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Performance Ratios: Profitability Analysis and Sustainability Item General introduction

Role in Simfi

Where? Profitability analysis

Description Accounting and financial ratios are numerical relationships based on financial data in the financial reports of a MFI. In Simfi, the following groups of ratios are covered: 1. Variations to the previous quarter 2. Portfolio quality (Portfolio at Risk or PaR) 3. Efficiency and productivity 4. Financial structure 5. Profitability analysis and sustainability The Profitability analysis and sustainability pertain mainly to data present on the balance sheet and profit & loss statement of the MFI. Ratios are used to draw comparisons with competitors, industry standards, and previous periods’ results of the MFI itself. The profitability analysis and sustainability ratios show to what extent the business of the MFI is viable and sustainable. For this purpose, the costs and returns are monitored and compared with the assets and equity on the balance sheet of the MFI. Ratio > Profitability analysis and sustainability Net Margin This shows what is left from the total financial income of the MFI, after deduction of interest paid and operational expenses.

Obviously, the higher the net margin, the better. Net income: Financial statement > Profit and loss (P&L) Total financial income: Financial statement > Profit and loss (P&L) Interest margin (annualised) Interest margin measures the net interest and fee income from the loan portfolio, divided by the average gross loan portfolio.

Since in the simulation many loan agreements expire at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarter’s balance amounts is taken. The net interest and fee income pertains to just one quarter. In order the get the annual number, the ratio is multiplied by four. The higher the interest margin, the more profitable the MFI. Total interest and fee income from loan portfolio: Financial statement > Profit and loss (P&L) > Interest and fee income from loan portfolio Interest and fee expenses: Financial statement > Profit and loss (P&L)


Gross loan portfolio: Financial statement > Balance sheet > Net loan portfolio Operating margin The operating margin consists of the Net operating margin divided by the Total financial income. Operating margin is a profitability ratio and allows for comparison of MFIs of different sizes.

The higher the operating margin, the better. Net operating margin: Financial statement > Profit and loss (P&L) Total financial income: Financial statement > Profit and loss (P&L) Net financial margin The net financial margin consists of the Net financial margin divided by Total financial income. Net financial margin is a profitability ratio and allows for comparison of MFIs of different sizes. The net financial margins shows what is left of the Total financial income after taking out expenses such as interest, loan loss provisions etc.

The higher the Net financial margin, the better. Net financial margin: Financial statement > Profit and loss (P&L) Total financial income: Financial statement > Profit and loss (P&L) Cost ratio Operating expenses divided by net financial margin. The cost ratio shows which part of the financial margin is taken away by the operating expenses.

The lower the cost ratio, the better. Operating expenses: Financial statement > Profit and loss (P&L) Net financial margin: Financial statement > Profit and loss (P&L) Cost-to-income ratio Operating expenses divided by net interest and fee income (from loans, investments, deposits and funds). The cost-to-income ratio shows a MFI’s costs in relation to its income.

The ratio gives an idea of how efficiently the MFI is being run. The lower the ratio, the more profitable the MFI will be. Operating expenses: Financial statement > Profit and loss (P&L)


Total financial income: Financial statement > Profit and loss (P&L) Total financial expenses: Financial statement > Profit and loss (P&L) Other operating income: Financial statement > Profit and loss (P&L) > Net financial margin (after provisions) Cost of client deposits This ratio expresses the costs related to the MFI clients’ deposits and can be calculated by dividing the interest and fee expenses for the deposits by the average amount of these deposits.

Since, in the simulation, many deposits are withdrawn at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarter’s balance amounts is taken. Time and demand deposits of the previous quarter consist of: Short term deposits, Long term time deposits, and Demand deposits. The same items are called upon for the current quarter. The lower the costs of client deposits, the better it is for the MFI. Demand deposits: Financial statement > Balance sheet > Liabilities > Current liabilities Short term time deposits: Financial statement > Balance sheet > Liabilities > Current liabilities Long term time deposits: Financial statement > Balance sheet > Liabilities > Current liabilities For client deposits: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses Costs of borrowed funds Interest and fee expenses for borrowed funds divided by total average amount of borrowed funds. Borrowed funds pertain to loans obtained from other banks, and for that reason they include quasi capital accounts.

Borrowed funds consist of: Short term borrowed funds, Long term borrowed funds, and Quasi capital accounts. Since in the simulation many borrowed funds agreements expire at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarter’s balance amounts is taken. The lower the costs of borrowed funds, the better. Short term time deposits: Financial statement > Balance sheet > Liabilities > Current liabilities Long term time deposits: Financial statement > Balance sheet > Liabilities > Long term liabilities


Quasi capital accounts: Financial statement > Balance sheet > Liabilities > Long term liabilities For borrowed funds: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses Funding expense ratio Interest and fee expenses for deposits, funds, and other financial expenses divided by total average gross loan portfolio outstanding. This ratio shows what the costs of funding are to the MFI.

Since in the simulation many loans expire at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarter’s balance amounts is taken. The lower the funding expense ratio, the better. For client deposits: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses For borrowed funds: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses Other financial expenses: Financial statement > Profit and loss (P&L) > Total financial expenses Gross loan portfolio: Financial statement > Balance sheet > Assets > Net loan portfolio Sustainability Return on equity (ROE) Return on equity shows how much profit investors are making on their investment. To make comparisons easier, the number is annualised. In the simulation the P&L provides quarterly figures, so it is assumed that the annual profit equals the last quarter’s profit times four. In order to show the development of the equity position throughout the quarter, rather than just giving a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

The higher the ROE, the better. Net income: Financial statement > Profit & Loss (P&L) Total equity: Financial statement > Balance sheet Return on equity (ROE) excluding donations Return on equity shows how much profit investors are making on their investment. The reason to exclude donations, is to get a picture of the sustainability of the MFI without donor support. To make comparisons easier, the number is annualised. In the simulation, the P&L provides quarterly figures, so it is assumed that the annual profit equals the last


quarter’s profit times four. The same goes for the donations which are also annualised. In order to show the development of the equity position throughout the quarter, rather than just a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

The higher the ROE excluding donations, the better. Net income: Financial statement > Profit & Loss (P&L) Donations: Financial statement > Profit & Loss (P&L) Net income before donations Total equity: Financial statement > Balance sheet Return on assets (ROA) Return on assets shows how much profit the MFI is making on the assets at its disposal. To make comparisons easier, the number is annualised. In the simulation, the P&L provides quarterly figures, so it is assumed that the annual profit equals the last quarter’s profit times four. In order to show the development of the asset position throughout the quarter, rather than just a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

The higher the ROA, the better. Net income: Financial statement > Profit & Loss (P&L) Total assets: Financial statement > Balance sheet

Return on assets (ROA) excluding donations Return on assets shows how much profit the MFI is making on the assets at its disposal. The reason to exclude donations, is to get a picture of the sustainability of the MFI without donor support. To make comparisons easier, the number is annualised. In the simulation the P&L provides quarterly figures, so it is assumed that the annual profit equals the last quarter’s profit times four. The same goes for the donations which are also annualised. In order to show the development of the asset position throughout the quarter, rather than just a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

The higher the ROA excluding donations, the better.


Net income: Financial statement > Profit & Loss (P&L) Donations: Financial statement > Profit & Loss (P&L) Net income before donations Total assets: Financial statement > Balance sheet Operational self-sufficiency Donors and MFI management use this benchmark to assess how far an MFI has come in covering its operating expenses with its operating income. The ratio shows to what extent the operating expenses are covered by the operating income.

The lower the Operating self-sufficiency the better. Numbers below 100% are considered good. Operating expenses: Financial statement > Profit and loss (P&L) Total financial expenses: Financial statement > Profit and loss (P&L) Loan loss provision expenses: Financial statement > Profit and loss (P&L) > Loan loss reserves Total financial income: Financial statement > Profit and loss (P&L) Other operating income: Financial statement > Profit and loss (P&L) > Net financial margin (after provisions)

Ratios: Financial Structure Item General introductio n

Description Accounting and financial ratios are numerical relationships based on financial data in the financial reports of a MFI. In Simfi, the following groups of ratios are covered: 1. 2. 3. 4. 5.

Variations to the previous quarter Portfolio quality (Portfolio at Risk or PaR) Efficiency and productivity Profitability analysis and sustainability Financial structure

The financial structure pertains mainly to data present on the balance sheet of the MFI. Role in Simfi Ratios are used to draw comparisons with competitors, industry standards, and previous years’ results of the MFI itself. The financial structure ratios cover the earning capacity, liquidity, solvency, and equity structure. Where? Ratio > Financial structure Earning Net portfolio / total assets capacity of assets This ratio shows to what extent the assets are put to work for lending purposes, which is the core business of a MFI. The net loan portfolio excludes the loan loss reserves, which are, in


bookkeeping terms, already ‘lost’ for the MFI. The higher this ratio, the better the MFI works toward its lending targets. Net loan portfolio: Financial statement > Balance sheet > Net loan portfolio Total assets: Financial statement > Balance sheet > Total assets Non-earning assets / total assets

This ratio shows to what extent the assets are deployed for purposes that do not produce earnings. It should be the aim of the MFI to keep this percentage low. The non-earning assets are the sum of Cash on hand, Non-interest bearing deposits and clearing accounts, Prepaid expenses, Accounts receivable, Other current assets, Net property and equipment, Other long term assets. The lower this ratio, the more the MFI is working toward its lending targets.

Solvency

Cash on hand: Financial statement > Balance sheet > Current assets Non-interest bearing deposits and clearing accounts: Financial statement > Balance sheet > Current assets Prepaid expenses: Financial statement > Balance sheet > Current assets Accounts receivable: Financial statement > Balance sheet > Current assets Other current assets: Financial statement > Balance sheet > Current assets Net property and equipment: Financial statement > Balance sheet > Long term assets Other long term assets: Financial statement > Balance sheet > Long term assets Total assets: Financial statement > Balance sheet Capital adequacy

The Capital adequacy ratio shows to what extent the balance sheet total is financed through equity. Although the Quasi capital accounts do not belong to the equity proper, they are, given their long term and subordinated nature, considered to have almost equity status. The higher this percentage, the more stable the MFI is. Total equity: Financial statement > Balance sheet Quasi capital accounts: Financial statement > Balance sheet Total assets: Financial statement > Balance sheet Leverage

The Leverage ratio shows the proportion between equity capital and debt.


The lower this percentage, the more stable the MFI is. Total liabilities: Financial statement > Balance sheet Total equity: Financial statement > Balance sheet Working capital Working capital measures the liquidity available for operating purposes. It is the difference between current assets and current liabilities. Commonly, the time horizon for the calculation of working capital is one year. However, for the MFIs, with many commitments of three months or less, the time horizon is set at one quarter.

The time horizon could also be set at one year, which will change the formula to:

The higher this amount, the more liquid the MFI is. The data to calculate the working capital on a quarterly basis are not available to the trainees. However, on a yearly basis the data can, with some trouble, be retrieved from the balance sheet. Cash on hand: Financial statement > Balance sheet > Current assets Non-interest bearing deposits and clearing accounts: Financial statement > Balance sheet > Current assets Interest bearing deposits and clearing accounts < 1 year: Financial statement > Balance sheet > Current assets: Financial statement > Balance sheet > Current assets Prepaid expenses: Financial statement > Balance sheet > Current assets Accounts receivable Interest receivable: Financial statement > Balance sheet > Current assets Other current assets: Financial statement > Balance sheet > Current assets Liquidity

Liquidity Liquidity indicates to what extent the MFI can meet its short term obligations. In the simulation, short term is defined as a quarter rather than a year.

A ratio above 100% is considered to be acceptable. The higher the ratio, the more liquid the MFI is. The data to calculate this ratio are not available on the balance sheet but can be calculated using two other ratios: Average current assets: Ratio > Financial structure > Liquidity


Average current liabilities: Ratio > Financial structure > Liquidity Average current assets These cannot be calculated by the trainee with the information available on the balance sheet. The reason for showing the average number, rather than using the balance sheet is that within the simulation at the end of the quarter many loans expire or start. Measuring liquidity at this ‘hectic’ moment would not provide a realistic view of the liquidity position. Average current liabilities

Liability compositio n

These cannot be calculated by the trainee with the information available on the balance sheet. The reason for showing the average number, rather than using the balance sheet is that, within the simulation, at the end of the quarter many loans expire or start. Measuring liquidity at this ‘hectic’ moment would not provide a realistic view of the liquidity position. Total client deposits / Total liabilities This ratio measures to what extent the banks debts are covered by clients’ deposits.

In general, the higher this ratio the better, since this makes the MFI less exposed to external financing. Demand deposits: Financial statement > Balance sheet > Current liabilities Short term time deposits: Financial statement > Balance sheet > Current liabilities Long term time deposits: Financial statement > Balance sheet > Long term liabilities Total liabilities: Financial statement > Balance sheet Borrowed funds / Total liabilities Borrowed funds refer to loans obtained from other banks and financial institutions.

If this ratio is high, the MFI is dependent on other financial institutions. Short term borrowed funds: Financial statement > Balance sheet > Current liabilities Long term borrowed funds: Financial statement > Balance sheet > Long term liabilities Quasi capital accounts: Financial statement > Balance sheet > Long term liabilities Current liabilities / Total liabilities This ratio expresses how much of the liabilities are short term. In this case, short term is less than one year.


In general, it is better for a bank to keep this ratio low since long term funding is more stable. Demand deposits : Financial statement > Balance sheet > Current liabilities Short time deposits: Financial statement > Balance sheet > Current liabilities Short time borrowed funds: Financial statement > Balance sheet > Current liabilities Interest payable: Financial statement > Balance sheet > Current liabilities Other short term liabilities: Financial statement > Balance sheet > Current liabilities Total liabilities: Financial statement > Balance sheet Gross loan portfolio / total clients deposits

Gross loan portfolio / total clients deposits This ratio shows to what extent the loans outstanding are covered by funding through the MFIâ&#x20AC;&#x2122;s own client base.

In general, the lower this ratio is, the better, because it demonstrates financial independence of the MFI.

Donated equity / total equity

Gross loan portfolio: Financial statement > Balance sheet Demand deposits: Financial statement > Balance sheet > Current liabilities Short term time deposits: Financial statement > Balance sheet > Current liabilities Long term time deposits: Financial statement > Balance sheet > Long term liabilities Donated equity / total equity This ratio shows to what extent the equity has been funded through donations, usually stemming from development cooperation initiatives.

The lower the ratio, the more independent the MFI and the local economy are. Donated equity: Financial statement > Balance sheet > Equity Total equity: Financial statement > Balance sheet

Ratios: Efficiency and Productivity Item General introduction

Description Accounting and financial ratios are numerical relationships based on financial data in the financial reports of a MFI. In Simfi, the following groups of ratios are covered: 1. Variations to the previous quarter 2. Portfolio quality (Portfolio at Risk or PaR) 3. Financial structure 4. Profitability analysis and sustainability 5. Efficiency and productivity The Efficiency and productivity ratios pertain mainly to data present on the profit


Role in Simfi

Where? Portfolio yield

& loss statement and balance sheet of the MFI and the composition of the staff. Ratios are used to draw comparisons with competitors, industry standards, and previous periodsâ&#x20AC;&#x2122; results of the MFI itself. The ratios in this chapter cover the efficiency and productivity of the MFI. Ratio > Efficiency and productivity Total interest and fee income of the loan portfolio: this amount is calculated as a percentage of total average gross loan portfolios outstanding. This ratio is annualised.

The portfolio yield ratio shows how productive the portfolio is. In general, the higher the ratio, the more productive the MFI is.

Operating expense ratio

Interest and fee income from loan portfolio: Financial statement > Profit and loss (P&L) Gross loan portfolio > Financial statement > Balance sheet Total operating costs calculated as a percentage of the total average gross loan portfolio outstanding. Operating cost are personnel and administration cost. This ratio is annualised.

The operating expense ratio shows the size of the costs compared to the size of the lending business of the MFI. The lower this ratio, the more productive the MFI is. Operating expenses: Financial statement > Profit and loss (P&L)e5 Gross loan portfolio > Financial statement > Balance sheet Portfolio rotation

Total value newly disbursed loans calculated as a percentage of total average gross loan portfolios outstanding. This ratio is annualised.

The ratio shows how good the MFI is at finding new business for its lending activities. The higher this ratio, the more active the MFI is. Newly disbursed loans > Cannot be obtained from the information available. Gross loan portfolio > Financial statement > Balance sheet Average

Total value newly disbursed loans divided by total number of newly disbursed


disbursed loan size

loans.

This ratio gives an idea of the average size of the loans given out. Total value newly disbursed loans > Cannot be obtained from the information available. Total number of newly disbursed loans > Cannot be obtained from the information available. Cost per loan

Total operating expenses divided by total of number loan contracts which are not expired.

This gives an indication of the costs of the remaining loans. The lower the costs per loan, the better. Operating expenses: Financial statement: Profit and loss (P&L) Number of short term loans 3M individual: Detailed portfolio > Short term loans Number of short term loans 6M individual: Detailed portfolio > Short term loans Number of short term loans 9M individual: Detailed portfolio > Short term loans Number of short term loans 12M individual: Detailed portfolio > Short term loans Number of short term loans 3M group: Detailed portfolio > Short term loans Number of short term loans 6M group: Detailed portfolio > Short term loans Number of short term loans 9M group: Detailed portfolio > Short term loans Number of short term loans 12M group: Detailed portfolio > Short term loans Number of long term loans 2Y individual: Detailed portfolio > Long term loans Number of long term loans 5Y individual: Detailed portfolio > Long term loans Number of long term loans 2Y group: Detailed portfolio > Long term loans Number of long term loans 5Y group: Detailed portfolio > Long term loans Composition and numbers of staff Number of active loans per loan officer

Number of active loans per staff member

Credit staff as % of staff

Numbers and percentages of top managers, middle managers and other staff cannot be retrieved from the screen. Moreover, there are no specific formulas and calculations necessary barring simple summations. Total number of loan contracts which are not expired divided by the total number of loan officers.

This number cannot be calculated by the participants. Total number of loan contracts which are not expired divided by the total number of staff members.

This number cannot be calculated by the participants. Number of loan officers calculated as a percentage of all staff members


This number cannot be calculated by the participants.

09 Performance Ratios  

This document explains the term 'Performance Ratios' in SimFi