Key trends and ratio analysis of the last three fiscal years
In the banking industry, a financial ratio (or otherwise known as a banking ratio) is a ratio of two selected numerical values taken from an enterprise’s financial statements. There are many standard ratios we can use if we want to try to evaluate the overall financial condition of a bank or other organization. The scope behind financial ratios is to enable managers within a business and its shareholders (owners) to have a clear picture of the health of their business. These ratios are used even by security analysts in order to compare the strengths and weaknesses in various companies (Ehsan & Groppelli, p. 4).
For the purpose of our assignment, we will use values of the total share capital of the year, the profit (before depositors’ share, tax, and gain on transfer of an interest in the subsidiary) for the year, and the dividends paid to the shareholders of the banks. These values will be used to determine the trends of the banks in the last three years, 2006, 2007, and 2008, because as a business, its main purpose is to increase the profits of its shareholders. If the bank accumulates more profits and pays higher dividends to its shareholders, then it is in a healthy situation. If this is the situation, the bank becomes attractive to more potential investors and partners because it is perceived as a stable and growing bank. We will start with the Dubai Islamic Bank.
In the “consolidated financial statement of the fiscal year 2008” for the Dubai Islamic Bank, we find that the total share capital as of balance on 31 December 2008 is 3445.4 million dirhams (UAE).
One year before, as of 31 December 2007, the balance of the total share capital was 2996 million dirhams, and as of 31 December 2006, it was 2800 million dirhams.
So if we do the ratios, we will find that from 2006 to 2007, the total share capital increased by 2996-2800=196 million dirhams, which is an increase of 196/2800 x100= 7%. From 2007 to 2008, we have 3445.4-2996=449.4 million dirhams, which is an increase of 449.4/2996 x100= 15%. As we can see from the results, the total share capital growth rate in 2008 has more than doubled from the growth rate of 2007, from 7% to 15%.
The second indicator is the net profit for the year. As of 31 December 2008, the net profit of the bank is 3604.360 million dirhams. As of 31 December 2007, it is 4237.518 million dirhams, and as of 31 December 2006, it is 3341.576 million dirhams. From 2006 to 2007, we have an increase of 4237.518 – 3341.576= 895.942 million dirhams. That is 895.942/3341.576 x100= 26.81% increase in profits, a huge increase. But from 2007 to 2008 the profit gain did not increase, in fact, we have a decrease in profits: 4237.518-3604.360=633.158 million dirhams less in 2008. This corresponds to a 14.94% decrease in profits from 2007 to 2008.
And the final indicator for the health of the bank is the sum of money proposed to be paid as a dividend to the shareholders. On 31 December 2008, this was 1032.628 million dirhams instead of 1647.800 million on 31 December 2007. That is a: 1647.800 – 1032.628 = 615.172 million dirham less available for the shareholders in 2008 than in 2007. It is a 37.33% decrease. In comparison, on 31 December 2006, the sum proposed was 1176.0 million, which in itself is more than that proposed in 2008. Also, from 2006 to 2007 the sum proposed was increased by 40.11%. It seems like the bank has passed through a “boom” and “bust” cycle from 2006 to 2008.
Now let’s see the Al-Rajhi Bank of Saudi Arabia and compare it to the Dubai Islamic Bank figures. Of course, the comparison will be made in percentages on all three indicators (as well as in the rest of the assignment) because of the different monetary mediums of the banks.
The total share capital as of 31 December 2006 is 6750 million SR, on 31 December 2007 13500 million SR and on 30 September 2008 15000 million SR. From 2006 to 2007, we have a 13500 – 6750 = 6750 mln SR increase, which corresponds to exactly a 100% growth in total share capital. From 2007 to 2008, we have a 15000-13500=1500mln SR increase which corresponds to 11.11% growth in share capital. Compared to the previous year it seems a small increase.
But if we compare the total share capital growth of the two banks, we will see that from 2006 to 2007, the Al-Rajhi Bank has an overwhelming 100% share capital growth instead of 7% of the Dubai Islamic Bank. But, from 2007 to 2008 this last has grown with a factor of 15% instead of 11% of the Al-Rajhi. While Dubai Islamic Bank has kept on growing share capital gradually, the Al-Rajhi seems to have had a head-start (by doubling the share capital from 2006 to 2007) but a serious slow-down to an 11.11% growth rate (almost 90% decrease in growth from the previous year).
The net income of the Al-Rajhi on 31 December 2006 was 7301.891 mln SR, one year after it was 6449.657 mln SR and on September 30, 2008, it was 5100.736 mln SR.
So, from 2006 to 2007 the net income of the bank decreased from 7301.891-6449.736 = 852.155 mln SR, which corresponds to an 852.155/7301.891 x100 = 11.67% decrease. For the year 2008, since the data are still unaudited, we have to compare them with the data of September 30 of the previous year in order to see the ongoing of the bank for one year.
5100.736 – 4873.907 = 226.829 mln SR which is a 226.829/4873.907 x100 = 4.65% increase in profits from 2007 to 2008.
If we compare the two banks, we find that the profits we can see that the Dubai Islamic bank goes from a huge profit increase (more than 28% in 2007) to a decrease of 14% in 2008 instead the Al-Rajhi does quite the opposite, from a profit decrease in 2007 to an increase in 2008.
Regarding the shareholders proposed dividends, we find that for the 2006 fiscal year, the sum proposed by Al-Rajhi is 998.021 mnl SR. For the fiscal year 2007, the sum goes to 1223.917 mnl SR, and until September 30, 2008, it is yet not decided, so we have to compare only 2006 and 2007 with the Dubai Islamic Bank. For these two years, 2006 to 2007, the proposed dividends increased by 1223.917 – 998.021 = 225.896 mln SR, which is 225.896/998.021 x100 = 22.63% increase in dividends available from the shareholders.
Compared to the Dubai Islamic Bank, the Al-Rajhi has an increase of 22.63% from 2006 to 2007 instead of a more than 40% increase in proposed dividends for the shareholders for the Dubai Islamic Bank. But the next year, the Dubai Islamic bank has a sudden decrease, as with the other two indicators, of more than 37%. Even though for the fiscal year 2008, the Al-Rajhi Bank has not yet made its proposition for dividends, still it is expected to be with an increase from the last year since the net profits were so.
So, for the comparison of these three indicators, we could say that these two banks seem to be the opposite of each other. The first, the Dubai Islamic Bank, seems to have an incredible start and an impulsive growth in almost every fiscal factor, but it also has a sudden decrease and (almost crash) in many fiscal factors.
On the other hand, the Al-Rajhi has a slow-step growth, gradual but steady, and does not suffer the same decrease situation as the Dubai Islamic Bank. Its careful and steady growth has made it more “resistible” to market shocks than the Dubai counterpart. In order to further give arguments in favor of this statement, we will complete the ratio analysis by analyzing and comparing some other fiscal factors of the two banks.
Financial ratios are calculated from one or more pieces of information from a company’s financial statements. For example, the “gross margin” is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company’s situation and the trends that are developing (“Financial Statement Analysis,” 1).
Liquidity ratios are the first to be measured. Their ratio is obtained by the division of the ‘Total Current Assets’ of a company with its ‘Total Current Liabilities.’ The ratio that comes out is regarded as a test of liquidity for a company. It expresses the ‘working capital’ relationship of current assets available to meet the company’s current obligations (“Financial Statement Analysis,” 1). For the Dubai Islamic Bank in 2006, the liquidity ratios were 64,433.936/55,609.686= 1.158.
In 2007 the ratios was: 83,738,759/73,073,642= 1.145
In 2008: 85,031.113/76,105.759= 1.117
This means that in 2006 the Dubai Islamic Bank had 1.158 dirhams to meet 1 dirham of its liability. In 2007 it had 1.145 for 1 and in 2008 1.117 for 1. It is clear that from 2006 to 2008, the matching power of the assets to the liabilities has been decreasing. In 2007 it decreased by 1.12% and in 2008 from 2007 further decreased by 2.44%.
The Al-Rajhi for the 2006: 105208744/85029268= 1.237
In 2007: 124886482/101280370= 1.233
And in 2008: 163,255,693/137,647,762= 1.186
For the 2006 fiscal year, the Al-Rajhi had 1.237 SR of assets for every 1 SR of liability. In 2007 this decreased by 0.32% to 1.233 SR for every 1 SR of liability, and at the end of the third quarter of 2008, it decreased further by 3.81%. For the comparison with the Dubai Islamic Bank, the Al-Rajhi had a decrease of 0.32% in 2007 from 2006 instead of a 1.12% of Dubai. For 2008, the figures of Al-Rajhi are incomplete even if it looks like it had a greater decrease value than the Dubai Islamic Bank.
Financial risk management & tools
“Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk.” (Lam, 2)
What can be the risks associated with the two banks we are dealing with here?
It is important to note that both banks in 2008 had a decrease in matching power of assets to liabilities, more than 2% for each, which means that the risk has grown for both. If the value of assets corresponding to every dirham, or SR, of liability, diminishes, it means that the bank is encountering a greater risk. This risk means that the bank can lose revenues and profits (Lam, 6). If the ratio matches 1 for 1 (for example, in Al-Rajhi, 1 SR asset for every SR of liability), it means that the bank is running on the basis of 100% risk because the liabilities are going to draw the current assets without leaving the opportunity for profits. If the ratio goes negative, which means for every SR of liability, the bank has less than 1 SR of assets. Then it has a risk factor of more than 100%. This means there is the probability that the bank can even come out not only without profits at the end of the year but with losses compared to previous years.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
This is not the case for both our banks certainly. At least not until now, but the diminishing of the matching capability of the liabilities from the assets is worrisome and increases the probability of losses for the banks. In fact, if we match the data from the liquidity ratios with those from the decrease in profits, we can have a clearer picture. From 2006 to 2008, the risk factor for both the banks has been rising, and consequently, the profits have been decreasing. Ultimately this results in fewer dividends for the shareholders and fewer investment capabilities for the bank itself. We can see from the proposed dividends quotas that they have been diminishing over the three-year period for both the banks. It is true that Al-Rajhi had a slower diminishing factor, but this is the result of the smaller risk factor probability that this bank has in comparison with the Dubai Islamic Bank.
References
- Groppelli, Angelico A.; Ehsan Nikbakht. Finance (4th ed.) Barron’s Educational Series. 2000.
- Financial Statement Analysis. The Credit Guru Website. 2009. Web.
- Lam, James. Enterprise Risk Management: From Incentives to Controls. John Wiley & Sons: USA, 2003.