Financial Management of Prime Bank Limited: Part 01

This work was actually done as a part of academic requirement in my MBA program. This was a group project and I would like to acknowledge and thank my group members, Urmi Das, Nadisha Ahmed, and Jafrin Siddique for their valuable support in doing this work. We tried our best to produce a work of value and I think it will be helpful for others wanting to know about or work on bank financial management.

Full work will be published in 6 blog posts and the financial management areas of Prime Bank Limited (PBL) those will be covered include analysis of operating performance and credit-deposit mix, assessment of asset quality, provisioning practices, and capital adequacy, evaluation of treasury performance and liquidity management and analysis of risk management practices.

The very purpose of these articles is to apply the theoretical understanding and evaluate the practices of financial management in terms of Prime Bank Limited (PBL). For the relevant data, the annual reports of the bank for 5 years (2010-14) are collected and the stand alone financial statements are used instead of consolidated one.  To mention, the methods used and results found here are not free from error, therefore, any conclusive decision by the reader is not encouraged based on these.  

This Part 01 is on operating performance analysis where we will see the operating revenue composition, primary drivers of operating revenue and operating performance ratios of PBL.

Composition of Operating Revenue

The sources of operating revenue of PBL include funded and non-funded income where funded income is generated from the net interest income (NII) and investment income and non-funded income comes from the commission, exchange and brokerage (CEB) and other operating sources. Table 01 shows the operating revenue of PBL and the contribution of different sources for 2010-14.

It can be observed that PBL earned highest operating income of Tk. 13,472 million in 2012 which was backed by maximum funded income of Tk. 10,045 million (74.56%) in that year.  And, lowest operating income of Tk. 10,793 million is seen in 2010 with lowest funded income of Tk. 7,366 million (68.25%). Highest non-funded income is found in 2011 of Tk. 3,716 million and lowest Tk. 2,968 million in 2013.  In case of percentage distribution, NII is showing decreasing trend after 2012 where the investment income is increasing from 2011. For nun-funded, CEB is showing decreased contribution from 2010 except 2014 while others income have mixed trend.

Table 01: Composition of Operating Revenue (in million Tk)
Component	2010		2011		2012		2013		2014
	Amount	%	Amount	%	Amount	%	Amount	%	Amount	%
Funded Income
NII	4,648	43.07	4531	36.16	5,411	40.17	4,332	33.63	2,872	24.12
Investment Income	2,718	25.18	4,282	34.18	4,633	34.39	5,583	43.33	6,194	52.03
Total Funded Income	7,366	68.25	8,814	70.34	10,045	74.56	9,915	76.96	9,067	76.15
Non Funded Income
CEB	2,718	25.19	2,916	23.27	2,628	19.51	2,155	16.73	2,033	17.08
Others	708	6.56	800	6.39	799	5.93	813	6.31	806	6.77
Total Non-Funded Income	3,427	31.75	3,716	29.66	3,427	25.44	2,968	23.04	2,840	23.85
Total Operating Income	10,793	100	12,530	100	13,472	100	12,883	100	11,906	100

Analysis of Primary Drivers of Operating Revenue

The major source of operating revenue of PBL is the funded income as table 01 shows, for 2010-14, about 68-76% of the total operating income of PBL came from the funded income and this income consists of the net interest income and investment income. A detailed discussion on these primary drivers of operating income i.e. net interest income (NII) and investment income is made here.

q  Net Interest Income (NII): The net interest income is the difference between the interest income and expense. From 2010 to 2013, both the interest income and interest expense have an increasing trend but reduced in 2014 creating the lowest net interest income. On 2014, the NII was the lowest as loans against trust receipts, lease finance, secured overdraft was condensed by a significant amount and a higher amount of interest have to be paid on saving bank deposits.

The areas of interest income of PBL are shown in table 02 with their relative contribution in total interest income. The major areas of interest income are Loans (General) / Musharaka, Loans against trust receipts, Cash credit / Bai-Muajjal, and Secured overdraft. The maximum, about 19%-22%, of the interest income is earned from secured overdraft and on average minimum from credit card. Over the years, loans (general)/musharaka, consumer credit scheme, and others income are showing increasing trend where loans against trust receipt, lease fiancé/ijara, secured overdraft, and documentary bills purchased are showing decreasing trend.

Table 02: Composition of Interest Income of PBL (in percentage)
Particulars	2010	2011	2012	2013	2014	Average
Loans (General) / Musharaka	15.88%	15.27%	17.02%	19.10%	19.20%	17.30%
Loans against trust receipts	15.55%	16.14%	14.43%	8.74%	6.29%	12.23%
Lease finance / Izara	5.77%	5.68%	5.69%	4.70%	3.90%	5.15%
Hire purchase	4.72%	4.59%	4.74%	5.17%	4.89%	4.82%
Cash credit / Bai-Muajjal	13.77%	14.13%	12.30%	13.31%	13.61%	13.42%
Secured overdraft	20.41%	20.82%	22.75%	21.71%	19.72%	21.08%
Consumer credit scheme	9.69%	9.12%	7.92%	8.70%	10.98%	9.28%
Small and Medium Enterprise (SME)	0.97%	2.13%	3.07%	3.34%	2.51%	2.40%
Documentary bills purchased	5.73%	5.39%	4.06%	3.52%	1.14%	3.97%
Interest income from credit card	0.99%	0.88%	0.84%	3.41%	1.29%	1.48%
Others	6.51%	5.84%	7.17%	8.29%	16.47%	8.86%
Total Interest Income	100.00%	100.00%	100.00%	100.00%	100.00%	100.00%

In interest expense, as shown in table 03 the major areas of expense are Term deposits / Mudaraba term deposits (50%-58%) and Deposits under scheme (22%-34%). The lowest interest expense is seen for call deposit followed by others interest expense.

Table 03: Composition of Interest Expense of PBL (in percentage)
Particulars	2010	2011	2012	2013	2014	Average
Savings bank / Mudaraba savings deposits	6.38%	5.01%	4.32%	4.70%	5.91%	5.27%
Special notice deposits	3.11%	2.56%	3.03%	5.35%	4.94%	3.80%
Term deposits / Mudaraba term deposits	50.34%	58.74%	56.02%	58.00%	52.89%	55.20%
Deposits under scheme	34.61%	25.24%	22.43%	27.29%	32.06%	28.33%
Call deposits	0.52%	1.42%	5.84%	1.36%	0.24%	1.88%
Repurchase agreement (repo)	1.13%	4.18%	5.96%	0.66%	0.21%	2.43%
PBL bond	3.30%	2.27%	1.66%	1.64%	1.85%	2.15%
Others	0.60%	0.58%	0.75%	1.00%	1.91%	0.97%
Total Interest Expense	100.00%	100.00%	100.00%	100.00%	100.00%	100.00%

q  Investment Income: From table 01, it can be observed that investment income of PBL is rising over the years reaching highest Tk. 6,194 million in 2014. From the percentage distribution of investment portfolio in table 04 it is found that the major areas of income are Interest on treasury bills / Reverse repo / bonds, Gain on discounted bond / bills, and Gain on Government security trading where the maximum percentage (74%-83%) is the interest on treasury bills, reverse repo, and bonds.

Table 04: Composition of Investment Income of PBL (in percentage)
Particulars	2010	2011	2012	2013	2014	Average
Interest on treasury bills / Reverse repo / bonds	74.72%	63.15%	82.16%	83.31%	80.69%	76.80%
Interest on debentures / bonds	1.21%	1.84%	2.53%	1.73%	0.92%	1.64%
Gain on discounted bond / bills	4.59%	6.18%	10.74%	12.04%	16.62%	10.03%
Gain on sale of shares	0.94%	0.02%	0.24%	0.05%	0.28%	0.31%
Gain on Govt. security trading	18.11%	18.96%	2.00%	2.73%	4.13%	9.19%
Dividend on shares	0.43%	11.25%	5.49%	1.61%	1.29%	4.01%
Less: Loss on revaluation of security trading	0.00%	1.40%	3.15%	1.46%	3.93%	1.99%
Total Investment Income	100%	100%	100%	100%	100%	100%

Operating Performance Ratios

Operating performance ratios i.e. Net Interest Margin (NIM), Spread, and Operational Efficiency of PBL are shown in table 05. From the table 4.6, it can be interpreted that

§  Net Interest Margin (NIM) of PBL is showing positive value over the years but has a decreasing trend with lowest 1.99% in 2014. The reason can be the increased focus of the bank to investment rather loans. Therefore, the interest income from credit is decreasing while the decrease in expense for deposit is not proportional to that of interest income over the years.

Table 05: Operating Ratios of PBL (in percentage)
Ratio	Formula	2010	2011	2012	2013	2014
NIM	[(Interest Income – Interest Expense) / Interest Earning Assets] x 100	4.05	3.69	2.90	2.92	1.99
Spread	[(Interest Income/ Interest Earning Assets) – (Interest Expense/Interest Bearing Liabilities)] x 100	4.03	2.97	3.10	4.86	4.23
Operational Efficiency	Operating Expense/Operating Income	36.94	35.75	36.62	41.98	48.29

o   Spread, the difference between the lending and borrowing rate of PBL is showing fluctuating trend over the years. The highest spread was found in 2013 due to the highest interest income against lowest earning asset out of those five years. And, the lowest spread was seen on 2011 because of higher Interest expense to liabilities ratio than other years.

o   Operational Efficiency of PBL is indicating an increasing trend over the years which means that the banks operating expense is increasing more relative to the operating income. In addition, the decreases of operating income in 2013 and 2014 have boosted the ratio more than other years which call for the need of operational efficiency by better cost management and fund utilization.