The Commercial Bank of Dubai Case Report

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Updated: Jan 29th, 2024

Introduction

The Commercial Bank of Dubai is a middle-sized financial institution listed in the financial market. The bank was established in 1969. During its inception, it comprised of ten staff members and one branch. The bank has evolved and currently has over 1200 staff members and more than 24 branches (Kumbrai & Webb, 2015). The bank is a full-range service offertory. These services include corporate, commercial, and consumer banking. The bank’s financial records indicate that it has enjoyed profits over the years of its existence. It is one of the institutions that record the highest return on assets in the banking industry. Notably, the institution is greatly driven by its quest to be a successful institution in the Emirate Countries. Consequently, it engages in deploying an integrated performance management system to augment the strategic planning systems within the institution (Ferrouhi, 2015).

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The range of these activities is broad, including qualifying non-financial objectives, delaying of the manually demanding assessment method, and linking of reward to actual performance or output (Fields, 2011). As for now, the bank is a major financial institution in the UAE. It has successfully managed to redevelop its online banking offers by creating Smartphone apps, social media and a new website. In addition, the bank maintains its success even as technological advancement is felt across the world due to its effectiveness in mitigating threats. The CBD conducts QualysGuard scans of its internal networks weekly as a way of countering technological risks, especially software related risks. The company also extends its performance management framework using QPR Metrics to individual levels. Its website offers customers a range of satisfaction namely, information delivery, self-service offering, and conversational analytics. The bank has implemented a virtual banking assistant Sara in a bid to meet its objective. Such innovative technologies assist the bank in deploying information to its customers (Ferrouhi, 2015).

Business Overview

The bank is managed by four key business segments. These segments are personal banking, commercial banking, treasury and investment, and corporate banking. Corporate banking involves clients with turnover above AED 500 million (Gupta, 2014). The bank offers a range of credit and non-credit products. These products include overdrafts, term loans, and trade finance. It offers a wide variety of services such as debt capital markets, payment services, as well as payroll processing among others (Gupta, 2014). Commercial banking involves clients with AED 40 million to AED 500million. Under this category, the bank offers products such as overdrafts, working capital finance, as well as trade and deposits to its commercial customers. Most entrepreneurs and business persons like banking with CBD (Gupta, 2014).

Personal banking entails different classification of customers based on income and wealth. There exist several categories under personal banking (Misra, Sushendra, & Apa, 2013). The first category is ultra-high net worth clients, the second category is affluent banking, and the third one is the direct and business banking clients with turnovers from AED 5 to AED 40 million. The CBD offers different services such as current accounts, instant access savings accounts, fixed deposit accounts, and foreign exchange accounts among others (Ferrouhi, 2015). Under treasury and investment, the bank services commercial and corporate clients. It gives wholesale investment products as well as hedging elucidations in foreign exchange (Misra et al., 2013). Moreover, it ensures proactive balance sheet management, which includes the investment portfolio prudent liquidity management and adequate funding to offer support to the bank’s asset management (Kumbrai & Webb, 2015).

Financial Analysis

Ratio analysis Performance

Both gross and operating profit margins will also be reviewed in the vertical analysis segment. Any person planning to invest in the bank (CBD) as an ordinary shareholder is highly likely to be interested in return on shareholder’s funds (Brigham & Ehrhardt, 2015).

Profit before tax and after interest

Shareholder’s funds

201520142013
Return on shareholders’ funds(10023/97368)*100=18.5%(9648/82695)*100=11.7%((4188)/75459)*100=(5.6%)

As per the calculations above, the return has augmented speedily. This means that the company is worth being traded in the stock markets as its shares continue to gain momentum (Tuna, 2016). All the ratios in the table above are imperative ratios that forecast the financial strength of the CBD. Gross margin is obtained by dividing the gross profit figure by its net sales figure.

Liquidity ratios

Current ratio201520142013
Current assets/current liabilities125765/58187=2.2101830/45385=4538580615/42640=1.9
Quick ratio201520142013
(Current asset-stock)/current liabilities(125765-55450)58187=1.2(101830-44791)/45385=1.380615-36425)/42640=1.0

Liquidity ratio indicates that there is no cause for concern for the company. Even with the reasoning, the figure for creditors was extremely high in 2015 than it was in 2013. The advantage of the company is that it covers this figure with its adequate current assets (Tuna, 2016).

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Efficiency ratios

The ratios calculated here will include stock turnover, debtors’ turnover (in days), and fixed asset turnover in three fiscal years (Al Tamimi, 2016).

Fixed asset turnover201520142013
Stock/fixed assets596860/86790=6.88491383/83250=5.9415985/94484=4.40
Stock turnover201520142013
(stock/cost of sales)*365(55450/402964)*365=50.2days44791/325089)*365=50.3days(36425/271588)365=49.0days
Debtors turnover201520142013
(debtor/sales)*365570315/596860)*365=43.0days56233/491383)*365=41.8 days44190/415985)*365=38.8 days

There is an increasing rate in the fixed asset turn over. Bank stock turnover at 50 days is a bad indicator; it indicates that there are inefficiencies in handling loans and overdrafts. Nonetheless, the remarks above are not conclusive (Goddard, Molyneux, Wilson, & John, 2016). There are many variables that would lead to poor turnover rates. It is noted that the business takes longer than scheduled in debt collection. However, at 43 days, the bank is still within safe margins of collecting debt given that the maximum day it offers is 30 days (Al Tamimi, 2016).

Gearing ratios

Gearing ratio in the case of the CBD is relevant due to findings it collects from investors and government financial institutions in Dubai.

Gearing ratio201520142013
Debt/(debt+equity)*10057000/(57000+97368)100=36.9%57000(57000+82695)100=40.8%57000/(57000+75459)100=43.0%

Observations indicate that debt remains constant. On the other hand, equity gradually rises. The main reason is due to retained profits; hence, debt becomes comparatively not as much significant. It is important to acknowledge that at 36.9%, it is still significant (Goddard et al., 2016).

Horizontal Analysis or Trend Analysis

The presence of figures of the three fiscal years makes it highly likely to perform or conduct a horizontal analysis (trend analysis) of the Commercial Bank of Dubai. Below is the horizontal trend analysis of the bank in 2015, 2014, and 2013 (Goddard et al., 2016).

Formula: (Yn – Y1) / (Y1) * 100%

Particulars% change over previous year% change over previous year
Sales21.518.1
Cost of sales24.019.7
Gross profit16.615.2
Marketing costs26.416.4
Administrative expenses6.5(3.3)
Directors remuneration10.19.1
Interests payables27.523.0
Fixed assets4.311.9
Debtors25.027.3
Trade creditors36.710.7
Overdrafts0.65.3

The above is the horizontal trend analysis of CBD. It indicates that there is a general trend that indicates growth in the business. Most of the particulars are increasing proportionately over the financial periods (Goddard et al., 2016). Due to effective marketing and technological advancements, the company is able to enjoy a constant increase in sales (Tuna, 2016). The increase is substantial; nonetheless, there is a matching rise in gross profit, though not as pronounced as desired. Close observations indicate that the gross profit will be declining in the near future. As observed, the bank is exposed to selling and marketing costs which are rising greatly as observed between 2013 and 2015 (Al Tamimi, 2016). Even with the indications, the bank has been able to manage its administrative costs which are seen to be under control. Directors’ remuneration is declining, implying that the business p-profits are also going down. Observations to investments indicate a modest growth. All working capital items have gone up substantially. At the same time, the bank has managed its overdraft customers, hence maintaining overdraft at a continuous level. Even so, trade creditors have risen by a bigger portion/percentage, translating to better terms of credit offered by the bank (Al Tamimi, 2016).

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Vertical analysis

Vertical analysis involves the examination of the profit and loss account based upon sales, which is equals to 100% (Gitman et al., 2013). Moreover, it is based upon analyses of the balance sheet based upon net assets, which is equals to 100%. The following results are extracted from the vertical analysis of the CBD (Jha & Xiaofeng, 2014).

CBD vertical analysis of profit and loss account for the years ending 31 December 2015, 2014, 2013

Particulars2015…..($)2014….($)2013….($)
sales100.0100.0100.0
Cost of sales(67.5)(66.2)(65.3)
Gross profit32.533.834.7
Marketing and sales costs(12.9)(12.4)(12.6)
Administrative costs(5.7)(6.4)(7.9)
Directors’ remuneration(10.1)(12.2)(14.4)
Operating profit/loss interest payable and similar charges(0.9)(0.8)(0.8)
Profit/loss on ordinary activities before taxation3.02.0(1.0)
Taxation(0.6)(0.5)
Retained profits for the year2.41.51.0

CBD vertical analysis of the balance sheet for the year ended 31 December 2015, 2014, and 2013

Particulars2015…. ($)2014…. ($)2013…. ($)
Fixed assets89.1100.6125.3
Current assets
stock57.054.248.3
Debtors72.268.058.5
cash70.881.072.6
129.2123.2106.8
Trade creditors48.842.041.9
Overdraft11.012.914.9
Creditors: amount due within one year59.854.956.5
Net current assets69.468.350.3
Creditors: amount due after more than one year(58.5)(68.9)(50.3)
Capital and reserves100.0100.0100.0
Share capital46.254.459.6
reserves53.845.640.4
100.0100.0100.0

The vertical analysis is used to indicate any chances of poor performance. In this case, the vertical analysis of the profit and loss approves that the gross profit margin is on the decline (Arnold, 2008). The declining administrative costs will be a factor of sale percentage. The bank is well known for good controls over costs hence it maintains considerate attempts to maintain administrative expenses to the lowest value (Jha & Xiaofeng, 2014). It is important to note that savings on such costs if carried out in details, the bank will operate at far much below the optimal efficiency. One major problem observed in the case of the CBD is reluctant supervision in multiple ownership situations. The CBD maintains majority share in insurance and equity firms (Jha & Xiaofeng, 2014).

The analysis indicates low operating profit margin same as the margin of retained profits to sales. Even so, the company has not endured any loses for more than six years. Nonetheless, the profits are not impressive according to the potential of the bank (Kumbrai & Webb, 2015). It is observed that directors enjoy substantial levels of dividends even at their highest levels. As a percentage of net assets, the analysis indicates that stocks and debtors have increased. Trade creditors have also increased as noted in the horizontal analysis (Goddard et al., 2016).

Recommendations

Inasmuch as the bank is enjoying profits, there are many challenges that will emanate in the course of business. For instance, in Dubai, most banks have received low Moody’s financial strengths ratings. One major problem observed in the case of CBD is reluctant supervision in multiple ownership situations. CBD maintains majority share in equity and insurance organizations. This is not a formal way of monitoring likely anti-trust damages. Consequently, the bank needs to be ahead of legislation by implementing positive strategies towards avoidance of contradicting court rulings over its engagement in business. The bank should also constitute different strategies that will see its profits increase in order to reward the shareholders and directors. At the same time, the bank should implement culture trump strategy to enhance capturing and retaining more customers. In many business situations, culture is the leading growth indicator. Dubai is a modern town as compared to the other cities in the UAE. The population is of mixed nationalities. Nonetheless, the bank should observe the Islamic rules to enhance cultural business capabilities. Additionally, CBD should deploy strategies that will assist in mastery of owning the entire client relationship. Since most people will see the bank services as offering solutions to their financial needs, no one will bargain the prices of these services.

Summary and conclusion

The bank appears to be stable and realizing its objectives. It appears to be growing over the years. However, the profits indicate that the business will reach a breaking point. The observation is not a cause of alarm due to several factors. The first factor is that the business has been on the growth path by increasing overdraft sales and fixed assets turn over. The second factor is that the working capital is growing, making the CBD not to show any sign of future liquidity problems. All factors analyzed indicate that the business is a profit-generating venture. In comparison to other financial institutions, the CBD net profit for fiscal year 2014 improved by 19%. This makes the bank realize profits for the last consecutive years. The banks operating income has also increased by 10.2% in 2014. This is attributed to the increase of 9.3% in net interest income.

Total assets increased by 5.5% in 2014. Even in that state, loans and advances increased by 6.2% in the same year. Total landings observed in the first two levels of business, commercial and corporate clients augmented by 3.5%. In the personal banking sector, there was an increase in loans to 35%. All these elements translate to more interests, hence registering more profits for the bank. Its powerful maintenance of business operations is attributed to collaborative efforts to its all lines of businesses. These lines of businesses have further diversified the bank’s revenues. The liability front also indicates that customers’ deposits grew by 3.9 per cent, and liquidity continued to be strong. The bank’s impairment provisions fell, indicating an overall asset quality improvement. Lastly, the non-performing loan ratio dropped significantly, which is a clear indication that the company is maintaining its objectives.

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References

Al Tamimi, H. (2016). Factors influencing performance of the UAE Islamic and Conventional National Banks. Global Journal of Business Research, 4(2), 1-9.

Arnold, G. (2008). Corporate financial management (4th ed.). Harlow, UK: Pearson Financial Times/Prentice Hall.

Brigham, E. F., & Ehrhardt, M. C. (2015). Fundamentals of financial management (14th ed.). Houston, TX: South-Western College Publisher.

Ferrouhi, E. M. (2015). Moroccan Banks Analysis Using CAMEL Model. International Journal of Economics and Financial Issues, 4(3), 622-627.

Fields, E. (2011). Essentials of finance and accounting for non-financial managers (2nd ed.). New York, NY: AMACOM.

Gitman, L. J., Zutter, C. J., Mukherjee, A. K., Battista, D., Gitman, L. J., & Zutter, C. J. (2013). Principles of managerial finance (13th ed.). Harlow, UK: Prentice Hall.

Goddard, J., Molyneux, P. Wilson, J., & John, P. (2016). The Profitability of European Banks. The Manchester Business Journal, 72(3), 363-381.

Gupta, C. R. (2014). An Analysis of Indian Public Sector Banks Using Camel Approach. IOSR Journal of Business and Management, 16(1), 94-102.

Jha, S., & Xiaofeng, H. (2014). A Comparison of Financial Performance of Commercial Banks: A Case Study of Nepal. African Journal of Business Management, 6(25), 7601-7611.

Kumbrai, M., & Webb, R. (2015) A Financial Ratio Analysis of Commercial Bank Performance in South Africa. African Review of Economics and Finance, 2(1), 30-53.

Misra, S., Kumar, M., Apa, P., & Kumar, P. (2013). A Camel Model Analysis of State Bank Group. World Journal of Social Science, 3(4), 36-55.

Tuna, V. V. (2016). Comparison Analysis of Camel Ratio Between bank Mandiri and Bank Negara Indonesia Period 2008 – 2012. EMBA Journal, 1(4), 756-761.

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