Financial Performance Analysis of Allied Bank Limited

over the period of (2008-2012)

By:
(USMAN AZIZ)

(01-120121-079)

(ARSLAN AZIZ)

(01-120121-011)

(KHAWAR AZIZ)

(01-120121-034)

MBA
Session:
2012-2015
Supervisor:
(AJAB KHAN BURKI)
Department of Management Sciences
Bahria University Islamabad
2015

Financial Performance Analysis of Allied Bank Limited

over the period of (2008-2012)

By:
(USMAN AZIZ)

(01-120121-079)

(ARSLAN AZIZ)

(01-120121-011)

(KHAWAR AZIZ)

(01-120121-034)

Supervisor:
(AJAB KHAN BURKI)

A research project submitted in partial fulfillment

of the requirement for the degree of MBA

Bahria University Islamabad

2015

Dedication:
We dedicate this study to our families that supported us during up and downs of our life,
special feeling of thankfulness to our caring parents who always encouraged us and supported
us throughout our studies.

There are no secrets to success. It is the result of preparation, hard work, and learning
from failure.

Acknowledgement
All praises for the all mighty Allah who is most beneficent and the most merciful. I would
like to give my thankfulness to the supervisor Sir Ajab Khan Burki who due to his support,
motivation and knowledge made me complete our Research Project. We also thank to Mrs.
Maria Iftikhar for her sincere and friendly guidance and made sure that our Research Project
is on the right path. And we are taking this chance to thank everyone including my our
dearest Sister Mrs. Fiza Sibtan who encouraged and motivated us throughout our Research
Project.

Abstract
In emerging economies like Pakistan the commercial bank plays and important role by
providing financial services to the individuals and corporate sector. To evaluate and examine
the performance of financial institutes specially the banks the most useful tool is ratio
analysis and CAMEL analysis is also be considered. For the evaluation of the financial
performance of Allied bank limited by keeping financial aspects and elements in view, ratio
and CAMEL analysis has been selected as an evaluating tool. The research team used the
final reports from the year 2008 to the year 2012 for gathering and interpreting the data for
this study. This research work is based on secondary data which is collected from annual
reports of ABL bank, past journals about banks performance and financial books. The
financial analysis of Allied bank limited refers that the bank has made a slow progress over
the financial year 2008 to the year 2012 as the bank has expended its business in these years
and its expenses grow more rapidly than that of income, but the end of the year 2011 bank
was in a position where it reduced its interest expenses which ultimately result in increase of
its profit.

Table of Contents
Acknowledgement................................................................................................. 4
Abstract................................................................................................................. 5
CHAPTER NO. 1...................................................................................................... 9
1.0 Introduction.................................................................................................. 9
1.1 Problem area........................................................................................... 17
1.2 Rational of the study............................................................................... 17
1.3 Objective of the study............................................................................. 17
1.4 Significance of the study.........................................................................17
CHAPTER NO. 2.................................................................................................... 19
2.0 Background Study...................................................................................... 19
2.1 Financial Information Users.....................................................................20
2.2 Need for Financial Analysis......................................................................20
2.3 Bank Performance Indicators...................................................................21
2.4 Bank Performance Determinants.............................................................23
2.5 Macroeconomic Factors...........................................................................25
CHAPTER NO. 3.................................................................................................... 26
3.0 Research Methodology............................................................................... 26
3.1 Research Design...................................................................................... 26
3.2 Nature of Data......................................................................................... 26
3.3 Analytical Tools........................................................................................ 26
3.4 Presentation of Results............................................................................ 27
3.5 Importance of Financial Ratios.................................................................27
CHAPTER NO. 4.................................................................................................... 29
4.0 Interpretations and Results.........................................................................29
4.1 Return on Equity...................................................................................... 29
4.2 Return on Asset....................................................................................... 30
4.3 Net Interest Margin.................................................................................. 31
CAMEL........................................................................................................... 32
4.4 Capital Adequacy.................................................................................... 32
4.5 Asset Quality........................................................................................... 33
4.6 Management Quality............................................................................... 35
4.7 Earning Ability......................................................................................... 36
4.8 Liquidity................................................................................................... 37
CHAPTER NO. 5.................................................................................................... 39
5.0 Common Size Analysis of Financial Statement...........................................39
6

5.1 Vertical Analysis of ABL.............................................................................. 39

5.1.0 Assets................................................................................................... 39
5.1.1 Liabilities.............................................................................................. 40
5.1.2 Income Statement................................................................................ 41
5.2 Horizontal Analysis of ABL..........................................................................42
5.2.0 Assets................................................................................................... 42
5.2.1 Liabilities.............................................................................................. 43
5.2.2 Income Statement................................................................................ 44
CHAPTER NO. 6.................................................................................................... 45
6.0 Conclusion and Recommendation...............................................................45
CONCLUSION....................................................................................................... 45
RECOMMENDATION.............................................................................................. 46
Bibliography......................................................................................................... 47

TABLE OF FIGURES
7

Table

Page no.

TABLE 1: RETURN ON EQUITY..............................................................30

TABLE 2: RETURN ON ASSET...............................................................31
TABLE 3: NET INTEREST MARGIN..........................................................32
TABLE 4: CAPITAL ADEQUACY.............................................................34
TABLE 5: ASSET QUALITY...................................................................35
TABLE 6: MANAGEMENT QUALITY.........................................................36
TABLE 7: EARNING ABILITY................................................................37
TABLE 8: LIQUIDITY........................................................................39
TABLE 9: VERTICAL ANALYSIS OF ABL ASSETS...........................................40
TABLE 10: VERTICAL ANALYSIS OF ABL LIABILITY......................................41
TABLE 11: VERTICAL ANALYSIS OF ABL INCOME STATEMENT..........................42
TABLE 12 : HORIZONTAL ANALYSIS OF ABL ASSETS......................................43
TABLE 13: HORIZONTAL ANALYSIS OF ABL LIABILITIES.................................44
TABLE 14: HORIZONTAL ANALYSIS OF ABL INCOME STATEMENT.......................45

CHAPTER NO. 1

1.0 Introduction
Banks are essential organization in any general public as they altogether add to the
improvement of an economy through assistance of business. Banking industry is the most
imperative monetary go-between in the economy as it interfaces surplus and shortage
financial operators. The relative significance of the diverse parts of banks shifts considerably
crosswise over nations and times in any case, banks are constantly discriminating to the
monetary framework. As of late saving money organizations are confronting the environment
that is changing quickly and rivalry is expanding at nearby and worldwide level.
Banks are the essential wellspring of stores for overall population, government organization
and additionally for chip in areas. Banks additionally encourage the improvement of sparing
arranges and are instruments of government's financial method among others. Consequently
the part of a bank is to give a sheltered spot to keep your cash and here and there the chance
to acquire enthusiasm on your store. Nations whose managing an account framework is
productive can effectively deal with the money related trouble and improve a commitment in
the consistency of budgetary framework by drawing in more investment funds from client
and give the better quality administrations to the general population. In this way it is helpful
to examine what are the central point which can influence the benefit of banks.
A significant measure of changes have been happened in overseeing managing an account
segment of Pakistan since 1947. Under the Act 1956 State bank of Pakistan, encouraged
private division to make the budgetary establishments. By June 1974 in Pakistan all the banks
were nationalized by the regulatory body. From this time forward privatization in 1992 attract
the adjacent and what's more distant examiner to secure the banks of Pakistan.
An aggressive keeping money framework advances the proficiency and in this way essential
for development, however market influence is vital for steadiness in the managing an account
framework (Northcott, 2004). Business bank holds a substantial offer of financial exercises of
a nation. The capacity of the business banks has been improved in Nepal to manage the
expanding need of the administration division and the economy all in all (Elyor, 2009).
Securities exchange has been commanded by the business banks since 10 years. The share
trading system, as well as the business banks have likewise been real supporters to the
9

income of the nation. They have been paying a lot of duty consistently. Execution assessment
is the vital methodology for undertakings to give motivator and to limitation to their
administrators. It is likewise an imperative channel for big business partners to get the
execution data (Sun, 2011). The execution assessment of a business bank is typically
identified with how well the bank can utilize its benefits, partners' values and liabilities,
incomes and costs. The execution assessment of banks is imperative for all gatherings
including contributors, financial specialists, bank administrators and controllers. The
assessment of a company's execution typically utilizes the monetary proportion strategy, in
light of the fact that it gives a basic portrayal about the association's budgetary execution in
examination with past periods and serves to enhance its execution of administration (Lin, CF,
& CW, 2005).
Keeping the banking industry and financial institution in Pakistan it is supposed to be a
mixture of Islamic, private, specific and public institutions. By the closing of the financial
year 2011 the recorded banks of Pakistan were 38 in number. Among them are 22 private
banks, 5 open banks, whereas 7 outside banks and particular banks were 4 in number. State
Bank of Pakistan is an administrative power of every one of these banks. Complete resources
of saving money segment toward the end of 2011 were Rs. 8,295 billion, which implies 15%
of development as contrast with 2010. Absolute liabilities of general keeping money industry
toward the end of year 2011 was Rs. 7,486 billion that was calculated by the end of financial
year 2010

were Rs. 6490 billion which in results additionally demonstrated 15%

development. Aggregate stores expanded from Rs. 5500 billion to Rs. 6300 billion by the end
of year 2011 which demonstrate 14.7% development. Thus development amount to aggregate
lending was recorded 1% during the financial year 2011 and which shows the benefit after
expense at 58.3% development. Budgetary investigation is a key expertise in an assortment of
occupations including venture administration corporate money, business loaning and
expansion of credit. Budgetary proportions are broadly utilized for demonstrating reason both
by expert and scientist.
Ratio analysis is utilized as a method for breaking down the execution of an organization
through its correlation with the usual performance of the comparable institution of the same
industry. Ratio analysis is a tool which gives the extremely essential pre cautionary steps
which helps the scientist to handle the business problems before the organization is
obliterated by them. These investigation apparatuses are critical for people evaluate to an
10

organization or a firm by making two essential sorts of examinations. Initially, the expert can
hope to measure up the present proportions with the past proportions to figure out whether
there has been a change or change happen in the association over the time. Second, the ratio
of one association is contrast and comparable association performing same capacity in the
business sector. This is the sort of "benchmarking" so that one may figure out if the
association is performing more terrible, great or superior to anything others. On the other
hand, the instrument additionally has its drawback that the discoveries of the examination
will just give quantifiable information. This implies the examination is utilized as a part of
figuring out what's wrong yet not giving any suitable arrangements.
In today's dynamic and quickly developing economy, banks are assuming an imperative part
in money related business sector. The adjustment in the fiscal atmosphere has a significant
influence on banks, as these banks are battling adequately by concerning their benefit ratio at
low level on credits, ratio for rivalry to store and for the changes occur in the general business
sector, industry patterns and monetary varieties. Its being a task for the banks to viably
implement their development techniques with the upcoming and recent financial markets, an
increase in the rate of interest show that it helps the financial and monetary institutions and it
impact the change on buyers and organizations.
Financial performance of banks can be measured through the financial ratios using
accounting and financial data of pre and post Statement. (Rehman & S, 2008) Compare the
financial ratios to measure the efficiency of banks in Pakistan. This study has the importance
for the concerned institutions, customers, shareholders, investors, competitors and internal
management.
Thusly Ratio analysis is essential piece of entire business key arranging. Budgetary
examination allude to an evaluation of the practicality, dependability and productivity of
business, sub-business or task. The accounting report and the announcement of salary are
fundamental, yet they are just the beginning stage for effective monetary administration. Use
of ratio analysis to budgetary explanations ought to prompt investigate the achievement,
disappointment, and advancement of business. Transient venture to current resource decay. In
today's dynamic and quickly developing environment, the banks are vital players in
budgetary market and offer money related administrations, for example, venture reserves,
corporate account and business giving. The emerging fiscal atmosphere has an intensive
11

influence on banks and economies as they encounter viably to concern with their benefit ratio
spread notwithstanding low rates on credits, rate for rivalry to stores and the changes occur in
general business, industry policies or patterns and financial matters variances.
Examination finds that banks are discriminatingly critical for modern development, the
corporate administration of the organizations, and capital portion. At the point when banks
effectively activate and apportion finances, this brings down the expense of funding to firms,
supports capital development, and fortifies efficiency development. Consequently the
working of banks has repercussions for the operations of the organizations and the success of
countries (Ross, 2003).
Its being a task for a bank to adequately implement the development techniques with the
emerging monetary markets. An increasing trend in the rate of interest may indicate to help
money related establishments, yet the effect of the developments on shoppers and business is
unpredictable and the task stays for the institution to create an arrival to their shareholders.
For being the proprietors of these budgetary establishments the troughs, suppliers, clients,
administrative offices, every one require money related data for compelling choice making.
The fundamental hotspot for getting money related data is budgetary explanation. Monetary
proclamation examination is a key ability in a mixture of occupations like venture
administration, corporate money, business giving and expansion of credits.
Banks provide facility of financing to different industries and provide the best possible
services for the economic growth of the country. The bank which has been selected here for
financial analysis is Allied Bank Limited, a prominent name among the private commercial
banks of Pakistan.
Associated Bank includes the first Islamic Bank to be built in Pakistan. It began in Lahore by
the name Australasia Bank before autonomy in Dec 3, 1942 with a paid up Share capital of
Rs. 0.124 million. Bank had pulled in stores that were proportionate to Rs. 0.4323 million in
its initial 18 months. Then again, today Allied Bank's paid up Share Capital is Rs. 9.4786
billion, stores surpass to Rs. 10.5194 billion and aggregate resources Rs. 11.5393 billion.
Later on they change the name of the bank into Allied Bank of Pakistan Limited in 1974 and
after that Allied Bank Limited in 2005. As it is going to be 70 years by establishment of the
bank, the Bank has fabricated itself an establishment with a solid value, resources and store
12

base. It offers widespread saving money administrations, while setting substantial

accentuation on retail managing an account. The Bank likewise has the biggest system of
more than 700 online branches in Pakistan and offers different innovative services and items
also administrations to banks assorted customer base.
The main reasons behind selection of the topic is to analyze the overall financial performance
of Allied Bank Limited including the financial policies, bad debts, loaning, deposits and
interest rates and their risks associated to the bank. This Research project will evaluate the
financial position of the Allied Bank through time series trend analyses. In this analysis,
ratios are compare over periods of time. Yearly comparisons can pin point the requirement for
action and this trend analyses works best with five years of ratios. Research work also
elucidates the reason to take these trends into account in order to survive and excel in the
banking industry. The privatization of commercial banks in Pakistan was made and new
banks were established in private sector as more individuals investors began to see the open
access for putting investment into a de-regulated system hence in a result this built a market
based banking system. The Pakistani government showed its interest in upgrading the
effectiveness and efficiency of the banking industry in the country, which made positive steps
to reinforce the asset quality, improve the capital adequacy, the expansion of incomes and to
enhance the management practices. Besides, interest rates deregulation, the cancellation of
policies under which the credit is controlled and to make improvements in money market has
additionally determined to keep focus on banking sector.
By 1980s the activities in banking industry of Pakistan were vigorously controlled by the
government authorities. "For executing the developmental procedures normally the Pakistan
government influences the financial activities". Subsequently, the state owned financial
institution and government of Pakistan is engaged to make a competition where there is no
chance of rivalry. However, in 1990 the economy was influenced by the basic changes plan
and the financial structure is supposed to be reinforce, which results in liberalization and
deregulation in financial sector of the country.
In Pakistan there are different groups of banks including private banks, foreign banks and
state owned banks. By the end of year 1993 Pakistan has total 33 commercial banks including
19 foreign and 14 local banks. By the year 2001 there were 10 more local banks started
business in Pakistan as local, which expanded the banking sector from 33 banks to 43. In
13

such case, this type of deregulation implies the 'adequate survival' of society. The banks those
perform efficiently can make their survival in the market on the other hand the banks with
inefficient performance will be evicted from the industry. The banking industry and real
economy support each other in any country, the dynamic and growing banking industry plays
a sufficient role in the financial growth of Pakistan.
In Pakistan the center of monetary part is established by the banking industry. The investment
from private sector and its utilization are the key characters by which the economy may drive.
In this manner, these characters can be reinforced by developing the financial services and
intermediaries including both the banks and other financial institutions, stock market and the
securities through which the borrowing can be made. A financial sector including banks
assume an imperative part through lending relationship and equity proprietorship for various
organization, and by and large the bank connections, depending on both the market and the
equity, unquestionably influence the investments made for capital. Thus, the bank influence
the performance of market by having affirmative inconsequential effect. (Fotis, 2006)
When the regulations and supervision from bank is not considered the
results obtained from equity to assets shows the optimum proportion.
Banks do exist in such a market where the state owned banks doled out
the lower ratings. Whereas, the expansion of financial performance could
be measured by the changes occur in techniques and assets. This is one
of the way or a key to measure the parameters of monetary dependability
furthermore this refers to the functioning level performed by the banks
and the survival in long run.
Then again, usual way to doing things of business managing an account is altering at a very
quick speed. Rivalry is getting severer and focused in this manner, it turns into the essential
for the banks to build them aggressiveness and proficiency by enhancing their performance.
Normally budgetary execution of financial institutions and the banks is being measured by
utilizing a mixture of benchmark, evaluating the performance regarding spending plan and
the ratios analysis. The evaluation of financial performance is progressed and is appreciated
in financial and management sector (Tarawneh & Medhat, 2006).

14

(Aarma, J, & V, 2004) Demonstrated it is a vital issue to analyze the performance of bank in
such a state where the economy moves due to the function perform by monetary part shows a
fruitful move. Then again, the investigation conducted by two personals in 2011, the result of
which leads towards traditional as well as Islamic banking system in Pakistan, which assure
in keeping money execution of traditional banks is more compelling than the Islamic ones.
The expanded working expense along with wastefulness of administration is used to be
credited by them. By the late 1980s the baking execution was made on basis of new
composition of investigation (Olweny & T.M, 2011) along with utilization of efficiency
structure and the market power (Athanasoglou, Sophocles, & Matthaios, 2005) The market
power refers the expanded outside business sector strengths results into benefit. Also, the
theory recommend that just firms with huge piece of the overall industry and all around
separated portfolio item can win their rivals and acquire monopolistic benefit. Then again, the
efficiency structure shows that improved administrative and scale proficiency prompts higher
focus and afterward to higher benefit.
Modern financial analysts have demonstrated an energetic and rising enthusiasm for the field
of business keeping money as they think of it as an essential branch of mechanical financial
aspects. Despite the fact that capital markets additionally secure connections among
borrowers and moneylenders yet business banks have the remarkable favorable position
because of their capacity to give obligation within data they have of the indebted person. As
instability in choice making in the field of fund can prompt slips which have an enduring
effect on the capital markets as well as on people, budgetary investigation turns into the
essentials for the purpose of decrease the dependence on perceptions, ideas, conjectures, and
instinct. For the judgment of somebody the requirement is distributed with a successful,
orderly premise which depended up to the settling on firms choices. The outcomes can be
utilize as viably oversee, can be improve or use in anticipation of organizations execution in
this era of reports. Income statement is one of the reports that is a monetary explanation
which measures the firms money related items and their execution throughout the financial
year. Monetary execution is evaluated by giving a synopsis of how the business acquires its
incomes and costs through both working and non-working exercises. It likewise demonstrates
the net benefit or misfortune brought about over a particular bookkeeping period, commonly
over a monetary quarter or year.

15

The expansion and reduction in total assets of any organization is demonstrated by the net
salary before the consideration of dispersals to commitments done by the stakeholders. In
addition, the financial position of an organization can be expressed with the help of balance
sheet for a particular financial year. Most organizations take after the general bookkeeping
guideline of displaying the Balance Sheet regarding resource and liabilities.
Despite the fact that the dependence on the capital proportions, informally as well as
formally, is being around for quite a while, method for utilizing those is not generally being
same. A case refer to this, in prior days severe capital prerequisites, bank chiefs utilized
investment proportions to the dependable guideline and gage level to capital of an
association. There was no clue for individuals that customary proportions i.e. cash flow to
aggregate resources or funding to stores can likewise utilized for the exact measurement of
sufficient capital required by any bank, however expansive deviancies to genuine investment
proportions to the benchmark of supervisory which recommended requirement if there is a
need of investigation anymore.
(Ghana, 2000) Certified the proportion investigation as an impression to the genuine situation
for the execution of a business. In any case, proportion investigation has some imperative
limits as a diagnostic device in bank execution examination. Moreover, (Ho & D, 2004) had
reported the assessment made for an organization's execution has centering the working
viability & effectiveness, the impact of which may the organization will survive
straightforwardly.

Exact consequences explores (Raza, M, & M, 2011) clarified an

organization, having a better proficiency, doesn't imply the dependably and will demonstrate
a better viability.
Proportion investigation is not about just contrasting figures of the budgetary reports. It also a
source to have a look on the figures contrary to earlier year, different organizations, industries
and the economies when all is said in done. Proportion if we take a gander as a sample from
the connection which the individuals have in their values and then compare them and to relate
with any organization that how an organization had performed now and how it did before.
(Gopinathan, 2009) Has introduced that the money related proportions investigation can spot
better speculation choices for speculators as the proportion examination measures different
parts of the execution and dissects basics of an organization or a foundation. Moreover, (Ho
& D, 2004) has reported the assessment of an organization's execution has been centering the
operational viability and proficiency, which may impact the organization's survival
16

straightforwardly. The exact aftereffects of the looks into (Raza, M, & M, 2011) and
(Tarawneh & Medhat, 2006) clarified an organization, which had a better productivity, it
doesn't imply the dependably and will demonstrate a better viability.

1.1 Problem area

As in emerging markets the banking is a promptly growing industry and the banks are trying
to improve their overall position by increasing its profits to have a strong position in the
financial market. This study will help to evaluate the financial performance of Allied bank
from the period 2008-2012.

1.2 Rational of the study

This Study will help in understanding the important factors which are affecting the financial
performance and risk associated with it. This study will also show that how ABL is
competing efficiently and effectively in this upgrading and growing business world with an
intensive influence of competitors by following and adapting the recommendation of this
study. This study will help them to enhance their knowledge and abilities by which they can
increase their efficiency of management. The financial performance analysis is a tool to
evaluate the past performance of any organization as well as it also predicts the future
outcomes up to some extent. Basically it is an analysis of the firms financial statement and
its flow of funds. Analysis of financial statement can be done on the basis of different ratios
calculation. Ratio analysis help the concerned parties including creditors, mangers, and
investors to examine the organizations financial performance relatives to that of other. The
decision of corporate investment, and financial operations can be made on behalf of the ratio
analysis of firm. The study will examine the banks performance in the crisis period 2008.

1.3 Objective of the study

o To evaluate the financial performance of ABL for the financial year 2008-2012
o To examine the vertical analysis and horizontal analysis for ABL
o To make recommendations on behalf of results calculated

17

1.4 Significance of the study

The study would provide management with the true state of financial performance of the
Allied bank and also make projections into the future with the view to ensure improved
performance. This piece of work would help the management of the bank to evaluate their
overall performance in past 5 years.

18

CHAPTER NO. 2

2.0 Background Study

The CAMEL is a tool to make analysis of efficiency or financial position through some
different angles. (Elyor, 2009) & (Uzhegova, 2010) they used CAMEL analysis to check
either its factors affect the banks profit or not. CAMEL analysis is one of the most useful
tool (Baral, 2005). CAMEL framework is also be used by The Central bank of Nepal to make
evaluation of their banks and their major financial institutions. By using CAMEL analysis
one can be aware of different scenarios of any bank (Buyuksalvarci & A, 2011). Banking
sector is being consider as the main part of any economy and its development and
performance reflects the good heath of any economy. The banking industry made a major
progress in Pakistan after introducing the new economic reforms in the past few decades, and
by the growing banking industry they give a boost to CAMEL analysis for the purpose of
measuring and interpreting the banks or any financial institutions performance (Baral,
2005).
As the CAMEL analysis is much effective to measure the financial performance which made
its popularity among the management of financial institutions. According to (Gaytan,
Johnson, & CA, 2002) this tool is user friendly to make analysis of financial performance of
any bank. (Sarker, 2005) Mentioned that the North American banks regulation has followed
the CAMEL ratio to analyze the financial performance and reliability of management for the
lending through commercial banks. This tool is also useful to evaluate the overall
performance of banks their strengths as well as their weaknesses. (Wirnkar & M, 2008)
Emphasizes that CAMEL is more important to examine the overall condition of banks. This
study enlighten every characteristic of each component that CAMEL bears through which the
regulators of financial institutions made their evaluation and assessments about the
performance of the bank. The banks having optimum efficiency and productivity do relay on
CAMEL ratio, as they know that the regulatory bodies of financial institutions also have
CAMEL rating system for the examination.

19

2.1 Financial Information Users

The groups interested in financial information are wide in range but the main focused groups
involve are, Government, the equity investors, creditors, regulatory body of financial
institution, general public including stakeholders, taxation department, unions of labor and
customers. All of them have a definite interest in the analysis of financial statement or
financial performance but the major groups which shows more interest in statements are the
creditors and investors to make decisions about their amount. So the standards of financial
accounting are being set according to the need of investors and creditors. The main concern
of financial statement analysis is to make a comparative study or to measure the comparison
of return and risk to take decision about credits and to put investment. For such decisions the
estimation is made on the yearly basis, semi-annually, quarterly, monthly or even for a
decade.
Mostly the interest on the owner equity depends on long term basis, the growth ability,
companys power of earning, and to increase its value by measuring its capacity of paying
dividends to its stakeholders. As the investors faces the residual risk in the businesses, which
is instable in nature and one of the severe risk, the CAMEL is the most useful analysis to
make judgments as it is also followed and implemented by the external analysts.
Creditors mostly want a different analytical approach specially the creditors who lends their
money on short term basis including banks and trade creditors who wants their capital or
amount on early pay back basis. The investors who made long term investments regarding
bonds, insurance, pension funds, are mostly consider the assets position and earnings of the
businesses for long run (Ghana, 2000). These investors look for the confirmation of their
payment back, the capacity to give interest on their investment and refund them their amounts
on the time of maturity. The credit risk is smaller in nature then that of the equity risk, and
can be easier to quantify.

2.2 Need for Financial Analysis

The financial statement analysis is basically an open view for the analyst to interpret the
results. The financial statements that are considered as comparable with other firms having
accurate and stable results for long time, and unbiased reflection of financial position of the
20

business, it will be easy to make analysis and to understand that analysis is also get easy,
nonetheless the situation is up to some extent is being changed. Mostly the reports made over
a time period of financial year have complimentary data which in result helps the analyst to
examine and to do interpretation of the statement, and make it able to adjust the results of
business performance through which they make an adequate comparison, and present the real
face of economy.

The analysis of financial statement is being used to make a comparison between returns and
the risk of an industry portfolio to help out the investors of financial markets and the creditors
to make adequate decision about their lending and investments. In an industry portfolio these
type of decision can easily made by the help of evaluating the past trend which a firm keeps
over the time period of its business life by comparing it with other organizations in same
industry. Another key advantage that the ratio analysis have, is able to make a comparison
between the risks and returns through using the data of diverse businesses, so an investor can
make diversity in its investments. Through ratio analysis the users can be aware of a firms
competitive advantage, its economical features, its different operations, and its investments
and financial features (Sun, 2011). Such regularization process may have misleading data by
ignoring variances among the industries, the effect of different capital structure, and the
inconsistency of information by the time then the level of ratios at any stage during the time.

2.3 Bank Performance Indicators

All commercial banks in order to survive compete with each other in the market in order to
maximize their profits for their stakeholders. Firms capitalize all their resources to form
strategies and efforts are made to achieve this particular goal. In addition to the commercial
banks also have other objectives as well other than just focusing on the maximization of the
profit. They focus on the social objectives and as well as on economic objectives in order to
maintain the balance. But this study only focuses on the profitability aspect of the
commercial banks. The commercial banks in order to check and to keep an on their
profitability measure their profitability through various ratios.
2.3.1 Return on Equity (ROE)
In order to check the profitability of the organization that how much the company has earned
during a period of a year as compared to the equity invested by the shareholders the find out
21

the return on equity ratio. It is something that really concerns the shareholder which they find
out that how much they are getting in return as compared to the money they have invested.
The higher the return on investment of the company the more the company is considered to
be capable to earn more cash internally. The more the return on investment he more will be
the will be the profit of the company. It is more enlightened by (Khrawish, 2011) that ROE is
the ratio of Net Income after Taxes divided by Total Equity Capital. A good return on
investment is the indicator of the fact that the organization or the bank management is
utilizing the shareholders money efficiently and effectively.
2.3.2 Return on Asset (ROA)
In order to find out the profitability of banking organization, the ratio that indicates the
comparison of the income earned by the organization to the total assets (Khrawish, 2011). It
is considered as one of the most important ratio for the banks because it finds out the ratio of
the income earned by the banks after utilizing their available assets. In other words it is the
ratio of Income to its total asset (Khrawish, 2011). This particular ratio indicates the
efficiency of the banking organization to utilize the available resources for the purpose of
generating income. (Khrawish, 2011) Explains the ratio in a way that the efficiency of the
management of a company in generating net income from all the resources of the institution.
(Gopinathan, 2009), state that the more the Return on assets projects that the company is
more efficient in using its resources.
2.3.3 Net Interest Margin (NIM)
Another profitability ratio of the banking organization is the net interest margin that
determines the success of the decisions made by the bank management in contrast to its debt
situation that works as a performance metric. If the net interest margin is on the negative, it
shows that the banking organization has failed in optimal decision making which resulted in
the higher interest expenses as compared to the amount of returns produced through
investment made. So the factor that is the stability which must be constant should be kept in
the consideration (Wen, 2010). It is the ratio of what the banking organizations earn on the
loans in particular time excluding interest that has been paid on funds borrowed divided by
the average amount of the assets on which it earned income in that time period.

22

2.4 Bank Performance Determinants

For the purpose of determination of the bank performance there are two way thats are used
the internal and the external one. The internal way is the bank specific and the external one is
the macroeconomics (Al-Tamimi & Hassan, 2010). The individual characteristics of the bank
are the internal factors. These factors are influenced by the decisions of the management. On
the other hand the external factors consist of the country wide and the sector side influence
and the individual bank has nothing to do with it. There is an advantage with the internal
factors that these factors can be manipulated by the banking organizations and these factors
are not the same for every bank. These factors include capital size, size and composition of
credit portfolio, size of deposit liabilities, labor productivity, interest rate policy and state of
risk level, information technology, management quality, bank size, ownership. CAMEL
framework often used by scholars to substitute the bank specific factors (Dang & Uyen,
2011).
2.4.1 Capital Adequacy
In order to support the organization in the adverse time most of the banking organization have
their own funds or capital to support the organization and to survive the bad time
(Athanasoglou, Sophocles, & Matthaios, 2005). Liquidity that is generated through the
capital and more the liquidity of the capital of the bank the less are the chances of the
organization in the state of the problems. When the company that withstands the risk in the
form of credit and operational risks absorb potential losses and protect the bank debtors is
capital adequacy.
The ratio that is used to measure the capital adequacy is the capital adequacy ratio (CAR). It
measures the internal strength of the banking organization in order to bear and withstand the
losses which is also considered to be directly proportional to the flexibility or resilience of the
bank in these crises situation. It also have direct influence on the bank decisions for
determining the expansion risky and profitable investments (Sangmi & Tabassum, 2010).

23

2.4.2 Asset Quality

The profitability of the bank is influenced by the assets of the bank that consist of current
assets, fixed assets, credit portfolio and other investments. Mostly the loan lent by the banks
are also considered as the important asset of the bank that constitute the major part of the
bank overall income. This is mostly seen in the case of the commercial banks. So we can
judge the profitability of the bank through the quality of the bank loan portfolios. One of the
major risks in this regard are the loans lent by the banks and are not recovered by it. So the
quality of the assets of the bank is best measured through the loans that are not been
recovered. So in order to ensure the quality of the assets the management of the bank try to
ensure the level of the loans that are not been recovered should be kept at minimum level.
The reason for this is that these loans directly influence the overall profitability of the banks.
If the banks succeed in lowering this ratio the better will be there performance (Sangmi &
Nazir, 2010).

2.4.3 Management Efficiency

The management efficiency is another factor that determines the profitability of the banks. It
deals with the ability of the management of the banking organization to deploy there
resources in such a way that maximizes their efficiency and effectiveness and reducing the
overall cost and maximizing the income of the bank. The financial ratios that are included in
this ratio are total asset growth, loan growth rate and earnings growth rate (Sarker, 2005).
Management efficiency is the name of operational efficiency of the organization in terms of
managing staff, organization discipline and control systems in the banks. In addition to it
another important ratio in this regard is the expense to asset ratio. It is the ratio that
determines the ratio between the total assets and operating expenses. This particular ratio is
negatively associated with the profitability of the organization.

2.4.4 Liquidity
The liquidity management of the assets of the bank also determines the profitability of the
banks. The liquidity of the bank is its ability to pay off the financial obligation to the
depositors when they require. (Dang & Uyen, 2011) Explains the liquidity as adequate level
of liquidity is positively related with bank profitability. Customer deposits in the bank to the
total assets are the most commonly used ratio that reflects the liquidity of the bank.
24

2.5 Macroeconomic Factors

The macroeconomic factor that determine the profitability and stability of a particular sector
include Gross Domestic Product, Inflation, Interest Rate and Political instability. The change
in the GDP growth also has an impact on the profitability of the sector because the decrease
in GDP results in the fall of demand for the credit that would ultimately reduce the
profitability. In contrary to it the increase in the GDP results in the increase of the demand for
the credit resulting in increase in the profitability. (Athanasoglou, Sophocles, & Matthaios,
2005) Have figured that the relationship between banks profitability and inflation level is not
conclusive. The major reason that the companies go for the financial analysis is when they
decide to acquire or make investment in the other companies. That can only happen in
frequently changing markets. Financial reporting, in other developed and rising financial
markets, has come a long way in terms of research and its application during the past several
years.

25

CHAPTER NO. 3

3.0 Research Methodology

The descriptive research method is used in this research to analyze the financial performance
of ABL by consulting their annual reports and generals as well as secondary data. Whereas
CAMEL and ratio analysis are also used as main measurement tool to hold this research.

3.1 Research Design

The research used to describe the manifest evidences of numeric data is descriptive in nature.
o Descriptive research has been carried out to achieve the intended objective.
o ABL has been selected for this study
o The study will appraise five year financial performance of the ABL from year 20082012.

3.2 Nature of Data

This study is based on secondary data collected form the annual report of the Allied bank
limited for the year 2008 to the year 2012 and the data is being evaluated by using ratios and
CAMEL analysis.

3.3 Analytical Tools

There are numerous methods of measuring the efficiency of banks but most commonly used
method to analyze the efficiency measurement is the financial analysis. This study includes

26

the different ratios and CAMEL analysis with the vertical and horizontal analysis to analyze
the financial performance of selected bank.

Ratios
o Return on Equity (ROE)
o Return on Assets (ROA)
o Net Interest Margin (NIM)

Camel
o
o
o
o
o

Capital Adequacy
Asset Quality
Management Quality
Earnings Ability
Liquidity

3.4 Presentation of Results

Financial proportions for each of the budgetary year from 2008-2012 were calculated and
afterwards presented in tabular and graphic form to report the overall trend. After calculation,
these proportions were evaluated to ascertain different turning points in the trends and to
concede and document the primary reason behind the changes in the trends that were
occurring for judging the performance of ABL.

3.5 Importance of Financial Ratios

The financial analysts undertake various aspect of a firm financial condition to evaluate its
performance through their financial ratio analysis. A financial ratio is an index of financial
ratio that relays to secretarial numbers and is obtained by dividing one umber by the other.
Effective interpretation of ratio requires the analysts to:
o Identify the economic current conditions facing the business.
27

o Identify the strategy that the firm selects to complete in the business
o Understand the important concepts and principles underline the firms financial
statement used in the computing of financial ratios.
The financial statement operators attach different degrees of importance to the four categories
of the ratio according to their subject. The potential investors or security analysts consider
profitability more pivotal than liquidity and debt utilization. On the other hand bankers or
trade creditors emphasize on the firms existing capability to meet its debt commitments.
Mostly the debt to equity ratio effects the bondholders as it shows about the value creation by
liquidation. While by focusing the effectiveness of the firm in the term of ability to perform
its debt obligations of course. The expenditure analysts look at all the ratios but with
different degree of attention.

28

CHAPTER NO. 4
4.0 Interpretations and Results
4.1 Return on Equity
According to Investopedia return on equity is the aggregate of net income paid as a
percentage of shareholders equity. It estimates the net profit that a stockholder have received
from capitalizing their amount in the bank. Return on equity ratio is important for the
investor in security market.
Table 1: Return on Equity
YEARS
RESULTS

2008
0.212

2009
0.305

2010
0.288

2011
0.295

2012
0.290

Return Of Equity
0.31

0.29

0.3

0.29

2010

2011

2012

0.21

2008

2009

The ratio of profit after tax to average capital reflect the investors average return which they
get by holding their capital. The ratios also need to infer with great restraint as increase in
ratio may specify both high profitability as well as low capitalization and decrease in ratio
specify low profitability as well as high capitalization. The ROE of Allied bank had increased
from 21.2% to 29.9% by the year 2009, and then get stable which is good for the bank, more
the ROE shows the profitability of the bank.
29

4.2 Return on Asset

This ratios show that how the assets of the bank are efficiently utilized. It is measured by
dividing profit after tax by total assets. ROA is basically a gauge of managerial efficiently. It
shows that how proficiently the management of the bank has been transforming the
organizations asset in to earnings. It indicates the efficiency with which management
employed the total capital resource available to it. It is a better measure of operating
performance than ROE because ROE is affected by degree of financial leverage.
Table 2: Return on Asset
YEARS
RESULTS

2008

2009

2010

2011

2012

0.0121

0.0181

0.0189

0.0210

0.0203

RETURN OF ASSET
0.02
0.02

0.02

0.02

0.01

2008

2009

2010

2011

2012

The above result from ROA shows and increasing trend from the financial year 2008 to the
year 2012 which show that Allied Bank had incurred more return on asset than its assets
value. The maximum return was earned from year 2008 to year 2009 and then it increases
slowly.

30

4.3 Net Interest Margin

According to Investopedia definition Net interest margin (NIM) is an amount of the
difference of the interest income created by banks or other financial institutions and the
amount which is paid to the banks lender as an interest on their investments (for instance,
deposits) relative to the amount of their (interest-earning) assets. It is the income which the
bank can receive from lending as it is the core or main business of the bank. Whereas, the
bank earned the net interest margin by dividing its earning assets. These earning assets
include of investment, advances and balance with The State bank of Pakistan.
Table 3: Net Interest Margin
YEARS
RESULTS

2008
0.0629

2009
0.0637

2010
0.0630

2011
0.0572

2012
0.0341

NET INTEREST MARGIN

0.06

0.06

0.06
0.06

0.03

2008

2009

2010

2011

2012

Above result of Net interest margin show that from the year 2008 to the year 2010 the net
interest margin show and increasing trend which is a cause of deposits which are accepted by
the bank on low cost, but it gradually decreases in year 2011 and 2012. As the interest rate
gets higher. These deposits reflects the current and saving accounts.

31

CAMEL
The acronym CAMEL denotes the major five resources of the bank in term of financial
analysis including Capital adequacy, Asset quality, Management quality, Earning ability and
Liquidity.
CAMEL is an assessment tool for financial situation of a bank which adds score/rating for
every component of CAMEL from capital adequacy to liquidity. The rating 1 and 2 tells that
the credit union is rigorous with the administrative concern, although credit unions of 3, 4 &
5 shows normal toward severe level of managerial issues. The State Bank of Pakistan has
recognized Security and Exchange Commission of Pakistan, which is liable for managerial
charge of altering requirements of a stable and strong financial structure. A supervisor of SBP
carried both off-site and on-site assessment to estimate the institutions profile of risk. This is
a parameter through which the commercial banks regulations can be monitored. It mainlu
focuses on capital adequacy, connected lending and reisk exposure.
The results of CAMEL rating consisted of private supervisory information of the bank are
approachable only for its executive management and related administration and are never
unconfined or disclosed to general public.

4.4 Capital Adequacy

Capital Adequacy is the tool to measure the ratio of banks capital to its risk. The financial
personal are supposed to sustain an adequate or acceptable level of capitalization through this
parameter.
8% Capital adequacy ratio is mandatory for international settlement according to the banks
BASEL committee. The actions made for the setbacks in balance sheet of financial
institutions can be judged by Capital adequacy ratio which helps in to understand that how
the institution deals with these setbacks and confront them. The easy way to calculate the
Capital Adequacy ratio is, if the analyst knows about the associated risks to the assets of the
institution which includes the three risk types i.e., foreign risk, credit risk and financial risk.
CAR consider the interest of depositor and encourages the proficiency and purpose of capital
structure.

32

According to the BASEL the required percentage for Capital adequacy ratio set by the baking
regulators is 8%.
Table 4: Capital Adequacy
YEARS
RESULTS

2008
0.1090

2009
0.1347

2010
0.1384

2011
0.1343

2012
0.1617

Capital Adequacy
0.16
0.13

0.14

0.13

2009

2010

2011

0.11

2008

2012

The increasing trend of CAR shows that the bank meets the standard set by the regulatory
body. A 9% capital adequacy refers that the ABL has such a position where it can meet the
unexpected losses, liabilities, withdrawals and boosts the confidence level of investor, though
there is a slight decline in CAR by year 2011 but it gets boost again in year 2012.

4.5 Asset Quality

It shows that how much a bank is rigid or liable in case of loss in asset value. The main
reason behind the problems and issues occur in banking, is fading the value of assets which
further affects directly by hitting the capital as loss, which results in the reduction of earning
ratio of the bank. The calculation of asset quality can be made by relation to degree and nonperforming assets, capability or provision. Generally loan default to total assets, nonperforming loans to advances and recoveries to loan default ratio come in this framework.
Weakened assets shows the risk of an institution referring its solvency stage, thats where it is
most important to monitor the asset quality by defining a definite risk. Non-performing loan
33

to total loan is one aspect. The gross non-performing loans to gross advances ratio has critical
and more importance referring the good quality credit decision making by a banker. Lower
ratio refers the good quality credit decision making by the institution and vice-versa.
Table 5: Asset Quality
YEARS
RESULTS

2008
0.0615

2009
0.0651

2010
0.0697

2011
0.0780

2012
0.0715

Asset Quality
0.08
0.06

2008

0.07

2009

0.07

0.07

2010

2011

2012

This shows the increasing trend of non-performing loans due to There was increase in nonperforming loans because of inadequate lending principles and incompetent operating
practices the allied bank is performing to sustain its high quality assets and NPLs by the year
2010 but non-performing loans increased by the end of 2010- June 2012 it shows a slightly
decline by the end of 2012.

4.6 Management Quality

CAMELs other components influence the Management quality ratio. Moreover it is
grounded on leadership styles of top management, rules and regulations, and policies that are
supposed to be implemented in the banks. An effective and efficient management is one of
34

the most prosper element of any financial institution. The factors of a good quality
management cannot be gathered easily through the whole sector but can be implemented
specifically in an organization solely. Moreover the accuracy of a good quality management
cannot be quantify on behalf of financial progress or accounts of a bank. On the other hand
the items of income statement including operating expenses, net income and other
expenditures can be used as a helping tool to quantify the quality management. Therefore it is
difficult to measure but a good quality management has a core position in a banks
performance. The non-interest expense to total asset ratio is a tool by which the management
quality can be measured. The non-interest expenses includes the compensations to workers,
and imitate the position of management policies. The efficiency ratios demonstrated that how
a company or bank utilizes its asset efficiently and manages its operations.
Table 6: Management Quality
YEARS
RESULTS

2008
0.360

2009
0.292

2010
0.332

2011
0.328

2012
0.315

Management Quality
0.36
0.32

0.32

0.32

2010

2011

2012

0.29

2008

2009

In year 2008 the non-interest expenses were high but control immediately in 2009 by making
sound management decisions these expenses again get high slightly by the year 2010 but
controlled by the management by making good decisions through which these expenses are
now maintained up to the time of study conducted.

35

4.7 Earning Ability

The profits and earnings of any financial institution are the main source of addition in its
capital that can be measured in relation to IR (investor relation) policy and provision
capability. Moreover it can help in sustaining all the businesses of the financial institution.
The primary source of calculating the earnings of the institutions is ROA which is the net
income after taxes to total assets ratio. Earning ability also influence the current as well as the
future operations of the institution. Furthermore it is also the primary source for an institution
or bank to fulfill the need of investment in terms of expansion, to set out the losses and to
make the payments in term of dividend to the stakeholders. ROA is one of the best tool to
recognize when there is a need to make high earnings to fascinate the decreasing trend of
capital, and to make it high although there are other tools exist for this purpose but ROA is
supposed to be the best for this purpose. Other tool used to calculate the earning ability is the
net interest margin but as compare to ROA the interpretation of profitability is slightly
difficult by using the net interest margin. It could be measured as the ROA ratio.
Table 7: Earning Ability
YEARS
RESULTS

2008
0.0121

2009
0.0181

2010
0.0189

2011
0.0210

2012
0.0203

Earning Ability
0.02
0.02

0.02

0.02

0.01

2008

2009

2010

2011

2012

In 2008 their earning ability is 1.21, in 2009 it is 1.81, in 2010 it is 1.89, in 2011 it is 2.10 and
in 2012 it is 2.03. From 2008 to 2012 Allied banks earnings ability has increased by 82 basis

36

points. Allied banks earning ability ratio is increasing in nature which is a better sign for a
bank that bank can recover from loss and pay dividend to the investors.

4.8 Liquidity
Sufficient liquidity position is, when at a bearable cost by increase in liability and exchange
in assets the sufficient funds can be generate. The exposure of interest rate between risk
weighted assets and risk weighted liabilities is being calculated by using the gap technique,
whereas liquid to total assets ratio is used for the calculation of liquidity. The poor
management of short term liquidity is a cause of the earliest solvency. Liquidity means that
how immediately an institutions assets can be converted inti cash, or you can say the degree
of conversion of an asset into the cash. Most of the banks and financial institution thought
that their safety depends upon the volume and size of the liquid assets or their ratio so they
can able to meet their unexpected obligations, withdrawals and losses.

Table 8: Liquidity
YEARS
RESULTS

2008
0.0702

2009
0.06662

2010
0.0707

2011
0.0739

2012
0.0702

37

Liquidity
0.08
0.07
0.07
0.07
0.07
0.07
0.06
0.06
2008

2009

2010

2011

2012

From 2008 to 2009 liduidity was dcreased by 36 basis points, from 2009 to 2010 it was
increase by 41 basis points, from 2010 to 2011 its was increased by 32 basis ponits and from
2011 to 2012 it was decresed by 37 basis points. From 2008 to 2012 there is no chnge in their
liquidity ratio which is not a very good sign for a bank because their current liabilties are
increasing more rapidly than their current assests.

CHAPTER NO. 5

38

5.0 Common Size Analysis of Financial Statement

A yearly base analysis which shows the changes occur in assets and liabilities and in cost
structure, is the common size analysis. The financial statement of common size indicates each
and every item of income statement and balance sheet as a proportion to revenue earned and
total assets correspondingly. Common size analysis of profit and loss account and income
statement over the financial years have some important understandings for every bank and as
a comparison between the banks.

5.1 Vertical Analysis of ABL

5.1.0 Assets
Table 9: Vertical Analysis of ABL Assets
YEARS

2008

Cash and balance with treasury

banks
Lending to Financial Institution

25,751

2009
27,716
7%

15,793

28,123

82,646

Advances

212,972
11,134

Other Assets

18,399

Total Assets

366,695

12,447

5%
100%

244,433

15,360
3%

4%
418,374 1
100%

449,931

271,084

18,087

43%
19,871

4%
17,964

4%

3%
18,455

4%
515,699

100%

42%

47%

3%
17,719

2%
267,403

38%

56%

17,955

10,721

195,694

252,345

7%

0%

27%

57%

3%

1,362

121,173

237,344

44,381
7%

3%

23%

58%

Operating Fixed Assets

11,489

94,789

2012

38,159
7%

6%

23%

2011

31,845
7%

4%

Investment

2010

100%

3%
631,915
100%

In financial year 2012, the cash and balances with treasury banks were increased by 7
percent, from December 2008 it shows the increasing trend and at the same rate. The lending
to financial institution is increased by the 2 percent by the year of 2012, the past five years
results shows little fluctuations by one percent or 2 percent increase or decrease, but by the
year of 2010 to 2012 it decreases. The investment on securities had increased in 2012 and it
showed upward trend from the past five years. The advances portfolio of Allied bank
decreased by 4 percent at the end of year 2012 but by year 2011 it was decreased by 9
percent, in year 2008 it was increased by 5 percent. The operating fixed assets and other
39

assets of the bank showed average trend from the year 2008 to 2011, there were no such
changes occurred in operating fixed assets and other fixed assets.

5.1.1 Liabilities
Table 10: Vertical Analysis of ABL Liability
YEARS

2008

Customer deposits

297,475

2009
328,875
81%

Inter bank borrowings

27,778

Bills payable

2,952

Other liabilities

13,636

Sub-ordinated loans

2,498

Total Liabilities

344,339

2010
371,284
79%

39,819
7%

9%

5%

1%

4%
1%
94%

1%

3%

1%

3%

1%

93%

1%
15,684

5,493

413,956

6%
6,203

13,296

5,495

388,414

10%

1%

3%

81%
38,916

4,015

12,284

5,497

514,707
77%

49,993

4,119

11,061

2012

399,562
82%

20,774

3,162
1%

2011

3%
5,490

1%
472,359

92%

1%
581,000

92%

3%

The customer deposit showed a little change of up to 2 percent in the year 2008 to 2010, but
in the year 2011 it was decreased by 5 percent because the liquidity position of the market
was not good in that year and it was increased by 4 percent again in 2012. Inter bank
borrowings were decreased by 6 percent in the financial year 2012 as rate of borrowing were
high for inter-bank borrowing, other liabilities shows a constant result for the last five years
i.e. from year 2008 to 2012.

5.1.2 Income Statement

Table 11: Vertical Analysis of ABL Income Statement
YEARS

2008

2009

2010

2011

2012

Interest / Return / Non Interest

Income earned

40

Markup / Return / Interest

earned
Fee, Commission, Brokerage
and Exchange income
Capital gain & Dividend
income
Other income

30,571

41,122

44,993

86%
3,266

3,470

59

36

Total

63,297

58,764
100%

Markup / Return / Interest and

Non-Interest Expense
Markup / Return / Interest
expensed
Operating expenses

(17,273)

100%

(22,422)

(8,513)

Provisions

(3,561)

Taxation

(1,964)

Total expense - percentage of

total income

(31,311)

Profit after taxation

4,156

-10%

(13,745)

-9%
(4,118)

-88%

-9%
(42,439)

-85%

-9%
(48,624)

-84%
8,225

7,122

-6%
(4,969)

-7%
(39,958)

-23%
(3,267)

-9%

-5%

-45%

-23%
(4,326)

(3,414)

100%

(26,643)

(11,567)

-83%
10,140

16%

15%

0%
35,467

-44%

-21%
(4,416)

12%

100%

(22,428)

(9,706)
-24%

0%
47,080

-48%

17%
272

0%
50,665

-49%

6%
48

0%

5%
10,353

5%
251

0%

6%
3,507

5%

78%
3,169

6%
2,511

5%

88%
3,395

7%
2,452

49,503

89%
2,910

9%
1,571

51,814

88%

100%

(31,142)
-49%
(14,922)
-24%
(1,362)
-2%
(4,195)
-7%
(51,621)
-82%
11,676

17%

18%

In the year 2012 the profit after tax of the bank was increased by 18 percent, the past trend of
five year showed an upward trend in income of Allied bank limited but in 2008 it was
decreased by 4 percent as compare to the income in 2007. The interest expense of the Allied
bank was increased from the last five years which shows less profitability of the bank.
In 2004 the bank faced a loss but the bank improves its position by minimizing its noninterest and interest expenses. In 2012 interest income increased by 78 percent but it is 10
percent less than the interest earned in 2011. The profit of the bank for year 2012 is decreased
due to excess of the interest expense over the interest income as the interest rate for
borrowing from other institutions were high.

5.2 Horizontal Analysis of ABL

5.2.0 Assets
Table 12 : Horizontal Analysis of ABL Assets
YEARS

2008

Cash and balance with treasury

banks

25,751

2009

2010

27,716
15%

2011

31,845
8%

2012

38,159
15%

44,381
20%

16%

41

Lending to Financial Institution

15,793

28,123
-145%

Investment

82,646

94,789
-2%

Advances

212,972
11,134

Other Assets

18,399
366,695
15%

195,694

252,345

12%

244,433
-3%
18,087
23%

17,719

-2%
418,374 1
14%

61%

6%
15,360

17,955

10,721
-88%

28%

11%
12,447

62%

Total Assets

121,173

237,344

47%

1,362
-59%

15%

26%

Operating Fixed Assets

11,489
78%

18%
17,964

-1%
449,931

1%
515,699

8%

15%

687%
267,403
37%
271,084
11%
19,871
10%
18,455
3%
631,915
23%

The results shows that the cash and balance with treasury and other banks were increased by
16 Percent in the financial year 2012 and in 2011 it was increased by 20 percent, where as in
2008 it shows negative result of declining by 15 percent due to the financial crises faced by
the bank.
The lending to financial institutions decreased by 145 percent in year 2008 and remains
negative by the year 2011 due to financial recession faced by the bank and less customers
deposits but it increased by 687 percent by the year 2012. Allied bank limited basically lend
advances to the corporate sector of economy which were increased by 11 percent as it was in
negative 3 percent in year 2011, the bank made more investment in bonds and different
securities by the year 2012.

5.2.1 Liabilities
Table 13: Horizontal Analysis of ABL Liabilities
YEARS

2008

Customer deposits

297,475

2009
328,875
13%

Inter bank borrowings

27,778

Bills payable

2,952

Other liabilities

13,636

2010
371,284
11%

39,819
21%

43%

86%

-48%

7%

141%

30%

-22%
6,203

3%
13,296

11%

29%
38,916

4,015

12,284
-19%

514,707
8%

49,993

4,119

11,061

2012

399,562
13%

20,774

3,162
-16%

2011

54%
15,684

8%

18%

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Sub-ordinated loans

2,498

5,497
0%

Total Liabilities

344,339

5,495
120%

388,414
15%

5,493
0%

413,956
13%

5,490
0%

472,359
7%

0%
581,000

14%

23%

In financial year 2011 the customer deposits were 8 percent increased as a result to year 2010
but in year 2012 it was increased by 29 percent. The inter bank borrowing by the year 2012
showed negative result of 22 percent decrease which is 22 percent less than standard
borrowing as the interest rate for the inter bank borrowing were high in the year 2012
whereas there were more borrowing made in the year 2011. The bank faced an inappropriate
loss in 2012 due to the high borrowing rate.

5.2.2 Income Statement

Table 14: Horizontal Analysis of ABL Income Statement
YEARS
Interest / Return / Non Interest
Income earned
Markup / Return / Interest
earned
Fee, Commission, Brokerage
and Exchange income
Capital gain & Dividend
income
Other income

2008

2009

30,571

41,122
44%

3,266

3,470
45%

1,571
59
35,467

2,910

2,452

3,507

251

-7%
10,353

40%
48

597%
50,665

-4%
3,169

17%

2%

-39%
47,080

3,395

2,511

36

49,503
15%

-16%

56%

2012

51,814
9%

6%

-1%

2011

44,993
35%

-24%

Total

2010

195%
272

-81%
58,764

467%
63,297

43

41%

Markup / Return / Interest and

Non-Interest Expense
Markup / Return / Interest
expensed
Operating expenses

(17,273)

33%

(22,422)
71%

(8,513)
(3,561)

Taxation

(1,964)

Total expense - percentage of

total income

(31,311)

Profit after taxation

4,156

(22,428)
30%

(9,706)
37%

Provisions

24%

-2%

24%
(4,969)

21%
(42,439)

28%

21%
(48,624)

6%
8,225

7,122

19%
(3,267)

(4,118)
74%

49%

(13,745)

(4,326)

(39,958)

19%

19%

24%

5%

(26,643)

(11,567)

(3,414)

16%

0%

14%
(4,416)

2%

8%

71%

15%
10,140

16%

8%

(31,142)
17%
(14,922)
9%
(1,362)
-58%
(4,195)
-16%
(51,621)
6%
11,676

23%

15%

Markup and interest earned showed a negative result as the interest rate were high. The
lending made by the bank was not sufficient or up to the estimate which results in negative
interest income generation. The brokerage fee and commission was also decreased by 7
percent, the interest expense also increases in year 2012 due to which the profitability of the
bank decreased. The bank had overall better performance in year 2012, as in such a situation
the bank faced in year 2004 results in bearing loss to the bank. The Allied bank increased its
profit after tax 2004 by managing its interest and non-interest expenses.

CHAPTER NO. 6
6.0 Conclusion and Recommendation
CONCLUSION
On the basis of the study conducted some discrepancies occurred regarding the financial
health of Allied bank limited. To analyze the financial performance of Allied bank Ratio
analysis, CAMEL analysis and vertical & horizontal analysis are used as a tool. This analysis
point out some elements regarding financial condition or operations of the bank.
The return on equity show the profit stability from the last three years i.e. from the financial
year 2010 to the year 2012. The result from return of asset shows and increasing trend from
44

the financial year 2008 to the year 2012 which show that Allied Bank had incurred more
return on asset than its assets value. The maximum return was earned from year 2008 to year
2009 and then it increases slowly. The result of Net interest margin show that from the year
2008 to the year 2010 the net interest margin show and increasing trend which is a cause of
deposits which are accepted by the bank on low cost, but it gradually decreases in year 2011
and 2012. As the interest rate gets higher. These deposits reflects the current and saving
accounts. Furthermore in CAMEL analysis the capital adequacy ratio show that the bank is in
a condition where it is able to meet an unexpected loss and liabilities. As the bank followed
the incompetent operating practices and inadequate lending principles, there were an increase
in non-performing loan which is a not a good sign for Allied bank limited. By the year 2010
the non-interest expense were controlled by making quality decision by the banks
management. Another element of CAMEL is earning ability which shows the increasing trend
in favor of bank that it can recover its losses and can pay to its shareholders in term of
dividend. As the liquidity shows a constant movement from the year 2008 to the year 2012, it
reflects negative sign because the banks current liabilities are increasing rapidly than that of
their current assets.
Allied Bank is competing in a situation where it can a little profit after accomplishing its
operational cost. The inter-banking bowering rate is higher so its interest income is up to
some extend not sufficient as compare to its interest expenses.

RECOMMENDATION
o Allied bank should reduce their operating expense so that they can increase their
profitability because their operating expenses were uniform during financial year
2010 to the year 2011 but they increase by the end of year 2012.
o Another element from the income statement interest and non-interest expense for the
betterment of earnings and to reduced cost.
o As the inter-banking markup rate in higher the bank should reduce the ratio of loan
from other banks, so it can be reduces the interest expense.
o The provision for non-performing loan should be reduced in term of increase in profit
for bank and for reduction in bad debts.
o Allied bank limited should reduce their non-performing loan and also by improving
their loan procedures they can increase their markup income.
o As for profitability by assets management, Allied bank should improve the current
working fix assets.
45

o Allied bank should improve its liquidity by increasing its current assets, profitability
and to make reductions in its current liabilities.
o Allied bank should open international branches in respect to capture and to hold the
foreign market earning good reputation there.

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