time series and forecasting of deposits of nbl

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 NII2004 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)

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.

1

Net interest income

0

500

1000

1500

2000

2500

2004 2005 2006 2007 2008

year

Tk in

millio

n

Net interest income

LIQUIDITY RATIO:

Landing Deposit Ratio = X 100

Table2: LD ratio (Taka in Million)Year Loan Deposit LD Ratio2004 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)

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):

2

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

Table2: Return on loans (Taka in Million)

Year Interest income Loans ROL2004 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:

3

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%

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 2008Ratio 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 assets

4.6% 3.79% 3.03%

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:

4

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.

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)

5

2009 72,527

2010 88,369

2011 107,671

2012 131,190

2013 159,845

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.


unit in the independent variable X (deposits).

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

6

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

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 million2009 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:

7

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,

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.




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



Y = -667.10 + .818X

The above equation indicates that if we increase deposit by 1 unit loans and advance

will increase by .818 units.


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

8

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

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.



9


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



Y = -1332 + .049X

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

increase by .049 units.


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 million2009 72,527 2221.82

2010 88,369 2998.08

2011 107,671 3943.88

2012 131,190 5096.31

2013 159,845 6500.40

10

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 Ratio2004 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.

Provision for Loan

Provision for loan = X 100

(Tk in million)

YearProvision 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

11

% of Classified loan = X 100

year Classified loans Loan

% Of classified 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:

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

year Paid-up capital Total asset Ratio2004 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

12

year deposits Total asset ratio2004 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 Ratio2006 1224.553 3279.431 37.34%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 % growth2004 2341.43 -

13

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 EPS2004 27.442005 43.852006 63.012007 66.112008 81.03

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 ratio2006 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

time series and forecasting of deposits of nbl

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