Performance analysis of Mutual Trust Bank Limited

Performance analysis of Mutual Trust Bank

Limited
[This Dissertation is submitted for the partial fulfillment of BBA
program]

Guide Teacher :
.
Department of Finance
University of Dhaka

Submitted by :
Tamanna Tanvir Haque
BBA program,16 th Batch
ID No.

Date of submission:

Date.
To
The Director
Department of Finance
Faculty of Business Studies
University of Dhaka
Subject: Submission of the dissertation paper on Performance analysis
of Mutual Trust Bank Limited
Dear Madam
With due respect, I am submitting herewith mi dissertation paper on
the above mentioned title for the partial fulfillment of the
requirements of BBA program.
I have toiled hard in preparing this dissertation and tried to make the
report clear and comprehensive within the constraints. I sincerely
believe that it will serve the required purposes. I shall always be
obliged to furnish any clarification regarding the dissertation, if
required.
Sincerely yours,

Tamanna Tanvir Haque

BBA program,16 th batch

ID No. .

Guide Teachers Certificate

This is to certify that the Internship Report on Performance analysis of

Mutual Trust Bank Limited (Based on Financial Ratio) in the bona fide
record at the report is done by Tamanna Tanvir Haque as a partial
fulfillment of the requirement of Bachelor of Business Administration
(BBA) degree from the department of Finance, University of Dhaka.
The Report has been prepared under my guidance and is a record of the
bona fide work carried out successfully.

.
..

Bank

Declaration

I do hereby solemnly declare that the work presented in this Internship

Report has been carried out by me and has not been previously submitted
to any other University/College/Organization for an academic
qualification/certificate/diploma or degree.

The work I have presented does not breach any existing copyright and no
portion of this report is copied from any work done earlier for a degree or
otherwise.

I further undertake to indemnify the Department against any loss or

damage arising from breach of the foregoing obligations.

Tamanna Tanvir Haque

BBA program,16th Batch
ID #
Date:

Acknowledgement
First, I would like to express my gratitude to almighty ALLAH to give
me the strength to complete the report within the stipulated time.
I would like to thank the Higher Authority of University of Dhaka for
giving me every facility & opportunity to complete all necessary tasks to
prepare the report on such a wonderful and learning issue.
I am deeply indebted to my guide teacher .
, professor, Department of finance, University of Dhaka for his wholehearted advice and guidance. Without his suggestions, comments and
lucid discussion from time to time and also giving valuable instructions
and suggestions to complete this paper in an appropriate manner, it would
have never been possible on my part to make the report a good one.
Actually he acted as a great source of spirit.
It will be very ungrateful if I dont say my gratitude to the Staff Member
of Department of Finance, who helped me a lot during my whole research
period.
Lastly, I would like to give many special thanks and inexpressible greets
to Mr. head of Branch, Mutual Trust Bank, Branch,Dhaka,MR
Financial administration Devision,Dhaka and othes for giving me advice,
inspiration and support.
Thanks for all from the core of my heart.

Tamanna Tanvir Haque

BBA program,16th Batch
ID #
Date:

Executive summary

CHAPTER ONE

Introduction

Introduction
1.1. Prelude
Banks are very old form of financial institution that channel excess funds from
surplus unit to deficit unit in consideration of a price called Interest. Banking
business definitely established on a relationship of Debtor-Creditor between
the surplus unit called depositors and the bank and between the deficit unit
called borrowers and the bank. Here, opportunity cost of money works as
interest is considered the price of the credit. For the development of an
economy, bank furnishes a huge contribution and modern economy can not be
imagined without the service of bank. Economic development of a country
requires a well organized, smooth, easy to reach and efficient savinginvestment process. The function of a single bank is not limited to its
geographical region only rather it has reached beyond the border of the
country. So, banking business has been shaped as global business and the rest
other business greatly depends on the strength of banking business
performance.
In a view of IMF, the recent financial crisis showed many weakness within
the on hand financial system across the world, which triggers many issues
linking to the protection of banking institutions against probable future nonexpected risks associated with periods of insecurity.
Banks regulatory authority are directly liable to evaluate the performance of
each banking business to find out any flaw, regulatory authority should have to
sense any upcoming difficulties regarding the performance of all banks. For
this purpose, regulatory authority asked for specific statements highlighting
the performance of financial operation on which the evaluation of
performance is done. Regulatory required statements supplies most of the
information reflecting the performance. Despite, onsite inspection is also

required to find out the accuracy and to judge qualitative performance of the
banking company. Banks soundness and performance can be summarized by
the financial ratios.

1.2.Statement of the Problem

A single bank is highly connected with other banks for payment system and
other functions of bank. The failure of a single bank not only affects its
shareholders and depositors rather it affects rest other banks and even all rest
other business. The failure of a single bank creates an economic turmoil
situation and is regarded as a disaster for the economy. The recent global
recession is also an example of economic disaster that occurred for the failure of
banking business. So, the government of any country must have a high concern
about the performance of all banks. To supervise and regulate the performance
of banking business, there is a supervisory authority called central bank in each
country. The supervisory authority creates smooth and efficient atmosphere for
fund flow and payment system. Supervisory authorities measure the
performance and assess the strength and weakness of bank and tasks necessary
actions.
The banking sector of Bangladesh compared to its economic size is moderately
bigger than many other economies of equal level of development and per capita
income. There are fifty-two commercial banks operating in this small economy.
Although over the last thirty years, the country achieved noticeable success
regarding the access to banking services, in 1972 population per branch was
57,700 and in the year of 2010, it was 20,162 per branch. The statistics indicates
that getting banking services is not a significant problem for the country.
Bangladesh bank perform both onsite and offsite supervision of banking
operation. For offsite supervision, Bangladesh Bank has to rely on various
financial statements and other documents as specified by Bangladesh Bank sent
by all the scheduled banks. Bangladesh Bank measures the performance of all
individual banks based on CAMELS ratio.
Financial ratios mainly indicate the adequacy of the risk based capital, credit
growth, credit concentration, single borrower exposure, non-performing loan
position, liquidity gap analysis, liquidity ratio, inter-bank dependency, return on
asset (ROA), return on equity (ROE), net interest margin (NIM), forign
exchange exposure, market risk and management questionnaire etc. But, no

detailed study has yet been done for the ordinary people, students, researcher to
confer the overall knowledge of CAMELS rating systems in the context of
Bangladesh. This study use financial ratio and due to security aspect we can not
find the weight of each components of CAMEL and qualitative measures
depends on analyst so that we use here financial ratio to evaluate financial
performance of the bank.
Mutual Trust Bank Limited made adequate provision against classified loans.
Specific provision made is significantly higher than last year. Adequate
provision made the bank stronger than before. Tier- 1 Capital stood at BDT .
Million at the end of 2011 compared to that of BDT million at the end of
2010. Tier-2 Capital reached to BDT ..million at the end of December 2011 as
compares to that of BDT ... million at the end of 2010. Return on Assets (ROA)
was % as on December 31,2011 and Return on Equity (ROE) was % as on
December 31,2011. Consolidated Capital Adequacy Ratio (CAR) of the bank
stood at % against minimum requirement of % as per Basel II capital Accord in
December 2011. Net Interest Margin (NIM) stood at % at the end of 2011
suggesting a healthy growth in Net Interest Income.

1.3.Rational of the Study

Bangladesh Bank(BB) as central bank of Bangladesh , has the statutory task of
regulating and supervising the banking system of Bangladesh. To play this
vital role, BB assesses the overall performance of the banking system to find
out strength and weakness as a whole, as well as the safety and soundness of
each individual banking company. Bangladesh bank conduct its offsite
supervisory function mainly based on CAMELS rating. Presently Risk Based
Supervisory activities are also executed from the end of the central bank with
a view to helping the banks so that they might keep pace with the modern,
diversified, most complicated, vulnerable and most competitive baking
environment. Notable, the Risk Based Ratings derived from risk based
supervisory activities and inspections are reflected in the management
Component of CAMELS rating in order to focus on management Efficiency in
managing multiple issues of the banking business.
Financial ratios are use as a supervisory tools to find out the overall position
of an individual bank so that Bangladesh Bank can take necessary actions
where it is necessary. The study will present all the related issues with

Financial ratio. All the ratios will be summarized so that anyone can have the
clear concept about each component of CAMELS. Since CAMELS rating
result is kept confidential, stakeholders of a bank are not aware about the
actual performance of a banking company. So, a detailed discussion of
financial ratio is required for the mass people.
The performance of Mutual Trust Bank Limited need to be analysed to focus
the strength and weakness which are to be done in this study. It will help the
regulatory authority, stakeholders and mass people to think and to concentrate
about the required strategy to safe guard their interest.
1.4.Objectives
The study will help to show how financial ratio is applied by bank to assess
the performance of Mutual Trust Bank Limited in a complete format. Specific
objectives of the study are:
To measure the performance of bank based on financial ratios.
To find the strength and weakness of the bank in financial aspect in
particulars.
To recommend some measure for better functioning of financial system
of the bank.

1.5.Methodology
Collection of Data :
This study has been undertaken on the basis of secondary data (i.e., published
data or processed data). For this purposes, a good number of sources have
been used.
The sources include:

 Annual Report of the bank

Insight Monthly Magazine of the bank
Books and Web sites
Processing of data
Processing of data has been done carefully with a view to making
comparison and doing ratio analysis and interpretations. This includesi) Editing of Data: After collecting data from different sources, the
relevant data have been scrutinized carefully. Data may differ from
one source to another. Exact sources of data are cited in the footnotes
of each table.
ii) Classification and Tabulation of Data: after collecting and editing data,
it becomes necessary to organize it in such a way that facilitates
analysis and interpretation of data on the basis of different variables.
Analysis and Interpretation:
Processed data have been then been duly analyzed and interpreted as to achieve
the desire objectives. For understanding the CAMEL of the bank, data have
been analyzed to compare the financial condition of the bank. Some related
ratios have also been used to indicate the financial health, degree of
liberalization and the inspect on bank performance. All the data have been
manipulated by standard computer packages like MS Excel and MS Word.
Final Repot Preparation:
The final report hass been prepared on the basis of analysis and interpretation of
data

1.6.Limitations of the Study

Every research work needs high degree of involvement regarding collection
of information, creation of database, review of literature and analysis of the
data. In this study, utmost endeavor has been put to collect, organize, analyze,
and interpret the related data and finally to attain the optimum outcome of the
study. However, this study has suffered from certain constraints noted below:
Primary and unpublished data have not considered for the study.

 Data accuracy can not be ensured as mainly secondary data collected

from Annual Report.
The depth of the analysis has been limited to the extent of information
collected from different sources.
CAMELS analysis can not used in this report because weight used by the
bank for each component of CAMELS is secret for the bank qualitative
measures are different from different analyst. So that we use financial
ratio to evaluate the performance of the bank.

CHAPTER ONE

Key Financial Ratios

Used by Commercial Banks

Key Financial Ratios Used by Commercial Banks

2.1 Capital adequacy:
A bank must have capital for three reasons:
i) To absorb unexpected credit losses.
ii) To provide safety for depositors and creditors, and
iii) To satisfy regulatory authorities ongoing concern with depositors
protection and a stable banking system.
2.1.1. Market approach:
1. Basic capital ratio = Equity/ Total asset
2. Equity multiplier = Total asset/ Equity
3. Divided payout ratio = Dividends/ Net income
2.1.2. Regulatory approach
1. capital adequacy ratio = Primary capital / total assets
2. Basel (or BIS ) ratio = capital ( tier 1 + tier 2 + tier 3 )/ Risk- weighted assets

2.2 Asset quality:

Yet the assessment of asset quality is one of the most difficult aspects of bank
analysis. Given that difficulty, the credit analyst must proceed in two directions:
1) Examine the banks credit risk management strength and weakness, and
2) Try to evaluate the quality of the investment and loan portfolio using trend
analysis and peer comparison.
earnings before taxes ,depreciation , provisions
provision for loanlosses

Provision coverage :=

Provision charge ratio :=

provision for loan losses

Average loan portfolio

Reserve for loan losses

Average loan portfolio

Reserveadepuacy ratio :=

Chargeoff ratio (1):=

Loan writeoffs
Average loan portfolio

Chargeoff ratio (2):=

Loan writeoffs
Net interest income

Non performingloan coverage:=

Reserv for loanlosses

Non performingloan ( NPLs )

Non performingloan Ratio(1):=

Non performingloan(NPLs)
Totalloans

Non performingloan Ratio( 2):=

Non performing loan(NPLs )

Total assets

2.3 Earnings:
Bank earnings provide capital formation, and they are needed to attract new
investor capital, which is essential if the institution is to grow. They serve both
as a demonstration of managements effectiveness and as a barometer of the
effects of macro-financial policies on banking institutions. Healthy profits are
needed to absorb loan losses and to build adequate provisions. A consistent
earnings performance builds public confidence in the bank.
1.Net interest income:
Net interest margin=

Net interest income (C)

Average total assets

2.Other income:
Ratio=

Other income(D)
Total operating income ( E)

3.Operating expenses (overhead expenses)

cost income ratio=

overheads( F )
Total operating income( E)

4.Provision for loan losses:

Ratio 1=

Provision for loanlosses ( G )

Average total asseets

Ratio 2=

Provision for loanlosses (G)

Average loan portfolio

Ratio 3=

OverheadsProvision for loanlosses( F +G)

Average total asseets

Ratio 4=

Income before taxesextraordinary items+ Provision for loanlosses (H +G)

Provision for loanlosses ( G )

5.Income before extraordinary items and taxes:

Ratio 1=

Pretax operating profit ( H )

Averagetotal asseets

Ratio 2=

Pretax operating profit ( H )

Average stockholders equity

6. Net income:
Ratio 1=

net income( K )
Average total asseets

Ratio 2=

net income( K )
Average stockholders equity

2.4 Liquidity:
Liquidity in bank management is needed for two reasons:
1.To satisfy demand for new loans without having to recall existing loans or
realizing term investments such as bond holdings, and
2. to meet both daily and seasonal swings in deposits so that withdrawals can
be met in a timely and orderly fashion.

Ratio 1=

Liquid assets
Total assets

Ratio 2=

Liquid assets
Total deposits

Ratio 3=

Loans
deposits

Ratio 4=

Loans
deposits +borrowed funds

Ratio5=

Loans
Total assets

CHAPTER FOUR

Analysis and Interpretation

Analysis and Interpretation

4.1 Capital adequacy

A bank must have capital for three reasons:

1. To absorb unexpected credit losses.
2. To provide safety for depositors and creditors, and
3. To satisfy regulatory authorities ongoing concern with
depositor protection and a stable banking system
In effect, a banks capital acts as a safety net in the case of unfortunate events. A
high level of capital permits management to pursue higher-risk business
opportunities. A low level of capital restricts managements scope for
moreover.
Capital adequacy refers to the amount of stockholders fund that are available to
support the business of the bank. The amount depends on the size of the balance
sheet and the types of activities in which the bank participates. Clearly, the
riskier its loan portfolio, the more stockholders funds are required to support
those activities. A bank that only purchases government securities or only makes
short term loans on a secured or guaranteed basis will not require as much
capital as a similar-sized bank that makes unsecured loans to small enterprises
and commercial property developers. Since the second bank has more risk. It
should be expected to have more capital to protect its other creditors against
losses. However, the reward for the stockholders of the second bank is that
higher risk normally generates higher profits, If managed properly.
Nevertheless, the question is what constitutes adequate capital? Here the banker
is faced with a dilemma:
Too much capital reduces leverage or the bankers ability to maximize return
for shareholders; but
Too little capital exposes the bank to a disproportionate level of risk of
failure if misfortune strikes.
Banks generally prefer a lower level of capital to maximize return on equity (net
income divided by equity), while the regulatory authorities prefer a higher level
to safeguard the banking system and reinforce market stability.
The problem loan experiences of the 1970s and 1980s have shown that capital
adequacy is important. Even the best capitalized bank can be overwhelmed by
unfortunate events but the results are less catastrophic. A bank with a sound
capital base has more time to consider problem and to deal with them

effectively, while high capital does tend to impede high profits, the best
capitalized banks are among the most profitable worldwide.
Two approaches help determine the adequate level of capital. One is the
market approach, where the markets decide whether a bank has sound capital
base; for example, requiring banks to be rated by a prominent rating agency;
with low ratings (the result of low capital among other factors) the result
additional risk premiums in the market. The second is the regulatory approach,
whereby the central bank or bank supervisory authorities stipulate the level of
capital. In view of concern by the authorities, the latter approach receives the
most attention.
Capital adequacy: Principal ratios
With either approach, capital ratios are the main technique for analyzing capital
adequacy. Deviations of capital ratios for individual banks from national
averages provide a warning signal to both management and analysts that a
closer look at capital adequacy is required.

Market approach
Significance: This ratio is easy to use science it requires only a cursory glance at
the banks balance sheet. Equity is simply assets minus liabilities, or the
stockholders equity section of the balance sheet, which includes:
Non-redeemable preferred stock;
Common stock or sharp capital;
Capital surplus (premium paid over stock par value);
Permanent and statutory reserves; and
Retained earnings.
Total assets equal the total balance sheet. An average figure is technically
preferable but not terribly important to arrive at a rough estimate of capital
adequacy.

Weakness: A ratio below the 5 per cent rule of thumb is not necessarily a sign of
inadequate capital. Many state-owned banks exhibit low levels of capital but
generally have back-up support from the Government, a Government agency, or
even the central bank.
This simplistic approach also ignores other sources of permanent funds a bank
may have, such as subordinated debt, which generally is not listed among
shareholder funds.