Ratio Analysis

Financial Ratio Analysis 2009

A Case Study of Bank Alfalah and Habib Bank Ltd ( 092-006-115-Minhaj University)

Financial Ratios Analysis

A case study of Bank Al-Falah and Habib Bank Ltd.

092-006-115

Faculty of Commerce & Management Sciences

MINHAJ UNIVERSITY LAHORE

Table of Contents

EXECUTIVE SUMMARY ..................................................................................................................... 2

OBJECTIVES OF THE PROJECT........................................................................................................... 2

INTRODUCTION................................................................................................................................ 3

Introduction to Banking Sector .................................................................................................... 3

Evolution of Banks........................................................................................................................ 3

Definitions of Bank ....................................................................................................................... 4

Evolution of Banking in Pakistan.................................................................................................. 6

Types of Banks ...........................................................................................................................13

THEORETICAL ASPECTS .................................................................................................................. 16

RATIO ANALYSIS ......................................................................................................................... 16

Current liabilities........................................................................................................................ 19

COMPARATIVE ANALYSIS OF HBL VS. BANK AL FALAH.................................................................. 26

Horizontal Analysis.....................................................................................................................59

VERTICAL ANALYSIS....................................................................................................................69

REVIEW OF DESCRIPTIVE INFORMATION....................................................................................... 80

Comparisons .............................................................................................................................. 82

Trend Analysis ............................................................................................................................ 82

SUMMARY......................................................................................................................................87

CONCLUSIONS AND RECOMMEDATIONS ......................................................................................89

ANNEXURES ................................................................................................................................... 91



EXECUTIVE SUMMARY

This study project is undertaken to analyze the financial statement and then to measure theperformance of the Habib Bank Limited and related sectors. For this purpose various aspects,techniques and financial tools are used in this project.

Financial analysis refers to an assessment of the viability, stability and profitability of a business.For analysis of financial statement distinct ratio methods has been used. Financial ratio analysisshows a growth in financial statement and analysis also shows that bank have strongposition and having better future. For Comparison purpose the financial statements of HBLhave been statistically measured with Bank Al Falah Ltd.

Through this study it has been realized that Habib Bank is performing very well since itsinception. It is quite difficult to give suggestion to improve the banking conditions of Habib BankLimited. As we know that nothing is perfect, there is always a room for improvement so at theend of the project some measures have been suggested, if implemented these would be of highadvantage for future development of Habib Bank Limited.

OBJECTIVES OF THE PROJECT

The basic purpose of this project is to understand the financial system of a Bank and to knowabout analysis of a financial statement by applying my analytical and professional skills.

This project will help the reader to understand and analyze financial affairs of a commercialBank



INTRODUCTION

Introduction to Banking Sector

Banking is the business of providing financial services to consumers and businesses. The basic

services a bank provides are checking accounts, which can be used like money to make

payments and purchase goods and services; savings accounts and time deposits that can be

used to save money for future use; loans that consumers and businesses can use to purchase

goods and services; and basic cash management services such as check cashing and foreign

currency exchange. Four types of banks specialize in offering these basic banking services:

commercial banks, savings and loan associations, savings banks, and credit unions.

A broader definition of a bank is any financial institution that receives, collects,

transfers, pays, exchanges, lends, invests, or safeguards money for its customers.

This broader definition includes many other financial institutions that are not usually thought ofas banks but which nevertheless provide one or more of these broadly defined banking services.These institutions include finance companies, investment companies, investment banks,insurance companies, pension funds, security brokers and dealers, mortgage companies, andreal estate investment trusts.

Evolution of Banks

There are different opinions that how the word ‘Bank’ originated. Some of the author’s opinionthat this word is derived from the word ‘Bancus’ or Banque’, which means a bench. Theexplanation of this origin is attributed to the fact that the Jews in Lombard transacted thebusiness of money exchange on benches in the market place; and when the business failed, thepeople destroyed the ‘bench’. Incidentally the word ‘Bankrupt’s said to have evolved from thispractice.

Some of the authors are of opinion that the word ‘Bank’ is derived from the German word back,which means ‘joint stock fund’. Later on when the German occupied major part of the Italy theword ‘Back’ was italicized into ‘Back’.

In fact human left the need of bank when it begins to realize the importance of money as amedium of exchange. Perhaps it where the Babylonian who developed banking system as earlyas 2000 BC. At that time temples were used as banks because of their prevalent respect. Duringthe rule of king Hamurabi (1788 – 1686 BC) the founder of Babylonians Empire, loans werestarted being granted for interest. The borrower has to provide guarantee or he had to pledgehis goods or valuables. King Hamurabi drew up a code wherein he laid down standards rules forprocedures for banking operations by temples and great landowners. Also in Greece, the



temples were used as banks, where the people deposited their money and other valuables forsafe custody and security. In Europe with the ‘revival of civilization’ (Renaissance) in the middleof twelve century, trade and commerce started expanding and this development compelled thebusiness community to borrow the money from the Hebrew money lenders on high rates ofinterest and usury. Seeing the great demand, these moneylenders started organizing themselvesand bank started up at the principle seaports of southern Europe. Soon Venice and Genevabecame the most important money markets of the time and banking though different from itspresent form, flourished. What we know as ‘modern banking’ originated in the 14th century inBarcelona.

Definitions of Bank

"A financial institution, which deals with money and credit. It accepts

Deposits from individuals, firms and companies at a lower rate of

Interest and gives at higher rate of interest to those who need them.”

A financial establishment which uses money deposited by customers for investment, pays it outwhen required, makes loan at interest, exchanges currency, etc.

J.W Gilbert in his principles and practice banking defines a banker in these words:

“A banker is dealer in capital or more properly, a dealer in money. He is intermediate partybetween the borrower and the lender. He borrows of one and lends to another”.

Sir John Paget defines banker in these terms:

“That no person or body, corporate or otherwise, can be a banker who does not

Take deposits accounts.

Take current accounts,

Issue and pay Cheques and



Collect Cheques crossed and uncrossed for his customers” (The law of Banking by Sir

John Paged, page 51).

The American defined the term banker in a very broad sense as under:

“By banking, we mean the business of dealing in credits and by a ‘Bank’ we include everyperson, firm or company having a place of business where credits are opened by deposits ofcollection of money or currency. Subjects to be paid or remitted on Cheques or order, money isadvanced or loaned on stocks, bonds, bullion, bill of exchange, promissory notes are received fordiscount or sale”.

“Banks do business of money. Rather banks do business of lending and borrowing loans.”

“Banks are guardian distributor of cash money”.

“Banker or a bank or a person or company carrying on the business receiving moneys andcollecting drafts for customers subject to the obligation of honoring cheques drawn upon themfrom time to time by the customer to the extent of the amount available on their currentaccounts”.



Evolution of Banking in Pakistan

The first phase in evolution of banking in Pakistan sees very hard days for the whole bankingsector. Starting virtually from scratch in 1947, the country today possesses a full range ofbanking and financial institutions to cope with various needs of the economy.

The area now constituting Pakistan was, relatively speaking, fairly well provided with bankingfacilities in undivided India, in March 1947 there were 3496 offices of Indian scheduled banksout of which as many as 487 were situated in territories now constituting Pakistan.

The Reserve bank of India was the central banking authority in India. At the time of partition itwas decided that in the interest of smooth transition it should continue to function in newlyemerging state of Pakistan, until 30th Sep.1948.

In 1947 due to uncertainty and unsuitability the banking sector suffer heavy losses.

This resulted in a negative effect on baking service in Pakistan. The banks, which had theirregistered offices in Pakistan, transferred them to India. In an effort to bring about the collapseof the new state by pushing a deliberate policy of withdrawals the Indian bank offices closedquickly. Those banks, which stayed, operated only in name pending the winding up of theirbusiness. The number of scheduled banks thus declined form 487 branches beforeindependence to only 195 branches by 30th June1948.

Banking Growth during (1948-1970)

In this tense situation, a committee was immediately setup to formulate a scheme of centralbanking legislation for Pakistan. Many specialists were of the opinion that in view of the acuteshortage of trained staff, any idea of establishing a central bank was I impractical and the bestthat could be attempted was the setting up of a currency board until such times as sufficientstaff could be organize to operate a central bank.

The questions as to whether the institution should be only a currency board or a full-fledgedcentral bank had exercised the mind of the Pakistan government since independence. Through,it was realized that the shortage of trained personal to run the central bank would presentserious difficulty in view of the tangible advantages that a central bank enjoyed over currencyboard, the government ultimately decided to take the bold step of setting up a full fledgedcentral banking authority. Among other factors, which led to this decision, there was the factthe banking facilities in the country had been totally disrupted and there was an urgent need fortheir rehabilitation, which a central ban alone could meet. As there was hardly any time to passas Act, an order was drafted, known as the state bank of Pakistan order, which was promulgatedby the government of Pakistan on 12th may 1948. The state bank declared open on July 1, 1948by the father of the nation.

One of the first tasks of the state bank was to arrange for the replacement of the Reserve bankof India notes, which had continued to circulate in Pakistan during the transitional period, byPakistan currency.



The first Pakistan notes were issued in October 1948 in the denominations of Rs. 5, 10 & 100.

An equally urgent task, which the new central bank had to address itself, was the creation of anational banking system. To this end, while extending every help and encouragement to HabibBank to expand its organization, the state bank recommended the setting up of a new bankinginstitution to serve both as an agent to the state bank recommended the setting up of a newbanking institution to serve both as an agent of the state bank as well as the spearhead of itscredit polices.

Accordingly the NATIONAL BANK OF PAKITSN was setup under an ordinance in November 1949.It started with six offices in the former East Pakistan. In view of the special role assigned to thenew institution, contrary to traditional practices the Governor of the state bank was appointedto head its board of Director in 1950. Under the fostering care of the state bank and the supportof the government, the new institution developed rapidly. By using its special powers, the statebank made liberal advances to the new bank to help it expand credit facilities in the country. By1952, the National bank of India. Shortly, afterwards, in November 1952, the governor of thestate bank ceased to function as the president of National bank of Pakistan.

With a view to broadening the institutional framework of the financial system, the state bankalso sponsored the establishment of specialized credit institutions in the filed of agriculture andindustry. Banking companies (control) act was passed in December 1948 specificallyempowering the state bank to control the operations of banking companies in Pakistan.

Moreover realizing that the most serious limitation on the expansion of banking services inPakistan was the lack of trained personal, the state bank sponsored a banking training scheme,which was repeated after year and turned out a large number of bankers.

As the Commercial Banking facilities continued to expand, a new Pakistani bank, the NationalCommercial Bank was established and registered as a scheduled bank. In the filed of industrialfinance a new institution known as the industrial credit and investment cooperation was set up.

The year 1958 marked the completion of the first decade of the working of the State Bank ofPakistan. When it was established there were only 195 bank offices in existence. At the end ofJune 1958 their number had increased to 307, of which Pakistani banks accounted for 232against 25 in mid 1948. Moreover at the end of June 1958, Pakistani banks held 60% of the totalbanks deposits, and were responsible for 65 of total bank credit.

When the Ayub Government took over in 1958, the banking and monetary scene wassignificantly affected by Developments such as the liberalization of imports, transfer of businessin food grains to the private sector, and the firming up of commodity markets. The demand offunds picked up and there was a substantial expansion of bank credit to the private sector. Thepace of expansion in the institutional frame work of the country’s banking system quickenedand a new Pakistani, bank, namely the United Bank Limited was established.



Owning the five years 1960-65, the credit structure in Pakistan made rapid progress. The bankextended its network by opening six new offices located at Chitagong, Peshawar, Quetta,Khulna, Layallpur and Rawalpindi. The number of scheduled bank offices rose from 430 at theend of June 1960 to 1591 in June 1965. Several new banks were added to the list of scheduledbanks.

Two principal additions were the commerce bank, and the standard bank. The number ofscheduled banks, which stood at 29 in June 1960 rose to 36 by June 1965.

Under the impact of economic growth and dear scope of private enterprises, bank credit to theprivate sector rose from Rs. 1,458 millions to Rs. 5759 million. Thus the total expansion in bankcredit to the private sector during this period amounted to Rs. 4300 million, which gave a annualexpansion of Rs. 860 million compared to the annual average increase of Rs. 144 million overthe preceding five years. Banks deposits increased from Rs. 2,493 million to Rs. 6883 millionduring the five years period ended June 1965 compared to Rs. 231 million in the proceeding fiveyears. Time deposits during this period increased from Rs. 946 million to Rs. 3228 million, wheredemand deposits rose from Rs. 1997 million to Rs 3655 million. The increase in time depositswas particularly rapid. The ratio of time deposits to total deposits in June 1965 stood at 49.6percent age as against 32.01 percent age five years earlier. Another salient feature of bankingdevelopment during this period was that since the rate of increase in bank deposits laggedbehind the rate of expansion in bank credit, the banked has to depend increasingly on centralbank finance. They borrowing from the state bank rose from Rs. 11 million in June 1960 to Rs.1688 million in June 1965. Owing keen demand for bank credit, bank’s investments could notincrease as rapidly as their advances. Their investments totaled to Rs. 1,874 million at the end ofJune 1965 compared to Rs. 1,231 million in June 1960. Investments which were almost equal totheir advances in June 1960 were only about one third of the advances in June 1965.

The third plane period witnessed a further expansion of banking facilities in the country thetotal number of scheduled banked offices increased from 1,591 at the end of June 1965 to 3133at the close of June 1970. During the same bank credit to the private sector rose from Rs. 5,789million to Rs. 9492 million. There was also a substantial growth in the bank deposits, whichincreased from Rs. 6883 million June 1965 to Rs. 13147 million at the end of June 1970. Aremarkable change occurred during this period related to the composition of deposits. Timedeposit becomes greater than demand deposits forming about 54 percent age of the totaldeposits. As oppose to what happened in the previous period, banks were able to finance amush higher level of credit expansion without having to increase their borrowings from thecentral bank.

Banking Reforms 1972

After the assumption of office by a new government in 1971, may 1972 different reforms wereintroduced to make the banks more responsive to the requirements of economics growth withsocial justice. The reforms aimed at bringing about a more purposeful and equitable distributionof bank credit, improving the soundness and efficiency of the banks, and securing greater socialaccountability of the banking system as a whole.



The role of the banking system had been truly spectacular in mobilizing savings of thecommunity and meeting the credit needs of the economy. But at the same time, the banks hadgenerally neglected their role in promoting social justice and had failed to play an effective rolein ensuring a wider and more equitable dispersal of the benefits of economic growth. Inparticular the inter locking of ownership with commercial and industrial interests had led to themisuse of bank resources. There was a heavy concentration of credit in big accounts and inurban area. Credit facilities for agriculture, small business, newly emerging exports and housinghad remained obviously inadequate while the banks indulged in capital financing in few selectedbusiness sectors and issued guarantees on behalf of favored clients, term clients, term financingfacilities for industry were wholly absent.

Under the banking reforms introduced in May 1972 the state bank of Pakistan was accordedwider powers. It was authorized to remove directors or managerial personnel, if necessary andsupersede the board of directors of a banking company and appoint administrators during theperiod of such super session. It was also empowered to nominate directors on the board ofevery bank. As regard bank directors, it was provided that anyone defaulting in meeting hisobligations to bank would forfeit his directorship. Moreover, it was laid down that no personcould serve as director of a bank for more than six years continuously. Each bank was requiredto have a paid up capital of not less than 5 percent age of its deposits to be progressively buildup to 10 percent age over a period of time. The banks were also required to transfer 10percentage of their profit their reserves every years after the reserve became equal to the paidup capital. With a view to diversity the ownership of the banks, the banks were required to raisenew capital from the market. Unsecured loans to directors, their families or firms andcompanies, were totally prohibited.

The bank reforms also brought about the establishment of new institutions to achieve newobjectives.

A national credit consultative was setup under the supervision of the state bank withrepresentation from the government and the private sector. It was assigned the task ofdetermining of economy’s annual credit needs within the safe limits of monetary and creditexpansion with reference to the annual development plan. Such a credit plan was to cover thepublic and private sectors. Alongside the National credit council and Agricultural AdvisoryCommittee was formed to allocate agriculture credit for various purposes, to coordinate theoperation or the agriculture credit agencies and to oversee the flow of credit to the designatedtargets. A standing committee on exports in general and the new emerging exports in particular,was also established. With a view to encourage the banks to extend credit to small borrowers, acredit guarantee scheme was introduced under which the state bank under took to share anybonfire losses incurred by the commercial banks in case of small loans of advances toagriculture.

At the same time two financing institutions were established. The people’s Finance Corporationwas designed to provide finance to people of small means while the National DevelopmentFinance Corporation was setup of finance public sector owned and managed industries andenterprises.



Nationalization of Banks (1974)

The banking reforms turned to be transitional and interim step and when they were hardlyeighteen months old the government nationalized the banking systems, with the following mainobjectives.

To enable the government to use the capital concentrated in the hands of a few rich bankers forthe rapid economic development of the country and the more urgent social welfare objectives.

To distribute equitably credit too different classes sectors and regions.

To coordinate the banking policies in various area of feasible joint activity without eliminatinghealthy competition among banks.

The act passed for the nationalization of banks is known as the banks Nationalization Act 1974.

Thus under this act the state bank of Pakistan and all the commercial banks incorporated inPakistan and carrying business in or outside the country were brought under governmentownership with effect from Jan 1, 1974. The ownership, management and control of all Pakistanibanks stood transferred to and vested in the Federal government. The shareholders wereprovided compensation in the form of federal government bonds redeemable at par anytimewithin the period of fifteen years. Under the Nationalization act, the Chairman, Directors andExecutives of various banks, other than those appointed by federal government were removedfrom their offices and the central boards of the banks and all local bodies were dissolved.Pakistan banking council was established to coordinate the activities of the NationalizedCommercial banks. At the time of Nationalization on December31, 1973 there were following 14Pakistani commercial banks with 3323 offices allover Pakistan and 74 offices in foreigncountries:

National Banks of Pakistan

Habib Bank Limited

Habib Bank (Overseas) Limited

United Bank Limited

Muslim Commercial Bank Limited

Commerce Bank Limited

Standard Bank Limited



Australia Bank Limited

Bank of Bahawalpur Limited

Premium Bank Limited

Pak Bank Limited

Sarhad Bank Limited

Lahore Commercial Limited

Punjab Provincial Co-operative Bank Limited

The Pakistan banking council prepared a scheme for the recognition of banks. The bank(amalgamation) scheme 1974 was notified in April, providing for the amalgamation of thesmaller banks into bigger ones and the following five units:

1. National Bank Limited

2. Habib Bank Limited

3. United Bank Limited

4. Muslim Commercial Bank Limited

5. Allied Bank of Pakistan Limited

The first phase was completed on 30th June. 1974. When the Bank of Bahawalpur Limited wasmerged with the National Bank of Pakistan. The Premier Bank Limited with Muslim CommercialBank Limited, Sarhad Bank Limited and Pak Bank Limited were renamed as Allied Bank ofPakistan Limited.

The second phase was completed on 31st Dec.1974, when the Commerce Bank Limited mergedwith the United Bank limited.

The third and the final phase were completed on 30th June, 1975 when the Standard BankLimited was merged with Habib Bank Limited.

The nationalization was very smooth and gave very positive results.

The number of branches, which stood at 3397 on Dec31, 1973, reached on 7661 by the end ofJune 1992. The bank deposits which stood at Rs. 1925 crores at the end of 1973 went onincreasing very high.



1.9 Islamisation of Banking

Another major development in the history of Pakistan Banking System was the introduced ofinterest free banking in selected Commercial Banks with effect form Jan1, 1981. This followedthe effort to eliminated interest from the operation of Nation investment trust, the HouseBuilding Finance Corporation of Pakistan. Certain amendments were made in banking and otherlaws with the object of ushering in a new system of banking, which would confirm of Shariah. Anew law Modaraba Companies Ordinance 1980 was promulgated. Separate interest freecounters began to operate in all the nationalized commercial banks free counters began tooperate in all the nationalized commercial banks. The state bank provides finance againstparticipation term certificate and also against promissory notes supported by Modarabacertificate.

In order to cover interest free transactions certain banking definitions such as creditors, debtor,and advances credits and deposits were revised. Stipulations concerning form of business inwhich banking companies may engage may also have been modified schemes were introducedto provide interest free loans to formers and deserving students.

A private Limited Company named as Bankers Equity limited was incorporated in 1979 toprovide financial assistance to the industrial sector primarily on interest free basis.

A scheme to extend interest free productive loans to farmers and fisherman has also beenintroduced. Instead of interest, a system based on mark-up in price, exchange rate differential,and profit and loss sharing accounts were introduced.

Different financial schemes introduced in the Islamization process are:

Musharika Financing.

Hire Purchase Financing.

Modaraba Financing.

Specific Purpose Modaraba.

1.10 Dis-Investment and Deregulation of Banking – 1991

When it was realized that the role of public sector in the economy is over extended and thebanking sector has more earning potential in the private sector the process of privatizationbanking sector restarted in 1991 by the Muslim League Government. Muslim Commercial Bankwas Dis-invested in to two phases while ABL was sold to its employees. Since then allot ofinvestment is being made in the banking sector and several new banks were established and still



the process is going on. Now only NBP is government bank other than SBP. The performance ofthis bank will be analyzed and judged in the following chapters.

1.11 Interest Free Banking

A new concept of interest free banking was introduced in 1981 and by now it has beenestablished on sound footing and new trends and techniques are being implemented to makethis system result oriented. New products and their systematic consumption are makingPakistani banking comparable to their several modern counterparts anywhere in the developedworld.

Types of Banks

Primarily all banks gather temporarily idle money for the purpose of lending to otherand investment gain in the form of return, profits and dividends etc. however, due to the verityof resources of money and the diversity in lending and investment operations, banks have beenplace in various categories, such as

Commercial Bank Savings Bank Merchant Banks Mortgage Banks Consumer Bank Investment Bank Central Bank

Commercial Bank:

The commercial banks received deposits from the general public, which are repayableon demand upon written orders of the depositors. As their most distinctive feature thecommercial banks maintain the checking accounts for the constitutions.

Te commercial banks are also distinguished for providing short-term finance to trade,commerce and industry to enable these sectors to expand their productive activities



Merchant Banks:

Merchant banks are those, which have been mainly financing the domestic andinternational trade. During the late 18th and early 19th centuries the trade between countrieswas financed by bill of exchange by well-reputed merchant’s houses for which they wouldcharges a commission for their services

Savings Banks:

The basic purpose of these banks is to inculcate the habit of saving in the peoplethe savings banks deposits are not repayable upon only the written order of depositorbut the depositor of his agent has to appear personally at the saving banks to makewithdrawal and for this purpose he must present a pass book a certificate of deposit orsome similar documents to prove his right to receive his payments. Post office savingsbanks and savings accounts at national saving organizations are well known nationalsaving banks in Pakistan.

Mortgage Banks:

These banks mainly deal in loans for acquisition or construction of real estate againstthe securities of mortgage.

Consumer Banks :

These banks providing finance for purchasing consumption goods for the use of Brewers

Investment banks:

These banks assists business houses and governmental bodies to raise money throughthe sale of stocks and bond for usually long term purposes these banks perform the usualfunctions of raising deposits of idle money from the public and finance the business housesother bodies.



Central Banks:

Central banks occupy the unique position in banking structure of a country because they havebeen interested with the responsibility of controlling the money supply, interest rate, andfinancial market of a country for the purpose of economic development.



CHAPTER 2

THEORETICAL ASPECTS

RATIO ANALYSIS

2.1 Meaning and Definition of Ratio Analysis

Ratio analysis is a widely used tool of financial analysis. It is defined as thesystematic use of ratio to interpret the financial statements so that the strength andweaknesses of a firm as well as its historical performance and current financial conditioncan be determined. The term ratio refers to the numerical or quantitative relationshipbetween two variables.

2.2 Significance or Importance of Ratio Analysis

It helps in evaluating the firms performance

With the help of ratio analysis conclusion can be drawn regarding severalaspects such as financial health, profitability and operational efficiency of theundertaking. Ratio points out the operating efficiency of the firm i.e. whetherthe management has utilized the firm’s assets correctly, to increase theinvestor’s wealth. It ensures a fair return to its owners and secures optimumutilization of firms assets

It helps in inter-firm comparison

Ratio analysis helps in inter-firm comparison by providing necessary data. Aninter firm comparison indicates relative position. It provides the relevant data for thecomparison of the performance of different departments. If comparison shows avariance, the possible reasons of variations may be identified and if results are negative,the action may be initiated immediately to bring them in line.

It simplifies financial statement



The information given in the basic financial statements serves no useful Purposeunless it s interrupted and analyzed in some comparable terms. The ratio analysis is oneof the tools in the hands of those who want to know something more from the financialstatements in the simplified manner.

It helps in determining the financial position of the concern

Ratio analysis facilitates the management to know whether the firmsfinancial position is improving or deteriorating or is constant over the years bysetting a trend with the help of ratios The analysis with the help of ratio analysiscan know the direction of the trend of strategic ratio may help the managementin the task of planning, forecasting and controlling.

It is helpful in budgeting and forecasting

Accounting ratios provide a reliable data, which can be compared, studied andanalyzed. These ratios provide sound footing for future prospectus. The ratios can alsoserve as a basis for preparing budgeting future line of action.

Liquidity position

With help of ratio analysis conclusions can be drawn regarding the Liquidityposition of a firm. The liquidity position of a firm would be satisfactory if it is able tomeet its current obligation when they become due. The ability to met short termliabilities is reflected in the liquidity ratio of a firm.

Long term solvency:

Ratio analysis is equally for assessing the long term financial ability of the Firm.The long term solvency is measured by the leverage or capital structure and profitabilityratio which shows the earning power and operating efficiency, Solvency ratio showsrelationship between total liability and total assets.

Operating efficiency:



Yet another dimension of usefulness or ratio analysis, relevant from the Viewpoint of management is that it throws light on the degree efficiency in the variousactivity ratios measures this kind of operational efficiency.

2.3 Classification of Ratios

Different ratios are used for different purposes; these ratios can be groupedinto various classes according to the financial activity. Ratios are classified into fourbroad categories.

2.3.1 Liquidity Ratio

2.3.2 Leverage Ratio

2.3.3 Profitability Ratio

2.3.4 Activity Ratio

2.3.1 Liquidity Ratio:

Liquidity ratio measures the firms ability to meet its current obligations i.e. ability to payits obligations and when they become due. Commonly used ratios are:

2.3.1.1 Current Ratio2.3.1.2 Acid Test Ratio or Quick Ratio

2.3.1.1 Current Ratio

Current ratio is the ratio, which express relationship between current asset and currentliabilities. Current asset are those which can be converted into cash within a short period oftime, normally not exceeding one year. The current liabilities which are short- termmaturing to be met.

Current Assets

Current Ratio =

Current liabilities



2.3.1.2 Acid Test Ratio or Quick Ratio:

The acid test ratio is a measure of liquidity designed to overcome the

Defect of current ratio. It is often referred to as quick ratio because it is ameasurement of firm’s ability to convert its current assets quickly into cash in orderto meet its current liabilities.

Current Asset - Inventories

Acid Test Ratio =

Current liabilities

2.3.2 Leverage or Capital Structure Ratio:

Leverage or capital structure ratios are the ratios which indicate the relativeinterest of the owners and the creditors in an enterprise. These ratios indicate thefunds provided by the long-term creditors and owners.

To judge the long term financial position of the firm following ratios are applied.

2.3.2.1 Debt – Equity Ratio

2.3.2.2 Total Debt Ratio

2.3.2.1 Debt – Equity Ratio

Debt-equity ratio which expresses the relationship between debt and equity.This ratio explains how far owned funds are sufficient to pay outside liabilities. It iscalculated by following formula:

Long Term + Short Term Debts + Current Liabilities

Debt Equity Ratio =

Net Worth



2.3.2.2 Total Debt Ratio

This ratio explains how far owned and borrowed funds are sufficient to pay debt of afirm

Long Term + Short Term Borrowing + Current Liabilities

Total Debt Ratio =

Capital employed

2.3.3 Profitability Ratios

Profitability ratio are the best indicators of overall efficiency of the businessconcern, because they compare return of value over and above the value put intobusiness with sales or service carried on by the firm with the help of assetsemployed. Profitability ratio can be determined on the basis of:

1. Sales2. Investment

2.3.3.1 Profitability Ratios Related to Sales:

2.3.3.1.1 Gross Profit to Sales Ratio2.3.3.1.2 Net Profit to Sales Ratio or Net Profit of Margin.

2.3.3.1.1 Gross Profit to Sales Ratio

The gross profit to sales ratio establishes relationship between gross profitand sales to measure the relative operating efficiency of the firm to reflect pricingpolicy.

Sales - Cost of Goods Sold

Gross Profit to Sales Ratio = * 100

Sale



2.3.3.1.2 Net Profit Margin

The net margin indicates the management’s ability to earn sufficient profiton sales to earn sufficient profit on sales not only to cover all revenue operatingexpenses of the business, the cost of borrowed funds and the cost of goods or servicing,but also to have sufficient margin to pay reasonable comparison to shareholders ontheir contributions to the firm.

Net profit after tax and interest

Net Profit Margin = * 100

Sales

2.3.3.2 Profitability Ratios Related to Investments:

2.3.3.2.1 Return on Assets2.3.3.2.2 Return on Capital Employed

2.3.3.2.1 Return on Assets

The profitability ratio here measures the relationship between net profit andassets.

Net Profit after Tax

Return on Assets =

Fixed Assets



2.3.3.2.2 Return on Capital Employed:

Net Profit after Taxes

Return on Capital Employed =

Total Capital Employed

2.3.4 Activity Ratios or Efficiency Ratios:

Activity ratio are sometimes are called efficiency ratios. Activity ratios areconcerned with how efficiently the assets of the firm are managed.

These ratios express relationship between level of sales and the investment invarious assets inventories, receivables, fixed assets etc.

The important activity ratios are as follows:

2.3.4.1 Inventory Turnover Ratio

2.3.4.2 Debt Turnover Ratio

2.3.4.3 Average Collection Period Ratio

2.3.4.1 Inventory Turnover Ratio:

Raw Materials Consumed

Inventory Turnover Ratio =

Average Stock of Raw Materials



2.3.4.2 Debt Turnover Ratio

This ratio shows how quickly the debtors are converted into cash

Total Sales

Debt Turnover Ratio =

Debtors

2.3.4.3 Average Collection Period Ratio

This ratio indicates how quickly the inventory is converted into cash.

Days in a Year

Average Collection Period Ratio =

Debtors Turnover

2.4 Parties Interested In Ratio Analysis

2.4.1 Trade creditors

Trade creditors are interested in firm's ability to meet their claims over a very shortperiod of time. Their analysis will, there fore confine to the evaluation of the firm'sliquidity positions.

2.4.2 Suppliers of long-term debt

Suppliers of long-term debt on the other hand are concerned with firm's long-term solvency andsurvival. They analysis the firms profitability over time, its ability to generate cash to be able topay interest and repay interest and repay principal and the relationship between various sourceof funds. (Capital structure relationship).

Long-term creditors do analyses the historical financial statements but they place moreemphasis on the firm's projected financial statement to make analysis about its future solvencyand profitability.

2.4.3



Investors

Investors who have invested their money in the firms share are most concerned about the firmsteady growth in earning. As such, they concentrate on the analysis of the firm's present andfuture profitability. They are also interested in the firms financial structure of the extent itinfluence the firms earning ability and risk.

2.4.4 Management.

An organization would be interested in every aspect of the financial analysis. It is their overallresponsibility to see that the resources of the firm are used most effectively and efficiently andthat the firm's financial condition is sound.

So thus management employee financial analysis for the purpose of internal control and tobetter provide what capital supplier seeks in financial condition and performance from thebusiness and from an internal control standpoint, management needs to take financial analysisin order to plan and control effectively.

1. RATIO ANALYSIS:

Financial ratios are useful indicators of a firm's performance and financial situation.

Financial ratios can be used to analyze trends and to compare the firm's financials to

those of other firms. Ratio analysis is the calculation and comparison of ratios which are

derived from the information in a company's financial statements. Financial ratios are

usually expressed as a percent or as times per period. Ratio analysis is a widely used tool

of financial analysis. It is defined as the systematic use of ratio to interpret the financial

statements so that the strength and weaknesses of a firm as well as its historical

performance and current financial condition can be determined. The term ratio refers to

the numerical or quantitative relationship between two variables. With the help of ratio

analysis conclusion can be drawn regarding several aspects such as financial health,

profitability and operational efficiency of the undertaking. Ratio points out the

operating efficiency of the firm i.e. whether the management has utilized the firm’s



assets correctly, to increase the investor’s wealth. It ensures a fair return to its owners

and secures optimum utilization of firm’s assets. Ratio analysis helps in inter-firm

comparison by providing necessary data. An inter firm comparison indicates relative

position. It provides the relevant data for the comparison of the performance of

different departments. If comparison shows a variance, the possible reasons of

variations may be identified and if results are negative, the action may be initiated

immediately to bring them in line. Yet another dimension of usefulness or ratio analysis,

relevant from the View point of management is that it throws light on the degree

efficiency in the various activity ratios measures this kind of operational efficiency.

1.1 Liquidity Ratios 1.2 Leverage Ratios

1.3 Profitability Ratios 1.4 Activity Ratios

1.5 Market Ratios 1.6 Statements of Cash Flow



Ratio Analysis

COMPARATIVE ANALYSIS OF HBL VS. BANK AL FALAH

1.1 Liquidity Ratios

Liquidity ratios measure a firm’s ability to meet its current obligations. These include:

Current Ratio:

Current Ratio = Current Assets / Current Liabilities

This ratio indicates the extent to which current liabilities are covered by those assets expected

to be converted to cash in the near future. Current assets normally include cash, marketable

securities, accounts receivables, and inventories. Current liabilities consist of accounts payable,

short-term notes payable, current maturities of long-term debt, accrued taxes, and other

accrued expenses. Current assets are important to businesses because they are the assets that

are used to fund day-to-day operations and pay ongoing expenses.

HABIB BANK

BANK AL FALAH

Year 2006 2007 2008

Current Assets 575611106 671597594 731954693

Current Liabilities 480455832 566659483 631948038

Current ratio 1.20 1.19 1.16

Year 2006 2007 2008

Current Assets 265182551 316972828 335217471


Current ratio 1.06 1.10 1.06



Interpretation

HABIB BANK

The current ratio for the year 2006, 2007 & 2008 is 1.20, 1.19 & 1.16 respectively, compared to

standard ratio 2:1 this ratio is lower which shows low short term liquidity efficiency at the same

time holding less than sufficient current assets mean inefficient use of resources

BANK AL FALAH

The ratios for the last 3 years are 1.06, 1.10 & 1.06, shows below standard of 2:1 which means

efficient use of funds but at the risk of low liquidity.

Sales to Working Capital:

Sales to Working Capital = Sales / Working Capital

Sales to working capital give an indication of the turnover in working capital per year. A

low working capital indicates an unprofitable use of working capital.

HABIB BANK

BANK AL FALAH

Year 2006 2007 2008

Sales 43685740 43685740 63305033

Working Capital 95155274 104938111 100006655

Sales to Working 0.5 times 0.5 times 0.6 times

Year 2006 2007 2008

Sales 21191470 25783871 31046583

Working Capital 15276529 30128884 19741302

Sales to Working 1.38 0.85 1.57



Interpretation:

HABIB BANK:

This liquidity ratio for the years 2006, 2007 & 2008 is 0.5,0.5 & 0.6 times respectively, compared

to standard ratio 2:1 this ratio is lower which shows low short term liquidity efficiency at the

same time holding less than sufficient current assets mean inefficient use of resources

BANK AL FALAH:

The ratios for the last 3 years are 1.06, 1.10 & 1.06, shows below standard of 2:1 which means

efficient use of funds but at the risk of low liquidity.

Working Capital:

Working Capital = Current Assets – Current Liabilities

A measure of both a company's efficiency and its short-term financial health. Positive working

capital means that the company is able to pay off its short-term liabilities. Negative working

capital means that a company currently is unable to meet its short-term liabilities with its

current assets (cash, accounts receivable and inventory).

Also known as "net working capital", or the "working capital ratio".

HABIB BANK

Year 2006 2007 2008

Current Assets 575611106 671597594 731954693


Working Capital 95155274 104938111 100006655



BANK AL FALAH

Interpretation:

HABIB BANK:

It is very clear from the above calculations that the working capital of the bank is gradually

increasing over the years, which shows good short term liquidity efficiency.

BANK AL FALAH:

This ratio increased to a great extent in 2007, almost double of the year 2006 but later on in the

year 2008 it went down again.

1.2 Leverage Ratios:

By using a combination of assets, debt, equity, and interest payments, leverage ratio's are used

to understand a company's ability to meet it long term financial obligations. Leverage ratios

measure the degree of protection of suppliers of long term funds. The level of leverage depends

on a lot of factors such as availability of collateral, strength of operating cash flow and tax

treatments. Thus, investors should be careful about comparing financial leverage between

companies from different industries. For example companies in the banking industry naturally

operates with a high leverage as collateral their assets are easily collateralized.

These include:

Time Interest Earned:

TIE Ratio = EBIT / Interest Charges

The interest coverage ratio tells us how easily a company is able to pay interest expenses

associated to the debt they currently have. The ratio is designed to understand the amount of

Year 2006 2007 2008

Current Assets 265182551 316972828 335217471


Working Capital 15276529 30128884 19741302



interest due as a function of company’s earnings before interest and taxes (EBIT). This ratio

measures the extent to which operating income can decline before the firm is unable to meet its

annual interest cost.

HABIB BANK

BANK AL FALAH

Interpretation

HABIB BANK

We can see from this ratio analysis that, this company has covered their interest expenses 2.43

times in 2006, 1.79 times in 2007 and 1.8 times in 2008. It means they have performed pretty

much same in 2007 and 2008, but has taken a different look in 2006. As in 2006 they issued a

little high number of long-term loans and does not have good liquidity position, their EBIT

became high thus making TIE a little high as well

Year 2006 2007 2008

EBIT 32044524 34298574 48559935

Interest Charges 13204037 19153957 19153957

TIE ratio 2.43 1.79 1.83

Year 2006 2007 2008

EBIT 17798831 21156515 22125914

Interest charges 15232886 16620963 20331194

TIE ratio 1.16 1.27 1.08



BANK AL FALAH

We can see that, this company has covered their interest expenses 1.16 times in 2006, 1.27

times in 2007 and 1.08 times in 2008. It means they haven’t improved in the past years.

Debt Ratio:

Debt Ratio = Total Debt / Total Assets

The ratio of total debt to total assets, generally called the debt ratio, measures the percentage

of funds provided by the creditors. The proportion of a firm's total assets that are being financed

with borrowed funds. The debt ratio is calculated by dividing total long-term and short-term

liabilities by total assets. The higher the ratio, the more leverage the company is using and the

more risk it is assuming. Assets and liabilities are found on a company's balance sheet.

HABIB BANK

BANK AL FALAH

Year 2006 2007 2008

Total debt 536848102 628754092 682747953

Total Assets 590291468 691991521 757928,89

Debt Ratio 0.91 0.91 0.9

Year 2006 2007 2008

Total debt 263443596 312675308 331946025

Total Assets 275685541 328895152 348990764

Debt Ratio 0.95 0.95 0.95



Interpretation:

HABIB BANK

Calculating the debt ratio, we came to see that this company is highly leveraged one

BANK AL FALAH

Calculating the debt ratio, we came to see that this company is highly leveraged one.

Debt to Equity Ratio:

Debt to Equity Ratio = Total debt / Total Equity

The debt to equity ratio is the most popular leverage ratio and it provides detail around the

amount of leverage (liabilities assumed) that a company has in relation to the monies provided

by shareholders. As you can see through the formula below, the lower the number, the less

leverage that a company is using. The debt to equity ratio gives the proportion of a company (or

person's) assets that are financed by debt versus equity. It is a common measure of the long-

term viability of a company's business and, along with current ratio, a measure of its liquidity, or

its ability to cover its expenses. As a result, debt to equity calculations often only includes long-

term debt rather than a company's total liabilities. A high debt to equity ratio implies that the

company has been aggressively financing its activities through debt and therefore must pay

interest on this financing.

HABIB BANK

Year 2006 2007 2008

Total debt 536848102 628754092 682747953

Total Equity 45177664 55063125 71280902

Debt To Equity Ratio 11.88 11.42 9.58



BANK AL FALAH

Interpretation

HABIB BANK

We can see from the above calculations that this ratios continuously decreasing in the last three

years.

BANK AL FALAH

Calculating this debt ratio we can see that it was 24.91, 22.71 & 22.72 in the year 2006, 2007 &

2008 respectively. This shows a decline in the ratio over the years.

Current Worth / Net worth Ratio:

Current Worth to Net worth Ratio= Current Worth / Net worth Ratio

We can calculate current worth and net worth by using following formulas:

Current Worth = Total Current Assets – Total Current Liabilities

Net Worth = Total Assets - Total Liabilities

HABIB BANK

Year 2006 2007 2008

Total debt 263443596 312675308 331946025

Total Equity 10572605 13766673 14608523

Debt To Equity Ratio 24.91 22.71 22.72

Year 2006 2007 2008

Current Worth 95155274 104938111 100006655

Net Worth 53443366 63237429 75180436

Current Worth to Net 1.78 1.66 1.33



BANK AL FALAH

Interpretation

HABIB BANK

We can see from the above calculations that this ratios continuously decreasing in the last three

years. In 2006 it was 1.78, in 2007 it was 1.66 and in 2008 it was 1.33.

BANK AL FALAH

Analysis shows that this ratio was as high as 1.2 among three years. However, it declined to 1.15

in the year 2008. In 2007 the ratio somewhat increased to 1.85.

Total Capitalization Ratio:

Total Capitalization Ratio = Long-term debt / long-term debt + shareholders' equity

The capitalization ratio measures the debt component of a company's capital structure, or capitalization

(i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations

and growth. Long-term debt is divided by the sum of long-term debt and shareholders' equity. This ratio is

considered to be one of the more meaningful of the "debt" ratios - it delivers the key insight into a

company's use of leverage.

Year 2006 2007 2008

Current Worth 15276529 30128884 19741302

Net Worth 12241945 16219844 17044739

Current Worth to Net 1.247 1.85 1.15



HABIB BANK

BANK AL FALAH

Interpretation

HABIB BANK

It is obvious from the above calculations that there is a gradual fall in this ratio over the years.

BANK AL FALAH

The ratios for the last 3 years are 0.56, 0.65 and 0.52. Shows below standard of 2:1

Long term Assets versus Long term Debt:

Long term Assets versus Long term Debt = Long Term Assets / Long Term Debts

HABIB BANK

Year 2006 2007 2008

Long Term debt56392270 62094609 50799915

Long term debt + Equity 101569934 117157734 122080817

Capitalization Ratio 0.56 0.53 0.42

Year 2006 2007 2008

Long Term debt13537574 25831364 16469856

Long term debt + Equity24110179 39598037 31078379

Capitalization Ratio0.56 0.65 0.52

Year 2006 2007 2008

Long Term Assets 14680362 20393927 25973696

Long term debt 56392270 62094609 50799915

L.T Assets /L.T Debts 0.26 0.33 0.51



BANK AL FALAH

Debt Coverage Ratio:

Debt Coverage Ratio = Net Operating Income / Total Debt

HABIB BANK

BANK AL FALAH

Year 2006 2007 2008

Long Term Assets 13773293 11922324 10502990

Long term debt 13537574 25831364 16469856

L.T Assets /L.T Debts 1.01 0.46 0.63

Year 2006 2007 2008

Net Operating Income 12074762 5121453 5655568

Total Debt 536848102 628754092 682747953

Debt Coverage Ratio 0.02 0.008 0.0083

Year 2006 2007 2008

Net Operating Income 14574192 15118049 16880487

Total Debt 263443596 312675308 331946025

Debt Coverage Ratio 0.055321869 0.048350633 0.0508531



1.3 Profitability Ratios:

Profitability is the net result of a number of policies and decisions. This section of the discusses

the different measures of corporate profitability and financial performance. These ratios, much

like the operational performance ratios, give users a good understanding of how well the

company utilized its resources in generating profit and shareholder value. The long-term

profitability of a company is vital for both the survivability of the company as well as the benefit

received by shareholders. It is these ratios that can give insight into the all important "profit".

Profitability ratios show the combined effects of liquidity, asset management and debt on

operating results. These ratios examine the profit made by the firm and compare these figures

with the size of the firm, the assets employed by the firm or its level of sales. There are four

important profitability ratios that I am going to analyze:

Net Profit Margin:

Net Profit margin = Net Profit / Sales x 100

Net Profit Margin gives us the net profit that the business is earning per dollar of sales.

This margin indicates the profit after all the costs have been incurred it shows that what

% of turnover is represented by the net profit. An increase in the ratios indicates that a

firm is producing higher net profit of sales than before.

HABIB BANK

Year 2006 2007 2008

Net Profit 12700315 10084037 15614020

Sales 43685740 50481021 63305033

Net Profit Margin 29.07% 19.97% 24.66%



BANK AL FALAH

Interpretation

HABIB BANK

Therefore, the Net Profit Margin was 8.31% in 2006, increase to 12.1% in 2007 and then

decrease to 4% in 2008

BANK AL FALAH

Therefore, the Net Profit Margin was 29.07% in 2006, decrease to 19.97% in 2007 and

then again increased to 24.66% in 2008

Operating Income Margin:

Operating Income Margin = Operating Income x 100

Net Sales

Operating Income Margin =

Net mark-up / interest income after provisions + Mark-up / return / interest expensed - Total

non mark-up / interest expenses

HABIB BANK

Year 2006 2007 2008

Net Profit 1762691 3130229 1301301

Sales 21191470 25783871 31046583

Net Profit Margin 8.31% 12.1% 4%

Year 2006 2007 2008

Operating Income 25278799 24275410 37738818

Net Sales 43685740 50481021 63305033

Operating Income 57.9% 48% 59.6%



BANK AL FALAH

Return on Assets:

Return on Assets (ROA) = Profit after Taxation / Average Total assets x 100

ROA, A measure of a company's profitability, equal to a fiscal year's earnings divided by its total

assets, expressed as a percentage. This is an important ratio for companies deciding whether or

not to initiate a new project. The basis of this ratio is that if a company is going to start a project

they expect to earn a return on it, ROA is the return they would receive. Simply put, if ROA is

above the rate that the company borrows at then the project should be accepted, if not then it

is rejected.

HABIB BANK

BANK AL FALAH

Year 2006 2007 2008

Operating Income 14574192 15118049 16880487

Net Sales 21191470 25783871 31046583Operating Income

0.687738604 0.586337443 0.5437148

Year 2006 2007 2008

Net income 12700315 10084037 15614020

Total Average assets 559592686.5 641141494.5 724959955

ROA 2.27% 1.57% 2.15%

Year 2006 2007 2008

Net income 1762691 3130229 1301301

Total Average assets 137966927.5 302290346.5 338942958ROA

1.27% 1.01% 0.038%



Interpretation

HABIB BANK

Return on assets decreased in 2007 and 2008 and it was maximum in year 2006. This

may have occurred because Square used more debt financing in 2006 compared to 2007

and 2008 which resulted in more interest cost and brought the Net income down.

.

BANK AL FALAH

Return on assets decreased gradually throughout the years.

Return on Equity (ROE):

Return on Total Equity = Profit after taxation x 10

Total Equity

Return on Equity measures the amount of Net Income earned by utilizing each dollar of Total

common equity. It is the most important of the “Bottom line” ratio. By this, we can find out how

much the shareholders are going to get for their shares. This ratio indicates how profitable a

company is by comparing its net income to its average shareholders' equity. The return on

equity ratio (ROE) measures how much the shareholders earned for their investment in the

company. The higher the ratio percentage, the more efficient management is in utilizing its

equity base and the better return is to investors.

HABIB BANK

Year 2006 2007 2008

Net income 12700315 10084037 15614020

Total Equity 45177664 55063125 71280902ROE 28.11% 18.31% 21.9%



BANK AL FALAH

Interpretation

HABIB BANK

The Return on Equity was maximum in 2006 but decreased in 2007 and went down

more in 2008. This again may have happened due to the issue of more long-term debt in

2007 and 2008.

BANK AL FALAH

The Return on Equity was maximum in 2007 but decreased to an extent in the following years

2007 and 2008. This again may have happened due to the issue of more long-term debt in 2007

and 2008.

Year 2006 2007 2008

Net income 1762691 3130229 1301301

Total Equity 10572605 13766673 14608523ROE

16.6% 22.5% 8.9%



DuPont Return on Assets:

DuPont Return on Assets = Profit after taxation x 100

Total Assets

HABIB BANK

BANK AL FALAH

Operating Assets Turnover:

Operating Assets Turnover = Operating Assets x 100

Net Sales

HABIB BANK

BANK AL FALAH

Year 2006 2007 2008

Net Profit 12700315 10084037 15614020

Total assets 590291468 691991521 757928389

DuPont ROA 2.15% 1.46% 2.06%

Year 2006 2007 2008

Net Profit 1762691 3130229 1301301

Total assets 275685541 328895152 348990764

DuPont ROA 0.006 0.009 0.003

Year 2006 2007 2008

Operating Assets 94230402 97259620 110591707

Net Sales 43685740 50481021 63305033

Operating Assets Turnover 192.7% 192.7% 174.70%

Year 2006 2007 2008



Detail of Operating Assets of Habib Bank Limited

2008

Operating Assets:

Cash and balances with treasury banks 56533134

Balances with other banks 39307321

Operating fixed assets 14751252

110591707

2007

Operating Assets:




97259620

2006

Operating Assets:




94,230,402


Net Sales 21191470 25783871 31046583Operating Assets Turnover

2.41% 2.31% 2.19%



Detail of Operating Assets of Bank Al Falah Limited

2008

Operating Assets:




51094302

2007

Operating Assets:




59739440

2006

Operating Assets:




68041671



Return on Operating Assets:

Return on Operating Assets = Profit after Taxation x 100

Operating assets

HABIB BANK

BANK AL FALAH

Sales to Fixed Assets:

This ratio is indicates that how much sales are contributed by investment in fixed Assets.

Sales to Fixed Assets = Net Sales / Fixed Assets

HABIB BANK

Year 2006 2007 2008

Net Profit 12700315 10084037 15614020


Return on Operating Assets 13.48% 10.37% 11.19%

Year 2006 2007 2008

Net Profit 1762691 3130229 1301301


Return on Operating Assets 0.034 0.052 0.019

Year 2006 2007 2008

Net Sales 43685740 50481021 63305033

Fixed Assets 11954876 13780555 14751252



BANK AL FALAH

1.4 Activity Ratios:

Activity ratio are sometimes are called efficiency ratios. Activity ratios are concerned with how

efficiency the assets of the firm are managed. These ratios express relationship between level of

sales and the investment in various assets inventories, receivables, fixed assets etc.

Total Asset Turnover:

Total Asset Turnover = Total Sales / Total Assets

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales

in dollars by assets in dollars. Asset turnover measures a firm's efficiency at using its assets in

generating sales or revenue - the higher the number the better. It also indicates pricing strategy:

companies with low profit margins tend to have high asset turnover, while those with high profit

margins have low asset turnover.

HABIB BANK

Sales to Fixed Assets 3.65 times 3.66 times 3.66 times

Year 2006 2007 2008

Net Sales 21191470 25783871 31046583

Fixed Assets 10502990 11922324 13773293

Sales to Fixed Assets 2.017 times 2.16 times 2.25 times

Year 2006 2007 2008

Total Sales 43685740 50481021 63305033

Total Assets 590291468 691991521 757928389

Total Asset Turnover 0.07 0.07 0.08



BANK AL FALAH

Interpretation

HABIB BANK

The Return on Equity was maximum in 2006 but decreased in 2007 and went down

more in 2008. This again may have happened due to the issue of more long-term debt in

2007 and 2008.

BANK AL FALAH

The Return on Equity was maximum in 2007 but decreased to an extent in the following years

2007 and 2008. This again may have

Year 2006 2007 2008

Total Sales 21191470 25783871 31046583

Total Assets 275685541 328895152 348990764

Total Asset Turnover 0.07 0.07 0.08



1.5 Market Ratio:

Market Value Ratios relate an observable market value, the stock price, to book values obtained

from the firm's financial statements.

Dividend per Share – DPS:

Dividend per Share = Total amount of Dividend

Number of outstanding shares

Per share capital = 10 per share

Or

No. of shares outstanding = share capital / 10

HABIB BANK

BANK AL FALAH

Note: There is no dividend paid by the bank in the year 2006 and 2007

Earning Per Share- EPS:

Year 2006 2007 2008

Total amount of Dividend 691350 1381000 2730251

Number of Shares 690000 690000 759000

Dividend per Share 1.0019 2.0014 3.597

Year 2006 2007 2008

Total amount of Dividend 00 00 975000

Number of Shares 500000 650000 799500

Dividend per Share 00 00 1.21



Earning Per Share = Profit after Taxation

Number of Shares

The portion of a company's profit allocated to each outstanding share of common

stock. Earnings per share serve as an indicator of a company's profitability. Earnings per share

are generally considered to be the single most important variable in determining a share's

price. It is also a major component used to calculate the price-to-earnings valuation ratio.

HABIB BANK

BANK AL FALAH

Price / Earning Ratio:

Price / Earning Ratio = Stock Price Per Share

Earning Per Shares

The Price-Earnings Ratio is calculated by dividing the current market price per share of the stock

by earnings per share (EPS). (Earnings per share are calculated by dividing net income by the

number of shares outstanding.)

The P/E Ratio indicates how much investors are willing to pay per dollar of current earnings. As

such, high P/E Ratios are associated with growth stocks. (Investors who are willing to pay a high

Year 2006 2007 2008

Profit after Taxation 12700315 10084037 15614020

Number of Shares 690000 690000 759000

Earning Per Share 18.41 14.61 20.57

Year 2006 2007 2008

Profit after Taxation 1762691 3130229 1301301

Number of Shares 500000 650000 799500

Earning Per Share 3.525 4.815 1.627



price for a dollar of current earnings obviously expect high earnings in the future.) In this

manner, the P/E Ratio also indicates how expensive a particular stock is. This ratio is not

meaningful, however, if the firm has very little or negative earnings. The Price-Earnings Ratio is

calculated by dividing the current market price per share of the stock by earnings per share

(EPS). (Earnings per share are calculated by dividing net income by the number of shares

outstanding.) The P/E Ratio indicates how much investors are willing to pay per dollar of current

earnings. As such, high P/E Ratios are associated with growth stocks. (Investors who are willing

to pay a high price for a dollar of current earnings obviously expect high earnings in the future.)

In this manner, the P/E Ratio also indicates how expensive a particular stock is. This ratio is not

meaningful, however, if the firm has very little or negative earnings.

HABIB BANK

BANK AL FALAH

Interpretation

HABIB BANK

Year 2006 2007 2008

Stock price per share 10 10 10

EPS 18.41 14.61 20.57

Price / Earning Ratio 0.54 0.68 0.49

Year 2006 2007 2008

Stock price per share 10 10 10

EPS 3.525 4.815 1.627

Price / Earning Ratio 2.83 2.07 6.14



The P/E ratio was 0.54 times in 2006 and increased further to as high as 0.68 times in

the following year. However, in 2008 it declined to 0.49 times which is an alarming

signal for the potential investors.

BANK AL FALAH

The P/E ratio was 2.83 times in 2006 and decreased a little bit in 2007. However, in 2008 it

increased as much higher than before to 6.14 times.



Dividend Payout Ratio:

Dividend Payout Ratio = Dividend per Share

Earning per Share

The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea

of how well earnings support the dividend payments. More mature companies tend to have a

higher payout ratio. This ratio identifies the percentage of earnings (net income) per common

share allocated to paying cash dividends to shareholders. The dividend payout ratio is an

indicator of how well earnings support the dividend payment.

HABIB BANK

BANK AL FALAH

Dividend Yield:

Dividend Yield = Dividend per Share

Share Price

Year 2006 2007 2008

DPS 1.0019 2.0014 3.597

EPS 18.41 14.61 20.57

Dividend Payout Ratio 0.0544 0.137 0.175

Year 2006 2007 2008

DPS 00 00 1.21

EPS 3.525 4.815 1.627

Dividend Payout Ratio 00 00 0.74



Financial ratio that shows how much a company pays out in dividends each year relative to its

share price. In the absence of any capital gains, the dividend yield is the return on investment

for a stock. A stock's dividend yield is expressed as an annual percentage and is calculated as the

company's annual cash dividend per share divided by the current price of the stock. The

dividend yield is found in the stock quotes of dividend-paying companies. Investors should note

that stock quotes record the per share dollar amount of a company's latest quarterly declared

dividend. This quarterly dollar amount is annualized and compared to the current stock price to

generate the per annum dividend yield, which represents an expected return.

HABIB BANK

BANK AL FALAH

Book Value per Share:

Book Value per Share = Shareholders’ Equity

Share Capital

This is defined as the Common Shareholder's Equity divided by the Shares Outstanding at the

end of the most recent fiscal quarter. It is the Indication of the net worth of the corporation.

Year 2006 2007 2008

DPS 1.0019 2.0014 3.597

Share Price 10 10 10

Dividend Yield 0.10019 0.20014 0.3597

Year 2006 2007 2008

DPS 00 00 1.21

Share Price 10 10 10

Dividend Yield 00 00 0.121



Somewhat similar to the earnings per share, but it relates the stockholder's equity to the

number of shares outstanding, giving the shares a raw value. Comparing the market value to the

book value can indicate whether or not the stock in overvalued or undervalued.

HABIB BANK

BANK AL FALAH

1.6 Statement of Cash Flow:

Cash flow ratios indicate liquidity, borrowing capacity or profitability. This section of the

financial ratio looks at cash flow indicators, which focus on the cash being generated in terms of

how much is being generated and the safety net that it provides to the company. These ratios

can give users another look at the financial health and performance of a company.

Operating Cash Flow to Total Debt:

Operating Cash Flow to Total Debt = Operating Cash Flow/Total Debt

This coverage ratio compares a company's operating cash flow to its total debt, which, for

purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of

long-term debt and long-term debt. This ratio provides an indication of a company's ability to

Year 2006 2007 2008

Equity 45177664 55063125 71280902

Share Capital 6900000 6900000 7590000

Book Value per Share 6.5 7.98 9.39

Year 2006 2007 2008

Equity 10572605 13766673 14608523

Share Capital 5000000 6500000 7995000

Book Value per Share 2.11 2.11 1.82



cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the

better the company's ability to carry its total debt.

HABIB BANK

BANK AL FALAH

Operating Cash Flow per Share:

Operating Cash Flow per Share = Operating cash flow / Total Shares

HABIB BANK

Year 2006 2007 2008

Operating Cash flow 17851517 56224065 18231677

Total Debts 536848102 628754092 682747953

Operating Cash Flow to T.Debt 0.033 0.089 0.027

Year 2006 2007 2008


Total Debts 263443596 312675308 331946025

Operating Cash Flow to T.Debt 0.029 0.126 0.007

Year 2006 2007 2008


Total Shares 690000 690000 759000

Operating Cash Flow per Share 25.87 81.48 24.02



BANK AL FALAH

.

2. Common Size Analysis (Vertical and Horizontal):

The term "trend analysis" refers to the concept of collecting information and attempting to spot

a pattern, or trend, in the information. In some fields of study, the term "trend analysis" has

more formally-defined meanings. Although trend analysis is often used to predict future events,

it could be used to estimate uncertain events in the past. Financial statement information is

used by both external and internal users, including investors, creditors, managers, and

executives. These users must analyze the information in order to make business decisions, so

understanding financial statements is of great importance. Several methods of performing

financial statement analysis exist. I will discuss two of these methods: horizontal analysis and

vertical analysis.

2.1 Horizontal Analysis

Methods of financial statement analysis generally involve comparing certain information. The

horizontal analysis compares specific items over a number of accounting periods. For example,

accounts payable may be compared over a period of months within a fiscal year, or revenue

may be compared over a period of several years. It is a procedure in fundamental analysis in

which an analyst compares ratios or line items in a company's financial statements over a

certain period of time. The analyst will use his or her discretion when choosing a particular

timeline; however, the decision is often based on the investing time horizon under

consideration.

Year 2006 2007 2008


Total Shares 500000 650000 799500

Operating Cash Flow per Share 15.70 60.99 3.12



HORIZONTAL ANALYSIS

HABIB BANK

BALANCE SHEET

AS ON DEC 31 2008, 2007 & 2006

(Rupees in ‘000’) Horizontal Analysis

2008 2007 2006

ASSETS 2008 2007 2006

Cash and balances

with treasury banks56533134 55487664 46310478 122.07 119.8 100

Balances with other

banks39307321 27020704 35965048 109.29 75.13 100

Lending to financial

institutions6193787 1628130 6550128 94.56 24.86 100

Investments 13814592 177942251 119587476 11.552 148.8 100

Advances 456355507 382172734 349432685 130.6 109.4 100

Other assets 35419252 27346111 17765291 199.37 153.9 100

Operating fixed

assets14751252 13780555 11954876 123.39 115.3 100

Deferred tax asset 11222444 6613372 2725486 411.76 242.6 100

TOTAL ASSETS 757928389 691991521 590291468 128.4 117.2 100

LIABILITIES

Bills payable 9944257 15418230 5737457 173.32 268.7 100

Borrowings from 46844890 58994609 56392270 83.07 104.6 100



financial institutions

Deposits and other

accounts597090545 531298127 459140198 130.05 115.7 100

Sub-ordinate loans 3954925 3100000 0 0 0 0

Liabilities against

assets subject to

finance lease

Other liabilities 24913236 19943126 15578177 159.92 128 100

Deferred tax liability ------- ----------- ---------

TOTAL LIABILITIES 682747953 628754092 536848102 127.18 117.1 100

NET ASSETS 75180436 63237429 53443366 140.67 118.3 100

REPRESENTED BY

Shareholders Equity

Share capital 7590000 6900000 6900000 110 100 100

Reserves 24243254 19821455 17802584 136.18 111.3 100

Unappropriated

profit39447648 28341670 20 475,080 159.92 128 100

Total equity

attributable to the

equity holders of the

Bank

71280902 55063125 45177664 157.78 121.9 100

Minority interest 890099 965642 913317 97.458 105.7 100

Surplus on 3009435 7208662 7352385 40.931 98.05 100



revaluation of assets

- net of tax

TOTAL EQUITY 75180436 63237429 53443366 140.67 118.3 100

Horizontal Analysis

HABIB BANK

CONSOLIDATED PROFIT & LOSS ACCOUNT

AS ON DEC 31 2008, 2007 & 2006

2008 2007 2006 Horizontal Analysis

(Rupees in ‘000’) 2008 2007 2006

Mark-up / return /

interest earned63,305,033 50,481,021 43,685,740 144.91 115.6 100

Mark-up / return /

interest expensed26,525,556 19,153,957 13,204,037 200.89 145.1 100

Net mark-up /

interest income36,779,477 31,327,064 30,481,703 120.66 102.8 100

Provision against

non-performing

loans and advances

- net

6,904,919 8,238,227 2,863,207 241.16 287.7 100

Charge / (reversal)

against off-balance

sheet obligations

372,598 (54,626) (45,438) -820.01 120.2 100



Charge / (reversal)

of provision against

diminution in the

value of

investments

1,909,887 (84,310) (13,697) -13944 615.5 100

Bad debts written

off directly---------- ---------- -------------

9,187,404 8,099,291 2,804,072

Net mark-up /

interest income

after provisions

27,592,073 23,227,773 27,677,631 99.691 83.92 100

Fee, commission

and brokerage

income

4,518,408 3,420,051 3,931,710 114.92 86.99 100

Income / gain on

investments2,369,233 2,472,663 1,219,623 194.26 202.7 100

Income from

dealing in foreign

currencies

2,374,318 1,487,374 1,102,358 215.39 134.9 100

Gain on

investments in

associate

4,000,330 ------- 0 0 0 0

Other income 3,116,522 2,643,076 2,235,805 139.39 118.2 100

Total non-mark-up /

interest income16,378,811 10,023,164 8,489,496 192.93 118.1 100

43,970,884 33,250,937 36,167,127 121.58 91.94 100



Non mark-up /

interest expense

Administrative

expenses21,348,016 18,297,279 15,425,461 138.39 118.6 100

Other provisions /

write offs - net200,163 276,111 122,510 163.39 225.4 100

Other charges 64,751 85,152 54,898 117.95 155.1 100

Workers welfare

fund323,575

Total non mark-up /

interest expenses21,936,505 18,106,32 15,602,869 140.59 0 100

Profit before

taxation22,034,379 15,144,617 18,840,487 116.95 80.38 100

Taxation

- Current 8,661,15 7,220,717 7,144,846 0 101.1 100

- Prior years 233,100 1,668,562 (39,067) -596.67 -4271 100

- Deferred (2,473,891) (3,828,699) (965,607) 256.2 396.5 100

6,420,359 10,084,037 12,700,315 50.553 79.4 100

Profit after taxation 15,614,020 10,084,037 12,700,315 122.94 79.4 100

Attributable to:

Equity holders of

the Bank15,535,011 10,000,231 12,630,259 123 79.18 100

Minority interest 79,009 83,806 70,056 112.78 119.6 100

15,614,020 10,084,037 12,700,315 122.94 79.4 100



Basic and diluted

earnings per share20.47 13.18 18.30 111.86 72.02 100



HORIZONTAL ANALYSIS

BANK AL FALAH LIMITED

BALANCE SHEET

AS ON DEC 31 2008, 2007 & 2006

Years

(Rupees in ‘000’)Horizontal Analysis

2008 2007 2006

ASSETS 2008 2007 2006

Cash and balances

with treasury banks118.41 29436378 27859360 118.41 105.7 100

Balances with other

banks169.5 18380738 12731952 169.5 144.4 100

Lending to financial

institutions26.616 3452059 12456653 26.616 27.71 100

Investments 134.46 88491564 56502210 134.46 156.6 100

Advances 132.88 171198992 144999325 132.88 118.1 100

Operating fixed

assets131.14 11922324 10502990 131.14 113.5 100

Deferred tax asset 0 0 0 0

Other assets 159.58 6013097 5633051 159.58 106.7 100

TOTAL ASSETS 126.59 328895152 275685541 126.59 119.3 100

LIABILITIES 0

Bills payable 111.68 4138243 3091135 111.68 133.9 100



Borrowings from

financial

institutions

163.09 21230697 8394130 163.09 252.9 100

Deposits and

other accounts125.56 273173841 239509391 125.56 114.1 100

Sub-ordinate

loans79.798 3220858 3222106 79.798 99.96 100

Liabilities against

assets subject to

finance lease

0 0 0 0

Deferred tax

liability10.85 1379809 1921338 10.85 71.82 100

Other liabilities 154.56 9531860 7305496 154.56 130.5 100

TOTAL

LIABILITIES126 312675308 263443596 126 118.7 100

NET ASSETS 139.23 16219844 12241945 139.23 132.5 100

REPRESENTED BY

SHAREHOLDERS EQUITY

Share capital 159.9 6500000 5000000 159.9 130 100

Reserves 115.15 2414833 2749533 115.15 87.83 100

Unappropriated

profit122.12 4851840 2823072 122.12 171.9 100

138.17 13766673 10572605 138.17 130.2 100



Surplus on

revaluation of

assets - net of tax

145.94 2453171 1669340 145.94 147 100

TOTAL EQUITY 139.23 16219844 12241945 139.23 132.5 100



HORIZONTAL ANALYSIS


PROFIT & LOSS ACCOUNT

AS ON DEC 31 2008, 2007 & 2006

2008 2007 2006 Horizontal Analysis

(Rupees in ‘000’) 2008 2007 2006

Mark-up / return /

interest earned31046583 25783871 21191470 146.51 121.7 100

Mark-up / return /

interest expensed20331194 16620963 15232886 133.47 109.1 100

Net mark-up / interest

income10715389 9162908 5958584 179.83 153.8 100

Provision against non-

performing loans and

advances - net

2035997 2370867 697690 291.82 339.8 100

Provision for diminution

in value of investment1479062 0 0 0

Bad debts written off

directly28298 5844 1537 1841.1 380.2 100

3,543,357 2,376,711 699,227 506.75 339.9 100


income after provisions7,172,032 6,786,197 5,259,357 136.37 129 100

Non mark-up / interest

income



Fee, commission and

brokerage income2,539,321 2,429,599 1,804,998 140.68 134.6 100

Dividend income 300,943 64,722 37,393 804.81 173.1 100

Income from dealing in

foreign currencies914,845 474,510 386,997 236.4 122.6 100

Gain on sale of securities 424,220 2053192 180751 234.7 1136 100

Unrealized loss on

revaluation of

investments classifies as

held for trading

181,571 21530 27599 657.89 78.01 100

Other income 1,247,669 1,031,372 842,099 148.16 122.5 100

Total non-mark-up /

interest income5,245,427 6,038,466 3,224,639 162.67 187.3 100

12,417,459 12,824,663 8,483,996 146.36 151.2 100


expense

Administrative expenses 10,741,399 8,272,587 5,874,745 182.84 140.8 100

Provisions against off-

balance sheet obligations28,582 6,959 0 0 0 0

Other charges 122,758 9,565 43,306 283.47 22.09 100

Total non mark-up /

interest expenses10,622,739 8289111 5,918,051 179.5 0 100

Profit before taxation 1,794,720 4,535,552 2,565,945 69.944 176.8 100

Taxation 0 0 0

- Current 1730051 1726810 476226



- Prior years 221797 0 100874 219.88 0 100

- Deferred 1014835 321487 427902 237.17 75.13 100

493419 1405323 803254 61.428 175 100

Profit after taxation 1301301 3130229 1962691 66.302 159.5 100

Attributable to:

Unappropriated profit

brought forward4851840 2823072 1886845

Transferred from surplus

on revaluation of fixed

assets - net of tax

24586 24585 26074 94.293 94.29 100

Profit available for

appropriation6177727 5977886 3675610 168.07 162.6 100



VERTICAL ANALYSIS

It is a method of financial statement analysis in which each entry for each of the three major

categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a

proportion of the total account. The main advantages of analyzing a balance sheet in this

manner are that the balance sheets of businesses of all sizes can easily be compared. It also

makes it easy to see relative annual changes in one business. When using vertical analysis, the

analyst calculates each item on a single financial statement as a percentage of a total. The term

vertical analysis applies because each year's figures are listed vertically on a financial statement.

The total used by the analyst on the income statement is net sales revenue, while on the

balance sheet it is total assets. This approach to financial statement analysis, also known as

component percentages, produces common-size financial statements. Common-size balance

sheets and income statements can be more easily compared, whether across the years for a

single company or across different companies.

VERTICAL ANALYSIS

HABIB BANK

BALANCE SHEET

AS ON AS ON DEC 31 2008, 2007 & 2006

(Rupees in ‘000’) Vertical Analysis

2008 2007 2006

ASSETS 2008 2007 2006

Cash and

balances with

treasury banks

56533134 55487664 46310478 7.4589 8.019 7.8454

Balances with

other banks39307321 27020704 35965048 5.1862 3.905 6.0928



Lending to

financial

institutions

6193787 1628130 6550128 0.8172 0.235 1.1096

Investments 13814592 177942251 119587476 1.8227 25.71 20.259

Advances 456355507 382172734 349432685 60.211 55.23 59.197

Other assets 35419252 27346111 17765291 4.6732 3.952 3.0096

Operating fixed

assets14751252 13780555 11954876 1.9463 1.991 2.0252

Deferred tax

asset11222444 6613372 2725486 1.4807 0.956 0.4617

TOTAL ASSETS 757928389 691991521 590291468 100 100 100

LIABILITIES

Bills payable 9944257 15418230 5737457 1.312 2.228 0.972

Borrowings

from financial

institutions

46844890 58994609 56392270 6.1806 8.525 9.5533

Deposits and

other accounts597090545 531298127 459140198 78.779 76.78 77.782

Sub-ordinate

loans3954925 3100000 0 0.5218 0.448

Liabilities

against assets

subject to

finance lease

Other liabilities 24913236 19943126 15578177 3.287 2.882 2.6391



Deferred tax

liability------- ----------- ---------

TOTAL

LIABILITIES682747953 628754092 536848102 90.081 90.86 90.946

NET ASSETS 75180436 63237429 53443366 9.919 9.14 9.054

REPRESENTED BY

Shareholders Equity

Share capital 7590000 6900000 6900000 1.001 1 1.169

Reserves 24243254 19821455 17802584 3.199 2.86 3.016

Unappropriated

profit39447648 28341670 20 475,080 5.205 4.1 3.287

Total equity

attributable to

the equity

holders of the

Bank

71280902 55063125 45177664 9.405 7.96 7.653

Minority

interest890099 965642 913317 0.117 0.14 0.155

Surplus on

revaluation of

assets - net of

tax

3009435 7208662 7352385 0.397 1.04 1.246

TOTAL EQUITY 75180436 63237429 53443366 9.919 9.14 9.054



VERTICAL ANALYSIS

HABIB BANK

CONSOLIDATED PROFIT & LOSS ACCOUNT

AS ON DEC 31 2008, 2007 & 2006

2008 2007 2006 Vertical Analysis

(Rupees in ‘000’) 2008 2007 2006

Mark-up / return /

interest earned63,305,033 50,481,021 43,685,740 100 100 100

Mark-up / return /

interest expensed26,525,556 19,153,957 13,204,037 41.901 37.94 30.225

Net mark-up /

interest income36,779,477 31,327,064 30,481,703 58.099 62.06 69.775

Provision against

non-performing

loans and advances

- net

6,904,919 8,238,227 2,863,207 10.907 16.32 6.5541

Charge / (reversal)

against off-balance

sheet obligations

372,598 (54,626) (45,438) 0.5886 -0.108 -0.104

Charge / (reversal)

of provision against

diminution in the

value of

investments

1,909,887 (84,310) (13,697) 3.017 -0.167 -0.031

Bad debts written ---------- ---------- ------------- 0 0 0



off directly

9,187,404 8,099,291 2,804,072 14.513 16.04 6.4187

Net mark-up /

interest income

after provisions

27,592,073 23,227,773 27,677,631 43.586 46.01 63.356

Fee, commission

and brokerage

income

4,518,408 3,420,051 3,931,710 7.1375 6.775 9

Income / gain on

investments2,369,233 2,472,663 1,219,623 3.7426 4.898 2.7918

Income from

dealing in foreign

currencies

2,374,318 1,487,374 1,102,358 3.7506 2.946 2.5234

Gain on

investments in

associate

4,000,330 ------- 0 6.3191 0.3162 0

Other income 3,116,522 2,643,076 2,235,805 4.923 5.236 5.1179

Total non-mark-up

/ interest income16,378,811 10,023,164 8,489,496 25.873 19.86 19.433

43,970,884 33,250,937 36,167,127 69.459 65.87 82.789

Non mark-up /

interest expense

Administrative

expenses21,348,016 18,297,279 15,425,461 33.722 36.25 35.31

Other provisions /

write offs - net200,163 276,111 122,510 0.3162 0.547 0.2804



Other charges 64,751 85,152 54,898 0.1023 0.169 0.1257

Workers welfare

fund323,575 0.5111 0 0

Total non mark-up /

interest expenses21,936,505 18,106,32 15,602,869 34.652 0 35.716

Profit before

taxation22,034,379 15,144,617 18,840,487 34.807 30 43.127

Taxation

- Current 8,661,15 7,220,717 7,144,846 0 14.3 16.355

- Prior years 233,100 1,668,562 (39,067) 0.3682 3.305 -0.089

- Deferred (2,473,891) (3,828,699) (965,607) -3.908 -7.584 -2.21

6,420,359 10,084,037 12,700,315 10.142 19.98 29.072

Profit after

taxation15,614,020 10,084,037 12,700,315 24.665 19.98 29.072

Attributable to:

Equity holders of

the Bank15,535,011 10,000,231 12,630,259 24.54 19.81 28.912

Minority interest 79,009 83,806 70,056 0.125 0.17 0.16

15,614,020 10,084,037 12,700,315 24.66 20 29.07

Basic and diluted

earnings per share20.47 13.18 18.30 3.23 2.61 4.189



VERTICAL ANALYSIS


BALANCE SHEET

AS ON DEC 31 2008, 2007 & 2006

Years

(Rupees in ‘000’)Vertical Analysis

2008 2007 2006

ASSETS 2008 2007 2006

Cash and

balances with

treasury banks

32987335 29436378 27859360 9.4522 8.95 10.105

Balances with

other banks21581043 18380738 12731952 6.1838 5.589 4.6183

Lending to

financial

institutions

3315500 3452059 12456653 0.95 1.05 4.5184

Investments 75973238 88491564 56502210 21.769 26.91 20.495

Advances 192671169 171198992 144999325 55.208 52.05 52.596

Operating fixed

assets13773293 11922324 10502990 3.9466 3.625 3.8098

Other assets 8989186 6013097 5633051 2.5758 1.828 2.0433

TOTAL ASSETS 348990764 328895152 275685541 100 100 100

LIABILITIES



Bills payable 3452031 4138243 3091135 0.9891 1.258 1.1213

Borrowings from

financial

institutions

13690222 21230697 8394130 3.9228 6.455 3.0448

Deposits and

other accounts300732858 273173841 239509391 86.172 83.06 86.878

Sub-ordinate

loans2571169 3220858 3222106 0.7367 0.979 1.1688

Liabilities against

assets subject to

finance lease

Deferred tax

liability208465 1379809 1921338 0.0597 0.42 0.6969

Other liabilities 11291280 9531860 7305496 3.2354 2.898 2.6499

TOTAL

LIABILITIES331946025 312675308 263443596 95.116 95.07 95.559

NET ASSETS 17044739 16219844 12241945 4.884 4.93 4.441

REPRESENTED BY:

Shareholders Equity

Share capital 7995000 6500000 5000000 2.291 1.98 1.814

Reserves 3166056 2414833 2749533 0.907 0.73 0.997

Unappropriated

profit3447467 4851840 2823072 0.988 1.48 1.024

14608523 13766673 10572605 4.186 4.19 3.835



Surplus on

revaluation of

assets - net of tax

2436216 2453171 1669340 0.698 0.75 0.606

TOTAL EQUITY 17044739 16219844 12241945 4.884 4.93 4.441

VERTICAL ANALYSIS


PROFIT & LOSS ACCOUNT

AS ON DEC 31 2008, 2007 & 2006

2008 2007 2006 Vertical Analysis

(Rupees in ‘000’) 2008 2007 2006

Mark-up / return / interest

earned31046583 25783871 21191470 100 100 100

Mark-up / return / interest

expensed20331194 16620963 15232886 65.486 64.46 71.882


income10715389 9162908 5958584 34.514 35.54 41.23

Provision against non-

performing loans and

advances - net

2035997 2370867 697690 6.55 9.195 3.2923

Provision for diminution in

value of investment1479062 4.76 0 0



Bad debts written off

directly28298 5844 1537 0.091 0.023 0.0073

3,543,357 2,376,711 699,227 11.413 9.218 3.2996


income after provisions7,172,032 6,786,197 5,259,357 23.101 26.32 24.818


income

Fee, commission and

brokerage income2,539,321 2,429,599 1,804,998 8.1791 9.423 8.5176

Dividend income 300,943 64,722 37,393 0.9693 0.251 0.1765

Income from dealing in

foreign currencies914,845 474,510 386,997 2.9467 1.84 1.8262

Gain on sale of securities 424,220 2053192 180751 1.3664 7.963 0.8529

Unrealized loss on

revaluation of investments

classifies as held for trading

181,571 21530 27599 0.5848 0.084 0.1302

Other income 1,247,669 1,031,372 842,099 4.0187 4 3.9738

Total non-mark-up / interest

income5,245,427 6,038,466 3,224,639 16.895 23.42 15.217

12,417,459 12,824,663 8,483,996 1357.3 2703 2192.3


expense

Administrative expenses 10,741,399 8,272,587 5,874,745 5915.8 38424 21286

Provisions against off-

balance sheet obligations28,582 6,959 0 2.2908 0.042 0



Other charges 122,758 9,565 43,306 2.3403 0.058 1.343

Total non mark-up / interest

expenses10,622,739 8289111 5,918,051 85.547 49.87 69.755

Profit before taxation 1,794,720 4,535,552 2,565,945 5.7807 27.29 12.108

Taxation 0 0 0

- Current 1730051 1726810 476226 5.5724 6.697

- Prior years 221797 0 100874 0.7144 0 0.476

- Deferred 1014835 321487 427902 3.2687 1.247 2.0192

493419 1405323 803254 1.5893 5.45 3.7905

Profit after taxation 1301301 3130229 1962691 4.1914 12.14 9.2617

Attributable to:

Unappropriated profit

brought forward4851840 2823072 1886845

Transferred from surplus on

revaluation of fixed assets -

net of tax

24586 24585 26074 0.0792 0.095 0.123

Profit available for

appropriation6177727 5977886 3675610 19.898 23.18 17.345



REVIEW OF DESCRIPTIVE INFORMATIONHabib Bank Limited:

These financial statements have been prepared in accordance with approved accounting

standards as applicable in Pakistan. Approved accounting standards comprise of such

International Financial Reporting Standards issued by the International Accounting Standards

Board as are notified under the Companies Ordinance, 1984, provisions of and directives issued

under the Companies Ordinance, 1984 and Banking Companies Ordinance, 1962 and the

directives issued by State Bank of Pakistan (SBP). In case the requirements of provisions and

directives issued under the Companies Ordinance, 1984 and Banking Companies Ordinance,

1962 and the directives issued by SBP differ, the provisions of and directives issued under the

Companies Ordinance, 1984 and Banking Companies Ordinance, 1962 and the directives issued

by SBP shall prevail.

Amended IAS 27 Consolidated and Separate Financial Statements (effective for annual periods

beginning on or after 1 July 2009) requires accounting for changes in ownership interest by the

group in a subsidiary, while maintaining control, to be recognized as an equity transaction.

When the group loses control of subsidiary, any interest retained in the former subsidiary will be

measured at fair value with the gain or loss recognized in the profit or loss. The application of

the standard is not likely to have an effect on the Group's financial statements. The auditors

conducted their audit in accordance with the auditing standards as applicable in Pakistan. These

standards require that they plan and perform the audit to obtain reasonable assurance about

whether the above said statements are free of any material misstatement. And in their opinion

the consolidated financial statements present fairly the financial position of Habib Bank Limited

as at December 31, 2006, 2007 & 2008 and the results of its operations, its cash flows and

changes in equity for the year then ended in accordance with the approved accounting

standards as applicable in Pakistan.

Bank Al Falah Limited:



The financial statements prepared by the management, present fairly its state of affairs, the

results of its operating cash flow and changes in equity. All directors of the company are

registered as tax payers and none of them has default in payments of any loan to a banking

company. The auditors perform their audit in accordance with the auditing standards as

applicable in Pakistan. These standards require that they plan and perform the audit to obtain

reasonable assurance about whether the above said statements are free of any material

misstatement. And in their opinion the consolidated financial statements present fairly the

financial position of Habib Bank Limited as at December 31, 2006, 2007 & 2008 and the results

of its operations, its cash flows and changes in equity for the year then ended in accordance

with the approved accounting standards as applicable in Pakistan.

The board of directors through its sub committee called Board Risk Management Committee

(BRMC) oversees the overall risk of the bank. RMD is the organizational arm performing the

functions of identifying, measuring, monitoring and controlling the various risks and assists the

Apex level committee and the various sub- committees in conversion of policies into action.

Credit risk Management processes encompasses identification, assessment, measurement,

monitoring and control of the credit exposures. The bank, as per State Bank of Pakistan

Guidelines, has migrated to base II as on January, with the standardized approach.



Comparisons

Financial trend analysis is an applied, practical approach for monitoring the financial condition

of any company through the use of financial indicators. I shall use technique to compare

previous three-year period data and observes how they change. This would permit an

assessment of the current financial condition.

Trend Analysis

A firm's present ratio is compared with its past and expected future ratios to determine whether

the company's financial condition is improving or deteriorating over time. Trend analysis studies

the financial history of a firm for comparison. By looking at the trend of a particular ratio, one

sees whether the ratio is falling, rising, or remaining relatively constant. This helps to detect

problems or observe good management.

TREND ANALYSIS

HABIB BANK LIMITED

FOR THE YEARS 2006, 2007 & 2008

Performance Area 2006 2007 2008 Trend

a) Liquidity Ratios

Current Ratio1.20 1.19 1.16

Lower liquidity in

2008

Sales to Working Capital 0.5 times 0.5 times 0.6 times Increase in 2008

Working Capital95155274 104938111 100006655

Lower liquidity in

2008

b) Leverage Ratios



Time Interest Earned 2.43 1.79 1.83 Lower since 2008

Debt Ratio0.91 0.91 0.9

Leverage remain

same

Debt to Equity Ratio 11.88 11.42 9.58Drops in leverage in

2008

Current Worth / Net worth

Ratio1.78 1.66 1.33

Higher in 2006

Total Capitalization Ratio 0.56 0.53 0.42 Lower during 2008

Long term Assets versus Long

term Debt0.26 0.33 0.51

Drops in leverage in

2006

Debt Coverage Ratio 0.02 0.008 0.0083Lower coverage in

2006

c) Profitability Ratios

Net Profit Margin29.07% 19.97% 24.66%

Lower profitability

during 2007

Operating Income Margin57.9% 48% 59.6%

Increased Profitability

since 2008

Return on Assets 2.27% 1.57% 2.15%Lower ROA during

2007

Operating Assets Turnover192.7% 192.7% 174.70%

Lower efficiency since

2008

Return on Operating Assets13.48% 10.37% 11.19%

Lower efficiency in

2007

Sales to Fixed Assets3.65 times 3.66 times 3.66 times

No change in last 3

years



d) Activity Ratios:

Total Asset Turnover0.07 0.07 0.08

Higher efficiency

since 2008

e) Market Ratios:

Dividend per Share – DPS1.0019 2.0014 3.597

Good marketperceptions

Earning Per Share- EPS 18.41 14.61 20.57 Higher In 2008

Price / Earning Ratio0.54 0.68 0.49

Lower in 2008

Dividend Payout Ratio0.0544 0.137 0.175

Good market

perceptions

Dividend Yield 0.10019 0.20014 0.3597 Lower in 2006

Book Value per Share6.5 7.98 9.39

Good market

perceptions

f) Statement of cash flow

Operating Cash Flow to Total

Debt0.033 0.089 0.027

Lower in 2006

Operating Cash Flow per Share25.87 81.48 24.02

Increased during

2007



TREND ANALYSIS


FOR THE YEARS 2006, 2007 & 2008

Performance Area 2006 2007 2008 Trend

a) Liquidity Ratios

Current Ratio1.06 1.10 1.06

Higher liquidity in

2007

Sales to Working Capital 1.38 0.85 1.57 Increase in 2008

Working Capital 15276529 30128884 19741302 Lower liquidity in

2006

b) Leverage Ratios

Time Interest Earned 1.16 1.27 1.08Lower since 2008

Debt Ratio0.95 0.95 0.95

Leverage remain

same

Debt to Equity Ratio24.91 22.71 22.72 Drops in leverage in

2008

Current Worth / Net worth

Ratio

1.2471.85 1.15 Higher during 2007

Total Capitalization Ratio 0.561487909 0.652339509 0.5299458 Increased during

2007

Long term Assets versus Long

term Debt

1.01 0.46 0.63 Higher during

leverage in 2006



Debt Coverage Ratio0.055321869 0.048350633 0.0508531 Lower coverage in

2007

c) Profitability Ratios

Net Profit Margin 0.08%0.12% 0.04%

Lower profitability

during 2006

Operating Income Margin0.687738604 0.586337443 0.5437148

Increased

Profitability since

2006

Return on Assets0.012776185 0.010355041 0.0038393 Lower ROA during

2007

Operating Assets Turnover2.41% 2.31% 2.19%

Lower efficiency

since 2008

Return on Operating Assets0.034 0.052 0.019

Lower efficiency in

2008

Sales to Fixed Assets 2.017 times 2.16 times 2.25 times Lower in 2006

d) Activity Ratios:

Total Asset Turnover0.07 0.07 0.08

Higher efficiency

since 2008

e) Market Ratios:

Dividend per Share – DPS00 00

1.21 Dividend announcedjust in 2008

Earning Per Share- EPS 3.525 4.815 1.627 Higher In 2007

Price / Earning Ratio 0.54 0.68 0.49 Lower in 2008

Dividend Payout Ratio00 00 0.74

Good market

perceptions



Dividend Yield00 00 0.121

No Dividend in 2006

& 2007

Book Value per Share2.11 2.11 1.82

Good market

perceptions

f) Statement of cash flow

Operating Cash Flow to Total

Debt0.029 0.126 0.007 Lower in 2008

Operating Cash Flow per

Share15.70 60.99 3.12

Increased during

2007

Industry Averages and Comparisons with Competitors

The entire ratio has been compared through above mentioned comparisons and analysis, which

include horizontal analysis, vertical analysis and trend analysis.

SUMMARYFinancial Statement Analysis is a method used by interested parties such as investors,

creditors, and management to evaluate the past, current, and projected conditions and

performance of the firm. This report mainly deals with the insight information of the

two mentioned companies. In the current picture where financial volatility is endemic

and financial intuitions are becoming popular, when it comes to investing, the sound

analysis of financial statements is one of the most important elements in the

fundamental analysis process. At the same time, the massive amount of numbers in a

company's financial statements can be bewildering and intimidating to many investors.

However, through financial ratio analysis, I tried to work with these numbers in an

organized fashion and presented them in a summarizing form easily understandable to

both the management and interested investors.



It is required by law that all private and public limited companies must prepare the

financial statements like, income statement, balance sheet and cash flow statement of

the particular accounting period. The management and financial analyst of the company

analyze the financial statements for making any further financial and administrative

decisions for the betterment of the company. Therefore, I select this topic, so that I

have done some solid financial analysis that will certainly help the management of

review their performance and also assist the interested people like investors and

creditors. That as a financial analyst how can I make any important financial decision by

analyzing the financial statements of the company. Because, it is the primary

responsibility of the financial managers or financial analyst to manage the financial

matters of the company by evaluating the financial statements. I am also providing

some important suggestions and opinions about the financial matters of the business.



CHAPTER 5

CONCLUSIONS AND RECOMMEDATIONS

5.1 Conclusion / Findings:

I compare and analysis the financial statements of Habib Bank Limited and Bank Al Falah

Limited.

Liquidity position of both companies is not up to standard, both are below industry

average, but the liquidity position of Habib Bank is better from Bank AL Falah

Limited. Working capital of Habib Bank is better than Bank Al Falah, but both

companies must improve their liquidity position.

Leverage ratios indicate the high risk associated with both the companies. Generally

leverage ratios, measures the percentage of funds provided by the creditors. The

proportion of a firm’s total assets is being financed with high percentage of

borrowed funds.

Profitability ratios of Habib Bank Limited are better than Bank AL Falah Limited. Net

profit of Bank Al Falah Limited is low due to heavy financial charges.

Habib Bank has a good market perception due to continuous declaration of

dividends but on the other hand Bank LA Falah limited has not announced in

dividend in the year 2006 and 2007.

Book value per share of Habib Bank Limited is much higher than the Al Falah Bank.

It is the Indication of the net worth of the corporation. Somewhat similar to the

earnings per share, but it relates the stockholder's equity to the number of shares

outstanding, giving the shares a raw value. So the net worth of Habib Bank is better

than Al Falah Bank.

Earning per Share and Operating cash flow of Habib Bank Limited is also better than Bank ALFalah Limited.



5.2 RECOMMENDATIONS

I have realized that Habib Bank is performing very well since its inception. It is quite difficult to

give suggestion to improve the banking conditions Habib Bank Limited. As we know that nothing

is perfect, there is always a room for improvement, so I will recommend the following

suggestions for HBL:

Employees Training programs must be introduced on continuous basis so thatEmployees have understanding with the latest developments especially with thecustomers.

Bank should introduced incentive plans for employees on regular basis so that ifemployees may work whole heartedly for the welfare of their organization. While givingincentives qualification, work, experience, hard work and such other factors must beconsidered.

Mismanagement of resources must be avoided as much as possible as it decreases profitbut also discourage hard worker and honest employees.

Fresh graduates must be recruited. As the combination of Experienced and fresh canproduce better results and it will improve the efficiency of management.

Habib Bank is going towards mobile banking but the problem is that a common clienthas no idea of its usage due to lack of marketing. I think that a proper marketingprogram must be launched for client’s awareness.

Banks different schemes must be conveyed to the targeted customers so that to have areasonable share in market.

Bank should help the society by providing interest free loans to the Talented Students.

Online Banking should be introduced in all the branches.

To motivate the employees their remuneration / salaries should be made at par withtop tier Banks.

Aggressive publicity campaign must be introduced through press and Electronic mediafor new products and scheme by initiating vigorous marketing policy.

Bank should adopt such an induction plan that when a customer opens his account withthe bank he should be supplied with a booklet which enables him to know theprocedure of filing the cheques, pay-in-slip etc. It will save a lot of time of the bank staffafterward during the conduct of the account of that customer.

The attitude of the bankers with all of their customers is not the same; they pay moreattention and good service to some of the customers and neglect a major portion ofthem. Some of the customers approach to the bank officials and get their work donebefore others; it is not a good practice. All the customers should be treated equally.

HBL should increase its communication with customers about the terms and conditionsof its different products and services.

A Case Study of Bank Alfalah and Habib Bank

Financial Ratio Analysis

A Case Study of Bank Alfalah and Habib Bank Ltd ( 092-006-115-Minhaj University

ANNEXURES

Ratio Analysis 2009

Minhaj University)

A Case Study of Bank Alfalah and Habib Bank

Financial Ratio Analysis

A Case Study of Bank Alfalah and Habib Bank Ltd ( 092-006-115-Minhaj University

Ratio Analysis 2009

Minhaj University)



GLOSSARY

Acid test RatioAlso called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaiditems to current liabilities.

Analytical

This is auditor-speak for finding the percentage difference from the current year's revenuebalance to the prior year's balance. Ignore the awkward phrase. It's a great exercise because itcan help you spot large swings from one year to the next. Big percentage changes relative topast performance should be red flags.

Balance Sheet

Also called the statement of financial condition, it is a summary of a company's assets, liabilities,and owners' equity.

Bank Regulation

The formulation and issuance by authorized agencies of specific rules or regulations, undergoverning law, for the conduct and structure of banking.

Bankruptcy

Inability to pay debts. In bankruptcy of a publicly owned entity, the ownership of the firm'sassets is transferred from the stockholders to the bondholders.

Capital Adequacy Ratio

It is also called Capital to Risk (Weighted) Assets Ratio (CRAR), is a ratio of a bank's capital to itsrisk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount ofloss and are complying with their statutory Capital requirements.This has been agreedinternationally at 8%.

Cash Reserve Ratio (CRR)

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with SBP.



Credit Risk

The possibility that a bond issuer will default, by failing to repay the principal and interest ontime

Debit Equity Ratio

It compares a company's total liabilities to its total shareholders' equity

Derivative

A financial contract whose value is based on, or "derived" from, a traditional security (such as astock or bond), an asset (such as a commodity), or a market index.

Economic Value Added (Eva)

Economic Value Added, a measure of the superiority of the return a company is able to realizeon invested capital above the baseline return expected by the investment community.

Economic Value of Equity

EVE is the present value of the expected cash flow of assets minus the value of the expectedcash flows on liabilities, plus or minus the present value of expected cash flows on off balancesheet instruments, discounted to reflect market rates.

Foreign Exchange Risk

It is a risk which is associated with exposure to fluctuation in spot exchange rates.

Gross Income

Gross income is commonly defined as the amount of a company's or a person's income beforeall deductions or any taxpayer’s income, except that which is specifically excluded by theInternal Revenue Code, before taking deductions or taxes into account. For a business, thisamount is pre-tax net sales less cost of sales.

Halal; Anything permitted by the Shariah.



Haram; Anything prohibited by the Shariah.

Ijarah-wa-Iqtina

A mode of financing, by way of Hire-purchase, adopted by Islamic banks. It is a contract underwhich the Islamic bank finances equipment, building or other facilities for the client against anagreed rental together with a unilateral undertaking by the bank or the client that at the end ofthe lease period, the ownership in the asset would be transferred to the lessee. The undertakingor the promise does not become an integral part of the lease contract to make it conditional.The rental as well as the purchase price is fixed in such a manner that the bank gets back itsprincipal sum along with some profit, which is usually determined in advance.

Inter Bank Rated

The rate of interest charged on short-term loans made between banks. Banks borrow and lendmoney in the inter bank market in order to manage liquidity and meet the requirementsplaced on them. The interest rate charged depends on the availability of money in the market,on prevailing rates and on the specific terms of the contract, such as term length.

Interest Rate Risk

The risk that an investment's value will change due to a change in the absolute level of interestrates, in the spread between two rates, in the shape of the yield curve or in any other interestrate relationship. Such changes usually affect securities inversely and can be reduced bydiversifying (investing in fixed-income securities with different durations) or hedging (e.g.through an interest rate swap).

Liquid Assets

Liquid assets are accounts or securities that can be easily converted to cash at little or no loss ofvalue.

Liquidity Risk

The risk stemming from the lack of marketability of an investment that cannot be bought or soldquickly enough to prevent or minimize a loss.

M2



Total stock of money in the economy, consisting primarily of currency in circulation and depositsin savings and checking accounts.

Market Risk

Market risk is the risk that the value of an investment will decrease due to moves in marketfactors

Money Market

Money markets are for borrowing and lending money for three years or less. The securities in amoney market can be .government bonds, Treasury bills and commercial paper from banks andcompanies.

Mudarabah

A form of partnership where one party provides the funds while the other provides expertiseand management. The latter is referred to as the Mudarib. Any profits accrued are sharedbetween the two parties on a pre-agreed basis, while loss is borne by the provider(s) of thecapital.

Murabaha

Literally it means a sale on mutually agreed profit.

Technically, it is a contract of sale in which the seller declares his cost and the profit. This hasbeen adopted by Islamic banks as a mode of financing. As a financing technique, it can involve arequest by the client to the bank to purchase a certain item for him.



Musharika

Musharika means a relationship established under a contract by the mutual consent of theparties for sharing of profits and losses in the joint business. It is an agreement under which theIslamic bank provides funds which are mixed with the funds of the business enterprise andothers. All providers of capital are entitled to participate in management, but not necessarilyrequired to do so. The profit is distributed among the partners in pre-agreed ratios, while theloss is borne by every partner strictly in proportion to respective capital contributions.

Net Interest Income

NII is a financial measure for banks, calculated by the amount of money the bank receives frominterest on assets (commercial loans, personal mortgages, etc) minus the amount of money thebank pays out for interest on liabilities (personal bank accounts, etc). Although usuallycalculated for banks

Net Interest Margin

(NIM) is a measurement of the difference between the interest income generated by banks orother financial institutions and the amount of interest paid out to their lenders(for example,deposits).

Net Investment Income per Share

Income received by an investment company from dividends and interest on investments lessadministrative expenses, divided by the number of outstanding shares.

Net Performing Loans

Generally, one on which payments are less than 90 days past due.

Non Performing Asset

An asset that is not effectively producing income, such as an overdue loan.

Open Market Operations

Open market operations are the means of implementing monetary policy by which a centralbank controls its national money supply by buying and selling government securities, or otherfinancial instruments. Monetary targets, such as interest rates or exchange rates, are used toguide this implementation.



Operating Leverage

Fixed operating costs, which are characterized as leverage because they accentuate variations inprofits.

Operating Profit (Or Loss)

Revenue from a firm's regular activities less costs and expenses and before income deductions.

Over-The-Counter (OTC)

Trading is to trade financial instruments such as stocks, bonds, commodities or derivativesdirectly between two parties. It is contrasted with exchange trading, which occurs via facilitiesconstructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stockexchanges.

Paid up Capital

The total amount of shareholder capital that has been paid in full by shareholders.

Profit Margin

Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determinedby dividing net income by revenue for the same 12-month period. Result is shown as apercentage. Also known as net profit margin.

Profitability Ratios

Ratios that focus on how well a firm is performing. Profit margins measure performance withrelation to sales. Rate of return ratios measure performance relative to some measure of size ofthe investment.

Ratio Analysis

A way of expressing relationships between a firm's accounting numbers and their trends overtime that analysts use to establish values and evaluate risks.

Receivable Turnover



This ratio can help you get a feel for just how quickly a company collects the money it's owedfrom its customers. Just divide total annual sales by average of the most recent two years'accounts receivable. Thirty days is a pretty good benchmark (most companies require paymentin 30 days), but check with the company's competitors.

Required Rate of Return (RRR)

The minimum expected yield by investors requires in order selecting a particular investment.

Return on Assets (ROA)

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as tohow efficient management is at using its assets to generate earnings.

Return on Equity (ROE)

The amount of net income returned as a percentage of shareholders equity. Return onequity measures a corporation's profitability by revealing how much profit a companygenerates with the money shareholders have invested.

Riba

An excess or increase. Technically, it means an increase over principal in a loan transaction or inexchange for a commodity accrued to the owner (lender) without giving an equivalent counter-value or recompense in return to the other party; every increase which is without an ‘equalcounter-value.

Risk Weighted Assets

In terms of the minimum amount of capital that is required within banks and other institutions,based on a percentage of the assets, weighted by risk.

Secondary Market

A market where investors purchase securities or assets from other investors, rather than fromissuing companies them.

Shariah

The term Shariah refers to divine guidance as given by the Holy Quran and the Sunnah of the

Prophet MUHAMMAD (PBUH) and embodies all aspects of the Islamic faith, including

beliefs and practice.



Tier 1 CapitalTier 1 capital is the core measure of a bank's financial strength from a regulator's pointof view. It is composed of core capital,[1] which consists primarily of equity capital andcash reserves, but may also include irredeemable non-cumulative preferred stock andretained earnings.

Tier 11 Capital

A term used to describe the capital adequacy of a bank. Tier II capital is secondary bank capitalthat includes items such as undisclosed reserves, general loss reserves, subordinated term debt,and more.

Tier 111 Capital

Tertiary capital held by banks to meet part of their market risks, that includes a greater varietyof debt than tier 1 and tier 2 capitals. Tier 3 capital debts may include a greater numberof subordinated issues, undisclosed reserves and general loss reserves compared to tier 2capital.

Yield Curve Risk

The risk of experiencing an adverse shift in market interest rates associated with investing in afixed income instrument. The risk is associated with either a flattening or steepening of the yieldcurve, which is a result of changing yields among comparable bonds with different maturities.

Yield Risk

The risk of experiencing an adverse shift in market interest rates associated with investing in afixed income instrument. The risk is associated with either a flattening or steepening of the yieldcurve, which is a result of changing yields among comparable bonds with different maturities.

Yield SpreadIn finance, the yield spread is the difference between the quoted rates of return on twodifferent investments, usually of different credit quality.

It is a compound of yield and spread.

Ratio Analysis

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