This document provides an analysis of the 2011/2012 annual report of Commercial Bank of Ceylon Plc. It finds that 2012 was an excellent year for the bank, with assets crossing Rs. 500 billion and profit after taxation reaching Rs. 10 billion. The analysis examines the bank's financial performance through comparative financial statement analysis and ratio analysis to measure profitability, liquidity, and market performance. It concludes that the bank saw strong growth in net interest income and profits in 2012 despite challenges in obtaining adequate funding to support loan growth.
This document provides an analysis of the 2011/2012 annual report of Commercial Bank of Ceylon Plc. It finds that 2012 was an excellent year for the bank, with assets crossing Rs. 500 billion and profit after taxation reaching Rs. 10 billion. The analysis examines the bank's financial performance through comparative financial statement analysis and ratio analysis to measure profitability, liquidity, and market performance. It concludes that the bank saw strong growth in net interest income and profits in 2012 despite challenges in obtaining adequate funding to support loan growth.
This document provides an analysis of the 2011/2012 annual report of Commercial Bank of Ceylon Plc. It finds that 2012 was an excellent year for the bank, with assets crossing Rs. 500 billion and profit after taxation reaching Rs. 10 billion. The analysis examines the bank's financial performance through comparative financial statement analysis and ratio analysis to measure profitability, liquidity, and market performance. It concludes that the bank saw strong growth in net interest income and profits in 2012 despite challenges in obtaining adequate funding to support loan growth.
Analysis of Financial Statements of Commercial Bank of Ceylon Plc
Based on Annual Report 2011/2012
A Comprehensive Report for the Existing and Prospective I nvestors
Prepared to: Dr.E.M.A.S.B.Ekanayake Senior Lecturer, Dept of Management Studies University of Peradeniya
Prepared By: N.Mohamed Nithal HD/DIP/12/13/136 MGT506: Financial Statement Analysis Post Graduate Diploma in Accounting & Finance University of Peradeniya
Executive Summary
This report analyzes the financial statements of Commercial Bank of Ceylon Plc based on the 2011/2012 Annual Report. Comparative Financial Analysis and Ratio Analysis are employed to measure the Profitability, Liquidity and Market Performance of Commercial Bank of Ceylon Plc. A significant trend is noticed at the Financial year 2012, has been excellent one for the Bank as evident from its Assets Portfolio crossing Rs.500 Bn and Profit After Taxation reaching Rs10. Bn.
( i ) 1. Introduction During the financial year under review (FY 2012), significant fluctuations in key economic variables, most notably the exchange and local interest rates, remained the norm. Over the course of the reporting period, the Sri Lankan Rupee (LKR) peaked to 134 against the USD, reflecting a depreciation of over 17% compared to the beginning of the year. Likewise, interest rates maintained an upward momentum throughout the year with the Average Weighted Prime Lending Rate (AWPLR) increasing from 10.8% at the start of 2012 to reach 14.4% by year end. Nevertheless, the Banking sector benefited from these fluctuations, with notable gains from foreign exchange movements and improved interest margins.
2. Industry & Strategy Analysis Commercial Bank of Ceylon PLC, also known as Commercial Bank is identified as the benchmark private bank in Sri Lanka operating 227 branches in Sri Lanka and 17 branches in Bangladesh. Commercial Bank is the only Sri Lankan bank operating in Bangladesh. The company has plans for covering a wider area by extending the market to South Asian countries such as India and Maldives. The companys vision is "To be the most technologically advanced, innovative and customer friendly financial services organisation in Sri Lanka, poised for further expansion in South Asia". Commercial Bank has an extended vision of becoming the number 1 private bank in Sri Lanka, and simultaneously to overtake all the government banks in 10 years time. The bank is also considered as one of the most profitable bank in Sri Lanka assuring excellent and diverse facilities and services for both employees and customers.
1 This comprehensive SWOT profile of Commercial Bank of Ceylon PLC provides an in-depth strategic SWOT analysis of the companys businesses and operations. This table shows a clear and an unbiased view of the companys key strengths and weaknesses and the potential opportunities and threats. Strengths 1. The Bank had the largest market capitalization. 2. Customer base, our highly trained and motivated staff, our superior technological platform & IT driven processes and our highly developed work ethic and culture.A very customer centric Bank maintaining the highest levels of engagement with its customers. 3. Taking the number of branches to 227 and 55 ATMs coming on line making a total of 555 by end of 2012 & Operates 17 delivery points and 17 ATMs in Bangaldesh. Weaknesses 1. Countrywide loan write-offs, claims, and settlements. 2. Unable to capture the Retails Banking since the other competitive player in the industry have a huge market share of the industry.
Threats 1. Loan growth due to regulatory barriers and economic trend.Creating economic value addition while minimizing adverse impacts on people and planet. 2. Stiff competition in the Local Market. 3. Adverse macro economic variables both locally and globally & Stakeholders dissatisfaction due to lapses in the Banks engagement process. Opportunities 1. Lending opportunities thriving from large scale infrastructure development taking place in the country in its journey to become Miracle of Asia 2. Serving unnoticed market niches with the gamut of sustainability merits & customers loyalty being the benchmark private sector Bank which is a definite advantage in perking up the market share. 2 3. Accounting Analysis Changes to Financial Reporting Standards With the new Sri Lanka Accounting Standards (SLFRS / LKAS) issued in line with the International Financial Reporting Standards becoming effective from 1st January 2012, business entities were required to apply these standards retrospectively, with all adjustments to equity up to the transitional date of 1stJanuary 2011, recognized under Statement of Change in Equity.
As required by these standards, the Bank prepared its opening Statement of Financial Position as at 1stJanuary 2011 based on the assumption that the Bank had applied these standards retrospectively with all the adjustments to equity being recognized directly on the Statement of Changes in Equity. 4. Financial Analysis 4.1 Comparative Financial Statement Analysis Statement of Comprehensive Income Income The Banks interest income for the reporting period grew by 37.36%, prompted by increase in yields coupled with growth in interest earning assets. Interest cost mirrored this upward movement with perceptible increase of 51.81%. Higher deposit rates, deposit growth as well as conversion of low cost deposits to fixed deposits at higher rates pushed the interest costs upwards. Nevertheless, the Bank witnessed a growth of 22.19% in net interest income amounting to LKR 4 Bn during the financial year 2012. Efforts in this regard yielded positive results with the Bank increasing its commission income by 10.13% in 2012 against that of the previous financial year.
3 Operating expenses Commercial bank is one of the best managed banks in the country today. The operational excellence is primarily achieved through optimal and lean cost structures adopted by the bank. Other expenses including premises, equipment and establishment costs increased by 9.82% during the year 2012 and despite the stated increases in operating expenses, the higher percentage growth in income compared to expenses was facilitated by new branches that augmented the network during 2010 and 2011. These contributed positively towards the bottom line. Profitability The Banks pre-tax profits recorded a strong growth of 31.18% to LKR 14.2 Bn compared to 2011 while Group pre-tax profits also improved by 30.35% to LKR 14.3 Bn. The net profit after tax for the Bank recorded a growth of 28.10% to stand at LKR 4.1 Bn while the Group net profit after tax recorded a year on year growth of 27.09% to LKR 10.08 Bn for the year ended 31st December 2012.The Return On Assets (ROA) for the Bank in 2012 improved to 2.12% compared to 1.94% in the previous year, with improved margins, higher non-interest income to net income and reduction in cost to income ratios positively contributing towards same while Return on Equity was maintained at 20.96%.
Statement of Financial Position The greatest challenge in 2012 was to source adequate funding to support the unprecedented growth in credit witnessed in 2011, which also spilt over to the early part of 2012. As the Central Bank imposed conditional restrictions on the loan growth, obtaining foreign funding (to have the flexibility to increase the asset growth up to 23% if required) was also a key objective at the start of the financial year. In totality, gross loans and advances grew by 18.68% and other interest earning assets by 4.8 %. There was no major change in the stated capital of the Bank. 4 4.2 Ratio Analysis 4.2.1 Profitability Ratios Return on Assets & Return on Equity Bank continued to maintain excellent levels of profitability as depicted by the ROA and ROE. Inf8act ROE is much higher than the underlying cost of equity. The trend reflected by ROA and ROE is reflected in the cost to income ratio, which improved by 4 .2% from 51.7 in 2011 to 47.50 in 2012 indicating better efficiency and profitability performance.
4.2.2 Liquidity Ratios Liquid Asset Ratio The bank liquid assets ratio stood above 25%.During most part of the year Deposit mobilization efforts as well as provident fund management enabled the Bank to main satisfactory LAR. The LAR of 25.8% as at Dec 31, 2012 was well above 20% minimum stipulated by the CBSL. The ratio increase by 0.8% from 25% in 2011 to 25.8 in 2012 indicating a increase in the amount of customer and short term funds that could be met if they were not suddenly withdrawn.
4.2.3 Efficiency Ratios/Debt Management Ratio Debt to Equity Ratio The debt to equity ratio has been increased from 2.35% to 18.25% in 2012.This shows a high risk on investors. This is mainly due to the Bank was raised long term loan of US $ 65 Mn from International Finance Corporation (IFC), to improve financial assistance to SME sector. There was no major change in the stated capital of the Bank. 5 Interest Cover Ratio (Times) The Interest Cover Ratio has been reduced from 49.07 to 48.61 in 2012.The ability of the company to pay the Fixed interest slightly came down by significant amount followed the long term loan obtained from international Finance Corporation (IFC) in 2012. 4.2.4 Market/ Investors Ratios Earnings per Share The significant growth in profits during the year resulted in a 28.09% rise in the Companys Earnings per Share to Rs.12.13 compared with Rs. 9.47 the previous year. Price Earnings Ratio The price Earnings ratio declined by three times from 11 times in 2011 to 9 times in 2012,mainly due to the lower improvement in Market Shares Value during 2012, while the Earning Per share has been increased to Rs.12 in 2012 from Rs.9 in 2011. Dividend per share In accordance with the dividend policy of the Bank which ensures a reasonable to the shareholders while funding future growth, the Bank has been paying a fairly consistent dividend in the past. The dividend per share improved by 8.33% from Rs.6 to Rs. 6.50, indicating a better return to the Shareholders. Dividend Payout Ratio Total dividend payout ratio of the Bank amounted to 53.7% compared to 62.3% in 2011.similarly the cash dividend payout ratio amounted to 37.1% compared to 41.5% in 2011.the total dividend payout ratio was well above the minimum level of prescribed by the deemed dividend rules of the Department of the Inland Revenue. 6 Net assets value per share Net assets value per share has been increased from Rs.54 in 2011 to Rs.63 in 2012, mainly due to shareholders funds recorded a growth of Rs.8.8 Bn in 2012.
7 5. Conclusions and Recommendations The main issue considered in this analysis was whether to make the investment in Commercial Bank of Ceylon Plc, is a viable option for the existing and Prospective Shareholders. Based on the preceding analysis, the conclusion drawn is that such an investment is likely to be a sound investment. Accordingly, the following recommendations are made:
1. It is noted through our Analysis the Bank strong market position as Sri Lankas largest privately owned licensed commercial bank (LCB) and third-largest overall LCB. The Analysis also reflects Commercial Banks strong franchise and healthy financial performance, funding and liquidity, as well as good capitalization levels. 2. Year on year basis Commercial Bank of Ceylon PLC grew revenues 38.94% from 44.55bn to 61.90bn while net income improved 27.08% from 7.93bn to 10.08bn
3. Year on year, both dividends per share and earnings per share excluding extraordinary items growth increased 14.50% and 27.08%, respectively. 4. The positive trend in dividend payments is noteworthy since only some companies in the Regional Banks industry pay a dividend. Additionally when measured on a five year annualized basis, both dividend per share and earnings per share growth ranked in-line with the industry average relative to its peers 5. The Banks uses little or no debt in its capital structure 6. The Banks performance is deemed healthy owing to the operational cost efficiencies achieved through its low-cost delivery channels and economies of scale. This has translated into an ROA that is among the industrys best. 7. In the short to medium term, Commercial Banks performance is expected to remain healthy, backed by its expanding loan base and operational efficiencies despite a lower Net Interest Margin. 8 Net profit margin 30.74% Operating margin 43.66% References
(Annual Report, Commercial Bank of Ceylon Plc, 2012), Retrieved from
http://www.combank.net/newweb/investor-relations
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