Financial Ratio Analysis | AFS

Bank AL Habib Ltd.

Analyzed By

Hussain Raza (1456107)

Submitted to:

Sir Mohsin Adhi | Course Instructor

Fall 2014

RATIO ANALYSIS
Ratio analysis is the calculation and comparison of ratios which are derived from the information
in a company's financial statements. Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firms assets correctly, to increase the investors
wealth. It ensures a fair return to its owners and secures optimum utilization of firms assets.
Following types of ratios will be used to analyze Bank AL Habib:

a) Liquidity Ratios
b) Leverage Ratios
c) Profitability Ratios
d) Activity Ratios
e) Market Ratios
f) Statements of Cash Flow

a) Liquidity Ratios
Liquidity ratios measure a firms ability to meet its current obligations. These include:

Current Ratio:
Current Ratio = Current Assets / Current Liabilities
This ratio indicates the extent to which current liabilities are covered by those assets expected to
be converted to cash in the near future. Current assets include cash, marketable securities,
accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term
notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses.

Current Assets
Current Liabilities
Current Ratio

2013
340,214,195
325,214,195
1.04

2012
328,657,723
312,879,246
1.05

2011
233,761,330
223,421,314
1.04

Current Ratio
1.052
1.05
1.048
1.046
Axis Title

1.044
1.042
1.04
1.038
1.036
1.034
Current Ratio

2013

2012

2011

1.04

1.05

1.04

The current ratio is maintaining a stable outlook for the bank and is above the satisfaction level
of 1:1. The ratio suggests that the bank is monitoring the ratio and so it is being kept constant
with increase in number of assets and liabilities. This means that the bank is able to pay off its
liabilities easily at any point in time.

Sales to Working Capital:

Sales to Working Capital = Sales / Working Capital
Sales to working capital give an indication of the turnover in working capital per year. A low
working capital indicates an unprofitable use of working capital.

Sales

2013
41,163,717

2012
44,414,947

2011
39,223,613

Working Capital
Sales To WC

15,000,000
2.74

15,778,477
2.81

10,340,016
3.79

Sales To WC
4
3.5
3

Axis Title

2.5
2
1.5
1
0.5
0
Sales To WC

2013

2012

2011

2.74

2.81

3.79

Sales of the bank (interest + non-interest income) declined by 3 billion mainly because of
low current account deposits as compared to saving and fixed deposits hence working capital
has decreased slightly but is stable.

Working Capital:
Working Capital = Current Assets Current Liabilities
A measure of a company's efficiency and its short-term financial health.

Current Assets
Current Liabilities
Working Capital

2013
340,214,195
325,214,195
15,000,000

2012
328,657,723
312,879,246
15,778,477

2011
233,761,330
223,421,314
10,340,016

Working Capital
18,000,000
16,000,000
14,000,000

Axis Title

12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
Working Capital

2013

2012

2011

15,000,000

15,778,477

10,340,016

The Working capital has decreased slightly which reflects deposits have increased with a higher
ratio than that of advances and investments.

Advances to Deposit Ratio:

Advances to Deposit Ratio = Total Advances / Total Deposits
A commonly used statistic for assessing a bank's liquidity by dividing the banks total
loans by its total deposits. This number is expressed as a percentage. If the ratio is too
high, it means that banks might not have enough liquidity to cover any unforeseen fund
requirements; if the ratio is too low, banks may not be earning as much as they could be.

Advances to
Deposit Ratio

2013
0.43

2012
0.43

2011
0.38

Advances to Deposit Ratio

0.44
0.43
0.42

Axis Title

0.41
0.4
0.39
0.38
0.37
0.36
0.35
Advances to Deposit Ratio

2013

2012

2011

0.43

0.43

0.38

The stable outlook of advances to deposits portrays the interest of the key management in
maintaining a constant ratio. Bank Al Habib has had a constant ratio which corresponds
well with the policy of prudent banking and extensive credit risk analysis.

Investment to Deposit Ratio (IDR)

Investment to Deposit Ratio = Total Investments / Total Deposits
Total Investment includes all the investments that are done by the bank in the financial
year which includes all the long term and short term investments in marketable securities,
investment bonds and Investment in stock market
The deposit ratio refers to the deposits raised by the bank from saving account, current
account, Recurring deposit account and fixed account.

Investment to
Deposit Ratio

2013
0.62

2012
0.73

2011
0.74

Investment to Deposit Ratio

0.76
0.74
0.72
0.7

Axis Title

0.68
0.66
0.64
0.62
0.6
0.58
0.56
Investment to Deposit Ratio

2013

2012

2011

0.62

0.73

0.74

The ratio has declined over the year which is reflected in the decline of bank borrowing.
Investments usually are of a longer time period hence bank has focused on early yields and given
advances to customers so the advances ratio has been kept at a constant rate.

b) Leverage Ratios:
By using a combination of assets, debt, equity, and interest payments, leverage ratios are used to
understand a company's ability to meet it long term financial obligations.

Time Interest Earned:

TIE Ratio = EBIT / Interest Charges

The interest coverage ratio tells us how easily a company is able to pay interest expenses
associated to the debt they currently have. The ratio is designed to understand the amount of
interest due as a function of companys earnings

Interest
coverage ratio

2013
1.73

2012
1.99

2011
1.92

The ratio has declined as compared to last year mainly because of reduction in EBIT for the
bank. The main reason of a lower profit is associated with the increased rate on Saving deposits
and SBPs requirement of paying profit on savings accounts on average monthly balance which
was previously lowest monthly balance.

Debt Ratio:
Debt Ratio = Total Debt / Total Assets
The ratio of total debt to total assets, generally called the debt ratio, measures the percentage of
funds provided by the creditors.

Debt ratio

2013
0.94

2012
0.94

2011
0.95

Debt to Equity Ratio:

Debt to Equity Ratio = Total debt / Total Equity
The debt to equity ratio is the most popular leverage ratio and it provides detail around the
amount of leverage (liabilities assumed) that a company has in relation to the money provided by
shareholders. It is a common measure of the long-term viability of a company's business and,
along with current ratio, a measure of its liquidity, or its ability to cover its expenses.

Debt to Equity
Ratio

2013
17.2

2012
18.0

2011
18.4

Debt to Equity Ratio

18.6
18.4
18.2
18

Axis Title

17.8
17.6
17.4
17.2
17
16.8
16.6
Debt to Equity Ratio

2013

2012

2011

17.2

18

18.4

Banks usually have a higher debt to equity ratio has debt mainly consists of Deposits which
holds a major chunk of liabilities side.

Capital Adequacy Ratio:

Capital Adequacy Ratio = Tier 1 Capital + Tier 2 Capital / Risk weighted
Assets
Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CRAR),
is the ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it
can absorb a reasonable amount of loss and complies with statutory Capital requirements.

C.A.R

2013
14.3%

2012
15.96%

2011
16.69%

A capital adequacy ratio of 14.3 percent means that a banks capital is 14.3 percent of the
size of its credit exposures in 2013. Similarly 15.96 % and 16.69% of the capital is for its
credit exposure in 2012 and 2011 respectively.

c) Profitability Ratios:
Profitability is the net result of a number of policies and decisions. This section discusses the
different measures of corporate profitability and financial performance. These ratios, much like
the operational performance ratios, give users a good understanding of how well the company
utilized its resources in generating profit and shareholder value. The long-term profitability of a
company is vital for both the survivability of the company as well as the benefit received by
shareholders.

Net Profit Margin:

Net Profit margin = Net Profit / Sales x 100
Net Profit Margin gives us the net profit that the business is earning per dollar of sales. This
margin indicates the profit after all the costs have been incurred it shows that what % of turnover
is represented by the net profit.

Net Profit Margin

2013
12.5%

2012
12.3%

2011
11.6%

Net Profit Margin

12.60%
12.40%
12.20%

Axis Title

12.00%
11.80%
11.60%
11.40%
11.20%
11.00%
Net Profit Margin

2013

2012

2011

12.50%

12.30%

11.60%

NPM has shown an increasing trend which portrays that banks have been increasing their sales
which comes in the shape of interest and non-interest income while they have also reduced the
cost which is in shape of profit paid on saving accounts.

Operating Income Margin:

Operating Income Margin = Operating Income / Net Sales x 100
Net Op. Margin

2013
18.24%

2012
19.9%

2011
18.25%

Operating margin has decreased mainly due to increase in administrative expenses of the bank.
The bank is eyeing expansion in its branch network and opened 30+ Branches in 2013 which is
highlighted in the increasing admin and salary expenses.

Net Op. Margin

20.50%

20.00%

Axis Title

19.50%

19.00%

18.50%

18.00%

17.50%

17.00%
Net Op. Margin

2013

2012

2011

18.24%

19.90%

18.25%

Return on Assets:
Return on Assets (ROA) = Profit after Taxation / Average Total assets x 100
ROA, A measure of a company's profitability, equal to a fiscal year's earnings divided by its total
assets, expressed as a percentage.

ROA

2013
1.19%

2012
1.37%

2011
1.29%

According to above calculations 1.19 number of paisa earned on each rupee of assets in
2013. We can say net profit of bank is 1.19% of its average of total assets in 2013.
Similarly net profit is 1.37% and 1.29% of its average of total assets in 2012 and 2011
respectively.

Return on Equity (ROE):

Return on Total Equity = Profit after taxation / Total Equity x 100
Return on Equity measures the amount of Net Income earned by utilizing each dollar of Total
common equity. It is the most important of the Bottom line ratio. By this, we can find out how
much the shareholders are going to get for their shares.

2013
20.3%

ROE

2012
23%

2011
22.96%

ROE
23.50%
23.00%
22.50%
22.00%

Axis Title

21.50%
21.00%
20.50%
20.00%
19.50%
19.00%
18.50%
ROE

2013

2012

2011

20.30%

23%

22.96%

According to above calculations 20.3 number of paisa earned on each rupee of stock
holders equity in 2013. We can say net profit of bank is 20.3 % of its average of stock
holders equity in 2013.

d) Activity Ratios:
Activity ratio are sometimes are called efficiency ratios. Activity ratios are concerned with how
efficiency the assets of the firm are managed. These ratios express relationship between level of
sales and the investment in various assets inventories, receivables, fixed assets etc.

Total Asset Turnover:

Total Asset Turnover = Total Sales / Total Assets
The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales
in dollars by assets in dollars. Asset turnover measures a firm's efficiency at using its assets in
generating sales or revenue - the higher the number the better.

Total Sales
Total Assets
Total Asset
Turnover

2013
41,162,000
460,726,918
0.089

2012
44,414,000
453,105,539
0.098

2011
39,222,000
384,282,461
0.102

e) Market Ratio:
Market Value Ratios relate an observable market value, the stock price, to book values obtained
from the firm's financial statements.

Dividend per Share DPS:

Dividend per Share = Total amount of Dividend / Number of outstanding shares

DPS

2013
2.95

2012
2.14

2011
1.42

DPS
3.5

Axis Title

2.5

1.5

0.5

0
DPS

2013

2012

2011

2.95

2.14

1.42

The bank has been rolling out an increased rate of dividends over the years which reflect that the
bank paying out a hefty amount to shareholders and retaining less.

Earnings per Share- EPS:

Earnings per Share = Profit after Taxation / Number of shares outstanding
The portion of a company's profit allocated to each outstanding share of common stock. Earnings
per share serve as an indicator of a company's profitability.

EPS

2013
5.1

2012
5.4

2011
4.5

EPS has mainly declined due to decrease in profit after taxation for the bank as compared to
previous year.

EPS
6

Axis Title

0
EPS

2013

2012

2011

5.1

5.4

4.5

Price / Earnings Ratio:

Price / Earnings Ratio = Stock Price Per Share / Earning Per Shares
The P/E Ratio indicates how much investors are willing to pay per dollar of current Earnings. In
this manner, the P/E Ratio also indicates how expensive a particular stock is.

Price / Earning
Ratio

2013
9.04

2012
8.8

2011
7.9

The increasing trend of P/E ratio instills confidence of the customers to invest in BAHLs shares.

Dividend Payout Ratio:

Dividend Payout Ratio = Dividend per Share / Earning per Share
The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea
of how well earnings support the dividend payments. More mature companies tend to have a
higher payout ratio.

2013
0.57

Dividend Payout
Ratio

2012
0.39

2011
0.315

Dividend Payout Ratio

0.6

0.5

Axis Title

0.4

0.3

0.2

0.1

0
Dividend Payout Ratio

2013

2012

2011

0.57

0.39

0.315

The dividend payout ratio has increased significantly despite lower earnings in 2013 which
reflects that the management is committed to give back to the shareholders a hefty percentage of
what the bank has earned.

Dividend Yield:
Dividend Yield = Dividend per Share / Share Price
Financial ratio that shows how much a company pays out in dividends each year relative to its
share price. In the absence of any capital gains, the dividend yield is the return on investment for
a stock.

Dividend Yield

2013
4.26%

2012
3.8%

2011
3.4%

Book Value per Share:

Book Value per Share = Shareholders Equity / Share Capital
This is defined as the Common Shareholder's Equity divided by the Shares Outstanding at the
end of the most recent fiscal quarter. It is the Indication of the net worth of the corporation.
Somewhat similar to the earnings per share, but it relates the stockholder's equity to the number
of shares outstanding, giving the shares a raw value. Comparing the market value to the book
value can indicate whether or not the stock in overvalued or undervalued.

Book Value per

Share

2013
25.03

2012
23.5

2011
19.5

Price to Book Value Ratio

P/B Ratio = Stock price / Total Assets Intangible assets & liabilities
The price-to-book ratio measures a company's market price in relation to its book value. The
ratio denotes how much equity investors are paying for each dollar in net assets. A P/B ratio of
less than 1.0 can indicate that a stock is undervalued, while a ratio of greater than 1.0 may
indicate that a stock is overvalued.

P/B RATIO

2013
1.59

2012
1.38

2011
1.19

The P/B ratio is showing an increasing trend which is a sign of good stock market growth and
price appreciation. Hence we can say that the stock is over valued.

f) Statement of cash flow:

Cash flow ratios indicate liquidity, borrowing capacity or profitability. This section of the
financial ratio looks at cash flow indicators, which focus on the cash being generated in terms of
how much is being generated and the safety net that it provides to the company.

Operating Cash Flow to Total Debt:

Operating Cash Flow to Total Debt = Operating Cash Flow/Total Debt
This coverage ratio compares a company's operating cash flow to its total debt, which, for
purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of longterm debt and long-term debt. This ratio provides an indication of a company's ability to cover
total debt with its yearly cash flow from operations.

Operating Cash
Flow to Total Debt

2013
0.017

2012
0.086

2011
0.24

The operating cash flow has decreased over the years mainly because of borrowing with other
banks which has decreased significantly over the years and the bank is funding liabilities from its
own cash.