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Financial Performance Evaluation of Mercantile Bank Limited CHAPTER-01 INTRODUCTION Introduction: As a part of the internship Program of MBM course requirement, I was assigned to do my internship in Mercantile Bank Limited, Mohakhali branch, Dhaka for the period of three months starting from January 1, 2012 to March 31, 2012. My report is on the “financial performance dealings of Mercantile Bank Ltd (Mohakhali Branch)” 1.2 Background of the study: With a view to acquire an in-depth knowledge about the practical orientation and experiences of dynamic business world, it is obligatory to undertake an extensive study to prepare internship report the students of Business Administration, Bangladesh University of Business & Technology (BUBT), who are desirous to the successfully completion of their MBM degree. During the preparation of the internship report, the students are guided and supervised by the faculties of the department with whom they are attached to. Each student is required to work on a specific topic to his/her learning with the attachment of any respective organization. As part of the program, I am highly proud to join with Mercantile bank Limited as Internee and selecting topic “Financial Performance Evaluation of Mercantile Bank Limited (MBL), Mohakhali Branch, Dhaka”. I was placed in Mercantile Bank Limited, Mohakhali Branch for a period of three months. This internship is an orientation to the entire working activities of Mercantile Bank Limited. However, I had worked there in several departments, but I had to select an area of study in which I can make detail research and present my understanding in the report. This report, “Performance Evaluation of Mercantile Bank Limited”, has been prepared to fulfill the partial requirement of MBM program as a mean of Internship Program. While preparing this report, I had a great opportunity to have sound knowledge of all the banking activities of Mercantile Bank Ltd. 1.1 Significance of the study: The prime reason of this study is to become familiar with the realistic business world and to attain practical knowledge about the banking and corporate world. We all know that there is no alternative of practical knowledge, which is more beneficial than theoretical aspects. 1.4 Scope of the study: The report covers the topic titled “The Financial Performance Evaluation of Mercantile Bank Limited”. Therefore, the focus of this report is to analyze the financial performance of MBL. In order to conduct study on this topic, the following topics fall within the scope of the study. • An overview of Mercantile Bank Limited • Performance analysis of MBL through trend analysis of financial ratios of MBL • Comparison of MBL with CBL and MBL through ratio analysis • To obtain practical experience about general banking activities by involving such type of program 1.5 Objective of the Study (Changeable) 1.5.1 Broad Objective: The prime objective of this report is to analyze “The Financial Performance of Mercantile Bank Ltd”.


1.5.2 Specific objectives: The following objectives can be listed as the specific objectives of study. •

To analyze total financial performance and position of MBL.

To seek the way of increasing profit with expanding corporate image and service of MBL.

To provide the reason of bad debts and to give proper risk recovery solution for credit risk, Liquidity risk, market risk and equity risk.

To understand the financial performance Of MBL comparison to other two banks-City bank and Eastern bank. • To identify inter performance of all the branches of MBL. • To calculate the ratio analysis and identify the area of concern. To measure present condition and future prospective of MBL. Then trying to identify the findings and suggest possible recommendation for MBL. 1.6 Methodology: 1.6.1 Research Design: This report is a descriptive type of research, which briefly reveals the overall activities performed by Mercantile Bank Ltd. It has been administered by collecting secondary data. Annual report of MBL was the major secondary data sources in this regard. Ratio analysis in the form trend analysis and comparative analysis has also been used as major tools for the financial performance evaluation. This report is analytical in nature. 1.6.2 Sources of data: Sources of secondary data of this report are: • • • • •

Annual Report of MBL Different text book and journals Various reports and articles related to study Some of my course elements as related to this report Web base support from the internet

1.6.3 Data Collection Procedure: Conducting this study secondary data are used. Data regarding the Performance Evaluation of The Mercantile Bank Ltd. were collected from secondary sources like Annual Reports, journals, Brochures, Manuals and Publication of The Mercantile Bank Ltd., official website. Some information are also collected by taking expert opinion from the officers and difference observation while I doing internship program at the bank. 1.6.4 Instruments Used for Analysis: A. Ratio analysis A.1.Time series (Trend) analysis A.2. Comparative analysis


A. Ratio Analysis: Financial statement provides information about a firm’s positions at a point in time as well as its operations over some past period. The quantitative (such as ration analysis) tools are used to analyze the gathered data and different types of computer software are used for reporting the gathered information from the analysis. The term ‘ratio’ refers to the numerical or quantitative relationship between two items. Ratio can be classified into four broad groups1. Liquidity Ratio 2. Activity Ratio 3. Debt Ratio 4. Profitability Ratio Ratio analysis is made in the form of trend analysis and comparative analysis. A 1 Trend Analysis It is important to analysis trends in ratios as well as their absolute levels. This analysis informs us whether a company’s financial condition improving or deterioratiA.2 Comparative analysis: Comparative analysis involves the comparison of different firms’ financial ratios at the same point of time or over the number of periods. 1.7 Limitation of the Study: Every matter has some limitations. Therefore, this is also not an exception. The limitations of this internship report are been sated below: • Due to time and cost restriction, the study is concentrated in selected areas. To continue study in such a vast area requires a big deal of time. As an internee, I had only three month that is not enough. • As a financial organization a bank has some restrictions to serve all the real data of the bank to the general people, as a result the study is mostly depending on official files and annual reports. • Available data also could not be verified. In most cases, I simply did not have any option but to furnish with data without verification. • MBL as a commercial bank so its key personnel are very busy and they could not able to give me enough time for discussion about various topics. • Sometimes such kinds of tasks were given in the Bank that was no way related to my topic and I was responsible to do it that breaks my concentration in my major area of investigation. • Every organization has its own secrecy that is not revealed to others. • Lack of experience has acted as constraints in the way of meticulous exploration of the topic. CHAPTER-2 OVERVIEW OF MERCANTILE BANK LTD 2.1 Background and History of MBL: Mercantile Bank Limited is a third generation bank in Bangladesh. Mercantile Bank has been incorporated on May 20th, 1999 in Head office at 61 Dilkhusha C/A, Dhaka, Bangladesh as a public limited company with the permission of the Bangladesh Bank. Mercantile Bank Limited commenced formal commercial banking operation from the June 02, 1999. The founders of MBL are committed to make it a little more different and a bit special qualitatively. The Authorized Capital of the Bank is BDT 800000 million and divided into 80000000 ordinary shares of BDT 100 each as of 31 December 2009. The Paid -up Capital is BDT 215841 million of 21584134 ordinary shares of face value of BDT 100 each and listed both in DSE & CSE. MBL make it most efficient to meet the needs of 21st century with assets of BDT 44,940.54 million and more than 1000 employees. The Bank


provides a broad range of financial services to its customers and corporate clients in retail banking, corporate banking and international trade. The total amount of deposit is BDT 39,348 million and the total loans and advances are BDT 31,877.86 million at the end of the year 2007 that shows a great performance of MBL. The credit deposit ratio is 81.02%. The net profit after tax at the end of the year 2007 is BDT 540.50 million. The bank has 10 divisions namely HRD, Credit division, Development and marketing division, Research and planning division, Information technology division, General banking division, Treasury and money market division, The opening of the Principal Office was the big leaf forward and successively the opening of the Mothijil Branch expanded the horizon of Mercantile Bank Limited to bring its services to the valued clients more effectively. The second Branch opened at Dhanmondi Residential Area, Dhaka on August 04, 1999. The third branch was opened at Agrabad, Chittagong on November 06, 1999. The bank stood 58 branches all over the country up to October, 2010. With a firm commitment to achieve an excellence in service, Mercantile Bank Limited has always tried for creating wide array of banking solution and offer supervision value proposition. 2.2 Vision of Mercantile Bank: To make finest corporate citizen 2.3 Mission of Mercantile Bank: Will become most caring, focused for equitable growth based on diversified deployment of resources, and nevertheless would remain healthy and gainfully profitable Bank. 2.4 Objectives Strategic objectives: • To achieve positive Economic Value Added (EVA) each year. • To be market leader in product innovation. • To be one of the top three Financial Institutions in Bangladesh in terms of cost efficiency. • To be one of the top five Financial Institutions in Bangladesh in terms of market share in all significant market segments we serve. Financial objectives: • To achieve 20% return on shareholders' equity or more, on average. 2.5 Core values 

For the customers: Providing with caring services by being innovative in the development of new banking products and services

For the shareholders: Maximizing wealth of the Bank

For the employees: Respecting worth and dignity of individual employees devoting their energies for the progress of the Bank

For the community: Strengthening the corporate values and taking environment and social risks and reward into account

2.6 MBL at a Glance:


• • • • • • •

MBL is one of the largest private banks in Bangladesh. It operates through 65 fully computerized branches ensuring best possible and fastest services to its valued clients. The bank has more than 500 foreign correspondents worldwide. Total number of employees nearly 1500. The Board of Directors consists of 11 members. The Managing Director who is the Chief Executive Officer heads the bank. The Head Office is located at Bank’s own 61 Dilkusha C/A at Motijheel, Dhaka.

MBL Networks Corporate Offices ( Corporate Branch and Local Office ) Regional Office Worldwide Affiliates Total Branches ( Including Corporate Branch and Local Office ) Authorized Dealer Branches Treasury and Dealing Room Training Institute Man Power

2 10 400 65 24 1 1 1500

Table- 1: MBL Networks 2.7 Strategies of MBL: •

MBL Bank Limited mainly follows top down approach to take necessary decisions for the company. Basically they follow the centralize strategy where the Head Office of the Bank control and monitor all the activities of its branches. In case of marketing strategy, they basically depend on ‘word of mouth’ as they are already well reputed for its long-term service in the banking industry.

2.8 Function of Mercantile Bank LTD: Mercantile Bank Limited performs all types of functions of a modern commercial bank, which generally includes: • Mobilization of savings of the people and safe keeping of all types of deposit account • Making advances especially for productive activities and for the other commercial and socioeconomic needs • Providing banking services to common people through the branches • Introduce modern Banking services in the country • Discounting and purchasing bills • Various information, guidance and suggestions for promotion of trade and industry keeping in view of the overall economic development of the country • Finance for both capital machinery and working capital • Finance under small business of self employed clients • Finance of farming and non-farming activities to rural people including purchase of agricultural equipments • Developing new products Market surveys before making any finance • Finance for small transport • Monitoring and forecasting • Developing marketing campaigns • Finance for household durables


• Work simplification studies • Monitoring diversification of portfolio among different sectors 2.9 Organ gram: 2.9.1 The Corporate Structure: Board of Directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business actives and performance of management while the Board remains accountable to the company and its shareholders. The Executive Committee and Audit Committee assist the Board. 2.9.2 Board of Directors: Board of Directors who decides the composition of each committee determines the responsibilities of each committee. The board of directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business activities and performance of management while The Board remains accountable to the company and its shareholders. The Executive Committee and Audit Committee assist the Board. Managing Director & CEO Additional Managing Director Deputy Managing Director

Dewan Mujibur Rahman A.K.M. Shahidul Haque Md. Abul Shahjahan

Table- 2: Board of Director MBL 2.9.3 Executive Committee of MBL: All routine matters beyond delegated powers of management are decided by or routed through the Executive Committee, subject to rectification by the Board of Directors. Senior Executive Vice President

Executive Vice President

Md. Abdul Jalil Chowdhury Monindra Kumar Nath M. A. Yousuf Khan Md. Quamrul Islam Chowdhury Choudhury Moshtaq Ahmed A S M Bulbul Md. Nazrul Hossain S Q Bazlur Rashid

Table- 3: Executive Committee of MBL 2.10 Different departments of MBL: There are mainly four departments of MBL• General Banking Department • Credit department • Cash Section • Foreign Exchange Department 2.10.1 General Banking: In this department, the general Banking activities like- opening account & related information are provided. The general banking in charge of Mercantile Bank Ltd (Mohakhali Branch) is Md. Solayman Hossain. 2.10.2 Credit Department:


Credit department helps the customers through providing bank loans. There are various types of loans handled by different officers. There are secured loan, unsecured loan, SME loan, Home & other loan facilities. 2.10.3 Cash Section: Cash section performs the activities of keeping and giving cash to the customer. The person who wants to open an account, have to keep specific amount of money to the account. Customers can withdraw the cash when the need after a specific period. In cash section, various type of bills like- DESCO bill, ALICO monthly fees are taken from the customers. The name of cash in charge is Md. Mahamudul Haque 2.10.4 Foreign Exchange Department: Foreign Exchange Department consists of three sections• Import section. • Export Section. • Remittance Section. Three departments are organized properly to provide the best facilities to the customers. 2.11 Correspondent Relationships: The Bank has established correspondent relationship across the world with a number of foreign banks namely Citibank N.A., The bank of Tokyo Mitsubishi Ltd., Standard Chartered Bank, American Express Bank, HSBC, Commerzbank, Commonwealth Bank of Australia, Scotia Bank, Toronto Dominion Bank, Unicredito ltaliano, Wachovia Bank, N.A., Hutton National Bank, HypoVereinsbank, Bank Australia, Sumitomoto Mitsui Banking Corp., ING Bank, United Bank of India, ICICI Bank etc. The number of foreign correspondents is 584 as of December 31, 2007. Efforts are being continued to further expand the Correspondent Relationship to facilitate Bank’s growing foreign trade transactions. 2.12 Human resource development: In today’s competitive business environment, only the quality of human resources makes the difference. The bank’s commitment to attract the best persons to work for its and the adaptation of the latest technologies is reflected in the efforts of the bank in the development of its human resources. In the face of today’s global competition, the bank envisages to develop highly motivated workforce and to equip them with latest skills and technologies. A good working environment promotes a level of loyalty and commitment, devotion and dedication of the part of the employees. The bank sent number of officers to Bangladesh Institute of Bank Management and the other training institutes for specialized training various aspects of banking. The bank is contemplating to set up “Training Institute” for providing facilities to its executive and officers. The bank believes in professional excellence and considers its working force as its most valuable asset and the basis of its efficiency and strength. 2.13 Branch Expansion: The bank commenced its business on June 02, 1999. The first Branch was opened at 61 Dilkusha Commercial Area on the Inauguration Day of the Bank. The second Branch opened at Dhanmondi Residential Area, Dhaka on August 04, 1999. The third branch was opened at Agrabad, Chittagong on November 06, 1999. Now the total number of branches stood at 58 at the end of the month, September 2010. 2.14 Foreign Exchange business:


A commercial Bank/MBL is involved in financing foreign trade apart from financing internal credit requirement in the economy. This involves handling of import business through opening L/C and handling of export business. As banking has become very keenly competitive, banks find it convenient to involve in foreign exchange business as a lucrative source of earning income and profit. Apart from financing foreign trade, Commercial Banks also provide guarantees of various types to their clients. While these facilities clients to undertake jobs assigned to them by various corporations and organization, this enables the bank to earn commission. 2.15 Different Types of Scheme & services of MBL: Mercantile Bank Limited has different types of scheme for a customer. These are given below: • • • • • • • • • • • • • •

Monthly saving scheme. Family Maintenance Deposit scheme. Double benefit deposit scheme. Special Savings Scheme. Pension and Family Support Deposit. Consumers' Credit Scheme. Small Loan Scheme. Lease Finance. Doctors' Credit Scheme. Rural Development Scheme. Women Entrepreneurs Development Scheme. SME Financing Scheme. Personal Loan Scheme Car Loan Scheme.

2.16 Financial Highlights of MBL: years Particulars

2006 Tk in million

2007 Tk in million

2008 Tk in million

2009 Tk in million

2010 Tk in million

Paid capital

up

1199.12

1498.90

1798.08

2158.42

4072.21

Total Loans & Advances Price earning ratio Earning per share

26842.1 4

31877.8 6

43419.3 6

48295.5 5

66377.7 0

9 times

12 times

10 times

11 times

14 time

41.22

30.05

28.53

30.67

41.04

Income from investment

369.12

764.48

520.33

696.66

919.45


Total asset

37159.6 5

44940.5 4

55928.7 2

66166.5 2

87140.1 1

Total deposit

33317.6 4

39348.0 0

49538.3 5

58033.4 7

75629.1 4

Table- 4: Financial Highlights of MBL [Source: Annual journal of MBL (From 2006 to 2010)] CHAPTER-3 THEORITICAL BACKGROUND 3.1 Financial performance analysis: Financial performance analysis of a company is very important to get an overall view about an organization. It generally consists of interpretation of balance sheet and interpretation of income statement. By using these two sources, one can perform the ratio analysis in the form of trend and comparative analysis, which are the major tools for analyzing the financial performance of a bank. 3.2 Balance sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement, which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. . 3.3 Income statement: Income statement also referred as profit and loss statement, earnings statement, operating statement or statement of operations is a company's financial statement that indicates how the revenue is transformed into the net income. It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. 3.4 Ratio Analysis Ratio analysis involves methods of calculating and interpreting financial ratios to assess the bank’s performance and status. The basic inputs to ratio analysis are the bank’s income statement and balance sheet. 3.5 Types of Ratio Comparisons Ratio analysis is not merely the application of a formula to financial data to calculate a given ratio. More important is the interpretation of the ratio value. To answer such questions as is it too high or too low. Is it good or bad? Two types of ratio comparisons can be made: Cross-sectional & Time-series analysis. 3.5.1Time-series Analysis Time-series analysis evaluates performance over time. Comparison of current to past performance, using ratios, allows the firm to determine whether it is progressing as planned. Additionally, time-series analysis is often helpful in checking the reasonableness of a firm’s projected financial statements.


3.5.2Cross-Sectional Analysis Cross-Sectional analysis evaluates performance of different firms` financial ratios at the same point in time. 3.6. Cautions about Ratio Analysis Before discussing specific ratios, we should consider the following cautions: • • • •

A single ratio does not generally provide sufficient information from which to judge the overall performance of the firm. Be sure that the dates of the financial statements being compared are the same. It is preferable to use audited financial statements for ratio analysis. Be certain that the data being compared have all been developed in the same way.

3.7. Groups of Financial Ratios Financial ratios can be divided into four basic groups or categories: i. Liquidity ratios ii. Activity ratios iii. Debt ratios iv. Profitability ratios Liquidity, activity, and debt ratios primarily measure risk, profitability ratios measure return. In the near term, the important categories are liquidity, activity, and profitability, because these provide the information that is critical to the short-run operation of the firm. 3.7.1. Analyzing Liquidity The liquidity of a business firm is measured by its ability to satisfy its short-term obligations as they come due. Liquidity refers to the solvency of the firm’s overall financial position. The three basic measures of liquidity are3.7.1. a. Net Working Capital: Net Working Capital, although not actually a ratio is a common measure of a firm’s overall liquidity. A measure of liquidity is calculated by subtracting total current liabilities from total current assets. Net Working Capital =Total Current Assets –Total Current Liabilities 3.7.1. b. Current Ratio: One of the most general and frequently used of these liquidity ratios is the current ratio. Organizations use current ratio to measure the firm’s ability to meet short-term obligations. It shows the banks ability to cover its current liabilities with its current assets. Current Ratio = Current Asset/Current Liabilities 3.7.1. c. Quick Ratio: The quick ratio is a much more exacting measure than current ratio. This ratio shows a firm’s ability to meet current liabilities with its liquid assets. Quick Ratio=Cash + Government Securities + Receivable / Total Current Liabilities.


3.7.2. Analyzing Activity: Activity ratios measure the speed with which accounts are converted into sale or cash. With regard to current accounts measures of liquidity are generally, inadequate because differences in the composition of a firm’s current accounts can significantly affects its true liquidity. A number of ratios are available for measuring the activity of the important current accounts, which includes inventory, accounts receivable, and account payable. The activity (efficiency of utilization) of total assets can also be assessed. 3.7.2. a. Operating Cost to Income Ratio: It measures a particular Bank’s operating efficiency by measuring the percent of the total operating income that the Bank spends to operate its daily activities. It is calculated as follows: Cost Income Ratio = Total Operating Expenses / Total Operating Income 3.7.2. b. Total Asset Turnover: The total asset turnover indicates the efficiency with which the firm is able to use all its assets to generate sales. Total Asset Turnover = Sales/ Total Asset 3.7.2. c. Investment to Deposit Ratio: Investment to Deposit Ratio shows the operating efficiency of a particular Bank in promoting its investment product by measuring the percentage of the total deposit disbursed by the Bank as loan and advance or as investment. The ratio is calculated as follows: Investment to Deposit Ratio = Total Investments / Total Deposits 3.7.2. d. Inventory turnover: A ratio showing how many times a company's inventory is sold and replaced over a period. Inventory Turnover= Cost of good sold/ Average Inventory The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days". This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. 3.7.2. e. Average Collection Period: Average collection period is useful in evaluating credit and collection policies. This ratio also measures the quality of debtors. It is arrived at by diving the average daily sales into the accounts receivable balance: Average Collection Period=Accounts receivable/ (Credit sales/365)


A short collection period implies prompt payment by debtors. It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors. 3.7.2. f. Average Payment Period: Average payment period ratio gives the average credit period enjoyed from the creditors that means it represents the number of days by the firm to pay its creditors. A high creditor’s turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of the company. However, a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors. It can be calculated using the following formula: Average Payment Period=Accounts payable/ Average purchase per day 3.7.3. Analyzing Debt The debt position indicates the amount of other people’s money being used in attempting to generate profits. In general, the more debt a firm uses in relation to its total assets, the greater its financial leverage, a term use to describe the magnification of risk and return introduced through the use of fixed-cost financing such as debt and preferred stock. 3.7.3. a. Debt Ratio: The debt ratio measures the proportion of total assets provided by the firm’s creditors. Debt Ratio = Total Liabilities / Total Assets 3.7.3. b. Time Interest Earned Ratio: This ratio measures the ability to meet contractual interest payment that means how much the company able to pay interest from their income. Time Interest Earned Ratio=EBIT/ Interest 3.7.4. Analyzing Profitability These measures evaluate the bank’s earnings with respect to a given level of sales, a certain level of assets, the owner’s investment, or share value. Without profits, a firm could not attract outside capital. Moreover, present owners and creditors would become concerned about the company’s future and attempt to recover their funds. Owners, creditors, and management pay close attention to boosting profits due to the great importance placed on earnings in the marketplace. 3.7.4. a. Operating Profit Margin: The Operating Profit Margin represents what are often called the pure profits earned on each sales dollar. A high operating profit margin is preferred. The operating profit margin is calculated as follows: Operating Profit Margin = Operating Profit / Sales 3.7.4. b. Net profit Margin: The net profit margin measures the percentage of each sales dollar remaining after all expenses, including taxes, have deducted. The higher the net profit margin is better. The net profit margin is calculated as follows:


Net profit Margin = Net profit after Taxes / Sales 3.7.4. c. Return on Asset (ROA): Return on asset (ROA), which is often called the firms return on total assets, measures the overall effectiveness of management in generating profits with its available assets. The higher ratio is better. Return on Asset (ROA) = Net profit after Taxes / Total Assets 3.7.4. d. Return on Equity (ROE): The Return on Equity (ROE) measures the return earned on the owner’s investment. Generally, the higher this return, the better off the owners. Return on Equity (ROE) = Net profit after Taxes / Stockholders Equity 3.7.4. e. Price/ Earnings ratio (PE ratio): The Price/ Earnings ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the income or profit earned by the firm per share. P/E ratio - Price per share / earnings per share 3.7. 4. f. Earnings per share (EPS): EPS represents the dollar amount earned behalf of each outstanding share of common stock. EPS= Net income/no. of common share outstanding CHAPTER-4 FINANCIAL ANALYSIS 4.0. Quantitative Analysis of Mercantile Bank Limited 4.1 Ratio Analysis: 4.1.1 Liquidity Ratio: Liquidity ratio measures the firm’s ability to pay short-term obligations as they come due. 1. Current ratio: The current ratio, one of the most commonly cited financial ratios, measures the firm’s ability to meet its short-term obligations. The higher the current ratio, the better the liquidity position of the firm. It is expressed as Current Ratio=Current Asset/Current Liabilities Year

2006

2007

2008

2009

2010

Current Ratio

1.005

1.01

1.02

1.04

1.05

Table-5: Current ratio Source: Annual Report of MBL Graphical Presentation:


Current ratio 1.06 1.05 1.04 1.03 1.02 1.01 1 0.99 0.98

1.05

1.04

1.005

2006

1.02

1.01

2007

2008

2009

2010

Figure 4.1 Current Ratio Interpretation: The graph shows an upward trend in MBL’s current ratio. This indicates that MBL has increased its liquidity position over the years and there by it has reduced the chance of being technically insolvent. 2. Net Working capital Net working capital, although not actually a ratio is a common measure of a firm’s overall Liquidity a measure of liquidity ratio calculated by Net Working capital=Current Asset-Current Liabilities Year Net Working Capital (Tk. million)

2006 Tk. 822.34

2007 Tk. 1056.25

2008 Tk. 1471.08

2009 Tk. 2150.14

2010 Tk. 2447.97

Table-6: Current ratio Source: Annual Report of MBL Graphical Presentation:

Figure 4.2: Net Working Capital Interpretation: Net working capital measures liquidity position of the firm. In 2006, the net working capital was tk 822.34 million that was gradually increased to tk 2447.97 million in 2010. The graph shows an increasing trend of MBLs liquidity position this indicates that MBL has increased its ability to pay short-term obligation out of its currents assets.


4.1.2 Activity ratios: Activity ratios measure the speed with which accounts are converted into sale or cash. 1. Cost Income Ratio: It measures a particular Bank’s operating efficiency by measuring the percent of the total operating income that the Bank spends to operate its daily activities. It is calculated as follows. Cost Income Ratio=Total operating Expenses/Total Operating Income Year

2006

2007

2008

2009

2010

Cost Income Ratios (%)

40.13%

42.33%

44.15%

42.25%

40.38

Table-7: Cost Income ratio Source: Annual Report of MBL Graphical Presentation:

Figure 4.3 Cost Income Ratio Interpretation: In 2008 the cost income ratio of Mercantile Bank Ltd. is highest but after 2008 it is decreasing. Therefore, it can be said that the operating efficiency of the Mercantile Bank Ltd. is becoming good. This means they are successful in minimizing their operating cost relative to its operating income. 2. Total Asset Turnover Ratio: The total asset turnover indicates the efficiency with which the firm is able to use all its assets to generate revenue. Total Asset Turnover= Operating Income/Total Asset Year Total Asset Turnover (times)

2006 0.053

2007 0.053

2008 0.051

Table-8: Total Asset Turnover Source: Annual Report of MBL Graphical Presentation:

2009 0.053

2010 0.055


Figure 4.4 Total Asset Turnovers Interpretation: This ratio measures the efficiency of the bank in using its total assets to generate operating income. The graph shows an upward trend in total asset turn over except in 2008. Its total asset turnover is lowest in 2008, but it is highest in 2010. This indicates that MBL is becoming more efficient in using its assets to generate operating income. 3. Investment to Deposit ratio: Investment to Deposit Ratio shows the operating efficiency of a particular Bank in promoting its investment product by measuring the percentage of the total deposit disbursed by the Bank as loan and advance or as investment. Investment to Deposit Ratio=Total investment/Total Deposit Year Investment To Deposit Ratio

2006

2007

2008

2009

2010

.21

.19

.15

.25

.15

Table-9: Investment to Deposit Ratio Source: Annual Report of MBL Graphical Presentation:

Figure 4.5 Investment to Deposit ratio Interpretation:


In 2009, investment to deposit ratio is highest. That is, 25% of total deposits are in the form of investment. However, this ratio drastically falls from 25% to 15%, which is not good sign for the company. This indicates that MBL is becoming less efficient in converting their deposit into investment. 4.1.3 Debt ratios: Debt ratios measure the portion of assets financed by firm’s creditors. These ratios also indicate the firm’s debt service capacity. 1. Debt Ratio: The debt ratio measures the proportion of total assets financed by the firm’s creditors. Debt ratio= Total Liabilities/Total Assets Year

2006

2007

2008

2009

2010

Debt Ratio

.92

0.93

0.94

0.94

0.92

Table-10: Debt Ratio Source: Annual Report of MBL Graphical Presentation:

Figure 4.6 Debt Ratio Interpretation: The graph shows that debt ratio MBL is fluctuating. The MBL has reduced its debt ratio in 2010 to amount of 92% from 94% in 2009 and thereby it has reduced its financial leverage and financial risk. 2. Time Interest Earned Ratio The times interest earned ratio, sometimes called the interest coverage ratio, measures the firm’s ability to make contractual interest payments. Time Interest Earned Ratio =Earnings before interest & Taxes/Interest Year

2006

2007

2008

2009

2010

Time Interest Earned Ratio

1.13

1.22

1.37

1.54

1.28

Table-11: Time Interest Earned Ratio


Source: Annual Report of MBL Graphical Presentation:

Figure 4.7 Time Interest Earned Ratio Interpretation: There is an upward trend in MBL’s time interest earned ratio up to year 2009. However, it has decreased in 2010 to the amount of 1.28 times. This indicates that MBL has reduced its margin safety in paying the contractual interest and thereby it has increased its financial risk. 4.1.4 Profitability ratios: These ratios measure the bank’s earnings with respect to a given level of revenue, a certain level of assets, the owner’s investment, or share value. 1. Net Profit Margin The net profit margin measures the percentage of each sales dollar remaining after all expenses, including taxes, have deducted. The higher the firm’s net profit margin is better. The net profit margin is a commonly cited measure of the company’s success with respect to earnings on sales. Net Profit Margin=Net profit after tax/operating income Year Net Profit Margin

2006

2007

2008

2009

2010

0.21

0.23

0.22

0.23

0.30

Table-12: Net Profit Margin Source: Annual Report of MBL Graphical Presentation:


Figure 4.8 Net Profit Margin Interpretation: There is an upward trend in MBLs net profit margin except in 2008 as shown in graph. This indicates that MBL has succeeded to increase the portion of total operating income that remains after deducting all the costs and expenditure. 2. Return on Asset (ROA): The return on asset (ROA), which is often called the firm’s return on total assets, measures the overall effectiveness of management in generating profits with its available assets. The higher the ratio is better. Return on Asset (ROA) =Net Profit after tax/Total Asset Year Return On Asset (%)

2006 1.33%

2007 1.20%

2008 1.10%

2009 1.22%

2010 1.64%

Table-13: Return on Asset Source: Annual Report of MBL Graphical Presentation:

Figure 4.9 Return on Asset Interpretation: Return on assets is an indicator of how profitable a company is. The banks return on asset increasing from 1.33 to 1.64 in the preceding 5 years. It can be said that MBL’s earning capacity is increasing year by year. This is good sign for the Bank.

3. Return on Equity (ROE): The return on equity measures the return earned on the owner’s investment. High the return on equity is the better for the owner. Return on Equity=Net Profit after Tax/ Shareholders equity Year

2006

2007

2008

2009

2010

Return on Equity(%)

21.94

18.45

17.75

18.80

19.84

Table-14: Return on Equity Source: Annual Report of MBL


Graphical Presentation:

Figure 4.10 Returns on Equity Interpretation: The return on equity ratio was decreasing from 2006 to 2010. This has been decreased from 21.94% to 19.84%, which is not desirable. Therefore, the management should work hard to increase the return associated with equity. Though return on equity has slightly increased in 2010 from preceding year, still it is significantly deviated from that of in 2006. 4. Earnings per Share The firm’s Earning per share (EPS) are generally of interest to present or prospective stockholders and management. The Earning per share represent the number of dollars earned on behalf of each outstanding share of common stock. The earnings per share is calculated as follows Earnings Per Share =Earnings available for common stock holder/No. of shares of common stock outstanding Year

2006

2007

2008

2009

2010

EPS(tk.)

41.22

30.05

28.53

30.67

41.04

Table-15: Earnings Per Share Source: Annual Report of MBL Graphical Presentation:

Figure 4.11 Earnings Per Share


Interpretation: The graph shows that, EPS is highest in 2006 and there is a downward trend in EPS from year 2006 to 2008. However, MBL has managed to increase its EPS as shown by the upward trend in EPS over the last three years. 5. Price Earnings Ratio The price or earning (P/E) ratio is commonly used to assess the investors’ appraisal of share value. The P/E represents the amount investors are willing to pay for each dollar of the firm’s earnings. The higher the P/E ratio, the greater the investor confidence in the firm’s future is. The price Earning (P/E) ratio is calculated as follows Price Earnings Ratio=Market price per share of common stock/Earning per share Year

2006

2007

2008

2009

2010

Price Earnings Ratio(times)

8.62

13.83

12.21

12.88

14.14

Table-16: Price Earnings Ratio Source: Annual Report of MBL Graphical Presentation:

Figure 4.12 Price Earnings Ratio Interpretation: The graph shows an upward trend in price earnings ratio of MBL. This indicates that investors’ perception regarding performance and future prospects of MBL is becoming well over the last 5 years. This increasing trend in P/E ratio is good sign for the MBL because it indicates the shareholders’ wealth maximization and new investors’ confidence on MBL’s performance and prospect. CHAPTER-5 COMPARATIVE ANALYSIS 5.1 Comparative Analysis of MBL with CBL and EBL 5.1.1 Comparative Ratio Analysis: 5.1.2 Liquidity Ratio: a. Current Ratio:


Year 2008 2009 2010

CBL 0.94 1.23 1.32

EBL 0.71 0.78 1.28

MBL 1.02 1.04 1.05

Table-17: Current Ratio Source: Annual Report (2008-2010) of CBL, EBL & MBL Graphical Presentation:

Figure 5.1: Current Ratio Interpretation: The current ratio measures a firm’s liquidity by measuring the portion of its current asset relative to its current liabilities and the higher the ratio, the higher the liquidity of the firm. In 2008, MBL is in better liquidity position than CBL and EBL. The graph shows that, CBL current ratio is better than EBL and MBL in 2009 to 2010. 5.1.3 Analyzing Activity: a. Total Asset Turnover Ratio: Year

CBL

EBL

MBL

2008

0.06

0.05

0.05

2009 2010

0.06 0.08

0.07 0.08

0.05 0.055

Table-18: Total Asset Turnover Source: Annual Report (2008-2010) of CBL, EBL & MBL Graphical Presentation:


Figure 5.2: Total Asset Turnover Ratio Interpretation: The graph shows that, the total asset turnover ratio of CBL and EBL is higher than MBL. The graph also shows that in 2010 the CBL and EBL have the same value (8%). The MBL’s total asset turnover is in worse position than that of other two Banks that indicates they are less capable in comparison to other two banks to utilize its total assets to generate revenue. 5.1.4 Analyzing Debt: a. Debt Ratio: Year

CBL

EBL

MBL

2008

0.92

0.89

0.94

2009

0.92

0.87

0.94

2010

0.8

0.85

0.92

Table-19: Debt Ratio Source: Annual Report (2008-2010) of CBL, EBL & MBL Graphical Presentation:

Figure 5.3: Debt Ratio


Interpretation: The graph shows that, the debt ratio of MBL is highest that of CBL and EBL in every year. This indicates that MBL is using more financial leverage and taking more financial risk than EBL and CBL. b. Time Interest Earned Ratio: Year

CBL

EBL

MBL

2008

1.3

1.5

1.37

2009

1.4

1.7

1.54

2010

1.9

2.1

1.28

Table-20: Time Interest Earned Ratio Source: Annual Report (2008-2010) of CBL, EBL & MBL Graphical Presentation:

Figure 5.4: Time Interest Earned Ratio Interpretation: The graph shows that EBL has the greater ability to meet its interest expense and it is increasing year by year. This ratio for CBL is also increasing year by year. However, in case of MBL it is fluctuating. Time interest earned ratio of MBL in 2010 is 1.28 that is lower than that of EBL and CBL. It indicates that MBL has lower ability to pay contractual interest expenses in comparison with EBL and CBL. 5.1.5 Analyzing Profitability: a) Net Profit Margin: Year

CBL

EBL

MBL

2008

0.12

0.29

0.22

2009

0.18

0.31

0.23

2010

0.25

0.38

0.30

Table-22: Net Profit Margin


Source: Annual Report (2008-2010) of CBL, EBL & MBL Graphical Presentation:

Figure 5.5: Net Profit Margin Interpretation: The graph shows that, EBL net profit margin is higher than that of Mercantile Bank Limited and City Bank Limited. The graph also shows net profit margin of three Banks is increasing where CBL’s net profit margin is lowest and MBL’s net profit margin is moderate.

b)

Return on Asset: Year

CBL

EBL

MBL

2008 2009 2010

0.8 1.2 2.2

1.68 2.34 3.19

1.10 1.22 1.64

Table-23: Return on Asset Source: Annual Report (2008-2010) of CBL, EBL & MBL Graphical Presentation:


Figure 5.6: Return on Asset

Interpretation: Return on Asset measures the management ability to generate net profit by its total available assets. The graph shows that EBL management is efficient to generate profit and their ROA is increasing year by year. In compare to EBL, MBL’s management is less efficient. In compare to CBL, they are efficient in using assets to generate profit except in 2010. c) Return on Equity (ROE): Year

CBL

EBL

MBL

2008

11.2

18.64

17.75

2009

16.2

22.1

18.80

2010

21.3

23.64

19.84

Table-24: Return on Equity Source: Annual Report (2008-2010) of CBL, EBL & MBL

Graphical Presentation:


Figure 5.7: Return on Equity (ROE)

Interpretation: Return on Equity measures the percentage of profit against 1 taka equity. The ROE of EBL has the highest value and increasing year by year. In compare to EBL, MBL is in worse position, and in compare to CBL, MBL is in good position except in 2010. The ROE of all the banks is increasing over the years. d) Earnings per Share: Year

CBL

EBL

MBL

2008 2009 2010

23.3 52.1 59.4

30.20 50.00 80.30

28.53 30.67 41.04

Table-25: Earnings Per Share Source: Annual Report (2008-2010) of CBL, EBL & MBL

Graphical Presentation:


Figure 5.8: Earning Per Share (EPS)

Interpretation: Earnings per Share measure the profit against each common stock share. From the graph, it can be said that EBL has the largest highest earnings per share. In compare to EBL and CBL, MBL is in worse position. In addition, in compare to CBL, EBL is in good position except in 2009. e) Price earnings ratio P/E Ratio: Year

CBL

EBL

MBL

2008 2009 2010

18 14 17

17.07 12.89 15.59

12.21 12.88 14.14

Table-26: Price Earnings Ratio Source: Annual Report (2008-2010) of CBL, EBL & MBL

Graphical Presentation:


P/E Ratio CBL 18

EBL

MBL

17.07

17 12.21

2008

14

15.59

12.89 12.88

2009

14.14

2010

Figure 5.9: P/E Ratio Interpretation P/E ratio for CBL is higher than that of others Bank. The P/E ratio for MBL is increasing at a lower rate. In 2010, the P/E ratio is lowest for MBL and highest for CBL. Therefore, investors’ confidence is highest on CBL. The graph also shows investors’ confidence on MBLs stock is increasing gradually which are not observed in case of EBL and CBL. CHAPTER-6 FINDINGS, CONCLUSION, AND RECOMENDATION 6.1. Major Findings: The trend analysis of Mercantile Bank Limited and comparative analysis of Mercantile Bank Limited with City Bank Limited and Eastern Bank Limited reveals the following major findings. • • • • • • • • • •

The current ratio of MBL is increasing year by year. Yet, MBL’s liquidity position is still lower than CBL and EBL in 2010. Mercantile Bank Limited net working capital has gradually increased year by year. MBL is becoming more efficient in using assets to generate revenue as reflected in its total asset turnover. However, their efficiency in utilizing assets is still less than that of CBL and EBL. Mercantile Bank Ltd’s investment to deposit ratio is fluctuating year by year. In 2009, it was highest. Nevertheless, in 2010 investment to deposit ratio is very low so it indicates the inefficiency of the bank. PBL has reduced its debt ratio to 92% in 2010. Still MBL is using more debt and taking more financial risk in comparison with EBL and CBL. There is an upward trend in PBL’s time interest earned ratio up to year 2009. In 2010, MBL has poor margin of safety to pay contractual interest in comparison with MBL and EBL. EBL management is efficient to generate profit and there ROA is increasing year by year. In compare to EBL and CBL, PBL management is less efficient in generate net income from its assets Return to equity holders of PBL has decreased over the last five years from 21.94% to 19.84%, which is not desirable. Its ROE is lower than that of EBL and MBL in 2010 as well. The Earning per Share of the PBL has increased over the last three years even it is inefficient in its performance in relative to the EBL and the MBL. The increasing trend in P/E ratio found in the trend analysis shows upward trend in investors’ confidence on PBL’s performance and prospect. Yet, investors’ confidence on MBL is lowest relative to MBL and PBL.


6.2 Conclusion: In developing a country’s economic condition, Bank plays vital role. The Mercantile Bank is one of the leading banks in our country that also plays a vital role. In 2010, the Mercantile Bank total deposit was tk.75629.14 million and provided loan tk.66377.70 million. Mercantile bank collects deposit by providing different types attracting deposit product and provide loan by offering different types of investment product. In developing economic condition, mercantile bank has the huge contribution. From the practical point of view, I can declare that I have really enjoyed my internship at this bank from the very first day. Moreover, the internship program that is mandatory for my MBM program obviously will help me in thinking about my career. Every effort has been given to prepare the report on Financial Performance Evaluation of MBL. The evaluation of financial performance shows that there is an increasing trend in liquidity position, total asset turnover, price earnings ratio. With respect to EBL and CBL, MBL has high debt ratio and low price earnings ratio. The MBL should reduce its debt ratio, increase its investment to deposits ratio and efficiency of asset utilization to keep speed with and outperform the EBL and CBL. 6.3 Some Recommendations for MBL Bank Limited: The findings from the analysis require the following recommendations that may help the Mercantile Bank Limited to improve its performance and to be a key member in the banking sector of Bangladesh. • Though current ratio of MBL is increasing year by year, it is not in line with EBL and CBL. To be in line with the other two banks, MBL should slightly increase its current assets relative to its current liability. • Mercantile Bank Ltd. is becoming successful to decrease its operating expenses relative to its operating income over the last two years. MBL should try to keep and increase this pace of this efficiency. • MBL is becoming more efficient in using its assets to generate operating income. Nevertheless, in order to keep pace with the CBL and MBL it should use its assets more efficiently to generate more operating income. • Debt Ratio of the MBL is decreasing. MBL should further reduce its debt ratio to bring its financial risk to a level that is maintained by CBL and EBL. • MBL should reduce its interest obligation by reducing debt or increase its operating income by utilizing assets properly in order to increase margin of safety in paying interest obligation. • The MBL should increase their investment to deposit ratio to maximize their operating income and owner’s equity. • ROA is increasing year by year. MBL should try to maintain it and increase it by utilizing its assets more efficiently to outperform the CBL and EBL. • There is an upward trend in investors’ confidence on MBL’s performance and prospect. The MBL should try to keep this upward trend. In order to bring the investors’ confidence on the performance of MBL to level that is higher than that of EBL and CBL, MBL should increase its overall performance.


Financial Performance Evaluation of Mercantile Bank Limited