ratio analysis - hbl

Financial Analysis of Himalayan Bank Limited

Chapter I

Introduction

Background of the study:

This study is conducted for the partial fulfillment of the requirements of "Banking and Insurance." The final year students of BBS program of colleges affiliated with the Tribhuvan University are required to prepare a report in their concerned field in an organization as part of the regular course work.

Being a final year student in commercial field, I have conducted a brief study on the Himalayan Bank Limited. I have concentrated my study on the Financial Analysis of "The Himalayan Bank Limited-A Joint Venture with Habib Bank Limited, Pakistan." The chosen title of my study lies under the course offered by the Tribhuvan University, Nepal.

Financial resource is an inseparable component in every sphere of life. It is equally important to a social organization as well as for a business organization. Moreover, its importance to a financial organization like a bank, that keeps money for individuals or companies, exchanges currencies, make loans, and offers other financial services, can hardly be neglected. Finance plays an important role in the economy. As banks, credit unions, and other financial institutions provide credit, they help expand the economy by directing funds from savers to borrowers. A wide variety of financial institutions such as a bank has different roles in finance and the economy as it link lenders and borrowers. These institutions act as an intermediary among consumers, businesses, and governments by lending out deposits and help to boost up the national economy. So, the smooth operation of a bank mainly depends upon effective management of its financial resources and effective management is possible upon effective analysis.

Meaning of Commercial Bank:

Commercial banks are the most significant of the financial intermediaries, accounting for some 60 percent of the nation's deposits and loans. A commercial bank is a bank, which pools together savings of community and arrange for their productive use, accepting deposit on the condition that they are available on demand or on a short-term notice.

According to Nepal Commercial Act 2031, a commercial bank is a bank which operates currency exchanges transactions, accepts deposits, provides loans, and performs dealings relating to commerce except the banks which have been specified for the co-operative, agriculture and industry of similar specific objective.

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Functions of Commercial Banks:

The main functions of a commercial bank are as follows:

Acceptance of Deposits in Advancing Loans in Agency Service Credit Creation General Utility Services

Safekeeping of valuables Assist in foreign trade Making venture capital loans Financial advising Offers security brokerage services Offers investment banking and merchant banking services

Development of Commercial Banks in Nepal

The history of commercial banking in Nepal started after the establishment of Nepal Bank Limited in the year B.S. with a paid-up capital of Rs 8, 45,000. Later Nepal Rastra Bank was established as the central bank in 2013 followed by the establishment of Rastriya Banijya Bank.

After Nepal practiced Liberalization Policies, Nepal had access to many joint venture banks and other financial institution. Today, Nepal can take legitimate pride in the remarkable growth and progress in the banking and financial industry. Nepal has opened its door to foreign commercial banks to operate in the kingdom. Since then there are 17 commercial and development banks till date.

S. No. Financial Institution Numbers

1 Commercial Banks 17

2 Development Banks 16

3 Rural Development Banks 5

4 Finance Companies 55

5 Cooperatives 35

7 Insurance Companies 17

8 Non-Governmental organizations (Ltd banking transactions) 36

9 Pension Fund Companies 1

10 Credit Guarantee Corporation 1

11 Postal Saving Organization 1Table A

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Introduction to Himalayan Bank Limited

Himalayan Bank Limited was incorporated in 1992 by the distinguished business personalities of Nepal in partnership with Employees Provident Fund and Habib Bank Limited, one of the largest commercial banks of Pakistan. Banks operation was commenced from January 1993. It is the first commercial bank of Nepal with maximum share holding by the Nepalese private sector. Besides commercial activities, the Bank also offers industrial and merchant banking.

Himalayan Bank's policy is to extend quality and personalized service to its customers as promptly as possible. All customers are treated with utmost courtesy as valued clients. The Bank, as far as possible, offers tailor made facilities to its clients, based on the unique needs and requirements. To extend more efficient services to its customers, Himalayan Bank has been adopting innovative and latest banking technology. This has not only helped the Bank to constantly improve its service level but has also kept it prepared for future adaptation of new technology. Though Himalayan Bank Limited is young in terms of tenure of its operation, at present the bank is serving its valued customers with the following facilities besides the general banking services.

Credit Card:Himalayan Bank Limited has been a pioneer in introducing a Nepalese domestic Credit Card. The bank has introduced 'Himalayan Bank Gold Card' which has eased the banking operation. Likewise, the bank is also the member of VISA and MASTER Card. The bank issues all range of VISA card and has a plan to issue MASTER card.

Tele-Banking:To provide more prompt and efficient service to its customers, the bank has been pioneering on instituting Tele-banking service. Dialing a pre-specified telephone number, its clients will be able to:

Make balance and statement inquiresOrder statement and cheque booksRequest instant faxing of statementGet information on foreign exchange etc.

Any Branch Banking:This product, integrated with the core banking system has enabled the bank to make certain operations like withdrawal and deposit of cash and cheques from any of HBL branches. Customers maintaining account with any of HBL branches can operate its transaction from any branches convenient to them.

Automated Teller Machine:ATM established in the premise of Head Office, Thamel, Maharajgunj branch, Patan Branch and New Road Branch have enabled customers to extend services for 24 hours. Currently Customers can utilize ATMs and make withdrawals at any time round the clock. ATMs of the remaining branches are under testing phase of interfacing with ATM

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Switching software to enable all the ATMs of the bank to allow Any Branch and International transactions of the customers.

Share Subscription of Himalayan Bank Limited

Subscription % Holding

Promoter Share Holders 51 %

Habib Bank Limited, Pakistan 20%

Financial Institution (Employees Provident Fund) 14%

Nepalese Public Share Holders 15%

Total 100% Table B

Beneficiaries:

This analysis is destined to provide financial information to different sectors of business that is directly or indirectly influenced by financial performances of Himalayan Bank Limited. Especially this report will serve the management, share holders, long-term and short-term money lenders, creditors and employees members of Himalayan Bank Limited in implementing future projects or initiating corrective actions by status of the organization. In addition, this report may also help potential investors, financial institutions and people interested in financial analysis and similar business.

Objectives of the study:

The overall objectives of this study are to give a brief insight about the financial strength and weakness of the organization. However, the specific objectives of this analysis are as follows:

To evaluate the organization's financial statusTo evaluate the organization's operating efficiencyTo measure the comparative ratios of the bankTo measure the organization's short-term solvencyTo measure the organization's long-term solvencyTo evaluate the organization's efficiency in managing and utilizing its assetsTo help us work on the practical scenario of day-to-day operation in an organizational environment.To help in enhancing and developing managerial behavior and skills.

Limitations:

This study was done during the busy office hours. So it was somehow difficult to cope along with the office personnel and the entire analysis is based on the secondary data. The data provided then is limited to the research and the report. Detailed information

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about the financial resources of the bank could not be provided due to security reasons of the bank's operation technology and software.

Field Work Procedure:

The main objective of this fieldwork is to study the financial position of Himalayan Bank Limited. The study is purely based on the exploratory design finding access to the requisites of the study. The analysis is diagnosed through limited resources from the bank due to different reasons.In the beginning, required secondary data was obtained through the bank's website which was reviewed and presented in a systematic and tabular form along with charts to make the study more precise. The data collected were the bank's operating statements and balance sheets etc.

Method of data collection:

Data can be collected from different sources. Generally, there are two sources of data.

Primary Data:

Primary data are the first data obtained by the researchers during the field visit. These are the first data obtained for different kinds of study related to the research. It can be collected through interviews, interactions and questionnaires etc. Although primary data plays an important role by making the research person familiar with the field, work, people and the environment, in this analysis, however, primary data could not be obtained for different reasons.

Secondary Data:

Secondary data are second data that has already been published before in the form of records, annual reports, pamphlets, statistic gather, directories, publications, computer data banks etc. This entire report is based on the secondary data.Since the report is concerned with the financial analysis of the organization, balance sheets of five years from the fiscal year 2055/56 - 2059/60 were collected from different sources. The balance sheet and other required documents and information were obtained from the Eleventh Annual Report of Himalayan Bank Limited. Likewise other required information were collected from libraries, the bank's website and review of the previous studies done by former third year students.

Tools used for the analysis:

Financial analysis is a process of determining the financial relation amongst different financial variables, strength and weakness of a firm by establishing a scientific and systematic strategy and knowing the financial status of the firm at present. Different financial tools may be available for financial analysis. Ratio Analysis has been used as a tool in analyzing this part of field work

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Chapter II

Presentation and Analysis of Data

This chapter is incorporated with different tools for the analysis of the financial status of Himalayan Bank Limited. Different ratios are used for the purpose of analysis. The first presentation of the analysis is the comparative balance sheet.

A. Comparative Balance Sheet:A comparative balance sheet is an aggregate balance sheet prepared from the

individual balance sheets of many years. It helps to study, compare and make a quick review of the financial status of the firm.

Presented here is the comparative balance sheet of five years from the FY 2055/56 to 2059/60.

Comparative Balance Sheet of Himalayan Bank Limited

Amt Rs. in '000'Particulars 2055/56 2056/57 2057/58 2058/59 2059/60

1. Assets

Cash & bank balance 802208 901907 1435175 1264672 1979209

Placement 4125854 4682762 4057654 352350 150100

Investment 468945 2216416 4083160 9157107 10175435

Loans, advances & bills purchased

5245975 7224727 9015347 9557137 10844599

Total Current Assets 10642982 15025812 18591336 20331266 23149343

Fixed Assets 171313 193046 201679 318844 2,29,871

Other Assets 429801 644882 707557 665738 8,18,760

Total Assets 11244096 15863740 19500572 21315848 2,41,97,974

2. Liabilities

Borrowings 232653 128646 79527 534013 645840

Deposit Liabilities 9772736 14043097 17532404 18619375 21007379

Total current Liabilities 10005389 14171743 17611931 19153388 21653219

Other Liabilities 543604 821462 690369 660931 6,38,872

Total Liabilities 10548993 14993205 18302300 19814319 2,22,92,091

Net Assets 695103 870535 1198272 1501529 19,05,883

Paid up capital 192000 240000 300000 390000 429000

Proposed capitalization of profit bonus share

48000 60000 90000 39000 107250

Reserves 157144 200600 261697 309585 404389

Reserves for doubtful debt 243919 344484 477681 643414 842751

Retained earnings 54040 25451 68912 119530 122494

Total shareholders' Equity 695103 870535 1198272 1501529 1905883

Total Capital + liabilities 11244096 15863740 19500572 21315848 24197974

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Table C

Comparative Profit and Loss A/C Of

Himalayan Bank LimitedRs in '000'

Particulars 2055/56 2056/57 2057/58 2058/59 2059/60

Income

Interest Income 862054 1033660 1326378 1148998 1201234

Interest Expenses 533590 594800 734518 578134 554128

Net Income 328464 438860 591860 570864 647106

Commission and Discounts 101983 110330 96065 101704 102561

Foreign Exchange Income 63958 87327 119261 104601 109599

Other Income 5624 9685 31220 32038 30154

Non-Operating Income 1061 1695 2303 2451 10760

Total Income 501090 647897 840709 811658 900180

Expenses

Staff Expenses 47364 59880 85575 101537 120146

Operating Expenses 109746 132545 141116 155786 177132

Provision for Doubtful Debts 64570 103249 134320 166506 202873

Provision for staff Bonus 27941 34855 48336 38783 400003

Non-operating Expenses 0 3672 0 0 0

Total Expenses 249621 334201 409347 462612 900154

Profit before Tax 251469 313696 431362 349046 360024

Income Tax Provision 86221 114316 154323 114023 147896

Net Profit After Tax 165248 199380 277039 235023 212128

PL Appropriation

Profit/Loss Carried Down 234419 253420 302491 303936 331656Statutory General Reserve 33050 39876 57117 47005 42426Exchange Equalization Fund 429 3580 3962 901 1720Interest Spread Reserve Fund 770 0 0 0 0HBL Bond 2066 Redemption Reserve 0 0 0 0 51429Interim Dividend 28800 36000 60000 0 0Proposed Dividend 37200 84000 22500 97500 5645Transfer to Paid up Capital 0 0 0 0 0Proposed Capitalization of Profit Bonus Share 84000 60000 90000 39000 107250Income tax of Last Year 0 813 0 0 0Staff Gratuity Fund 2130 37000 0 0 0

Profit Transfer to Balance sheet 54040 25451 68912 119530 122493

Table DLiquidity Ratio:

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Liquidity ratio is defined as the test for solvency position for the payment of short-term liabilities, solvency position or liquidity denotes ability for the payment of short-term liabilities. It is extremely essential for a firm to be able to meet its obligation as they become due. Liquidity ratio measures the ability of a firm to meet its current obligation. In fact, analysis of liquidity need preparation of cash budget and cash and funds flow statement; but liquidity ratio by establishing cash and other current assets to current obligations, provide a quick measure of liquidity. A firm should ensure that it does not suffer from lack of liquidity and that it does not have excess liquidity. The failure of a company to meet its obligation due to lack of sufficient liquidity will result in a poor credit worthiness, loss of creditors’ confidence or even legal tangles resulting closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing. The firm’s fund will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity.

While considering liquid assets, it includes cash and those assets, which can be converted into cash within a year, such as sundry debtors, short-term investments, bank deposits; stock advances and accrued income etc. current; liabilities includes those obligation which mature within one year such as creditors, bills payable, outstanding expenses, bank drafts, income tax payable etc.

1. Current Ratio:

Current Ratio is the ratio between the current assets and the current Liabities of a firm. The current ratio is a measure of a firm’s short-term solvency. It indicates the availability of current assets in rupees for every one rupee of current liability. This ratio helps the company to determine the desirable liquidity position to meet its maturing obligations so; the company may neither suffer from lack of liquidity nor too much high liquidity.

The current ratio is calculated by dividing current asset by current liability. As a conventional rule, current ratio of 2:1 or more is considered satisfactory.

Mathematically, Current ratio = Current assets

Current liabilities Where, Current assets = cash and bank balance + receivables + advances and deposits Current liabilities = sundry creditors + payables and provisions

Calculation of Current RatiosAmount Rs. in "000"

Fiscal Year Current Assets Current Liabilities Current Ratios

2055/56 10642982 10005389 1.064

2056/57 15025812 14171743 1.060

2057/58 18591336 17611931 1.056

2058/59 20331266 19162388 1.061

2059/60 23149343 21653219 1.069

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Table 1

Comparative Current Ratios

0

5000000

10000000

15000000

20000000

25000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

1.045

1.05

1.055

1.06

1.065

1.07

Cu

rren

t R

ati

os

Current Assets

Current Liabilities

Current Ratios

Chart 1

The table 1.1 above shows different level of Current Ratios at varying level of Current Assets and Current Liabilities during the five year of observation. The highest and the lowest Current Ratios are 1.069 and 1.064 in the F.Y 2055/56 and 2059/60 respectively. Generally, Current Ratio of 2:1 is considered satisfactory. In case of the Himalayan Bank Limited, the current ratio is below the standard. However, the current ratio trend is increasing slowly which is a good sign of good liquidity management and satisfactory performance done by the bank.

2. Cash Ratio

Since cash is the most liquid asset, a financial analysis may examine cash ratio and its equivalent current liabilities. Trade investments or marketable securities are equivalent of cash; therefore, they may be included in the computation of cash ratio.

Mathematically, Cash Ratio = Cash + Marketable securities (investment)

Current Liabilities

Calculation of Cash RatioAmt Rs in '000'

Fiscal Year Cash Investment Current Liabilities Cash Ratio2055/56 1271153 100053892056/57 3118323 141717432057/58 5518335 176119312058/59 10421779 191533882059/60 12154644 21653219

Table 2

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Comparative Cash Ratios

0

5000000

10000000

15000000

20000000

25000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Amt i

n Rs

.

0.000

0.100

0.200

0.300

0.400

0.500

0.600

Cash

Rat

ios Cash Investment

Current Liabilities

Cash Ratio

Chart 2

The above table shows the highest and the lowest cash ratio of Himalayan Bank Limited as 0.561 and 0.127 times in the FY 2055/56 and 2059/60 respectively. The cash ratio trend of The Himalayan Bank is not satisfactory which means that the cash and the investments of this bank have very low liquidity to meet its current obligation. However the Cash Ratio trend is increasing which shows that the banks performances in meeting its current obligation are increasing.

3. Net Working Capital Ratio:

The difference between the current asset and the current liabilities excluding the short-term bank borrowings is called the net working capital of net current assets. Net working capital is some time used as the measure of firm’s liquidity. It is considered that, between two firms, the one having the larger working capital has larger ability to meet its current obligations. This is not necessarily so, the measure of liquidity is a relationship, rather than the difference between the current assets and the current liabilities. Net working capital however measures the firms’ potential reservoir of funds.

Mathematically,Net Working Capital Ratio = Net working Capital

Net AssetsWhere Net Assets = total current assets - total current liabilities-short - term bank

borrowingsCalculation of Net Working Capital Ratio

Amt Rs in '000'Fiscal Year Current Assets Current Liabilities -

Short Term Bank Borrowings

Net Working Capital Net Assets Net Working Capital Ratio

2055/56 10642982 9772736 870246 695103 1.2522056/57 15025812 14043097 982715 870535 1.1292057/58 18591336 17532404 1058932 1198272 0.8842058/59 20331266 18619375 1711891 1501529 1.1402059/60 23149343 21007379 2141964 1905883 1.124

Table 3

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Comparative Net Working Capital

0

500000

1000000

1500000

2000000

2500000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

NW

CR Net Working Capital

Net Assets

NWCR

Chart 3

During the study of period, net working capital ratio of the Himalayan Bank Limited is satisfactory. It has recorded the highest ratio of 1.252 and the lowest of 0.884 times in the fiscal year 2055/2056 and 2057/58 respectively. However, the ratio after the F.Y. 2057/58 is increasing towards satisfactory which shows the Bank has been maintaining sound liquidity position to meet its current obligations.

Leverage Ratio:

Leverage ratio is defined as the ratio of relationship between the total debt and total assets organization’s long-term solvency. The short-term creditors, like bankers and supplies of raw materials, are most concerned with the firms’ current debt paying ability. On the other hand, long-term creditors like debenture holders and financial institution etc are more concerned with the firms’ long-term financial strength. To judge the long-term financial position of a firm, financial leverage and structure ratio are calculated. These financial positions indicate mix of funds provided by owners and lenders. Generally, there should be an appropriate mix of debt and owner’s equity in financing the firm’s assets.

Debt Ratio:

Several Debt ratio s may be used to analyze long-term solvency of a firm. The firm may be interested in knowing the proportion of the interest bearing debt in the capital structure. We may therefore compute debt ratio by dividing total debt by total asset. Total debt will include long-term and short- term from financial institutions, debenture, bonds, and different payments arrangements for buying capital equipments, bank borrowings, public deposits and any other interest-bearing loan.

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Mathematically,

Debt Ratio = Total Debt Total Assets

Where, Total Debt = Borrowings + Deposit Liabilities + other LiabitiesTotal Assets = cash and Bank Balances + Placements + Investments + Loans,

Advances and Bills Purchased + Fixed Assets + Other Assets

Calculation of Debt Ratio

Amount Rs. In ‘000’Fiscal Year

Total Assets Total Debt Debt Ratio

2055/56 11244096 10548993 0.9382056/57 15863740 14993205 0.9452057/58 19500572 18302300 0.9392058/59 21315848 19814319 0.9302059/60 24197974 22292091 0.921

Table 4

Comparision Between Total Debt & Total Assets

0

5000000

10000000

15000000

20000000

25000000

30000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0.9050.9100.9150.9200.9250.9300.9350.9400.9450.950

Deb

t Rat

ios Total Assets

Total Debt

Debt Ratios

Chart 4

From the above study, the highest and the lowest debt ratio of Himalayan Bank Limited are 0.945 and 0.921 times in the F.Y. 2056/57 and 2059/60 respectively. Normally debt financing is costly and riskier in the long run. In this context, HBL has been reducing its debt financing since the F.Y. 2057/58 which is a good sign of financing. The current year's debt ratio is 0.921, which indicate that the bank has financed 92.10% of debt from total assets.

Debt Equity Ratio:

This ratio reflects the relation between the shareholder’s fund and the outsider’s fund. The relationship describing the lenders’ contribution for each rupee of the owners’

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contribution is called Debt-Equity Ratio. It is relationship between debt and equity, i.e. debt-equity ratio indicates to what extent the firm depends upon the outsiders for its existence.

Mathematically, Debt-Equity Ratio = Long Term Debt

Shareholders Equity

Calculation of Debt-Equity Ratio:Amount Rs. in ‘000’

Fiscal Year Total Debt Share Holders Equity Debt Equity Ratio2055/56 10548993 695103 15.1762056/57 14993205 870535 17.2232057/58 18302300 1198272 15.2742058/59 19814319 1501529 13.1962059/60 22292091 1905883 11.696

Table 5

Chart 5

From the above study, the highest and the lowest debt-equity ratio of Himalayan Bank Limited are 17.223% and 11.696% in the F.Y. 2056/57 and 2059/60 respectively. It indicates that the firm does not need to depend more on the outsiders for its financing. It has different other reliable sources for its financing.

Profitability Ratio:

A company should earn profit to survive and grow over a long period of time. Profit is essential but it would be wrong to assume that every action initiated by management should be aimed at maximizing profit, irrespective of social consequences. Profit is the difference between revenue and expenses over a period of time, usually one year. Profit is the ultimate output of a company, and it would have no future if it fails to make sufficient

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Comparative Debt-Equity Ratio

0

5000000

10000000

15000000

20000000

25000000

Fiscal Year

Am

t in

Rs.

0

5

10

15

20

Deb

t-E

qu

ity

Rat

io

Total Debt

Shareholders equity

Debt-Equity Ratio


profit. Therefore, a financial manager should continuously evaluate the efficiency of his company in terms of profit. The profitability ratios are calculated to measure the operating efficiency of a company. Besides management of a company, creditors and the owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principals regularly. Owners want to get a required rate of return on their investments. This is possible only when the company earns enough profits.Generally, higher value of profitability ratio shows better financial performances of the company and vice versa.

Return on Share Holder’s Equity (ROSE):

Common or ordinary shareholders are entitled to the residual profit. The rate of dividend is not fixed; the earnings may be distributed to the shareholders or retained in the business. A return on shareholders equity is calculated to see the profitability of the owners’ investments. ROSE indicates how a firm has used the resources of the owners. In fact this ratio is on of the most important relationships in financial analysis. Generally, higher ratio shows the efficient utilization of owner’s fund.

Mathematically, ROSE = Net Profit after Tax x 100

Shareholders Equity

Calculation of Return on Shareholders Equity

Amount Rs. in ‘000’Fiscal Year

Net Profit After Tax Share Holders Equity Return on Shareholders Equity

2055/56 165248 695103 23.7732056/57 199380 870535 22.9032057/58 277039 1198272 23.1202058/59 235023 1501529 15.6522059/60 212128 1905883 11.130

Table 6

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Calculation of Return on Shareholders Equity

0

500000

1000000

1500000

2000000

2500000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Amt i

n Rs

.

0

5

10

15

20

25

ROSE

Net Profit after TaxShareholders equityROSE


Chart 6In the above table, the highest and the lowest return on shareholders’ equity is 23.773% and 11.13% in the fiscal year 2055/56 and 2059/60 respectively. The return on shareholders equity of HBL is in decreasing trend. It may be due to decreasing profit after tax and increasing shareholders equity over the few years. The lowest percentage in return on shareholders’ equity in the current year may indicate inefficient management of incomes and expenses.

Return on Total assets:

Return on total assets is defined as the ratio of relationship between net profits after tax to total assets. It evaluates the efficiency of a firm in utilizing and mobilizing its assets.

Mathematically,Return on total Asset = Net Profit after Tax

Total Assets

Calculation of return on Total Assets

Amount Rs. In ‘000’Fiscal Year Net Profit After Tax Total Assets Return on Total Assets

2055/56 165248 11244096 1.4702056/57 199380 15863740 1.2572057/58 277039 19500572 1.4212058/59 235023 21315848 1.1032059/60 212128 24197974 0.877

Table 7

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Comparative return on Total Assets

0

5000000

10000000

15000000

20000000

25000000

30000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

RO

A

Net Profit After Tax

Total Assets

ROA


Chart 7

In the above table, the highest and the lowest return on total assets is 1.47 and .877 in the fiscal year 2055/56 and 2059/60. It shows that the management has utilized its assets to earn profit at it full capacity. The lowest ratio does not mean that the firm's profit is in a decreasing trend. It is due to the increasing trend in fixed assets. The profit after tax and the return on total assets of the company is satisfactory.

Earning Per Share (EPS):

Earning per share expresses the amount the shareholders get on every share held by them. It also helps to determine the market price of the equity share of the company and also helps in estimating the company's capacity to pay dividend to its shareholders.

Mathematically,EPS = Net profit after tax available to equity shareholders

No. of equity shares outstanding

Calculation of Earning Per Share(Amt Rs in '000')

Fiscal Year

Net Profit After Tax in "000"

No of Equity Shares in"000" Earning Per Share

2055/56 165248 192000 86.0672056/57 199380 240000 83.0752057/58 277039 300000 92.3462058/59 235023 390000 60.2622059/60 212128 429000 49.447

Table 8

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Earning Per Share

020406080

100

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

EPs Earning Per Share

Chart 8

The above table shows the highest and the lowest earning per share at 92.346% and 49.447% in the FY 2057/58 and 2059/60 respectively. During the five years analysis, although the EPS of HBL is good, it has gradually decreased. However, it does not mean that the EPS in the decreasing trend. It is due to bonus share of 107250 provided in the year 2059/60. It shows that profit of Himalayan Bank Limited is highly satisfactory.

Dividend Per Share (DPS):

The net profit after tax belongs to the shareholders. But the income, which they really received, is the amount of earnings distributed as cash dividends. Therefore, a large number of present and potential investors may be interested in DPS, rather than EPS. DPS is the total dividends divided by the total numbers of equity shares outstanding.

Mathematically,DPS = Total Dividends No. of Equity Shares Outstanding

Where, Total Dividend = interim dividend + proposed dividend

Calculation of Dividend per Share(Amt Rs. In '000')

Fiscal Year Total Dividend in No of Equity Shares Dividend Per Share2055/56 96000 192000 50.0002056/57 120000 240000 50.0002057/58 82500 300000 27.5002058/59 97500 390000 25.0002059/60 5645 429000 1.316

Table 9

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Chart 9

The above table shows that the highest and the lowest dividend per share as 50 in the F.Y. 2059/60 and 1.316 in the FY 2055/56 to 2056/57 respectively. The DPS of HBL has gradually decreased since the F.Y.2056/57 which is not a good sign to the shareholders.

Other Ratios:

The liquidity ratio, profitability ratio and the leverage ratio are mostly used for the manufacturing houses and firms. It does not mean that these financial indicators are not useful for analyzing banking sectors. However, for proper analysis of any ban\k, we have to use other ratios and other financial indicators. Different other ratios used are as follows:

Dividend Payout Ratio (D/P Ratio):

Also known as Payout ratio, dividend payout ratio is defined as the ratio that measures the relationship of earnings belonging to the ordinary shareholders and the dividend paid to them. It can be found out by dividing the DPS by EPS. Alternatively, it can be calculated by dividing the total dividend paid to the owners by the total no. of earnings available to them.D/P Ratio = Total Dividend to Equity Holders Total Net Profit Belonging to Equity Holders

Or, D/P Ratio = DPS

EPS

Calculation of Dividend Payout RatioAmount Rs. In '000'

Fiscal Year Earning Per Share Dividend Per Share Dividend Payout Ratio

2055/56 86.067 50.000 58.0952056/57 83.075 50.000 60.1872057/58 92.346 27.500 29.7792058/59 60.262 25.000 41.4852059/60 49.447 1.316 2.661

18

Dividend Per Share

0

20

40

60

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

DP

S DPS


Table 10

Chart 10

In the above table, the highest and the lowest D/P ratio are 60.187% and 2.661% % in the F.Y 2056/57 and 2059/60 respectively. In the current year, the D/P ratio has decreased sharply due to very low dividend compared to the earnings.

Return in Loans and Advances (ROLA):

The ROLA is defined as the relationship between net profit after tax and loans and advances. It shows the percentage of return on loans and advances provided by the firm.

Mathematically, ROLA = Net Profit after Tax

Loans and Advances

Calculation of Return on Loans and AdvancesAmount Rs. In '000'

Fiscal Year Net Profit After Tax in "000"

Loans and Advances Return on Loans & Advances

2055/56 165248 5245975 3.1502056/57 199380 7224727 2.7602057/58 277039 9015347 3.0732058/59 235023 9557137 2.4592059/60 212128 10844599 1.956

Table 11

19

Comparision Between EPS and DPS

0

10

20

30

40

50

60

70

80

90

100

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

EP

S /

DP

S

0

10

20

30

40

50

60

70

DP

Rat

io

Earning Per ShareDividend Per ShareDividend Payout Ratio


Comparision Between Loans & Advances and Net Profit Afrer Tax

0

2000000

4000000

6000000

8000000

10000000

12000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

RO

LA Net Profit After Tax

Loans & AdvancesROLA

Chart 11

In the above table, the highest and the lowest return on loans and advances are 3.15% and 1.956% in the FY 2055/56 and 2059/60 respectively. For a firm whose main income is the return on loans and advances, the decreasing trend of ROLA is not good. The rate of ROLA is inefficient for the bank. It shows that HBL has defaulted in collecting its return on the loans and advances.

Return on Net Fixed Assets (RONFA):

Return on Net Fixed Assets is defined as the relationship between net profit and net fixed assets. It shows the quantity of return on fixed assets. Mathematically,

RONFA = Net Profit after Tax Net Fixed Assets

Calculation of Return on Net Fixed AssetsAmount Rs in '000'

Fiscal Year Net Profit After Tax Net Fixed Assets Return on Net Fixed Assets2055/56 165248 171313 96.4602056/57 199380 193046 103.2812057/58 277039 201679 137.3662058/59 235023 318844 73.7112059/60 212128 229871 92.281

Table 12

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Comparative Net Fixed Assets and Net Profit After Tax

0

50000

100000

150000

200000

250000

300000

350000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0

20

40

60

80

100

120

140

160

RO

NFA Net Profit After Tax

NetFixed AssetsRONFA

Chart 12

The above table presents the ratio between net profit and net fixed assets. The highest and the lowest RONFA are 137.366% and 73.711% in the F.Y. 2057/58 and 2058/59 respectively. The percentage of return in net fixed assets is tending towards satisfactory.

Total Interest Earnings to External Assets (TIEEA):

Total interest earnings to external assets is the ratio of relationship between interest earnings and external assets. It is the ratio of interest earnings from its assets such as loans, advances, investments, placements etc. It shows how much a bank has earned from its external assets.

Mathematically,TIEEA = Total Interest Income

Total External Assets

Where, Total external assets = investments + money at call and short notice + loans,

advances and bills purchased and discounted

Calculation of Total Interest Earnings to external AssetsAmount Rs. in '000'

Fiscal Year

Total Interest Earnings

Total External Assts

Total Interest Earnings to External Assets

2055/56 862054 9840774 8.7602056/57 1033660 14123905 7.3192057/58 1326378 17156161 7.7312058/59 1148998 19066594 6.0262059/60 1201234 21170134 5.674

Table 13

21


Chart 13

The above table presents the highest and the lowest percentage of total interest earnings to external assets as 8.76% and 5.674% in the FY 2055/56 and 2059/60 respectively. The return or the income not satisfactory. The management should use effective policy to increase its interest income from external assets.

Exchange Earning to Gross Income (EEGI):

Exchange earning to Gross Income is the relationship between earnings from foreign income and gross income excluding gross expenses. It shows the income from foreign currency exchange.

Mathematically, EEGI = Foreign Exchange Income

Gross Income

Calculation of Exchange Earnings to Gross Income(Amt Rs in '000')

Fiscal Year Foreign Exchange Income

Gross Income Exchange Earnings To Gross Income

2055/56 63958 501090 12.7642056/57 87327 647897 13.4792057/58 119261 840709 14.1862058/59 104601 811658 12.8872059/60 109599 900179 12.175

Table 14

22

Comparative External Assets and Total Interest Earnings

0

5000000

10000000

15000000

20000000

25000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0

2

4

6

8

10

TIE

EA Total External Assets

Total Interest EarningsTIEEA


Chart 14

The above table shows the highest and the lowest EEGI as 17.54% in the FY 2054/55 and 6.16% in the FY 2053/54 respectively. The percentage of EEGI in gross income is satisfactory but not highly satisfactory.

Commission to Gross Income (CGI):

Commission to gross income is the ratio that shows the percentage of commission and discount in total income or gross income. A financial manager should know the percentage of commission to make effective policy in the near future.

Mathematically, CGI = Commission and Discount Gross Income

Calculation of commission to Gross IncomeAmount Rs. in '000'

Fiscal Year Gross Income Commission And Discount Commission to Gross Income2055/56 501090 101983 20.3522056/57 647897 110330 17.0292057/58 840709 96065 11.4272058/59 811658 101704 12.5302059/60 900179 102561 11.393

Table 15

23

Comparative Exchange Earnings And Gross Income

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

EE

GI

Foreign Exchange Income

Gross Income

Exchange Earnings To GrossIncome


Chart 15

The above table shows the highest and the lowest CGI ratios as 20.352% and 11.393% in the FY 2055/56 and 11.393% respectively. The percentage of commission in total income is not so satisfactory and it should be noted that the decreasing trend of CGI is not a good symptom of effective management.

Total External Assets to Total Deposit (TEATD):

The ratio of total external assets to total deposit refers to the relationship between external assets i.e. out gone assets or investments with deposit collection. It shows in which ratio the bank has utilized its deposit in external assets.Mathematically,

TEATD = Total External Assets Total Deposit

Where,Total external assets = investments + placement + loans, advances, bills

purchased and discounted.

Calculation of Total External Assets to Total DepositAmount Rs. In '000'

Fiscal Year Total External Assts Total Deposit Total External Assets to Total Deposit2055/56 9840774 9772736 100.6962056/57 14123905 14043097 100.5752057/58 17156161 17532404 97.8542058/59 19066594 18619375 102.4022059/60 21170134 21007379 100.775

Table 16

24

Comparative Gross Income And Commission & Discount

0100000200000300000400000500000600000700000800000900000

1000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0.0

5.0

10.0

15.0

20.0

25.0

CG

I

Gross IncomeCommission & DiscountCGI


Chart 16

The above table shows the highest and the lowest TEATD ratio in percentage as 102.402% and 97.854% in the FY 20584/59 and 2057/58 respectively. It means that the external assets have been invested properly from total deposit, which is a symptom of effective management policy.

Total Shareholders Equity to Total Risk :(TSETR)

Total shareholders equity to total risk ratio defines the risk for the shareholders in their share of profit. It shows that risk in shareholders equity from loans, advances and bills purchased that is provided by the bank. It can be calculated by dividing shareholders equity by total risk.

Mathematically, TSETR = Shareholders Total RiskWhere Total Risk = Loans, advances and bills purchased

Calculation of Total Shareholders Equity to Total RiskAmount Rs in '000'

Fiscal Year

Share Holders Equity Total Risk

Total Shareholders equity to Total Risk

2055/56 695103 5245975 13.2502056/57 870535 7224727 12.0492057/58 1198272 9015347 13.2912058/59 1501529 9557137 15.7112059/60 1905883 10844599 17.574

Table 17

25

Comparative Total External Assets to Total Deposit

0

5000000

10000000

15000000

20000000

25000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

95

96

97

98

99

100

101

102

103

TE

AT

D Total External AssetsTotal DepositTEATD


Chart 17

In the above table the highest and the lowest TSETR ratios are 17.574% and 12.049% in the F.Y. 2059/60 and 2056/57 respectively. It is considered that this ratio is to be lowered much as possible. The increasing trend of this ratio in case of HBL indicates that HBL's risk is also increasing simultaneously.

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Comparative Shareholders Equity to Total Risk

0

2000000

4000000

6000000

8000000

10000000

12000000

2055/56 2056/57 2057/58 2058/59 2059/60

Fiscal Year

Am

t in

Rs.

0

2

4

6

8

10

12

14

16

18

20

TSE

TR Shareholders Equity

Total RiskTSETR


Study Result:

Financial performance concerns with the measurement and analysis of financial operation of a firm through liquidity, leverage, profitability, turnover and other useful ratios. By using ratio analysis as an analytical tool, some of the results found through this study are as follows:

Current ratio of Himalayan Bank Limited shows that the higher ratio is 1.069 and the lowest ratio is 1.056 times. Generally, the current ratio is concerned satisfactory when 2:1. In this sense, the current ratio of this bank is not much satisfactory.

Cash ratio of Himalayan Bank Limited shows highest and lowest ratios as 0.561 and 0.127 respectively. The cash ratio trend of Himalayan Bank Limited is not satisfactory and has very low liquidity to meet its current obligation.

Net Working Capital Ratio of Himalayan Bank Limited has recorded highest and the lowest as 1.252 and 0.889 times. It shows that Himalayan Bank Limited has maintained a sound liquidity position to meet its current obligation.

The highest and lowest debt ratio of Himalayan Bank Limited is 0.9456 and 0.921 times respectively. HBL has been reducing its debt financing since the F.Y. 2057/58 which is a good sign of financing. The current year's debt ratio is 0.921, which indicate that the bank has financed 92.10% of debt from total assets.

Higher return on shareholders equity ratio shows efficient utilization of owners' investment. Here, highest ratio is 23.773% and the lowest ratio is 11.13%. The lowest percentage in return on shareholders’ equity in the current year may indicate inefficient management of incomes and expenses.

Return on total asses measures the profitability of invested funds in the organization. The highest and the lowest ratios recorded here are 1.47% and 0.877% respectively. The lowest ratio does not mean that the firm's profit is in a decreasing trend. It is due to the increasing trend in fixed assets. The profit after tax and the return on total assets of the company is satisfactory.

Earning per share helps in estimating the organization's capacity to pay dividends. In this respect, the highest and the lowest ratios of Himalayan Bank Limited are 92.346% and 49.447%. During the five years analysis, although the EPS of HBL is good, it has gradually decreased. However, it does not mean that the EPS in the decreasing trend. It is due to bonus share provided in the year 2059/60. It shows that profit of Himalayan Bank Limited is highly satisfactory.

A large number of present and potential investors may be interested in DPS. The highest and the lowest DPS recorded are 50% and 1.316. The DPS of HBL has

27


gradually decreased since the F.Y.2056/57 which is not a good sign to the shareholders.

The dividend payout ratio measure the earnings belonging to the ordinary shareholders and dividend paid to them. In the previous table, the highest and the lowest D/P ratio is 60.187% and 2.661%. In the current year, the D/P ratio has decreased sharply due to very low dividend compared to the earnings.

Higher return on loan and advances are preferable. Here, the highest and the lowest ROLA are 3.15% and 1.956. The rate of ROLA is inefficient for the bank. It shows that HBL has defaulted in collecting its return on the loans and advances.

Return on net fixed asset is the total profit returned in total investment in fixed assets. Higher return is considered the best. In the above table, the highest and the lowest RONFA is 137.366% and 92.281%. The percentage of return in net fixed assets is tending towards satisfactory.

Total interest to external asset means the profit earned from investments. Here, the highest ratio is 8.76% and the lowest ratio is 3.674%. The return or the income not satisfactory. The management should use effective policy to increase its interest income from external assets.

The highest and the lowest exchange earnings to gross income ratio of Himalayan Bank Limited are 114.186% and 12.175%. The percentage of EEGI in gross income is satisfactory but not highly satisfactory.

Commission to gross income ratio Of Himalayan Bank Limited has recorded highest and the lowest as 20.352% and 11.393% respectively. The percentage of commission in total income is not so satisfactory and it should be noted that the decreasing trend of CGI is not a good symptom of effective management.

The external assets to total deposit mean the ratio of relationship between investments with deposit. In case of HBL, the highest and the lowest ratio recorded are 102.402% and 97.854% respectively. It means that the external assets have been invested properly from total deposit, which is a symptom of effective management policy.

Lowest ratio in shareholders equity to total risk is preferred best. In the above-mentioned table, the highest and the lowest ratios recorded are 17.574% and 12.049% respectively. It is considered that this ratio is to be lowered much as possible. The increasing trend of this ratio in case of HBL indicates that HBL's risk is also increasing simultaneously. It can be highly satisfactory if the ratio go down further.

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Chapter III

Summary and Conclusion

Summary:

Nepal being a development country has not been able to reach the peak of development due to the lack of finance. It has many sectors to develop, which can be done by the government or the private sectors. For this development, a bank has played a vital role. It has been providing loans to the government and private sectors for development as well as for business purpose to the public and the private sectors. A bank provides money to the government by purchasing treasury bills and providing loans to the public for agriculture, small as well as cottage industries by keeping reasonable securities. A bank is a financial institution that deals with financial securities. It also works as a financial intermediary for the public.

There are many banks involved in this field, amongst which Himalayan Bank Limited is one.

The objective of this study is to investigate whether Himalayan Bank Limited is sound or not. To fulfill this objective, financial data are collected from Himalayan Bank Limited for a period of five years, from the fiscal year 2055/56 to 2059/2060.

After they have organized in a suitable table and charts, financial position and performances of Himalayan Bank Limited is determined using the financial tools such as Ratio Analysis.

Conclusion:

The following conclusion referring to the ratio calculated and interpreted has been drawn regarding the financial situation of the organization.

Liquidity position of Himalayan Bank Limited is good. It has a satisfactory liquid asset and there is no liquidity crisis in the organization. The current ratio, cash ratio and the net working capital has been balanced but is not very satisfactory. No body can predict the future. The main obligation of a commercial bank is to pay to its depositors on demand. In case if a bank defaults so, it may have a negative impact on its worthiness. In addition to this, in this competitive world good will is a must. Hence, the bank should, in future, try to maintain a sound liquidity position.

Himalayan Bank Limited has properly balanced the leverage ratio. It seems that the bank has properly balanced the debt from the total assets. The ratio is satisfactory which implies that management has been utilizing its assets and capital efficiently and optimally.

29


Profitability position of Himalayan Bank Limited is not highly satisfactory. Although the bank has been earning profits every year, the profit so earned is not enough for a financial firm. On the basis of this analysis, we can clearly see that the main profit indicators such as Return on shareholders equity, return on total assets, dividend per share, earning per share etc. are in a decreasing trend. Hence, it can be concluded that profitability position of HBL is not so good.

Other ratios such as D/P ratio, return on loans and advances, return on net fixed assets, exchange earnings to gross income, commission to gross income, external assets to total deposits and total shareholder equity risk ratios are satisfactory however the firm should try to minimize risk much as possible.

Last but not the least, this analysis is based only on the availability of an annual report. Other necessary documents required for the total analysis could not be obtained due to various reasons. Likewise, an analysis based only in terms of ratios may not be sufficient for the overall analysis of a bank. Hence, due to these limitations this report can not be concluded as the overall and the actual analysis of Himalayan Bank Limited. This analysis report may only be used as reference concerning the Financial Analysis of Himalayan Bank Limited. In addition, since the bank is run by highly competent personnel, they may have utilized the bank's assets and loans to its optimum capacity.

30


Recommendation

Based on the study performed, the following suggestions are recommended.

The current ratio shows the minimum position, which is not satisfactory and the cash ratio trend is not much satisfactory either to meet its current obligations. Management should be concerned about it and they should try to maintain a good cash ratio in the coming future.

The profitability ratio of Himalayan Bank Limited is not highly satisfactory. The financial manager should make more effective policies to make high profit.

The trend of return on loans and advances is not much satisfactory. The bank has a high percentage of public deposits and to pay interest to them the ratio of returns on loans and advances are not much enough. The management should investigate and make effective policies to increase the ratio of return on loans and advances.

The ratio of percentage of return on net fixed assets is highly satisfactory. However, after the FY. 2052/53, the percentage of return on net fixed assets is slightly in a decreasing trend, which is not a good indication in this cut- throat competition. The management of the bank should investigate the reasons for the decreasing tend and should increase the ratio in the coming year.

The highest ratio of earnings to external assets is satisfactory but not much. The management should use effective policies to increase its interest income trend from external assets.

Exchange earnings to gross income ratio are satisfactory but it would have been more precise if the trend were higher.

The ratio of commission to gross income is satisfactory but the trend is slowly decreasing which is not a good symptom for the bank. So the management should investigate about this and use different policies to increase its commission income.

Total shareholders equity to total risk rate trend clarifies that the risk in shareholders equity is not high. This ratio must be lowered, as the owners are concerned their equity of profit. Therefore, management should decrease the ratio mush as possible.

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ratio analysis - hbl

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