s holding of interest earning assets into total assets. It indicates a bank’s position in revenue generating assets.
Net Interest Margin: This ratio indicates banks total interest income relative to banks total interest earning assets. This ratio is one of the main indicators of a banks operating performance as interest is one of the main source of income for banks.
Investment risk: The ratio indicates Bank’s 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 bank’s total capital which in turn indicates a banks exposure to investment risk
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 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 bank’s 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.
Credit Management of SEBL:
For describing the credit management system of South East Bank Limited of different type – at first the guideline from Bangladesh Bank was described and then the credit management policy of SEBL was described to infer the superiority or inferiority of the SEBL’s credit management system.
Overview Of The Bank:
Southeast Bank Limited is a modern bank that was established in 1995 with a dream and a vision to become a pioneer banking institution of the country and contribute significantly to the growth of the national economy. The Bank’s journey began when it was incorporated as a Public Limited Company on March 12, 1995. The Registrar of Joint Stock Companies and Firms issued the Certificate of Commencement of Business of the Bank on the same date. The Bank received its Banking License from Bangladesh Bank on March 23, 1995. The Bank’s first branch was opened by Late M. Saifur Rahman, the then Honorable Finance Minister of the Government of the People’s Republic of Bangladesh as the Chief Guest at the busiest commercial hub of the country at 1, Dilkusha Commercial Area, Dhaka on May 25, 1995.
In its arduous journey since, Southeast Bank has succeeded in realizing the dreams of those who established it. Today it is one of the country’s leading banks in the private sector contributing significantly to the country’s economy. The Authorized Capital of the Bank today is Tk.10, 000 million. It’s Paid-Up-Capital and Reserve reached Tk.9, 927.16 million as on December 31, 2009. The Bank had 1402 Staff of whom 113 were Executives. 1141 were Officers and 148 were other staff as on December 31, 2009.
Core Values, Core Strengths and Core Competencies of the SEBL
The Core Values, Core Strengths and Core Competencies of the SEBL are given below:
|Core Values||Core Strengths||Core Competencies|
|Integrity||Transparent and quick decision making||Knowledge|
|Respect||Efficient team of performers||Experience and Expertise|
|Fairness||Satisfied customers||Customer Orientation/ Focus|
|Team spirit||Skilled risk management||Determination|
|Courtesy||Diversification||Zeal of Improvement|
|Commitment||Pursuit of Disciplined Growth Strategy|
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 bank’s guideline: The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio. For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the bank’s marketing staff.
SEBL’s 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 BB’s guideline. For example – SEBL’s 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 bank’s guideline: Details of the bank’s Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Banks may wish to establish more conservative criteria in this regard.
SEBL’s 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 bank’s 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 Bank’s 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 Bank’s total capital are considered as large loan.
– Bank’s policy is to arrange syndicated loan and participated in the syndicated/consortium loan arrangement or in a club finance basis.
– Group Relationship would be established as per Bangladesh Bank guidelines provided/ to be provided from time to time.
Discouraged Business Types:
Bangladesh bank’s 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
SEBL’s policy: SEBL also discourage to lend in those sector which are discouraged by B.B as described before.
Loan Facility Parameters:
Bangladesh bank’s guideline: As a minimum, the following parameters should be adopted:
Banks should not grant facilities where the bank’s 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.
SEBL’s 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 Bank’s mortgage clause.
A valuation of the property/ machinery/ stocks must be obtained (to be assessed by HOB as well as by Bank’s 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 bank’s guideline: Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details:
– Amount and type of loan(s) proposed.
– Purpose of loans.
– Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
– Security Arrangements
In addition the following risk areas should be addressed –
– Borrower Analysis. – Supplier/Buyer Analysis. – Account Conduct.
– Industry Analysis. – Historical Financial Analysis. – Mitigating Factors.
– Loan Structure. – Security – Name Lending.
– Projected Financial Performance – Adherence to Lending Guidelines
SEBL’s 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 – Interest Rate Risk
– Foreign Exchange Risk – Cost over run analysis etc.
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.
(b) Risk Grading:
Bangladesh bank’s guideline: All Banks should adopt a credit risk grading system. The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. B.B has proposed standard risk grading and risk scoring and risk assessment mechanism for giving guidance to banks.
SEBL’s policy: SEBL uses the same risk classification model, same risk grading criteria and even same risk grade score as proposed by Bangladesh Bank [Appendix 2] according to credit risk management – industry best practices published by Bangladesh Bank. Risk grading is a key measurement of’ a Bank’s asset quality, and all facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities are immediately changed by SEBL. Borrower Risk Grades are clearly stated on Credit Applications.
Borrower / Group: ————
Industry Code: ——————
Date of Grading: —————
Date of Financials: ————
Completed by: ——————
| Score Risk Grade|
< 35 H
The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process.
Bangladesh bank’s guideline: The following guidelines should apply in the approval/sanctioning of loans:
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 bank’s 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.
SEBL’s policy: SEBL’ follows the guideline proposed by Bangladesh Bank. Their policy regarding approval authority shows their compliance with B.B’s 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
– Margin: At least 10% margin on present value or encashment value whichever is lower.
– Interest Rate: 2.50% – 3.00% above the rate of FDR.
Managing Director through Head Office Credit Committee:
– 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 Consumer Credit Scheme up to Tk.10.00 lac.
– Loans under Credit Card up to Tk.5.00 lac.
Head of Credit through Head Office Credit Card Committee:
– 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:
– All types of facilities up to Tk.10.00 crore
Board of Directors:
– All types of facilities above Tk.10.00 crore.
Internal Audit / Control:
Bangladesh bank’s guideline: Banks should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines and Bangladesh Bank requirements.
SEBL’s policy: The Bank has a separate and independent internal audit/control department charged with conducting audits and inspection of all the Branches and departments of Head Office. This department has renamed as Internal Audit/ Control & Compliance Department. Audits and inspection are carried out on periodic interval (at least once in a year) to ensure compliance with regulatory guidelines, internal procedures, and Lending Guidelines and Bangladesh Bank requirements. Surprising visit /special audit are also conducted. The Head of Audit directly reports to the President and Managing Director.
To minimize credit losses, monitoring procedures and systems should be in place that provide an early indication of the deteriorating financial health of a borrower.
Bangladesh bank’s guideline: At a minimum, systems should be in place to report the following exceptions to relevant Executives in CRM and RM team:
Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants
Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up.
Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.
All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually.
SEBL’s policy: SEBL’s credit monitoring system is exactly the same as prescribed by Bangladesh Bank. The credit monitoring process in Bank is vested on Credit Administration Department (CAD). The Head of Credit Administration Department reports the exceptional list of assets on daily basis on the categories described in the guideline prescribed by Bangladesh Bank.
Early Alert Process:
Bangladesh bank’s 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 Bank’s 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 Bank’s 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.
SEBL’s policy: SEBL’s policy regarding the early alert process is exactly the same as prescribed by Bangladesh Bank’s 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 bank’s 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.
SEBL’s policy: SEBL’s 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 bank’s 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.
SEBL’s 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.
Bangladesh bank’s 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.
SEBL’s policy: SEBL’s 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. SEBL’s policy for maintaining loan losses are as follows –
|Type of Loan||Provision|
|Unclassified – General provision||1%|
|Small and medium enterprise financing||1%|
|Loan to BHs/MBs/SDs against shares||2%|
|Housing and loan for professional||2%|
|Special Mention Account (SMA)||5%|
Write Off Of Loans / Advances:
All loans / advances written-off must be recommended for prior approval of the Head Office and the recommendation must be accompanied by a memo summarizing the circumstances necessitating the current write-offs as well as recovery efforts to date.
Under no circumstances should the fact that all or any portion of a loan / advances that has been written-off be revealed to the borrower, nor should the borrower be informed that the loan / advances is on a non-accrual basis
In case of write-off / waiver the Bank’s policy is to realize the entire Principal amount along with 100% Interest taken into income account.
Then the Bank may waive / Write off maximum 50% of interest as kept in interest suspense account against the respective client or as decided by the Board of Directors.
Performance analysis of SEBL – Mohammadpur Branch:
Due to confidentiality policy of the bank I could not avail all the data that I would have like to avail for the performance analysis of this branch. However, here I am doing some analysis on the performance of SEBL’s Mohammadpur branch. Most of the data used for this analysis part are unaudited data and is inferred from unclassified balance sheet of the branch as on 19th july,2011. [Appendix 3]
The major type of deposit for SEBL Mohammadpur branch is time deposit. About 96% OF the deposit is different type of time deposit. The percentage of demand deposit and saving deposit are significantly low compared to time deposit. The reason is that most of the depositors are individual household who prefers to save for future benefits in long term. The business related deposit are low in that locality so the other type of short time deposits like – sundry creditor, margin against gurantee and L/C are comparatively low.
SOURCE: SEBL, Mohammadpur Branch
However, among different type of schemes for term deposit “Fixed Term Deposit” is the highest compared to others. There are different types of scheme like – millionaire deposit scheme, monthly saving scheme, double benefit scheme etc. with attractive than FDR. But still people prefer FDR because they think it is safer and interest rate is also high. Currently all type of FDR offered by SEBL with different maturity are providing 12% interest rate. Another reason for this may be it has maturity of 1 year so people prefer to deposit in that maturity period because time period is short and the interest rate is high. If the compounded interest rate is calculated for other schemes interest rate will be higher for “Double Benefit Scheme” [Appendix ] but the time period for that scheme is higher so prefer may prefer FDR than other deposit scheme.
Loan disbursement trend:
SEBL provides different types of loan scheme for customers like – consumer credit, overdraft, advance against trust receipt etc. however in Mohammadpur Branch the major part of loan disbursement has been given as term loan. Term loan are mainly long term loan that are given for businesses’ long term finance. The second highest type of loan is disbursed for overdraft. This type of loan is also given to business sector for meeting their day to day operational requirement. The graph shown below will clear the actual scenarios of different types of loan disbursement.
In the figure above it is clear that loan disbursement was highest in term loan (TE.L) – 73.75% and among the other type of loan over draft (O.D) was the highest – 23.86%. Other types of loan were significantly lower compared to term loan and over draft.
Sector wise loan disbursement:
Up to 30th June 2011 – of the total loan disbursed by SEBL (Mohammadpur branch); 2.73% were personal loan and the rest was business loan. And among the total loan disbursed to business sector most of the loan were disbursed in that particular locality (Mohammadpur).
Sources and uses of fund – Based on maturity:
Most of the deposit collected by this branch was long term in nature and most of the loan disbursed by this branch is long term in nature likewise. And short term deposit and short term loan disbursed were lower than long term deposit collected and long term loan disbursed respectively.
However, if sources and uses of fund is considered it was seen that – long term loan disbursed were lower than the amount of long term deposit collected and the short term loan disbursed were more than the amount of short term deposit collected. The following graph in the next page will clear the above stated.
Those deposits are considered long term deposit which have a maturity of more than one year and the loan which have a repayment period of more than one year are considered as long term loan. The above graph shows that total long term loan disbursed were lower than the total long term loan disbursed. The branch disbursed a long term loan of 516,666,289.36 tk. against a total of 1,267,034,288.72 tk. deposit collected.
The above graph shows that the total short term loan disbursed were higher than the total short term deposit collected. The bank disbursed short term loan of 165,949,574.84 tk. against a short term deposit of 67,568,327.16 tk. collected.
However it must be noted that usually the loan disbursement target is set by head office and branch office has little to do about it.
Some performance measure of the branch:
Some of the performance measure of the branch I have calculated are – Loan to deposit ratio, Return on assets, net interest margin etc.
Loan to deposit ratio:
Total loan = 682,615,864.20 [Appendix – 4]
Total deposit = 1,379,011,201.34 [appendix – 4]
Loan to deposit ratio = (682,615,864.20 / 1,379,011,201.34)*100
Return on assets:
Return on assets = net income / total assets
Net income = total income – total expense
= 92,893,527.15 – 80,172,618.00 [Appendix 3]
Total assets = 1,490,899,217.80
Return on assets = (12,720,910.15 / 1,490,899,217.80)*100
The loan to deposit ratio is 49.50% which indicates that the total lending capacity of the branch is under utilized.
Return on assets of the branch is .86%. The overall return on asset of the bank up to 30th march 2011 was only .42% [Appendix – ] which indicates that the operating performance of the branch was quite satisfactory.
Overall performance analysis of SEBL:
For overall performance analysis the year from 2006-2010 has been chosen. Because it was the latest available published audited data that was found. Here I have tried to evaluate the credit performance by evaluating different factors that are related to credit management and I have also tried to compare it among different years to show the trend.
Credit rating of South East Bank Limited:
Credit rating of SEBL is assigned by CRISL. CRISL’s entity rating is valid one year for long-term rating and 6 months for short term rating. The credit rating assigned by CRISL to SEBL is as –
|Surveillance Rating, 2011|
What the rating means?
[according to credit rating manual of CRISL]
|(Double A Minus) – (High Safety)|
Bank/ FIS rated in this category are adjudged to be of high quality, offer higher safety and have high credit quality. This level of rating indicates a corporate entity with a sound credit profile and without significant problems. Risks are modest and may vary slightly from time to time because of economic conditions
High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small.
|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 improvement in non funded exposure etc. However, above factors are moderated, to some extent, by decline in asset quality, high loan to deposit ratio, high dependency on term deposit, sectoral concentration in textile and garments and recovery from rescheduled assets not up to satisfaction etc.
Total loan and advances:
( in million)
Loan and advances has increased every year. However if percentage is calculated it increased highest in the year 2009 as it increased by 29% in that year compared to previous year.
Sector wise loan disbursement trend:
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%.
* % of total loans **% change from previous year
If the percentage changes were evaluated then, it was seen that in the year 2008 and 2010 it increased significantly from the previous year. And in the year 2007 and 2009 it decreased from previous year.
Trend in Bad / Loss loan for last 5 years:
Bad / Loss loan
% of total loan
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 in provision for loan looses for last 5 years:
*% in total loans
* % has been calculated as a percentage of total loans
**% has been calculated as a percentage change from previous year
If the trend is analyzed then we can see that provision for loan losses as a percentage of total loan were highest in the year 2010 and it has been increasing every year which means that the banks classified loan has also been increasing every year which should have been opposite, However if the percentage change in every year is calculated then it has been seen that there 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.
SEBL’s trend in SLR maintenance of the last 5 years is as follows –
|Year||SLR kept||SLR required||CRR required||CRR kept|
In the year 2009 only, the banks SLR and CRR kept was very high from the required SLR and CRR. In the other years it did not vary that significantly.
CAR ratio of the last 5 years:
CAR ratio is a ratio that regulators in the banking system use to watch bank’s health, specifically bank’s capital to its risk. Regulators in the banking system track a bank’s 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:
Loan to deposit ratio
Loan to Deposit ratio
[appendix – 8]
SEBL’s 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:
Lending rate [appendix – 8]
Deposit rate [appendix – 8]
[appendix – 8]
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.
Repricing GAP analysis:
[ Appendix 9]
[ Appendix 9]
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 SEBL’s 10% – 12% assets were exposed to interest rate risk and in the year 2010 SEBL’s 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
[ appendix 10 ]
[ appendix 10 ]
[ appendix 10 ]
Average ROE = 16.51%
SEBL’s return on equity has been very consistent among the year compared. Return on equity actually represents the return from the perspective of the owners. SEBL’s ROE has varied between 12% – 20%, which means that the SEBL’s equity holder has earned between 12% – 20% on their equity investment. SEBL’s average ROE of the last 5 years is 16.51% which means that SEBL’s 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
ROA * EM [appendix – 10]
*% change has been calculated as a percentage change from previous year
SEBL’s ROA has been increasing every year, which indicates that the banks percentage return on its assets is increasing which in turns mean that the banks operating efficiency has increased every year. The banks average ROA is 1.68% which means that on an average the banks earned 1.68% on its assets over last 5 years
ROA AND AVERAGE ROA
SEBL’s 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]
*% change has been calculated as a percentage change from previous year
The banks profit margin has been increasing in almost every year which means that the banks percentage income from its loans and advances has been increasing yearly over the last 5 years. Which means that the banks operating efficiency has increased over the years. Profit margin is one of the main contributors of total ROA and ROA usually tends to move in the same direction with PM. SEBL’S increasing PM has affected the increase in ROA over the last 5 years.
There has been a decreasing trend in the asset utilization in the recent year (2009 & 2010). AU utilization for a bank indicates that how much of its assets a bank can use as loan and advances. The banks decreasing AU means that SEBL ability to invest or loan as a percentage of total assets has decreased in recent years.
RETURN ON ASSETS AND PROFIT MARGIN
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 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:
NONPERFO -RMONG LOAN
TOTAL LOSS LOAN
TEXTILE AND GERMANTS INDUSTRIES
TOTAL LOSS LOAN
LOAN IN TEXTILE AND GERMANTS INDUSTRIES
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
The correlation matrix in the previous page shows the correlation (the 1st number in the table) between all the variables. However here only those variables which have a high degree of correlation are shown:
Total lending and total operating profit: Total lending and total operating profit were found to be strongly correlated (.917) but not perfectly correlated which means – that operating profit depends not only on the total lending but it also depends on how was loan managed or what percentage of the loan became classified loan or non performing loan and on some other economic variables.
Total lending and total nonperforming loan: Total loan and total nonperforming loan were also found to be highly correlated. So it can be inferred that in almost every year a certain percentage of loan became nonperforming or classified loan so whenever total loan increased total classified loan also increased
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 SEBL’s 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 bank’s loan recovery efficiency has also increased. So bank’s 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.
However the significance of R value can also be used to determine whether we are confident about their correlation.
Let’s 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:
|Total lending and total operating profit|
|Total lending and total nonperforming loan|
|Total lending and total lending in textile and garments industries|
|Total loan to textile and garments industry and total income|
|Total loan to textile and garments industry and total nonperforming loan|
Other variables were not significantly related with each other although the correlation value of some of them was very high.
Financial ratios are one of the main indicators of a bank’s performance. Here I am comparing SEBL’s performance from year 2008 – 2010 based on some key indicator and ratios which are related to bank’s credit performance –
(Liquid asset/Total External Liability)
(Short term Borrowing = short term Borrowing from other banks + short term Deposits and other accounts)
(volatility liabilities = Total demand deposits + 10% of savings deposits + Total borrowing from call market)
(net interest income\Total earning assets)
(Investment portfolio/Total Capital)
Interpretation of the result:
1. Snap Liquidity ratio: The snap liquidity ratio indicates a bank’s ability to meet up to its external liabilities from its liquid assets. SEBL’s snap liquidity ratio for the year 2008 and 2009 are .54 and for the year 2010 are .60. A ratio of 1 or very near to 1 is usually considered satisfactory. SEBL’s snap liquidity ratio has varied between .54 and .60 which means that SEBL’s had around .54 – .60 taka of liquid assets against per taka of short term liability. It indicates that SEBL were exposed to credit risk over a short term period. However the ratio increased in the year 2010 which indicates that SEBL’s short term position in liquid assets was improving.
2. Short term Borrowing / liquid assets: The ratio indicates Bank’s dependency on short term borrowing in comparison to its liquid assets. SEBL’s short term borrowing to liquid assets 10.72, 11.14 and 7.26 respectively. Which means that in the year of 2008 SEBL had around 10 times of more short term borrowing than it’s liquid assets – in the year 2009 it was around 11 times and in the year 20100 it was around 7 times higher. A short term borrowing to liquid asset ratio which is more than 1 indicates that the bank had more short term borrowing than its assets which could be liquidated to pay of its debt. The banks short term borrowing to liquid assets ratio decreased significantly in the year 2010 which indicates that banks short term borrowing in respective to its liquid assets were decreasing. But still the ratio were high.
3. Volatility Liability/total assets: Banks volatility liability to total assets indicates banks volatile or rate sensitive liability against its total assets. There is no standard of this ratio rather it depends on the risk management policy of the bank. A significantly higher or significantly lower ratio both are considered as a dissatisfactory ratio. In this category SEBL’s ratio was – 0.10, 0.07, and 0.10 in the year 2008, 2009 and 2010 respectively. Result shows that the bank had a very significantly lower amount of rate sensitive liability against its total assets. This reason for this may be SEBLs assets are mainly long term in nature. For example, saving deposit is one of the largest sources of fund for SEBL and in this particular ratio calculation only 10% of the total FDR are considered as volatile liability or rate sensitive liability.
4. Interest earning assets/ total assets: This ratio indicates bank’s holding of interest earning assets into total assets. It indicates a bank’s position in revenue generating assets. SEBL’s interest earning asset to total assets ratio were – .95 , .94 , .94 in the year 2008, 2009 and 2010 respectively. This ratio indicates that the bank had around 95% of interest earning assets as a percentage of total assets – which is very high. A high ratio in this category also indicates prudent management of fund.
5. Net Interest Margin: This ratio indicates banks total interest income relative to banks total interest earning assets. This ratio is one of the main indicators of a banks operating performance as interest is one of the main source of income for banks. Net interest margin of SEBL for the year 2008, 2009 and 2010 were .02, .01 and .02 respectively. It indicates that in the year 2008 SEBL had about 2% of total interest income as a percentage of bank’s total interest earning assets. Similarly in the year 2009 and 2010 respectively it had around 1% and 2% of net interest income against banks total interest earning assets. The higher the ratio is the satisfactory the bank’s performance is assumed to be.
6. Investment risk: The ratio indicates Bank’s 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 bank’s 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. SEBL’s 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.
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]
PR( BVE < O )
Interpretation of the result:
Probability of book value insolvency expressed as [PR (BVE < O] indicates the percentage probability of a bank becoming book value insolvent. A Probability of book value insolvency of .0332% indicates that the bank had only .0322 percentage chance of becoming book value insolvent. The lower the ratio is the safer the bank is. 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 SEBL’s credit risk were much moderate in that year.
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. Total provision for loan losses (Y)
- Independent variable:
i. Total substandard loan (x1)
ii. Total doubtful loan (x2)
iii. Total loss loan (x3)
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]
HA: p 0 [There is a correlation between dependant and independent variables]
Now we compare the F – value with the Table value. If the table value is less then the F – value we reject the null hypothesis. Rejecting the null hypothesis indicates that there is a relationship between dependent and independent variables. The finding of the result can be summarized as follows –
F – value
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.
Peer Group Analysis:
Peer group analysis has been done with the published unaudited financial statement for the accounting year ended 31 March, 2011.
Selection of Peer group:
Here credit performance of SEBL has been compared with the credit performance of Mutual Trust Bank Limited and Pubali Bank Limited as its peer group. The peer group was selected according to CAMEL’s rating of non government banks in Bangladesh. According to CAMEL rating which is rated by Bangladesh Bank these two banks are closest to the rating of SEBL. So these two banks were selected for peer group analysis.
Comparison based on operating profitability ratios:
Operating profitability ratios are one of the major indicators of a banks credit performance. To compare the operating profitability the ratio the accounting data of SEBL, MTBL and PBL for the accounting year ended at 31st march, 2011 has been used.
[ Appendix – 14 ]
[ Appendix – 14 ]
1. Net Interest Margin :
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:
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. Return on assets (ROA):
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 Bank’s asset base is compared to its shareholders’ equity. The Financial Leverages for SEBL, MTBL and PBL are presented in the following graph-
The 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. Return on equity (ROE):
The banks ROE indicates how much return the banks equity holder are getting. The higher the ratio is the better the bank’s 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 (AU):
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 SEBL’s cost of fund was 8.25%, MTBL’s cost of fund was 8.58% and PBL’s 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.
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 SEBL’s operating efficiency were much better than its peer group competitors in most of the operating profitability indicators. And in case of credit performance ratio SEBL’s performance was better in almost every variables that was used.
Findings of the Study
The finding of the study can be summarized as follows:
SEBL’s overall performance over the years has been good and it has been improving over the year.
SEBL’s NPL loan has not decreased over the years, although its total loss loan as a percentage of total loans has decreased over the years. A very unusual movement was seen in the change in NPL. If NPL increased in one year, it decreased in the next year and in the year after that it increased again.
The banks equity multiplier has been decreasing every year. The bank’s lower equity multiplier gives its competitor banks a competitive edge over it.
SEBL’s loan recovery mechanism has improved over the tears because it was seen that its loss loan as a percentage of total loan has decreased over the years.
The banks main source of deposit is fixed deposit; other types of deposit scheme are not very significant compared to fixed deposit scheme which indicates that the banks main source of fund is long term in nature.
Over a short term maturity period the bank was always exposed to refinancing risk because it had more risk sensitive liabilities than assets.
Loan to textile and garments sector are preferred by the banks management because it was seen that the loan disbursed to this sector as a percentage of total loan has increased every year.
The banks performance was better compared to its peer group banks in most of the cases.
A significance relationship was seen between the banks total loan and total income which indicates that the bank’s operating performance was good.
The issues of the finding can be addressed by the bank in the following ways-
Bank’s loss loan as a percentage of total loans has been decreasing every year and the bank should try to maintain this decreasing trend.
The bank’s net interest margin was lower when compared to its peer group banks. So the bank should try to increase its interest income.
The bank’s equity multiplier has been decreasing every year which means that the banks leverage has been increasing every year. So the bank should try to increase its equity multiplier to have a competitive edge over its competitor.
The bank should try to mange its rate sensitive assets and liabilities more prudently because it was seen that over a short term maturity period ( 1 year) the bank had more risk sensitive liabilities than assets in almost every year that was compared.
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 it’s equity holder.
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 Bank’s percentage of Loss Loan Loans compared to total outstanding Loans & Advances. The Bank’s 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 bank’s 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.
Bank’s 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
Websites of Bangladesh Bank, South East Bank Limited, Pubali Bank Limited, Mutual Trust Bank Limited.
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