Ratio Analysis

Financial Ratio Analysis 2009
Financial Ratios Analysis

A case study of Bank Al-Falah and Habib Bank Ltd.
092-006-115
Faculty of Commerce & Management Sciences
MINHAJ UNIVERSITY LAHORE
Table of Contents
EXECUTIVE SUMMARY ..................................................................................................................... 2
OBJECTIVES OF THE PROJECT........................................................................................................... 2
INTRODUCTION................................................................................................................................ 3
Introduction to Banking Sector .................................................................................................... 3
Evolution of Banks........................................................................................................................ 3
Definitions of Bank....................................................................................................................... 4
Evolution of Banking in Pakistan.................................................................................................. 6
Types of Banks ........................................................................................................................... 13
THEORETICAL ASPECTS .................................................................................................................. 16
RATIO ANALYSIS ......................................................................................................................... 16
Current liabilities........................................................................................................................ 19
COMPARATIVE ANALYSIS OF HBL VS. BANK AL FALAH.................................................................. 26
Horizontal Analysis..................................................................................................................... 59
VERTICAL ANALYSIS.................................................................................................................... 69
REVIEW OF DESCRIPTIVE INFORMATION....................................................................................... 80
Comparisons .............................................................................................................................. 82
Trend Analysis............................................................................................................................ 82
SUMMARY...................................................................................................................................... 87
CONCLUSIONS AND RECOMMEDATIONS ...................................................................................... 89
ANNEXURES ................................................................................................................................... 91
A Case Study of Bank Alfalah and Habib Bank Ltd ( 092-006-115-Minhaj University) Page 1
EXECUTIVE SUMMARY
This study project is undertaken to analyze the financial statement and then to measure the
performance of the Habib Bank Limited and related sectors. For this purpose various aspects,
techniques and financial tools are used in this project.
Financial analysis refers to an assessment of the viability, stability and profitability of a business.
For analysis of financial statement distinct ratio methods has been used. Financial ratio analysis
shows a growth in financial statement and analysis also shows that bank have strong
position and having better future. For Comparison purpose the financial statements of HBL
have been statistically measured with Bank Al Falah Ltd.
Through this study it has been realized that Habib Bank is performing very well since its
inception. It is quite difficult to give suggestion to improve the banking conditions of Habib Bank
Limited. As we know that nothing is perfect, there is always a room for improvement so at the
end of the project some measures have been suggested, if implemented these would be of high
advantage for future development of Habib Bank Limited.
OBJECTIVES OF THE PROJECT

The basic purpose of this project is to understand the financial system of a Bank and to know
about analysis of a financial statement by applying my analytical and professional skills.
This project will help the reader to understand and analyze financial affairs of a commercial
Bank
INTRODUCTION
Introduction to Banking Sector
Banking is the business of providing financial services to consumers and businesses. The basic
services a bank provides are checking accounts, which can be used like money to make
payments and purchase goods and services; savings accounts and time deposits that can be
used to save money for future use; loans that consumers and businesses can use to purchase
goods and services; and basic cash management services such as check cashing and foreign
currency exchange. Four types of banks specialize in offering these basic banking services:
commercial banks, savings and loan associations, savings banks, and credit unions.
A broader definition of a bank is any financial institution that receives, collects,

transfers, pays, exchanges, lends, invests, or safeguards money for its customers.
This broader definition includes many other financial institutions that are not usually thought of
as banks but which nevertheless provide one or more of these broadly defined banking services.
These institutions include finance companies, investment companies, investment banks,
insurance companies, pension funds, security brokers and dealers, mortgage companies, and
real estate investment trusts.
Evolution of Banks
There are different opinions that how the word ‘Bank’ originated. Some of the author’s opinion
that this word is derived from the word ‘Bancus’ or Banque’, which means a bench. The
explanation of this origin is attributed to the fact that the Jews in Lombard transacted the
business of money exchange on benches in the market place; and when the business failed, the
people destroyed the ‘bench’. Incidentally the word ‘Bankrupt’s said to have evolved from this
practice.
Some of the authors are of opinion that the word ‘Bank’ is derived from the German word back,
which means ‘joint stock fund’. Later on when the German occupied major part of the Italy the
word ‘Back’ was italicized into ‘Back’.
In fact human left the need of bank when it begins to realize the importance of money as a
medium of exchange. Perhaps it where the Babylonian who developed banking system as early
as 2000 BC. At that time temples were used as banks because of their prevalent respect. During
the rule of king Hamurabi (1788 – 1686 BC) the founder of Babylonians Empire, loans were
started being granted for interest. The borrower has to provide guarantee or he had to pledge
his goods or valuables. King Hamurabi drew up a code wherein he laid down standards rules for
procedures for banking operations by temples and great landowners. Also in Greece, the
temples were used as banks, where the people deposited their money and other valuables for
safe custody and security. In Europe with the ‘revival of civilization’ (Renaissance) in the middle
of twelve century, trade and commerce started expanding and this development compelled the
business community to borrow the money from the Hebrew money lenders on high rates of
interest and usury. Seeing the great demand, these moneylenders started organizing themselves
and bank started up at the principle seaports of southern Europe. Soon Venice and Geneva
became the most important money markets of the time and banking though different from its
present form, flourished. What we know as ‘modern banking’ originated in the 14th century in
Barcelona.
Definitions of Bank
"A financial institution, which deals with money and credit. It accepts
Deposits from individuals, firms and companies at a lower rate of
Interest and gives at higher rate of interest to those who need them.”
A financial establishment which uses money deposited by customers for investment, pays it out
when required, makes loan at interest, exchanges currency, etc.
J.W Gilbert in his principles and practice banking defines a banker in these words:
“A banker is dealer in capital or more properly, a dealer in money. He is intermediate party

between the borrower and the lender. He borrows of one and lends to another”.
Sir John Paget defines banker in these terms:
“That no person or body, corporate or otherwise, can be a banker who does not
 Take deposits accounts.
 Take current accounts,
 Issue and pay Cheques and
 Collect Cheques crossed and uncrossed for his customers” (The law of Banking by Sir
John Paged, page 51).
The American defined the term banker in a very broad sense as under:
“By banking, we mean the business of dealing in credits and by a ‘Bank’ we include every
person, firm or company having a place of business where credits are opened by deposits of
collection of money or currency. Subjects to be paid or remitted on Cheques or order, money is
advanced or loaned on stocks, bonds, bullion, bill of exchange, promissory notes are received for
discount or sale”.
“Banks do business of money. Rather banks do business of lending and borrowing loans.”
“Banks are guardian distributor of cash money”.
“Banker or a bank or a person or company carrying on the business receiving moneys and
collecting drafts for customers subject to the obligation of honoring cheques drawn upon them
from time to time by the customer to the extent of the amount available on their current
accounts”.
Evolution of Banking in Pakistan

The first phase in evolution of banking in Pakistan sees very hard days for the whole banking
sector. Starting virtually from scratch in 1947, the country today possesses a full range of
banking and financial institutions to cope with various needs of the economy.
The area now constituting Pakistan was, relatively speaking, fairly well provided with banking
facilities in undivided India, in March 1947 there were 3496 offices of Indian scheduled banks
out of which as many as 487 were situated in territories now constituting Pakistan.
The Reserve bank of India was the central banking authority in India. At the time of partition it
was decided that in the interest of smooth transition it should continue to function in newly
emerging state of Pakistan, until 30th Sep.1948.
In 1947 due to uncertainty and unsuitability the banking sector suffer heavy losses.
This resulted in a negative effect on baking service in Pakistan. The banks, which had their
registered offices in Pakistan, transferred them to India. In an effort to bring about the collapse
of the new state by pushing a deliberate policy of withdrawals the Indian bank offices closed
quickly. Those banks, which stayed, operated only in name pending the winding up of their
business. The number of scheduled banks thus declined form 487 branches before
independence to only 195 branches by 30th June1948.
Banking Growth during (1948-1970)
In this tense situation, a committee was immediately setup to formulate a scheme of central
banking legislation for Pakistan. Many specialists were of the opinion that in view of the acute
shortage of trained staff, any idea of establishing a central bank was I impractical and the best
that could be attempted was the setting up of a currency board until such times as sufficient
staff could be organize to operate a central bank.
The questions as to whether the institution should be only a currency board or a full-fledged
central bank had exercised the mind of the Pakistan government since independence. Through,
it was realized that the shortage of trained personal to run the central bank would present
serious difficulty in view of the tangible advantages that a central bank enjoyed over currency
board, the government ultimately decided to take the bold step of setting up a full fledged
central banking authority. Among other factors, which led to this decision, there was the fact
the banking facilities in the country had been totally disrupted and there was an urgent need for
their rehabilitation, which a central ban alone could meet. As there was hardly any time to pass
as Act, an order was drafted, known as the state bank of Pakistan order, which was promulgated
by the government of Pakistan on 12th may 1948. The state bank declared open on July 1, 1948
by the father of the nation.
One of the first tasks of the state bank was to arrange for the replacement of the Reserve bank
of India notes, which had continued to circulate in Pakistan during the transitional period, by
Pakistan currency.
The first Pakistan notes were issued in October 1948 in the denominations of Rs. 5, 10 & 100.
An equally urgent task, which the new central bank had to address itself, was the creation of a
national banking system. To this end, while extending every help and encouragement to Habib
Bank to expand its organization, the state bank recommended the setting up of a new banking
institution to serve both as an agent to the state bank recommended the setting up of a new
banking institution to serve both as an agent of the state bank as well as the spearhead of its
credit polices.
Accordingly the NATIONAL BANK OF PAKITSN was setup under an ordinance in November 1949.
It started with six offices in the former East Pakistan. In view of the special role assigned to the
new institution, contrary to traditional practices the Governor of the state bank was appointed
to head its board of Director in 1950. Under the fostering care of the state bank and the support
of the government, the new institution developed rapidly. By using its special powers, the state
bank made liberal advances to the new bank to help it expand credit facilities in the country. By
1952, the National bank of India. Shortly, afterwards, in November 1952, the governor of the
state bank ceased to function as the president of National bank of Pakistan.
With a view to broadening the institutional framework of the financial system, the state bank
also sponsored the establishment of specialized credit institutions in the filed of agriculture and
industry. Banking companies (control) act was passed in December 1948 specifically
empowering the state bank to control the operations of banking companies in Pakistan.
Moreover realizing that the most serious limitation on the expansion of banking services in
Pakistan was the lack of trained personal, the state bank sponsored a banking training scheme,
which was repeated after year and turned out a large number of bankers.
As the Commercial Banking facilities continued to expand, a new Pakistani bank, the National
Commercial Bank was established and registered as a scheduled bank. In the filed of industrial
finance a new institution known as the industrial credit and investment cooperation was set up.
The year 1958 marked the completion of the first decade of the working of the State Bank of
Pakistan. When it was established there were only 195 bank offices in existence. At the end of
June 1958 their number had increased to 307, of which Pakistani banks accounted for 232
against 25 in mid 1948. Moreover at the end of June 1958, Pakistani banks held 60% of the total
banks deposits, and were responsible for 65 of total bank credit.
When the Ayub Government took over in 1958, the banking and monetary scene was
significantly affected by Developments such as the liberalization of imports, transfer of business
in food grains to the private sector, and the firming up of commodity markets. The demand of
funds picked up and there was a substantial expansion of bank credit to the private sector. The
pace of expansion in the institutional frame work of the country’s banking system quickened
and a new Pakistani, bank, namely the United Bank Limited was established.
Owning the five years 1960-65, the credit structure in Pakistan made rapid progress. The bank
extended its network by opening six new offices located at Chitagong, Peshawar, Quetta,
Khulna, Layallpur and Rawalpindi. The number of scheduled bank offices rose from 430 at the
end of June 1960 to 1591 in June 1965. Several new banks were added to the list of scheduled
banks.
Two principal additions were the commerce bank, and the standard bank. The number of
scheduled banks, which stood at 29 in June 1960 rose to 36 by June 1965.
Under the impact of economic growth and dear scope of private enterprises, bank credit to the
private sector rose from Rs. 1,458 millions to Rs. 5759 million. Thus the total expansion in bank
credit to the private sector during this period amounted to Rs. 4300 million, which gave a annual
expansion of Rs. 860 million compared to the annual average increase of Rs. 144 million over
the preceding five years. Banks deposits increased from Rs. 2,493 million to Rs. 6883 million
during the five years period ended June 1965 compared to Rs. 231 million in the proceeding five
years. Time deposits during this period increased from Rs. 946 million to Rs. 3228 million, where
demand deposits rose from Rs. 1997 million to Rs 3655 million. The increase in time deposits
was particularly rapid. The ratio of time deposits to total deposits in June 1965 stood at 49.6
percent age as against 32.01 percent age five years earlier. Another salient feature of banking
development during this period was that since the rate of increase in bank deposits lagged
behind the rate of expansion in bank credit, the banked has to depend increasingly on central
bank finance. They borrowing from the state bank rose from Rs. 11 million in June 1960 to Rs.
1688 million in June 1965. Owing keen demand for bank credit, bank’s investments could not
increase as rapidly as their advances. Their investments totaled to Rs. 1,874 million at the end of
June 1965 compared to Rs. 1,231 million in June 1960. Investments which were almost equal to
their advances in June 1960 were only about one third of the advances in June 1965.
The third plane period witnessed a further expansion of banking facilities in the country the
total number of scheduled banked offices increased from 1,591 at the end of June 1965 to 3133
at the close of June 1970. During the same bank credit to the private sector rose from Rs. 5,789
million to Rs. 9492 million. There was also a substantial growth in the bank deposits, which
increased from Rs. 6883 million June 1965 to Rs. 13147 million at the end of June 1970. A
remarkable change occurred during this period related to the composition of deposits. Time
deposit becomes greater than demand deposits forming about 54 percent age of the total
deposits. As oppose to what happened in the previous period, banks were able to finance a
mush higher level of credit expansion without having to increase their borrowings from the
central bank.
Banking Reforms 1972
After the assumption of office by a new government in 1971, may 1972 different reforms were
introduced to make the banks more responsive to the requirements of economics growth with
social justice. The reforms aimed at bringing about a more purposeful and equitable distribution
of bank credit, improving the soundness and efficiency of the banks, and securing greater social
accountability of the banking system as a whole.
The role of the banking system had been truly spectacular in mobilizing savings of the
community and meeting the credit needs of the economy. But at the same time, the banks had
generally neglected their role in promoting social justice and had failed to play an effective role
in ensuring a wider and more equitable dispersal of the benefits of economic growth. In
particular the inter locking of ownership with commercial and industrial interests had led to the
misuse of bank resources. There was a heavy concentration of credit in big accounts and in
urban area. Credit facilities for agriculture, small business, newly emerging exports and housing
had remained obviously inadequate while the banks indulged in capital financing in few selected
business sectors and issued guarantees on behalf of favored clients, term clients, term financing
facilities for industry were wholly absent.
Under the banking reforms introduced in May 1972 the state bank of Pakistan was accorded
wider powers. It was authorized to remove directors or managerial personnel, if necessary and
supersede the board of directors of a banking company and appoint administrators during the
period of such super session. It was also empowered to nominate directors on the board of
every bank. As regard bank directors, it was provided that anyone defaulting in meeting his
obligations to bank would forfeit his directorship. Moreover, it was laid down that no person
could serve as director of a bank for more than six years continuously. Each bank was required
to have a paid up capital of not less than 5 percent age of its deposits to be progressively build
up to 10 percent age over a period of time. The banks were also required to transfer 10
percentage of their profit their reserves every years after the reserve became equal to the paid
up capital. With a view to diversity the ownership of the banks, the banks were required to raise
new capital from the market. Unsecured loans to directors, their families or firms and
companies, were totally prohibited.
The bank reforms also brought about the establishment of new institutions to achieve new
objectives.
A national credit consultative was setup under the supervision of the state bank with
representation from the government and the private sector. It was assigned the task of
determining of economy’s annual credit needs within the safe limits of monetary and credit
expansion with reference to the annual development plan. Such a credit plan was to cover the
public and private sectors. Alongside the National credit council and Agricultural Advisory
Committee was formed to allocate agriculture credit for various purposes, to coordinate the
operation or the agriculture credit agencies and to oversee the flow of credit to the designated
targets. A standing committee on exports in general and the new emerging exports in particular,
was also established. With a view to encourage the banks to extend credit to small borrowers, a
credit guarantee scheme was introduced under which the state bank under took to share any
bonfire losses incurred by the commercial banks in case of small loans of advances to
agriculture.
At the same time two financing institutions were established. The people’s Finance Corporation
was designed to provide finance to people of small means while the National Development
Finance Corporation was setup of finance public sector owned and managed industries and
enterprises.
Nationalization of Banks (1974)
The banking reforms turned to be transitional and interim step and when they were hardly
eighteen months old the government nationalized the banking systems, with the following main
objectives.
To enable the government to use the capital concentrated in the hands of a few rich bankers for
the rapid economic development of the country and the more urgent social welfare objectives.
To distribute equitably credit too different classes sectors and regions.
To coordinate the banking policies in various area of feasible joint activity without eliminating
healthy competition among banks.
The act passed for the nationalization of banks is known as the banks Nationalization Act 1974.
Thus under this act the state bank of Pakistan and all the commercial banks incorporated in
Pakistan and carrying business in or outside the country were brought under government
ownership with effect from Jan 1, 1974. The ownership, management and control of all Pakistani
banks stood transferred to and vested in the Federal government. The shareholders were
provided compensation in the form of federal government bonds redeemable at par anytime
within the period of fifteen years. Under the Nationalization act, the Chairman, Directors and
Executives of various banks, other than those appointed by federal government were removed
from their offices and the central boards of the banks and all local bodies were dissolved.
Pakistan banking council was established to coordinate the activities of the Nationalized
Commercial banks. At the time of Nationalization on December31, 1973 there were following 14
Pakistani commercial banks with 3323 offices allover Pakistan and 74 offices in foreign
countries:
National Banks of Pakistan
Habib Bank Limited
Habib Bank (Overseas) Limited
United Bank Limited
Muslim Commercial Bank Limited
Commerce Bank Limited
Standard Bank Limited
Australia Bank Limited
Bank of Bahawalpur Limited
Premium Bank Limited
Pak Bank Limited
Sarhad Bank Limited
Lahore Commercial Limited
Punjab Provincial Co-operative Bank Limited
The Pakistan banking council prepared a scheme for the recognition of banks. The bank
(amalgamation) scheme 1974 was notified in April, providing for the amalgamation of the
smaller banks into bigger ones and the following five units:
1. National Bank Limited
2. Habib Bank Limited
3. United Bank Limited
4. Muslim Commercial Bank Limited
5. Allied Bank of Pakistan Limited
The first phase was completed on 30th June. 1974. When the Bank of Bahawalpur Limited was
merged with the National Bank of Pakistan. The Premier Bank Limited with Muslim Commercial
Bank Limited, Sarhad Bank Limited and Pak Bank Limited were renamed as Allied Bank of
Pakistan Limited.
The second phase was completed on 31st Dec.1974, when the Commerce Bank Limited merged
with the United Bank limited.
The third and the final phase were completed on 30th June, 1975 when the Standard Bank
Limited was merged with Habib Bank Limited.
The nationalization was very smooth and gave very positive results.
The number of branches, which stood at 3397 on Dec31, 1973, reached on 7661 by the end of
June 1992. The bank deposits which stood at Rs. 1925 crores at the end of 1973 went on
increasing very high.
1.9 Islamisation of Banking
Another major development in the history of Pakistan Banking System was the introduced of
interest free banking in selected Commercial Banks with effect form Jan1, 1981. This followed
the effort to eliminated interest from the operation of Nation investment trust, the House
Building Finance Corporation of Pakistan. Certain amendments were made in banking and other
laws with the object of ushering in a new system of banking, which would confirm of Shariah. A
new law Modaraba Companies Ordinance 1980 was promulgated. Separate interest free
counters began to operate in all the nationalized commercial banks free counters began to
operate in all the nationalized commercial banks. The state bank provides finance against
participation term certificate and also against promissory notes supported by Modaraba
certificate.
In order to cover interest free transactions certain banking definitions such as creditors, debtor,
and advances credits and deposits were revised. Stipulations concerning form of business in
which banking companies may engage may also have been modified schemes were introduced
to provide interest free loans to formers and deserving students.
A private Limited Company named as Bankers Equity limited was incorporated in 1979 to
provide financial assistance to the industrial sector primarily on interest free basis.
A scheme to extend interest free productive loans to farmers and fisherman has also been
introduced. Instead of interest, a system based on mark-up in price, exchange rate differential,
and profit and loss sharing accounts were introduced.
Different financial schemes introduced in the Islamization process are:
 Musharika Financing.
 Hire Purchase Financing.
 Modaraba Financing.
 Specific Purpose Modaraba.
1.10 Dis-Investment and Deregulation of Banking – 1991
When it was realized that the role of public sector in the economy is over extended and the
banking sector has more earning potential in the private sector the process of privatization
banking sector restarted in 1991 by the Muslim League Government. Muslim Commercial Bank
was Dis-invested in to two phases while ABL was sold to its employees. Since then allot of
investment is being made in the banking sector and several new banks were established and still
the process is going on. Now only NBP is government bank other than SBP. The performance of
this bank will be analyzed and judged in the following chapters.
1.11 Interest Free Banking

A new concept of interest free banking was introduced in 1981 and by now it has been
established on sound footing and new trends and techniques are being implemented to make
this system result oriented. New products and their systematic consumption are making
Pakistani banking comparable to their several modern counterparts anywhere in the developed
world.
Types of Banks
Primarily all banks gather temporarily idle money for the purpose of lending to other
and investment gain in the form of return, profits and dividends etc. however, due to the verity
of resources of money and the diversity in lending and investment operations, banks have been
place in various categories, such as
 Commercial Bank
 Savings Bank
 Merchant Banks
 Mortgage Banks
 Consumer Bank
 Investment Bank
 Central Bank
Commercial Bank:
The commercial banks received deposits from the general public, which are repayable
on demand upon written orders of the depositors. As their most distinctive feature the
commercial banks maintain the checking accounts for the constitutions.
Te commercial banks are also distinguished for providing short-term finance to trade,
commerce and industry to enable these sectors to expand their productive activities
Merchant Banks:
Merchant banks are those, which have been mainly financing the domestic and
international trade. During the late 18th and early 19th centuries the trade between countries
was financed by bill of exchange by well-reputed merchant’s houses for which they would
charges a commission for their services
Savings Banks:
The basic purpose of these banks is to inculcate the habit of saving in the people
the savings banks deposits are not repayable upon only the written order of depositor
but the depositor of his agent has to appear personally at the saving banks to make
withdrawal and for this purpose he must present a pass book a certificate of deposit or
some similar documents to prove his right to receive his payments. Post office savings
banks and savings accounts at national saving organizations are well known national
saving banks in Pakistan.
Mortgage Banks:
These banks mainly deal in loans for acquisition or construction of real estate against
the securities of mortgage.
Consumer Banks :
These banks providing finance for purchasing consumption goods for the use of Brewers
Investment banks:
These banks assists business houses and governmental bodies to raise money through
the sale of stocks and bond for usually long term purposes these banks perform the usual
functions of raising deposits of idle money from the public and finance the business houses
other bodies.
Central Banks:
Central banks occupy the unique position in banking structure of a country because they have
been interested with the responsibility of controlling the money supply, interest rate, and
financial market of a country for the purpose of economic development.
CHAPTER 2
THEORETICAL ASPECTS
RATIO ANALYSIS
2.1 Meaning and Definition of Ratio Analysis
Ratio analysis is a widely used tool of financial analysis. It is defined as the

systematic use of ratio to interpret the financial statements so that the strength and
weaknesses of a firm as well as its historical performance and current financial condition
can be determined. The term ratio refers to the numerical or quantitative relationship
between two variables.
2.2 Significance or Importance of Ratio Analysis
 It helps in evaluating the firms performance
With the help of ratio analysis conclusion can be drawn regarding several
aspects such as financial health, profitability and operational efficiency of the
undertaking. Ratio points out the operating efficiency of the firm i.e. whether
the management has utilized the firm’s assets correctly, to increase the
investor’s wealth. It ensures a fair return to its owners and secures optimum
utilization of firms assets
 It helps in inter-firm comparison
Ratio analysis helps in inter-firm comparison by providing necessary data. An

inter firm comparison indicates relative position. It provides the relevant data for the
comparison of the performance of different departments. If comparison shows a
variance, the possible reasons of variations may be identified and if results are negative,
the action may be initiated immediately to bring them in line.
 It simplifies financial statement
The information given in the basic financial statements serves no useful Purpose
unless it s interrupted and analyzed in some comparable terms. The ratio analysis is one
of the tools in the hands of those who want to know something more from the financial
statements in the simplified manner.
 It helps in determining the financial position of the concern
Ratio analysis facilitates the management to know whether the firms

financial position is improving or deteriorating or is constant over the years by
setting a trend with the help of ratios The analysis with the help of ratio analysis
can know the direction of the trend of strategic ratio may help the management
in the task of planning, forecasting and controlling.
 It is helpful in budgeting and forecasting
Accounting ratios provide a reliable data, which can be compared, studied and
analyzed. These ratios provide sound footing for future prospectus. The ratios can also
serve as a basis for preparing budgeting future line of action.
 Liquidity position
With help of ratio analysis conclusions can be drawn regarding the Liquidity
position of a firm. The liquidity position of a firm would be satisfactory if it is able to
meet its current obligation when they become due. The ability to met short term
liabilities is reflected in the liquidity ratio of a firm.
 Long term solvency:
Ratio analysis is equally for assessing the long term financial ability of the Firm.
The long term solvency is measured by the leverage or capital structure and profitability
ratio which shows the earning power and operating efficiency, Solvency ratio shows
relationship between total liability and total assets.
 Operating efficiency:
Yet another dimension of usefulness or ratio analysis, relevant from the View
point of management is that it throws light on the degree efficiency in the various
activity ratios measures this kind of operational efficiency.
2.3 Classification of Ratios
Different ratios are used for different purposes; these ratios can be grouped
into various classes according to the financial activity. Ratios are classified into four
broad categories.
2.3.1 Liquidity Ratio

2.3.2 Leverage Ratio
2.3.3 Profitability Ratio
2.3.4 Activity Ratio
2.3.1 Liquidity Ratio:
Liquidity ratio measures the firms ability to meet its current obligations i.e. ability to pay
its obligations and when they become due. Commonly used ratios are:
2.3.1.1 Current Ratio

2.3.1.2 Acid Test Ratio or Quick Ratio
2.3.1.1 Current Ratio

Current ratio is the ratio, which express relationship between current asset and current
liabilities. Current asset are those which can be converted into cash within a short period of
time, normally not exceeding one year. The current liabilities which are short- term
maturing to be met.
Current Assets
Current Ratio =
Current liabilities
2.3.1.2 Acid Test Ratio or Quick Ratio:
The acid test ratio is a measure of liquidity designed to overcome the

Defect of current ratio. It is often referred to as quick ratio because it is a
measurement of firm’s ability to convert its current assets quickly into cash in order
to meet its current liabilities.
Current Asset - Inventories

Acid Test Ratio =
Current liabilities
2.3.2 Leverage or Capital Structure Ratio:
Leverage or capital structure ratios are the ratios which indicate the relative
interest of the owners and the creditors in an enterprise. These ratios indicate the
funds provided by the long-term creditors and owners.
To judge the long term financial position of the firm following ratios are applied.
2.3.2.1 Debt – Equity Ratio

2.3.2.2 Total Debt Ratio
2.3.2.1 Debt – Equity Ratio
Debt-equity ratio which expresses the relationship between debt and equity.
This ratio explains how far owned funds are sufficient to pay outside liabilities. It is
calculated by following formula:
Long Term + Short Term Debts + Current Liabilities

Debt Equity Ratio =
Net Worth
2.3.2.2 Total Debt Ratio
This ratio explains how far owned and borrowed funds are sufficient to pay debt of a
firm
Long Term + Short Term Borrowing + Current Liabilities

Total Debt Ratio =
Capital employed
2.3.3 Profitability Ratios
Profitability ratio are the best indicators of overall efficiency of the business
concern, because they compare return of value over and above the value put into
business with sales or service carried on by the firm with the help of assets
employed. Profitability ratio can be determined on the basis of:
1. Sales
2. Investment
2.3.3.1 Profitability Ratios Related to Sales:

2.3.3.1.1 Gross Profit to Sales Ratio
2.3.3.1.2 Net Profit to Sales Ratio or Net Profit of Margin.
2.3.3.1.1 Gross Profit to Sales Ratio
The gross profit to sales ratio establishes relationship between gross profit
and sales to measure the relative operating efficiency of the firm to reflect pricing
policy.
Sales - Cost of Goods Sold
Gross Profit to Sales Ratio = * 100
Sale
2.3.3.1.2 Net Profit Margin
The net margin indicates the management’s ability to earn sufficient profit
on sales to earn sufficient profit on sales not only to cover all revenue operating
expenses of the business, the cost of borrowed funds and the cost of goods or servicing,
but also to have sufficient margin to pay reasonable comparison to shareholders on
their contributions to the firm.
Net profit after tax and interest

Net Profit Margin = * 100
Sales
2.3.3.2 Profitability Ratios Related to Investments:
2.3.3.2.1 Return on Assets

2.3.3.2.2 Return on Capital Employed
2.3.3.2.1 Return on Assets

The profitability ratio here measures the relationship between net profit and
assets.
Net Profit after Tax

Return on Assets =
Fixed Assets
2.3.3.2.2 Return on Capital Employed:
Net Profit after Taxes

Return on Capital Employed =
Total Capital Employed
2.3.4 Activity Ratios or Efficiency Ratios:
Activity ratio are sometimes are called efficiency ratios. Activity ratios are
concerned with how efficiently 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.
The important activity ratios are as follows:
2.3.4.1 Inventory Turnover Ratio

2.3.4.2 Debt Turnover Ratio
2.3.4.3 Average Collection Period Ratio
2.3.4.1 Inventory Turnover Ratio:
Raw Materials Consumed

Inventory Turnover Ratio =
Average Stock of Raw Materials
2.3.4.2 Debt Turnover Ratio
This ratio shows how quickly the debtors are converted into cash
Total Sales
Debt Turnover Ratio =
Debtors
2.3.4.3 Average Collection Period Ratio
This ratio indicates how quickly the inventory is converted into cash.
Days in a Year
Average Collection Period Ratio =
Debtors Turnover
2.4 Parties Interested In Ratio Analysis

2.4.1 Trade creditors
Trade creditors are interested in firm's ability to meet their claims over a very short
period of time. Their analysis will, there fore confine to the evaluation of the firm's
liquidity positions.
2.4.2 Suppliers of long-term debt
Suppliers of long-term debt on the other hand are concerned with firm's long-term solvency and
survival. They analysis the firms profitability over time, its ability to generate cash to be able to
pay interest and repay interest and repay principal and the relationship between various source
of funds. (Capital structure relationship).
Long-term creditors do analyses the historical financial statements but they place more
emphasis on the firm's projected financial statement to make analysis about its future solvency
and profitability.
2.4.3
Investors
Investors who have invested their money in the firms share are most concerned about the firm
steady growth in earning. As such, they concentrate on the analysis of the firm's present and
future profitability. They are also interested in the firms financial structure of the extent it
influence the firms earning ability and risk.
2.4.4 Management.
An organization would be interested in every aspect of the financial analysis. It is their overall
responsibility to see that the resources of the firm are used most effectively and efficiently and
that the firm's financial condition is sound.
So thus management employee financial analysis for the purpose of internal control and to
better provide what capital supplier seeks in financial condition and performance from the
business and from an internal control standpoint, management needs to take financial analysis
in order to plan and control effectively.
1. RATIO ANALYSIS:
Financial ratios are useful indicators of a firm's performance and financial situation.
Financial ratios can be used to analyze trends and to compare the firm's financials to
those of other firms. Ratio analysis is the calculation and comparison of ratios which are
derived from the information in a company's financial statements. Financial ratios are
usually expressed as a percent or as times per period. Ratio analysis is a widely used tool
of financial analysis. It is defined as the systematic use of ratio to interpret the financial
statements so that the strength and weaknesses of a firm as well as its historical
performance and current financial condition can be determined. The term ratio refers to
the numerical or quantitative relationship between two variables. With the help of ratio
analysis conclusion can be drawn regarding several aspects such as financial health,
profitability and operational efficiency of the undertaking. Ratio points out the
operating efficiency of the firm i.e. whether the management has utilized the firm’s
assets correctly, to increase the investor’s wealth. It ensures a fair return to its owners
and secures optimum utilization of firm’s assets. Ratio analysis helps in inter-firm
comparison by providing necessary data. An inter firm comparison indicates relative
position. It provides the relevant data for the comparison of the performance of
different departments. If comparison shows a variance, the possible reasons of
variations may be identified and if results are negative, the action may be initiated
immediately to bring them in line. Yet another dimension of usefulness or ratio analysis,
relevant from the View point of management is that it throws light on the degree
efficiency in the various activity ratios measures this kind of operational efficiency.
1.1 Liquidity Ratios 1.2 Leverage Ratios
1.3 Profitability Ratios 1.4 Activity Ratios
1.5 Market Ratios 1.6 Statements of Cash Flow
Ratio Analysis
COMPARATIVE ANALYSIS OF HBL VS. BANK AL FALAH
1.1 Liquidity Ratios
Liquidity ratios measure a firm’s 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 normally 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 are important to businesses because they are the assets that
are used to fund day-to-day operations and pay ongoing expenses.
HABIB BANK
Year 2006 2007 2008

Current Assets 575611106 671597594 731954693
Current Liabilities 480455832 566659483 631948038
Current ratio 1.20 1.19 1.16
BANK AL FALAH
Year 2006 2007 2008

Current Assets 265182551 316972828 335217471
Current ratio 1.06 1.10 1.06
Interpretation
HABIB BANK
The current ratio for the year 2006, 2007 & 2008 is 1.20, 1.19 & 1.16 respectively, compared to
standard ratio 2:1 this ratio is lower which shows low short term liquidity efficiency at the same
time holding less than sufficient current assets mean inefficient use of resources
BANK AL FALAH
The ratios for the last 3 years are 1.06, 1.10 & 1.06, shows below standard of 2:1 which means
efficient use of funds but at the risk of low liquidity.
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.
HABIB BANK
Year 2006 2007 2008

Sales 43685740 43685740 63305033
Working Capital 95155274 104938111 100006655
Sales to Working 0.5 times 0.5 times 0.6 times
BANK AL FALAH
Year 2006 2007 2008

Sales 21191470 25783871 31046583
Working Capital 15276529 30128884 19741302
Sales to Working 1.38 0.85 1.57
Interpretation:
HABIB BANK:
This liquidity ratio for the years 2006, 2007 & 2008 is 0.5,0.5 & 0.6 times respectively, compared
to standard ratio 2:1 this ratio is lower which shows low short term liquidity efficiency at the
same time holding less than sufficient current assets mean inefficient use of resources
BANK AL FALAH:
The ratios for the last 3 years are 1.06, 1.10 & 1.06, shows below standard of 2:1 which means
efficient use of funds but at the risk of low liquidity.
Working Capital:
Working Capital = Current Assets – Current Liabilities
A measure of both a company's efficiency and its short-term financial health. Positive working
capital means that the company is able to pay off its short-term liabilities. Negative working
capital means that a company currently is unable to meet its short-term liabilities with its
current assets (cash, accounts receivable and inventory).
Also known as "net working capital", or the "working capital ratio".
HABIB BANK
Year 2006 2007 2008

Current Assets 575611106 671597594 731954693
Working Capital 95155274 104938111 100006655
BANK AL FALAH
Year 2006 2007 2008

Current Assets 265182551 316972828 335217471
Working Capital 15276529 30128884 19741302
Interpretation:
HABIB BANK:
It is very clear from the above calculations that the working capital of the bank is gradually
increasing over the years, which shows good short term liquidity efficiency.
BANK AL FALAH:
This ratio increased to a great extent in 2007, almost double of the year 2006 but later on in the
year 2008 it went down again.
1.2 Leverage Ratios:
By using a combination of assets, debt, equity, and interest payments, leverage ratio's are used
to understand a company's ability to meet it long term financial obligations. Leverage ratios
measure the degree of protection of suppliers of long term funds. The level of leverage depends
on a lot of factors such as availability of collateral, strength of operating cash flow and tax
treatments. Thus, investors should be careful about comparing financial leverage between
companies from different industries. For example companies in the banking industry naturally
operates with a high leverage as collateral their assets are easily collateralized.
These include:
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 company’s earnings before interest and taxes (EBIT). This ratio
measures the extent to which operating income can decline before the firm is unable to meet its
annual interest cost.
HABIB BANK
Year 2006 2007 2008

EBIT 32044524 34298574 48559935
Interest Charges 13204037 19153957 19153957
TIE ratio 2.43 1.79 1.83
BANK AL FALAH
Year 2006 2007 2008

EBIT 17798831 21156515 22125914
Interest charges 15232886 16620963 20331194
TIE ratio 1.16 1.27 1.08
Interpretation
HABIB BANK
We can see from this ratio analysis that, this company has covered their interest expenses 2.43
times in 2006, 1.79 times in 2007 and 1.8 times in 2008. It means they have performed pretty
much same in 2007 and 2008, but has taken a different look in 2006. As in 2006 they issued a
little high number of long-term loans and does not have good liquidity position, their EBIT
became high thus making TIE a little high as well
BANK AL FALAH
We can see that, this company has covered their interest expenses 1.16 times in 2006, 1.27
times in 2007 and 1.08 times in 2008. It means they haven’t improved in the past years.
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. The proportion of a firm's total assets that are being financed
with borrowed funds. The debt ratio is calculated by dividing total long-term and short-term
liabilities by total assets. The higher the ratio, the more leverage the company is using and the
more risk it is assuming. Assets and liabilities are found on a company's balance sheet.
HABIB BANK
Year 2006 2007 2008

Total debt 536848102 628754092 682747953
Total Assets 590291468 691991521 757928,89
Debt Ratio 0.91 0.91 0.9
BANK AL FALAH
Year 2006 2007 2008

Total debt 263443596 312675308 331946025
Total Assets 275685541 328895152 348990764
Debt Ratio 0.95 0.95 0.95
Interpretation:
HABIB BANK
Calculating the debt ratio, we came to see that this company is highly leveraged one
BANK AL FALAH
Calculating the debt ratio, we came to see that this company is highly leveraged one.
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 monies provided
by shareholders. As you can see through the formula below, the lower the number, the less
leverage that a company is using. The debt to equity ratio gives the proportion of a company (or
person's) assets that are financed by debt versus equity. 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. As a result, debt to equity calculations often only includes long-
term debt rather than a company's total liabilities. A high debt to equity ratio implies that the
company has been aggressively financing its activities through debt and therefore must pay
interest on this financing.
HABIB BANK
Year 2006 2007 2008

Total debt 536848102 628754092 682747953
Total Equity 45177664 55063125 71280902
Debt To Equity Ratio 11.88 11.42 9.58
BANK AL FALAH
Year 2006 2007 2008

Total debt 263443596 312675308 331946025
Total Equity 10572605 13766673 14608523
Debt To Equity Ratio 24.91 22.71 22.72
Interpretation
HABIB BANK
We can see from the above calculations that this ratios continuously decreasing in the last three
years.
BANK AL FALAH
Calculating this debt ratio we can see that it was 24.91, 22.71 & 22.72 in the year 2006, 2007 &
2008 respectively. This shows a decline in the ratio over the years.
Current Worth / Net worth Ratio:
Current Worth to Net worth Ratio= Current Worth / Net worth Ratio
We can calculate current worth and net worth by using following formulas:
Current Worth = Total Current Assets – Total Current Liabilities
Net Worth = Total Assets - Total Liabilities
HABIB BANK
Year 2006 2007 2008

Current Worth 95155274 104938111 100006655
Net Worth 53443366 63237429 75180436
Current Worth to Net 1.78 1.66 1.33
BANK AL FALAH
Year 2006 2007 2008

Current Worth 15276529 30128884 19741302
Net Worth 12241945 16219844 17044739
Current Worth to Net 1.247 1.85 1.15
Interpretation
HABIB BANK
We can see from the above calculations that this ratios continuously decreasing in the last three
years. In 2006 it was 1.78, in 2007 it was 1.66 and in 2008 it was 1.33.
BANK AL FALAH
Analysis shows that this ratio was as high as 1.2 among three years. However, it declined to 1.15
in the year 2008. In 2007 the ratio somewhat increased to 1.85.
Total Capitalization Ratio:
Total Capitalization Ratio = Long-term debt / long-term debt + shareholders' equity
The capitalization ratio measures the debt component of a company's capital structure, or capitalization
(i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations
and growth. Long-term debt is divided by the sum of long-term debt and shareholders' equity. This ratio is
considered to be one of the more meaningful of the "debt" ratios - it delivers the key insight into a
company's use of leverage.
HABIB BANK
Year 2006 2007 2008

Long Term debt 62094609 50799915
56392270
Long term debt + Equity 101569934 117157734 122080817
Capitalization Ratio 0.56 0.53 0.42
BANK AL FALAH
Year 2006 2007 2008

Long Term debt
13537574 25831364 16469856
Long term debt + Equity
24110179 39598037 31078379
Capitalization Ratio
0.56 0.65 0.52
Interpretation
HABIB BANK
It is obvious from the above calculations that there is a gradual fall in this ratio over the years.
BANK AL FALAH
The ratios for the last 3 years are 0.56, 0.65 and 0.52. Shows below standard of 2:1
Long term Assets versus Long term Debt:
Long term Assets versus Long term Debt = Long Term Assets / Long Term Debts
HABIB BANK
Year 2006 2007 2008

Long Term Assets 14680362 20393927 25973696
Long term debt 56392270 62094609 50799915
L.T Assets /L.T Debts 0.26 0.33 0.51
BANK AL FALAH
Year 2006 2007 2008

Long Term Assets 13773293 11922324 10502990
Long term debt 13537574 25831364 16469856
L.T Assets /L.T Debts 1.01 0.46 0.63
Debt Coverage Ratio:
Debt Coverage Ratio = Net Operating Income / Total Debt
HABIB BANK
Year 2006 2007 2008

Net Operating Income 12074762 5121453 5655568
536848102 628754092 682747953
Total Debt
Debt Coverage Ratio 0.02 0.008 0.0083
BANK AL FALAH
Year 2006 2007 2008

Net Operating Income 14574192 15118049 16880487
Total Debt 263443596 312675308 331946025
1.3 Profitability Ratios:
Profitability is the net result of a number of policies and decisions. This section of the 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. It is these ratios that can give insight into the all important "profit".
Profitability ratios show the combined effects of liquidity, asset management and debt on
operating results. These ratios examine the profit made by the firm and compare these figures
with the size of the firm, the assets employed by the firm or its level of sales. There are four
important profitability ratios that I am going to analyze:
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. An increase in the ratios indicates that a
firm is producing higher net profit of sales than before.
HABIB BANK
Year 2006 2007 2008

Net Profit 12700315 10084037 15614020
Sales 43685740 50481021 63305033
Net Profit Margin 29.07% 19.97% 24.66%
BANK AL FALAH
Year 2006 2007 2008

Net Profit 1762691 3130229 1301301
Sales 21191470 25783871 31046583
Net Profit Margin 8.31% 12.1% 4%
Interpretation
HABIB BANK
Therefore, the Net Profit Margin was 8.31% in 2006, increase to 12.1% in 2007 and then
decrease to 4% in 2008
BANK AL FALAH
Therefore, the Net Profit Margin was 29.07% in 2006, decrease to 19.97% in 2007 and
then again increased to 24.66% in 2008
Operating Income Margin:
Operating Income Margin = Operating Income x 100
Net Sales
Operating Income Margin =
Net mark-up / interest income after provisions + Mark-up / return / interest expensed - Total
non mark-up / interest expenses
HABIB BANK
Year 2006 2007 2008

Operating Income 25278799 24275410 37738818
43685740 50481021 63305033
Net Sales
Operating Income 57.9% 48% 59.6%
BANK AL FALAH
Year 2006 2007 2008

Operating Income 14574192 15118049 16880487
Net Sales 21191470 25783871 31046583
Operating Income
0.687738604 0.586337443 0.5437148
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. This is an important ratio for companies deciding whether or
not to initiate a new project. The basis of this ratio is that if a company is going to start a project
they expect to earn a return on it, ROA is the return they would receive. Simply put, if ROA is
above the rate that the company borrows at then the project should be accepted, if not then it
is rejected.
HABIB BANK
Year 2006 2007 2008

Net income 12700315 10084037 15614020
Total Average assets 559592686.5 641141494.5 724959955
ROA 2.27% 1.57% 2.15%
BANK AL FALAH
Year 2006 2007 2008

Net income 1762691 3130229 1301301
Total Average assets 137966927.5 302290346.5 338942958
ROA
1.27% 1.01% 0.038%
Interpretation
HABIB BANK
Return on assets decreased in 2007 and 2008 and it was maximum in year 2006. This
may have occurred because Square used more debt financing in 2006 compared to 2007
and 2008 which resulted in more interest cost and brought the Net income down.
.
BANK AL FALAH
Return on assets decreased gradually throughout the years.

Return on Equity (ROE):
Return on Total Equity = Profit after taxation x 10
Total Equity
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. This ratio indicates how profitable a
company is by comparing its net income to its average shareholders' equity. The return on
equity ratio (ROE) measures how much the shareholders earned for their investment in the
company. The higher the ratio percentage, the more efficient management is in utilizing its
equity base and the better return is to investors.
HABIB BANK
Year 2006 2007 2008

Net income 12700315 10084037 15614020
Total Equity 45177664 55063125 71280902
ROE 28.11% 18.31% 21.9%
BANK AL FALAH
Year 2006 2007 2008

Net income 1762691 3130229 1301301
Total Equity 10572605 13766673 14608523
ROE
16.6% 22.5% 8.9%
Interpretation
HABIB BANK
The Return on Equity was maximum in 2006 but decreased in 2007 and went down
more in 2008. This again may have happened due to the issue of more long-term debt in
2007 and 2008.
BANK AL FALAH
The Return on Equity was maximum in 2007 but decreased to an extent in the following years
2007 and 2008. This again may have happened due to the issue of more long-term debt in 2007
and 2008.
DuPont Return on Assets:
DuPont Return on Assets = Profit after taxation x 100
Total Assets
HABIB BANK
Year 2006 2007 2008

Net Profit 12700315 10084037 15614020
Total assets 590291468 691991521 757928389
DuPont ROA 2.15% 1.46% 2.06%
BANK AL FALAH
Year 2006 2007 2008

Net Profit 1762691 3130229 1301301
Total assets 275685541 328895152 348990764
DuPont ROA 0.006 0.009 0.003
Operating Assets Turnover:
Operating Assets Turnover = Operating Assets x 100
Net Sales
HABIB BANK
Year 2006 2007 2008

Operating Assets 94230402 97259620 110591707
Net Sales 43685740 50481021 63305033

Operating Assets Turnover 192.7% 192.7% 174.70%
BANK AL FALAH
Year 2006 2007 2008
Net Sales 21191470 25783871 31046583
Operating Assets Turnover
2.41% 2.31% 2.19%
Detail of Operating Assets of Habib Bank Limited
2008
Operating Assets:
Cash and balances with treasury banks 56533134
Balances with other banks 39307321
Operating fixed assets 14751252
110591707
2007
Operating Assets:
97259620
2006
Operating Assets:
94,230,402
Detail of Operating Assets of Bank Al Falah Limited
2008
Operating Assets:
51094302
2007
Operating Assets:
59739440
2006
Operating Assets:

68041671
Return on Operating Assets:
Return on Operating Assets = Profit after Taxation x 100
Operating assets
HABIB BANK
Year 2006 2007 2008

Net Profit 12700315 10084037 15614020
Return on Operating Assets 13.48% 10.37% 11.19%
BANK AL FALAH
Year 2006 2007 2008

Net Profit 1762691 3130229 1301301
Return on Operating Assets 0.034 0.052 0.019
Sales to Fixed Assets:
This ratio is indicates that how much sales are contributed by investment in fixed Assets.
Sales to Fixed Assets = Net Sales / Fixed Assets
HABIB BANK
Year 2006 2007 2008

Net Sales 43685740 50481021 63305033
Fixed Assets 11954876 13780555 14751252
Sales to Fixed Assets 3.65 times 3.66 times 3.66 times
BANK AL FALAH
Year 2006 2007 2008

Net Sales 21191470 25783871 31046583
Fixed Assets 10502990 11922324 13773293
Sales to Fixed Assets 2.017 times 2.16 times 2.25 times
1.4 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. It also indicates pricing strategy:
companies with low profit margins tend to have high asset turnover, while those with high profit
margins have low asset turnover.
HABIB BANK
Year 2006 2007 2008

Total Sales 43685740 50481021 63305033
Total Assets 590291468 691991521 757928389
Total Asset Turnover 0.07 0.07 0.08
BANK AL FALAH
Year 2006 2007 2008

Total Sales 21191470 25783871 31046583
Total Assets 275685541 328895152 348990764
Total Asset Turnover 0.07 0.07 0.08
Interpretation
HABIB BANK
The Return on Equity was maximum in 2006 but decreased in 2007 and went down
more in 2008. This again may have happened due to the issue of more long-term debt in
2007 and 2008.
BANK AL FALAH
The Return on Equity was maximum in 2007 but decreased to an extent in the following years
2007 and 2008. This again may have
1.5 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
Per share capital = 10 per share
Or
No. of shares outstanding = share capital / 10
HABIB BANK
Year 2006 2007 2008

Total amount of Dividend 691350 1381000 2730251
Number of Shares 690000 690000 759000

Dividend per Share 1.0019 2.0014 3.597
BANK AL FALAH
Year 2006 2007 2008

Total amount of Dividend 00 00 975000
Number of Shares 500000 650000 799500

Dividend per Share 00 00 1.21
Note: There is no dividend paid by the bank in the year 2006 and 2007
Earning Per Share- EPS:
Earning Per Share = Profit after Taxation
Number of Shares
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. Earnings per share
are generally considered to be the single most important variable in determining a share's
price. It is also a major component used to calculate the price-to-earnings valuation ratio.
HABIB BANK
Year 2006 2007 2008

Profit after Taxation 12700315 10084037 15614020
Number of Shares 690000 690000 759000

Earning Per Share 18.41 14.61 20.57
BANK AL FALAH
Year 2006 2007 2008

Profit after Taxation 1762691 3130229 1301301
Number of Shares 500000 650000 799500
Earning Per Share 3.525 4.815 1.627
Price / Earning Ratio:
Price / Earning Ratio = Stock Price Per Share
Earning Per Shares
The Price-Earnings Ratio is calculated by dividing the current market price per share of the stock
by earnings per share (EPS). (Earnings per share are calculated by dividing net income by the
number of shares outstanding.)
The P/E Ratio indicates how much investors are willing to pay per dollar of current earnings. As
such, high P/E Ratios are associated with growth stocks. (Investors who are willing to pay a high
price for a dollar of current earnings obviously expect high earnings in the future.) In this
manner, the P/E Ratio also indicates how expensive a particular stock is. This ratio is not
meaningful, however, if the firm has very little or negative earnings. The Price-Earnings Ratio is
calculated by dividing the current market price per share of the stock by earnings per share
(EPS). (Earnings per share are calculated by dividing net income by the number of shares
outstanding.) The P/E Ratio indicates how much investors are willing to pay per dollar of current
earnings. As such, high P/E Ratios are associated with growth stocks. (Investors who are willing
to pay a high price for a dollar of current earnings obviously expect high earnings in the future.)
In this manner, the P/E Ratio also indicates how expensive a particular stock is. This ratio is not
meaningful, however, if the firm has very little or negative earnings.
HABIB BANK
Year 2006 2007 2008

Stock price per share 10 10 10
EPS 18.41 14.61 20.57
Price / Earning Ratio 0.54 0.68 0.49
BANK AL FALAH
Year 2006 2007 2008

Stock price per share 10 10 10
EPS 3.525 4.815 1.627
Price / Earning Ratio 2.83 2.07 6.14
Interpretation
HABIB BANK
The P/E ratio was 0.54 times in 2006 and increased further to as high as 0.68 times in
the following year. However, in 2008 it declined to 0.49 times which is an alarming
signal for the potential investors.
BANK AL FALAH
The P/E ratio was 2.83 times in 2006 and decreased a little bit in 2007. However, in 2008 it
increased as much higher than before to 6.14 times.
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. This ratio identifies the percentage of earnings (net income) per common
share allocated to paying cash dividends to shareholders. The dividend payout ratio is an
indicator of how well earnings support the dividend payment.
HABIB BANK
Year 2006 2007 2008

DPS 1.0019 2.0014 3.597
EPS 18.41 14.61 20.57
Dividend Payout Ratio 0.0544 0.137 0.175
BANK AL FALAH
Year 2006 2007 2008

DPS 00 00 1.21
EPS 3.525 4.815 1.627
Dividend Payout Ratio 00 00 0.74
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. A stock's dividend yield is expressed as an annual percentage and is calculated as the
company's annual cash dividend per share divided by the current price of the stock. The
dividend yield is found in the stock quotes of dividend-paying companies. Investors should note
that stock quotes record the per share dollar amount of a company's latest quarterly declared
dividend. This quarterly dollar amount is annualized and compared to the current stock price to
generate the per annum dividend yield, which represents an expected return.
HABIB BANK
Year 2006 2007 2008

DPS 1.0019 2.0014 3.597
Share Price 10 10 10
Dividend Yield 0.10019 0.20014 0.3597
BANK AL FALAH
Year 2006 2007 2008

DPS 00 00 1.21
Share Price 10 10 10
Dividend Yield 00 00 0.121
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.
HABIB BANK
Year 2006 2007 2008

Equity 45177664 55063125 71280902
Share Capital 6900000 6900000 7590000
Book Value per Share 6.5 7.98 9.39
BANK AL FALAH
Year 2006 2007 2008

Equity 10572605 13766673 14608523
Share Capital 5000000 6500000 7995000
Book Value per Share 2.11 2.11 1.82
1.6 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. These ratios
can give users another look at the financial health and performance of a 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
long-term 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. The higher the percentage ratio, the
better the company's ability to carry its total debt.
HABIB BANK
Year 2006 2007 2008

Operating Cash flow 17851517 56224065 18231677
Total Debts 536848102 628754092 682747953
Operating Cash Flow to T.Debt 0.033 0.089 0.027
BANK AL FALAH
Year 2006 2007 2008

Total Debts 263443596 312675308 331946025
Operating Cash Flow to T.Debt 0.029 0.126 0.007
Operating Cash Flow per Share:
Operating Cash Flow per Share = Operating cash flow / Total Shares
HABIB BANK
Year 2006 2007 2008

Total Shares 690000 690000 759000
Operating Cash Flow per Share 25.87 81.48 24.02
BANK AL FALAH
Year 2006 2007 2008

Total Shares 500000 650000 799500
Operating Cash Flow per Share 15.70 60.99 3.12
2. Common Size Analysis (Vertical and Horizontal):
The term "trend analysis" refers to the concept of collecting information and attempting to spot
a pattern, or trend, in the information. In some fields of study, the term "trend analysis" has
more formally-defined meanings. Although trend analysis is often used to predict future events,
it could be used to estimate uncertain events in the past. Financial statement information is
used by both external and internal users, including investors, creditors, managers, and
executives. These users must analyze the information in order to make business decisions, so
understanding financial statements is of great importance. Several methods of performing
financial statement analysis exist. I will discuss two of these methods: horizontal analysis and
vertical analysis.
2.1 Horizontal Analysis
Methods of financial statement analysis generally involve comparing certain information. The
horizontal analysis compares specific items over a number of accounting periods. For example,
accounts payable may be compared over a period of months within a fiscal year, or revenue
may be compared over a period of several years. It is a procedure in fundamental analysis in
which an analyst compares ratios or line items in a company's financial statements over a
certain period of time. The analyst will use his or her discretion when choosing a particular
timeline; however, the decision is often based on the investing time horizon under
consideration.
HORIZONTAL ANALYSIS
HABIB BANK
BALANCE SHEET
AS ON DEC 31 2008, 2007 & 2006
(Rupees in ‘000’) Horizontal Analysis
2008 2007 2006
ASSETS 2008 2007 2006
Cash and balances

56533134 55487664 46310478 122.07 119.8 100
with treasury banks
Balances with other

39307321 27020704 35965048 109.29 75.13 100
banks
Lending to financial
6193787 1628130 6550128 94.56 24.86 100
institutions
Investments 13814592 177942251 119587476 11.552 148.8 100
Advances 456355507 382172734 349432685 130.6 109.4 100
Other assets 35419252 27346111 17765291 199.37 153.9 100
Operating fixed
14751252 13780555 11954876 123.39 115.3 100
assets
Deferred tax asset 11222444 6613372 2725486 411.76 242.6 100
TOTAL ASSETS 757928389 691991521 590291468 128.4 117.2 100
LIABILITIES
Bills payable 9944257 15418230 5737457 173.32 268.7 100
Borrowings from 46844890 58994609 56392270 83.07 104.6 100
financial institutions
Deposits and other

597090545 531298127 459140198 130.05 115.7 100
accounts
Sub-ordinate loans 3954925 3100000 0 0 0 0
Liabilities against
assets subject to
finance lease
Other liabilities 24913236 19943126 15578177 159.92 128 100
Deferred tax liability ------- ----------- ---------
TOTAL LIABILITIES 682747953 628754092 536848102 127.18 117.1 100
NET ASSETS 75180436 63237429 53443366 140.67 118.3 100
REPRESENTED BY
Shareholders Equity
Share capital 7590000 6900000 6900000 110 100 100
Reserves 24243254 19821455 17802584 136.18 111.3 100
Unappropriated
39447648 28341670 20 475,080 159.92 128 100
profit
Total equity
attributable to the
71280902 55063125 45177664 157.78 121.9 100
equity holders of the
Bank
Minority interest 890099 965642 913317 97.458 105.7 100
Surplus on 3009435 7208662 7352385 40.931 98.05 100
revaluation of assets
- net of tax
TOTAL EQUITY 75180436 63237429 53443366 140.67 118.3 100
Horizontal Analysis
HABIB BANK
CONSOLIDATED PROFIT & LOSS ACCOUNT
AS ON DEC 31 2008, 2007 & 2006
2008 2007 2006 Horizontal Analysis
(Rupees in ‘000’) 2008 2007 2006
Mark-up / return /
63,305,033 50,481,021 43,685,740 144.91 115.6 100
interest earned
Mark-up / return /
26,525,556 19,153,957 13,204,037 200.89 145.1 100
interest expensed
Net mark-up /
36,779,477 31,327,064 30,481,703 120.66 102.8 100
interest income
Provision against
non-performing
6,904,919 8,238,227 2,863,207 241.16 287.7 100
loans and advances
- net
Charge / (reversal)
against off-balance 372,598 (54,626) (45,438) -820.01 120.2 100
sheet obligations
Charge / (reversal)
of provision against
diminution in the 1,909,887 (84,310) (13,697) -13944 615.5 100
value of
investments
Bad debts written

---------- ---------- -------------
off directly
9,187,404 8,099,291 2,804,072
Net mark-up /
interest income 27,592,073 23,227,773 27,677,631 99.691 83.92 100
after provisions
Fee, commission
and brokerage 4,518,408 3,420,051 3,931,710 114.92 86.99 100
income
Income / gain on
2,369,233 2,472,663 1,219,623 194.26 202.7 100
investments
Income from
dealing in foreign 2,374,318 1,487,374 1,102,358 215.39 134.9 100
currencies
Gain on
investments in 4,000,330 ------- 0 0 0 0
associate
Other income 3,116,522 2,643,076 2,235,805 139.39 118.2 100
Total non-mark-up /
16,378,811 10,023,164 8,489,496 192.93 118.1 100
interest income
43,970,884 33,250,937 36,167,127 121.58 91.94 100
Non mark-up /
interest expense
Administrative
21,348,016 18,297,279 15,425,461 138.39 118.6 100
expenses
Other provisions /
200,163 276,111 122,510 163.39 225.4 100
write offs - net
Other charges 64,751 85,152 54,898 117.95 155.1 100
Workers welfare
323,575
fund
Total non mark-up /

21,936,505 18,106,32 15,602,869 140.59 0 100
interest expenses
Profit before
22,034,379 15,144,617 18,840,487 116.95 80.38 100
taxation
Taxation
- Current 8,661,15 7,220,717 7,144,846 0 101.1 100
- Prior years 233,100 1,668,562 (39,067) -596.67 -4271 100
- Deferred (2,473,891) (3,828,699) (965,607) 256.2 396.5 100
6,420,359 10,084,037 12,700,315 50.553 79.4 100
Profit after taxation 15,614,020 10,084,037 12,700,315 122.94 79.4 100
Attributable to:
Equity holders of
15,535,011 10,000,231 12,630,259 123 79.18 100
the Bank
Minority interest 79,009 83,806 70,056 112.78 119.6 100
15,614,020 10,084,037 12,700,315 122.94 79.4 100
Basic and diluted

20.47 13.18 18.30 111.86 72.02 100
earnings per share
HORIZONTAL ANALYSIS
BANK AL FALAH LIMITED
BALANCE SHEET
AS ON DEC 31 2008, 2007 & 2006
Years
Horizontal Analysis
(Rupees in ‘000’)
2008 2007 2006
ASSETS 2008 2007 2006
Cash and balances

118.41 29436378 27859360 118.41 105.7 100
with treasury banks
Balances with other

169.5 18380738 12731952 169.5 144.4 100
banks
Lending to financial
26.616 3452059 12456653 26.616 27.71 100
institutions
Investments 134.46 88491564 56502210 134.46 156.6 100
Advances 132.88 171198992 144999325 132.88 118.1 100
Operating fixed
131.14 11922324 10502990 131.14 113.5 100
assets
Deferred tax asset 0 0 0 0
Other assets 159.58 6013097 5633051 159.58 106.7 100
TOTAL ASSETS 126.59 328895152 275685541 126.59 119.3 100
LIABILITIES 0
Bills payable 111.68 4138243 3091135 111.68 133.9 100
Borrowings from
financial 163.09 21230697 8394130 163.09 252.9 100
institutions
Deposits and
125.56 273173841 239509391 125.56 114.1 100
other accounts
Sub-ordinate
79.798 3220858 3222106 79.798 99.96 100
loans
Liabilities against
assets subject to 0 0 0 0
finance lease
Deferred tax
10.85 1379809 1921338 10.85 71.82 100
liability
Other liabilities 154.56 9531860 7305496 154.56 130.5 100
TOTAL
126 312675308 263443596 126 118.7 100
LIABILITIES
NET ASSETS 139.23 16219844 12241945 139.23 132.5 100
REPRESENTED BY
SHAREHOLDERS EQUITY
Share capital 159.9 6500000 5000000 159.9 130 100
Reserves 115.15 2414833 2749533 115.15 87.83 100
Unappropriated
122.12 4851840 2823072 122.12 171.9 100
profit
138.17 13766673 10572605 138.17 130.2 100
Surplus on
revaluation of 145.94 2453171 1669340 145.94 147 100
assets - net of tax
TOTAL EQUITY 139.23 16219844 12241945 139.23 132.5 100
HORIZONTAL ANALYSIS
PROFIT & LOSS ACCOUNT
AS ON DEC 31 2008, 2007 & 2006
2008 2007 2006 Horizontal Analysis
(Rupees in ‘000’) 2008 2007 2006
Mark-up / return /
31046583 25783871 21191470 146.51 121.7 100
interest earned
Mark-up / return /
20331194 16620963 15232886 133.47 109.1 100
interest expensed
Net mark-up / interest

10715389 9162908 5958584 179.83 153.8 100
income
Provision against non-

performing loans and 2035997 2370867 697690 291.82 339.8 100
advances - net
Provision for diminution

1479062 0 0 0
in value of investment
Bad debts written off

28298 5844 1537 1841.1 380.2 100
directly
3,543,357 2,376,711 699,227 506.75 339.9 100

7,172,032 6,786,197 5,259,357 136.37 129 100
income after provisions
Non mark-up / interest

income
Fee, commission and

2,539,321 2,429,599 1,804,998 140.68 134.6 100
brokerage income
Dividend income 300,943 64,722 37,393 804.81 173.1 100
Income from dealing in

914,845 474,510 386,997 236.4 122.6 100
foreign currencies
Gain on sale of securities 424,220 2053192 180751 234.7 1136 100
Unrealized loss on
revaluation of
181,571 21530 27599 657.89 78.01 100
investments classifies as
held for trading
Other income 1,247,669 1,031,372 842,099 148.16 122.5 100
Total non-mark-up /
5,245,427 6,038,466 3,224,639 162.67 187.3 100
interest income
12,417,459 12,824,663 8,483,996 146.36 151.2 100

expense
Administrative expenses 10,741,399 8,272,587 5,874,745 182.84 140.8 100
Provisions against off-

28,582 6,959 0 0 0 0
balance sheet obligations
Other charges 122,758 9,565 43,306 283.47 22.09 100
Total non mark-up /

10,622,739 8289111 5,918,051 179.5 0 100
interest expenses
Profit before taxation 1,794,720 4,535,552 2,565,945 69.944 176.8 100
Taxation 0 0 0
- Current 1730051 1726810 476226
- Prior years 221797 0 100874 219.88 0 100
- Deferred 1014835 321487 427902 237.17 75.13 100
493419 1405323 803254 61.428 175 100
Profit after taxation 1301301 3130229 1962691 66.302 159.5 100
Attributable to:
Unappropriated profit
4851840 2823072 1886845
brought forward
Transferred from surplus

on revaluation of fixed 24586 24585 26074 94.293 94.29 100
assets - net of tax
Profit available for

6177727 5977886 3675610 168.07 162.6 100
appropriation
VERTICAL ANALYSIS
It is a method of financial statement analysis in which each entry for each of the three major
categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a
proportion of the total account. The main advantages of analyzing a balance sheet in this
manner are that the balance sheets of businesses of all sizes can easily be compared. It also
makes it easy to see relative annual changes in one business. When using vertical analysis, the
analyst calculates each item on a single financial statement as a percentage of a total. The term
vertical analysis applies because each year's figures are listed vertically on a financial statement.
The total used by the analyst on the income statement is net sales revenue, while on the
balance sheet it is total assets. This approach to financial statement analysis, also known as
component percentages, produces common-size financial statements. Common-size balance
sheets and income statements can be more easily compared, whether across the years for a
single company or across different companies.
VERTICAL ANALYSIS
HABIB BANK
BALANCE SHEET
AS ON AS ON DEC 31 2008, 2007 & 2006
(Rupees in ‘000’) Vertical Analysis
2008 2007 2006
ASSETS 2008 2007 2006
Cash and
balances with 56533134 55487664 46310478 7.4589 8.019 7.8454
treasury banks
Balances with
39307321 27020704 35965048 5.1862 3.905 6.0928
other banks
Lending to
financial 6193787 1628130 6550128 0.8172 0.235 1.1096
institutions
Investments 13814592 177942251 119587476 1.8227 25.71 20.259
Advances 456355507 382172734 349432685 60.211 55.23 59.197
Other assets 35419252 27346111 17765291 4.6732 3.952 3.0096
Operating fixed
14751252 13780555 11954876 1.9463 1.991 2.0252
assets
Deferred tax
11222444 6613372 2725486 1.4807 0.956 0.4617
asset
TOTAL ASSETS 757928389 691991521 590291468 100 100 100
LIABILITIES
Bills payable 9944257 15418230 5737457 1.312 2.228 0.972
Borrowings
from financial 46844890 58994609 56392270 6.1806 8.525 9.5533
institutions
Deposits and
597090545 531298127 459140198 78.779 76.78 77.782
other accounts
Sub-ordinate
3954925 3100000 0 0.5218 0.448
loans
Liabilities
against assets
subject to
finance lease
Other liabilities 24913236 19943126 15578177 3.287 2.882 2.6391
Deferred tax
------- ----------- ---------
liability
TOTAL
682747953 628754092 536848102 90.081 90.86 90.946
LIABILITIES
NET ASSETS 75180436 63237429 53443366 9.919 9.14 9.054
REPRESENTED BY
Shareholders Equity
Share capital 7590000 6900000 6900000 1.001 1 1.169
Reserves 24243254 19821455 17802584 3.199 2.86 3.016
Unappropriated
39447648 28341670 20 475,080 5.205 4.1 3.287
profit
Total equity
attributable to
the equity 71280902 55063125 45177664 9.405 7.96 7.653
holders of the
Bank
Minority
890099 965642 913317 0.117 0.14 0.155
interest
Surplus on
revaluation of
3009435 7208662 7352385 0.397 1.04 1.246
assets - net of
tax
TOTAL EQUITY 75180436 63237429 53443366 9.919 9.14 9.054
VERTICAL ANALYSIS
HABIB BANK
CONSOLIDATED PROFIT & LOSS ACCOUNT
AS ON DEC 31 2008, 2007 & 2006
2008 2007 2006 Vertical Analysis
(Rupees in ‘000’) 2008 2007 2006
Mark-up / return /
63,305,033 50,481,021 43,685,740 100 100 100
interest earned
Mark-up / return /
26,525,556 19,153,957 13,204,037 41.901 37.94 30.225
interest expensed
Net mark-up /
36,779,477 31,327,064 30,481,703 58.099 62.06 69.775
interest income
Provision against
non-performing
6,904,919 8,238,227 2,863,207 10.907 16.32 6.5541
loans and advances
- net
Charge / (reversal)
against off-balance 372,598 (54,626) (45,438) 0.5886 -0.108 -0.104
sheet obligations
Charge / (reversal)
of provision against
diminution in the 1,909,887 (84,310) (13,697) 3.017 -0.167 -0.031
value of
investments
Bad debts written ---------- ---------- ------------- 0 0 0
off directly
9,187,404 8,099,291 2,804,072 14.513 16.04 6.4187
Net mark-up /
interest income 27,592,073 23,227,773 27,677,631 43.586 46.01 63.356
after provisions
Fee, commission
and brokerage 4,518,408 3,420,051 3,931,710 7.1375 6.775 9
income
Income / gain on
2,369,233 2,472,663 1,219,623 3.7426 4.898 2.7918
investments
Income from
dealing in foreign 2,374,318 1,487,374 1,102,358 3.7506 2.946 2.5234
currencies
Gain on
investments in 4,000,330 ------- 0 6.3191 0.3162 0
associate
Other income 3,116,522 2,643,076 2,235,805 4.923 5.236 5.1179
Total non-mark-up
16,378,811 10,023,164 8,489,496 25.873 19.86 19.433
/ interest income
43,970,884 33,250,937 36,167,127 69.459 65.87 82.789
Non mark-up /
interest expense
Administrative
21,348,016 18,297,279 15,425,461 33.722 36.25 35.31
expenses
Other provisions /
200,163 276,111 122,510 0.3162 0.547 0.2804
write offs - net
Other charges 64,751 85,152 54,898 0.1023 0.169 0.1257
Workers welfare
323,575 0.5111 0 0
fund
Total non mark-up /

21,936,505 18,106,32 15,602,869 34.652 0 35.716
interest expenses
Profit before
22,034,379 15,144,617 18,840,487 34.807 30 43.127
taxation
Taxation
- Current 8,661,15 7,220,717 7,144,846 0 14.3 16.355
- Prior years 233,100 1,668,562 (39,067) 0.3682 3.305 -0.089
- Deferred (2,473,891) (3,828,699) (965,607) -3.908 -7.584 -2.21
6,420,359 10,084,037 12,700,315 10.142 19.98 29.072
Profit after
15,614,020 10,084,037 12,700,315 24.665 19.98 29.072
taxation
Attributable to:
Equity holders of
15,535,011 10,000,231 12,630,259 24.54 19.81 28.912
the Bank
Minority interest 79,009 83,806 70,056 0.125 0.17 0.16
15,614,020 10,084,037 12,700,315 24.66 20 29.07
Basic and diluted

20.47 13.18 18.30 3.23 2.61 4.189
earnings per share
VERTICAL ANALYSIS
BALANCE SHEET
AS ON DEC 31 2008, 2007 & 2006
Years
Vertical Analysis
(Rupees in ‘000’)
2008 2007 2006
ASSETS 2008 2007 2006
Cash and
balances with 32987335 29436378 27859360 9.4522 8.95 10.105
treasury banks
Balances with
21581043 18380738 12731952 6.1838 5.589 4.6183
other banks
Lending to
financial 3315500 3452059 12456653 0.95 1.05 4.5184
institutions
Investments 75973238 88491564 56502210 21.769 26.91 20.495
Advances 192671169 171198992 144999325 55.208 52.05 52.596
Operating fixed
13773293 11922324 10502990 3.9466 3.625 3.8098
assets
Other assets 8989186 6013097 5633051 2.5758 1.828 2.0433
TOTAL ASSETS 348990764 328895152 275685541 100 100 100
LIABILITIES
Bills payable 3452031 4138243 3091135 0.9891 1.258 1.1213
Borrowings from
financial 13690222 21230697 8394130 3.9228 6.455 3.0448
institutions
Deposits and
300732858 273173841 239509391 86.172 83.06 86.878
other accounts
Sub-ordinate
2571169 3220858 3222106 0.7367 0.979 1.1688
loans
Liabilities against
assets subject to
finance lease
Deferred tax
208465 1379809 1921338 0.0597 0.42 0.6969
liability
Other liabilities 11291280 9531860 7305496 3.2354 2.898 2.6499
TOTAL
331946025 312675308 263443596 95.116 95.07 95.559
LIABILITIES
NET ASSETS 17044739 16219844 12241945 4.884 4.93 4.441
REPRESENTED BY:
Shareholders Equity
Share capital 7995000 6500000 5000000 2.291 1.98 1.814
Reserves 3166056 2414833 2749533 0.907 0.73 0.997
Unappropriated
3447467 4851840 2823072 0.988 1.48 1.024
profit
14608523 13766673 10572605 4.186 4.19 3.835
Surplus on
revaluation of 2436216 2453171 1669340 0.698 0.75 0.606
assets - net of tax
TOTAL EQUITY 17044739 16219844 12241945 4.884 4.93 4.441
VERTICAL ANALYSIS
PROFIT & LOSS ACCOUNT
AS ON DEC 31 2008, 2007 & 2006
2008 2007 2006 Vertical Analysis
(Rupees in ‘000’) 2008 2007 2006
Mark-up / return / interest

31046583 25783871 21191470 100 100 100
earned
Mark-up / return / interest

20331194 16620963 15232886 65.486 64.46 71.882
expensed

10715389 9162908 5958584 34.514 35.54 41.23
income
Provision against non-

performing loans and 2035997 2370867 697690 6.55 9.195 3.2923
advances - net
Provision for diminution in

1479062 4.76 0 0
value of investment
Bad debts written off

28298 5844 1537 0.091 0.023 0.0073
directly
3,543,357 2,376,711 699,227 11.413 9.218 3.2996

7,172,032 6,786,197 5,259,357 23.101 26.32 24.818
income after provisions

income
Fee, commission and

2,539,321 2,429,599 1,804,998 8.1791 9.423 8.5176
brokerage income
Dividend income 300,943 64,722 37,393 0.9693 0.251 0.1765
Income from dealing in

914,845 474,510 386,997 2.9467 1.84 1.8262
foreign currencies
Gain on sale of securities 424,220 2053192 180751 1.3664 7.963 0.8529
Unrealized loss on
revaluation of investments 181,571 21530 27599 0.5848 0.084 0.1302
classifies as held for trading
Other income 1,247,669 1,031,372 842,099 4.0187 4 3.9738
Total non-mark-up / interest

5,245,427 6,038,466 3,224,639 16.895 23.42 15.217
income
12,417,459 12,824,663 8,483,996 1357.3 2703 2192.3

expense
Administrative expenses 10,741,399 8,272,587 5,874,745 5915.8 38424 21286
Provisions against off-

28,582 6,959 0 2.2908 0.042 0
balance sheet obligations
Other charges 122,758 9,565 43,306 2.3403 0.058 1.343
Total non mark-up / interest

10,622,739 8289111 5,918,051 85.547 49.87 69.755
expenses
Profit before taxation 1,794,720 4,535,552 2,565,945 5.7807 27.29 12.108
Taxation 0 0 0
- Current 1730051 1726810 476226 5.5724 6.697
- Prior years 221797 0 100874 0.7144 0 0.476
- Deferred 1014835 321487 427902 3.2687 1.247 2.0192
493419 1405323 803254 1.5893 5.45 3.7905
Profit after taxation 1301301 3130229 1962691 4.1914 12.14 9.2617
Attributable to:
Unappropriated profit
4851840 2823072 1886845
brought forward
Transferred from surplus on

revaluation of fixed assets - 24586 24585 26074 0.0792 0.095 0.123
net of tax
Profit available for

6177727 5977886 3675610 19.898 23.18 17.345
appropriation
REVIEW OF DESCRIPTIVE INFORMATION

Habib Bank Limited:
These financial statements have been prepared in accordance with approved accounting
standards as applicable in Pakistan. Approved accounting standards comprise of such
International Financial Reporting Standards issued by the International Accounting Standards
Board as are notified under the Companies Ordinance, 1984, provisions of and directives issued
under the Companies Ordinance, 1984 and Banking Companies Ordinance, 1962 and the
directives issued by State Bank of Pakistan (SBP). In case the requirements of provisions and
directives issued under the Companies Ordinance, 1984 and Banking Companies Ordinance,
1962 and the directives issued by SBP differ, the provisions of and directives issued under the
Companies Ordinance, 1984 and Banking Companies Ordinance, 1962 and the directives issued
by SBP shall prevail.
Amended IAS 27 Consolidated and Separate Financial Statements (effective for annual periods
beginning on or after 1 July 2009) requires accounting for changes in ownership interest by the
group in a subsidiary, while maintaining control, to be recognized as an equity transaction.
When the group loses control of subsidiary, any interest retained in the former subsidiary will be
measured at fair value with the gain or loss recognized in the profit or loss. The application of
the standard is not likely to have an effect on the Group's financial statements. The auditors
conducted their audit in accordance with the auditing standards as applicable in Pakistan. These
standards require that they plan and perform the audit to obtain reasonable assurance about
whether the above said statements are free of any material misstatement. And in their opinion
the consolidated financial statements present fairly the financial position of Habib Bank Limited
as at December 31, 2006, 2007 & 2008 and the results of its operations, its cash flows and
changes in equity for the year then ended in accordance with the approved accounting
standards as applicable in Pakistan.
Bank Al Falah Limited:
The financial statements prepared by the management, present fairly its state of affairs, the
results of its operating cash flow and changes in equity. All directors of the company are
registered as tax payers and none of them has default in payments of any loan to a banking
company. The auditors perform their audit in accordance with the auditing standards as
applicable in Pakistan. These standards require that they plan and perform the audit to obtain
reasonable assurance about whether the above said statements are free of any material
misstatement. And in their opinion the consolidated financial statements present fairly the
financial position of Habib Bank Limited as at December 31, 2006, 2007 & 2008 and the results
of its operations, its cash flows and changes in equity for the year then ended in accordance
with the approved accounting standards as applicable in Pakistan.
The board of directors through its sub committee called Board Risk Management Committee
(BRMC) oversees the overall risk of the bank. RMD is the organizational arm performing the
functions of identifying, measuring, monitoring and controlling the various risks and assists the
Apex level committee and the various sub- committees in conversion of policies into action.
Credit risk Management processes encompasses identification, assessment, measurement,

monitoring and control of the credit exposures. The bank, as per State Bank of Pakistan
Guidelines, has migrated to base II as on January, with the standardized approach.
Comparisons
Financial trend analysis is an applied, practical approach for monitoring the financial condition
of any company through the use of financial indicators. I shall use technique to compare
previous three-year period data and observes how they change. This would permit an
assessment of the current financial condition.
Trend Analysis
A firm's present ratio is compared with its past and expected future ratios to determine whether
the company's financial condition is improving or deteriorating over time. Trend analysis studies
the financial history of a firm for comparison. By looking at the trend of a particular ratio, one
sees whether the ratio is falling, rising, or remaining relatively constant. This helps to detect
problems or observe good management.
TREND ANALYSIS
HABIB BANK LIMITED
FOR THE YEARS 2006, 2007 & 2008
Performance Area 2006 2007 2008 Trend
a) Liquidity Ratios
Current Ratio Lower liquidity in

1.20 1.19 1.16
2008
Sales to Working Capital 0.5 times 0.5 times 0.6 times Increase in 2008
Working Capital Lower liquidity in

95155274 104938111 100006655
2008
b) Leverage Ratios
Time Interest Earned 2.43 1.79 1.83 Lower since 2008
Debt Ratio Leverage remain

0.91 0.91 0.9
same
Drops in leverage in
Debt to Equity Ratio 11.88 11.42 9.58
2008
Current Worth / Net worth Higher in 2006
1.78 1.66 1.33
Ratio
Total Capitalization Ratio 0.56 0.53 0.42 Lower during 2008
Long term Assets versus Long Drops in leverage in

0.26 0.33 0.51
term Debt 2006
Lower coverage in
2006
c) Profitability Ratios
Net Profit Margin Lower profitability

29.07% 19.97% 24.66%
during 2007
Operating Income Margin Increased Profitability
57.9% 48% 59.6%
since 2008
Lower ROA during
Return on Assets 2.27% 1.57% 2.15%
2007
Operating Assets Turnover Lower efficiency since
192.7% 192.7% 174.70%
2008
Return on Operating Assets Lower efficiency in
13.48% 10.37% 11.19%
2007
Sales to Fixed Assets No change in last 3
3.65 times 3.66 times 3.66 times
years
d) Activity Ratios:
Total Asset Turnover Higher efficiency

0.07 0.07 0.08
since 2008
e) Market Ratios:
Dividend per Share – DPS Good market

1.0019 2.0014 3.597 perceptions
Earning Per Share- EPS 18.41 14.61 20.57 Higher In 2008
Price / Earning Ratio Lower in 2008

0.54 0.68 0.49
Dividend Payout Ratio Good market

0.0544 0.137 0.175
perceptions
Dividend Yield 0.10019 0.20014 0.3597 Lower in 2006
Book Value per Share Good market

6.5 7.98 9.39
perceptions
f) Statement of cash flow
Operating Cash Flow to Total Lower in 2006

0.033 0.089 0.027
Debt
Operating Cash Flow per Share Increased during
25.87 81.48 24.02
2007
TREND ANALYSIS
FOR THE YEARS 2006, 2007 & 2008
Performance Area 2006 2007 2008 Trend
a) Liquidity Ratios
Current Ratio Higher liquidity in

1.06 1.10 1.06
2007
Sales to Working Capital 1.38 0.85 1.57 Increase in 2008
Working Capital 15276529 30128884 19741302 Lower liquidity in

2006
b) Leverage Ratios
Time Interest Earned 1.16 1.27 1.08

Lower since 2008
Debt Ratio Leverage remain

0.95 0.95 0.95
same
24.91 22.71 22.72 Drops in leverage in
Debt to Equity Ratio
2008
Current Worth / Net worth 1.247
1.85 1.15 Higher during 2007
Ratio
Total Capitalization Ratio 0.561487909 0.652339509 0.5299458 Increased during
2007
Long term Assets versus Long 1.01 0.46 0.63 Higher during
term Debt leverage in 2006
0.055321869 0.048350633 0.0508531 Lower coverage in
Debt Coverage Ratio
2007
c) Profitability Ratios
Net Profit Margin 0.08% Lower profitability

0.12% 0.04%
during 2006
Operating Income Margin Increased
0.687738604 0.586337443 0.5437148
Profitability since
2006
0.012776185 0.010355041 0.0038393 Lower ROA during
Return on Assets
2007
Operating Assets Turnover Lower efficiency
2.41% 2.31% 2.19%
since 2008
Return on Operating Assets Lower efficiency in
0.034 0.052 0.019
2008
Sales to Fixed Assets 2.017 times 2.16 times 2.25 times Lower in 2006
d) Activity Ratios:
Total Asset Turnover Higher efficiency

0.07 0.07 0.08
since 2008
e) Market Ratios:
Dividend per Share – DPS 1.21 Dividend announced

00 00
just in 2008
Earning Per Share- EPS 3.525 4.815 1.627 Higher In 2007
Price / Earning Ratio 0.54 0.68 0.49 Lower in 2008
Dividend Payout Ratio Good market

00 00 0.74
perceptions
Dividend Yield No Dividend in 2006
00 00 0.121
& 2007
Book Value per Share Good market
2.11 2.11 1.82
perceptions
f) Statement of cash flow
Operating Cash Flow to Total

0.029 0.126 0.007 Lower in 2008
Debt
Operating Cash Flow per Increased during
15.70 60.99 3.12
Share 2007
Industry Averages and Comparisons with Competitors
The entire ratio has been compared through above mentioned comparisons and analysis, which
include horizontal analysis, vertical analysis and trend analysis.
SUMMARY
Financial Statement Analysis is a method used by interested parties such as investors,
creditors, and management to evaluate the past, current, and projected conditions and
performance of the firm. This report mainly deals with the insight information of the
two mentioned companies. In the current picture where financial volatility is endemic
and financial intuitions are becoming popular, when it comes to investing, the sound
analysis of financial statements is one of the most important elements in the
fundamental analysis process. At the same time, the massive amount of numbers in a
company's financial statements can be bewildering and intimidating to many investors.
However, through financial ratio analysis, I tried to work with these numbers in an
organized fashion and presented them in a summarizing form easily understandable to
both the management and interested investors.
It is required by law that all private and public limited companies must prepare the
financial statements like, income statement, balance sheet and cash flow statement of
the particular accounting period. The management and financial analyst of the company
analyze the financial statements for making any further financial and administrative
decisions for the betterment of the company. Therefore, I select this topic, so that I
have done some solid financial analysis that will certainly help the management of
review their performance and also assist the interested people like investors and
creditors. That as a financial analyst how can I make any important financial decision by
analyzing the financial statements of the company. Because, it is the primary
responsibility of the financial managers or financial analyst to manage the financial
matters of the company by evaluating the financial statements. I am also providing
some important suggestions and opinions about the financial matters of the business.
CHAPTER 5
CONCLUSIONS AND RECOMMEDATIONS
5.1 Conclusion / Findings:
I compare and analysis the financial statements of Habib Bank Limited and Bank Al Falah
Limited.
 Liquidity position of both companies is not up to standard, both are below industry
average, but the liquidity position of Habib Bank is better from Bank AL Falah
Limited. Working capital of Habib Bank is better than Bank Al Falah, but both
companies must improve their liquidity position.
 Leverage ratios indicate the high risk associated with both the companies. Generally
leverage ratios, measures the percentage of funds provided by the creditors. The
proportion of a firm’s total assets is being financed with high percentage of
borrowed funds.
 Profitability ratios of Habib Bank Limited are better than Bank AL Falah Limited. Net
profit of Bank Al Falah Limited is low due to heavy financial charges.
 Habib Bank has a good market perception due to continuous declaration of
dividends but on the other hand Bank LA Falah limited has not announced in
dividend in the year 2006 and 2007.
 Book value per share of Habib Bank Limited is much higher than the Al Falah Bank.
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. So the net worth of Habib Bank is better
than Al Falah Bank.
Earning per Share and Operating cash flow of Habib Bank Limited is also better than Bank AL
Falah Limited.
5.2 RECOMMENDATIONS
I have realized that Habib Bank is performing very well since its inception. It is quite difficult to
give suggestion to improve the banking conditions Habib Bank Limited. As we know that nothing
is perfect, there is always a room for improvement, so I will recommend the following
suggestions for HBL:
 Employees Training programs must be introduced on continuous basis so that

Employees have understanding with the latest developments especially with the
customers.
 Bank should introduced incentive plans for employees on regular basis so that if
employees may work whole heartedly for the welfare of their organization. While giving
incentives qualification, work, experience, hard work and such other factors must be
considered.
 Mismanagement of resources must be avoided as much as possible as it decreases profit
but also discourage hard worker and honest employees.
 Fresh graduates must be recruited. As the combination of Experienced and fresh can
produce better results and it will improve the efficiency of management.
 Habib Bank is going towards mobile banking but the problem is that a common client
has no idea of its usage due to lack of marketing. I think that a proper marketing
program must be launched for client’s awareness.
 Banks different schemes must be conveyed to the targeted customers so that to have a
reasonable share in market.
 Bank should help the society by providing interest free loans to the Talented Students.
 Online Banking should be introduced in all the branches.
 To motivate the employees their remuneration / salaries should be made at par with
top tier Banks.
 Aggressive publicity campaign must be introduced through press and Electronic media
for new products and scheme by initiating vigorous marketing policy.
 Bank should adopt such an induction plan that when a customer opens his account with
the bank he should be supplied with a booklet which enables him to know the
procedure of filing the cheques, pay-in-slip etc. It will save a lot of time of the bank staff
afterward during the conduct of the account of that customer.
 The attitude of the bankers with all of their customers is not the same; they pay more
attention and good service to some of the customers and neglect a major portion of
them. Some of the customers approach to the bank officials and get their work done
before others; it is not a good practice. All the customers should be treated equally.
 HBL should increase its communication with customers about the terms and conditions
of its different products and services.
ANNEXURES
A Case Study of Bank Alfalah and Habib Bank Ltd ( 092-006-115-Minhaj

Minhaj University)
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GLOSSARY
Acid test Ratio

Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities.
Analytical
This is auditor-speak for finding the percentage difference from the current year's revenue
balance to the prior year's balance. Ignore the awkward phrase. It's a great exercise because it
can help you spot large swings from one year to the next. Big percentage changes relative to
past performance should be red flags.
Balance Sheet
Also called the statement of financial condition, it is a summary of a company's assets, liabilities,
and owners' equity.
Bank Regulation
The formulation and issuance by authorized agencies of specific rules or regulations, under
governing law, for the conduct and structure of banking.
Bankruptcy
Inability to pay debts. In bankruptcy of a publicly owned entity, the ownership of the firm's
assets is transferred from the stockholders to the bondholders.
Capital Adequacy Ratio

It is also called Capital to Risk (Weighted) Assets Ratio (CRAR), is a 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 are complying with their statutory Capital requirements.This has been agreed
internationally at 8%.
Cash Reserve Ratio (CRR)

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with SBP.
Credit Risk
The possibility that a bond issuer will default, by failing to repay the principal and interest on
time
Debit Equity Ratio

It compares a company's total liabilities to its total shareholders' equity
Derivative
A financial contract whose value is based on, or "derived" from, a traditional security (such as a
stock or bond), an asset (such as a commodity), or a market index.
Economic Value Added (Eva)

Economic Value Added, a measure of the superiority of the return a company is able to realize
on invested capital above the baseline return expected by the investment community.
Economic Value of Equity

EVE is the present value of the expected cash flow of assets minus the value of the expected
cash flows on liabilities, plus or minus the present value of expected cash flows on off balance
sheet instruments, discounted to reflect market rates.
Foreign Exchange Risk

It is a risk which is associated with exposure to fluctuation in spot exchange rates.
Gross Income
Gross income is commonly defined as the amount of a company's or a person's income before
all deductions or any taxpayer’s income, except that which is specifically excluded by the
Internal Revenue Code, before taking deductions or taxes into account. For a business, this
amount is pre-tax net sales less cost of sales.
Halal; Anything permitted by the Shariah.
Haram; Anything prohibited by the Shariah.
Ijarah-wa-Iqtina
A mode of financing, by way of Hire-purchase, adopted by Islamic banks. It is a contract under
which the Islamic bank finances equipment, building or other facilities for the client against an
agreed rental together with a unilateral undertaking by the bank or the client that at the end of
the lease period, the ownership in the asset would be transferred to the lessee. The undertaking
or the promise does not become an integral part of the lease contract to make it conditional.
The rental as well as the purchase price is fixed in such a manner that the bank gets back its
principal sum along with some profit, which is usually determined in advance.
Inter Bank Rated

The rate of interest charged on short-term loans made between banks. Banks borrow and lend
money in the inter bank market in order to manage liquidity and meet the requirements
placed on them. The interest rate charged depends on the availability of money in the market,
on prevailing rates and on the specific terms of the contract, such as term length.
Interest Rate Risk

The risk that an investment's value will change due to a change in the absolute level of interest
rates, in the spread between two rates, in the shape of the yield curve or in any other interest
rate relationship. Such changes usually affect securities inversely and can be reduced by
diversifying (investing in fixed-income securities with different durations) or hedging (e.g.
through an interest rate swap).
Liquid Assets
Liquid assets are accounts or securities that can be easily converted to cash at little or no loss of
value.
Liquidity Risk
The risk stemming from the lack of marketability of an investment that cannot be bought or sold
quickly enough to prevent or minimize a loss.
M2
Total stock of money in the economy, consisting primarily of currency in circulation and deposits
in savings and checking accounts.
Market Risk
Market risk is the risk that the value of an investment will decrease due to moves in market
factors
Money Market
Money markets are for borrowing and lending money for three years or less. The securities in a
money market can be .government bonds, Treasury bills and commercial paper from banks and
companies.
Mudarabah
A form of partnership where one party provides the funds while the other provides expertise
and management. The latter is referred to as the Mudarib. Any profits accrued are shared
between the two parties on a pre-agreed basis, while loss is borne by the provider(s) of the
capital.
Murabaha
Literally it means a sale on mutually agreed profit.
Technically, it is a contract of sale in which the seller declares his cost and the profit. This has
been adopted by Islamic banks as a mode of financing. As a financing technique, it can involve a
request by the client to the bank to purchase a certain item for him.
Musharika
Musharika means a relationship established under a contract by the mutual consent of the
parties for sharing of profits and losses in the joint business. It is an agreement under which the
Islamic bank provides funds which are mixed with the funds of the business enterprise and
others. All providers of capital are entitled to participate in management, but not necessarily
required to do so. The profit is distributed among the partners in pre-agreed ratios, while the
loss is borne by every partner strictly in proportion to respective capital contributions.
Net Interest Income

NII is a financial measure for banks, calculated by the amount of money the bank receives from
interest on assets (commercial loans, personal mortgages, etc) minus the amount of money the
bank pays out for interest on liabilities (personal bank accounts, etc). Although usually
calculated for banks
Net Interest Margin

(NIM) is a measurement of the difference between the interest income generated by banks or
other financial institutions and the amount of interest paid out to their lenders(for example,
deposits).
Net Investment Income per Share

Income received by an investment company from dividends and interest on investments less
administrative expenses, divided by the number of outstanding shares.
Net Performing Loans

Generally, one on which payments are less than 90 days past due.
Non Performing Asset

An asset that is not effectively producing income, such as an overdue loan.
Open Market Operations

Open market operations are the means of implementing monetary policy by which a central
bank controls its national money supply by buying and selling government securities, or other
financial instruments. Monetary targets, such as interest rates or exchange rates, are used to
guide this implementation.
Operating Leverage
Fixed operating costs, which are characterized as leverage because they accentuate variations in
profits.
Operating Profit (Or Loss)

Revenue from a firm's regular activities less costs and expenses and before income deductions.
Over-The-Counter (OTC)
Trading is to trade financial instruments such as stocks, bonds, commodities or derivatives
directly between two parties. It is contrasted with exchange trading, which occurs via facilities
constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock
exchanges.
Paid up Capital
The total amount of shareholder capital that has been paid in full by shareholders.
Profit Margin
Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined
by dividing net income by revenue for the same 12-month period. Result is shown as a
percentage. Also known as net profit margin.
Profitability Ratios
Ratios that focus on how well a firm is performing. Profit margins measure performance with
relation to sales. Rate of return ratios measure performance relative to some measure of size of
the investment.
Ratio Analysis
A way of expressing relationships between a firm's accounting numbers and their trends over
time that analysts use to establish values and evaluate risks.
Receivable Turnover
This ratio can help you get a feel for just how quickly a company collects the money it's owed
from its customers. Just divide total annual sales by average of the most recent two years'
accounts receivable. Thirty days is a pretty good benchmark (most companies require payment
in 30 days), but check with the company's competitors.
Required Rate of Return (RRR)

The minimum expected yield by investors requires in order selecting a particular investment.
Return on Assets (ROA)

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to
how efficient management is at using its assets to generate earnings.
Return on Equity (ROE)

The amount of net income returned as a percentage of shareholders equity. Return on
equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.
Riba
An excess or increase. Technically, it means an increase over principal in a loan transaction or in
exchange for a commodity accrued to the owner (lender) without giving an equivalent counter-
value or recompense in return to the other party; every increase which is without an ‘equal
counter-value.
Risk Weighted Assets
In terms of the minimum amount of capital that is required within banks and other institutions,
based on a percentage of the assets, weighted by risk.
Secondary Market
A market where investors purchase securities or assets from other investors, rather than from
issuing companies them.
Shariah
The term Shariah refers to divine guidance as given by the Holy Quran and the Sunnah of the
Prophet MUHAMMAD (PBUH) and embodies all aspects of the Islamic faith, including
beliefs and practice.
Tier 1 Capital
Tier 1 capital is the core measure of a bank's financial strength from a regulator's point
of view. It is composed of core capital,[1] which consists primarily of equity capital and
cash reserves, but may also include irredeemable non-cumulative preferred stock and
retained earnings.
Tier 11 Capital
A term used to describe the capital adequacy of a bank. Tier II capital is secondary bank capital
that includes items such as undisclosed reserves, general loss reserves, subordinated term debt,
and more.
Tier 111 Capital

Tertiary capital held by banks to meet part of their market risks, that includes a greater variety
of debt than tier 1 and tier 2 capitals. Tier 3 capital debts may include a greater number
of subordinated issues, undisclosed reserves and general loss reserves compared to tier 2
capital.
Yield Curve Risk

The risk of experiencing an adverse shift in market interest rates associated with investing in a
fixed income instrument. The risk is associated with either a flattening or steepening of the yield
curve, which is a result of changing yields among comparable bonds with different maturities.
Yield Risk
The risk of experiencing an adverse shift in market interest rates associated with investing in a
fixed income instrument. The risk is associated with either a flattening or steepening of the yield
curve, which is a result of changing yields among comparable bonds with different maturities.
Yield Spread
In finance, the yield spread is the difference between the quoted rates of return on two
different investments, usually of different credit quality.
It is a compound of yield and spread.

Ratio Analysis

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Financial Ratio Analysis 2009

Financial Ratios Analysis

OBJECTIVES OF THE PROJECT

Introduction to Banking Sector

A broader definition of a bank is any financial institution that receives, collects,

Deposits from individuals, firms and companies at a lower rate of

“A banker is dealer in capital or more properly, a dealer in money. He is intermediate party

Sir John Paget defines banker in these terms:

 Take deposits accounts.

 Take current accounts,

 Issue and pay Cheques and

“Banks are guardian distributor of cash money”.

Evolution of Banking in Pakistan

Banking Growth during (1948-1970)

Banking Reforms 1972

Nationalization of Banks (1974)

To distribute equitably credit too different classes sectors and regions.

National Banks of Pakistan

Habib Bank Limited

Habib Bank (Overseas) Limited

United Bank Limited

Muslim Commercial Bank Limited

Commerce Bank Limited

Standard Bank Limited

Bank of Bahawalpur Limited

Premium Bank Limited

Pak Bank Limited

Sarhad Bank Limited

Lahore Commercial Limited

Punjab Provincial Co-operative Bank Limited

1. National Bank Limited

2. Habib Bank Limited

3. United Bank Limited

4. Muslim Commercial Bank Limited

5. Allied Bank of Pakistan Limited

1.9 Islamisation of Banking

Different financial schemes introduced in the Islamization process are:

 Hire Purchase Financing.

 Specific Purpose Modaraba.

1.10 Dis-Investment and Deregulation of Banking – 1991

1.11 Interest Free Banking

2.1 Meaning and Definition of Ratio Analysis

Ratio analysis is a widely used tool of financial analysis. It is defined as the

2.2 Significance or Importance of Ratio Analysis

 It helps in evaluating the firms performance

 It helps in inter-firm comparison

Ratio analysis helps in inter-firm comparison by providing necessary data. An

 It simplifies financial statement

 It helps in determining the financial position of the concern

Ratio analysis facilitates the management to know whether the firms

 It is helpful in budgeting and forecasting

 Long term solvency:

2.3 Classification of Ratios

2.3.1 Liquidity Ratio

2.3.1 Liquidity Ratio:

2.3.1.1 Current Ratio

2.3.1.1 Current Ratio

2.3.1.2 Acid Test Ratio or Quick Ratio:

The acid test ratio is a measure of liquidity designed to overcome the

Current Asset - Inventories

2.3.2 Leverage or Capital Structure Ratio:

2.3.2.1 Debt – Equity Ratio

2.3.2.1 Debt – Equity Ratio

Long Term + Short Term Debts + Current Liabilities