Financial Management Assignment

Financial Management: An Explorative Study on Pubali Bank Limited in the Background of Financial Management Tools This is an explorative academic exercise of financial management tools over a financial institution (Pubali Bank Ltd.).

2010

Ikramul Hasan

An Explorative Study on Pubali Bank Limited in the Background of Financial Management Tools

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1.0 Introduction:

The emergence of financial management as a distinct management discipline is relatively recent and

linked to changes in business and socio-economic scenario, brought about by the advancements in

computer and information technology, emergence of multi-product and multi-division corporations

with complex and dynamic organizational set-ups, increasing global competition etc. Financial

management is an essential element of good corporate governance and forms part of the firm

foundations of an organization, underpinning service quality and improvement on the basis of

accountability to stakeholders for the stewardship and use of resources in today’s world. It is about

managing performance and achieving an organization’s strategic objectives, as much as about

managing money. The essential objective of financial management can be categorized into two

broad functional categories – recurring finance functions and non-recurring or episodic finance

functions--defining the functional role of a financial manager and performing the regular finance

functions including financial planning including assessing the funds requirement, identifying and

sourcing funds, allocation of funds and income and controlling the use or utilization of funds

towards achieving the primary goal of profit/wealth maximization.

1.1 Company Background:

The Bank was initially emerged in the Banking scenario of the then East Pakistan as Eastern

Mercantile Bank Limited at the initiative of some Bangalee entrepreneurs in the year 1959 under

Bank Companies Act 1913 . After independence of Bangladesh in 1972 this Bank was nationalized

as per policy of the Government and renamed as Pubali Bank. Subsequently due to changed

circumstances this Bank was denationalized in the year 1983 as a private bank and renamed as

Pubali Bank Limited. The Government of the People's Republic of Bangladesh handed over all

assets and liabilities of the then Pubali Bank to the Pubali Bank Limited. Since then Pubali Bank

Limited has been rendering all sorts of Commercial Banking services as the largest bank in private

sector through its branch network all over the country.

1.1.1 Vision:

To excel as best private Commercial Bank in Bangladesh with meticulous observance of rules and

regulations and ensure commitment to corporate social responsibility.


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1.1.2 Mission:

To be the most admirable private Commercial Bank in the country. To get recognition as a

dynamic, innovative and customer supportive Bank. To maintain continuous & steady growth with

utmost transparency and to diversify development of resources. To enhance continuous

development of In formation & Technology to meet the demand and challenges of the time.

1.1.3 Corporate Objectives:

Growth

Value Addition

CSR

Quality Standard

1.1.4 Aim:

To match Corporate Objectives, with Ownership and Accountability

To increase our value by releasing each individual’s true potentials

1.2 Corporate Governance:

Our bank is a 100% indigenously sponsored private commercial bank. Meanwhile Pubali Bank

Limited has adopted effective measures to implement Corporate Governance. Corporate

Governance is simultaneously echoed with the good governance. The Bank has ensured four pillars

of good governance i.e. Accountancy, Transparency, Predictability & Balancing the Extreme,

through utilization of available resources and day to day decision-making keeping conformity with

instructions of regulatory bodies.

1.21 Board Structure:

The Board of Directors consisting of 13 Members mainly deals with policy formulation and

monitoring of its guidelines.There are following supporting committees:

Executive committee: The Executive Committee is comprised of 5 Board Members and they take

decision on emergency matters as and when required relating to Bank’s business etc. subject to

ratification by the full Board.

Audit Committee: The Audit Committee is formed with 3 Members of the Board of Directors.The

Audit Committee peruses and evaluates all the Audit Reports of all the Branches of the Bank The


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committee assists the Board of Directors in ensuring that the Financial Statements reflect true and

fair view of the state of affairs of the company and ensuring a congenial working method in the

bank as per guidelines of the Regulators. In 2008 the Committee conducted 11 Meetings.

1.2.2 Financial Management:

The Annual Budget and the statutory financial statements are prepared with the approval of the

Board.The Board regularly monitors and reviews Banks liquidity, income, expenditures, non-

performing loans, loss provisions and steps taken for recovery of defaulted loans including legal

means.

1.2.3 Management Structure:

The Management headed by Managing Director is assisted by 25 General Managers to run the

Business. The workflow are carried out by the relevant divisions! departments! branches of the

Bank. The Management is also assisted by the following Committees:

i) Management Committee (MANCOM): The MANCOM comprised of Senior

Management Members, meets monthly to discuss relevant agenda and take appropriate

actions for running the Bank smoothly.

ii) Asset Liability Management Committee(ALCO): Asset Liability Management

Committee headed by Managing Director is responsible for Balance Sheet Risk

Management. The results of Balance Sheet analysis along with recommendation are

placed in ALCO meeting where important decisions are made to minimize risk and to

maximize returns.

iii) Credit Committee: Headed by the Senior General Manager of the Credit Division, the

Credit Committee evaluates credit proposals and recommends for approval or otherwise.

iv) Task Force for Recovery of Classified Loans: A Task Force for recovery of classified

loans is constituted in the Head Office of the Bank with the Chairmanship of Managing

Director. The other Members are General Mangers and Deputy General Managers of

Credit Monitoring and Recovery Division, Credit Division, Securities Trading Division,

Lease Financing Division and Law Division.


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1.2.4 Code of Ethics I Policy of Business Conduct:

The Bank instituted “Service Rules” since the inception of the Bank in 1 959.The Bank has

formulated different policies including Credit Policy, Purchase Policy and Rules, Finance and

Accounting Policy, Foreign Exchange Risk Management Policy, Internal Control & Compliance

Policy and Anti-Money Laundering Policy. All these policies are followed and supervised on the

basis of own manual & guidelines of each encompassed field / Division.

1.2.5 Lending to Directors, Controlling Shareholders or Employees:

No lending has been made to the Directors / Controlling Shareholders of the Bank However, the

employees of the bank are entitled to House Building Loan, Consumers Loan under Consumer

Credit Scheme and Provident Fund Loan at arm’s length basis.

1.3 Core Risk Management Risk Management:

The risk of the Bank is defined as the possibility of losses, financial or otherwise. The risk

management of the bank covers 6 (Six) core risk areas of banking i.e. Credit Risk, Foreign

Exchange Risk, Asset Liability Management Risk, Money Laundering Risk, Internal Control and

Compliance Risk and Information Technology Risk.

The Bank Management is well conscious about its responsibilities and always use to take

calculative business risk with a view to safeguard the Bank’s Capital, its financial resources and

profitability.The Bank strictly follows the guidelines of Bangladesh Bank and other regulatory

authorities in respect of Risk Management.

1.4 Report on Basel II:

The Bank has formed a Basel II Implementation Cell under guidelines of Bangladesh Bank. Basel II

Implementation Cell has been working on preparing a road map for implementation of Basel II

accord in the Bank.

1.5 Corporate Social Responsibilities (CSR):

The Board of Directors and the management feel that a corporate body like ours has definite

obligation to the community and we are participating in various social activities through our good

governance.We contribute a handsome money of our pre-tax profit for corporate social


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responsibility practice in each year. Areas of our social services are not limited at all. In 2008 we

participated in various social activities.

(i) Donation to Hospital :Taka 40 million has been donated to Ahsania Mission Cancer Hospital.

(ii) Donation to different organizations In the year 2008 we have donated to Chief Adviser’s Relief

Fund and to many other organizations.

(iii) Pubali Bank Employees Staff Welfare Fund : Pubali Bnak Limited has always put importance

on its commitment to the employee’s welfare. Accordingly “Pubali Bank Employees Staff Welfare

Fund” was created in order to undertake staff welfare activities and to provide financial, Medical

support to the employees. To encourage as well as to provide financial support to the employees of

the Bank, cash reward / scholarship are awarded among the children of the members of the fund in

each year.

1.6 Key Financials as at 31st December:


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2.0 Purpose of the study:

The primary aim of this study is that exploring whether financial management system of Pubali

Bank is working for maximize the wealth of shareholders and investigate that by using this system

how fur it is successful in making capital decisions. In summery:

To learn about the real scenario of the financial management practice;

To identify the factors that make the change in the process;

To find out why and how these changes occur in their system.

3.0 Problem statement:

In the field management activities every firm has to have finance department for its planning and

allocation of capital and overall activities where it need money because without money and its

proper use firm can not go fur, concerning this matter financial management come on to the picture.

In this study problem is going to find out on the basis of financial management tools by

investigating whether it is performing according to the concepts or not in year to year performance.

4.0 Theoretical Background:

An analyst must have a clear understanding of the firm’s objectives to effectively measure its

business performance and management. In most financial textbooks, the objective of a company is

maximizing the value of the owner’s interest in the firm. For the investor oriented firm (IOF), the

firm’s value depends on earnings used to reward investors and to reinvest in productive assets that

will generate future earnings. From an analytical point of view, the most significant information in

the equity section of the balance sheet relates to the composition of the capital accounts and to

restrictions imposed on the distribution of equity usually sheds light on the cooperative’s freedom

of action in such areas as patronage distributions and levels of working capital. Such restrictions

also note the bargaining strength and standing in the credit markets. Moreover, a careful reading of

the covenants will enable the analyst to assess the potential for default. A brief review of

cooperative financial statements is warranted before starting a discussion of financial analysis.

Financial statements provide certain basic information that focuses on the entity as a whole and

meets the common needs of external users. Three main financial statements are required from

businesses a statement of financial position (balance sheet), a statement of activities (operating


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statement), and a statement of cash flows. The balance sheet states the cooperative’s assets,

liabilities, and members equity as of a particular date, for example, as of Dec. 31, 2001. Asset

values are usual usually stated at historical cost (what the cooperative paid for it). However, some

accounting standards prescribe using current market values for specific assets.

The stated liabilities indicate the amount owed and are stated at cost. Members’ equity is the

difference between assets and liabilities. The balance sheet of Farmer Cooperative is shown in table

1. Notice that cooperative equity is divided into allocated and unallocated portions. Allocated equity

is owned by specific members. Unallocated equity is not earmarked for specific members and is

used as a general reserve. The operating statement (table 2) reveals a cooperative’s performance

during a particular period of time, such as the fiscal year ending Dec. 31, 2001. It reports revenues

from sales, services, and patronage refunds received from other cooperatives. It also includes

various costs, including the cost of goods sold, general and administrative expenses, interest

expenses, and taxes. Some marketing cooperatives report the results of their commodity pools in the

operating statement.

The Statement of Cash Flows (SCF) indicates cash receipts and cash disbursements during the

accounting year. The SCF summarizes the operating, investing, and financing activities of a

business enterprise during an accounting period and completes the disclosure of changes in financial

position that aren’t readily apparent in comparative balance sheets and income statements. The SCF

complements the financial description of a business when used in conjunction with the operating

statement and balance sheet. Looking at annual “trends” of cash flows over several years enhances

the analysis. The SCF presents “pure cash flow” information that sometimes is difficult to glean

from the other statements. Decisions that might not affect the long-run ability of the firm to generate

a positive net income may affect the cash flow information disclosed for a particular period. The net

cash flow from operations, however, shouldn’t be viewed as a substitute for net income. Both the

cash and accrual descriptions of events are important, and the inclusion of an SCF ensures that both

will be available for the assessment of the future cash flow and income potential. One additional

financial statement is frequently available in the annual reports issued by companies. The Statement

of Changes in Members Equity describes how various equity accounts are affected during the

business cycle. Cooperatives generate equity from several sources, including net income, issuance

of stock, and per-unit capital retains. So financial statement analysis can be beneficial in this respect

because it highlights a firm’s strengths and weaknesses.


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4.1 Ratio Analysis:

Ratios are the most widely used tools for financial analysis. Yet, their function is often

misunderstood, and, consequently, their significance may easily be overrated. A ratio expresses the

mathematical relationship between two quantities. Ratios are analysis tools that provide clues to

help identify symptoms of underlying conditions. Analysts, depending on their needs, may differ in

the ratios they find useful when examining a cooperative’s financial position. Short-term creditors

are primarily interested in the cooperative’s current performance and its holdings of liquid assets

that can provide a ready source of cash to meet current cash requirements. These assets include

cash, marketable securities, accounts receivable, inventory, and other assets which can be sold for

cash or can become cash through the normal course of a business cycle. Long-term creditors and

member/owners, on the other hand, are concerned with both the long-term and short-term outlook.

Management will also find ratios useful in measuring its own performance. As a final note of

caution, the analysis of ratios is useful only when all influencing factors are interpreted skillfully

and intelligently. Standard financial ratios are divided in to four categories of ratios are typically

used in analyzing financial position:

_ Liquidity

_ Debt Management

_ Profitability

4.2 Cost of Capital:

Capital is a necessary factor of production, and like any other factor, it has a cost. The cost is equal

to the marginal investors required return on the security. The firm’s primary objective is to

maximize shareholder value, and companies can increase shareholder value by investing in projects

that earn more than the cost of capital. For that reason the management focuses on Economic Value

Added (EVA). Total investor supplied operating capital is the sum of the interest bearing debt,

preferred stock , and common equity used to acquire the company’s net operating assets, that is, its

net operating working capital plus net planned and equipment. EVA is a estimate of a business true

economic profit for the year, and it differs sharply from accounting profit. EVA represents the

residual income that remains after the cost of all capital, including equity capital, has been

deducted, whereas accounting profit is determined without imposing a charge for equity capital.

Equity capital has a cost, because funds provided by shareholders could have been invested

elsewhere where they would have earned a return shareholders give up the opportunity to invest

funds elsewhere when they provide capital to the firms. The return they could earn elsewhere in


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investments of equal risk represents the cost of equity capital which will help to ensure that they

operate in a manner that is consistent with maximizing shareholder wealth. EVA also determined

the divisions as well as the company as a whole, so it provides a useful basis for determining

managerial compensation at all levels.

The after-tax cost of debt is used to calculate the WACC (weighted average cost of capital), and it is

the interest rate on debt, Kd, less the tax savings that result because interest is deductible. This is the

same as Kd multiplied by (1-T), where T is the firms marginal tax rate. Management might

misguidedly think that retained earnings are “free” because they represent money that is “left over”

after paying dividends. While it is true that no direct costs are associated with capital raised as

retained earnings, but this capital still has a cost. All earnings remaining after interest and preferred

dividends belong to the common stockholders, and these earnings serve to compensate stockholders

for the use of their capital. Management may pay out earnings in the form of dividends or else

earnings and reinvest them in the business.

4.3 Dividend Policy:

Successful companies earn income. That income can then be reinvested in operating assets, used to

acquire securities, used to retire debt, or distributed to stockholders. When deciding how much cash

to distribute to stockholders, financial managers must keep in mind that the firm’s objective is to

maximize shareholder value. Consequently, the target payout ratio defined as the percentage of net

income to be paid out as cash dividends- should be based in large part on investors’ preference for

dividends versus capital gains: do investors prefer 1) to have the firm distribute income as cash

dividends or 2) to have it either repurchase stock or else plow the earnings back into the business.

So dividends can be given in following ways:

1. Cash dividends: These are the most common and are usually paid four times a year.

2. Stock dividends: Stock dividends are not true dividends in that a distribution of stock does not

affect the value of the firm or the wealth of the shareholder. These dividends are paid out of

Treasury stock.

3. Stock split: Similar to a stock dividend. The NYSE requires share distributions of less than 25%

to be treated as stock dividends.


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4. Share repurchases: The Company repurchases the stock. Shareholders pay tax only on the

capital gains portion. Same effect as a regular dividend as cash LEAVES the corporation.

There are some theories like 1) Dividend Irrelevance, 2) Bird-in-hand and 3) Tax preference. The

most logical way to proceed is to test the theories empirically. Some investors clearly prefer

dividend, hence could be described as Bird-in-hand advocates. They like companies that pay high

dividend, so if a company raises its dividend, they would buy more of its stock, raise its price, and

thus lower its cost of equity. However other investors have no need for current cash dividend and

are in high tax backers, so they prefer lower dividend payout. Finally some investors are probably

truly indifferent- to them, the advantages and disadvantages of dividends are equally balanced, so

their stock buying preferences would not change if companies paid out more or less of their

earnings.

5.0 Methodology:

This study is basically a desk study and data are fully depending on secondary source. To

investigate and analyze Pubali Bank financial activities. In order to do this study exploratory

approached is followed. For investigation financial management tools are used to complete this

study.

6.0 Results and Findings:

6.1 Ratio Analysis:

To conduct an analysis of information in a Pubali Bank financial statements. Ratios are calculated

from current year numbers and are then compared to previous years to judge the performance of the

Bank (table1).


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Table 1 : Ratio Analysis

Ratio

Year Performance

2009 2008

Liquidity:

Current Ratio 1.13 times 1.03 times

Debt Management:

Total debt to total asset 9.11% 9.16%

Time interest earn 1.01 1.2

Profitability:

Basic earning power 3.5% 3.8%

ROI 9.12% 5.37%

ROE 1.94 % 1.64%

Market Value

Price / Earning 9.92 10.54

After considering above table it can be said that in terms of liquidity bank is in good position

because in year to year calculation it is progressing from 1.03 to 1.13 which the current ratio gives a

clean bill of health. for every TK in current liabilities, there is $1.13 in current assets. In the matter

of times interest earn ration where we can see that bank loosing its capability in comparing previous

year to meet annual interest payment because it losing its position from 1.2 to 1.01. In the company

capability prospective profitability ratio says confidential things which is important to investment

decision from investor as well as companies own investment in this field we see that the earning

power of the bank in generation operating income is poor because it is lossong its position from 3.8

to 3.5. An investor will want to know all about the ROI because it tells him or her how successful it

is and in terms of that segment bank show progress from last year because it shows 5.37 to 9.12

which very good. Return on equity says that end of the period how much is going to get by

shareholder and in this segment bank is little a head from previous year that 1.64 to 1.94 %. Earning

per share ratio say that how much of investor will pay for TK1 of current earning where bank shows

poor performance in comparison with previous year which is 10.54 to 9.92.


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6.2 Economic Value Added:

Economic Value Added (EVA) measure of profitability which takes into consideration the cost of

total invested equity. Shareholder/Equity providers are always conscious about thee return on

capital investment in table 2.

After consider above table it is clear that there is growth in EVA comparing with last year that

23.07% which very good number in measuring profitability which takes in ot consideration the cost

of total invested equity.

6.3 WACC (Weighted Average Cost of Capital):

A bank or other company derives its assets by either raising debt or equity (or both), there are costs

associated with raising capital and WACC is an average figure used to indicate the cost of financing

a company’s asset base to determining WACC, the firm’s equity value, debt value and hence firm

value needs to be derived. Approach in finding the cost of equity: the dividend growth approach and

WACC in following:


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Using the dividend approach-

Po =D1/(Re-g)

739.50 = 146.77/.3556 –g

g = .1572

g = 15.17

So the dividend growth of the company 15.17%.

Since the cost of debt is given on an annual basis in calculating WACC, we use the after-tax cost of

debt, (This is because interest payments are eligible for tax deductions.) If the interest rate is taking

into account the tax deduction which is the actual interest rate must be lower. We have the cost of

debt and cost of equity; now we need to find the firm’s value, the values are as follows:

= 146.77/739.50 +0.1572

= 35.56%

Cost of debt = Y(Yeild) (1- Tax)

Y= savings + term dep.+ others Dep./ interest payment

= 7304737607/3765542302

= 19.39 %

Kd 09 = 0.1939(1-.0425)

= 11.14%

Cost of preferred stock:

Kp = preferred dividend/ current market price

= 146/739.50

= 19.87%

WACC 2009:

= 8.83*35.56 + 9.11*19.39 + (1-0.425)

= 4.15%

This rate is used in the evaluation of a project NPV or in determining the value of an asset. In this

situation we find that it must generate a return lower than the cost of raising debt and the cost of


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raising equity (R) because it also varies with capital structure, Since Kd is usually lower than Ke,

then the higher the debt level, the lower the WACC which means bank usually prefer issuing debt

first before they raise more equity.

6.4 Dividend policy:

In the matter of giving dividend Bank only give to its share holder stock dividend which is about

30% according to the 2009 annual report.

7.0 Conclusion:

After consider all facts it clear that how Pubali Bank operating its activities by using financial tools.

It consider ration analysis some part they do well like current ratio but they are performing poor in

time interest earn, Basic earning power and price / earning which means in totality they are doing

average. In the matter cost of capital decision making they are more interested in investing project

where they get interest rather that issuing share or other things that is why WACC is very poor in

considering Ke and Kd. Other side wealth maximization part there job is usual because they give

only stock divided for couple of year where many investor wants cash dividend as well in

considering satisfaction factor. In the matter of corporate social performance they are not significant

in catching attraction which very important for society as well as for investment. No result last

forever it may change time to time with the effort of work so results and findings of the study can

be changed with better performance of the bank.

8.0 References:

1. http://www.urgenttermpapers.com/roleofa.html

2. http://www.audit-

commission.gov.uk/aboutus/strategicobjectives/raisingstandards/pages/worldclassfinancialm

anagement.aspx

3. http://www.pubalibangla.com/pubali/Annual_2009_Report.pdf

4. http://www.hkiaat.org/images/uploads/articles/Weighted.pdf

http://www.urgenttermpapers.com/roleofa.html

http://www.audit-commission.gov.uk/aboutus/strategicobjectives/raisingstandards/pages/worldclassfinancialmanagement.aspx



http://www.pubalibangla.com/pubali/Annual_2009_Report.pdf

http://www.hkiaat.org/images/uploads/articles/Weighted.pdf


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David S. Chesnick, (2000),"Financial Management and Ratio Analysis for Cooperative

Enterprises", Rural Business-Cooperative Service, U.S. Department of Agriculture, Research

Report 175.

Bibliography

Brealey, Richard and Stewart Myers, Principles of Corporate Finance, Second Edition, McGraw

Hill.1984.

Brownlee, Richard, Kenneth Ferris and Mark Haskins, Corporate Financial Reporting, Second

Edition, Irwin. 1994.

Cobia, David ed., Cooperatives in Agriculture, Prentice- Hall. 1989.

Franks, Julian, John Broyles and Willard Carleton, Corporate Finance, Kent. 1985.

Leopold A. Bernstein, Financial Statement Analysis, Fifth Edition, Irwin. 1993.

Financial Management Assignment

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