EMPIRICAL ANALYSIS OF FUND MANAGEMENT OF

NATIONAL BANK LTD:

To analyze the fund management I have analyzed of a bank’s Net Interest Income,
Liquidity Ratio (loan-deposit ratio), Return on Loans (ROL) and tried to compare
with bank’s profitability to find that whether there have any relations or not.

NET INTEREST INCOME (NII):

We know: Net interest income (NII) = Interest income – Interest Expense
Table I: Net Interest Income (Taka in Million)
Year Interest Income (-)Interest Expense NII
2004 2341.43 1749.30 592.13
2005 2512.17 1897.83 614.34
2006 3674.32 2449.76 1224.56
2007 4288.80 2833.45 1455.35
2008 5787.92 3594.84 2193.08
(Sources: Annual Report of NBL)

2500
Here NII is increasing day by day because increase in interest rates earned on asset,
other wise increase in interest paid on funding will decrease NII.

LIQUIDITY RATIO:

1
Landing Deposit Ratio = X 100
Table2: LD ratio (Taka in Million)
Year Loan Deposit LD Ratio
2004 23129.65 28973.39 79.83%
2005 27020.21 32984.05 81.92%
2006 32709.68 40350.87 81.06%
2007 36475.74 47961.22 76.05%
2008 49665.07 60195.25 82.51%
(Sources: Annual Report of NBL)

LD Ratio

84.00%

82.00%

80.00%

78.00% LD Ratio

76.00%

74.00%

72.00%
2004 2005 2006 2007 2008

Liquidity Ratio should be 80% to 85% for a Bank. But here is 76.05% to 82.51%. So
we can say that they can use their deposits perfectly to earn more profit. This ratio
used by financial institutions to monitor current and potential funding levels.

RETURN ON LOANS (ROL):

Return on Loans (ROL) = Interest Income / Loans (II/L)*100

2
Table2: Return on loans (Taka in Million)
Year Interest income Loans ROL
2004 2341.43 23129.65 10.12%
2005 2512.17 27020.21 9.30%
2006 3674.32 32709.68 11.23%
2007 4288.80 36475.74 11.76%
2008 5787.92 49665.07 11.65%

Here we see that, return on loans of national bank limited has shown an increasing
trend which indicate that NBL’s loans are increasing over the last five years as well as
the interest income. This increasing trend of ROL is results from the decreasing trend
of non-performing loan to total loan ratio.

FUND MANAGEMENT AND ITS IMPACT ON PROFITABILITY:

It is already mentioned that effective fund management depends on less cost and less
volatile fund. It also depends on the effective utilization of the collected funds. From
the analysis, it is already clear that current deposit is the least costly source of
deposited funds whereas fixed deposit is the most costly source of deposited funds.
But current deposit is the most volatile sources in nature and fixed deposit is the
stable nature. Term deposit is consists of savings and fixed deposit. So, for getting an
appropriate source of fund structure, bank management must make a balance between
current and term deposit.

It can also use money market borrowing because it is less costly and flexible
compared to deposit. A bank can also rely on various off-balance sheet items for
funding to its needs.

Fund management also depends on the effective use of the collected funds. Improper
use makes the collected funds burden for the bank. In this part, various ratios are
analyzed both in the context of interest cost of the funds and their effective utilization.

Profitability Ratios of National Bank Limited:

Ratios 2004 2005 2006 2007 2008

Return on Assets (ROA) .48% .74% 1.19% 2.40% 2.36%
Return on Equity (ROE) 18.26% 11.82% 16.89% 31.57% 28.38%

3
 Earnings per Shares (tk) 27.44 43.85 63.01 66.11 81.03

The value of ROA and ROE depends on the volume of net income after tax. So, if banks use
heavily deposits, especially term deposits as sources of fund then ultimately the interest cost
will be increased. As a result values of the mentioned ratios will be decreased.
The value of ROA has increasing trend. The ROA of National Bank Ltd. is growing
over the last five years. It indicates that the management is somehow able to achieve
consistent growth in the bank’s spread through close control over the bank’s earning
assets and the pursuit of the cheapest sources of funding.

Indicators of a successful bank:

It is important to identify a successful bank for banking. Successful bank means those
banks that have a low loan risk, good profitability and sound liquidity position. For
understanding whether a bank is successful or not, bank’s one year performance is
compared with previous year performance. This process is generally known as ratio
analysis. Some of these ratios and present condition of NBL in these cases are given
below:
Table-06: Indicators of a successful bank:
Higher ratio indicating successful bank 2006 2007 2008
Ratio of net interest income and total assets 2.61% 2.57% 3.04%
Ratio of total investment and total assets 12.24% 13.73% 14.07%
Ratio of earning assets and total assets 95.60% 96.73% 97.80%
Ratio of current deposit and liability 7.90% 7.67% 6.91%
Employees average salaries 360585(Tk) 442008(Tk) 439420(Tk)
Lower ratio indicating successful bank

Ratio of interest expenses and total assets 5.23% 5.01% 4.98%

Ratio of expenses other than interest and total 4.6% 3.79% 3.03%
assets
Ratio of provision for loan and total assets 2.48% 2.59% 2.64%
Ratio of loan losses and total loan 5.45% 4.17% 4.33%

Trend analysis of deposits of NBL:

A time series is a collection of data recorded over a period of time- weekly, monthly,
quarterly, or yearly. A time series can be used by management to make current
decisions and plans based on long-term forecasting. We usually assume past patterns
will continue in to the future.

4
As the deposit of NBL was increased by increasing amount, I used nonlinear or
logarithmic trend equation for forecasting deposits. The general equation for the
logarithmic trend equation is:

log Y = log a + log b (t)

where,
Y is the projected value of deposits for a selected value of t.
a is the Y-intercept, it is the estimated value of deposits when t=0.
b is the slope of the line, or the average change in Y for each increase of one
unit in t.
t is any value of time that is selected.

By using Microsoft excel program we can find out the value of log a and log b and by
using these values we can find out the solution of logarithmic trend equation of
deposits which is mentioned below:

Log Y = 4.346 + .086t

By putting the value of t we can find out the amount of deposits for that particular
year. For example, we can forecast the amount of deposits for year 2010, by putting
the value of t=7 in above equation.
Here, I forecasted next five years deposits of NBL by using data of last five years
which was mentioned earlier.

Table: Forecasted amount of deposits of NBL for next five years.

Year Forecasted deposits (Tk in million)
2009 72,527
2010 88,369
2011 107,671
2012 131,190
2013 159,845

5
Here we see that the forecasted amount of deposits of NBL will increase at an
increasing rate if internal and external factors remain constant. In order to maintain
this future growth NBL’s management should take proper actions from now.

Relationship between deposits and investments:

In order to measure the strength of the relationship between deposits and investment,
we have to determine the coefficient of correlation (r). By using Microsoft excel
program we can easily find out the value of coefficient of correlation. In this case I
fond the value of coefficient of correlation, r = 0.97 which indicate that there is a
strong positive relationship between deposits and investment.

Forecasted investment based on forecasted deposits:

Here we consider deposits as an independent variable and investment as a dependent
variable. Now we develop an equation to express the linear relationship between
deposits and investment. In addition we able to estimate the value of the dependent
variable Y (investment) based on a selected value of the independent variable X
(deposits). The technique used to develop the equation and provide the estimates is
called regression analysis. The general form of linear regression equation is:

Y = a + bX
Where,
Y is the predicted value of investment for a selected X (deposits) value.
a is the Y-intercept, it is the estimated value of investment when X=0.
b is the slope of the line, or the average change in Y for each increase of one
unit in the independent variable X (deposits).

Here we used last five years data for regression analysis which are mentioned below:
Year Deposits in million Investment in million
2004 28973.39 4374.17
2005 32984.05 3564.82
2006 40350.87 6239.83
2007 47961.22 7760.38
2008 60195.25 10162.81

6
By using Microsoft excel program we can find out the value of a & b and by using
these values we can express the linear regression equation as:

Y = -2334.93 + 0.208X
The above equation indicates that if we increase deposit by 1 unit investment will
increase by .208 units.
By putting the value of independent variable X (forecasted deposits) we can
determine the value of the dependent variable Y (forecasted investment).

Table: Forecasted investment of NBL for next five years with forecasted deposits:

Year Forecasted deposits in million Forecasted investment in million

2009 72,527 12750.69
2010 88,369 16045.82
2011 107,671 20060.64
2012 131,190 24952.59
2013 159,845 30912.83

Relationship between deposits and loans & advances:

In order to measure the strength of the relationship between deposits and loans &
advances, we have to determine the coefficient of correlation (r). By using Microsoft
excel program we can easily find out the value of coefficient of correlation. In this
case we fond the value of coefficient of correlation, r = 0.99 which indicate that there
is a strong positive relationship between deposits and loans & advances.

Forecasted loans& advance based on forecasted deposits:

Here we consider deposits as an independent variable and loans & advance as a
dependent variable. Now we develop an equation to express the linear relationship
between deposits and loans & advance. In addition we able to estimate the value of
the dependent variable Y (loans & advance) based on a selected value of the
independent variable X (deposits). The technique used to develop the equation and
provide the estimates is called regression analysis. The general form of linear
regression equation is:
Y = a + bX
Where,

7
 Y is the predicted amount of loans & advance for a selected X (deposits) value.
a is the Y-intercept, it is the estimated amount of loans & advance when X=0.
b is the slope of the line, or the average change in Y for each increase of one
unit in the independent variable X (deposits).

Here we used last five years data for regression analysis which are mentioned below:

Year Deposits in million loans & advance in million

2004 28973.39 23129.65
2005 32984.05 27020.21
2006 40350.87 32709.68
2007 47961.22 36475.74
2008 60195.25 49665.07

By using Microsoft excel program we can find out the value of a & b and by using
these values we can express the linear regression equation as:

Y = -667.10 + .818X
The above equation indicates that if we increase deposit by 1 unit loans and advance
will increase by .818 units.

By putting the value of independent variable X (forecasted deposits) we can

determine the value of the dependent variable Y (forecasted loans & advance).

Table: Forecasted loans & advance of NBL for next five years with forecasted
deposit:
Year Forecasted deposits in million Forecasted loans & advance in million
2009 72,527 58689
2010 88,369 71654
2011 107,671 87450
2012 131,190 106698
2013 159,845 130150

Relationship between deposits and net profit:

In order to measure the strength of the relationship between deposits and net profit,
we have to determine the coefficient of correlation (r). By using Microsoft excel

8
program we can easily find out the value of coefficient of correlation. In this case we
fond the value of coefficient of correlation, r = 1 which indicate that there is a strong
positive relationship between deposits and net profit.

Forecasted net profit based on forecasted deposits:

Here we consider deposits as an independent variable and net profit as a dependent
variable. Now we develop an equation to express the linear relationship between
deposits and loans & advance. In addition we able to estimate the value of the
dependent variable Y (net profit) based on a selected value of the independent
variable X (deposits). The technique used to develop the equation and provide the
estimates is called regression analysis. The general form of linear regression equation
is:
Y = a + bX
Where,
Y is the predicted amount of net profit for a selected X (deposits) value.
a is the Y-intercept, it is the estimated amount of net profit when X=0.
b is the slope of the line, or the average change in Y for each increase of one
unit in the independent variable X (deposits).

Here we used last five years data for regression analysis which are mentioned below:
year Deposits in million Net profit in million
2004 28973.39 170.02
2005 32984.05 271.67
2006 40350.87 507.49
2007 47961.22 1238.11
2008 60195.25 1517.43

By using Microsoft excel program we can find out the value of a & b and by using
these values we can express the linear regression equation as:

Y = -1332 + .049X

The above equation indicates that if we increase deposit by 1 unit net profit will
increase by .049 units.

9
By putting the value of independent variable X (forecasted deposits) we can
determine the value of the dependent variable Y (forecasted net profit).

Table: Forecasted loans & advance of NBL for next five years with forecasted
deposit:
Year Forecasted deposits in million Forecasted net profit in million
2009 72,527 2221.82
2010 88,369 2998.08
2011 107,671 3943.88
2012 131,190 5096.31
2013 159,845 6500.40

EMPIRICAL ANALYSIS OF RISK MANAGEMENT OF

NATIONAL BANK LTD:
Here we analyze some ratios in order to see how well management of National bank
limited managing risks which are involved with banking business.

Analysis of credit risk management in NBL:

AD Ratio
AD Ratio = X 100
Year Loan Deposit AD Ratio
2004 23129.65 28973.39 79.83%
2005 27020.21 32984.05 81.92%
2006 32709.68 40350.87 81.06%
2007 36475.74 47961.22 76.05%
2008 49665.07 60195.25 82.51%

Here we can see that Ad ratio in creasing but not up to 110%. So we can say that credit risk is
under control.

10
Provision for Loan

Provision for loan = X 100

(Tk in million)
Year Provision Loan Provision for loan
2004 1932.64 23129.65 8.35
2005 967.20 27020.21 3.58
2006 1161.61 32709.68 3.55
2007 1462.65 36475.74 4.00
2008 1906.67 49665.07 3.84

Here we can see that Provision for loan is 8.35% in 2004 but it was decrease to 3.58% in 2005
and maintained approximate 3.75% over the year, so here credit risk is obviously little, credit
risk management is highly controlled.

% of classified loan as total Loan and Advance

% of Classified loan = X 100

% Of classified
Classified loans Loan
year Loan
2004 4017.62 23129.65 17.37%
2005 1910.33 27020.21 7.07%
2006 1965.85 32709.68 6.01%
2007 1651.10 36475.74 4.53%
2008 2729.33 49665.07 5.50%

Here we see that, % of classified loans was 17.37% which was very high. But it was
decreasing over the next three years and slightly increases in 2008, which indicate that
NBL’s credit risk is decreasing over time. So, we can easily say that credit risk management
is highly controlled.

Analysis of liquidity risk management in NBL:

Ratio of total paid up capital and total assets:

11
Ratio of total paid up capital and total assets = (paid up capital/total asset)X100

year Paid-up capital Total asset Ratio

2004 516.33 35127.30 1.47%
2005 619.59 38400.37 1.61%
2006 805.47 46796.04 1.72%
2007 1208.20 56526.96 2.14%
2008 1872.72 72212.86 2.59%

The ratio of paid-up capital and total asset increasing slightly over the last five years
which indicate that liquidity risk of the bank is little.

Ratio of total deposits and total assets:

Ratio of total deposits and total assets = (deposits/total asset)X100

year deposits Total asset ratio

2004 28973.39 35127.30 82.48%
2005 32984.05 38400.37 85.89%
2006 40350.87 46796.04 86.23%
2007 47961.22 56526.96 84.85%
2008 60195.25 72212.86 83.36%

Here we see that, Ratio of total deposits and total assets of the bank is slightly
increase over the first three years and then slightly decrease in last two years and
maintained approximate stable ratio over the years which indicate that NBL managing
their liquidity risk very effectively.

Analysis of interest rate risk of NBL:

Ratio of net interest income and total operating income:

Ratio of net interest income and total operating income = (NII/total operating
income)*100

year NII Operating income Ratio

2006 1224.553 3279.431 37.34%

12
 2007 1455.353 4358.432 33.39%
2008 2193.077 5323.323 41.19%

The ratio of net interest income and total operating income was 37.34% in year 2006
which was slightly decrease to 33.39% in 2007. But in 2008, the ratio was increased
to 41.19% which indicate that interest risk is very low. So, we can say that NBL
manage their interest risk very effectively.

% growth of interest income:

year Interest income % growth

2004 2341.43 -
2005 2512.17 7.29%
2006 3674.32 46.26%
2007 4288.80 16.72%
2008 5787.92 34.95%

Here we see that, % growth of interest income was increased at an increasing rate
over the last five years which indicate that the bank maintained their interest rate risk
at a minimal level which ultimately generate higher profitability for the bank.

Analysis of operating risk of NBL:

Earning per share:

year EPS
2004 27.44
2005 43.85
2006 63.01
2007 66.11
2008 81.03

13
Here we see that, the EPS of NBL was increasing over the last five years and stood at
Tk. 81.03 per share in 2008 which was Tk. 27.44 in 2004. So, we can say that
National bank limited manage their operating risk very effectively.

Ratio of total operating expenses and total assets:

Ratio of total operating expenses and total assets = (total operating expenses/total
asset)*100

year Operating expenses Total asset ratio

2006 2132.647 46796.04 4.56%
2007 2143.091 56526.96 3.79%
2008 2191.852 72212.86 3.03%

Here we see that, ratio of total operating expenses and total assets was decreasing
over the years which indicate that NBL’s operating risk is very little. So, we can say
that NBL manage their operating risk in a best way.

14