Final, SAFTA

Financial Statement Analysis

0fCommercial Bank of

CeylonPrepared For:Mr. Dr. Sheikh Abu TaherLecturer andCourse Teacher Financial Accounting (FNB 106)

Prepared By:

Name Student IDTanima Sarker 594Rajesh Paul 617Mehedi Hassan Rana

623

Lamia Nuzhat Shashi

1923

Md.Hasibul Islam 2131Batch: 02, (2nd Semester) BBA Program

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Savar, DhakaSeptember 07, 2011

Department of Finance & BankingJahangirnagar University

Table of Contents

Contents Page no.The Vision, Mission, Corporate information 03Financial statement analysis 04Income statement 2007-2008 05Income statement 2009-2010 06Balance sheet 2007-2008 07Balance sheet 2009-2010 08Ratio analysis 09-15Total assets to shareholder funds: 15Net assets value per share 16Dividend per share 16Earnings per share 17Profit retention ratio 17All round growth in profitability, productivity and return in 2010

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Asset mix 18Sectoral classification of loans and advances 19Share capital and gross dividend on ordinary share 19Net interest income and exchange profit 20Income 20Total assets 21Total deposits 21Deposit mix 22Conclusion 22

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Financial Statement Analysis

Institution Name:Commercial Bank of Ceylon PLC Fiscal Year: 2007, 2008, 2009 and 2010 The Vision:“To be the most technologically advanced, Innovative and customer friendly financial services organization”

The Mission:“Providing reliable, innovative and customer friendly financial services. Utilizing cutting edge technology and focusing continuously on productivity improvement whilst developing our staff and acquiring necessary expertise to expand logically and regionally”

Corporate information:

Commercial bank of Ceylon is a public limited liability company listed on the Colombo stock exchange, incorporated on June 25, 1969, in Sri Lanka. It is a licensed commercial bank regulated under the banking act no.30 of 1988 and amendments thereto. The bank was re-registered under the companies act no 07 of 2007. The registered office of the bank is situated at “Commercial House”, no.21, Bristol Street, Colombo 1, Sri Lanka. The ordinary shares of the bank have a primary listing on the Colombo stock exchange.

Analysis of Income Statement & Balance Sheet:

We have analyzed the accompanying financial statements of Commercial Bank of Ceylon PLC (“Bank”), the consolidated financial statement of the bank and its subsidiaries, which comprise the balance sheets as at December 31, 2010 and the income statements, for the year then ended, and a summary of significant accounting policies and other explanatory notes.

The Financial Statement includes the following components:

An income statement providing the information on the financial performance of the group and the bank for the year under review.

A balance sheet providing the information on the financial position of the group and the bank as at the year end.

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Notes to the financial statements comprising accounting policies used and other notes.

Our responsibility is to express an opinion on these financial statements based on our evaluation. We conducted our evaluation in accordance with Bangladesh Auditing Standards. Those standards require that we plan and perform the evaluation to obtain reasonable assurance whether the financial statements are free from material misstatement. An inspection includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An inspection also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We have obtained all the information and explanation which to the best of our knowledge and belief were necessary for the purposes of our inspection. We therefore believe that our assessment provides a reasonable basis for our opinion.

Financial Statement Analysis:

Financial statement analysis including quantitative, narrative and descriptive information is disclosed in respect to the previous period for all amounts reported in the financial statements in order to enhance the inter-period comparability. When the classification of items in the financial statements is amended, comparative amounts are also re-classified to confirm with the current year in order to provide a better presentation.

Our assessment is on two financial year 2009 and 2010. We have compared the financial result of these two years to know present condition of the bank. We use the balance sheet and the income statement of the bank for our assessment. We also use the ratio analysis for our review.

The balance sheet and the Income statement and the comparative ratio analysis of Commercial Bank of Ceylon of 2007, 2008, 2009 & 2010 are given below:

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Based on this information we analyze the ratios which are given below:

Liquidity Ratio:

These ratios are used to measure the ability of the firm to meet its current obligations when they become due or this measures the firm’s short-term solvency. Common liquidity ratios are:

1. Current ratio2. Quick or Acid test ratio3. Cash ratio

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Current Ratio:It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm.

Name 2007 2008 2009 2010

Current Ratio1.05:1 1.06:1 1.05:1 1.06:1

Analysis: The comparison of these years shows that the value of Current Ratio increased in the year 2008 to 2010 and decreased in 2007 and 2009. It refers the ability of the firm to pay is current obligation in time. It is increasing because of the decrease both of the current liabilities and the current assets. It is therefore suggested that the company should maintain the increasing trend for the good performance of the company.

Quick or Acid Test Ratio :It is the ratio of liquid assets to current liabilities. The acid test ratio refers to the ability of a firm to pay its short term obligations as and when they become due. It measures the firm's capacity to pay off current obligations immediately.

Name 2007 2008 2009 2010

Acid Taste Ratio

0.2424:1 0.2483:1 0.3880:1 0.2974:1

Analysis: The comparison of these year shows that the value of Acid Test Ratio is high in 2009 rather than 2007, 2008 and 2010. It indicates that the firm has much liquidity and the ability of the firm to meet its current liabilities in time. In 2009 this ratio increased because of the increasing amount of inventory of the company. But in 2010, it might lose it inventory. It is therefore suggested that the company should increase its level of inventory.

Cash Ratio: This Ratio is represented by cash and near cash items. It is a ratio of cash to current liabilities. In the computation of this ratio only the absolute liquid assets are compared with the liquid liabilities.

Name 2007 2008 2009 20100.4787:1 0.5046:1 0.5930:1 0.5750:1

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Cash Ratio

Analysis:The comparison of these years shows that the value of Cash Ratio is high in the year 2009. It means that the ability of the firm to meet its current or liquid liabilities with cash is increasing. It increase from 2007 to 2008 and 2008 to 2009 but in 2010 the company loses cash as a result this ratio decrease from previous year.

Assets management or Activity Ratio:Ratios those are used to measure how efficiently the firm is managing and utilizing its assets is called the asset management or activity ratios. These are

Fixed assets turnover ratio

Fixed Assets Turnover Ratio: Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio is used for measuring how efficiently the firm is utilizing its fixed assets to generate the sales. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets.

Name 2007 2008 2009 2010

Fixed Assets Turnover Ratio (Times)

0.1119:1 0.1086:1 0.1131:1 0.1111:1

Analysis: The comparison of these years shows that the value of fixed asset turnover ratio remain almost same in 2007 and 2010, a little bit decrease in 2008 and increased in 2009. This increase is due to the high increase in the values of both tangible and intangible assets of the firm. So it is suggested that the company should stabilize its non-current assets.

Debt management or Leverage Ratio: Leverage ratio means the use of debt (fixed cost funds) in financing a firm’s business. These are

1. Debt Ratio2. Time interest earned (TIE) ratio

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Debt Ratio: It measures the percentage of fund provided by creditors. Total debt includes both current liabilities and long-term debt. It is used to evaluate how the firm is financed.

Name 2007 2008 2009 2010

Debt Ratio(%)91.18 90.14 92.17 91.16

Analysis: The comparison of these years shows that the value of Debt Ratio decreased in 2008 rather than 2007, 2009 and 2010. The decrease in the Debt Ratio shows that the debt paying ability of the company has decreased because the company is increasing its total assets and company is moving towards growth.

Time Interest Earned Ratio (TIE): This ratio relates the annual interest charges to the income earned by the business. It is used to examine the ability of the firm to pay its annual interest payment.

Name 2007 2008 2009 2010

TIE Ratio (%)3.90 4.03 4.53 4.38

Analysis:The comparison of these years shows that the value of time earnings ratio is increased in 2009. This refers that the interest earning capability of the company is increasing in 2009 rather than others. In 2010 it decrease a little bit because of minimum earning but that’s not harmful. So the company is in right track and has to maintain the stabilization.

Profitability Ratio: This ratio is used to measure the operating efficiency of a firm. These ratios show the combined effect of liquidity, asset and debt management on the firm’s operating results. These ratios are:

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1. Basic Earning Power (BEP) Ratio2. Return on asset (ROA)3. Return on equity (ROE)

Basic Earning Power (BEP): This ratio is used to measure the ability of the firm’s assets to generate the operating profit. It shows the raw earning power of the firm’s assets, before the influence of taxes and leverage, and it is useful for comparing firms with different tax situation and different degrees of financial leverage.

Name 2007 2008 2009 2010

BEP Ratio (%)13.14 15.68 13.57 11.22

Analysis:The comparison of these years shows that the value of basic earning power ratio is decreasing from the year 2009 to 2010. It was high in 2008. This refers that the profitability of the corporation is decreasing. So the company has to take the rectification initiatives. The bank has to increase total assets and earnings before interest and taxes.

Return on Assets: Return on total assets measures the rate of return on total investment. It is calculated by dividing net income by total assets and usually calculated before interest and taxes. This ratio is a measure of performance. It is used to calculate the rate of return on assets after interest and taxes.

Name 2007 2008 2009 2010

Return on Assets (%)

1.67 1.55 1.43 1.60

Analysis:The comparison of these years shows that the value of return on assets ratio decreased in 2009 and is increasing from the year 2009 to 2010. This refers that the corporation earns an adequate amount of return from their assets. They should maintain this trend.Return on Equity: In measures the rate of return on common stockholder’s investment. Stockholders invest to get a return on their money and this ratio tells how well they are doing in accounting sense.

Name 2007 2008 2009 2010

Return on Equity 20.63 17.13 15.83 17.87

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(%)

Analysis:The comparison of these years shows that the value of return on equity is almost same in 2008 and 2010, increased in 2007 and decreased in 2009. It is increasing from the year 2009 to 2010. This refers that the owners of the bank gets sufficient return from their equity. So they will be pleased and should maintain the existing trend.

Market Value Ratio: These ratios are used to indicate what investors think about the firm’s past performance and future prospectus. These ratios relate the stock price to its earnings, cash flows and book value per share. These are:

1. Price/Earnings Ratio2. Price/Cash flow Ratio3. Market/Book Value Ratio

Price Earnings Ratio: This ratio is used to measure how much the investors are willing to pay for a taka of reported profit.

Name 2007 2008 2009 2010

Price Earnings Ratio (times)

9 4 11 18

Analysis:The comparison of these years shows that the value of price earnings ratio decreased in 2008 and is increasing from the year 2009 to 2010. This refers that the investors are very much willing to invest their money of company’s reported profit.

Price/Cash Flow Ratio: This is used to measure how much investors are willing to pay for a taka of reported cash flow.

Name 2007 2008 2009 2010

Price/Cash Flow Ratio (%)

9 4 11 18

Analysis:The comparison of these two years shows that the value of price cash flow ratio has not change from the year 2009 to 2010. The corporation has to

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earn more profit as well as has to paid more dividends to increase this ratio.

Market/Book Value Ratio: This is used to measure how much an investor is willing to pay less for a taka of book value than for one of an average company.

Name 2007 2008 2009 2010

Market/Book Value Ratio

147.00 67.00 189.50 259.90

Analysis:The comparison of these years shows that the value of market or book value ratio decreased in 2008 and is increasing from the year 2009 to 2010. This refers that the investors are very much willing to invest more money for each of share. It means the company has gain more so the price of share of this company has increased.

Total assets to shareholder funds:Due to the prudent policies adopted over time, the bank was able to build up shareholders’ funds and free capital, which stands at Rs. 33.3 Bn. and Rs. 23.8 Bn. respectively as at December 31, 2010. The proposed scrip dividends as part of the final dividends will have a favorable impact on the bank’s capital adequacy ratios.

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Net Assets value per share:

The graph shows that the net assets of value per share are increasing in 2010 than previous year. That means that the net assets of the bank are increasing.

Dividend per share:

Dividend per share refers that how much dividend is declared against one share. The graph shows that the shareholder gets same amount of return in 2010 that what they get in 2009. So they have to take proper initiatives to increase this rate.

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Earnings per share: Earnings per share refers that the return to the investor from their investment. That means how much a shareholder earns against his share. The graph shows that the earnings per share is high than the previous year. So the corporation is in right track.

Profit Retention Ratio:

Profit retention means how much amount of profit are retained in the corporation rather than paid out as dividend. Here we can see that the bank has declared more dividends from the previous year.

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All round Growth in Profitability, Productivity and return in 2010:The comparison shows the difference between two years of following things:

Profit before and after taxation

Grown of total assets Income/ cost ratio Gross dividend paid

In this graph you can see that all round growth in profitability, productivity and returns are higher in 2010 than 2009. So the company is in right track.

Asset Mix:Asset mix refers the interest earning assets and the non interest earning assets. The comparison of two years is given below:

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The comparison shows that the bank has used the interest earning assets and the non interest earning assets equally in the two financial years.

Sectoral Classification of Loans and Advances:The company allotted their funds in different sections.

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These graphs show that the company has invested more loans and advances in 2010 than previous year.

Share Capital and Gross Dividend on Ordinary Share:

Every year the corporation has paid the dividend. The total amount of dividend is called the gross dividend. The graph shows that the corporation has the same amount of capital but paid a huge more dividend rather than previous year. It refers that the bank is in the right track.

Net Interest Income and Exchange Profit: The Bank’s net interest income for the year was Rs. 16,411.4 Mn., and reflected an increase of Rs. 4,001.0 Mn. or 32.2% over the previous year. This was mainly due to the reduction of 22.0% in interest expenses which was partly set-off by the drop of 3.3% recorded in interest income. Despite the substantial growth in volumes, both interest income and interest expense recorded drops due to the relatively low interest rate regime that prevailed during the year. However, the reduction in NPAs had a favorable effect on the interest income of the bank.

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Income: Foreign exchange income reduced by 41.2% due to relatively low volatility in foreign exchange rates resulting in a dearth of arbitrage opportunities during the year. In addition, the appreciation of the Rupee against the US Dollar had a negative impact on the exchange profit of the Bank. Fees and commissions grew by a substantial 27.3% due to increases recorded in almost all categories of commission income. Furthermore, the relaxation of duty on vehicles and guarantee commission on account of IPOs contributed favourably to those categories of income. The Bank recorded a growth of 14.7% in total operating income over last year to reach Rs. 23,193.1 Mn. for the year.

Total Assets: The total of the Bank’s interest earning assets rose to Rs. 337.3 Bn. at the end of the year, an increase of Rs. 45.3 Bn. or 15.5%. Similarly, total interest-bearing liabilities increased by Rs. 35.4 Bn. or 13.7%, to reach Rs. 293.5 Bn. at the end of the year.

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Over the last 5 years, the Bank achieved a Compound Annual Growth Rate (CAGR) of 15.3%, 13.0% and 15.5% in deposits, net advances and total assets respectively.

Total Deposits: The Bank recorded a strong organic growth in its business volumes amidst a highly competitive environment during the year. The deposit base of the Bank grew by 10.7% or Rs. 25.0 Bn. to record Rs. 259.8 Bn. at the end of the year.

Deposit mix:

The Bank also witnessed a favorable shift in the deposit mix. This was partly as a result of reprising of deposits that matured at low rates due to the low interest rate regime prevailed during the year 2010.

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Conclusion: Financials show all round excellent performance despite heightened competition and pressure on margins. The sharp growth in business volumes is mainly organic. It also demonstrated good diversity across sources of income. Advances grew by a whopping 45.1 Bn. or 25.2% to reach a total of Rs. 223 Bn. This is whilst reducing the NPA portfolio by Rs. 2.7 Bn. bringing down the net NPA ratio to 4.22% from 6.84% in the previous year. Deposits grew by 10.7% to reach a total of Rs. 259.8 Bn. Both group profit before and after tax have grown in excess of 30%. The rise in operating expenses has been well-managed and the cost to income ratio has improved quite substantially by 2.2% ending at 54.69%.

Moving forward, the growth momentum will be supported by increasingly focusing on the basics, such as liquidity, capital and risk management; as well as diversifying further the sources of income. As Bangladesh steps in to a new era of economic development, Commercial Bank will be conscious of playing its part in supporting the economic development thrust of the country.

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