Table of Contents

1.0 INTRODUCTION ....................................................................................................................................... 1 2.0 QUANTITATIVE ANALYSIS ........................................................................................................................ 3 2.1 FINANCIAL STATEMENT ANALYSIS ...................................................................................................... 3 2.2 DUPONT ANALYSIS APPROACH ........................................................................................................... 9 3.0 QUALITATIVE ANALYSIS ........................................................................................................................ 13 4.0 DISCUSSIONS AND FINDINGS ................................................................................................................ 15 5.0 CONCLUSION ......................................................................................................................................... 16 ANNEXURE .................................................................................................................................................. 17

1.0 INTRODUCTION
A financial system is a set of interconnected markets, intermediaries and facilitators engaged in channelizing funds from the surplus to the deficit group of people. A financial system offers services in three particular manners; allocating resources in places and ways where both spenders and the borrowers involved in the transaction are benefited, sharing risks and facilitating all types of trades. In the global village with limited resources countries have grown interdependent on each other and the effects of the productive or nonproductive performance shown by any villager impacts all with a variable potential. That explains why the Subprime mortgage crises that occurred in US enveloped the entire global economies. Banks are the vital component of the financial system that practice borrowing and lending on routine basis which carries high financial risk, where on one hand they carry the responsibility of delivering the funds to the needy people they would be held responsible in the eyes of investors thus commercial banks have almost universally embarked upon an upgrading of their financial risk management and control systems to secure the investors along with satisfying the borrowers. Considering the critical importance of the banking sector in national and global economies banks which are often referred to as nations economic engine, take the services of credit analysts who are responsible for gathering and analyzing financial data about clients, including paying habits, earnings and savings information, and purchase activities and review the worthiness of either individuals or businesses. The credit analysts job carries a lot of responsibility thus his day is filled with doing research about individuals who are applying for credit to avoid any sort of asymmetric information that may turn into a moral hazard later on, keeping in mind the goal to find a solution that will sufficiently protect the lender, yet provide the borrower with the capital that is needed. This hectic job requires familiarity with different quantitative as well as qualitative models that guide the officer to the right decision. Where quantitative models reflect numerical realities it is not enough to base the final verdict because a person with a strong credit worthiness and a sound bank Balance may not be willing to use the money for the stated purpose and may even become bankrupt, hell not just end destroying himself but would also damage others engaged in the transaction. So based on the facts the quality of the credit offered by the credit manager is based on both types of skills; quantitative as well as qualitative and judgmental
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skills to overcome the decisiveness of people and rid of the asymmetry in the transaction and result in the benefit for not just the lender and the borrower but also to the economy which will be benefited from it along sided. Quantitative techniques widely used in the banking industry incorporate Financial Statement Analysis, Horizontal and Vertical Analysis, Ratio Analysis and DuPont Analysis etc. whereas qualitative techniques involve CAMEL approach, 5Cs Model for assessment of the financial institutions to ensure the investors of the safety of their investments and minimizing financial risks. These techniques are often used in a combination to ensure that there is least chance of error in the assessment which directly or indirectly has its impact on the economy as better off institutions are able to attract investors because they promise healthy returns and other would do the exact opposite. Based on the significance of the services Banks perform they are often referred to as a nation's economic engine and thus are highly regulated. Under the Banking Companies Ordinance, 1962 the State Bank of Pakistan is fully authorized to regulate and supervise banks and development finance institutions. During the year 1997 some major amendments were made in the banking laws, which gave autonomy to the State Bank in the area of banking supervision. Under Section 40(A) of the said Ordinance it is the responsibility of State Bank to systematically monitor the performance of every banking company to ensure its compliance with the statutory criteria, and banking rules & regulations. In every case in which the management of a bank is failing to discharge its responsibility in accordance with the applicable statutory criteria or banking rules & regulations or is failing to protect the interests of the depositors or for advancing loans and finance without due regard for the best interests of the bank or for reasons other than merit, the State Bank is empowered to take necessary remedial steps. As credit analysts we have conducted a Qualitative as well as Quantitative analysis of Allied Bank, Summit Bank, and Soneri Bank, all part of the private banking sector of Pakistan. We have analyzed these banks individually as well as conducted mutual comparisons between the three banks, with the help of DuPont Analysis, to determine the financial positions of each and conclude which one is the best to invest in. Our efforts in this analysis have also helped

determine the problem areas in each bank, if it is faced with any. This will help the State Bank of Pakistan to take remedial actions accordingly. Since all the chosen banks are from the private sector, this report on the analysis of their financial position, profitability, and risk, has become all the more important. Financial risk is the key challenge of the banking system in Pakistan these days. The overall fragile economic situation and weaknesses in the operating environment has aggravated the credit risk since end 2008. Due to subdued economic activity, banks have become cautious in their lending business. This is visible in the shift in their advances mix from consumer and SME to the top-rated corporations and the public sector. Today, almost 80 percent of the banking assets are held by the private sector banks. This shows the significance and pivotal role of ensuring regulation of private banking sector, in the prosperity of the entire financial system growth of the countrys economy.

2.0 QUANTITATIVE ANALYSIS

The term Quantitative analysis as indicated by its name is based on numerical data and various mathematical tools and techniques that are used in order to replicate reality and predict the future in numbers. In financial world Quantitative analysis is done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument and then based on inferences drawn out of it Credit analysts suggest the condition of an institutions and the level of risk that it bears. We will be taking as much help from different quantitative techniques to check the level of financial risk the banks under observation have up their sleeves.

2.1 FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis one of the quantitative tools that gives a review of the condition of the bank. The balance sheet and the income statements of banks reflect the financial standpoint of the banks and is done by analyzing the major components of the balance sheet such as Assets and Liabilities which give a general description of the sources and utilization of cash by the bank and the analysis of the past 5 years data gives a broader picture to the investors with the financial risk associated with the financial operations of banks.

2.1.1 BALANCE SHEET ANALYSIS One way to look at the balance sheet is that it gives us the accurate information about the degree of financial risk that a bank carries. It gives us access to content that can be analyzed to demonstrate how much Liquidity, adaptability and durability the firms assets and liabilities pertain to their selves. The total assets of each of the banks reflect an increasing pattern in almost a linear manner which is due to the addition of profits as well as a direct result of the rapid increase in the Deposits. However a rise in the deposits might be due to the broad range of products and services offered by the bank or it may be due to banks offering of higher interest returns on the deposited money. Whatever might be the case but raise in the deposits mean that banks major source of cash is the debt than equity which turns it into the state where it bears the highest degrees of financial risks. Banks unique capital structure however favors a higher leverage however it is not plausible to be capitalized perfectly also thus managing the operations thus carries vital significance and has a direct impact on the bank actuality. Credit Analysts thus need to devise policies focusing on an optimal fit in assets that ensures liquidity as well as profitability; where the bank can ensure higher returns on the investments carried out by investors along with sustaining the risks associated with the lending practices. To evaluate liquidity, cash-to-total assets ratio has been calculated. Allied Bank shows a decreasing trend from 2007 till 2009 followed by a gradual increase in the next two years. Soneri Bank shows a somewhat similar trend, however, its figures are relatively low which means its
Y e i l d

Cash to Assets Ratio

10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2007 2008 2009 2010 2011 Years
Figure 1: Cash to Assets Ratio

liquidity is slightly less than that of Allied Bank. Summit Bank, on the other hand, has showed an increasing trend in the figures of its cash-to-total asset ratio, except for in year 2009 where it fell to 5.07 from 5.44 in 2008. Although, the figures are way lower

Allied Summit Soneri

than those of the other two banks. Summit Bank, thus, has the highest liquidity risk because it has relatively less cash for meeting day to day expenses or tackling with any uncertain events that it may be faced with. Whereas, Allied Bank has the lowest liquidity risk and, therefore, can easily fulfill its day to day obligations with the cash available as well as be prepared for any uncertain events in the future. Bank is a bank because of its lending operations and Banks practices are based on lending to people and investing in a portfolio of assets. Thus it needs to be managed to ensure that creates the fit between assets which are majorly dependent on the Loans

Loans to Deposits Ratio

100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2007 2008 2009 2010 2011 Years
Figure 2: Loans to Deposits Ratio

advanced to people that carry the highest amount of risk and investments in securities that are less intense in riskiness as compared to the Advances but offer returns that are less in figures although. The credit asset ratio reflects the portion of assets invested in advances which on average basis carry a weightage of 54 % for Allied Bank which reflects its vulnerability to any
Y e i l d

Allied Summit Soneri

uncertain event that if will occur in the future in comparison to the deposits ratio which averages to a total of 80% on average basis which is the major source of funds for the bank but also this means that the debt to equity ratio is also severely high thus the bank would have a sufficiently a higher equity multiplier effect. On the other hand the Loans to Deposits ratio averages 67% which shows the matching of assets and liabilities of the bank where a fit is created between the two while efficiently utilizing the assets and sustaining minimum idle assets that might become a burden on the bank. Whereas on the other hand the other two banks Soneri and Summit keep a relatively lower deposits ratio that averages to 76% and 74 % of the total capital formation thus sustaining a lower financial risk than Allied Bank thus relying a lower debt rate while the efficiency of the banks can be highlighted that even though they have a relatively lower financial leverage their asset portfolio structure resembles closely to the industry leader ABL which for

Soneri Bank is 52% Credit Asset Ratio and 68% loans to deposit ratio and for Summit Bank is 52% Credit Asset ratio and 74% loans to deposit ratio. 2.1.2 PROFIT AND LOSS STATEMENT ANALYSIS Bank like any other profit organization seeks to earn profits and since its core function is lending to others this makes the interest or mark up the bread and butter for the investors and stake holders. Figures from the profit and loss account statement reflects how efficient the bank is in utilizing its available resources where financial risk being the major threat to it is to be efficiently accounted for the routine operations. Banks basic business practice is borrowing from people with surplus of funds and then lend to those who are needy and deserving. But everything comes for a price banks borrowing the funds need to compensate the investors and those who take the help of the bank they are required to give a certain amount of premium to the bank that is how the business cycle continues to rotate. However banks have become wiser and they understand that putting all the eggs in one basket only makes them face more threats thus now they dont only focus on their lending practices they have started to create diverse portfolios from which they generate revenues in terms of nonmarkup income, thus creating a fit that averts the riskiness nature of banking business and ensuring reasonable profits. Thus the trend shown by the Efficiency Ratio indicates their source of profits.

Efficiency Ratio
Now jumping towards the banks under observation the graph indicates that Allied Bank has created an optimal fit between both sources of income
R a t e 3.5000 3.0000 2.5000 2.0000 1.5000 1.0000 0.5000 0.0000 -0.5000 -1.0000 2007 2008 2009 2010 2011 Years
Figure 3: Efficiency Ratio

however the decline in the Efficiency ratio (after 2008) indicates that Allied Bank is showing more focus towards the interest income and the non-interest income is facing a decline thus ABL is showing more dependency on interest

Allied Soneri Summit

income and is less focused towards the diversity of its investments. Whereas the other player Soneri Bank shifted more focus towards the non interest based sources of revenues (2008 2009) which might be a combat against the crisis yet it is not a suitable fit for a banking institution because it clearly indicates that the Bank is diverting from its basic nature of operations and in case of any sort of adverse event in the financial system it will have less cushion for survival along sided the banks profits are expected to remain low because of the resource allocation strategy of the bank. The last bank under observation is the Summit Bank which has experienced a rapid decline in the efficiency ratio which was initially very high (2007) but since the bank has been in the market for less than a decade its natural to have more dependency on services based income but its increased dependency led the bank to experience negative returns from the impact of the 2008 2009 crisis and the bank fell into chaos and was not able to cover the cost of the borrowed money. Later after a two year period (2011) the bank still continues to operate under the previous policy as the ratio peaked indicating almost every single penny of income came from a non interest source and thus again the bank is now volatile to severe financial risk. The banks choice of the fit between interest income and non-interest income sources exposes it various degrees of financial risks that in turn causes the investors and lenders to demand higher returns for the higher level of risk born by them. In case of the industry giant Allied Bank, the constant avoidance of a diversified investment has led it to the degree of a higher financial risk thus the Cost of Funds that it had to bear also grew with the passage of time despite the fact that the average percentage of borrowing and deposits remained almost unchanged (average 80.44%) in the entire period under observation which peaked in the year 2009 and 2011 with 6% but due
0.12 0.10 R 0.08 a 0.06 t e 0.04 0.02 0.00 2007 2008 2009 2010 2011 Years
Figure 4: Cost of Funds

Cost of Funds

Soneri Summit Allied

to the banks strong reputation in the market the level of the cost of funds remained under limits and the bank continuously showed a rise in the return to the investors while covering the costs. Soneri Bank on the other hand also experienced an increase in the cost of funds due to change in the market conditions as the crisis hit the financial system and the constant devaluation of the Pakistani currency resulted in a higher cost of funds compared to Allied Bank which peaked at to 8% of deposits (2009) where the banks risk averse nature and dependency on fees and commissions helped the bank to avoid showing negative outcomes but the impact was severe and the banks return on equity started to decline from 15.4% in 2008 to 4.36% in the year 2010. Whereas Summit Banks strong dependency on the commissions and secondary sources of revenues turned the bank in losses and the cost of funds increment was the highest for Summit that peaked with a 10% (2009) turning the already low revenues below the expenses and ultimately Losses spurred out of the banks annual reports later the cost of funds declined yet remained higher than the other two banks under observation creating more obstacles for Summit Bank in its recovery phase. The cost of funds account for the interest expenses demanded by lenders outside of the bank however like other institutions banks also have to bear some operating costs however efficient banks are able to control the operating costs or in simple words they are able to reduce the effect of operating expenses by increasing the level of operations that they conduct thus dividing the effect on a greater number thus deployment of assets contribute to the
Figure 5: Operating Efficiency

Operating Efficiency
0.05 0.05 0.04 0.04 0.03 0.03 0.02 0.02 0.01 0.01 0.00 2007 2008 2009 2010 2011 Years

R a t e

Allied Soneri Summit

Operating Efficiency of Banks.

In the case of Allied Bank despite having the largest number of branches and the largest national network the bank has been able to efficiently control its operating expenses and distribute it over the number assets due to large investments and advancements thus the banks operating efficiency ratio indicates that the risk of such expenses is very much low on the Allied Bank.

Soneri Bank on the other hand has been able to retain its capital structure in the same manner as always thus it has been capable of maintaining its operating expenses through 2007 2010 and the operating expenses increased to a higher level in 2011 yet keeping it below the industry giant ABL but again the difference is also caused due to the difference in the scale of operations and the difference of banks presence across the entire country. Summit banks operating efficiency has been triggered since the bank was despite the fact that the total assets of the bank that constantly increased over the years its administrative expenses have rapidly increased in a higher proportion thus exposing the bank to more financial risk (2008 2010) however the bank controlled the rising differences and is thus experiencing a lower operating efficiency ratio thus increasing the efficiency of the bank on overall basis.

2.2 DUPONT ANALYSIS APPROACH

To narrow down our analysis from general perspectives to individual balance sheet and income statement items we move towards DuPont Analysis approach. DuPont analysis also known as the DuPont model it uses profitability ratios. We do single year and dual year analysis by using DuPont model. It breaks return on equity into three parts. All three of them are profitability ratios which are return on assets, profit margin and asset utilization. Return on equity It reflects the amount of net income returned as a percentage of shareholders equity. It measures a firms profitability by revealing how much profit a firm generates per unit of rupees invested by the owner. Out of the three banks chosen, Allied Bank shows a very high return on equity as compared to Soneri Bank, which are 96.9% and 13.1% respectively. Both the banks have shown an increase in 2011 as compared to 2010, showing a promising attitude towards increasing the efficiency at generating profits from every rupee of net
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Y e i l d 150.00% 100.00% 50.00% 0.00% -50.00% -100.00% -150.00% -200.00% -250.00% -300.00% Years
Figure 6: Return on Equity

Return on Equity

2007 2008 2009 2010 2011

Allied Summit Soneri

assets, and efficient utlization of the money invested by the owners. Summit Bank, however, shows a negative return on equity (i.e. -92.2%) which makes it obvious that the bank is going in loss and has a negative net income. Return on asset The multiplication as well as division of the return on equity formula decomposes it into two

Return on Assets
8.00% 6.00% 4.00% Y 2.00% i e 0.00% l -2.00% d -4.00% -6.00% -8.00% Years
Figure 7: Return on Assets

components. One of them is return on assets which is the ratio of net incometo- average total assets. The trend in return on asset of the three banks is the same as that in ROE; Allied Bank has the highest return on asset of 4.0% followed by Soneri Bank with that of 1.1%. However, for Summit Bank, the

Allied 2007 2008 2009 2010 2011 Summit Soneri

return on asset is also negative (i.e. -2.2%) due to same reason of negative net income. These findings reflect the prudent spending, and efforts to generate increased sales by using the existing assets, on part of Allied Bank as well as Soneri Bank to some extent. However, Summit Bank seems to lack both. It may have increased expenses due to purchase of fixed or other assets, and does not utilize its assets and other resources efficiently. Equity multiplier It is a measure of financial leverage of a bank which is determined when average total assets are divided by total shareholders
Figure 8: Equity Multiplier

Equity Multiplier
70.000 60.000 50.000 R a 40.000 t 30.000 e 20.000 10.000 0.000 2007 2008 2009 2010 2011 Years

Allied Soneri Summit

equity. It measures the extent to which a firm relies on debt financing in its capital structure. A high equity multiplier pushes up the return on equity if the return on asset is positive, which is the case of Allied Bank as well as
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Soneri Bank. Since the financial leverage of Soneri Bank is lower than that of Allied Bank, its return on equity is also lower and was boosted up only a little. All the debt finance has been put to use very wisely such that it has helped boost up profits instead of costs. However, the debt sword cuts both ways. Summit Bank has the highest financial leverage of all but, the imprudent use of all the debt has only increased its expenses. Thus, the negative return on assets and equity have resulted. Asset utilization This ratio is calculated by taking revenues of a bank as a percentage of its average total assets. It helps identify whether a firm is wasting its assets or putting them to good use. The asset utilization figure of Allied Bank is also slightly greater than that of Soneri Bank (0.053 and 0.033 respectively) depicting that its performance is better. The figures have been gradually growing over the period of five years (2007-2011) for
Figure 9: Asset Utilization

Asset Utilization
0.080 0.060 0.040 R a t e 0.020 0.000 -0.020 -0.040 -0.060 Years 2007 2008 2009 2010 2011 Allied Summit Soneri

Allied Bank but, have had ups and downs in case of Soneri Bank, with most efficient utilization of assets in the year 2011 (where the value is the highest). Summit Bank, however, has no asset uilization. Asset yield It is basically the interest earning-to-asset ratio. Since interest

Assets Yield
0.060 0.050 R 0.040 a 0.030 t e 0.020 0.010 0.000 2007 2008 2009 2010 2011 Years
Figure 10: Asset Yield

income is one of the major means of income for banks, a high interest incometo-asset ratio should be maintained. Allied Bank has the highest yield on asset of 0.045, followed by Soneri Bank with an asset yield of 0.031 and Summit Bank with that of 0.019.

Allied Summit Soneri

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Non interest income rate Non interest income also makes up a significant portion of most banks. It is primarily derived from fees such as deposit and transaction fees, annual fees, and monthly account service charges etc. These charges/income may sometimes reflect the marketing stance of a bank. The figure for Allied Bank and Soneri Bank is the same (i.e. 0.014) and that for Summit Bank is slightly less (i.e. 0.010). We may say that Allied Bank,

Non Interest Income Rate

0.025 0.020 R 0.015 a t 0.010 e 0.005 0.000 2007 2008 2009 2010 2011 Years
Figure 11: Non Interest Income Rate

Allied Summit Soneri

inspite of being amongst the top 5 private banks of Pakistan, has kept its charges/non interest income somewhat low. Interest expense ratio The difference between interest income and and interest expenses of a bank is the spread that they typically opertae on. An increase in interest expense will, therefore, cut short the banks profits unless it is accompanied by an increase in the interest income. The interest expense ratio of 0.049 for Allied Bank is reasonably lower than that of Soneri Bank which is 0.068. Summit Bank, however, has a negative interest expenseto-average total assets ratio i.e. -0.080 which depicts that its interest expenses are so high due to higher financial leverage that its interest income is insufficient to cover them.

Interest Expense Rate

0.140 0.120 0.100 R a 0.080 t 0.060 e 0.040 0.020 0.000 2007 2008 2009 2010 2011 Yeasrs
Figure12: Interest Expense Rate

Allied Summit Soneri

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Non interest expense ratio This ratio, also known as the overhead expense ratio, is calculated by taking the non interest expense as a percentage of the average total assets. The non interest expenses of the bank may include administrative expenses, salaries, as well as other expenses incurred by the bank in its day to day activities. Allied Bank has a very slightly greater non interest expense figure than that of Soneri Bank (0.026 and 0.024 respectively). However, Summit Bank has a negative non interest expense rate showing
R a t e

Non Interest Expense Rate

0.080 0.070 0.060 0.050 0.040 0.030 0.020 0.010 0.000

Allied Summit Soneri

Years
Figure13: Non Interest Expense Rate

that its overhead expenses are way greater than the non interest income it earns.

3.0 QUALITATIVE ANALYSIS

Quantitative techniques are no doubt very important but thats not all if it was then we wouldnt be experiencing financial crisis over and over again thus other judgmental and qualitative techniques are necessary. For checking the financial and non- financial performance of the banks different rating techniques are used by credit rating agencies which are becoming an increasingly important element of measuring large commercial banks financial, business and credit risk. 3.0.1 CAMELS RATINGS A very important and popular tool for checking performance of the banks is CAMELS ratings. The scale of CAMELS rating is from 1 to 5 with 1 being highest and 5 being lowest of all the banks scores. The ratios that we have used to assess the banks financial risk would serve as the ratios to base the verdict on for the ranking purpose. The CAMELS stand for Capital Adequacy, Assets quality, Management Quality, Earnings, Liquidity, and Sensitivity to Market Risk which is as follows

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Capital adequacy - It tells how much a bank can maintain its capital to overcome all kinds of risks. Asset quality - It is a review or evaluation assessing the credit risk associated with a particular asset such as loans. Management quality - It is related to the efficiency of the top level management for measuring, monitoring and controlling risk. A banks rating would be high if its management is efficient. Earnings - It tells about the current as well as projected level of earnings of the banks. A bank should have a high level of earning. Liquidity - It indicates that how much a bank is capable of paying its short term obligations. Bank should keep a sufficient amount of liquid assets for fulfilling its short term requirements. Sensitivity to market risk - It reflects that how much a bank is vulnerable to get affected by the changes in market conditions such as inflation etc. Bank should be less sensitive to the market risk. The evaluation of which is assessed using a developed rating scale that ranks 5 composite posts each having its own set of distinguished meanings and inferences can be drawn out of these ratings to let the bank know where the issues stand in the their paths that they need to resolve and where are the specialized. The rating scale is as follows

Sr. # 1 2 3 4 5

Composite Ratings 1.00 1.49 1.50 2.49 2.50 3.49 3.50 4.49 4.50 5.00

Meanings Strong Satisfactory Fair Marginal Unsatisfactory

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4.0 DISCUSSIONS AND FINDINGS

For analyzing the performance of the banks given, we analyzed their financial statements and calculated ratios for comparisons. Ratios provide a concise and systematic way to organize the enormous quantity of data contained in financial statements into a framework that creates meaningful information. Financial managers use ratios to benchmark their firms performance against that of their competitors and set goals for future performance. Credit managers use ratios to identify and create a distinctive line between the best performing and underperforming banks, to help the rating. One aspect of measuring and comparing the performance of banks is through the analysis of their financial management which refers to the efficient acquisition and allocation of funds. By efficient acquisition of funds, we mean that the firm will acquire funds at the lowest possible cost and by efficient allocation of funds we mean that the firm will invest funds at the highest possible return. For banks, the difference between such interest income and interest expense is the spread that they operate upon. A credit analyst puts into use his knowledge of how ratios fit together and how one set of ratios will affect another. Return-on-equity (ROE) is the ratio most commonly used to analyze the profitability of a business. The DuPont Analytical Approach enables us to evaluate the source and magnitude of Banks return on equity relative to selected risks taken. It discusses the relation of Return on equity with the return on assets and equity multiplier of the bank. Of course, for a bank to report higher returns than its peers it must take on more risk, price assets and fund liabilities better, or realize other cost advantages compared to peer banks. Discussion of the DuPont model starts with aggregate profit measures in terms of Return on equity and Return on assets and then decomposes ROA into component ratios to determine why performance varies from competitors. Equity multiplier affects a Banks profits because it has a multiplier impact on ROA to determine a banks ROE. Equity multiplier is a risk measure because it reflects how many assets can go into default before a bank becomes insolvent. It is also a measure of financial leverage because it determines how much a bank relies on debt for financing its assets. It is better for banks to go for a lower level of leverage in a situation of recession because the leverage is a double edged sword and can increase the losses as much as it can increase the profits.

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5.0 CONCLUSION
Return on equity measures a firm's efficiency at generating profits from every dollar of net assets, and shows how well a company uses investment dollars to generate earnings growth. Increased debt has the potential to lower revenues as more money is spent servicing that debt. If it is spent to increase the operating efficiency, increased debt may increase return on assets. That depends on whether or not the debt burden is so costly that it cuts into net income. If revenues rise as a result of efficient use of debt financing in the operations, but net income falls due to increased expense, return on assets declines. The risk that is posed to the banks to meet their expenses at any cost is known as financial risk that needs to be thus efficiently managed and carefully invested in a diverse portfolio that reduces the risk associated with the loans alone, banks that carefully manage their deposits and borrowings thus generate higher profits as compared to those who fail to understand the asset-liability matching philosophy and their increased risks would only cause their cost of funds to grow resulting in the fall of the return of equity.

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ANNEXURE
Ratios Return on Equity (ROE) Return on Assets (ROA) Equity Multiplier (EM) Asset Utilization (AU) Expense Ratio (ER) Tax Ratio (TR) Yield on Assets (II/ATA) Non-Interest Income Rate (NII/ATA) Interest Expense Rate (IE/ATA) Non-Interest Expense Rate (NIE/ATA) Allied Bank
96.9% 4.0% 23.985 0.053 0.075 0.008 0.045 0.014 0.049 0.026

Soneri Bank
13.1% 1.1% 12.508 0.033 0.066 0.003 0.031 0.014 0.068 0.024

Summit Bank
-92.2% -2.2% 28.902 0.000 -0.100 0.011 0.019 0.010 -0.080 -0.020

AVERAGE ASSETS AND LIABILITIES COMPONENTS

0% 3%

Components of Assets
4% 7% 0% 4% Cash and balances with treasury banks Balances with other banks Lendings to financial institutions 28% Investments Loans and Advances

54% Operating fixed assets Deferred tax assets

Figure 14: Allied Bank Components of Assets

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Components of Laiabilities
0% 1% 3% 0% 1% 4% 8% Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets Deferred tax liabilities Other liabilities Equity 83%

Figure 95: Allied Bank Composition of Liabilities

Components of Assets
0% 3% 3% 7% 3% 3% Cash and balances with treasury banks Balances with other banks Lendings to financial institutions 29% 52% Investments Loans and Advances Operating fixed assets Deferred tax assets

Figure 106: Soneri Bank Composition of Assets

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Components of Liabilities
0% 0% 1% 2% 8% 2% 10% Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets Deferred tax liabilities Other liabilities 77% Equity

Figure 117: Soneri Bank Composition of Liabilities

Components of Assets
1% 3% 4% 5% 4% 5% Cash and balances with treasury banks Balances with other banks Lendings to financial institutions Investments Loans and Advances Operating fixed assets 51% Deferred tax assets Other assets

27%

Figure 18: Summit Bank Composition of Assets

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Components of Liabilities
0% 0% 2% 2% 9% 1% 10% Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets Deferred tax liabilities Other liabilities 76% Equity

Figure 19: Summit Bank Composition of Liabilities

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