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Liability Management of Janata Bank Limited

Chapter 1: Introduction Liability management is a type of liquidity management that refers to meeting liquidity needs by using the outside sources of discretionary funds like government funds, discount window borrowings, repurchase agreements, certificates of deposits and other types of commercial borrowings. In an economy, banks play the crucial role of an intermediary that channel funds from the surplus economic units to the deficit economic units. So, obviously the fundamental and most important task of any commercial bank is to make the proper arrangements of its liquidity needs that the bank can meets it short term or long term operational activities. To perform the financial system in the economy smoothly and efficiently, bank plays a major role in channeling funds to borrowers with productive investment opportunities that ensure to earn highest profit. Basically a bank acquires funds by using or selling liabilities, which are consequently also referred to as the source of funds. These types of funds obtained from the issuing liabilities which are used to purchase income earning assets. Due to the changes of commercial banking regulations and operations, in the recent time the bank has introduced many new sources of funds, which have dramatically transformed the liability side of their balance sheets and also put pressure on the bank’s operating costs. Liability management for the commercial bank is essential because these types of current and term liabilities helps both the customers and bank by making assurance of safety of wealth and on the other side, the bank can meet its investment requirements with these sources of liquid assets. The customers of the bank are rewarded by the accumulation of their time interest earned income that create a center of attention to invests or deposits with the preferences of time and the bank is also be able to make a


supply of money that they invests to accelerate the overall economy. Sources of the bank funds have changed substantially because of changes in the inflationary rate, changing the customer needs, rising competition and financial services the leads the banks increasing the usage of liabilities sides funding and investment. Regarding to the profit dimensions from the liability management, the estimating costs of funds and their performances through the different time of maturities has become the crucial factor. It is significantly an important issue that one should deserve by the appropriate judgment that how the manager of financial institutions or banks deals with liabilities side items due to risk of movements of market interest rates and other factors and variables that has a substantial impact on their portfolio of assets and liabilities. This report on the “Liability Management of The Janata Bank Limited” that is significantly important for acquiring knowledge upon the activities of commercial banking sector in our country. Here, we introduce the theoretical development of asset liability management from the different aspects of The Janata Bank Limited. Then we can show their administration policy and statements regarding to the managing their assets liabilities and finally we have shown their financial performances through the performance analysis to assess their recent market condition.

1.1 Objectives of the Report •

The objectives of the report are as follows;

To give an overview of the liability management through the theoretical development.

To understand the administration process of asset liability management.

To identify and evaluate their financial performances by analyzing their ratios from financial statements.

To make recommendations regarding the Bank’s liability management activities.

1.2 Scope & Methodology of the Report:

This report will cover the details of Janata Bank’s practices about the liability management activities emphasizing the customer service process and funds administration. This report will also corroborate of the writer’s observations and on the job experiences in the corporate and investment banking division of Janata Bank Limited. The report mainly emphasizes the sequential activities involved in


deposits, loans from other sources and their processes, performances by Janata Bank for depository and payment obligation activities as an integral part of the liability management. The report will also address the activities on the asset liability management committee of their formulating pricing policy and investment decision adopted by Janata Bank Limited. The report incorporates an evaluation of the different aspects of the performances of their asset and liability management with the diverse aspects that related to the issue of their banking activities. 1.3 Sources of Data Collection: Information used in this report has been collected from both primary and secondary sources. Primary data has been collected mainly through the writer’s observation of the deposit policy and operational techniques, informal interviews of executives, officers and employees of The Janata Bank Limited. Majority of the information has been collected from the secondary sources, which include books, reading materials, newspapers, journals and various company news magazines, brochure information and reports published (Annual Reports) by Janata Bank Limited and some operational manuals published by the Bangladesh Bank and also the policy instruction manuals published by the authority of Janata Bank Limited. 1.4 Limitations: Since this is the first study on the aspect of Liability Management of Janata Bank Limited, the difficulties possess under the various course of actions depends upon the market conditions from time to time. The limitations that have countenanced from experienced through the internship courses to Janata Bank Limited are as follows; •

Insufficiency in data entailed for the required study.

Inadequate and confidential information that is hard to obtain.

Time provided for conducting the study is another important constraint.


1.5 Background of the Company: Janata Bank Limited is a scheduled commercial bank in Bangladesh. (It is formed in 1972 as a scheduled bank with assets and liabilities of the Eastern Banking Corporation set up in East Pakistan on 28 January 1965. It started banking business 22 June 1965 and became a member of the Dhaka Clearing House on 17 September 1965. At the time of establishment, Eastern Banking Corporation had a paid up capital of Tk 1.42 million and deposit resources of about Tk 10 million. It was the only scheduled bank formed with capital raised entirely from the small income group of people of East Pakistan. Eastern Banking Corporation was nationalized under the Bangladesh Banks Nationalization Order 1972 and its name was changed to Janata Bank. At that time, the bank had 182 branches. The government retracted 95% of its share capital and allowed it to operate as a private bank. It was transformed into a limited company on 15 September 1983. The bank is listed with both Dhaka and Chittagong Stock Exchanges. The bank performs all traditional commercial banking functions. The bank has correspondent relationships with 300 foreign banks/bank offices and exchange houses in 72 countries.)1 With the objective of attracting the Bangladeshi wage earners abroad and the non-resident foreigners to invest in Bangladesh, the bank offered them the opportunity to open non-resident foreign currency deposit accounts and foreign currency current deposit accounts with it. By sides the bank consists of major divisions named 1) Corporate banking, 2) Retail banking, 3) Treasury, 4) Small & Medium Enterprise (SME). At present the bank operating its business by 207 branches. Janata Bank Limited is the first local commercial bank that providing online banking services to its customers from the very beginning of its starts.


Chapter 2: Theoretical Development In this chapter we describe the nature of the liability management with analyzing the interest rate sensitivity position of the commercial bank by using the gap analysis. Here, we can precisely describe about the dollar gap, duration gap and the simulation that established the sensitivity of income changes in the composition of bank’s balance sheet when the interest rate changes.

2.1 Asset/Liability Management:

In the case of banking activities, the bankers must have to make the decision about the buying and selling the market securities for making the particular loans or to cover the their demanded fund for the investment and lending activities. The overall process for making the decision about the composition of bank’s assets and liabilities with the assessment of the risk is known as asset/liability management or (ALM). The three important criteria are viewed as to manage the sources and uses of funds on the balance sheet and off-balance sheet activities with respect to interest rate risk and liquidity. These are as follows: •

The direction of changes in interest rates in the future.

The composition of their assets and liabilities and

The degree of risk that they are waffling to take

Collectively, these decisions affect the bank’s net interest income and the balance sheet values. The process of making such decisions about the composition of their assets and liabilities and the risk assessment is generally known as asset/liability management or ALM. The traditional purpose of ALM is to control the size of the bank’s net interest income. The different features that are related to ALM are discussed bellow.


2.2 Net Interest Income (NII):

The net interest income is calculated by the difference between the interest earned on the assets and the cost of the liabilities. Here, we can describe the Nil with an example bellow: Net Interest Income (Nil) = Interest income — Interest expense

2.3 Net Interest Margin (NIM):

The net interest margin (NIM) is net interest income (NI!) divided by the total earnings assets that are shown below: Net Interest Margin (NIM) = Nil / Earnings Assets (Source: Commercial Banking, Gup & Kolari)

2.4 Measuring the Dollar or Maturity Gap:

The most commonly used measure of the interest rate sensitivity position of a financial institution is the gap analysis. Under this approach the different items of assets and liabilities are classified into groups of interest rate sensitive (RS) and non-interest rate sensitive (NRS) according to whether their interest return or cost varies with the movement of the general level of interest rates. The measurement techniques are used to examine the interest rate risk. Thus, the focus of gap analysis is on the net interest income. Gap analysis classifies assets and liabilities according to their interest rate sensitivity. So, the total effect on any changes in the net interest income or expenses can verify under as follows; • • •

Dollar or Maturity Gap Duration Gap and Simulation


2.4.1 Definition of Maturity Gap:

The total effect of any changes in the general level of interest rates on the net interest income for a financial institution depends on the effects on both interest revenue and interest expense. The effect on interest expense depends on the interest rate sensitivity of liabilities. Here, total effect of interest rate changes on the profitability can be summarized by its dollar or maturity gap. The dollar or maturity gap is the difference between the dollar or maturity amount of interest rate sensitive asset (RSA) and the dollar or maturity amount of interest rate sensitive liabilities (RSL). Gap (Tk) = RSA (Tk) - RSL (Tk) 2.4.2 Relative Gap Ratio: The interest rate sensitivity position can vary with size of the different financial institutions. So far in this case, the comparison technique requires the common size calculation with the measurement of relative gap ratio as follows: Relative Gap Ratio = Gaps (Tk) / Total Assets The relative gap ratio expresses the net liquidity amount of gap between rate sensitive assets and rate sensitive liabilities as the percentage of total assets. 2.4.3 Interest Sensitivity Ratio:

The interest sensitivity ratio expresses the BDT amount of RSA as the fraction of the BDT amount of RSL. Interest Sensitivity Ratio = RSA (Tk) / RSL (Tk) (Source: Commercial Banking, Gup & Kolari)


2.4.4 Asset/ Liability Sensitivity & Profitability:

The financial institution or a commercial bank can be asset or liability sensitive. Here, in this case, if the financial institution is the asset sensitive that is dealing much of the weight in the assets side value, than it would have a positive gap and positive gap ratio greater than one. So, in this asset side sensitivity position, the interest income will increase by the increasing of rate of interest rates and the interest income will decrease by the reducing of interest rates. Conversely, for the liability sensitive position, the value of liability is weighted than the assets and would have a negative gap and negative gap ratio which is less than one. So, here, the financial institution will incur an interest income by decreasing the interest rate and will acquire a loss provision if the interest rate rises. The expected changes in the dollar or BDT amount of the net interest income with the expected changes in the interest changes can be explained be the parentage form. (NII) = RSA (Al) - RSL (Al) = Gap (Tk) (Al)

The effect of the changes in the interest rate changes on the net interest margin which depends on the previous level of net interest income as well as the size of the earnings assets of the financial institution.

2.5 Gap Analysis: The gap between the interest rate sensitive assets and interest rate sensitive liabilities can be measured under two different circumstances; • •

Incremental Gap Cumulative Gap


2.5.1 Incremental Gap:

The incremental gap measures the difference between the rate sensitive assets and rate sensitive liabilities over the increments of the planning horizon.

2.5.2 Cumulative Gap: The cumulative gap measures the difference between rate sensitive assets and rate sensitive liabilities over the more extended period of time which is mainly the sum of the consecutive incremental gaps.

2.6 Managing Interest Rate Risk with Dollar Gap:

A commercial bank may use any of their financial instruments currently on its balance sheet in managing its assets and liabilities. The principal purpose of asset liability management traditionally has been to control the size of the net interest income. This control can be achieved by the to methods as follows; • •

Aggressive Asset Liability Management Defensive Asset Liability Management

2.6.1 Aggressive Asset Liability Management:

The aggressive asset liability management focuses on increasing the net interest income through the altering the portfolio of the institution. The success of the aggressive asset liability management depends on the ability to forecast future interest rate changes. The management of the bank may choose to focus on the maturity or dollar gap in controlling the interest rate risk of its portfolio. With the aggressive interest rate risk management program, such strategy involves in two steps which are discussed bellow. First, the direction of the future interest rates must be predicted and second, adjustment must be made in the interest rate sensitivity of the assets and liabilities in order to take advantages of the projected interest rate changes. If the interest rates are expected to increase the bank or the financial institution with a positive gap would increase the interest return more than the liabilities for costs. The bank or financial institution which has an inverse relationship with its gap can make adjustments in its


portfolio. It can also make more variable rate loans for increase the amount of rate sensitive assets that allow the higher level of interest rates to be reflected the higher interest income.

2.6.2 Defensive Asset Liability Management:

The goal of the defensive asset liability management is to insulate the net interest income from changes in the net interest rates to prevent the instability of changes from increasing or decreasing the net interest income. A defensive strategy attempts to keep the maturity gap amount of rate sensitive assets in balance with the rate sensitive liabilities over the given period so that the gap will near to zero. If successful, the increases in the interest rates wifi produce the equal increases in interest revenue and interest expense, with the result that net interest income and net interest margin will not change. Similarly, falling interest rates will reduce the interest revenue and interest expenses by the same amount and leave net interest income and net interest margin unchanged if the amount of rate sensitive assets and liabilities are balanced. A defensive strategy is not necessarily a passive one. Rather than many adjustments in the asset and liability portfolio under the defensive strategy are often necessary in order to maintain a zero gap position. The deficiencies of this traditional dollar gap analysis have given rise to an alternative approach that focuses on the market value of the assets, liabilities and equity of the bank. The ultimate goal of the other analysis is same to minimize and manage the risk of changing affects of interest rate sensitive assets and liabilities of the bank. 2.7 Duration Gap Analysis:

From the managerial perspective, the duration can be defined as the weighted average of time particularly in a year to receive all cash flows from financial instruments. The duration gap is the divergence between the duration of the bank’s assets and liabilities. It is the measurement of the interest rate sensitivity that helps to explain the changes in the interest rates affect the market value of a bank’s assets and liabilities in turn its net worth. The net worth is the difference between the market value of the assets and liabilities. Here, we can explain the net worth is; NW = Assets - Liabilities The effect of changing the interest rates on the net worth is related to the size of the duration gap. The


duration gap can be calculated as follows; D Gap DA-WDL Where, D Gap = Duration Gap DA = Average Duration of Assets DL = Average Duration of Liabilities W = Ratio of the Total Assets to Total Liabilities (Source: Commercial Banking, Gup & Kolari) 2.8 Defensive & Aggressive Duration Gap Management From the perspective of duration gap analysis, if the gap position is positive which means the duration of assets exceeds the duration of liabilities, then increasing in the interest rates will reduce the value of the net worth. And conversely, if the gap position is negative that is the duration of assets less than the duration of liabilities, rising in the interest rates will increase the value of the net worth were the falling interest rates will lead to reduction in it. If the institution is immunized from the changes in the interest rates through a zero duration gap, changes in the values of assets will be exactly offset by changes the value of liabilities. An aggressive interest rate risk management strategy would alter the duration gap in anticipation of changes in the interest rates. For this reason the portfolio strategy in response to the expectation of the higher interest rates for both duration and maturity gap are resemble to more short term assets and more long term liabilities. Such strategy could produce a positive maturity gap, where the gap is measured as the difference between the dollar amount of interest rate sensitive assets and liabilities and for a negative duration gap, where the gap is measured as the difference in the number of years of the duration of assets and liabilities. Defensive interest rate risk management within this context would seek to keep the duration of assets equal to the duration of liabilities, thereby maintaining a duration gap of zero.

2.9 Simulation Analysis:

The previous section we discussed about the dollar or BDT gap and duration gap analysis on the interest rate sensitive assets and liabilities. But in the real world situation, the rate of changes in the


interest rates in quite complicated to forecast. So far in this case the financial institutions or commercial banks can stipulated the risk of changes in the interest rates by the simulation analysis.

2.9.1 Simulated Models:

The simulation measurement techniques mainly deal with the hypothetical investigation of the possible changes in the interest rates by which their invested rate sensitive assets and liabilities position could adjust. In particular, the simulated asset/liability management models show the potential evaluation of various balance sheet strategies under the different assumptions. The most of the simulation models require the assumptions as follows; The expected changes the level of interest rates • • • •

The shape of the yield curve Pricing strategies for the assets and liabilities The growth potentials and The mixture of the portfolios of assets and liabilities

2.9.2 Alternative Assumptions:

The alternative assumptions maid covenant with the “what if” projections. In the recent time, many large financial institutions and commercial banks depend primarily on the simulation tests by setting the hypothetical limits for their interest rate exposure to test those limits under the diverse circumstances. This stress testing allows them to reveal the effect on income and capital for the significant mount of changes in the interest rate changes. This stress testing can be included the items as follows; Current and expected dollar or BDT gaps Duration gaps Balance sheet and income statements Various performances measures Implications of diverse case of scenarios. Simulation models permit the bank management to determine the risk and return trade-offs for the


different balance sheet strategies. Correlating the various types of risks with the possible returns in future, the management could concentrate on making appropriate investment decision about their interest rate sensitive assets liabifities portfolios by adjusting their interest rate risk exposures. The flexibility of testing the different scenarios helps to determine for allocating the asset/liability management successfully. From the discussion above we can say that the asset liability management is designed to achieve the near term financial goals. The focus of the asset liability management is the connection of the measuring of gap analysis. The widely use of maturity gap approach has a number of limitations, including the difficulty in selecting a single, appropriate time horizon. The implicit assumption is that interest revenue and costs on the rate sensitive assets and liabilities are perfectly correlated with the general interest rate movements and the myopic focus on the net interest margin rather than the goal of maximizing the shareholders wealth. Such a limited focus may produce portfolio strategies that increase the profitability but at the cost of reducing the market value of the equity.

Chapter 3: Administration of Liability Management This chapter is mainly discussed about the administration of liability management from the different aspects that should be considered in the management of bank liabilities that involved controlling the costs in acquiring funds. Here, we can converse the administration process of liability management from both the viewpoint of Bangladesh Bank and Janata Bank Limited.

3.1 Administration of Liability Management from the view point of Bangladesh Bank:

Liability Management is the most important aspect for the financial institutions and other commercial banking sectors to manage balance sheet risk, especially for managing of liquidity risk and interest rate risk. Failure to identify the risks associated with business and failure to take timely measures in giving a sense of direction threatens the very existence of the institution. It is, therefore, imperative for the financial institutions and other commercial banks to form

“Asset Liability Management Committee (ALCO)� with the senior management as its members to control and better manage its balance sheet risk. The main responsibilities of ALCO are to look after


the Financial Market activities, manage liquidity and interest rate risk, and understand the market position and competition.

32 Liability Structure:

Every commercial bank has to meet its funding needs through liability management. Some major funding and investments are covered from liability items. Liability structuring must be made in such a way so that it matches with the tenure of asset structure. The following points are to be considered at the time of liability structuring: •

‘Grouping of liability into two major categories according to the maturity namely, long term and short term.

Pricing option.

Exchange rate fluctuation in case of foreign currency transactions.

Early repayment option.

All the commercial banks are obliged to comply with the rule and regulations declared by the Bangladesh Bank. The rules concerning with the asset liability management are discussed as follows.

3.3 Rules Regarding Asset Liability Management:

From the policy statement of Bangladesh Bank, the bank should set out their own policy statement and an annual review should be made taking into consideration of the changes in the balance sheet and market dynamics. In this case the bank should not exceed 95% of its loan to fund ratio and any excess lending must be supported by confirmed sources of funds. With a view of strengthening the capital base requirements for the commercial banking, the bank has required to maintain a capital to risk weighed assets ratio of 10% at the minimum with the core capital not less than 5%. The capital structure includes equity, preference share, long term bond under both clean and securitization arrangement. The central bank also mentioned the capital restructuring process by evaluating the regulatory framework, favorable gearing ratio and capital adequacy ratio that analyze the value of the organization. Another thing is that, assets serve as a source of investment and must be framed in


groups according to the nature of either available for sale or held to maturity. Status of liquidity is to be judged in terms of length of time it takes to dispose off the asset and the price the asset carries when it is sold. The relative factors are to be considered at the time of asset structuring like nature of business, tenure of lending and most importantly the fixed and floating interest rate structure. 3.4 Responsibilities of Asset Liability Management Committee (ALCO):

The commercial banks have to maintain their own asset liability management committee which is responsible for the overall management of the balance sheet structure positions. Under the policy of Bangladesh Bank, the responsibilities of ALCO are stated in some core areas. The committee should maintain the monitoring activities of overall money markets. It should manage the liquidity and interest rate risk by complying with the regulations of Bangladesh Bank in respect of statutory obligations as well as thorough understanding of the risk elements involved within the business. The bank also has to maintain the market position and competition to provide the necessary information about to the treasurer regarding market views and update the balance sheet movements and their performances. The decisions are made by the ALCO is responsible for the overall financial direction and as well as to keep the control over the net interest income of the bank. 3.5 Policy Statement of Liability Management:

The policy statement for the liability management are mostly used for safeguarding the bank’s interest form the possible losses — financial operational and otherwise. The bank has compliance to mitigate the risks at various levels. Here, we can discuss some other related concerns that have a substantial impact on asset liability management.

3.6 Liquidity Contingency Plan:

A liquidity contingency plan needs to be approved by ALCO. A contingency plan needs to be prepared keeping in mind that enough liquidity is available to meet the fund requirements in liquidity crisis situation. An annual review of the contingency planning should be made.


The contingency plan should be backed up by first line of defense like, firm line of credit and second line of defense like, short-term loan, commercial paper, bifi discounting facility etc. Contingency plan should include fund requirement for LC, Guarantee etc. This contingency plan should be made for six months. Every bank and financial institution is required to maintain a Cash Reserve Ratio (CRR) of 2.50% on its customer deposits. The CRR is maintained with the non-interest bearing current account with the Bangladesh Bank. In addition, every financial institute is required to maintain a Statutory Liquidity Reserve (SLR) of 5% (including CRR) on all its liabilities. There is no restriction on where these SLR will be maintained but the financial institutions and the commercial banks holding deposits are given freedom to place the mandatory securities in any time buckets as suitable for them. This SLR shall be kept with banks and financial institutions for different maturities.

3.7 Maturity wise Interest Rate Profile:

Maturity wise Interest Rate Profile should be made both for lending and borrowing products so that Management can know its effective lending and borrowing rate at any particular point in time. This would help make Spread Analysis to make the proper projection of how to manage their investment portfolios regarding to any changes in the market interest rate movements. Management should classify its assets and liabilities according to their maturity tenure and according to the policy statements. The Janata Bank has classified their maturity of assets and liabilities within repayable on demand, within one month, over one month to six months, six months to one year, one to five years and over the five years but less than ten years. For the other activities like internal as well as statutory compliances must be strictly followed. Keeping the market scenario and regulatory framework, the internal compliance of asset liability management procedure should be flexible enough to adopt any required change immediately to meet the changing situation. 3.8 Balance Sheet Risk Profile:

In carrying out the business, every bank or financial institution has to encounter several risks like, liquidity, interest rate, prepayment, credit, reinvestment and event risk etc. So far in this case, the risk associated with the asset liability management is ability to meet its financial commitment and obligation regarding to their investment. Here, the interest rate risk which is related with both funding


and lending activities, the prepayment risk is associated with early repayment of loans, credit risk is associated with default due to client’s failure to repay loan installment, reinvestment risk is associated with reinvestment of prepayment/regular repayment proceeds at less than the existing rate and event risk is associated with happening of an unforeseen event that may cause financial loss to the organization. 3.9 Interest Rate Risk Management As earlier, in the theoretical development of this report we have mentioned the gap analysis features for the rate sensitive assets and liabilities. So, far from this point of view, we can say that the gap reports indicate whether the bank is in a position to benefit from rising or declining the interest rates. The Gap Report should be generated by grouping rate sensitive liabilities, assets and off-balance sheet position into time buckets according to residual maturity or next re-pricing period, whichever is earlier. All investments, advances, deposits, borrowings, purchased funds, etc that mature or re-price within a specified time-frame are interest rate sensitive. Similarly, any principal repayment of loan is also rate sensitive if the bank or institution expects to receive it within the time horizon that includes final principal repayment and interim installments. Certain assets and liabilities carry floating rates of interest that vary with a reference rate and hence, these items get re-priced at pre-determined intervals because such assets and liabilities are rate sensitive at the time of re-pricing. While the interest rates on term deposits are generally fixed during their currency, the trenches of advances are basically floating. The interest rates on advances could be re-priced any number of occasions, corresponding to the changes in performing loan ratio. The treasury department should set prudential limits on individual gaps in various time buckets with the approval of the ALCO. Such prudential limits should have a relationship with the total assets, earning assets or equity. In addition to the interest rate gap limits, the treasury department may set the prudential limits in terms of earnings at risk or net interest margin based on their views on interest rate movements with the approval of the asset liability management committee. 3.10 Asset Liability Management of Janata Bank Limited:

Janata Bank Limited has formed the Asset Liability Committee (ALCO). Their ALCO comprises of


managing director, head of treasury, head of the trade services and correspondent banking, head of credit and head of consumer banking. The ALCO is responsible for the overall management of their balance sheet structure positions. ALCO holds meeting at their own routine base and reviews the issues like interest rate trends, foreign exchange position, balance sheet risk, pricing on deposit and advances, liquidity requirements of the bank, maturity mismatch position of the assets and liabilities, interest margin and other internal and external concerns to take the appropriate action. If the bank found any problems in the current asset-liability profile and the consequential structure mismatches that needs higher tolerance level, it could operate with higher limit sanctioned by ALCO giving specific reasons on the need for such higher limit. The com.mittee is also responsible for money market activities to manage their own liquidity and interest rate risk that comply with the regulations under the Bangladesh Bank in respect of statutory obligations as well as thorough understanding of the risk elements involved within the business. The organizational flow chart of their ALCO regulatory is as follow; Janata Bank has also developed the DOl or Departmental Operating Instruction and DCFCL that is Departmental Control Function Check List for the assessment of their effective risk management fro the steady and stable growth of the bank in accordance with the guidelines of Bangladesh Bank.

GLv‡b GKwU wPÎ n‡Z The ultimate objective of asset liability management committee is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due. To this end, Janata Bank is maintaining a diversified and stable funding base comprising of core retail and corporate deposits and institutional balance. The management of the liability and funding is carried strictly by their treasury department under their newly approved policy guide lines.

Chapter 4: Performance Analysis In this chapter we have mainly focused on the performances of Janata Bank Limited (UBL) through the ratio analysis. These financial ratios are constructed by the formulating ratios of the accounting data contained in the bank’s reports of income statement, balance sheet and the cash flow statement. A wide variety of financial ratios can be calculated to assess the different characteristics of the financial performances. To evaluate a particular ratio for a bank, comparisons with other banks or


comparison with the over the period of several years are often used.

4.1 Five Years Liabilities Performance of Janata Bank Limited:

Here, we analyze the liabilities ratios of Janata Bank Limited over the five years to understand their overall liability condition. Various types of liability related ratios for the five years are shown in the table as follows.

GLv‡b GKwU wPÎ n‡Z

From the table above, the deposit terms are categorized in the five major sections of The Janata Bank Limited. Each type of deposit ratios are calculated from their total liabilities and quantified in the percentage form. The liabilities ratios can also in the chart bellow.

Chapter 4: Performance Analysis In this chapter we have mainly focused on the performances of Janata Bank Limited (UBL) through the ratio analysis. These financial ratios are constructed by the formulating ratios of the accounting data contained in the bank’s reports of income statement, balance sheet and the cash flow statement. A wide variety of financial ratios can be calculated to assess the different characteristics of the financial performances. To evaluate a particular ratio for a bank, comparisons with other banks or comparison with the over the period of several years are often used.

4.1 Five Years Liabilities Performance of Janata Bank Limited:

Here, we analyze the liabilities ratios of Janata Bank Limited over the five years to understand their overall liability condition. Various types of liability related ratios for the five years are shown in the table as follows.

GLv‡b GKwU wPÎ n‡Z


From the table above, the deposit terms are categorized in the five major sections of The Janata Bank Limited. Each type of deposit ratios are calculated from their total liabilities and quantified in the percentage form. The liabilities ratios can also in the chart bellow. 4.1.1 Current Deposits Ratio:

The current deposit is mainly the non interest bearing deposits of the bank and can withdraw at any time under the preferences of the depositor. The current deposits are not interest rate sensitive rather it is used to meet very short term liquidity needs by the bank. The chart bellow shows the ratio for five years;

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From the chart above, the current deposit of The Janata Bank Limited has increased by 5% during the year of 2007. The downward of the ratio in 2006 has covered by increasing in 2009 by more than 18% of the bank.

4.1.2 Savings Deposit Ratio:

Savings deposits accounts are generally earn interest at a prescribed rate and interests are charged on monthly basis. This is one common source of funds from the liability side items. The savings deposit rates for the five years are shown bellow; GLv‡b GKwU cvZv n‡Z

From the diagram above, we can see that their short term deposits have reduced. As earlier we mentioned that their investments are much more concern on their assets based, so the reduction in their short term deposits are to keep control over the access cash outflow of the bank.


4.1.4 Fixed Deposit Ratio:

The deposit that cannot be withdrawn before the maturity or has to pay a penalty for the early withdrawal is known as the fixed deposit of the bank. The Fixed deposits are important sources of funds from the liabilities sides. The fixed deposits of Janata Bank Limited for the last five years are shown in the chart;

GLv‡b GKwU wPÎ n‡Z

From the chart above the condition of their fixed deposit rate is relatively in the stable situation. The fixed deposit has a long term maturity and so far in this case, the bank holds a moderately steady form of their liability funds over the last five years. 4.1.5 Schemes & Other Deposits Ratio:

Janata Bank offers a wide variety of deposit products to meet their ultimate financial needs. From current and savings accounts to fixed deposits and pension schemes each account is designed to the best value for investments and return to their clients. The performance of their schemes and other depository products are given bellow

GLv‡b GKwU wPÎ n‡Z

From the diagram above, Janata Bank Limited has successfully increased their scheme deposit sources by introducing five different packages to their customers. They are now became much more concern to hold the interest costs more smoothly from the investment decision regarding to liability side items. The other types of liability related ratios are found from their income statement and balance sheet items are discussed as follows;


4.1.6 Volatile Liability Dependency Ratio:

The volatile dependency ratio indicates the portion of invested funds in liquid assets of the bank. From the temporary investment ratio we have found that Janata Bank has increased their temporary investment in more liquid assets than the year of 2006.

GLv‡b GKwU cvZv n‡Z

4.1.7 Leverage Ratio:

The financial leverage has a significant importance to assess the liquidity of the bank with relation to maintain the degree of risk with holding the percentages of liability with their equity position. The leverage ratio is calculated by dividing the bank’s total liabilities to its total equity and implication is that the higher the ratio more risky the position against their payment obligations. The leverage ratio of Janata Bank Limited has show under with table and chart; The leverage ratio of The Janata Bank has become stable over the period of time. This indicates that their total liabilities are relatively in constant market position with relation to the total equity. The bank has capable to maintain at 10% of leverage ratio at present. The bank efficiently able to reduce their risk position by the decrease their total liabilities position rather than the other particulars. 4.2 Overall Financial Performances: The overall financial performances of Janata Bank Limited are focused from the analysis of their profitability, capitalization, asset quality, operating efficiency, liquidity and interest rate sensitivity. Valuation of the ratio trends over the period of time provides the valuable information about the bank’s performance. The ratios are discussed as follows;

4.3 Profit Ratios:

The profitability ratios are mostly the glance of the performances for the stated financial period of time. This is an important tool for evaluating the financial statements to analyze the future scenarios which can help to judge the risk and expected returns of the bank. The profitability ratios are included


as follows; • • • • •

Return on Equity (ROE) Return on Assets (ROA) Profit Margin Ratio Equity Turnover Ratio Net Interest Margin

The each type of ratios of Janata Bank Limited is discussed with their performances over the five years;

4.3.1 Return on Equity (ROE):

The return on equity (ROE) is the measurement of how productively an entity’s equity has been employed. It is calculated by dividing the annual net income to total equity. Because the ultimate objective of the bank management to maximizes the share holders’ wealth, this ratio is particularly important for this reason. The ROE of Janata Bank Limited from the year of 2005 to 2009 has given bellow;

GLv‡b GKwU wPÎ n‡Z

From the statement above we can see that the ROE has increased by more than 71% from the year of 2006 but reduced to 10% after several years. So it indicates that there net profit has reduced form the previous years operation.

4.3.2 Return on Assets (ROA):

The rate of return on assets (ROA) measures the ability of management to utilize the real and financial resources of the bank to generate the returns. The return on assets indicates how effectively the entities are used to its total resources.


It is calculated by dividing the annual net income to total assets. The ROA of Janata Bank Limited has shown under;

GLv‡b GKwU wPÎ n‡Z

As we have mentioned that their net profit has become volatile in the year of 2005 and gradually increase from the year of 2006, the ROA also increases over the years and falls. So, they can increase the amount of net income and for the steady growth of their total assets causes the increase on their return on total assets.

4.3.3 Profit Margin Ratio: The profit margin ratio provides the information about the ability of management to control the expenses including taxes, given a particular level of operating income. This profit margin ratio can be calculated by dividing the net income to total operating income. The profit margin ratio of Janata Bank Limited has shown under the table and graph;

GLv‡b GKwU wPÎ n‡Z

The profit margin has become dramatically increased from the year of 2005. This indicates that total operating income has increased profoundly with ratio of net income from their operations.

4.3.4 Equity Turnover Ratio:

The equity turnover ratio mainly deals with the condition of the net profit to total equity of the bank. From this measurement the important thing that can verify to assess the return in terms of their total equity that includes stocks, paid up capital and total retained earnings to understand the capital structure of the bank. The turnover ratio can be calculated by dividing the net profit of the bank to total equity and the ratios are shown under with including the diagram;


GLv‡b GKwU wPÎ n‡Z

From the diagram above we can see that their equity turnover ratio has increased significantly from the year of 2005. This mainly happened because of lower portion of tax they have paid increase the net profit in terms of their equity position.

4.3.5 Net Interest Margin: A number of other profit measures are commonly used in banking, which provides the further insight into the bank’s financial performances. We have also discussed about the net interest margin before and this net interest margin found from the dividing of net taxable equivalent interest income to its average interest earnings assets. This is mainly the measurement of how the bank effectively utilizes its earnings assets in relation to the interest cost of funding. The net interest margins of Janata Bank Limited for the last five years are given bellow;

GLv‡b GKwU wPÎ n‡Z

From the diagram above the bank has obtained the volatile rate of net income so the net interest margin is relatively in volatile position. Here, the interest income and expenses adversely affect their earnings assets.

4.4 Asset Quality:

The asset quality can be assessed only indirectly using of the financial ratios. One-side inspection of the bank’s outstanding individual loans is certainly the best way to evaluate their asset quality and the other side is to judge their asset quality by analyzing the ratio from their profit and loss accounts. In the absence of this opportunity, some financial ratios can provide at least a historical account of the creditworthiness of a particular bank’s loan portfolio. So far from this point of view, we can evaluate the asset quality of The Janata Bank Limited from the analyzing of;


The ratios of loan losses

Loan ratio

Net interest income to total asset ratio

Asset utilization Ratio

4.4.1 Provision for Loan Losses:

Almost all the bank provides the estimated future loan losses as an expense on its income statement. The provision for the loan losses are found from the dividing the provision of estimated loan losses to its total loans and advances. The provisions for the loan losses have been calculated from the financial reports of Janata Bank Limited are given bellow;

GLv‡b GKwU wPÎ n‡Z

Earlier we have mentioned that their profit margin return on assets were increased in the year of 2006,2007 and 2009, so their provision for losses was less than 1% that is 0.39%, 0.52% and 0.75%. But in the year the year of 2005 and 2008 the provision for losses has increased with the amount of increase in investments of the bank. 4.4.2 Loan Ratio: The loan ratio mainly indicates the extant to which assets are committed to loans as opposed to other assets including cash, securities and plant and equipment. The loan ratio mostly followed by the gross loan amount which can be found by loans that are parted to different sectors in the outstanding form. The loan ratio can be calculated by the divining the net loan to total assets of the bank. Here, the net amount of loan is found from deducting the loans reserves for losses and unearned income reserve. The loan ratio of Janata Bank Limited has shown under; GLv‡b GKwU wPÎ n‡Z


From the chart above we can see that Janata Bank has substantially increased there loan ratio from the financial year of 2005. The loan ratio amount has decreased by 28% in the year 2009.

4.4.3 Net Interest Income to Total Assets Ratio:

From the income statement side of their financial performances, the quality of the total assets can be judged by the analyzing the ratio of net interest income to their total assets. From this measurement, the condition of their interest rate sensitive returns can be calculated over their invested time horizon and as well as their performances of cash flows. The ratio of net interest income or (NI!) to total assets can calculate by dividing them. The ratios of their Nil to total assets are shown bellow; 38 GLv‡b GKwU wPÎ n‡Z

From the chart above we see that the ratio of their net interest income to total assets is in the decreasing position from the year of 2005. As their total assets are in a steady growth position the bank mainly focuses to condense their interest costs. So as their net interest income has reduced, the ratio has decreased by more than 1% to the consecutive operating years of 2006 and 2007. 4.4.4 Asset Utilization Ratio: It is significantly important to understand the performances of the bank’s investments in terms of total assets position. The asset utilization ratio mainly evaluates to measure the percentages return from its total assets by adding the net interest income and income from other investments of the bank. The asset utilization ratio in a crucial indication of return from invested capital and assets in a financial period of their operations. The asset utilization ratio of Janata Bank Limited has shown bellow;

GLv‡b GKwU wPÎ n‡Z

From the diagram above we observed that Janata Bank’s asset utilization ratio has decreased over the period of time. This indicates that their return on investments on total assets has reduced. The main cause of the reduction in this asset utilization ratio is their both reduction in total operating income


and net interest income which has fall extensively from the year of 2006. 4.5 Operating Efficiency:

A significant management part that several studies have found to be the primary factor distinguishing is the high and low profit banks in terms of the operating efficiency. Mainly the operating efficiency deals with the production of outputs such as deposits and loan accounts and the security services at a minimum cost per accounts.

A number of ratios can be calculated to provide the information about the cost control by simply dividing various expenses accounts by the total operating expenses for the different expense categories. Here, we can show the operating efficiency ratio on wages and salaries which is the largest no interest expenses item. The occupancy ratios of Janata Bank Limited for the last five years are given bellow;

GLv‡b GKwU wPÎ n‡Z

The occupancy ratio mainly deals with the fixed expenses that the bank obliged to commit from its total operating expenses. The occupancy ratio for the wages and salaries are shown in the diagram stated that Janata Bank has decreased its fixed operating expenses. The decreased amount of the occupancy can cause by lack of expansion of business in the recent time.

4.6 Liquidity Ratio: Liquidity can be defined as the extant to whom the bank has funds available to meet cash demands for loan and deposit withdrawals. Banks mainly requires different amounts of liquidity depending on their growth rate and variability in lending and the deposit activities. There are four commonly used measures of the liquidity ratio by which one can assess the bank’s assets condition to meet up the unconditional demand needs for unstable interest rate movements. The three liquidity ratios are as follows; •

Loans to deposits ratio

Loans to non-deposit liabilities ratio

Temporary investments ratio


4.6.1 Loans to Deposit Ratio:

The loans to deposit ratio mainly indicates the bank’s dependency on the loans sources from either the deposits cash or other non deposit items. The loan to deposit ratio can be found from the dividing the total loans to total deposit amounts to view as the percentage form. Janata Bank limited has maintained their loan requirements in terms of the percentages of total deposit accounts. The do not lend more than 80% of its total deposits amounts under the rules of their credit policy manuals. The loan deposit ratio for five years is shown below;

GLv‡b GKwU wPÎ n‡Z

From the chart above we can explain that the bank has increased loan to deposit ratio over the years but it has decreased in 2009. This indicates that The Janata Bank condensed the loan amount from the deposit sources and relay on other sources of lending activities.

4.6.2 Loans to Non-Deposit Liabilities Ratios:

Other than the deposit items, the rest of the total liabilities for the loans the bank uses the sources for credit to non depository items. As the non deposit sources are relatively risky so the bank often use to lower percentage for the loan commitment. The loans to non deposit liabilities ratios of Janata Bank limited are shown under;

GLv‡b GKwU wPÎ n‡Z

The loan to deposit ratio of Janata Bank has increased from the year of 2005 to 2008 but it has decreased in the year 2009. This we can say that the bank did not take much risk for loan commitments from the non depository sources.


4.6.3 Temporary Investments Ratio:

The temporary investments are the bank’s most liquid assets. The higher the ratio of temporary investments to total assets, the greater the bank’s liquidity. The temporary investments mainly includes the trading account assets, investment the securities with maturities of one year or less and cash receivable from the other banks. The temporary investment ratios are given bellow;

GLv‡b GKwU wPÎ n‡Z

The temporary investment ratio of Janata Bank Limited has given above and we found that their liquidity position for the investment in most liquid assets has reduced to 16.44% to 8.98% in 2008. But after 2008, the bank has increased the investment on most liquid assets around to 11%.

4.7 Other Financial Ratios:

To reveal the strength and weakness of the bank under the studying of their financial performances, we can assess other different types of ratios. From this point of view, we here can calculate the two types of ratios and these are; • •

Interest sensitivity or maturity gap ratio Growth ratio

4.7.2 Interest Rate Sensitivity:

As previous of the discussion in the theoretical part of this report, we precisely define the interest sensitive assets and liabilities by which the responsiveness of liability costs and asset returns are changed. The difference between the interest rate sensitive assets and liabilities is known as dollar gap or maturity gap ratio. The gap analysis of Janata Bank Limited is shown for the last five years. This manly highlighted the features of their total interest rate sensitive assets and liabilities of their different maturity ranges. The calculated table of rate sensitive assets and rate sensitive liabilities for the five years are stated bellow;


4.7.2 Interest Rate Sensitivity:

As previous of the discussion in the theoretical part of this report, we precisely define the interest sensitive assets and liabilities by which the responsiveness of liability costs and asset returns are changed. The difference between the interest rate sensitive assets and liabilities is known as dollar gap or maturity gap ratio. The gap analysis of Janata Bank Limited is shown for the last five years. This manly highlighted the features of their total interest rate sensitive assets and liabilities of their different maturity ranges. The calculated table of rate sensitive assets and rate sensitive liabilities for the five years are stated bellow;

GLv‡b GKwU wPÎ n‡Z

From the table above we can see that the calculation of rate sensitive assets and liabilities with the ratio their interest rate sensitivity and the relative gap ratio for the last five years. Here, we can also explain the net and cumulative by the chart bellow;

GLv‡b GKwU wPÎ n‡Z

The chart shows the condition of net liquidity and cumulative gap ratio of interest rate sensitivity assets and liabilities for five years. We can also show the graphical figure of the ratios of interest rate sensitivity assets and liabilities from the calculated table above;

GLv‡b GKwU wPÎ n‡Z

From the graphs above we can see hat the ratio of rate sensitivity assets and liabilities of Janata Bank has relatively in a steady condition for the five years. It means that they have able to deal with market interest rate smoothly from the operation in five years. This ratio is also is also important for measuring the expressed fraction of the rate sensitivity assets and liabilities of Janata Bank Limited. The maturity gap ratios from their rate sensitive assets and liabilities are shown in the chart bellow;


GLv‡b GKwU wPÎ n‡Z

As we preserve to see that the interest rate sensitivity ratio and maturity gap relatively in stable condition, so, their maturity gap ratios are also in steady growth process. Here, one significant condition for these smooth ratios over the time is the market interest rates did not adversely changed and so for the invested rate sensitive assets and liabilities are in fixed growth process. If the future interest rate changes significantly, gap ratio will cause the bank’s profitability increase or decrease. 4.7.3 Growth Ratios: The growth ratios of Janata Bank Limited are given bellow to assess their five years financial growth prospects. Here we only shows some essential growth ratios like net profit, net interest income, total assets, total liabilities and growth of their gross profits from the financial year of 2005 to 2009. The growth ratios are shown in an aggregate table and chart bellow;

GLv‡b GKwU wPÎ n‡Z

From the chart above we can see that the growth ratios of Janata Bank Limited has become volatile in net profit, total assets, total liabilities and as well as their gross profits. This volatile growth ratios are mainly affected by the significantly volatile in their net interest income The growth potentialities are the important factor to consider the investment opportunities in the competitive economy. By the analyzing the growth ratios, we can determine the condition of market position at present and most importantly it gives the vision for the future prospects of their financial performances. These growth ratios are significantly imperative to evaluate the different risk involved in investments and as well as their rate of return in a given period of time. The evaluation of bank performance is a complex process involving the interaction between the environment, internal operations and their external activities. The ultimate objective of the management is to maximize the value of the bank’s equity shares by attaining the optimal mix of return and risks. In this respect the bank management needs to develop a comprehensive plan in order to identify the objectives, goals, budgets and strategies that will consistent with the maximization of share values. Planning should be encompassing both internal and relative performance evaluation. By analyzing the performances on financial ratios we can compare the historical activities of the bank’s


returns and risks. For the recent increase in financial services industry, the financial performances and competitiveness has become much more important for their market shares, regulatory compliance and Janata confidence.

Chapter-5: Summary & Conclusion This chapter mainly focuses on the overall findings of the term paper. As the report is based on the liability management of Janata Bank Limited, here we describe the different parts and relative features in brief as follows;

Report Summary: The introductory part of the report describes the primary concepts of asset liability management and their relative activities of commercial banking sectors in our country. The objectives and methodology of the report are discussed precisely by which the overall report is completed in five different parts.

From the theoretical development of the paper on asset liability management of Janata Bank Limited, shades the light on the nature of the liability management with analyzing the interest rate sensitivity position of the commercial bank by using the different gap analysis. The three types of gaps like Dollar or Maturity Gap, Duration Gap and Simulation analysis are discussed with their related issues and the total effect on any changes in the net interest income or expenses in their interest rate sensitive assets and liabilities. The administration part of the asset liability management of Janata Bank Limited focuses the process of their management of interest rate sensitive assets and liabilities under the rules and policy from both Bangladesh Bank and their treasury department. The administration part highlighted the responsibilities of asset liability management committee (ALCO) for the overall financial direction arid as well as to keep the control over the net interest income of the bank. This part also discussed about the policy statement of liability management, liquidity contingency plan and as well as balance sheet and maturity wise interest rate profile to cope with the bank’s interest rate risk management.


Performance analysis of Janata Bank Limited shows some crucial factors on their growth of liability side products of different deposits condition for the last five years. The liability ratios have shown their performances and other ratios like profitability, capitalization, asset quality, operating efficiency, liquidity and interest rate sensitivity focused the valuable information about the bank’s in general performance.

Conclusion:

The asset liability management enables the bank to shift funds from lower-earnings money market instruments to higher-earnings loans and investment securities. It also tends to increase the financial flexibility of the bank dealing with the liquidity needs. However, the asset liability management is not an easy task since debt interest obligations could raise as the percentage of the total assets and liabilities which tend to increase the bank’s exposure to the interest rate risk, as well as its financial risk because of increase in the financial leverage. The asset liability management committee or ALCO of Janata Bank Limited is principally responsible for the management of bank liabilities which is composed of different features of investment strategy throughout the bank. The large number of different types of deposit items offered to their customers today makes pricing a challenging task that requires balancing funds needs of the bank, profitability and customer relations. Regarding the financial performances dimension of the liability management, estimating the cost of funds and required returns from interest income is the crucial factor. By measuring the performance based on the bank’s financial statements structure helps to align the actions of managers with shareholders interests. From this way the bank can lead to a better risk management, efficient control of resources and informed judgment on the acceptability of investments by the bank.

BIBLIOGRAPHY 1. Departmental Operation Instruction & Concept File of Corporate Finance, Janata Bank Limited. 2. Commercial Banking by Gup & Kolari.


3. Annul Report, Janata Bank Ltd.

4. Prospectus of Bangladesh Bank.

5. The Website of the Janata Bank.

8. Bangladesh Bank Guidelines & Internal Circulars of ALCO.

Liability management of janata bank limited  

Liability management is a type of liquidity management that refers to meeting liquidity needs by using the outside sources of discretionary...

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