CHAPTER 4

FINANCIAL ANALYSIS OF NATIONAL BANK OF PAKISTAN

4.1 Financial Analysis

Financial analysis refers to an assessment of the viability, stability and profitability
of business. Financial statements reveal trends in the business and help the
organization better foresee how the organization is performing presently.
Financial analysis (also referred to as financial statement analysis or accounting
analysis or Analysis of finance) refers to an assessment of the viability, stability
and profitability of a business, sub-business or project.
Typically, financial analysis is used to analyze whether an entity is stable, solvent,
liquid, or profitable enough to be invested in. When looking at a specific company,
the financial analyst will often focus on the income statement, balance sheet, and
cash flow statement.

4.1.1 Common size analysis

Common size analysis expresses comparisons in percentages. It includes vertical
analysis and horizontal analysis .Vertical analysis compares each amount with a
base amount elected from the same year. Horizontal analysis compares each
amount with a base amount for a selected base year.

4.1.1.1 Vertical Analysis of NBP

Table 4.1 Vertical Analysis of NBP`s Balance sheet

Year

2014

2014% 2013

Rs in 000

2013%

Rs in 000

ASSETS
Cash and balance with
treasury bank
Balance with other banks
Lending to financial inst
Investments
Advances
Operating fixed assets
Defferred Tax Assets
Other assets

982,46,783

6%

15,823,0033

11%

12543964
111794127
561767518
630229649
33353526
9884256
91839258
1,549,659,08

1%
7%
36%
41%
2%
1%
6%
100%

18388738
51941866
396411825
620163029
34568864
10968824
81576084
1,372,249,26

1%
4%
29%
45%
2%
1%
6%
100%

LIABILITIES
Bills payables
Borrowings
Deposits and other accounts
Finance lease
Deferred tax liabilities
Other Liabilities
Total liabilities
Net Assets

11011827
38208413
1234405050
1691
83439108
1,367066089
182592992

1%
2%
80%
0%
0%
5%
88%
12%

13894667
23258971
1101845283
3636
72583176
121,1585,733
160663530

1%
2%
81%
0%
0%
5%
89%
11%

Share capital
Reserves
inappropriate profit
equity

21275131
32996496
59751578
114023205

1%
2%
4%
7%

21275131
33536713
49734161
104546005

2%
2%
4%
7%

Surplus on revaluation of

67852770

4%

55296862

4%

182,592,992

12%

160,663,530

11%

Assets

Sources: Annual reports 201-2014

Interpretation
The major components in the balance sheet of banks are deposits, advances and
investments. Advances decreased from 2013 and o 2014, increased from 41 % to
45%. Investment increased from 2013 to2014. Although it is not comparable to
previous years,still it is showing improvement from 2013. This is due to low
interest rates in 2013 and higher interest rate in2014 and . Bankers are left with
only option of investing in short-term investment, to increase their profit margin.
Investments, as being a non-interest source of income are more promising than
advances that are becoming more profitable due to inclining interest rates. Bankers
prefer to give advances when the interest rate was high but then prefer to invest in
non interest income in 2014 .

4.1.1.2 Vertical Analysis of NBP`s Income Statement

Table 4.2 Vertical Analysis of NBP Income Statement

Year

2014

2014% 2013

Rs in ooo

2013%

Rs in ooo

Markup revenue

115,251,748

100

100,192,320

100

Markup Expense

70099505

39

60894358

61

Net Markup

45152243

61

39297962

47

Provision against

non 11083973

12

17459330

25

58

1397122

19

12

3020

65

against 3392200

64

70230

64

9303015

14

19567702

14

35,849,228

28

19,730,260

26

performing advances
Reversal of provision 1441758
for

diminution

in

investment values
Bad debt written off
Provision

balance sheet obligations

Net Markup Income

SOURCE: Annual Report 2013-2014

Interpretation
The Vertical Analysis of Income Statement of NBP as given in the above table
shows a decreasing trend in 2013 and then increasing trend in 2014. Markup
expenses are actually cost of sale in case of a bank. Increasing trend in gross profit
shows the efficiency of the bank`s management in controlling markup expenses. A
look at the figure of total of total income of the bank reveals a decrease. As total
income is the sum of both markup income and the non markup income, this
decrease in total income

is due to the decrease in the markup income. This

organization`s total non markup income consists of fee and commission, dividend
income, exchange income and other income.

4.1.1.3 Horizontal Analysis of NBP`s Balance interpretation

Year

2014

2013

2014 vs

Rs in 000 Rs in 000 2013

%

ASSETS
Cash and balance with

982,46783

158,230033

-38%

125,43964
111794127
561767518
630229649
33353526
9884256
91839258
1,549,659,08

18388738
519,41866
396411825
620163029
34568864
10968824
81576084
1,372,249,26

-31%
115%
41%
2%
-3%
-10
13
12.9%

LIABILITIES
Bills payables
Borrowings
Deposits and other accounts
Finance lease
Deferred tax liabilities
Other Liabilities
Total liabilities
Net Assets

11011827
38208413
1234405050
1691
83439108
1367066089
182592992

13894667
23258971
1101845283
3636
72583176
1211585733
160663530

-21%
69%
12%
0%
0%
16%
12.8%
14%

Share capital
Reserves
inappropriate profit
equity
Surplus on revaluation of

21275131
32996496
59751578
114023205
678,52770

21275131
33536713
49734161
104,546,005
55,296,862

0%
2%
19%
9%
23%

182,592,992
160,663,530
Table4.3 Horizontal analysis of NBP`s Balance Sheet

14%

treasury bank
Balance with other banks
Lending to financial inst
Investments
Advances
Operating fixed assets
Defferred Tax Assets
Other assets

Assets

Source: Annual Report 2013-2014

Interpretation
Common size horizontal analysis of NBP for the year 2013-2014, in asset side of
the NBP balance sheet. Cash and balance with treasury banks, Balances with other
bank shows positive trend in 2013 and 2014 in both years. Lending to financial
institution investment are decreased in 2014 than 2013. Advances shows increase
in 2014 net advances. Operating fixed assets are decreased in 2014. Deferred tax
assets also decreased in 2014. Other assets are increased in 2014 as compare to
2013.
The liability part of the NBP balance sheet shows negative trend of bills payable in
shows increase in 2014 as compared to 2013. Borrowings, deposits and other
accounts shows increase in 2014. it shows that bank have sufficient funds to
maintain its financial position. Liabilities against assets subject to finance lease,
deferred tax liability they show decrease in 2014. Net Assets of share capitals,
Reserves, Inappropriate profit of the bank shows increase in 2014 it means that
bank have sufficient funds for investments.

4.1.1.4 Horizontal Analysis of NBP`s income statement an

Year
Markup revenue
Markup Expense
Net Markup
Provision against

2014

2013

Rs in ooo

Rs in ooo

115,251,748
70099505
45152243
non 11083973

performing advances
Reversal of provision for 1441758
diminution in investment
values

2013 vs 2014%

100,192,320
60894358
39297962
17459330

15
15
46
12

1397122

11

Bad debt written off

Provision against balance 3392200

3020
70230

12
12

19567702
19,730,260

11
16

sheet obligations
Net Markup Income

9303015
35,849,228

Table 4.4 Horizontal analysis of NBP`s Income Statement

Source Annual Report 2013-2014
4.5 Ratio Analysis
Ratio analysis is an important and old technique of financial analysis. Ratios are important and
helpful in the reference that:
These simplify the comprehension of financial statement and tell the whole story of changes in
the financial conditions of the business. These provide data for inter-firm comparison. The ratios
highlight the factors associated with successful and unsuccessful firms, also reveal strong and
weak firms. These help in planning and forecasting these can assist management in its basic
functions of forecasting, planning, coordination and control. These help in investment decision
in case of investor and lending decision in case of Bankers etc.
However, the ratios are only indicators, they cannot be taken as final regarding good or bad
financial position of the business other things have also to be seen. Great care is needed while
calculating meaningful ratios and in interpreting them. Although there are several ratios, which
an analyst can employ yet the type of ratios he would, use entirely depends on the purpose for
which the analysis is done i.e., a creditor would keep him abreast about the ability of a concern
to cover up its current obligations and so would care about current and liquid ratios, Turnover of
receivables, coverage of interest by the level of earnings etc.
4.5.1 Liquidity Ratios
In graphs 2014should be near origin. Round the figures upto 2 decimal places We need to
provide complete working of the ratios. we are required to carefully study the table regarding
maturities of assets and liabilities. Where you can easily find the current and long term part of
assets and liabilities. Assets and liabilities having upto 1 year maturity are considered as current

assets and current liabilities. This table is given in the annual report of the selected bank. You
need to re-calculate the current and long-term parts of assets and liabilities according to this
table.
These are includes:

Current Ratio:

Current ratio = current asset/current liabilities

2014 Rs. In 000

2013 Rs. In 000

1549659081/1372249263

1372249263/1211585733

1.13

1.13

Comments:
The current ratio of 2014 and 2013 is almost same. It means that its current ratio is less liquid.
There is small increase in industrys ratio which can meet the short term obligations of 2014 and
2013.

Current Ratio

2013
2014

Acid Test Ratio

Acid test ratio = current asset inventories prepaid expanses/current liabilities.
2014 Rs. In 000
2013 Rs. In 000
1549659081-561767518-

1372249263-396411825-

40975977/1367066089

37677868/1211585733

0.69

0.73

Comments
the acid test ratio shows the liquidity by showing its ability to pay off its current liabilities with
quick assets has decreased from 0.73 to 0.69 in 2014. If a firm has enough quick assets to cover
its total current liabilities

Acid Test Ratio

2013
2014

Profitability Ratios
Profitability measures enable the analyst to evaluate the bank or firms profits with respect to a
given level of sales, a certain level of assets or the owners investment. Without profits, a bank or
firm could not attract outside capital

Return on Total Assets:

2014 Rs. In 000

2013 Rs. In 000

(23135850 /1549659081)*100

(7028543/1372249263)*100

1.4

0.51

Return on Asset = Profit before Tax / Total Assets *100

Comments:
This ratio shows that the returns on assets are Increasing as compare to previous years and
overall profit with its available assets is increasing as well.

Return on Total Assets

2013
2014

Return on Total Equity:

Return on total equity = (Net income/ total equity)*100
2014Rs. In 000

2013Rs. In 000

(16071184/114023205)*100

(5306783/104546005)*100

14%

5.07%

Comments:
Return on equity indicates the net income by the total equity of the owners. In the year of 2014,
In the year of 2014, the total equity is grater than net income. It means that generally, the bank
has high return.

Return on Total Equity

2013
2014

Debt Ratio:
Debt Ratio= Total liabilities/ total assets.
2014 Rs. In 000

2013 Rs. In 000

1549659081/1367066089

1372249263/1211585733

1.13

1.13

Comments:
These values indicate that the firm has financed close to total of its assets with debt. This ratio is
same in both 2013 & 2014.The higher this ratio, the greater the firms degree of indebtedness and
the more financial leverage it has.

Debt Ratio

2013
2014

Debt-Equity Ratio:

Debt-equity ratio = total liabilities / total share holder equity.

2014 Rs. In 000

2013 Rs. In 000

1367066089/114023205

1211585733/104546005

11.9

11.5

Comments:
Debt Equity Ratio slightly increased in the year 2014 than the previous year 2013.

Debt Equity Ratio

2013
2014

Market Ratios
Market ratio relates a firms market value, as measured by its current shares price to
certain accounting values.
These include:

Dividend per share

Dividend per share =Total dividend/ no of share outstanding

2014 Rs. In 000

2013 Rs. In 000

2076699/10,018,80

2661077/45681938

0.5440

0.4582

Dividend per Ratio

2013
2014

Comments:
Dividend per Ratio Ratio slightly increased in the year 2014 than the previous year 2013

Earning per Share:

Earning per share = Net income/ no of share outstanding.
2014 Rs. In 000

2013Rs. In 000

16071184/16084763

5306783/5274779

1.0

1.0

Comments:
This ratio is same as in previous year. In these ratios, net income is greater than no of shares
outstanding. Thats why, the earning per share is same and growth rate as well as. It shows
profitability between the shareholders.

Earning Per Share

2013
2014

Market Capitalization Ratio:

Debt to total capital ratio = outstanding shares x share value

2014 Rs. In 000

2013 Rs. In 000

750322590/(750322590+8 1,811,716) 683869120/(683869120-71,235,347)

750322590/668510874

683869120/612633773

1.122379

1.1162772

Comments:
This ratio is relating the long-term debt to the permanent capital of the bank. It shows that the
fixed assets decrease than previous years which show a good sign. This ratio is considered to be
satisfactory.

Market Captalization Ratio

2013
2014

Interest Coverage Ratio,

Also known as Times Interest Earned Ratio (TIE), states the number of times a company is
capable of bearing its interest expense obligation out of the operating profits earned during a
period.
Interest cover Ratio= Profit before interest and tax / Interest Expense
2014 Rs. In 000

2013 Rs. In 000

16071184/23135850

536783/7028543

0.8

0.7

Comments:
This ratio increased from0.7 to0.8 in the year 2014

Interest Cover Ratio

2013
2014