CHAPTER 7

RATIO ANALYSIS

7.1National bank last five year Balance Sheet

National Bank of Pakistan Balance Sheet 2007-2011 Rupees in MillionASSETS 2007 2008 2009 2010 2011Cash & balance treasury banks

59,421 94,447 71,197 78,625 94,873balance other banks 24,154 49,785 31,019 40,642 37,473Lending to financial institutions

29,938 10,511 16,283 23,013 21,465Investments 166,196 144,736 156,986 139,947 210,788Advances 161,266 221,444 268,839 316,110 340,677Operating fixed assets 8,939 9,203 9,454 9,682 25,923Deferred tax assets 1,276Other assets 19,059 18,340 23,941 27,114 30,995TOTAL ASSETS 468,973 549,742 577,719 635,133 762,194

LIABILITIESBills payable 5,497 7,215 1,741 10,606 7,062Borrowings from financial institutions

16,570 11,085 8,757 11,704 10,886Deposits & other accounts 395,492 465,572 463,427 501,872 591,907Liabilities against assets 41 17 17 13 33Deferred tax liabilities 596 4,463 2,387 30,869Other liabilities 23,193 22,917 24,974 26,596 5,098

TOTAL LIABILITIES441,389 506,806 503,379 553,178 645,855

NET ASSETS

27,584 42,936 74,340 81,955 116,339

SHARE CAPITAL 4,103 4,924 5,909 7,091 8,155RESERVES 8,133 11,120 13,536 13,879 15,772UNAPPROPRIATED PROFIT

5,898 9,214 16,713 32,075 45,344TOTAL 18,134 25,258 36,158 53,045 69,271SURPLUS ON ASSETS

9,450 17,678 38,182 28,910 47,063

TOTAL EQUITY

27,584 42,936 74,340 81,955 116,339

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7.2 National bank last five year Income Statement National Bank of Pakistan Income Statement 2007-2011 Rs in Million

2007 2008 2009 2010 2011Mark up revenue 19,452 20,947 33,634 43,789 50,569Mark up exp (6,736) (6,559) (6,559) (13,635) (16,940)Gross profit margin 12,716 14,388 23,312 30,154 33,629provisions (2,619) (1,748) (2,224) (2,378) (4,722)Net mark up income 10,097 12,640 21,088 27,782 28,907Non mark up income

Fee & commission 3,261 5,099 4,926 6,145 6,782Dividend income 1,127 1,274 1,718 2,892 3,263Exchange income 711 1,009 1,206 1,334 1,042Gain on sale of securities - - - 1,169 2,310Other income 2,150 922 1,547 628 147Total non mark up 7,249 8,340 9,424 12,163 13,544Total income 17,346 20,944 30,512 39,945 42,451Non mark up expenses

Administrative exp (8,281) (8,879) (11,195) (13,443) (14,206)Other provisions (33) (32) (198) 17 (168)Other charges (23) (8) (63) (208) (17)Non mark up expenses (8,337) (8,919) (11,456) (13,634) (14,391)Profit before tax 9,009 12,025 19,056 26,311 28,060taxation (4,811) (5,782) (6,347) (9,289) (9,026)Profit after tax 4,198 6,243 12,709 17,022 19,034

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7.2Ratio Analysis of last five year from 2007-2011

(7.3.1) Pre-tax profit (Rs. In billion)

Ratios 2007 2008 2009 2010 2011Pre-tax profit 9.1 12.0 19.1 26.3 31.25After tax profit 4.2 6.2 12.7 17.02 19.12

From the year 2007 to 2011, NBP’s pre-tax profit increase from 9.1 to 31.256 billion due to

significant growth in core business activities. In the-07 PTP was 9.1 billion but due to

strategic business policies, organizational initiatives & consistent & effective policies of the

Govt. NBP, PTP increase 9.1 & 12.0 in the year- 2007 & 2008 due to higher interest rate,

revenues & enhanced fee income. Further in the year 2009 & 2010 PTP further jumped to

19.1 & 26.3 billion posted NBP highest over profit in Pakistan’s financial sector history due

to rising interest rate & healthy growth in lending to the private sector i.e. agricultural &

service in the form of advance salary, SME &agricultural loans.

(7.3.2) Pre / after –tax return on equity: (In %)

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Ratios 2007 2008 2009 2010 2011Pre tax return on equity 55.6 55.7 62.4 61.9 36.0Return on equity after tax 23.02 24.8 35.0 40.0 22.0

This ratio is a measure of NBP’ and ability to produce earning & therefore is an excellent

indicator both of viability & capability of NBP management. A High returns on equity reflect

that NBP acceptance of strong investment opportunities & effective expense management. In

the year-07 pre-tax return on equity was 55.6. In the year-04 further increase to 55.7 owing to

the reason of increase in revenue & profit retained by the bank. 40% increase in the year-07

when pre-tax return on equity at 55.6 places NBP in the top tier of Pakistan’s listed

corporation & financial institution. In the year-08, NBP sustained this equity i.e. 55.7, but in

the year-09 jumped to 62.4 i.e. very impressive by any yardstick.

(7.3.3) Return on assets (Pre / after – tax profit) (In %)

Ratios 2007 2008 2009 2010 2011Pre tax return on assets 2.0 2.4 3.4 4.3 4.55Return on assets after tax 0.89 1.12 2.19 3.4 2.8

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This ratio is used in calculating whether management has earned a reasonable return with the

assets under its control. Pre-tax return on assets in the year-07 was 2.0%.In the year-08

improved to 2.4%, due to increases in assets. In the year-08 Pre-tax return on assets further

improve to 2.4% from 2% of the last year. A 50% increases in Pre-tax return on assets was

made when this ratio reached to 3.4% in the year-09 due to highest increase in total assets

i.e.577,719 millions in the year-09.

(7.3.5) Earning Per Share (In Rs.)

Ratios 2007 2008 2009 2010 2011Earning per ratio 10.3 12.68 21.51 24.1 27.25

The performance and prospect of NBP is affected by the earning per share. In the year-07,

NBP offer 10% share to general public, which reflect position market sentiment about NBP’s

earning per share i.e.10.3. For the year-08 EPS almost increase i.e. 12.68 due to increase in

net income. In the year-09 further jumped to 21.51, while in the year-10 jumped by over 24.1

i.e. 27.25 one of the highest in banking sector due to higher net income.

(7.3.6) Net Profit Margin (In %)

Ratios 2007 2008 2009 2010 2011Net profit margin 21.0 27.5 38.8 43.0 45.0

This ratio measure profitability with respect to income generated. Net Profit margin for the

year-07 was 21.0, but due to higher income this ratio improved to27.5 in the year-08, but

after due to control on expenses & launching of new product further improved Net Profit

Margin to 27.5 & 38.8 in the year-2008 & 2009. And in the year-2011 due to effectiveness of

NBP’s marketing & sale efforts Net Profit Margin jumped to 45.0

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7.3.7 Liquidity Ratios:

Liquidity Ratios are used to judge a firm’s ability to meet short term obligations. It shows the

each solvency of a firm and its ability to remain solvent in the event or adversities.

7.3.7.1 Current Ratio:

Current ratios measure the number of times a company’s current assets cover its current

liabilities. The higher the ratio, the greater is the company’s ability to meet its short term

obligations as they come due. Current ratio is calculated by dividing current assets by current

liabilities. The ratio of the bank looks very attractive and stable as shown in the following

table and graph. In the year 2007, it was 1.06 and goes up to 1.16 in the year 2011, without

any fall in any of the year.

Current Ratio =Current assets/ current liabilities

Ratios 2007 2008 2009 2010 2011Current ratio 1.06 1.08 1.15 1.14 1.16

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7.3.8 Leverage Ratios:

Financial leverage is the extent to which a company is financed with debt. The amount of

debt a company use has both positive and negative effects. The more the debt, the more the

company will have trouble in meeting in its obligations. Thus the more debt, the higher is the

profitability of financial distress and bankruptcy. On the other hand debt is the major source

of financing and banking industry typically uses the higher percentage of debt. Debt

financing provides significant tax advantage and its transaction cost are low than that of

equality.

7.3.8.1 Debit Ratio:

Debt ratio shows the fraction of the company’s assets that is financed by debts. Creditor of a

company would generally like this ratio to be low. The ratio is derived by dividing a firm’s

total debt to its total assets. The ratio was improving in each year, it was 0.94 in the FY-07,

but continuously improved from year to year. And even in FY-11, it was accounted for as

0.85.

Debt Ratio = Total Debts / Total Assets (Rs in Million)

Ratios 2007 2008 2009 2010 2011Debt ratio 0.94 0.92 0.87 0.87 0.85

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7.3.8.2 Debt to Equity Ratio:

This ratio indicates the extent to which debt financing is used relative to equity financing.

This ratio also shows a tremendous improvement from year to year. The reliance of the bank

on equity is increasing. The increasing in the equity is because of constant increase in the

profitability.

Debt to Equity Ratio= Total Debts/ Share holders Equity (Rs in Millions) Ratios 2007 2008 2009 2010 2011Debt to equity ratio 16.0 11.80 6.77 6.74 5.55

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4.3.12 Activity Ratio:4.12.1 Total Assets Turnover (TAT) Ratio:

This ratio measures relative efficiency of total assets to generate sales.

TAT=Net Sales/ Total Assets (Rs in Million)

Ratios 2007 2008 2009 2010 2011TAT 0.04 0.04 0.06 0.07 0.07

In the year 2009, the ratio was 0.06 but falls in the next year and then this ratio remained

same for two years that is in year 2010 and in year 2011 because both total assets and net

sales are increasing in a same manner in these two years but in 2009 total assets increased in

same ratio but net sales have increased rapidly. This increase was also found in the year 2010

and again remained constant.

7.3.13 Profitability Ratio:

7.3.13.1 Net Profit Margin:

It measure the profit that is available from each rupee of sales after all expenses have been

paid including cost of sales, selling, general, and administrative expenses, depreciation,

interest, and taxes. The ratio is calculated as follows:

Net profit margin= Net profit after taxes / net sales *100 (Rs in Million)Ratios 2007 2008 2009 2010 2011Net profit margin 21.58 29.80 37.79 38.87 37.64

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Net profit margin of NBP has improved over time and its showing an increasing trend. The

cost of goods sold decreased in year 2007 but again increased in year 2008. The

administrative expense is increasing but other charges have decreased first in year 2009 and

then increased vastly in year 2010. One other explanation might be that the tax rate on

income has increased. In the year 2011, there is a slight decrease and accounted for as

37.64%.

7.3.14 Return On investment (ROI):

Return on investment (ROI) or return on assets, measure profitability per rupee of investment

in assets. The ratio is calculated as under:

ROI= Net profit after taxes / Total assets * 100

(Rs in Million)Ratios 2007 2008 2009 2010 2011ROI 0.89 1.14 2.20 2.68 2.50

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The ROI figures of NBP shows a consistent increase over the last six years .The reason for

this increase is due to increase in the net profit of the bank. Although total assets are also

increasing but the increasing in the net profits are more than the total assets.

7.3.15 Gross Profit Margin

Gross profit is the difference between revenues and cost of goods or services sold. Gross

profit is critical because it represents the amount of money remaining to pay operating

expenses financing costs, and taxes, and pay for profit.

Gross Profit Margin is the amount of each sale rupee left over after paying the cost of goods

or services sold. It is calculated as follows:

Gross profit margin=Gross profit /Net sales (Rs in Million)Ratios 2007 2008 2009 2010 2011Gross profit margin 65.37 68.69 69.31 68.86 66.50

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It showed increasing trend from the year 2007 to 2009. In 2007 to 2009 the gross profit

increased but mark up expenses decreased but in 2007 to 2008 gross profit increased and

mark up expenses decreased. Consequently, there is a slight decrease of gross profit ratio in

the year 2010 and 2011.

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7.3Horizontal or Index analysis

Horizontal analysis or index analysis is used to determine the trend in financial statements by

setting the base year and the other year trend which show the changes in the year to year how

company financial statement item change over the period. The item trend is individual

performance can be measured and comparison is made with base year.

7.3.1 Index Analysis of Balance Sheet: Rupees in MillionsAssets 2007 2008 2009 2010 2011Cash& Balances 100.00% 158.95% 119.82% 132.32% 100.45%Balances with other Banks

100.00% 206.11% 128.42% 168.26% 75.27%

Lending’s of financial 100.00% 35.11% 54.39% 76.87% 204.21%Investments 100.00% 87.09% 94.46% 84.21% 145.64%Advances 100.00% 137.32% 166.71% 196.02% 153.84Operating fixed assets 100.00% 102.95% 105.76% 108.31% 281.68%Deferred tax assets 0.00% 0.00% 0.00 0.00 0.00Other assets 100.00% 96.23% 125.62% 142.26% 169.00%Total Assets 100.00% 117.22% 123.19% 135.43% 138.65%

Liabilities Bills payable 100.00% 131.25% 31.67% 192.94% 97.88%Borrowing 100.00% 66.90% 52.85% 70.63% 98.20%Deposits 100.00% 117.72% 117.18% 126.90% 127.14%Deferred tax liabilities 100.00% 0.00% 748.83% 400.50% 0.00%Other liabilities 100.00% 98.81% 107.68% 114.67% 22.25%Finance lease 100.00% 41.46% 41.46% 31.71% 194.12%Total liabilities 100.00% 114.82% 114.04% 125.33% 127.44%

Net assets 100.00% 155.66% 269.50% 297.11% 270.96%Share capital 100.00% 120.01% 144.02% 172.82% 165.62%Reserve 100.00% 136.73% 166.43% 170.65% 141.83%Unappropriated profit 100.00% 156.22% 283.37% 0.00% 0.00%Total 100.00% 139.29% 199.39% 292.52% 274.25%Surplus 100.00% 187.07% 404.04% 305.93% 266.25%Total Equity 100.00% 155.66% 269.50% 297.11% 270.96%

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7.4 Comments on Horizontal / indexed analysis of Balance Sheet

In the above balance sheet the base year is 2007, the percentage of cash & balances with

other banks/institution increased due to increased in total deposits. Investment and advances

also sharply increased from FY-07 to FY-09 due to growth in stock market & loan portfolio

across all sector. Also NBP is the greatest investor/shareholder of NIT, enabling the bank to

increase its market penetrations.

Other assets and operating fixed assets also relative increase due to strong growth in banking

sector. On the liability side of a balance sheet bill payable of the bank declined, however

other liabilities i.e. borrowing, deposits after increased in FY-O7&09. Thus increased in

assets and decrease in liabilities greatly increased the net assets of the bank from FY-07to

FY-11 as shown. The bank share capital, reserve & un-appropriated profit also increased

from FY-07 to FY-09 due to strong growth on core banking policies & improved

management of assets & liabilities.

7.5 Verticals/Common Size Analysis

An analysis of percentage financial statements where all balance sheet items are divided by total

assets and all income statements item are divided by net sales or revenues is called common size

analysis. Common sizes analysis can give analyst valuable insight into changes that have

occurred in a firm’s financial condition and performance. As common sizes analysis gives us

relative percentage of an item with respect to total, so the growth or decline in various items of

balance sheet and income statement can not be detected from common sizes percentages.

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7.5.1 Common sizes analysis of Balance Sheet of last five year

Assets 2007 2008 2009 2010 2011Cash & Balances 12.83% 12.67% 17.18% 12.32% 12.38%Balances with other Banks

8.29% 5.15% 9.06% 5.37% 6.40

Lending’s 5.02% 6.38% 1.91% 2.28% 3.62%Investments 33.16% 35.44% 26.33% 27.17% 22.03%Advances 32.47% 34.39% 40.28% 46.53% 49.77%Operating fixed 1.87% 1.91% 1.67% 1.64% 1.52%Deferred tax assets 0.00% 0.00% 0.23% 0.00% 0.00%Other assets 6.35% 4.06% 3.34% 4.14% 4.27%

100.00% 100.00% 100.00% 100.00% 100.00%

LiabilitiesBills payable 0.82% 1.25% 1.42% 0.35% 1.92%Borrowing 2.45% 3.75% 2.19% 1.74% 2.12%Deposits 88.75% 89.60% 91.86% 92.06% 90.73%Liability 0.02% 0.01% 0.00% 0.00% 0.00%Deferred 0.70% 0.14% 0.00% 0.89% 0.43%Other Liabilities 7.26% 5.25% 4.52% 4.96% 4.81%

100.00% 100.00% 100.00% 100.00% 100.00%

Represented by Share capital 15.58% 14.87% 11.47% 7.95% 8.65%Reserves 29.85% 29.48% 25.90% 18.21% 16.93%Un appropriated 14.23% 21.38% 21.46% 22.48% 39.14%Total 59.65% 65.74% 58.83% 48.64% 64.72%Surplus 40.35% 34.26% 41.17% 51.36% 35.28%

100.00% 100.00% 100.00% 100.00% 100.00%

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7.5.2 Comments of Common Size Analysis of Balance Sheet:

The common size analysis of NBP’s balance sheet shows that on the assets side Advances are

showing increasing trend. It shows that the efficiency of NBP is increasing. Its products and

different schemes of advances are favored by people and they are taking interest in having loans

from NBP. On the other way investment side is showing decreasing trend. As advances are

increasing with a very good growth so now there is no need for NBP to invest money in many

different businesses. Advances are usually main source of income for banks and rate of interest is

also high.

On the liability side, the common size analysis of total liabilities is showing decreasing trend

which is mainly due to bills payable, borrowings, and liabilities against assets. Bills payable have

decreased too much in just one year and borrowings from financial institutions have also

decreased and all this show that in future the liabilities side will be continuously decreasing on

the owners equity side the share capital and reserves are increasing which may be the cause in

increasing change in inappropriate profit.

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