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8/6/2019 Financial Performance Analysis of Prudential Bank Final Edit
2. Industry Description and Analysis ................................ ................................ ................ 4
2.1 Current Trends in the Industry ................................ ................................ ................................ .......... 5
3. Company Description and Analysis ................................ ................................ .............. 6
3.1 The Bank¶s Shareholders are: ................................ ................................ ................................ ........... 6
3.2 Corporate Mission of the Bank ................................ ................................ ................................ .......... 6
3.3 Products and services ................................ ................................ ................................ ....................... 7 a. Domestic Banking ................................ ................................ ................................ ........................... 7 b. Specialized Retail Banking Services ................................ ................................ ............................... 7 c. International Banking................................ ................................ ................................ ..................... 7 d. Non- traditional exports/projects financing................................ ................................ .................... 8 e. PBL¶s e-Banking Products and Services Include: ................................ ................................ .......... 8
3.4 Success Story and what is impressive about Prudential Bank Ltd. ................................ ...................... 9
4. Identification of Significant Accounting polices................................ .......................... 11 4.1 Basis of Accounting ................................ ................................ ................................ ......................... 11
4.2 F unctional and Presentation Currency ................................ ................................ ............................ 11
4.3 Revenue Recognition ................................ ................................ ................................ ....................... 11 a. Interest Income and Expense ................................ ................................ ................................ ........... 11 b. Non-Interest Income ................................ ................................ ................................ ....................... 11 c. Income Tax ................................ ................................ ................................ ................................ ..... 12 d. Regulatory Impairment Reserve ................................ ................................ ................................ ...... 12 e. Property, plant and equipment ................................ ................................ ................................ ......... 12 f. Intangible Assets- Computer Software ................................ ................................ ............................. 12 g. Provisions ................................ ................................ ................................ ................................ ....... 12 h. Foreign Currency ................................ ................................ ................................ ............................ 12 i. Post Balance Sheet Events ................................ ................................ ................................ ............... 13
5. Analysis of the Bank¶s Financials ................................ ................................ ................ 13
5.1 Trend Analysis ................................ ................................ ................................ ................................ 13 a. Net Interest Income ................................ ................................ ................................ ......................... 14 b. Net Operating Income [Total (Gross) Income] and Operating Expenses ............ ......... ........ ... ........ ... 14 c. Profit before Tax ................................ ................................ ................................ ............................. 14 d. Assets ................................ ................................ ................................ ................................ ............. 14 e. Shareholder¶s Fund ................................ ................................ ................................ ......................... 15
5.2 V ertical Analysis ................................ ................................ ................................ ............................. 15 a. Net Interest Income and Net Operating Income................................ ................................ ........... 16 b. Pre-Tax Profit ................................ ................................ ................................ ............................... 16 c. Assets and Liabilities................................ ................................ ................................ ..................... 17
5.3 Key Ratios Analysis................................ ................................ ................................ ......................... 18 a. Profitability Ratios ................................ ................................ ................................ ........................ 18 b. Liquidity Ratio ................................ ................................ ................................ .............................. 19 c. Solvency Ratios ................................ ................................ ................................ ............................. 20
6. Evaluation and Summary ................................ ................................ ............................ 20
7. Limitations of Ratio and Financial Statement Analysis ................................ ............. 21
the kind of activity that will necessitate the required geographical spread by the commercial
banks.
The Central bank have sought to engender healthy competition among banks by admitting new
banks into the system, while encouraging existing banks to beef up their capital and adopt
universal banking. The result is an evolving competitive banking sector that has witnessed
continuing growth in banking sector assets, liabilities and incomes.
A number of critical factors that have to underpin banking operations for success in the market
includes the provision of quality products and services, competitive pricing of these products
and services, operational efficiency and enhanced access by customers to products and services
that meet their needs. And there is the need to satisfy the growing needs of the market without
compromising standards.
Ghana's financial sector reforms have increased the banking system's resilience to potential
financial shocks. Moreover, the central bank is carefully monitoring the system's financial
stability; it publishes a periodic financial stability report that is discussed by the central bank's
monetary policy committee.
2.1 Current Trends in the Industry
Most banks now employ cutting edge technologies to roll out their products to the Ghanaian
customer. Banking halls are housed in ultra modern buildings, staffed with well trained smart
looking ladies and gentlemen.
The re-denomination of the cedi and the development of appropriate technological solutions
such as cash cards, mobile and internet banking, and biometric solutions are all reshaping the
financial sector and redefining the way forward in doing modern business with the financial
sector as a vital backbone for sustenance and growth.
The Bank of Ghana, in pursuance of its objective to enhance the efficiency and security of
existing payment systems to bring them up to international standards, introduced the ChequeCodeline Clearing System in the year 2009. The system currently ensures clearance of cheques
within two days and is intended to enhance efficiency, reliability and timeliness in the clearing
of cheques.
A further addition to the payment automation process is a system to manage non-cheque inter-
bank transfers through the Automated Clearing House System.
8/6/2019 Financial Performance Analysis of Prudential Bank Final Edit
4. Identification of Significant Accounting polices
The significant accounting policies adopted by the Bank and which have been applied in
preparing their financial statements are stated below:
4.1 Basis of Accounting
The banks financial statements are prepared under the historical cost convention as modified by
the adoption of fair value measurement basis, in compliance with IFRS requirements, for
µavailable for sale (AFS)¶ investments and financial assets and financial liabilities held at fair
value through profit or loss (FVTPL).
4.2 Functional and Presentation Currency
The financial statements are presented in Ghana Cedi (GH¢) which is the functional and
presentation currency of the Bank.
4.3 Revenue Recognition
Revenue is recognized to the extent that the economic benefits will flow to the Bank and the
revenue can be reliably measured. The following specific recognition criteria apply to revenue
recognition.
a. Interest Income and Expense
Interest income and expense are recognised in the income statement for all interest bearing
financial instruments including loans and advances as interest accrues using the effective
interest rate method.
b. Non-Interest Income
The Bank earns commission and fees from a wide range of services provided to its customers.
Fee income is accounted for as follows:
± Income earned on performance of discrete services (such as funds transfers, specialclearing, transaction negotiation with third parties etc) is recognized as revenue upon
completion of the act or service
± Income arising from service fees (such as special statement requests, safe custody,
commission on turnover, etc) is recognized as the services are provided
± Loan origination fees and similar fees form an integral part of the effective interest
rate of a financial instrument and are not shown as part of non-interest income.
8/6/2019 Financial Performance Analysis of Prudential Bank Final Edit
Income Tax in the Profit and Loss Account comprises current tax and deferred tax.
Current tax is the tax expected to be payable, under the Internal Revenue Act 2000 (Act 592),
on the taxable profit for the year.
Deferred income tax is provided on all temporary differences at the balance sheet date between
the tax bases of assets and liabilities and their carrying amounts.
d. Regulatory Impairment Reserve
To cater for any shortfall between the Bank of Ghana¶s credit loss provision requirements and
loans and advances impairments based on IFRS principles, a charge is made to Income Surplus
in respect of the difference required to bring up the cumulative provision to the level required
under the Bank of Ghana regulations.
e. Property, plant and equipment
The Bank recognizes an item of property, plant and equipment as an asset when it is probable
that future economic benefits will flow to it and the amount meets the materiality threshold set by the Bank. Property, plant and equipment are stated at cost less accumulated depreciation and
any impairment in value. Depreciation is provided on the depreciable amount of each
component on a straight-line basis over the anticipated useful life of the asset.
f. Intangible Assets- Computer Software
Cost incurred to acquire and bring to use specific computer software licenses are capitalized
and amortised on the basis of the expected useful lives using the straight-line method.
Maximum useful live ranges between 4 and 5 years.
g. Provisions
The Bank recognizes provisions when it has a present obligation (legal or constructive) as a
result of past events and it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation.
h. Foreign Currency
Transactions denominated in foreign currency are translated into cedis at the rates of exchange
ruling on the dates of the transactions. Assets and liabilities denominated in foreign currencies
are translated into cedis at exchange rates ruling at the balance sheet date. Any gains or losses
resulting from foreign currency translation or exchange are dealt with through the profit and
loss account for the year.
8/6/2019 Financial Performance Analysis of Prudential Bank Final Edit
The analysis of the Net Interest Income shows a study upward trend with an average growth of
about 42% year-on-year from 2005 to 2008 and this was due to the fact that the Interest Income
trend was matching up with that of the Interest Expense. However, in 2009 the trend grew
below the average by only about 23% from 225% in 2008 to 248% in net interest income. This
might be as a result of increase in borrowings which grew by about 48% from 2008 to 2009
and a corresponding increase in the cost of borrowing and interest expense grew by about 70%
as against 18% growth in loans and advances from 2008 to 2009 and only 42% corresponding
increase in Interest income. It can be deduced that the bank did not make high charges on its
assets in general as against the expense on its borrowings.
b. Net Operating Income [Total (Gross) Income] and Operating Expenses
The bank¶s Net operating income grew steadily with ratios of 128%, 174% and 229% for 2006,
2007 and 2008 respectively but grew to 255% representing a 26% year-on-year growth from
2008. This can be attributed to the quantum increase in borrowing and increase in the interestexpense which is about 70% year-on-year increase from 2008 to 2009.
In the case of operating expense, the company managed to record its lowest increase in 2007
with a percentage value of about 170% which represents a 27% increase from 2006 year-on-
year. 2008 recorded the highest increase with a value of 79% from 2007 but managed to bring
it down by 19% as compared to 2008 year-on-year.
c. Profit before Tax
Even though the bank had an upward trend with its Interest Income, commissions and fees, its
profit before tax has not maintained the same trend. Its profit before tax dropped by 5% year-on
year from 2005 to 2006 but recovered and made an upward increase in both 2007 and 2008.
Yet again, it suffered a downward turn in 2009, and it could be largely attributed to the same
issues explained above. Despite the severe competition in the banking industry and the general
slowdown in the economy, the bank was able to make a reasonable profit. The bank¶s pre-tax
profit decreased by 39% to GH¢ 4,029,763 from GH¢ 6,611,115 in 2008.
Trend Analysis for the Balance Sheet
d. Assets
There was a marked increase in Loans and Advances over the period under consideration
which has been consistent. They trended with this values 2006- 184%, 2007- 238%, 2008-
324% and 2009- 383%. The performance of other assts also saw an upward trend as given in
the table xxx. Cash and Balances with Bank of Ghana and Government securities also
appreciated significantly over the period.
8/6/2019 Financial Performance Analysis of Prudential Bank Final Edit
(Table 3.0 Calculations for the Vertical analysis for the profit and loss account )
a. Net Interest Income and Net Operating Income
The vertical analysis indicates that there were significant fluctuations in this component. The
bank recorded a rising Net Interest Income of 55% from 2005 to 60% in 2006. In 2007
percentage fell by 6% to 54%. The downward trend continued into 2008 registering 50% which
was a 4% fall from the previous year. As if this was not enough, 2009 was the worst hit period
and had a record low of 39%. Even though the bank allocated a greater proportion of its
resources to loans and advances to generate higher levels of income, the interest income could
not much up with the Interest Expense which was on the upward trend and this might have led
to the fall in the percentage value of the Net Interest Income.The Net Operating Income followed a downward trend just like that of the Net Interest Income
and the same reasons might account for it as above.
b. Pre-Tax Profit
The banks pre-tax values of 2005- 22%, 2006- 16%, 2007- 20%, 2008- 19% and 2009- 8%
clearly shows that the bank was making less profits over periods with it worst profit period
being recorded in 2009. This was because the bank grew it assets which was mainly financed