Ratio Analysis - HBL

Financial Analysis of Himalayan Bank Limited

Functions of Commercial Banks:

The main functions of a commercial bank are as follows:  Acceptance of Deposits in  Advancing Loans in  Agency Service  Credit Creation  General Utility Services  Safekeeping of valuables  Assist in foreign trade  Making venture capital loans  Financial advising  Offers security brokerage services  Offers investment banking and merchant banking services

Development of Commercial Banks in Nepal

The history of commercial banking in Nepal started after the establishment of Nepal Bank Limited in the year B.S. with a paid-up capital of Rs 8, 45,000. Later Nepal Rastra Bank was established as the central bank in 2013 followed by the establishment of Rastriya Banijya Bank. After Nepal practiced Liberalization Policies, Nepal had access to many joint venture banks banks and other other financ financial ial instit instituti ution. on. Today, Today, Nepal Nepal can take take legiti legitimat matee pride pride in the remarkable growth and progress in the banking and financial industry. Nepal has opened its door to foreign commercial banks to operate in the kingdom. Since then there are 17 commercial and development banks till date.

S. No. 1 2 3 4 5 7 8 9 10 11

Financial Institution Commercial Banks Development Banks Rural Development Banks Finance Companies Cooperatives Insurance Companies Non-Governmental organizations (Ltd banking transactions) Pension Fund Companies Credit Guarantee Corporation Postal Saving Organization

Numbers 17 16 5 55 35 17 36 1 1 1

Table A

2


Introduction to Himalayan Bank Limited

Himala Himalayan yan Bank Bank Limite Limited d was incorp incorpora orated ted in 1992 1992 by the disti distingui nguishe shed d busine business ss personalities of Nepal in partnership with Employees Provident Fund and Habib Bank Limi Limited ted,, one of the the larg larges estt comm commer erci cial al bank bankss of Paki Pakist stan. an. Banks Banks oper operat atio ion n was was commenced from January 1993. It is the first commercial bank of Nepal with maximum share holding by the Nepalese private sector. Besides commercial activities, the Bank also offers industrial and merchant banking. Himalayan Bank's policy is to extend quality and personalized service to its customers as promptly as possible. All customers are treated with utmost courtesy as valued clients. The Bank, as far as possible, offers tailor made facilities to its clients, based on the unique unique needs needs and requir requireme ements nts.. To extend extend more more effici efficient ent servic services es to its its custom customers ers,, Himalayan Bank has been adopting innovative and latest banking technology. This has not only helped the Bank to constantly improve its service level but has also kept it prepared prepared for future adaptation adaptation of new technology. technology. Though Himalayan Himalayan Bank Limited Limited is young in terms of tenure of its operation, at present the bank is serving its valued customers with the following facilities besides the general banking services. Credit Card: Himalayan Himalayan Bank Limited Limited has been a pioneer pioneer in introducing introducing a Nepalese Nepalese domestic Credit Card. The bank has introduced 'Himalayan Bank Gold Card' which has eased the banking operation. Likewise, the bank is also the member of VISA and MASTER Card. The bank issues all range of VISA card and has a plan to issue MASTER card. Tele-Banking: To provid providee more more prompt prompt and effici efficient ent service service to its its custom customers ers,, the bank has been pioneering on instituting Tele-banking service. Dialing a pre-specified telephone number, its clients will be able to: Make balance and statement inquires Order statement and cheque books Request instant faxing of statement Get information on foreign exchange etc. • • • •

Any Branch Banking: This product, integrated with the core banking system has enabled the bank to make certain operations like withdrawal and deposit of cash and cheques from any of HBL branches. Customers maintaining account with any of HBL branches can operate its transaction from any branches convenient to them. Automated Teller Machine: ATM established in the premise of Head Office, Thamel, Maharajgunj branch, Patan Branch and New Road Branch Branch have enabled customers customers to extend extend services services for 24 hours. Currently Customers can utilize ATMs and make withdrawals at any time round the clock. ATMs of the remaining branches are under testing phase of interfacing with ATM

3


Switching software to enable all the ATMs of the bank to allow Any Branch and International transactions of the customers. Share Subscription of Himalayan Bank Limited Subscription

% Holding

Promoter Share Holders Habib Bank Limited, Pakistan Financial Institution (Employees Provident Fund) Nepalese Public Share Holders Total

51 % 20% 14% 15% 100%

Table B

Beneficiaries:

This analysis is destined to provide financial information to different sectors of business that is directly or indirectly influenced by financial performances of Himalayan Bank Limited. Especially this report will serve the management, share holders, long-term and short-term money lenders, creditors and employees members of Himalayan Bank Limited in implementing future projects or initiating corrective actions by status of the organization. In addition, this report may also help potential investors, financial institutions and people interested in financial analysis and similar business. Objectives of the study:

The overall objectives of this study are to give a brief insight about the financial strength and weakness of the organization. However, the specific objectives of this analysis are as follows: To evaluate the organization's financial status To evaluate the organization's operating efficiency To measure the comparative ratios of the bank To measure the organization's short-term solvency To measure the organization's long-term solvency To evaluate the organization's efficiency in managing and utilizing its assets To help us work on the practical scenario of day-to-day operation in an organizational environment. To help in enhancing and developing managerial behavior and skills. • • • • • • •

•

Limitations: This study was done during the busy office hours. So it was somehow difficult to cope along with the office personnel and the entire analysis is based on the secondary data. The data provided then is limited to the research and the report. Detailed information

4


about the financial resources of the bank could not be provided due to security reasons of the bank's operation technology and software. Field Work Procedure:

The main objective of this fieldwork is to study the financial position of Himalayan Bank Limited. The study is purely based on the exploratory design finding access to the requisites of the study. The analysis is diagnosed through limited resources from the bank due to different reasons. In the beginning, required secondary data was obtained through the bank's website which was reviewed and presented in a systematic and tabular form along with charts to make the study more precise. The data collected were the bank's operating statements and balance sheets etc. Method of data collection:

Data can be collected from different sources. Generally, there are two sources of data. Primary Data:

Primary data are the first data obtained by the researchers during the field visit. These are the first data obtained for different kinds of study related to the research. It can be collected through interviews, interactions and questionnaires etc. Although primary data plays an important role by making the research person familiar with the field, work, people and the environment, in this analysis, however, primary data could not be obtained for different reasons. Secondary Data:

Secondary data are second data that has already been published before in the form of records, annual reports, pamphlets, statistic gather, directories, publications, computer data banks etc. This entire report is based on the secondary data. Since the report is concerned with the financial analysis of the organization, balance sheets of five years from the fiscal year 2055/56 - 2059/60 were collected from different sources. The balance sheet and other required documents and information were obtained from the Eleventh Annual Report of Himalayan Bank Limited. Likewise other required information were collected from libraries, the bank's website and review of the previous studies done by former third year students. Tools used for the analysis:

Financial analysis is a process of determining the financial relation amongst different financial variables, strength and weakness of a firm by establishing a scientific and systematic strategy and knowing the financial status of the firm at present. Different financial tools may be available for financial analysis. Ratio Analysis has been used as a tool in analyzing this part of field work

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Chapter II Presentation and Analysis of Data

This chapter is incorporated with different tools for the analysis of the financial status of Himalayan Bank Limited. Different ratios are used for the purpose of analysis. The first presentation of the analysis is the comparative balance sheet. A. Comparative Balance Sheet: A comparative balance sheet is an aggregate balance sheet prepared from the individual balance sheets of many years. It helps to study, compare and make a quick review of the financial status of the firm. Presented here is the comparative balance sheet of five years from the FY 2055/56 to 2059/60. Comparative Balance Sheet of Himalayan Bank Limited Amt Rs. in '000' Particulars

2055/56

2056/57

2057/58

2058/59

2059/60

1. Assets

Cash & bank balance

802208

901907

1435175

1264672

1979209

Placement

4125854

4682762

4057654

352350

150100

Investment

468945

2216416

4083160

9157107

10175435

5245975

7224727

9015347

9557137

10844599

10642982

15025812

18591336

20331266

23149343

Fixed Assets

171313

193046

201679

318844

2,29,871

Other Assets

429801

644882

707557

665738

8,18,760

11244096

15863740

19500572

21315848

2,41,97,974

232653

128646

79527

534013

645840

9772736

14043097

17532404

18619375

21007379

10005389

14171743

17611931

19153388

21653219

543604

821462

690369

660931

6,38,872

10548993

14993205

18302300

19814319

2,22,92,091

695103

870535

1198272

1501529

19,05,883

192000

240000

300000

390000

429000

48000

60000

90000

39000

107250

Reserves

157144

200600

261697

309585

404389

Reserves for doubtful debt

243919

344484

477681

643414

842751

54040

25451

68912

119530

122494

695103

870535

1198272

1501529

1905883

11244096

15863740

19500572

21315848

24197974

Loans, advances & bills purchased Total Current Assets

Total Assets 2. Liabilities

Borrowings Deposit Liabilities Total current Liabilities

Other Liabilities Total Liabilities Net Assets Paid up capital Proposed capitalization of profit bonus share

Retained earnings Total shareholders' Equity Total Capital + liabilities

Table C

6


Comparative Profit and Loss A/C Of

Himalayan Bank Limited Rs in '000' Particulars

2055/56

2056/57

2057/58

2058/59

2059/60

Income

Interest Income

862054

1033660

1326378

1148998

1201234

Interest Expenses

533590

594800

734518

578134

554128

Net Income

328464

438860

591860

570864

647106

Commission and Discounts

101983

110330

96065

101704

102561

Foreign Exchange Income

63958

87327

119261

104601

109599

5624

9685

31220

32038

30154

Other Income Non-Operating Income

1061

1695

2303

2451

10760

501090

647897

840709

811658

900180

47364

59880

85575

101537

120146

109746

132545

141116

155786

177132

Provision for Doubtful Debts

64570

103249

134320

166506

202873

Provision for staff Bonus

27941

34855

48336

38783

400003

0

0

Total Income Expenses

Staff Expenses Operating Expenses

Non-operating Expenses

0

3672

0

Total Expenses

249621

334201

409347

462612

900154

Profit before Tax

251469

313696

431362

349046

360024

Income Tax Provision

86221

114316

154323

114023

147896

Net Profit After Tax

165248

199380

277039

235023

212128

Profit/Loss Carried Down

234419

253420

302491

303936

331656

Statutory General Reserve

33050

39876

57117

47005

42426

Exchange Equalization Fund

429

3580

3962

901

1720

Interest Spread Reserve Fund

770

0

0

0

0

0

0

0

0

51429

Interim Dividend

28800

36000

60000

0

0

Proposed Dividend

37200

84000

22500

97500

5645

0

0

0

0

0

84000

60000

90000

39000

107250

0

813

0

0

0

2130

37000

0

0

0

54040

25451

68912

119530

122493

PL Appropriation

HBL Bond 2066 Redemption Reserve

Transfer to Paid up Capital Proposed Capitalization of Profit Bonus Share Income tax of Last Year Staff Gratuity Fund

Profit Transfer to Balance sheet

Table D

Liquidity Ratio:

Liquidity ratio is defined as the test for solvency position for the payment of short-term liabilities, solvency position or liquidity denotes ability for the payment of short-term

7


liabilities. It is extremely essential for a firm to be able to meet its obligation as they become due. Liquidity ratio measures the ability of a firm to meet its current obligation. In fact, analysis of liquidity need preparation of cash budget and cash and funds flow statement; but liquidity ratio by establishing cash and other current assets to current obligations, provide a quick measure of liquidity. A firm should ensure that it does not suffer from lack of liquidity and that it does not have excess liquidity. The failure of a company to meet its obligation due to lack of sufficient liquidity will result in a poor credit worthiness, loss of creditors’ confidence or even legal tangles resulting closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing. The firm’s fund will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity. While considering liquid assets, it includes cash and those assets, which can be converted into cash within a year, such as sundry debtors, short-term investments, bank deposits; stock advances and accrued income etc. current; liabilities includes those obligation which mature within one year such as creditors, bills payable, outstanding expenses, bank drafts, income tax payable etc. 1. Current Ratio:

Current Ratio is the ratio between the current assets and the current Liabities of a firm. The current ratio is a measure of a firm’s short-term solvency. It indicates the availability of current assets in rupees for every one rupee of current liability. This ratio helps the company to determine the desirable liquidity position to meet its maturing obligations so; the company may neither suffer from lack of liquidity nor too much high liquidity. The current ratio is calculated by dividing current asset by current liability. As a conventional rule, current ratio of 2:1 or more is considered satisfactory. Mathematically, Current ratio = Current assets Current liabilities Where, Current assets = cash and bank balance + receivables + advances and deposits Current liabilities = sundry creditors + payables and provisions Calculation of Current Ratios Amount Rs. in "000" Fiscal Year

Current Assets

Current Liabilities

Current Ratios

2055/56

10642982

10005389

1.064

2056/57

15025812

14171743

1.060

2057/58

18591336

17611931

1.056

2058/59

20331266

19162388

1.061

2059/60

23149343

21653219

1.069

Table 1

8


Comparative Current Ratios 25000000

1.07

20000000

1.065

R 15000000 n i t m10000000 A

1.06

1.055

5000000

o i t a R t n e r r u C

Current Assets Current Liabilities Current Ratios

1.05

0

1.045 2055/56 2056/57

2057/58 2058/59 2059/60

Fiscal Year

Chart 1

The table 1.1 above shows different level of Current Ratios at varying level of Current Assets and Current Liabilities during the five year of observation. The highest and the lowest Current Ratios are 1.069 and 1.064 in the F.Y 2055/56 and 2059/60 respectively. Generally, Current Ratio of 2:1 is considered satisfactory. In case of the Himalayan Bank Limited, the current ratio is below the standard. However, the current ratio trend is increasing slowly which is a good sign of good liquidity management and satisfactory performance done by the bank. 2. Cash Ratio

Since cash is the most liquid asset, a financial analysis may examine cash ratio and its equivalent current liabilities. Trade investments or marketable securities are equivalent of cash; therefore, they may be included in the computation of cash ratio. Mathematically, Cash Ratio = Cash + Marketable securities (investment) Current Liabilities

Calculation of Cash Ratio Amt Rs in '000' Fiscal Year

2055/56 2056/57 2057/58 2058/59 2059/60

Cash Investment

Current Liabilities

1271153 3118323 5518335 10421779 12154644

Cash Ratio

10005389 14171743 17611931 19153388 21653219

0.127 0.220 0.313 0.544 0.561

Table 2

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C o m p a r at iv e C a s h 25000000

0.600

20000000

0.500

. s 1 5 0 0 0 0 0 0 R n i t 1 0 0 0 0 0 0 0 m A

0 . 4 0 0 s

Cas h Inves tm

0 . 3 0 0 t a

Current Liabil

0 . 2 0 0 h s

Cas h Ratio

o i R a

5000000

0 . 1 0 C 0

0

0.000 205 5/56205 6/572057 /582058 /59205 9/60 Fiscal Ye

Chart 2

The above table shows the highest and the lowest cash ratio of Himalayan Bank Limited as 0.561 and 0.127 times in the FY 2055/56 and 2059/60 respectively. The cash ratio trend of The Himalayan Bank is not satisfactory which means that the cash and the investments of this bank have very low liquidity to meet its current obligation. However the Cash Ratio trend is increasing which shows that the banks performances in meeting its current obligation are increasing. 3. Net Working Capital Ratio:

The difference between the current asset and the current liabilities excluding the shortterm bank borrowings is called the net working capital of net current assets. Net working capital is some time used as the measure of firm’s liquidity. It is considered that, between two firms, the one having the larger working capital has larger ability to meet its current obligations. This is not necessarily so, the measure of liquidity is a relationship, rather than the difference between the current assets and the current liabilities. Net working capital however measures the firms’ potential reservoir of funds. Mathematically, Net Working Capital Ratio = Net working Capital Net Assets Where Net Assets = total current assets - total current liabilities-short - term bank borrowings Calculation of Net Working Capital Ratio Amt Rs in '000' Fiscal Year

Current Assets

Current Liabilities Short Term Bank Borrowings

Net Working Capital

2055/56 2056/57 2057/58

10642982 15025812 18591336

9772736 14043097 17532404

870246 982715 1058932

2058/59

20331266

18619375

1711891

Net Assets

Net Working Capital Ratio

695103 870535 119827 2 150152 9

1.252 1.129 0.884 1.140

10


2059/60

23149343

21007379

2141964

190588 3

1.124

Table 3 Comparative Net Working Capital 2500000

1.4 1.2

2000000

. s R 1500000 n i t m1000000 A 500000

1.0 0.8 R C 0.6 W N 0.4

Net Working Capital Net Assets NWCR

0.2

0

0.0 2055/56 2056/57 2057/58 2058/59 2059/60 Fiscal Year

Chart 3

During the study of period, net working capital ratio of the Himalayan Bank Limited is satisfactory. It has recorded the highest ratio of 1.252 and the lowest of 0.884 times in the fiscal year 2055/2056 and 2057/58 respectively. However, the ratio after the F.Y. 2057/58 is increasing towards satisfactory which shows the Bank has been maintaining sound liquidity position to meet its current obligations. Leverage Ratio:

Leverage ratio is defined as the ratio of relationship between the total debt and total assets organization’s long-term solvency. The short-term creditors, like bankers and supplies of raw materials, are most concerned with the firms’ current debt paying ability. On the other hand, long-term creditors like debenture holders and financial institution etc are more concerned with the firms’ long-term financial strength. To judge the long-term financial position of a firm, financial leverage and structure ratio are calculated. These financial positions indicate mix of funds provided by owners and lenders. Generally, there should be an appropriate mix of debt and owner’s equity in financing the firm’s assets.

Debt Ratio:

Several Debt ratio s may be used to analyze long-term solvency of a firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. We may therefore compute debt ratio by dividing total debt by total asset. Total debt will include long-term and short- term from financial institutions, debenture, bonds,

11


and different payments arrangements for buying capital equipments, bank borrowings, public deposits and any other interest-bearing loan. Mathematically, Debt Ratio = Total Debt Total Assets Where, Total Debt = Borrowings + Deposit Liabilities + other Liabities Total Assets = cash and Bank Balances + Placements + Investments + Loans, Advances and Bills Purchased + Fixed Assets + Other Assets

Calculation of Debt Ratio Amount Rs. In ‘000’ Fiscal Year

Total Assets

2055/56 2056/57 2057/58 2058/59 2059/60

Total Debt

11244096 15863740 19500572 21315848 24197974

10548993 14993205 18302300 19814319 22292091

Debt Ratio

0.938 0.945 0.939 0.930 0.921

Table 4 C o m p a r i s io n B e t w e e n T o t a l D e b t & T o t a l 30000000

0.950 0.945 0.940 0.935 s o 0.930 i t a 0.925 R t b 0.920 e D 0.915 0.910 0.905

25000000 . 20000000 s R n i 15000000 t m A 10000000

5000000 0 2 05 5/ 56

2 05 6/ 5 7

2 0 57 /5 8

2 05 8 /5 9

Total Asset Total Debt Debt Ratios

2 0 59 / 60

Fiscal Yea

Chart 4

From the above study, the highest and the lowest debt ratio of Himalayan Bank Limited are 0.945 and 0.921 times in the F.Y. 2056/57 and 2059/60 respectively. Normally debt financing is costly and riskier in the long run. In this context, HBL has been reducing its debt financing since the F.Y. 2057/58 which is a good sign of financing. The current year's debt ratio is 0.921, which indicate that the bank has financed 92.10% of debt from total assets. Debt Equity Ratio:

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This ratio reflects the relation between the shareholder’s fund and the outsider’s fund. The relationship describing the lenders’ contribution for each rupee of the owners’ contribution is called Debt-Equity Ratio. It is relationship between debt and equity, i.e. debt-equity ratio indicates to what extent the firm depends upon the outsiders for its existence. Mathematically, Debt-Equity Ratio = Long Term Debt Shareholders Equity Calculation of Debt-Equity Ratio: Amount Rs. in ‘000’ Fiscal Year

2055/56 2056/57 2057/58 2058/59 2059/60

Total Debt 10548993 14993205 18302300 19814319 22292091

Share Holders Equity

695103 870535 1198272 1501529 1905883

Debt Equity Ratio 15.176 17.223 15.274 13.196 11.696

Table 5 Comparative Debt-Equity Ratio 25000000

20

o i t R y t 10 i u q E 5 t b e D

. 20000000 s R 15000000 n i t 10000000 m A

15 a

5000000

0

Total Debt Shareholders equity Debt-Equity Ratio

0

6 7 8 9 0 5 5 5 5 6 / / / / / 5 6 7 8 9 5 5 5 5 5 0 0 0 0 0 2 2 2 2 2

Fiscal Year

Chart 5

From the above study, the highest and the lowest debt-equity ratio of Himalayan Bank Limited are 17.223% and 11.696% in the F.Y. 2056/57 and 2059/60 respectively. It indicates that the firm does not need to depend more on the outsiders for its financing. It has different other reliable sources for its financing.

Profitability Ratio:

A company should earn profit to survive and grow over a long period of time. Profit is essential but it would be wrong to assume that every action initiated by management

13


should be aimed at maximizing profit, irrespective of social consequences. Profit is the difference between revenue and expenses over a period of time, usually one year. Profit is the ultimate output of a company, and it would have no future if it fails to make sufficient profit. Therefore, a financial manager should continuously evaluate the efficiency of his company in terms of profit. The profitability ratios are calculated to measure the operating efficiency of a company. Besides management of a company, creditors and the owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principals regularly. Owners want to get a required rate of return on their investments. This is possible only when the company earns enough profits. Generally, higher value of profitability ratio shows better financial performances of the company and vice versa. Return on Share Holder’s Equity (ROSE):

Common or ordinary shareholders are entitled to the residual profit. The rate of dividend is not fixed; the earnings may be distributed to the shareholders or retained in the business. A return on shareholders equity is calculated to see the profitability of the owners’ investments. ROSE indicates how a firm has used the resources of the owners. In fact this ratio is on of the most important relationships in financial analysis. Generally, higher ratio shows the efficient utilization of owner’s fund. Mathematically, ROSE = Net Profit after Tax x 100 Shareholders Equity

Calculation of Return on Shareholders Equity Amount Rs. in ‘000’ Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Net Profit After Tax

Share Holders Equity

165248 199380 277039 235023 212128

695103 870535 1198272 1501529 1905883

Return on Shareholders Equity

23.773 22.903 23.120 15.652 11.130

Table 6

C a l c u l a ti o n o f R e t u rn o n S h a r e h o 2500000

25

2000000

20

. s 1 5 0 0 0 0 0 R n i t 1 0 0 0 0 0 0 m A

15

E S O 1 0 R

500000

N et P rofit a fter S hareho lders e ROSE

5

0

0 2055/56 2056/57 2057/58 2058/59 2059/60 Fiscal Ye

14


Chart 6

In the above table, the highest and the lowest return on shareholders’ equity is 23.773% and 11.13% in the fiscal year 2055/56 and 2059/60 respectively. The return on shareholders equity of HBL is in decreasing trend. It may be due to decreasing profit after tax and increasing shareholders equity over the few years. The lowest percentage in return on shareholders’ equity in the current year may indicate inefficient management of incomes and expenses. Return on Total assets:

Return on total assets is defined as the ratio of relationship between net profits after tax to total assets. It evaluates the efficiency of a firm in utilizing and mobilizing its assets. Mathematically, Return on total Asset = Net Profit after Tax Total Assets

Calculation of return on Total Assets Amount Rs. In ‘000’ Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Net Profit After Tax 165248 199380 277039 235023 212128

Total Assets 11244096 15863740 19500572 21315848 24197974 Table 7

Return on Total Assets

1.470 1.257 1.421 1.103 0.877

Compa rative return on Total As 30000000

1.6

25000000

1.4 1.2

. 20000000 s R n i 15000000 t m A10000000

Net Profit After T

1.0 0.8 0.6

A O R

Total Assets RO A

0.4 5000000

0.2

0

0.0 2055/56 2056/57 2057/58 2058/59 2059/60 Fiscal Yea

15


Chart 7

In the above table, the highest and the lowest return on total assets is 1.47 and .877 in the fiscal year 2055/56 and 2059/60. It shows that the management has utilized its assets to earn profit at it full capacity. The lowest ratio does not mean that the firm's profit is in a decreasing trend. It is due to the increasing trend in fixed assets. The profit after tax and the return on total assets of the company is satisfactory. Earning Per Share (EPS):

Earning per share expresses the amount the shareholders get on every share held by them. It also helps to determine the market price of the equity share of the company and also helps in estimating the company's capacity to pay dividend to its shareholders. Mathematically, EPS = Net profit after tax available to equity shareholders No. of equity shares outstanding Calculation of Earning Per Share (Amt Rs in '000') Fiscal Year

2055/56 2056/57 2057/58 2058/59 2059/60

Net Profit After Tax in "000" 165248 199380 277039 235023 212128

No of Equity Shares in"000" 192000 240000 300000 390000 429000 Table 8

Earning Per Share

86.067 83.075 92.346 60.262 49.447

16


Earning Per S 10 0 80 60 s P E 4 0 20 0

E arni ng P e r S

20 55 /5 62 05 6 /5 72 05 7 /582 05 8/5 920 5 9/ 60 Fiscal Y

Chart 8

The above table shows the highest and the lowest earning per share at 92.346% and 49.447% in the FY 2057/58 and 2059/60 respectively. During the five years analysis, although the EPS of HBL is good, it has gradually decreased. However, it does not mean that the EPS in the decreasing trend. It is due to bonus share of 107250 provided in the year 2059/60. It shows that profit of Himalayan Bank Limited is highly satisfactory. Dividend Per Share (DPS):

The net profit after tax belongs to the shareholders. But the income, which they really received, is the amount of earnings distributed as cash dividends. Therefore, a large number of present and potential investors may be interested in DPS, rather than EPS. DPS is the total dividends divided by the total numbers of equity shares outstanding. Mathematically, DPS =

Total Dividends No. of Equity Shares Outstanding

Where, Total Dividend = interim dividend + proposed dividend Calculation of Dividend per Share (Amt Rs. In '000') Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Total Dividend in

No of Equity Shares

96000 120000 82500 97500 5645

192000 240000 300000 390000 429000

Dividend Per Share 50.000 50.000 27.500 25.000 1.316

Table 9

17


Dividend Per Sh 60 S P D

40 D PS 20 0 2055/562056/572057/582058/592059/60 Fiscal Yea

Chart 9

The above table shows that the highest and the lowest dividend per share as 50 in the F.Y. 2059/60 and 1.316 in the FY 2055/56 to 2056/57 respectively. The DPS of HBL has gradually decreased since the F.Y.2056/57 which is not a good sign to the shareholders. Other Ratios:

The liquidity ratio, profitability ratio and the leverage ratio are mostly used for the manufacturing houses and firms. It does not mean that these financial indicators are not useful for analyzing banking sectors. However, for proper analysis of any ban\k, we have to use other ratios and other financial indicators. Different other ratios used are as follows: Dividend Payout Ratio (D/P Ratio):

Also known as Payout ratio, dividend payout ratio is defined as the ratio that measures the relationship of earnings belonging to the ordinary shareholders and the dividend paid to them. It can be found out by dividing the DPS by EPS. Alternatively, it can be calculated by dividing the total dividend paid to the owners by the total no. of earnings available to them. D/P Ratio = Total Dividend to Equity Holders Total Net Profit Belonging to Equity Holders Or, D/P Ratio = DPS EPS Calculation of Dividend Payout Ratio Amount Rs. In '000' Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Earning Per Share 86.067 83.075 92.346 60.262 49.447

Dividend Per Share 50.000 50.000 27.500 25.000 1.316

Dividend Payout Ratio 58.095 60.187 29.779 41.485 2.661

18


Table 10 C o m p a r i s io n B e t w e e n E P S a n d 100

70

90

60

80

50

70 S P D / S P E

60

o 40 i t

50 40

30

30

20

20

a R P D

Earning Per Share Dividend Per Share Dividend Payout R

10

10 0

0 2 05 5 /5 6

2 05 6 /5 7

2 05 7 /5 8

2 0 58 / 59

2 0 59 /6 0

Fi s c a l Ye a

Chart 10

In the above table, the highest and the lowest D/P ratio are 60.187% and 2.661% % in the F.Y 2056/57 and 2059/60 respectively. In the current year, the D/P ratio has decreased sharply due to very low dividend compared to the earnings.

Return in Loans and Advances (ROLA):

The ROLA is defined as the relationship between net profit after tax and loans and advances. It shows the percentage of return on loans and advances provided by the firm. Mathematically, ROLA = Net Profit after Tax Loans and Advances

Calculation of Return on Loans and Advances Amount Rs. In '000' Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Net Profit After Tax in "000" 165248 199380 277039 235023 212128

Loans and Advances 5245975 7224727 9015347 9557137 10844599 Table 11

Return on Loans & Advances 3.150 2.760 3.073 2.459 1.956

19


Comparision Between Loans & Advances and N et Profit Afrer Ta 12000000

3.5

10000000

3.0 2.5

8000000

. s R n 6000000 i t m A

2.0 A

L O

1.5 R

4000000

Net Profit After Tax Loans & A dvances ROLA

1.0

2000000

0.5

0

0.0 2055/56

2056/57

2057/58

2058/59

2059/6 0

Fiscal Year

Chart 11

In the above table, the highest and the lowest return on loans and advances are 3.15% and 1.956% in the FY 2055/56 and 2059/60 respectively. For a firm whose main income is the return on loans and advances, the decreasing trend of ROLA is not good. The rate of ROLA is inefficient for the bank. It shows that HBL has defaulted in collecting its return on the loans and advances. Return on Net Fixed Assets (RONFA):

Return on Net Fixed Assets is defined as the relationship between net profit and net fixed assets. It shows the quantity of return on fixed assets. Mathematically, RONFA = Net Profit after Tax Net Fixed Assets

Calculation of Return on Net Fixed Assets Amount Rs in '000' Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Net Profit After Tax 165248 199380 277039 235023 212128

Net Fixed Assets

Return on Net Fixed Assets 171313 193046 201679 318844 229871

96.460 103.281 137.366 73.711 92.281

Table 12

20


Com parative Net Fixed Assets and Net Profit A 350000

160

300000

140

250000

120

. s R200000 n i t 150000 m A

100 80 60

100000

40

50000

20

0

A F N O R

Net Profit After T NetFixed Assets RONFA

0 2055/56 2056/57 2057/58 2058/59 2059/60 Fiscal Yea

Chart 12

The above table presents the ratio between net profit and net fixed assets. The highest and the lowest RONFA are 137.366% and 73.711% in the F.Y. 2057/58 and 2058/59 respectively. The percentage of return in net fixed assets is tending towards satisfactory. Total Interest Earnings to External Assets (TIEEA):

Total interest earnings to external assets is the ratio of relationship between interest earnings and external assets. It is the ratio of interest earnings from its assets such as loans, advances, investments, placements etc. It shows how much a bank has earned from its external assets. Mathematically, TIEEA = Total Interest Income Total External Assets Where, Total external assets = investments + money at call and short notice + loans, advances and bills purchased and discounted Calculation of Total Interest Earnings to external Assets Amount Rs. in '000' Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Total Interest Earnings

862054 1033660 1326378 1148998 1201234

Total External Assts 9840774 14123905 17156161 19066594 21170134 Table 13

Total Interest Earnings to External Assets 8.760 7.319 7.731 6.026 5.674

21


Com parative External Assets and Total Interest 25000000

10

20000000

8

. s 15000000 R

6

n i t 10000000 m A

4

5000000

2

0

A E E I T

Total External Ass Total Interest Earni TIEEA

0 2055/562056/572057/582058/592059/60 Fiscal Yea

Chart 13

The above table presents the highest and the lowest percentage of total interest earnings to external assets as 8.76% and 5.674% in the FY 2055/56 and 2059/60 respectively. The return or the income not satisfactory. The management should use effective policy to increase its interest income from external assets. Exchange Earning to Gross Income (EEGI):

Exchange earning to Gross Income is the relationship between earnings from foreign income and gross income excluding gross expenses. It shows the income from foreign currency exchange. Mathematically, EEGI = Foreign Exchange Income Gross Income

Calculation of Exchange Earnings to Gross Income (Amt Rs in '000') Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Foreign Exchange Income 63958 87327 119261 104601 109599

Gross Income 501090 647897 840709 811658 900179 Table 14

Exchange Earnings To Gross Income 12.764 13.479 14.186 12.887 12.175

22


Comparative Exchange Earnings And Gross Incom 1000000

14.5

900000

14.0

800000 700000 s R 600000 n i 500000 t m A 400000

13.5

Foreign Exchange Income

13.0 I

Gross Income

G E 12.5 E

300000

Exchange Earnings To Gross Income

12.0

200000

11.5

100000 0

11.0 2055/562056/572057/582058/592059/60 Fiscal Year

Chart 14

The above table shows the highest and the lowest EEGI as 17.54% in the FY 2054/55 and 6.16% in the FY 2053/54 respectively. The percentage of EEGI in gross income is satisfactory but not highly satisfactory. Commission to Gross Income (CGI):

Commission to gross income is the ratio that shows the percentage of commission and discount in total income or gross income. A financial manager should know the percentage of commission to make effective policy in the near future. Mathematically, CGI = Commission and Discount Gross Income Calculation of commission to Gross Income Amount Rs. in '000' Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Gross Income 501090 647897 840709 811658 900179

Commission And Discount 101983 110330 96065 101704 102561 Table 15

Commission to Gross Income 20.352 17.029 11.427 12.530 11.393

23


Comp arative Gross Income And Commission & D 1000000 900000 800000 700000 . s 600000 R n 500000 i t m 400000 A 300000 200000 100000 0

25.0 20.0 15.0 10.0

I G C

Gross Income Commission & Discount CGI

5.0 0.0 2055/56 2056/57 2057/58 2058/59 2059/60 Fiscal Yea

Chart 15

The above table shows the highest and the lowest CGI ratios as 20.352% and 11.393% in the FY 2055/56 and 11.393% respectively. The percentage of commission in total income is not so satisfactory and it should be noted that the decreasing trend of CGI is not a good symptom of effective management. Total External Assets to Total Deposit (TEATD):

The ratio of total external assets to total deposit refers to the relationship between external assets i.e. out gone assets or investments with deposit collection. It shows in which ratio the bank has utilized its deposit in external assets. Mathematically, TEATD = Total External Assets Total Deposit Where, Total external assets = investments + placement + loans, advances, bills purchased and discounted. Calculation of Total External Assets to Total Deposit Amount Rs. In '000' Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Total External Assts 9840774 14123905 17156161 19066594 21170134

Total Deposit 9772736 14043097 17532404 18619375 21007379 Table 16

Total External Assets to Total Deposit 100.696 100.575 97.854 102.402 100.775

24


Comparative Total External Assets to Total Deposit 25000000

103 102

20000000

101

. s R 15000000 n i t m A 10000000

100

D T 99 A E T 98

Total External Assets Total Deposit TEATD

97

5000000

96 0

95 2055/56

2056/57

2057/58

2058/59

2059/60

Fiscal Year

Chart 16

The above table shows the highest and the lowest TEATD ratio in percentage as 102.402% and 97.854% in the FY 20584/59 and 2057/58 respectively. It means that the external assets have been invested properly from total deposit, which is a symptom of effective management policy. Total Shareholders Equity to Total Risk :(TSETR)

Total shareholders equity to total risk ratio defines the risk for the shareholders in their share of profit. It shows that risk in shareholders equity from loans, advances and bills purchased that is provided by the bank. It can be calculated by dividing shareholders equity by total risk. Mathematically, TSETR = Shareholders Total Risk Where Total Risk = Loans, advances and bills purchased Calculation of Total Shareholders Equity to Total Risk Amount Rs in '000' Fiscal Year 2055/56 2056/57 2057/58 2058/59 2059/60

Share Holders Equity 695103 870535 1198272 1501529 1905883

Total Risk 5245975 7224727 9015347 9557137 10844599 Table 17

Total Shareholders equity to Total Risk 13.250 12.049 13.291 15.711 17.574

25


Comparative Shareholders Equity to Total 12000000

20 18

10000000

16 14

8000000 . s R n 6000000 i t m A

12

R

10 T E 8

4000000

S T

Shareholders Equit Total Risk TSETR

6 4

2000000

2 0

0 2055/56

2056/57

2057/58

2058/59

2059/60

Fiscal Yea

Chart 17

In the above table the highest and the lowest TSETR ratios are 17.574% and 12.049% in the F.Y. 2059/60 and 2056/57 respectively. It is considered that this ratio is to be lowered much as possible. The increasing trend of this ratio in case of HBL indicates that HBL's risk is also increasing simultaneously.

26


Study Result:

Financial performance concerns with the measurement and analysis of financial operation of a firm through liquidity, leverage, profitability, turnover and other useful ratios. By using ratio analysis as an analytical tool, some of the results found through this study are as follows: •

Current ratio of Himalayan Bank Limited shows that the higher ratio is 1.069 and the lowest ratio is 1.056 times. Generally, the current ratio is concerned satisfactory when 2:1. In this sense, the current ratio of this bank is not much satisfactory.

•

Cash ratio of Himalayan Bank Limited shows highest and lowest ratios as 0.561 and 0.127 respectively. The cash ratio trend of Himalayan Bank Limited is not satisfactory and has very low liquidity to meet its current obligation.

•

Net Working Capital Ratio of Himalayan Bank Limited has recorded highest and the lowest as 1.252 and 0.889 times. It shows that Himalayan Bank Limited has maintained a sound liquidity position to meet its current obligation.

•

The highest and lowest debt ratio of Himalayan Bank Limited is 0.9456 and 0.921 times respectively. HBL has been reducing its debt financing since the F.Y. 2057/58 which is a good sign of financing. The current year's debt ratio is 0.921, which indicate that the bank has financed 92.10% of debt from total assets.

•

Higher return on shareholders equity ratio shows efficient utilization of owners' investment. Here, highest ratio is 23.773% and the lowest ratio is 11.13%. The lowest percentage in return on shareholders’ equity in the current year may indicate inefficient management of incomes and expenses.

•

Return on total asses measures the profitability of invested funds in the organization. The highest and the lowest ratios recorded here are 1.47% and 0.877% respectively. The lowest ratio does not mean that the firm's profit is in a decreasing trend. It is due to the increasing trend in fixed assets. The profit after tax and the return on total assets of the company is satisfactory.

•

Earning per share helps in estimating the organization's capacity to pay dividends. In this respect, the highest and the lowest ratios of Himalayan Bank Limited are 92.346% and 49.447%. During the five years analysis, although the EPS of HBL is good, it has gradually decreased. However, it does not mean that the EPS in the decreasing trend. It is due to bonus share provided in the year 2059/60. It shows that profit of Himalayan Bank Limited is highly satisfactory.

•

A large number of present and potential investors may be interested in DPS. The highest and the lowest DPS recorded are 50% and 1.316. The DPS of HBL has

27


gradually decreased since the F.Y.2056/57 which is not a good sign to the shareholders. •

The dividend payout ratio measure the earnings belonging to the ordinary shareholders and dividend paid to them. In the previous table, the highest and the lowest D/P ratio is 60.187% and 2.661%. In the current year, the D/P ratio has decreased sharply due to very low dividend compared to the earnings.

•

Higher return on loan and advances are preferable. Here, the highest and the lowest ROLA are 3.15% and 1.956. The rate of ROLA is inefficient for the bank. It shows that HBL has defaulted in collecting its return on the loans and advances.

•

Return on net fixed asset is the total profit returned in total investment in fixed assets. Higher return is considered the best. In the above table, the highest and the lowest RONFA is 137.366% and 92.281%. The percentage of return in net fixed assets is tending towards satisfactory.

•

Total interest to external asset means the profit earned from investments. Here, the highest ratio is 8.76% and the lowest ratio is 3.674%. The return or the income not satisfactory. The management should use effective policy to increase its interest income from external assets.

•

The highest and the lowest exchange earnings to gross income ratio of Himalayan Bank Limited are 114.186% and 12.175%. The percentage of EEGI in gross income is satisfactory but not highly satisfactory.

•

Commission to gross income ratio Of Himalayan Bank Limited has recorded highest and the lowest as 20.352% and 11.393% respectively. The percentage of commission in total income is not so satisfactory and it should be noted that the decreasing trend of CGI is not a good symptom of effective management.

•

The external assets to total deposit mean the ratio of relationship between investments with deposit. In case of HBL, the highest and the lowest ratio recorded are 102.402% and 97.854% respectively. It means that the external assets have been invested properly from total deposit, which is a symptom of effective management policy.

•

Lowest ratio in shareholders equity to total risk is preferred best. In the abovementioned table, the highest and the lowest ratios recorded are 17.574% and 12.049% respectively. It is considered that this ratio is to be lowered much as possible. The increasing trend of this ratio in case of HBL indicates that HBL's risk is also increasing simultaneously. It can be highly satisfactory if the ratio go down further.

28


Chapter III Summary and Conclusion Summary:

Nepal being a development country has not been able to reach the peak of development due to the lack of finance. It has many sectors to develop, which can be done by the government or the private sectors. For this development, a bank has played a vital role. It has been providing loans to the government and private sectors for development as well as for business purpose to the public and the private sectors. A bank provides money to the government by purchasing treasury bills and providing loans to the public for agriculture, small as well as cottage industries by keeping reasonab le securities. A bank is a financial institution that deals with financial securities. It also works as a financial intermediary for the public. There are many banks involved in this field, amongst which Himalayan Bank Limited is one. The objective of this study is to investigate whether Himalayan Bank Limited is sound or not. To fulfill this objective, financial data are collected from Himalayan Bank Limited for a period of five years, from the fiscal year 2055/56 to 2059/2060. After they have organized in a suitable table and charts, financial position and performances of Himalayan Bank Limited is determined using the financial tools such as Ratio Analysis.

Conclusion:

The following conclusion referring to the ratio calculated and interpreted has been drawn regarding the financial situation of the organization. ∗

Liquidity position of Himalayan Bank Limited is good. It has a satisfactory liquid asset and there is no liquidity crisis in the organization. The current ratio, cash ratio and the net working capital has been balanced but is not very satisfactory. No body can predict the future. The main obligation of a commercial bank is to pay to its depositors on demand. In case if a bank defaults so, it may have a negative impact on its worthiness. In addition to this, in this competitive world good will is a must. Hence, the bank should, in future, try to maintain a sound liquidity position.

∗

Himalayan Bank Limited has properly balanced the leverage ratio. It seems that the bank has properly balanced the debt from the total assets. The ratio is satisfactory which implies that management has been utilizing its assets and capital efficiently and optimally.

29


∗

Profitability position of Himalayan Bank Limited is not highly satisfactory. Although the bank has been earning profits every year, the profit so earned is not enough for a financial firm. On the basis of this analysis, we can clearly see that the main profit indicators such as Return on shareholders equity, return on total assets, dividend per share, earning per share etc. are in a decreasing trend. Hence, it can be concluded that profitability position of HBL is not so good.

∗

Other ratios such as D/P ratio, return on loans and advances, return on net fixed assets, exchange earnings to gross income, commission to gross income, external assets to total deposits and total shareholder equity risk ratios are satisfactory however the firm should try to minimize risk much as possible.

∗

Last but not the least, this analysis is based only on the availability of an annual report. Other necessary documents required for the total analysis could not be obtained due to various reasons. Likewise, an analysis based only in terms of ratios may not be sufficient for the overall analysis of a bank. Hence, due to these limitations this report can not be concluded as the overall and the actual analysis of Himalayan Bank Limited. This analysis report may only be used as reference concerning the Financial Analysis of Himalayan Bank Limited. In addition, since the bank is run by highly competent personnel, they may have utilized the bank's assets and loans to its optimum capacity.

30

Ratio Analysis - HBL

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