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Letter of Transmittal

December 24, 2012

Mr. Mokhdum Morshed

Senior Lecturer

School of Business

North South University

Plot-15, Block-B, Bashundhara R/A, Dhaka-1229

Subject: Letter of Transmittal

Dear Sir,

With due respect, I am a student of your course titled “Bank Management” had great pleasure

doing this course with you. Here is the term paper on “Mutual Trust Bank Ltd. This report has

been prepared as a part of the course requirement. It is prepared after having extensive financial

analysis of this company. I have tried my level best to follow your guidelines in every aspects of

preparing the report.

This report has given me an opportunity to apply theoretical knowledge in real and practical

world. It has also given me a glimpse of my individual understanding and skills in various

situations. I sincerely hope that you will admire this report. If you have any further enquiry

concerning any information, I would be very pleased to clarify that.

Sincerely

Jonaid Yousuf Siam

Id: 092 0133 030

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Acknowledgement

First and foremost, I would like to thank almighty Allah for giving me the patience and the

ability to work hard with tremendous devotion.

I would especially like to thank Mr. Mokhdum Morshed, my course instructor, who has

allowed me to do this report, and whom I have frequently consulted for guidance and advice

during the preparation of this report. His wisdom and valuable insight helped me a lot to realize

the value of this report and motivated me to develop the entire work. Without his support, it

would not have been possible to complete and submit this report.

Finally, I would like to thank some of my friends who, did this course earlier, had helped me a

lot by providing necessary information to complete the report successfully.

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Executive Summary

In this report, financial performance of Mutual Trust Bank Limited (MTB) has been analyzed.

The time period was from year 2009 to year 2011. For analysis comparative performance of

MTB, the results have been compared with the same data obtained from one of their competitor

Prime Bank Limited. There are several financial performance analyze tools have been used.

First of all, to evaluate the overall performance of the bank and help the investors to make

decisions, financial performance is analyzed based on different categories of ratios like liquidity

ratios, efficiency ratios, leverage ratios, profitability ratios and stock market ratios. Then

performance has been analyzed based on both vertical and horizontal statements-income

statement & balance sheet.

The major part of the report is findings & analysis section as it shows all the facts with potential

understanding to an investor whether they should invest or not. And the recommendation part is

based on the findings and analysis section and shows what an existing or a potential investor

should decide about his investment decision for these two banks.

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Table of Contents

Letter of Transmittal ................................................................................................................1

Acknowledgement ....................................................................................................................2

Executive Summary .................................................................................................................3

Table of Contents ......................................................................................................................4

Introduction ..............................................................................................................................5

Objectives ..................................................................................................................................6

Methodology .............................................................................................................................6

Limitations ................................................................................................................................7

Overview of the Bank ...............................................................................................................8

Literature Review ................................................................................................................... 10

Ratio ..................................................................................................................................... 10

Common Size Statements .................................................................................................. 17

Findings and Analysis ............................................................................................................ 18

Ratio Analysis ....................................................................................................................... 18

Common size Statements Analysis ........................................................................................ 36

Return & Risk Analysis ......................................................................................................... 37

Required rate of return .......................................................................................................... 38

Recommendation ................................................................................................................... 40

Conclusion .............................................................................................................................. 40

Bibliography............................................................................................................................ 41

Appendix-1: Common Size Statements

Appendix-2: Risk Free Rate Selection

Appendix-3: Ratio Calculation

Apeendix-4: Daily Return Calculation

Appendix-5: Monthly Return Calculation

Appendix-6: Financial Statements

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Introduction

Bank plays a very important role in the economic life of the nation. Nowadays modern banks are

very constructive for the utilization of the resources of the country. The banks are mobilizing the

savings of the people for the investment purposes. In today’s world, a bank performs several

general banking activities in line with its different internal departments. To ensure economic

stability, and to develop the rural and urban areas with necessary financial assistance,

government nationalized commercial banking. Previously only government banks were here to

serve the financial needs of consumers, but later private banks started dominating the market

with lots of branches and many services all over the country. They have joined the banking

industry to serve the common and corporate sector and to enhance their profitability in the

economy.

The Bangladesh banking sector relative to the size of its economy is comparatively larger than

many economies of similar level of development and per capita income. The total size of the

sector at 1.51% of GDP dominates the financial system, which is proportionately large for a

country with a per capita income of only about US$848 in 2012. Currently there are 4

Nationalized Commercial Banks (NCBs) 32 private bank and 10 foreign banks operating in

Bangladesh.

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Objectives

The basic objective of this report is to understand the financial performance of the Mutual Trust

Bank Ltd. as the private commercial bank of Bangladesh whether its performance is improving

or not over a certain period of time i.e. from year 2009 to 2011 and to compare the performance

with one of its direct competitor, Prime Bank Ltd., in the banking industry.

To be familiar with the history and operations of Mutual Trust Bank in Bangladesh

To figure out operational performance of MTB in recent years

To familiar with the financial statements of the bank

To familiar with different types of financial performance analysis tools

To gather knowledge about the financial function of different sections

To fulfill the requirement of the course titled “Bank Management”

Methodology

This report has been prepared completely based on secondary data. Secondary sources includes-

Annual report of Mutual Trust Bank Limited (Year 2009 to Year 2011)

Annual report of Prime Bank Limited (Year 2009 to Year 2011)

Website (MTBL, Prime Bank etc.)

Books, Journal and Articles

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Limitations

However, I am lucky to get the chance to prepare this report but unfortunately I have to face

some difficulties. I have tried to overcome the difficulties and gave my best effort. While

preparing this report, some difficulties that I have faced are-

Time Shortages

This extensive type of report needs too much time to prepare it. However, I had to prepare this

report within a very short span of time. The bank officials are also very busy, so it was hard to

bring their concentration on the matter.

Inconsistent Terminologies

Sometimes it was very difficult to get the correct terminologies because there are many

inconsistent terminologies that bank are following now a day. There are many terminologies,

which are not consistent with the Generally Acceptable Accounting Principle (GAAP). So, I

need to closely look at those to find out the actual data from the financial statements.

Qualitative factors are ignored

Ratio analysis, common size statements are some of the techniques of quantitative analysis and

thus which may be important in decision making but ignores qualitative factors.

Different Financial Statements

Since the financial statements of a bank are completely different from the other service or

manufacturing company, it was difficult to understand some terms. As a result, it takes more

time to analyze the financial performance.

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Overview of the Bank

Mutual Trust Bank Limited (MTBL) is a Public Limited Company by shares in the Bangladesh,

with commendable operating performance. Directed by the mission to provide with prompt and

efficient services to clients, MTBL provides a wide range of commercial banking services also.

The bank has achieved success among its peer group within a short span of time with its

professional and dedicated team of management having long experience, commendable

knowledge and expertise in convention with modern banking.

Mutual Trust Bank Limited (MTBL) was incorporated on September 29, 1999 under the

companies Act 1994 as a public company limited. They introduced themselves as a pioneer in

banking sector. At the time of beginning their authorized capital was BDT 38, 00,000,000

divided into 38,000,000 ordinary shares of BDT 100.00 each. The head office of the bank is in

MTB center, 26 Gulshan Avenue. The bank has 78 branches all over the country; the bank

carries out international business through a Global Network of Foreign Correspondent Banks.

As envisaged in the Memorandum of Association and as licensed by Bangladesh Bank under the

provisions of the Banking Companies Act 1991, the Company started its banking operation and

entitled to carry out the following types of banking business:

All types of commercial banking activities including Money Market operations

Investment in Merchant Banking activities

Investment in Company activities

Financiers, Promoters, Capitalists etc

Financial Intermediary Services

Any related Financial Services

Mission

“We aspire to be the most admired financial institution in the country, recognized as a dynamic,

innovative and client focused company that offers an array of products and services in the

search for excellence and to create an impressive economic value.” – MTBL Group

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Vision

Mutual Trust Bank's vision is based on a philosophy known as MTB3V. They envision MTB to

be:

One of the Best Performing Banks in Bangladesh

The Bank of Choice

A Truly World-class Bank

Product & Services

The MTBL concentrates the following categories of banking-

Retail Banking

Deposit

Loans

Cards

Wholesale Banking

Term Finance

Working Capital Finance

Trade Finance

Offshore Banking

Syndication & Structured

Finance

SME Banking

MTB Bhagyoboti

MTB Krishi

MTB Mousumi

MTB Small Business Loan

MTB Digoon

Treasury Services

Money Market

Foreign Exchange

NRB Banking

NRB Savings A/C

NRB DPS A/C

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Literature Review

Financial statement plays a vital role among all of other aspects. Analysis of these statements is

essential to know a company much better. One foremost purpose of the financial statement

analysis is to use the past performance of a company to predict how the company will perform in

future. Another purpose would be to evaluate performance of a company with a view to identify

the problem areas. These statements are recognized & authorized by GAAP (Generally Accepted

Accounting Principles).

There are 4 main statements including income statement, Balance sheet, Statement of owner’s

equity and Statement of cash flow, which is mandatory to disclose to the external users like

shareholder, investors and creditors at the end of every fiscal year.

To figure out whether a company is good or bad, it is necessary to analyze the financial

statements. There are lots of tools and techniques available that would help to analyze this

financial statement. It involves the relationship of both financial statement numbers and the

trends in those numbers over time. It can identify the problem areas by evaluating financial

statements which effects the decision making process.

To analyze the performance of MTB and Prime Bank, there are several financial performance

analyze technique has been used such as Ratio Analysis, Horizontal and Vertical statements,

Risk & Return analysis etc.

Ratio

Ratio Analysis is the starting point in developing the information desired by the analyst. Ratio

analysis provides only a single snapshot, the analysis being for one given point or period in time.

In the ratio analysis it is possible to define the company ratio with a standard one. For this paper

I have gone through Time Series Analysis and Cross-sectional Analysis.

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Liquidity Position Indicator Ratios

Many financial-service institutions estimate their liquidity needs based upon experience and

industry average. This often means using certain liquidity indicators. For example, for depository

institutions the following liquidity indicator ratios are often useful:

Cash Position Indicator

The ratio indicates a bank’s ability to handle immediate cash needs. A greater proportion of cash

implies the institution is in a stronger position to handle immediate cash needs. The higher is the

ratio the better the liquidity position of the bank. It is calculated as follows-

𝐶𝑎𝑠𝑕 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 = 𝐶𝑎𝑠𝑕 𝑎𝑛𝑑 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠 𝑑𝑢𝑒 𝑓𝑟𝑜𝑚 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑜𝑟𝑦 𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Liquid Securities Indicator

This ratio compares the most marketable securities an institution can hold with the overall size of

its asset portfolio; the greater proportion of government securities, the more liquid the depository

institutions position tends to be. It is calculated as follows-

𝐿𝑖𝑞𝑢𝑖𝑑 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 𝑖𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 = 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Capacity Ratio

This is a negative liquidity indicator for the bank because the loans and leases are often the most

illiquid of assets. When this ratio goes up, the liquidity position of the financial institutions goes

down. It is calculated as follows-

𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 =𝑁𝑒𝑡 𝑙𝑜𝑎𝑛𝑠 𝑎𝑛𝑑 𝑙𝑒𝑎𝑠𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Deposit Composition Ratio

This ratio measures how stable a funding base each institution possesses. A decline in this ratio

suggests greater deposit stability and a lesser need for liquidity. A high ratio indicates the greater

requirement for liquidity. It is calculated as follows-

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𝐷𝑒𝑝𝑜𝑠𝑖𝑡 𝑐𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 =𝐷𝑒𝑚𝑎𝑛𝑑 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠

𝑇𝑖𝑚𝑒 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠

Leverage Ratios

Debt Ratio

This ratio measures the percentage of total assets that are financed through debt. The higher the

debt the more an institution is exposed to risk. This ratio is very high for financial institution. It

is calculated as follows-

𝐷𝑒𝑏𝑡 𝑟𝑎𝑡𝑖𝑜 =𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Equity multiplier

This is a measure of leverage. The higher the ratio is, the more the company is relying on debt to

finance its asset base. A higher equity multiplier indicates higher financial leverage, which

means the company is relying more on debt to finance its assets. It is calculated as follows-

𝐸𝑞𝑢𝑖𝑡𝑦 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Efficiency Ratios

Operating Efficiency Ratio

The efficiency ratio gives us a measure of how effectively a bank is operating. It is the cost

required to generate each dollar of revenue. An increase means the company is losing a larger

percentage of its income to expenses. If it is getting lower, it is good for the bank and its

shareholders. This measures non-interest expenses as a proportion of operating revenue. Costs

include salaries, technology, buildings, supplies, and administrative expenses. Revenue includes

net interest income (interest revenue less interest expenses) plus fees. It is calculated as follows-

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

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Employee productivity Ratio

The ratio measures the level of income that each employee generates. It helps to determine the

efficiency of a bank in terms of employees. A rise in the employee productivity ratio suggests

management and staffs are generating more operating revenue and/or reducing operating expense

per employee, helping to squeeze out more product with a given employee base. It is calculated

as follows-

𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑓𝑢𝑙𝑙 𝑡𝑖𝑚𝑒 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠

Profitability Ratios

Return on Assets (ROA)

It is primarily an indicator of managerial efficiency; it indicates how capable management has

been in converting assets into net earnings. The higher the percentage is better, because that

means the company is doing a good job using its assets to generate net earnings. It is calculated

as follows-

𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Return on Equity (ROE)

It is a measure of the rate of return flowing to shareholders. It approximates the net benefit that

the shareholders have received from investing their capital in the financial firm (i.e., placing their

funds at risk in the hope of earning a suitable profit. This is the ratio potential investors look at

when deciding whether or not to invest in the company. Net income comes from the income

statement and stockholder’s equity comes from the balance sheet. In general, the higher the

percentage is the better. It is calculated as follows-

𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

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Net Interest Margin

Net interest margin measures how large a spread between interest revenues and interest costs

management has been able to achieve by close control over earning assets and pursuit of the

cheapest sources of funding. It is expressed as a percentage of what the financial institutions are

earning minus the interest that it pays on borrowed funds to its investors. It examines

how successful a firm's investment decisions are compared to its debt situations. A negative

value denotes that the firm did not make an optimal decision, because interest expenses were

greater than the amount of returns generated by investments. It is calculated as follows-

𝑁𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Net Non Interest Margin

It measures the amount of noninterest revenues stemming from service fees the financial firm has

been able to collect relative to the amount of noninterest costs incurred (including salaries and

wages, repair and maintenance of facilities, and loan loss expenses). Typically net noninterest

margin is negative. Noninterest costs generally outstrip fee income; through fee income has been

rising rapidly in recent years as a percentage of all revenues. It is calculated as follows-

𝑁𝑒𝑡 𝑛𝑜𝑛𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑁𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑁𝑜𝑛 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Net Bank Operating Margin

A measure of how profitably the firm is operating. The ratio tells how well a company converts

revenue from core operations into actual profit - how many cents of profit it gets from every

dollar of sales. The operating margin shows how well the company controls costs. It is calculated

as follows-

𝑁𝑒𝑡 𝑏𝑎𝑛𝑘 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Net Profit Margin

It tells investors the percentage of money a company actually earns per dollar of sales. This

number is an indication of how effective a company is at cost control. The higher the net profit

margin is, the more effective the company is at converting revenue into actual profit. The net

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profit margin is a good way of comparing companies in the same industry. It is calculated as

follows-

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

Asset Utilization Ratio

It indicates that how efficiently the firm is utilizing the asset to generate revenue or return. It

concern on portfolio management policies, especially the mix and yields on the banks assets. By

carefully allocating assets to the highest yielding loans and investments while avoiding excessive

risk, management can raise the average yields on assets. It is calculated as follows-

𝐴𝑠𝑠𝑒𝑡 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

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Stock Market Ratios

Earnings per Share (EPS)

Earnings per Share are the most frequently used of all the ratios and are generally felt to give the

best view of performance. It indicates how much of a company’s profit can be attributed to each

ordinary share in the company.

𝐸𝑃𝑆 =𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠

𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑕𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Market-Book Value Ratio

It measures how much a company is worth at present, in comparison with the amount of capital

invested by current and past shareholders into it. This ratio is used by some investors or analysts

as an indicator of over- or undervaluation. If the balance sheet assets per share are much larger

than the share price, this is taken to be a buy signal. The equation is

𝑀/𝐵 𝑟𝑎𝑡𝑖𝑜 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒

𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒

Price Earnings Ratio (P/E)

It is a measure of the price paid for a share relative to the annual profit earned by the firm per

share. A high P/E suggests that investors are expecting higher earnings growth in the future

compared to companies with a lower P/E. It gives us an indication of the confidence that

investors have in the future prosperity of the business. The equation is

𝑃/𝐸 𝑟𝑎𝑡𝑖𝑜 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑠𝑕𝑎𝑟𝑒

𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒

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Common Size Statements

Vertical Balance sheet

In the vertical balance sheet all the figures of the balance sheet of a year are divided by that

year’s total asset and expressed those as a percentage (%).

Vertical Income statement

In vertical income statement all the figures of the income statement of a year are divided by that

year’s total operating revenue and expressed in percentage

Horizontal Balance sheet

In horizontal balance sheet each base year item’s amount is divided by itself and is expressed in

percentage form, so all the base year items are 100%. Then next year’s amounts are divided by

the base year’s amount and expressed as a percentage of the base year. Here, I have taken 2009

as the base year. In this way all the amounts of 2010 and 2011 have been calculated.

Horizontal Income statement

In horizontal income statement each base year item’s amount is divided by itself and is expressed

in percentage form, so all the base year items are 100%. Then next year’s amounts are divided by

the base year’s amount and expressed as a percentage of the base year. Here, I have taken 2009

as the base year. In this way all the amounts of 2010 and 2011 have been calculated. Then next

year’s amounts are divided by the base year’s amount and expressed as a percentage of the base

year.

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0%

2%

4%

6%

8%

10%

12%

14%

2009 2010 2011

Year

MTB

Prime Bank

Findings and Analysis

Ratio Analysis

Liquidity Position Indicator Ratios

Cash Position Indicator

2009 2010 2011

MTB 12.72% 10.32% 7.04%

Prime Bank 8.79% 6.88% 7.51%

In the year 2011, MTB’s cash and due from depository institutions was 7.04% of total assets.

Cash position indicator of Mutual Trust Bank is decreasing year by year which is not a good

sign. This indicates that their cash in hand is decreasing and will face problems to handle

immediate cash needs.

In the last two years, we can see that MTB had better cash indicator ratio than Prime Bank which

means they had good defence against liquiditity crisis. On the other hand, in 2011, Prime Bank’s

cash position indicator has increased over MTB’s cash position indicator.

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0%

5%

10%

15%

20%

25%

30%

2009 2010 2011

Year

MTB

Prime Bank

The total assets of Mutual Trust Bank Ltd. are increasing every year with a greater proportion

compared to cash and due from depository instituitions. That is the reason behind thedecreasing

of this ratio.

Liquid Securities Indicator

2009 2010 2011

MTB 16.98% 14.03% 16.98%

Prime Bank 15.24% 12.55% 17.20%

In the year 2011, MTB’s investment in government securities was 23.84% of total assets. Liquid

securities indicator has increased in 2011. Though it was slightly dropped in 2010. This indicates

that they have invested huge amount of money in marketable securities. They can easily sell

these securities when they need cash.

In the last two years, we can see that MTB had slighter better liquid securities indicator than

Prime Bank. On the other hand, in 2011, MTB has invested huge amount of money in

government securities compare to Prime Bank.

The investment in government securities of Mutual Trust Bank Ltd. are increasing every year

with a greater proportion compared to total assets. That is the reason behind its increasing of this

ratio.

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0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 2010 2011

Year

MTB

Prime Bank

Capacity Ratio

2009 2010 2011

MTB 64.20% 67.79% 60.38%

Prime Bank 71.51% 75.19% 69.72%

In the year 2011, MTB’s net loan and leases was 60.38% of total assets. This is the lowest

percentage among the three years which is a good sign for the company in terms of liquidity

concern.

In the last three years, we can see that MTB had slighter lower capacity ratio than Prime Bank.

That means they had highest liquidity position than their competitor.

The poportionate change in net loan and losses of Mutual Trust Bank Ltd. is lower than

poportionate change in total assets. That is the reason behind its decreasing of this ratio.

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0%

5%

10%

15%

20%

25%

30%

35%

40%

2009 2010 2011

Year

MTB

Prime Bank

Deposit Composition Ratio

2009 2010 2011

MTB 24.82% 33.59% 25.99%

Prime Bank 20.42% 25.40% 20.50%

In the year 2011, MTB’s total demand deposit was 25.99% of time deposits. This decreased in

2011 from 2010. This means MTB has taken less amount of current deposit compare to time

deposit. As a result their liquidity requirement has decreased in 2011.

In the last three years, we can see that MTB had higher deposit composition ratio than Prime

Bank. That means their liquidity requirment is higher than Prime Bank.

The poportionate change in current deposit of Mutual Trust Bank Ltd. is lower than poportionate

change in time deposit. That is the reason behind its decreasing of this ratio.

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86%

87%

88%

89%

90%

91%

92%

93%

94%

95%

2009 2010 2011

Year

MTB

Prime Bank

Leverage Ratios

Debt Ratio

2009 2010 2011

MTB 93.02% 92.76% 93.68%

Prime Bank 90.59% 89.05% 90.59%

In 2011, Mutual Trust Bank has financed 93.68% of their assets by debt. It means for every 100

taka of total assets, 93.68 taka is financed by debt. This ratio is increased in the year 2011 from

2010. Though it dropped slightly in 2010.

Debt ratio of Prime Bank Ltd. was lower than that of Mutual Trust Bank Ltd. for the last three

years. Like MTB, Debt Ratio of Prime Bank has increased in 2011. It is clearly seen in the graph

that MTB’s dependency on debt financing is slightly higher than Prime Bank. So risk exposure

for MTB is slightly higher than Prime Bank. If economy goes well than MTB will earn more

profit than Prime Bank but if economy goes through recession MTB will incur more loss than

Prime Bank. So Prime Bank with lower debt ratio is in a safer position.

In 2011, proportionate change in MTB’s total liabilities was more than proportionate change in

total assets. That’s why this ratio has increased in 2011.

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0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

2009 2010 2011

Tim

es

Year

MTB

Prime Bank

In 2011, MTB’s total assets were 15.83 times of total assets. Equity multiplier has increased

from the year 2010. This means, MTB has financed their assets more by debt capital compare to

equity capital.

Equity Multiplier of Prime Bank Ltd. was lower than that of Mutual Trust Bank Ltd. for the last

three years. Like MTB, Equity Multiplier of Prime Bank has increased in 2011. It is clearly seen

in the graph that MTB’s dependency on debt financing is slightly higher than Prime Bank. On

the other hand Prime Bank’s dependency on equity capital to finance their assets is slightly

above than MTB.

In 2011, the relative changes in total assets were more than relative changes in equity capital for

Mutual Trust Bank. That’s why this ratio has increased in 2011.

Equity Multiplier

2009 2010 2011

MTB 14.32 times 13.82 times 15.83 times

Prime Bank 10.63 times 9.13 times 10.45 times

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0%

5%

10%

15%

20%

25%

2009 2010 2011

Year

MTB

Prime Bank

Efficiency Ratios

Operating Efficiency Ratio

2009 2010 2011

MTB 15.40% 21.53% 21.06%

Prime Bank 17.49% 20.54% 17.25%

In 2011, the operating efficiency ratio of Mutual Trust Bank was 21.06%. It means MTB had to

spend 21.06% of their operating revenue for operating expense. This ratio had increased at a

higher percentage in the year 2010 from 2009. Though it has dropped in 2011 but the rate is very

low. This shows that overall operating efficiency is not good in 2011 compare to 2009.

The competitor of MTB, Prime Bank has achieved a wonderful position in terms of operating

efficiency in 2011. Their operating ratio was high compare to MTB in 2009. But they have

managed to control their operating expenses in 2011. This is the best position among the three

years.

In 2011, the proportionate change in operating revenues was slightly lower than proportionate

change in operating expenses. That’s why this ration has slightly decreased in 2011.

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0

1000000

2000000

3000000

4000000

5000000

6000000

2009 2010 2011

Un

it (

BD

T)

Year

MTB

Prime Bank

Employee Productivity Ratio

2009 2010 2011

MTB 3024994.98 2927785.22 2379368.67

Prime Bank 4444472.17 4579143.56 5080856.34

In 2011, each full time employee of Mutual Trust Bank has generated 2,379,368.67 taka revenue.

The ratio is decreasing in every year. It has decreased at a great rate in 2011 compared to

previous year. This indicates that the efficiency of the employees has gone down or in other

words the operating expense per employee has gone up.

Prime Bank, one of the competitors of MTB has done a good job in terms of employee

productivity ratio. It is increasing in year by year. This ratio has increased at a higher rate in

2011. So the employees of Prime Bank are more productive than that of MTB.

The relative changes in number of full time employee were more that relative changes in net

operating income.

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2009 2010 2011

Year

MTB

Prime Bank

Profitability Ratios

Return on Assets (ROA)

2009 2010 2011

MTB 1.55% 1.34% 0.83%

Prime Bank 2.23% 2.01% 1.83%

In 2011, every 100 taka worth of total assets of Mutual Trust Bank are generating 0.83 taka of

net income. This ratio is decreasing in every year. It has decreased at a higher rate in 2011. This

shows that MTB earnings is decreasing compare to investment in assets.

Like MTB, return on assets of Prime Bank is decreasing in every year. In spite of, they have

more than double return on assets in 2011 compared to MTB’s return on assets. So, Prime Bank

has used their assets more efficiently to generate net income.

So the proportionate changes in net income were lower than proportionate changes in total assets

in 2011 for MTB. That is the main reason for the downfall of this ratio.

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e27

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2009 2010 2011

Year

MTB

Prime Bank

In the year 2011, shareholders of Mutual Trust Bank have earned 13.14 taka for every 100 taka

investment in the company. This ratio is decreasing every year from the initial. The decrease rate

is quite high in every year. If this will happen in next few years, shareholder of MTB will lose

confidence to the company

The competitor of MTB, Prime Bank had higher ROE in 2009. But their return on earnings had

slightly gone down to MTB’s ROE in 2010. In spite of, they have recovered wonderfully in

2011. On the other hand MTB’s ROE has fallen greatly in 2011. As a result, a shareholder who

want to add a bank in his/her investment portfolio, will more likely to invest in Prime Bank.

The Proportionate change in net income in 2011 was less than proportionate change in total

shareholders’ equity.

Return on Equity (ROE)

2009 2010 2011

MTB 22.27% 18.56% 13.14%

Prime Bank 23.71% 18.34% 19.13%

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2009 2010 2011

Year

MTB

Prime Bank

In the year 2011, Mutual Trust Bank’s net interest margin was only 0.84%. This ratio has

decreased (almost 50 percent) greatly in 2011. This shows that the loan demand has decreased in

2011 compare to the supply of deposit.

Form the graph; we can see that net interest margin of prime bank also followed similar patter

over last three years. However, net profit margin of prime bank was above than that of MTB.

And their net interest margin also decreased less compare to MTB.

Net Interest Margin

2009 2010 2011

MTB 1.65% 2.04% 0.84%

Prime Bank 1.95% 2.80% 2.04%

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2009 2010 2011

Year

MTB

Prime Bank

In the year 2011, Mutual Trust Bank’s net not-interest margin was only 0.83% similar to net

interest margin. . This ratio is increasing every year from the initial. This shows that the loan

demand has decreased in 2011 compare to the supply of deposit.

Form the graph; we can see that net interest margin of prime bank also followed similar patter

over last three years. However, net profit margin of prime bank was above than that of MTB.

And their net interest margin also decreased less compare to MTB.

Net Non-Interest Margin

2009 2010 2011

MTB 1.43% 0.95% 0.83%

Prime Bank 2.29% 1.20% 1.68%

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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

2009 2010 2011

Year

MTB

Prime Bank

In the year 2011, the net bank operating margin of Mutual Trust Bank was 1.66%. That means

the company has earned 1.66 taka. This ratio is decreasing in every year. It has decreased at a

higher rate (almost 50 percent) in 2011. The proportionate change in total assets was more than

proportionate in profit before provision and taxation.

On the other hand, the net bank operating margin of Prime Bank has decreased in every year

from the initial at a lower rate. And the net bank operating margin of prime bank was more than

double in 2011. This shows that how Prime bank has controlled their expense over revenue with

the increase of total assets.

Net Bank Operating Margin

2009 2010 2011

MTB 3.08% 2.99% 1.66%

Prime Bank 4.24% 4.00% 3.73%

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Net Profit Margin

2009 2010 2011

MTB 13.78% 12.30% 7.66%

Prime Bank 16.75% 17.60% 15.07%

In 2011, Mutual Trust Bank’s net profit margin was 7.66%. This means they have converted

7.66% of their total revenue as net income. This ratio is going down in every year. This shows

that they are not effectively managing their expense. The expense is increasing at a higher rate

than compare to the increase in revenue.

Prime Bank, one of the competitors of MTB, has managed their expense quite efficiently because

they have higher net profit margin than over the three years. Though this ratio slightly dropped in

2011 but the rate was very lower compare to the net profit margin of Prime Bank.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

2009 2010 2011

Year

MTB

Prime Bank

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Asset Utilization Ratio

2009 2010 2011

MTB 11.28% 10.92% 10.85%

Prime Bank 13.32% 11.42% 12.15%

In 2011, the asset utilization of Mutual Trust Bank Ltd. was 10.85%. That means every 100

taka worth of total assets are generating 10.85 taka of total revenue. This ratio was quite stable

(decrease at a very lower rate) over the three years. The proportionate change in total assets was

slightly higher than proportionate change in total operating revenue.

On the other hand, Prime Bank is generating more operating revenue by using their assets.

Though this ratio dropped at a higher rate in 2010 but they have recovered successfully in 2011.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2009 2010 2011

Year

MTB

Prime Bank

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0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

2009 2010 2011

BD

T

MTB

Prime Bank

Stock Market Ratios

Earnings per Share

2009 2010 2011

MTB 3.23 3.04 2.50

Prime Bank 7.83 5.37 4.70

In the year 2011, the common shareholder of Mutual Trust Bank has earned 2.50 taka for every

share they hold. EPS is decreasing in every year from the base. So, the shareholders of MTB may

sell their share in future due to low EPS. The total number of shares outstanding was remained

same in every year where the net income has decreased in every year. That is why this ration has

decreased in every year.

The shareholders of Prime Bank have earned more than the share holders of prime bank in every

three years though it decreased in every year. Due to higher EPS, a shareholder may want to

keen the share of Prime Bank in their portfolio.

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0.00

5.00

10.00

15.00

20.00

25.00

2009 2010 2011

Year

MTB

Prime Bank

Price to Earnings Ratio

2009 2010 2011

MTB 12.76 23.31 13.81

Prime Bank 8.34 17.60 9.48

In the year 2011, Mutual Trust Bank’s shareholders were willing to pay 13.81 taka for every 1

taka of reported earnings. This ratio decreased in 2011 after a huge increase in 2010. The relative

change in market price per share was less that relative change in earnings per share.

The P/E ratio of Prime Bank was 9.48 in 2011. P/E ratio of Prime Bank was far below than that

of MTB. It shows that the shareholders of MTB are willing to pay more money for every 1 taka

of reported earnings.

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0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2009 2010 2011

Un

it (

tim

es)

Year

MTB

Prime Bank

Market to Book Value Ratio

2009 2010 2011

MTB 4.12 times 7.08 times 3.45 times

Prime Bank 6.53 times 9.45 times 4.45 times

In the year 2011, market price per share of Mutual Trust Bank was 3.45 times higher than the

book value per share. This ratio decreased in 2011 after an increase in 2010. The market price

per share has decreased in 2011 where book value per share remained same. That’s why this

ratio has fallen in 2011.

The M/B ratio of Prime Bank in 2011 was 4.45 times. This also decreased in Prime Bank in 2011

after a increase in 2010.

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Common size Statements Analysis

Vertical Balance Sheet

Mutual Trust Bank is decreasing their balance with other banks and financial institutions while

cash in hand and reserve in Bangladesh Bank is quite stable over the three years. MTB has

invested huge amount of money in government securities in 2011. On the other hand loan

demand has decreased in this year. Prime Bank’s loan demand also decreasing. Their investment

in government securities also increased in 2011.

MTB has borrowed highest amount of money from other banks and financial institutions in

2011. On the other hand, Prime Bank has borrowed less amount money. Both banks has

collected same percentage of deposits over the three years. The total shareholders’ equity are

higher for Prime bank. So MTB is more leveraged bank than Prime bank.

Horizontal Balance Sheet

The cash asset of MTB has increased more in 2011 than 2010 where Prime bank cash assets have

not increased relative to that percentage. MTB is decreasing deposit money in other banks and

financial institutions while Prime bank is increasing their deposit at a higher rate, completely

different strategy. MTB has increased more percentage of their total assets in government

securities than that of Prime Bank. Over the time period, demand for loan of Prime Bank has

increased more than MTB. In 2011, Prime Bank has borrowed huge amount of money from other

banks than MTB. Both total liability and shareholder equity has increased less over the this time

period than that of Prime Bank.

Vertical Income Statement

In 2011, net interest income of both banks has decreased due to high interest paid to customer

deposit compare to previous year. As well as, the no interest income also decreased. As a result

total operating income also decreased. Prime Bank has controlled their costs more efficiently that

MTB in 2011. As a result, net profit after tax in terms of total operating revenue has decreased

less than that of MTB.

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Horizontal Income Statement

Where Mutual Trust Bank’s net interest income has decreased in 2011, net interest income of

Prime Bank has increased at a higher rate compare to 2010. The total operating income of MTB

has decreased less compare to 2010 due to increase in non-interest income. Since n-interest

income of Prime Bank also increased, their total operating income also increased more. The total

operating expense of MTB has increase almost 91% from the base year where it has increased

only 44% in the case of Prime Bank. The is the main reason due to downfall of net profit after

tax of MTB and boost in the case of Prime Bank.

Return & Risk Analysis

Return

Average monthly return (from 2009 to 2011) and average yearly return of Mutual Trust Bank,

Prime Bank and Dhaka Stock Exchange General Index are given below-

MTB Prime Bank DGEN

Average Return (Monthly) 1.1934% -0.0077% 1.5404%

Average Return (Yearly) 14.3209% -0.0926% 18.4847%

As we can see from the table that average year return of MTB is 14.3209% where average return

of Prime bank is negative (-0.0926%). So, risk adverse investor will who wants higher return will

likely to invest in the stock of MTB from these two bank. Return based on daily stock price is

also calculated (see in the CD).

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Risk

MTB Prime Bank DGEN

Standard Deviation 14.2598% 14.7341% 9.7591%

Coefficient of Variation 0.996 -159.15 0.53

Beta 1.22273 0.8961

The beta of MTB is 𝛽 = 1.2273 which is the market risk is for MTB’s shares.

So, 𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘 𝜎 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑟𝑖𝑠𝑘 𝛽 + 𝐹𝑖𝑒𝑚 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑟𝑖𝑠𝑘

14.2598 = 1.22273 + 𝐹𝑖𝑟𝑚 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑟𝑖𝑠𝑘

𝑭𝒊𝒓𝒎 𝒔𝒑𝒆𝒄𝒊𝒇𝒊𝒄 𝒓𝒊𝒔𝒌 = 𝟏𝟑. 𝟎𝟑𝟕%

The beta of Prime Bank is 𝛽 = 0.8961 which is the market risk is for Prime Bank’s shares.

So, 𝑇𝑜𝑡𝑎𝑙 𝑟𝑖𝑠𝑘 𝜎 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑟𝑖𝑠𝑘 𝛽 + 𝐹𝑖𝑒𝑚 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑟𝑖𝑠𝑘

14.7341 = 0.8961 + 𝐹𝑖𝑟𝑚 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑟𝑖𝑠𝑘

𝑭𝒊𝒓𝒎 𝒔𝒑𝒆𝒄𝒊𝒇𝒊𝒄 𝒓𝒊𝒔𝒌 = 𝟏𝟑. 𝟖𝟑𝟖%

Required rate of return The minimum expected yield by the investors requires in order to selecting a particular

investment is called required rate of return. Here, I have used Capital Asset Pricing Model

(CAPM) to calculate the required rate of return for the stock of MTB and Prime Bank in 2011. In

this model, I have inserted values of Rm, Rf, and beta (β) in the formula of CAPM. This is the

return required by investors.

𝐾𝑒 = 𝑅𝑓 + 𝑅𝑚 − 𝑅𝑓 ∗ 𝛽

Pag

e39

Here

MTB Prime Bank

Risk free rate (𝑅𝑓) 10.00% 10.00%

Market return (𝑅𝑚 ) 18.48% 18.48%

Beta 1.22272 0.8961

Required Rate of Return 20.41% 17.60%

Intrinsic Share Price

Mutual Trust Bank has not given any kind of divided (neither cash nor stock) from 2009 to 2010.

They have issued bonus share in these period. That is why the intrinsic share price has not

calculated.

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Recommendation

From ratio and common size statement analysis it is clearly visible that financial performance of

Mutual Trust Bank is very poor compare to Prime Bank Limited over the last three years. So

they can overcome this hard situation by -

Decrease operating expense efficiently.

Give cash or stock dividend to shareholders.

MTB should engage more CSR (Corporate Social Responsibility). It will appreciate and

attract new investors.

Use customer deposits more efficiently to earn net interest income (by lending that

money to good borrower).

Use assets more efficiently to generate net income.

Conclusion

Finally after analyzing all the ratios and common size statement, it can be concluded that the

performance of Mutual Trust Bank was very bad in comparison with Prime Bank. The CAMELS

rating of Bangladesh Bank also tells that the performance of MTB is very poor in the previous

year. MTB was B-class bank in 2007 where Prime bank was in A-class bank on that period. Now

both are in B-class bank but the performance of MTB is not that much satisfactory compare to

Prime Bank. As an investor of common share may like to invest in MTB because of higher return

compare to Prime Bank.

Pag

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Bibliography

About us . (n.d.). Retrieved December 15, 2012, from Mutual Trust Bank Ltd.:

http://www.mutualtrustbank.com/about_profile.php

(2009-2011). Annual Report. Dhaka: Mutual Trust Bnak Ltd.

(2009-2011). Annula Report. Dhaka: Prime Bank Ltd.

Hudgins, S. C., & Rose, P. S. (2008). Bank Management & Financial Services (8th Edition ed.).

New York: McGrawHill.

Treasury bill/bond auctions. (n.d.). Retrieved December 16, 2012, from Bangladesh Bank:

http://www.bangladesh-bank.org/monetaryactivity/treasury.php

Uddin, A. Z. (2012, May 20). BB CAMELS rating. Retrieved December 2012, 23, from

Newagebd: http://www.newagebd.com/detail.php?date=2012-05-20&nid=10830