CHAPTER: O1

INTRODUCTION

1
1.1 Introduction:
Financial performance may be define as a subjective measure of how well a firm can
use assets from its primary mode of business and generate revenues. This term is also
used as a general measure of a firm’s overall financial health over a given period of
time, and can be used to compare similar firms across the same industry or a compare
industries or sectors in aggregation.
Financial performance analysis of a company is very important to get an overall view
about an organization. It generally consists of interpretation of balance sheet and
interpretation of income statement. By using these two sources one can perform the
ratio analysis and trend analysis which are the major tools for analyzing the financial
performance of a bank. (www.investopedia.com/terms/f/financialperformance.asp)
A financial instrument is a tradable asset of any kind; either cash, evidence of a
ownership interest in an entity, or a contractual right to receive or deliver cash or
another financial instrument. (www.answers.com/topic/financial-analysis)

There are many ratios used to analyze financial statements:-

 Liquidity Analysis Ratio: for example, the net working capital ratio is
calculated between networking capital and total assets.

 Profitability Analysis Ratio: For example, return on assets ratio is calculated

between net income and average total assets. Profit margin ratio is calculated
between net income and sales. Earnings per share are calculated between net
income and number of outstanding shares.

 Activity Analysis Ratio: For example, asset turnover ratio is calculated

between sales and average total assets. Inventory turnover ratio is calculated
between cost of goods sold and averages inventories.

2
  Capital structure Analysis Ratio: The most important ratio is debt to equity
ratio, which is calculated between total liabilities and total stockholder’s
equity.

 Capital Market Analysis Ratio: For example, dividend ratio is calculated

between annual dividends per common share and market price of common
stock per share.

All these ratios are collectively used to carry out the financial analysis of business to
assess growth, profitability, and solvency of a business.

1.2 Statement of the problem:

Financial position of the organization are most important to the users of financial
information especially to the investors and creditors. True and fair view of financial
position of the organization can be measured through the assessment of financial
performance. If the investment and credit decisions are taken without knowing the
actual financial health of the company, there is a large probability of being the
decisions wrong. The investors have to suffer from this problem because of the actual
information about the true and fair view of the financial health of the organization.
This study will try to assess the financial performance of MBL by using various tools
and techniques. It is expected that the study will be beneficial to the investors and
creditors.

1.3 Objective of the Study:

 To evaluate the financial position and performance of the Mercantile Bank

Ltd.

3
1.4 Methodology of the Study:
This study is a descriptive type of research which briefly reveals the overall financial
activities performed by Mercantile Bank Ltd. It has also been administered by
collecting secondary data. Annual reports of MBL were the major secondary data
sources in this regard. Ratio analysis in the form trend analysis and comparative
analysis have also been used as major tools for the financial performance evaluation.
The study is performed based on the information extracted from different sources
collected by using a specific methodology. This report is analytical in nature.

The study has been conducted based on the following secondary data:

 Annual Report of MBL 2007-2011.

 Different text book and journals.
 Various reports and articles related to study.
 Some of my course elements as related to this report.
 Web base support from the internet.

Secondary data are collected basically from Annual reports, journals, brochures,
paper, magazines, publications, book & other from of publications & official website

4
 CHAPTER: 2
OVERVIEW OF MERCANTILE
BANK LTD

5
2.1 Background and History of MBL:
Mercantile Bank Limited is a third generation bank in Bangladesh. Mercantile Bank has been
incorporated on May 20th, 1999 in Head office at 61 Dilkhusha C/A, Dhaka, Bangladesh as a
public limited company with the permission of the Bangladesh Bank. Mercantile Bank
Limited commenced formal commercial banking operation from the June 02, 1999. The
founders of MBL are committed to make it a little more different and a bit special
qualitatively.

The Authorized Capital of the Bank is BDT 800000 million and divided into 80000000
ordinary shares of BDT 100 each as of 31 December 2010. The Paid -up Capital is BDT
215841 million of 21584134 ordinary shares of face value of BDT 100 each and listed both in
DSE & CSE. MBL make it most efficient to meet the needs of 21 st century with assets of
BDT 44,940.54 million and more than 1000 employees. The Bank provides a broad range of
financial services to its customers and corporate clients in retail banking, corporate banking
and international trade.

The total amount of deposit is BDT 39,348 million and the total loans and advances are BDT
31,877.86 million at the end of the year 2008 that shows a great performance of MBL. The
credit deposit ratio is 81.02%. The net profit after tax at the end of the year 2008 is BDT
540.50 million.

The bank has 10 divisions namely HRD, Credit division, Development and marketing
division, Research and planning division, Information technology division, General banking
division, Treasury and money market division,

The opening of the Principal Office was the big leaf forward and successively the opening of
the Mothijil Branch expanded the horizon of Mercantile Bank Limited to bring its services to
the valued clients more effectively. The second Branch opened at Dhanmondi Residential
Area, Dhaka on August 04, 1999. The third branch was opened at Agrabad, Chittagong on
November 06, 1999. The bank stood 58 branches all over the country up to October, 2011.
With a firm commitment to achieve an excellence in service, Mercantile Bank Limited has
always tried for creating wide array of banking solution and offer supervision value
proposition.

6
2.2 Vision of Mercantile Bank:
To make finest corporate citizen.
2.3 Mission of Mercantile Bank:
Will become most caring, focused for equitable growth based on diversified deployment of
resources, and nevertheless would remain healthy and gainfully profitable Bank.
2.4 Objectives
 Strategic objectives:
 To achieve positive Economic Value Added (EVA) each year.
 To be market leader in product innovation.
 To be one of the top three Financial Institutions in Bangladesh in terms of cost
efficiency.
 To be one of the top five Financial Institutions in Bangladesh in terms of market
share in all significant market segments we serve.

 Financial objectives:
 To achieve 20% return on shareholders' equity or more, on average.

2.5 Core values

 For the customers:

Providing with caring services by being innovative in the development of new
banking products and services.

 For the shareholders:

Maximizing wealth of the Bank.

 For the employees:

respecting worth and dignity of individual employees devoting their energies for the
progress of the Bank.

 For the community:

Strengthening the corporate values and taking environment and social risks and
reward into account.

7
2.6 MBL at a Glance:


 MBL is one of the largest private banks in Bangladesh.

 It operates through 65 fully computerized branches ensuring best possible and fastest
services to its valued clients.

 The bank has more than 500 foreign correspondents worldwide.

 Total number of employees nearly 1500.

 The Board of Directors consists of 11 members.

 The bank is headed by the Managing Director who is the Chief Executive Officer.

 The Head Office is located at Bank’s own 61 Dilkusha C/A at Motijheel, , Dhaka.

MBL Networks
Corporate Offices ( Corporate Branch and Local Office ) 2
Regional Office 10
Worldwide Affiliates 400
Total Branches ( Including Corporate Branch and Local Office ) 65
Authorized Dealer Branches 24
Treasury and Dealing Room 1
Training Institute 1
Man Power 1500

Table-1

2.7 Strategies of MBL:

MBL Bank Limited mainly follows top down approach to take necessary decisions for the
company. Basically they follow the centralize strategy where the Head Office of the Bank
control and monitor all the activities of its branches. In case of marketing strategy they
basically depend on ‘word of mouth’ as they are already well reputed for its long-term
service in the banking industry.

8
2.8 Function of Mercantile Bank LTD:

Mercantile Bank Limited performs all types of functions of a modern commercial bank,
which generally includes:

1) Mobilization of savings of the people and safe keeping of all types of deposit account.
2) Making advances especially for productive activities and for the other commercial and
socio-economic needs.
3) Providing banking services to common people through the branches.
4) Introduce modern Banking services in the country.
5) Discounting and purchasing bills.
6) Various information, guidance and suggestions for promotion of trade and industry
keeping in view of the overall economic development of the country.
7) Finance for both capital machinery and working capital.
8) Finance under small business of self employed clients.
9) Finance of farming and non-farming activities to rural people including purchase of
agricultural equipments.
10) Developing new products Market surveys before making any finance
11) Finance for small transport.
12) Monitoring and forecasting.
13) Developing marketing campaigns.
14) Finance for household durables.
15) Work simplification studies.
16) Monitoring diversification of portfolio among different sectors.

9
2.9 Organ gram:
2.10 Structural Management:

MD & CEO

Chief Advisor
Board of Directors
Managing Director (HRD)

Deputy Managing Director Deputy Managing Director

GSD, CAD, A&I, GB, D&M ID, IT, Credit, R&D

Executive Vice President/

Company Secretary

Senior Vice President Senior Vice President Senior Vice President

Vice President
O
R
G Senior Astt. Vice President
A
N Astt. Vice President
I
Z
Senior Principle Officer
A
T
I Principle Officer
O
N Senior Officer

C
H Officer
A
R Junior Officer
T
Astt. Officer
O
f

M
B Fig: Organizational Chart of MBL
L

10
2.11 The Corporate Structure:

Board of Directors, the apex body of the Bank, formulates policy guidelines, provides
strategic planning and supervises business actives and performance of management while the
Board remains accountable to the company and its shareholders. The Board is assisted by the
Executive Committee and Audit Committee.

2.12 Board of Directors:

Board of Directors who decides the composition of each committee determines the
responsibilities of each committee. The board of directors, the apex body of the Bank,
formulates policy guidelines, provides strategic planning and supervises business activities
and performance of management while The Board remains accountable to the company and
its shareholders. The Board is assisted by the Executive Committee and Audit Committee.

Managing Director & CEO Dewan Mujibur Rahman

Additional Managing Director A.K.M. Shahidul Haque
Deputy Managing Director Md. Abul Shahjahan

2.13 Executive Committee of MBL:

All routine matters beyond delegated powers of management are decided by or routed through
the Executive Committee, subject to rectification by the Board of Directors.

Senior Executive Vice President Md. Abdul Jalil Chowdhury

Monindra Kumar Nath
M. A. Yousuf Khan
Md. Quamrul Islam Chowdhury

Executive Vice President Choudhury Moshtaq Ahmed

A S M Bulbul
Md. Nazrul Hossain
S Q Bazlur Rashid

11
2.14 Different departments of MBL:

There are mainly four departments of MBL-

 General Banking Department.
 Credit department.
 Cash Section. &
 Foreign Exchange Department.

2.15 General Banking:

In this department, the general Banking activities like- opening account & related information
are provided. The general banking in charge of Mercantile Bank Ltd (Mirpur Branch) is Md.
Mizanur Rahman.

2.16 Credit Department:

Credit department helps the customers through providing bank loans. There are various types
of loans handled by different officers. There are secured loan, Unsecured loan, SME loan &
Home & other loan facilities.

2.17 Cash Section:

Cash section performs the activities of keeping and giving cash to the customer. The person
who wants to open an account, have to keep specific amount of money to the account.
Customers can withdraw the cash when the need after a specific period. In cash section,
various type of bills like- DESCO bill, ALICO monthly fees are taken from the customers.
The name of cash in charge is Md. Kamruzzaman.

2.18 Foreign Exchange Department:

Foreign Exchange Department consists of three sections-
 Import section.
 Export Section.
 Remittance Section.
Three departments are organized properly to provide the best facilities to the customers.

12
2.19 Correspondent Relationships:

The Bank has established correspondent relationship across the world with a number of
foreign banks namely Citibank N.A., The bank of Tokyo Mitsubishi Ltd., Standard Chartered
Bank, American Express Bank, HSBC, Commerzbank, Commonwealth Bank of Australia,
Scotia Bank, Toronto Dominion Bank, Unicredito ltaliano, Wachovia Bank, N.A., Hutton
National Bank, HypoVereinsbank, Bank Australia, Sumitomoto Mitsui Banking Corp., ING
Bank, United Bank of India, ICICI Bank etc. The number of foreign correspondents is 584 as
of December 31, 2008. Efforts are being continued to further expand the Correspondent
Relationship to facilitate Bank’s growing foreign trade transactions.

2.20 Human resource development:

In today’s competitive business environment, only the quality of human resources makes the
difference. The bank’s commitment to attract the best persons to work for its and the
adaptation of the latest technologies is reflected in the efforts of the bank in the development
of its human resources. in the face of today’s global competition the bank envisages to
develop highly motivated workforce and to equip them with latest skills and technologies. A
good working environment promotes a level of loyalty and commitment, devotion and
dedication of the part of the employees.

The bank sent number of officers to Bangladesh Institute of Bank Management and the other
training institutes for specialized training various aspects of banking. The bank is
contemplating to set up “Training Institute” for providing facilities to its executive and
officers. The bank believes in professional excellence and considers its working force as its
most valuable asset and the basis of its efficiency and strength.

2.21 Branch Expansion

The bank commenced its business on June 02, 1999. The first Branch was opened at 61
Dilkusha Commercial Area on the Inauguration Day of the Bank. The second Branch opened
at Dhanmondi Residential Area, Dhaka on August 04, 1999. The third branch was opened at
Agrabad, Chittagong on November 06, 1999.
Now the total number of branches stood at 58 at the end of the month, September 2011.

13
2.22 Foreign Exchange business:

A commercial Bank/MBL is involved in financing foreign trade apart from financing internal
credit requirement in the economy. This involves handling of import business through
opening L/C and handling of export business. As banking has become very keenly
competitive, banks find it convenient to involve in foreign exchange business as a lucrative
source of earning income and profit.
Apart from financing foreign trade, Commercial Banks also provide guarantees of various
types to their clients. While these facilities clients to undertake jobs assigned to them by
various corporations and organization, this enables the bank to earn commission.

2.23 Different Types of Scheme & services of MBL:

Mercantile Bank Limited has different types of scheme for a customer. These are given
below:

 Monthly saving scheme.

 Family Maintenance Deposit scheme.
 Double benefit deposit scheme.
 Special Savings Scheme.
 Pension and Family Support Deposit.
 Consumers' Credit Scheme.
 Small Loan Scheme.
 Lease Finance.
 Doctors' Credit Scheme.
 Rural Development Scheme.
 Women Entrepreneurs Development Scheme.
 SME Financing Scheme.
 Personal Loan Scheme
 Car Loan Scheme.

14
 2.24 Financial Highlights:

years 2007 2008 2009 2010 2011

Particulars Tk in million Tk in million Tk in million Tk in million Tk in million

Paid up capital 1199.12 1498.90 1798.08 2158.42 4072.21

Total Loans & 26842.14 31877.86 43419.36 48295.55 66377.70

Advances

Price earning 9 times 12 times 10 times 11 times 14 time

ratio

Earning per 41.22 30.05 28.53 30.67 41.04

share

Income from 369.12 764.48 520.33 696.66 919.45

investment

Total asset 37159.65 44940.54 55928.72 66166.52 87140.11

Total deposit 33317.64 39348.00 49538.35 58033.47 75629.14

[Source: Annual journal of MBL (From 2007 to 2011)]

Figure: Financial highlights

15
 CHAPTER: 03
THEORETICAL BACKGROUND

16
3. Introduction:
3.1 Financial performance analysis:
Financial performance analysis of a company is very important to get an overall view about
an organization. It generally consists of interpretation of balance sheet and interpretation of
income statement. By using these two sources one can perform the ratio analysis and trend
analysis which are the major tools for analyzing the financial performance of a bank.
http://ebstudies.wordpress.com/2012/11/06/financial-performance-analysis/

3.2 Balance sheet:

In financial accounting, a balance sheet or statement of financial position is a summary of the
financial balances of a sole proprietorship, a business partnership or a company. Assets,
liabilities and ownership equity are listed as of a specific date, such as the end of its financial
year. A balance sheet is often described as a "snapshot of a company's financial condition".
Of the four basic financial statements, the balance sheet is the only statement which applies to
a single point in time of a business' calendar year. A standard company balance sheet has
three parts: assets, liabilities and ownership equity.
http://www.investopedia.com/terms/b/balancesheet.asp.

3.3 Income statement:

Income statement also referred as profit and loss statement, earnings statement, operating
statement or statement of operations is a company's financial statement that indicates how the
revenue is transformed into the net income. It displays the revenues recognized for a specific
period, and the cost and expenses charged against these revenues, including write-offs (e.g.,
depreciation and amortization of various assets) and taxes. The purpose of the income
statement is to show managers and investors whether the company made or lost money during
the period being reported.
http://www.investopedia.com/terms/i/incomestatement.asp
.

3.4 Ratio Analysis:

Ratio analysis involves methods of calculating and interpreting financial ratios to assess the
bank’s performance and status. The basic inputs to ratio analysis are the bank’s income
statement and balance sheet.
http://www.investopedia.com/terms/r/ratioanalysis.asp

17
3.5 Types of Ratio Comparisons:
Ratio analysis is not merely the application of a formula to financial data to calculate a given
ratio. More important is the interpretation of the ratio value. To answer such questions as is it
too high or too low? Is it good or bad? Two types of ratio comparisons can be made: Cross-
sectional & Time-series analysis.

 Time-series Analysis:

Time-series analysis evaluates performance over time. Comparison of current to past

performance, using ratios, allows the firm to determine whether it is progressing as planned.
Additionally, time-series analysis is often helpful in checking the reasonableness of a firm’s
projected financial statements.

 Cross-Sectional Analysis:

Cross-Sectional analysis evaluates performance of different firms` financial ratios at the same
point in time.

3.6 Cautions about Ratio Analysis:

Before discussing specific ratios, we should consider the following cautions:

 A single ratio does not generally provide sufficient information from which to judge
the overall performance of the firm.
 Be sure that the dates of the financial statements being compared are the same.
 It is preferable to use audited financial statements for ratio analysis.
 Be certain that the data being compared have all been developed in the same way.
3.7 Groups of Financial Ratios:
Financial ratios can be divided into four basic groups or categories:
i. Liquidity ratios
ii. Activity ratios
iii. Debt ratios &
iv. Profitability ratios
Liquidity, activity, and debt ratios primarily measure risk, profitability ratios measure return.
In the near term, the important categories are liquidity, activity, and profitability, because
these provide the information that is critical to the short-run operation of the firm. Debt ratios
are useful primarily when the analyst is sure that the firm will successfully weather the short
run.

18
3.7.1 Liquidity Ratio:
The liquidity of a business firm is measured by its ability to satisfy its short term obligations
as they come due. Liquidity refers to the solvency of the firm’s overall financial position. The
three basic measures of liquidity are-

3.7.2 Net Working Capital:

Net Working Capital, although not actually a ratio is a common measure of a firm’s overall
liquidity. A measure of liquidity is calculated by subtracting total current liabilities from total
current assets.

Net Working Capital (Taka) =Total Current Assets –Total Current Liabilities.

3.7.3 Current Ratio:

One of the most general and frequently used of these liquidity ratios is the current ratio.
Organizations use current ratio to measure the firm’s ability to meet short-term obligations. It
shows the banks ability to cover its current liabilities with its current assets.

Current Ratio (Times) = Current Asset/Current Liabilities

3.7.4 Quick Ratio:

The quick ratio is a much more exacting measure than current ratio. This ratio shows a firm’s
ability to meet current liabilities with its most liquid assets.

Quick Ratio(Times)=Cash + Government Securities + Receivable / Total Current

Liabilities.

3.7.5 Operating Cost to Income Ratio:

It measures a particular Bank’s operating efficiency by measuring the percent of the total
operating income that the Bank spends to operate its daily activities. It is calculated as
follows:

Cost Income Ratio(%) = Total Operating Expenses / Total Operating Income

19
3.7.6 Activity Ratio:

Activity ratios measure the speed with which accounts are converted into sale or cash. With
regard to current accounts measures of liquidity are generally inadequate because differences
in the composition of a firm’s current accounts can significantly affects its true liquidity.
A number of ratios are available for measuring the activity of the important current accounts
which includes inventory, accounts receivable, and account payable. The activity (efficiency
of utilization) of total assets can also be assessed.

3.8 Total Asset Turnover:

The total asset turnover indicates the efficiency with which the firm is able to use all its assets
to generate sales.
Total Asset Turnover(Times) = Sales/ Total Asset

3.9 Investment to Deposit Ratio:

Investment to Deposit Ratio shows the operating efficiency of a particular Bank in promoting
its investment product by measuring the percentage of the total deposit disbursed by the Bank
as long & advance or as investment. The ratio is calculated as follows:

Investment to Deposit Ratio (%) = Total Investments / Total Deposits

3.10 Inventory turnover:

A ratio showing how many times a company's inventory is sold and replaced over a period.

Inventory Turnover (%) = Cost of good sold/ Average Inventory

The days in the period can then be divided by the inventory turnover formula to calculate the
days it takes to sell the inventory on hand or "inventory turnover days". This ratio should be
compared against industry averages.
A low turnover implies poor sales and, therefore, excess inventory.
A high ratio implies either strong sales or ineffective buying. High inventory levels are
unhealthy because they represent an investment with a rate of return of zero. It also opens the
company up to trouble should prices begin to fall.

20
3.11 Average Collection Period:

Average collection period is useful in evaluating credit and collection policies. This ratio also
measures the quality of debtors. It is arrived at by diving the average daily sales into the
accounts receivable balance:

Average Collection Period (Times) =Accounts receivable/ (Credit sales/365)

A short collection period implies prompt payment by debtors. It reduces the chances of bad
debts. Similarly, a longer collection period implies too liberal and inefficient credit collection
performance. It is difficult to provide a standard collection period of debtors.

3.12 Average Payment Period:

Average payment period ratio gives the average credit period enjoyed from the creditors that
means it represents the number of days by the firm to pay its creditors. A high creditor’s
turnover ratio or a lower credit period ratio signifies that the creditors are being paid
promptly. This situation enhances the credit worthiness of the company. However a very
favorable ratio to this effect also shows that the business is not taking the full advantage of
credit facilities allowed by the creditors. It can be calculated using the following formula:

Average Payment Period(Times)=Accounts payable/ Average purchase per day

3.13 Fixed Asset Turnover:

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a
company's ability to generate net sales from fixed-asset investments - specifically property,
plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows
that the company has been more effective in using the investment in fixed assets to generate
revenues. The fixed-asset turnover ratio is calculated as:

Fixed Asset Turnover(%)=Gross Turnover/ Net fixed assets

3.14 Debt Ratio:

The debt position of that indicates the amount of other people’s money being used in
attempting to generate profits. In general, the more debt a firm uses in relation to its total
assets, the greater its financial leverage, a term use to describe the magnification of risk and
return introduced through the use of fixed-cost financing such as debt and preferred stock.

21
3.15 Debt Ratio:
The debt ratio measures the proportion of total assets provided by the firm’s creditors.
Debt Ratio(taka) = Total Liabilities / Total Assets
3.16 Equity Capital Ratio:
The ratio shows the position of the Bank’s owner’s equity by measuring the portion of total
asset financed by the shareholders invested funds and it is calculated as follows:

Equity Capital Ratio(taka) = Total Shareholder’s Equity / Total Assets

3.17 Time Interest Earned Ratio:

This ratio measures the ability to meet contractual interest payment that means how much the
company able to pay interest from their income .

Time Interest Earned Ratio(taka)=EBIT/ Interest

3.18 Profitability Ratio:

These measures evaluate the bank’s earnings with respect to a given level of sales, a certain
level of assets, the owner’s investment, or share value. Without profits, a firm could not
attract outside capital. Moreover, present owners and creditors would become concerned
about the company’s future and attempt to recover their funds. Owners, creditors, and

Management pay close attention to boosting profits due to the great importance placed on
earnings in the marketplace.
3.19 Operating Profit Margin:
The Operating Profit Margin represents what are often called the pure profits earned on each
sales dollar. A high operating profit margin is preferred. The operating profit margin is
calculated as follows:

Operating Profit Margin(taka) = Operating Profit / Sales

3.20 Net profit Margin:
The net profit margin measures the percentage of each sales dollar remaining after all
expenses, including taxes, have deducted. The higher the net profit margin is better. The net
profit margin is calculated as follows:
Net profit Margin(taka)= Net profit after Taxes / Sales

22
3.21 Return on Asset (ROA):
Return on asset (ROA), which is often called the firms return on total assets, measures the
overall effectiveness of management in generating profits with its available assets. The higher
ratio is better.

Return on Asset (%) = Net profit after Taxes / Total Assets

3.22 Return on Equity (ROE):

The Return on Equity (ROE) measures the return earned on the owners (both preferred and
common stockholders) investment. Generally, the higher this return, the better off the owners.
Return on Equity (%) = Net profit after Taxes / Stockholders Equity

3.23 Price/ Earnings ratio (PE ratio):

The Price/ Earnings ratio (price-to-earnings ratio) of a stock is a measure of the price paid for
a share relative to the income or profit earned by the firm per share.

P/E ratio(times) - Price per share / earnings per share

3. 24 Earnings per share (EPS):

EPS represents the dollar amount earned behalf of each outstanding share of common stock.

EPS(Taka)= Net income/no. of share outstanding

23
 CHARTER: 4
FINANCIAL ANALYSIS

24
4.1. Quantitative Analysis of Mercantile Bank Limited

4.1.1 Ratio Analysis:

1. Current ratio:
The current ratio, one of the most commonly cited financial ratios, measures the firm’s
ability to meet its short term obligations. The higher the current ratio, the better the
liquidity position of the firm. It is expressed as

Current Ratio=Current Asset/Current Liabilities

Year 2007 2008 2009 2010 2011

Current Ratio 1.00 1.01 1.02 1.04 1.05

Graphical Presentation:
Times

Figure 4.1 Current Ratio

Interpretation:

The graph shows an upward trend in MBL’s current ratio. This indicates that MBL’s has
increased its liquidity position and thereby it has reduced the change of being technically
insolvent.

25
2 .Net Working capital:

Net working capital, although not actually a ratio is a common measure of a firm’s overall
Liquidity a measure of liquidity ratio calculated by

Net Working capital=Current Asset-Current Liabilities

Tk (Million)

Year 2007 2008 2009 2010 2011

Net Working Tk.822.34 Tk.1056.25 T.k1471.08 T.k2150.14 Tk.2447.97

Capital (Tk)

Graphical Presentation:
Net Working Capital
TK.

Figure 4.2: Net Working Capital

Interpretation:

Net working capital measures the liquidity position of the firm. In 2007 the net working
capital was tk 822.34 million which was gradually increased to tk 2447.97 million in 2011.
The graph shows that increase trend of MBLs liquidity position this indicates that MBL has
increased its ability to pay short term obligation out of its currents assets.

26
 4.1.2 Activity Ratio:
3. Cost Income Ratio:
It measures a particular Bank’s operating efficiency by measuring the percent of the total
operating income that the Bank spends to operate its daily activities. It is calculated as
follows:

Cost Income Ratio=Total operating Expenses/Total Operating Income

Year 2007 2008 2009 2010 2011

Cost Income Ratios 40.13% 42.33% 44.15% 42.25% 40.38%

Graphical Presentation
(%)

Figure 4.3 Cost Income Ratio

Interpretation:
In 2009 the cost income ratio of Mercantile Bank Ltd. is high but after that it is decreasing. So
it can be said that the operating efficiency of the Mercantile Bank Ltd. is becoming good.
That means they are successful in minimizing their operating cost.

27
4. Total Asset Turnover Ratio:
The total asset turnover indicates the efficiency with which the firm is able to use all its assets
to generate income.
Total Asset Turnover= Operating Income/Total Asset

Year 2007 2008 2009 2010 2011

Total Asset Turnover(Times) 0.053 0.053 0.051 0.053 0.055

Graphical Presentation:

Figure 4.4 Total Asset Turnovers

Interpretation:

This ratio measures the efficiency of the bank in using its total assets to generate operating
income and the higher the ratio, the higher the efficiency of the bank is in using its assets. The
graph shows an upward trend in total asset tarn over except in 2009. Its total asset turn over is
lowest in 2009, but it is highest in 2011. This indicates that MBL is becoming more efficient
in using its assets to generate operating income.

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5. Investment to Deposit ratio:
Investment to Deposit Ratio shows the operating efficiency of a particular Bank in promoting
its investment product by measuring the percentage of the total deposit disbursed by the Bank
as long & advance or as investment. The ratio is calculated as follows:

Total investment/Total Deposit

Year 2007 2008 2009 2010 2011

Investment to Deposit Ratio .21 .19 .15 .25 .15

Graphical Presentation:

(%)

Figure 4.5 Investment to Deposit ratio

Interpretation:

In 2010 the unexpected investment was made by the Bank, the 25% of total deposit are in the
form of investment. But this ratio drastically falls from 25% to 15% which is not good sign
for the company.

29
4.1.3 Profitability Ratio:
6. Net Profit Margin:
The net profit margin measures the percentage of each sales dollar remaining after all
expenses, including taxes, have deducted. The higher the firm’s net profit margin is better.
The net profit margin is a commonly cited measure of the company’s success with respect to
earnings on sales.

Net Profit Margin=Net profit after tax/operating income

(%)
Year 2007 2008 2009 2010 2011
Net Profit Margin 0.21 0.23 0.22 0.23 0.30

Graphical Presentation:

(%)

Figure 4.6 Net Profit Margins

Interpretation:
This ratio shows the portion of total operating income that remains after deducting all the
costs and expenditure for particular period of time. From the graph, the net profit margin is
raising position in 2007 to 2011 except 2009. There profit margin is in strong position.

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7. Return on Asset (ROA):
The return on asset (ROA), which is often called the firm’s return on total assets, measures
the overall effectiveness of management in generating profits with its available assets. The
higher the ratio is better.

Return on Asset (ROA) =Net Profit after tax/Total Asset

Year 2007 2008 2009 2010 2011

Return On Asset 1.33% 1.20% 1.10% 1.22% 1.64%

Graphical Presentation:

(%)

Figure 4.7 Return on Asset

Interpretation:

Return on assets is an indicator of how profitable a company is. This ratio is used annually to
compare the business performance to its norms. The banks return on asset was increasing
from 1.33 to 1.64 in the preceding 5 years. It can be said that MBL’s earning capacity is
increasing year by year. This is good sign for the Bank.

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8. Return on Equity (ROE):

The return on equity measures the return earned on the owner’s investment. Generally the
higher the return, the better off the owner’s.

Return on Equity=Net Profit after Tax/ Shareholders equity

Year 2007 2008 2009 2010 2011

Return on Equity 21.94% 18.45% 17.75% 18.80% 19.84%

Graphical Presentation:

(%)

Figure 4.8 Return on Equity

Interpretation:

The return on equity ratio was decreasing from 2007 to 2011. That was decreased from
21.94% to 19.84%. which is not desirable. So, the management should work hard to increase
the return associated with equity. Though return on equity has slightly increased in 2011 from
preceding year, still it is significantly deviated from that of in 2007.

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10. Earnings per Share

The firm’s Earning per share (EPS) are generally of interest to present or prospective
stockholders and management. The Earning per share represent the number of dollars earned
on behalf of each outstanding share of common stock. The earnings per share is calculated as
follows

Earning Per Share =Earnings available for common stock holder/No of shares of
common stock outstanding

Year 2007 2008 2009 2010 2011

EPS(taka) 41.22 30.05 28.53 30.67 41.04

Graphical Presentation:

Figure 4.9 Earnings per Share

Interpretation:

The graph shows that, EPS is highest in 2007 and there is a downward trend in EPS from year
2007 to 2009. But MBL has managed to increase its EPS as shown by the upward trend in
EPS. Over the last three years.

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11. Price Earnings Ratio:

The price or earning (P/E) ratio is commonly used to assess the investor appraisal of share
value. The P/E represents the amount investors are willing to pay for each dollar of the firm’s
earnings. The higher the P/E ratio, the greater the investor confidence in the firm’s future. The
price Earning (P/E) ratio is calculated as follows

Price Earnings Ratio=Market price per share of common stock/Earning per

share

Year 2007 2008 2009 2010 2011

Price Earning Ratio(times) 8.62 13.83 12.21 12.88 14.14

Graphical Presentation:

Figure 4.10 Price Earnings Ratio

Interpretation:

It measures the level of price that the investors are paying for per taka of earnings offered by
the bank. From the graph have seen that in year 2011 the investors has paid maximum amount
of price for per unit of earnings in which the bank issued its share in the market. This
indicates the investors are paying more and willing to invest in MBL.

34
12. Time Interest Earned Ratio

The times interest earned ratio, sometimes called the interest coverage ratio, measures the
firm’s ability to make contractual interest payments.

Time Interest Earned Ratio =Earnings before interest & Taxes/Interest

Year 2007 2008 2009 2010 2011

Time Interest Earned 1.13 1.22 1.37 1.54 1.28

Ratio(taka)

Graphical Presentation:

Figure 4.12 Time Interest Earned Ratio

Interpretation:

Their Time Interest Earned ratio was not satisfactory because, they have only 1.54tk.against 1
taka interest obligation which is not good .Reduce their interest obligation or increase the
EBIT in order to smoothly operate their business.

35
 CHARTER: 5
COMPARATIVE ANALYSIS

36
5.1 Comparative Quantitative Analysis of MBL with CBL and EBL.

5.2 Comparative Ratio Analysis:

5.3 Liquidity Ratio:

a) Current Ratio:

Times

Year CBL EBL MBL

2009 0.94 0.71 1.02
2010 1.23 0.78 1.04
2011 1.32 1.28 1.05

Graphical Presentation:

Figure 5.1: Current Ratio

Interpretation:

The current ratio measures a firm’s liquidity by measuring the portion of its current asset
relative to its current liabilities and the higher the ratio, the higher the liquidity of the firm. In
2009, MBL is in better liquidity position then CBL and EBL. The graph shows that, CBL
current ratio is better than EBL and MBL in 2010 to 2011.

37
 5.4 Activity Ratio:

a)Total Asset Turnover Ratio:

Year CBL EBL MBL

2009 0.06 0.05 0.05

2010 0.06 0.07 0.05
2011 0.08 0.08 0.055

Graphical Presentation:

Figure 5.2: Total Asset Turnover Ratio

Interpretation:

The graph shows that, the total asset turnover ratio of CBL and EBL is higher than MBL. The
graph also shows that in 2011 the CBL and EBL has the same value (8%). The MBL’s total
asset turnover is in worse position than that of other Bank, that indicates less capable to utilize
its total assets to generate revenue.

38
5.5 Time Interest Earned Ratio:

Year CBL EBL MBL

2009 1.3 1.5 1.37

2010 1.4 1.7 1.54
2011 1.9 2.1 1.28

Graphical Presentation:

Figure 5.4: Time Interest Earned Ratio

Interpretation:
By observing the graph it can be said that EBL has the greater ability to meet its interest
expense and it increasing year by year. This ratio for CBL is also increasing year by year. But
in case of MBL it is fluctuating. Time interest earned ratio of MBL in 2011 is 1.28 which
lowers that of EBL and CBL. It indicates that MBL has lowers ability to pay contractual
interest expenses in comparison with EBL and CBL

39
5.6 Profitability Ratio:
a) Return on Asset:

Year CBL EBL MBL

2009 0.8 1.68 1.10
2010 1.2 2.34 1.22
2011 2.2 3.19 1.64

Graphical Presentation:

Figure 5.6: Return on Asset

Interpretation:

Return on Asset measures the management ability to generate net profit by its total available
assets. The graph shows that EBL management is efficient to generate profit and there ROA is
increasing year by year. In compare to EBL, MBL’s management is less efficient but in
compare to CBL they are in efficient in using assets to generate profit..

40
b) Return on Equity (ROE)

Year CBL EBL MBL

2009 11.2 18.64 17.75

2010 16.2 22.1 18.80
2011 21.3 23.64 19.84

Graphical Presentation:

Figure 5.7: Return on Equity (ROE)

Interpretation:

Return on Equity measures the percentage of profit against 1 taka equity. The ROE of EBL
has the highest value and increasing year by year. In compare to EBL, MBL is in worse
position and in compare to CBL, MBL is in good position. All the Bank’s ROE is increasing
year by year.

41
c) Earnings per Share:

Year CBL EBL MBL

2009 23.3 30.20 28.53
2010 52.1 50.00 30.67
2011 59.4 80.30 41.04

Graphical Presentation:

Figure 5.8: Earning Per Share (EPS)

Interpretation:

Earnings per Share measure the profit against each common stock share. From the graph it
has seen that CBL has the largest highest earnings per share. In compare to EBL, MBL is in
worse position. And in compare to EBL, MBL is in good position.

42
d) P/E Ratio:

Year CBL EBL MBL

2009 18 17.07 12.21
2010 14 12.89 12.88
2011 17 15.59 14.14S

Graphical Presentation:

Figure 5.9: P/E Ratio

Interpretation:

P/E ratio measures the investors willingness to pay for its 1 taka earnings. Greater the P/E
ratio higher the investors’ confidence. P/E ratio for CBL is higher than that of others Bank.
The P/E ratio for MBL is increasing at a lower rate, in 2011 the P/E ratio is lower for MBL
and higher for CBL. So investors confidence is highest on CBL. The graphs also shows
investors confidence on MBLs stock is increasing gradually which are not observed in case of
EBL and CBL.

43
 CHARTER: 6
FINDINGS, CONCLUSION,
RECOMMENDATIONs

44
6.1. Major Finding:


 The current ratio of MBL is increasing year by year. In the year of 2007 current ratio
was 1.00 which become 1.05 in the year of 2011. So the MBL has strong control and
management over the liquidity.

 Net working capital of MBL also shows an increasing trend. In the year of 2007 net
working capital was 822.34tk but in the year of 2011 it increased to 2447.97tk.it
indicates that MBL has increased its ability to pay short term obligation out of its
current assets.

 In 2009 the cost income ratio of MBL is high but after that it is decreasing. So it can
be said that the operating efficiency of the MBL is becoming good. That means,
minimizing their operating cost.

 Total asset turnover of MBL was 0.053, 0.053 in 2007 and 2008 and then it decreased
to 0.051 in 2009. Again it increased 0.053 and 0.055 in 2010 and 2011. It indicates
that MBL is becoming more efficient in using its assets to generate operating income.
Totally it had decreased 2009. But in 2011 this ratio is increasing mode.

 Mercantile Bank Ltd’s investment to deposit ratio was fluctuating year by year. In
2010 it was increased. But in 2011 investment to deposit ratio is very low so it is bad
for the bank.

 In 2011, MBL P/E ratio is indicates very positively. That means, the investors are
paying more and willing to invest in MBL.

 MBL’s Time interest earned ratio is not satisfactory because, they have only 1.54 tk.
earning against 1 taka interest obligation, which is not good.

 Return on equity was 21.94% in 2007. In the year of 2008, it decreased to 18.45% .It
also decreased to 17.75% in 2009. But it again increased 18.80% and 19.84% in 2010
and 2011 respectively. Finally return on equity has slightly increased in 2011 from
preceding year; still it is significantly deviated from that of in 2007.

 Net profit margin is raising position in 2007 to 2011 except 2009. Net profit margin is
in strong position.

 Return on asset was increasing from 1.33% to 1.64% in the preceding 5 years. It can
be said that MBL’s earning capacity is increasing year by year. this is good sign for
the bank.

 MBL is becoming more efficient in using assets to generate revenue as reflected in its
total asset turnovers. But their efficiency in utilizing assets is still less than that of CBL
and EBL.

45

 MBL has reduced its debt ratio to 92% in 2011, still MBL is using more debt and
taking more financial risk in comparison with EBL and CBL.

 In 2011 MBL time interest earned ratio is lower than CBL and EBL

 EBL management is efficient to generate profit and there ROA is increasing year by
year. In compare to EBL & MBL. EBL & MBL management is less efficient.

 The Earning per Share of the MBL is lower than the EBL and CBL.

 Over the three years, MBL financial performance was lower than the CBL but higher
than the EBL.

 Finally, Mercantile Bank Ltd Financial performance in 2011 was very good.

46
6.2 Conclusion:

Mercantile Bank Limited(MBL) setting new standards in the banking arena in the time of
turbulent economic conditions. As part of the long term financial reform and modernization
plan of the government, the bank had been converted into a public limited company. Bank is a
financial intermediary that collects money as deposit from idle section i.e. household by
providing interest against deposit and mobilize this money into productive sector i.e. industry,
agriculture, manufacturing from by collecting interest against loan. The difference between
interest expense and interest gain is the bank’s main profit. In banking language it is called
spread. Without a bank an economic development cannot be imagined. The mercantile bank
one of the leading banks in our country that also plays a vital role undoubtlly. In 2011 the
Mercantile Bank total deposit was (75629.14) million and provide loan (66377.70) million.
Mercantile bank collect deposit by providing different types attracting deposit product and
provide loan by offering different types of investment product. In developing economic
condition mercantile bank has the huge contribution i.e. in 2011 the contribution was in
garments sector (11,211,457,626), agriculture sector (2,038,915,000), government sector
(9,565,346,007). So it can be said that Mercantile Bank plays a very important role in
economic development.
The results of this study implies that it might be necessary for the management of Mercantile
Bank Limited to take all the require decision by consistently observing key financial ratio,
financial trend and significant deviation among various financial element to enhance the
financial position of this bank.

47
6.3 Some Recommendation for MBL Bank Limited:

It is not unexpected to have problems in any organization. There must be problems to operate
an organization. But there must be remedies to follow. The following commendations can be
suggested to solve the above mentioned problems:


 Based on the liquidity ratios, the position of liquidity in 2011 was fair. MBL should
maintain it improve its position. MBL should reserve more liquid assets.

 Although MBL’s net working capital was satisfactory range. So, it should try to
maintain this trend for smoothly operate their bank.

 From the trend analysis, operating efficiency of the Mercantile Bank Ltd. is becoming
a good position. That means they are succeed to minimize their operating cost. So, it
should take necessary steps to keep up this trend.

 MBL’s total asset turnover was not good at all. So, total assets turnover should be
increased by generating operating income to attract the outsider investor.

 MBL’s investment to deposit ratio was fluctuating year by year. The MBL should
increase their investment to deposit ratio to maximize their operating income and
owner’s equity.

 From the trend analysis, MBL’s P/E ratio was fluctuating. So, MBL’s should try
improving of this ratio.

 Although, Debt Ratio of the MBL was in satisfactory range because it is decreasing.
So it should continue these trends.

 As, MBL’s Time interest ratio is not satisfactory .So, it should increase their EBIT or
reduces the debt capital in order to smoothly satisfy the interest obligations.

 By analyzing financial ratio Eastern bank limited is in good position than Mercantile
Bank limited. So to attract the outsider investor as well as customer they should give
more concentration to improve management efficiency that shows the all ratio better
than other Bank.

48
References:

 Annual Report of Mercantile Bank Limited 2007-2011

 Besley scott & Brigham Eugene F. 2004, Essentials of managerial Finance, 13th
Edition, the Dryden press, Harcourt College Publications.

 Different Types of Form of MBL.

 Gitman J Lawrence, (2008), “Principle of Managerial Finance”, 10th edition, Pearson

Education Pte. Ltd, Singapore.
 Monthly Report of Mercantile Bank Limited of the year 2010-2011.
 Pandey, I.M, 2014, “Loan and Advance & Distribution” Financial Management,

(Ninth Edition), New Delhi.

 Foster George, “Financial Statement Analysis”, Second Edition, Pearson Education
Pte. Ltd, Singapore.

 Stephen A. Ross, Randolph W. Westerfield and Jaffery Jaffe, “Corporate Finance”,

Seventh Edition, Tata McGraw-Hill Publishing Company Limited.
 Schedule Bank Statistics of Mercantile Bank Limited, December-March, 2008.

 Advance-Limitation of financial performance analysis,(2010). Retrieved on 1 st

August, 2013 from www.accountingexplained.com/financial/advantages/-limitation.
 Definition of financial-performance, (2011), Retrieved on 1 st august, 2013 from
www.investopedia.com/terms/financialperfomance.asp.
 Limitation of using financial statement and performance analyze (2008). Retrieved on
1st August, 2013 from www.smallbusiness.chron.com/limitation-using-finanlcial-
statement-analyze-performance-24471.html.

49