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11.1 Analysis of the Financial Statements

Income statement: The main thing in the income statement is the income and the
expense of an organization. In the banking sector the majority of the income comes from
the interest and then from other investments made by the bank. Southeast Bank Limited a
suggested by the income statement gives a clear idea of how the income and the expense
are behaving for the last four years.

It shows that its income is always higher than the expense which is definitely a positive
sign for the Bank. Its income is gradually increasing and simultaneously the expense is
also rising due to the increase of business. Due to the healthy position of its net income
after tax, the Bank is able to pay dividends to its shareholders and even keep some
amount of money as retained earnings.

Balance Sheet: The balance sheet of SBL shows that it has pretty strong asset position. It
is also financed heavily with debt and this is because it is a common characteristic of
every banking institution to be financed more with debt. This happens because it has
deposits that is a liability for the bank. SBL on an average has approximately 95% debt
finance while the rest financed by the shareholders that is equity financed. Although the
fixed asset of the Bank has decreased than before, but the current assets and other assets
have gradually gone up which ultimately made the total asset to gone up. As bank is a
service-oriented company, it does not need huge amount of fixed assets, but it needs to
have healthy position in its current assets which Southeast Bank does possesses.
Cash flow Statement: The cash flow of the Bank shows that SBL has a good healthy
cash inflow from operating activities for the last four years. The investment activities
shows that for the last four years the Bank has a cash outflow from investment activities
and this is mainly because the Banks has been investing a lot of money in different places
like securities, deposit accounts and etc.

The Bank in the last four years had a cash inflow from financing activities only in the
year 1999 due to the deposit of share money. Except that the Bank is having cash outflow
from financing activities due to the payment of dividend to the shareholders of the Bank.
The Bank had a net cash inflow for most of the time but in the last year the bank
experienced a net cash outflow due to the cash outflow from investing and financing
activities. The huge amount of investment in securities and other places and the large
payment of dividend is the main reason behind this net outflow of cash during the year

Vertical Common Size Income Statement: From the vertical common size income
statement, it can be seen that the percentage of income expense of the interest income
over the four years have been going down, which is a good sign for the Bank considering
the fact that the Bank is able to spend less on interest on the different kinds deposits. This
has ultimately increased the net interest margin of the Bank.
Although the Bank has been experiencing increase in the net interest margin, the non-
interest income has been going down due to the percentage increase in non-interest

Expect these tow things all the other things like provision for loan loss, tax and other
things has been quiet the same and the net income after tax on an average is
approximately 16.5% of the interest income.

Vertical Common Size Balance Sheet Statement: From the vertical common size
balance sheet statement it is found that the cash position of the Bank as a percentage of
the total asset is more or less on an average is 12% which if compared with some other
PCB is quiet in the lower end. The investment securities of SBL shows that, the Bank is
concentrating quiet a bit on its investment securities because the portfolio of investment
securities is quiet high than some other banks. On an average, it is found to be close to
12% of the total asset over the last four years. As mentioned earlier, the majority part of
the asset of a bank comprises of loans and advances. So the loans and advances of SBL
shows that on an average it has been maintaining an average of about 63.5% of the total
asset which seems to be in the higher side because most of the PCB seems to have lower
percentage of loans and advances. This makes the Bank to possess less other assets which
is around 2.5% of the total asset while other banks seems to have it around 6-7% on an

It is also mentioned that the every bank is debt financed by almost 90-95% and the
majority of the liability comes in the form of deposits mix. Southeast Bank Limited is
debt financed by almost 95% whose deposit comprises of almost 70% on an average of
the total liability and equity position of the Bank. The other 15% of the liability comes
from non-deposit borrowings and other liabilities. But on the other hand, some of the
PCBs deposit is only about 55% of the total liability and equity, although its debt finance
is more than equity part. The rest of the liability comprises of other liabilities and only
about 3% comes from equity financing. Due to the perfect mix of assets, liabilities and
equity, the Bank is able to operate pretty smoothly till now.

11.2 Ratio Analysis

11.2.1 Value to Shareholders:

The key objective of any bank is to maximize the value of its shares, which represents
their obligation to the shareholders, for the use of their equity. Share performance
becomes an important indicator of their overall efficiency, as it is publicly traded. A bank
that has low earnings capacity cannot provide shareholders with value, whether in
dividends, or in high share prices. A close look at the dividend trend shows us that SBL
dividend per share has been more or less in a stable position for the last 4 years.

1999 2000 2001 2002

DPS 30.00 25.00 30.00 20.00

EPS 56.99 57.61 82.04 69.85
(Intrinsic Value) Po 200.00 166.67 200.00 133.33

The earnings per share have been rising from 1999 until 2001 which again dropped in the
last year. It is thus, not surprising that SBLs share price has followed somewhat stable
position but in the last year it fell again although the Bank is earning well.

Another aspect of shareholders value maximization is the Return on Equity which gives
further light to the performance measure of a bank The ROE of SBL for the last 4 years is
as follows:

1999 2000 2001 2002

ROE (%) 19.57 30.61 35.42 27.67

The rate of return flowing back to SBLs shareholder, it can be seen that Return on Equity
has been growing from 1999 till 2001 and in 2002 it fell again due to the fact that the
income in 2002 was less than the previous year and more shares have been issues in 2002
which ultimately increased the equity portion of the Bank.

11.2.2 Interest Spread:

In order to look closer into the efficiency of SBL, one of the major factors behind its
success, focus must be given to other aspects.

1999 2000 2001 2002

Net Interest Margin (%) 1.93 1.98 2.73 2.30

In order to measure the spread between interest revenues and interest expenses, the net
interest margin of the Bank must be focused. From this it can be seen that they have been
able to raise the spread over the years. This reflects that in this competitive environment
of the banking industry, SBL has been able to control its asset earnings, as well as its
liability costs. This can be seen again in the table below:

1999 2000 2001 2002

Interest paid on deposits (%) 7.94 8.55 9.84 7.48
Interest charged on loans and advances (%) 13.22 13.67 15.64 12.15

It can be clearly seen that, over the years, SBL has faced considerable pressure in terms
of rising interest rates on deposits which they have efficiently managed to cope up with
charging higher interest rates on loans and advances. The table below reconfirms this

1997 1998 1999 2000

Interest paid vs. interest charged 76.18 75.93 72.47 72.55
Looking into the earnings spread of SBL, it can be observed that SBL has not been able
to raise the spread but continuing to carry on with the same spread.

1999 2000 2001 2002

Earnings Spread 0.03 0.03 0.03 0.03

From this, it can be inferred that SBL has been able to control its interest rates on loans or
on deposits, despite of the strong competition in the banking industry.

11.2.3 Non-Interest Spread:

Further into the efficiency aspects, the non-interest margin, which measures the spread
between the revenues from services provided (fee income), and its non-interest cost
(salaries and wages, repair and maintenance, and loan loss expenses) can be focused.

1999 2000 2001 2002

Net Non Interest Margin (%) 0.45 0.90 0.67 0.30

From this, we can see that SBL has been successful at controlling internal costs, whereby
the difference between service fees and internal costs has been in a stable position. But
the margin fell in 2002. They have been successful at providing services that generate fee

1999 2000 2001 2002

Net Bank Operating margin (%) 1.93 1.98 2.73 2.31

Therefore, it can be assumed that it is due to their expense control strategies, that SBL
has been able to steadily increase its net bank operating margin, even in its competitive
environment. SBLs expense control efficiency will be discussed later in the report.

11.2.4 Asset Utilization:

The shift of focus is now to another aspect of SBLs performance, namely the Return on

1999 2000 2001 2002

ROA (%) 1.01 1.48 1.87 1.34

The Return on Assets shows a clearer picture of SBLs over the last 4 years. From here, it
can be reconfirmed the trend that SBLs earnings have been on the rise. From this, it can
be inferred that SBL boasts managerial efficiency, increasing the rate at which assets are
being converted into net earnings.

As the banking industry of Bangladesh has become saturated, and extremely competitive,
SBL has turned to non-interest income sources to increase its asset utilization ratio.
1999 2000 2001 2002
Asset utilization ratio 10.16 10.75 12.08 10.25

From this it can understand that the management of SBL has been able to construct sound
portfolio management policies, with respect to the mix and yield of the banks assets.

To look into the composition of SBLs assets, with reference to the earning assets, its
earning base in asset can be focused.

1999 2000 2001 2002

Earnings base in asset (%) 72.76 72.00 75.37 81.08

This shows that SBLs earning assets has been increasing over the last four years which is
a good sign and the reason for its good income.

SBL has been increasing its proportion of loans and investments over the last 4 years. It
can clearly seen a rise in their earnings base, meaning that the bank has been growing,
even in the event of extreme competition and uncontrollable environment. Their success
at growth can be considered a powerful indicator of their strength in the market. This
speaks well for their expansion prospects.

1999 2000 2001 2002

Total Loans and advances 31 36 30 42

The loans and advances of SBL has a steady growth rate with 2002 having a good growth
as new branches are opened in some of the important cities of Bangladesh and due to rise
in business, with the base rising steadily over the years.

11.2.5 Liabilities:

Another aspect of growth for SBL is the growth in deposits, which reflects their
acceptability and image in the market.

1999 2000 2001 2002

Total Deposits 37.00 37.13 22.5 31.42

From the table above, it can be seen that there has been considerable growth in the
deposits of Dhaka Bank although it fell during the year 2001. The growth has been at a
rate of 32.01% on average, every year. The management stated that due to the
government-imposed restriction on large loans to single clients, known as the Single
Exposure Problem, they have been restricted in their growth in the case of loans. The
restriction is that no single client can receive a loan worth more than 50% of the equity
unless they are sanctioned by the Bangladesh bank on a very special case.
Another performance evaluator used by SBL is the Credit/Deposit ratio, which is the ratio
between earning assets and charging liabilities.

1999 2000 2001 2002

Credit/Deposit ratio 0.79 0.82 0.87 0.85

Compared to the industry average, which recently moved up from 0.72 to 0.76, SBL
Bank has indeed outperformed to industry and their projected ratio shows that it will
move close to .90 within 1-2 years which is quiet an outstanding performance.

11.2.6 Internal Costs:

Further on, the tax management efficiency of SBL is examined, which shows the banks
effectiveness in using different tax-management tools in order to create tax shelter for the
banks earnings.

1999 2000 2001 2002

Tax management efficiency 0.50 0.60 0.67 0.58

This ratio is pretty low, meaning that the management of SBL has not been able to reduce
it tax exposure over the years. Here, they have failed to monitor and control taxes, in
order to protect earnings. The efficiency in one area has been undermined by their
inefficiency in another. When inquired about this issue, the management claimed that the
government had redefined tax rates, for which tax expenses had gone up. The table below
shows the growing proportions of tax on SBL.

1999 2000 2001 2002

Tax (trend) Tk in million 8.5 11.2 13.1 18.1

It can be can clearly seen that SBL is facing greater proportions of tax exposure year after

As mentioned earlier, SBL has maintained strict controls over their expenses over the last
4 years.

1999 2000 2001 2002

Expense Control efficiency 0.13 0.19 0.22 0.18

The table here shows that the management has been able to monitor its internal expenses
over the years, in order to overcome its relative lack of control over the external

11.2.7 Growth:

The earning potential of SBL is investigated by looking into its growth rate.
1999 2000 2001 2002
Growth rate of company (%) 0.63 0.55 3.70 3.94

With reference to previously mentioned factors like EPS, DPS and internal growth rate of
the company, it can be can understand that SBL has an average growth rate.

One of the most important aspects of measuring the banks performance is to look at its
capital adequacy ratio.

1999 2000 2001 2002

Capital Adequacy Ratio (%) 9.52 8.40 8.77 8.23

It can be seen that SBL has maintaining quiet a good capital adequacy ratio of the risk
weighted assets over the past few years. Before the capital adequacy ratio that banks
have to maintain according to Bangladesh Bank was 8% but from 2003 onwards, it is
fixed at 10%. So, it is a kind of challenge for SBL to take its capital adequacy ratio to
10%. It is predicted that with the inclusion of Right Share subscription money amounting
to Tk.165 million, the capital adequacy ratio of the Bank will further improve to 9.63% of
the total risk weighted assets.

11.2.8 Network Expansion:

Some other areas which would enable to measure the performance of the Bank even
further are discussed below.

1999 2000 2001 2002

Number of Correspondent Banks 34 39 40 45

Number of Foreign Correspondents 253 269 280 295

Number of Branches 12 12 13 19

This shows that the Bank due to the expansion of business has increased the number of
correspondent banks with whom more and more business can be done and in the same
way the number of foreign correspondents has also increased which gives the idea that
the Bank is doing well in the international arena also.

Due to the expansion of business, the number of branches of the Bank has also increased
over the two years. They have increased the branches of the bank for the convenient of
the clients. This helped the Bank to get more business in different cities of Bangladesh
and also helped the bank to make a strong customer base. Recently in the year 2003 the
Bank has opened 2 new branches with the concept of Islami Banking in order to attract

1999 2000 2001 2002

Number of Shareholders 1129 1266 1429 1666

The number of shareholders over the years has also increased significantly, which further
gives light in the fact that the share price of the Bank has been good which has attracted
the shareholders to buy shares of this Bank. From this it is clear that if the price of the
share increases, it is probable that the performance of the Bank is good.


Entity Rating A- (Assigned) ST-3 (Assigned)

CRISL has assigned A- (single A Minus) Rating to Southeast Bank Limited in the lomg
term and ST-3 Rating in short term on the basis of Banks strong fundamentals, asset
quality, profitability, growth rate, consistent efforts to maintain capital adequacy and
required liquidity. Financial Institutions rated in this category are adjudged to offer
adequate safety for timely repayment of financial obligations. The short term rating
indicates good certainty to timely payment. Liquidity factors and company fundamentals
are sound. Although ongoing funding needs may enlarge total financial requirements,
SBLs access to capital and financial markets is good to address the finance need. Risk
factors are modest, however, variable in periods of economic stress.