15074491 an Analysis of Financial Performance

8/14/2019 15074491 an Analysis of Financial Performance

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CONFIDENTIALITY

OTHER THAN IN RESPECT TO PUBLICLY AVAILABLE INFORMATION, THE

INFORMATION BEING FURNISHED HEREIN, AND OTHER INFORMATION YOU MAY

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FORM) OR, WITHOUT THE CONSENT OF CITIBANK, N.A., DISCLOSE IT TO OTHERS

EXCEPT THOSE WITH A NEED-TO-KNOW, OR IN RESPONSE TO AN ORDER OF A

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TO BE BOUND BY THIS UNDERSTANDING.


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ExecutiveSummaryThe rationale behind this study is to explore performance of Citibank, N.A.

Bangladesh which is reflected on its financial statements and to provide some

comments to improve its banking business. This study is carried out by observing

several financial ratios, analyzing trends of various elements of Citibanks past four

years performance results. I have used correlation and regression tools by applying

SPSS software package to determine the degree of relationship between variables with

their significance. A hypothesis is formulated to test whether there is a positive

correlation among the financial performance measured by return on assets & interest

income, and the independent variables (operating expense to net interest income,

operating income to total assets, and total assets).

The report is divided into the following four parts- Introduction, Company Overview,

Financial Performance Analysis, and Concluding Remarks. Introduction section deals

with some elementary issues regarding the background and the process of preparing

this report. The next section following the introduction helps to know the brief history

of Citigroup and Citibank, N.A. Bangladesh. Further, it focuses on the services

provided by Citibank, N.A. Bangladesh with its current organogram.

Financial performance analysis is the most imperative section which covers the focal

findings of the study. Financial highlights, common size financial statements, key

financial ratios, regression and trend analysis tools are applied to assess the financial

performance of the bank. Formulated hypothesis is tested in the last part of this section

using correlation matrix. Final section shows SWOT analysis of the selected bank

suggests some areas of perfection and draws a conclusion.

The study finds that almost all the performance measures show good performance on

the part of Citibank, N.A. Bangladesh. Banks riskiness measurements showed that

Citibank, N.A. Bangladesh is in a safe situation in terms of book value insolvency.

Regression results signify a significant impact of total deposit and total advance on net

profit independently. Trend analysis of total expense shows a significant increase of


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total expense after the year 2005. Test of hypothesis provides evidence not to reject the

null hypothesis (i.e. there is a positive correlation among the financial performance

measured by return on assets & interest income, and the independent variables) for a

given level of significance. Most of all, Citibank, N.A. Bangladesh plays an important

role in mobilizing domestic resources with its stupendous operating performance.


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TABLEOFCONTENTSChapter 1 INTRODUCTION

Introduction 1

Origin of the Report 2

Objectives of the Study 2Literature Review 3

Hypothesis 5

Methodology 6

1.1

1.2

1.31.4

1.5

1.6

1.7 Limitations of the Study 7

Chapter 2 COMPANY OVERVIEW

The Background of Citigroup (Citicorp & Travellers Group) 8

Brief History of Citibank, N.A. in Bangladesh 9

Citibank, N.A. Bangladesh as a Branch of Citibank 10

Organizational Structure of Citibank, N.A. Bangladesh 11

2.1

2.2

2.3

2.4

2.5 Services of Citibank, N.A. Bangladesh 12

Chapter 3 FINANCIAL PERFORMANCE ANALYSIS

3.1 Financial Highlights 13

Total Income, Total Expenses & Net Profit 13

Total Deposits & Total Advances 13

Interest Income, Interest Expense & Net Interest Income 14

Total Assets & Shareholders Equity 15

3.2 Variable Definitions 16

3.3 Results & Discussion 17

3.3.1 Common Size Financial Statements 17

Common Size Income Statement 17

Common Size Balance Sheet 18

3.3.2 Ratio Analysis 19Liquidity Measurement 19

Advances to Deposit 19

Liquid Asset to Liability 20

Advances to Liability 20

Efficiency Measurement 21

Cost to Income 21

Operating Expense to Assets 21

Operating Expense to Net Interest Income 22

Operating Expense to Operating Income 22

Provision for Loan Losses 23

Leverage Measurement 25

Debt to Equity 25

Debt to Assets 25

Solvency Measurement 26

Tier I Capital to Total Risk Weighted Assets 26

Profitability Measurement 27

Return on Assets 27

Return on Equity 28

Return on Deposit 29


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Implicit Interest Rate Spread 29

Net Interest Margin 30

Noninterest Income to Assets 31

Noninterest Income to Operating Income 31

Asset Utilization Ratio 32

3.3.3 Measuring Bank Riskiness 33

3.3.4 Regression Analysis 34Simple Regression 34

Regression equation of Net Profit on Total Deposits 34

Regression equation of Net Profit on Total Advances 35

Regression equation of Net Profit on ATD ratio 37

Regression equation of Net Profit on Total Assets 38

Regression equation of Operating Expense on Total Assets 39

Multiple Regression 40

Regression equation of Net Profit on

Total Deposits & Total Advances 41Regression equation of Net Profit on

Total Advances & Total Assets 42

3.3.5 Trend Analysis 433.3.6 Testing Hypothesis 44

Chapter 4 CONCLUDING REMARKS

4.1 SWOT Analysis 46

4.2 Recommendations 47

4.3 Conclusion 49

Bibliography 50

APPENDIX

Tables I

AT-1 Selected financial elements with growth rates IAT-2 Descriptive statistics of selected financial elements I

AT-3 Descriptive statistics of selected financial ratios II

AT-4 Common size Income Statement II

AT-5 Common size Balance Sheet III

Figures IV

AF-1 Trend analysis for total deposits IV

AF-2 Trend analysis for net interest income IV

AF-3 Trend analysis for total income V

AF-4 Trend analysis for total expense V

AF-5 Trend analysis for net profit VI

AF-6 Trend analysis for total loans & advances VI

AF-7 Trend analysis for total assets VII

AF-8

AF-9

Trend analysis for shareholders equity VII

Organogram of Citibank, N.A. Bangladesh VIII


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HAPTER I

INTRODUCTION


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An Analysis of Financial Performance of Citibank, N.A. in Bangladesh CHAPTER I

1.1 Introduction

In Bangladesh, the banking sector dominates the financial sector and it contributes to

economic growth by efficiently allocating investment funds among competing alternative

uses, by raising the rate of capital formation by separating the act of saving from the act of

investment, as well as by providing incentives for increased savings and investment1. The

overall performance of bank does not merely depend upon the banking industry itself but

also on the performance of economy wherever it is operating. The banking sector in

Bangladesh is disparate from the banking sector as seen in developed countries. This is

one of the foremost service sectors in Bangladesh economy.

However, a good number of foreign banks are operating in Bangladesh. Consistent with

(Engerer & Schrooten, 2004), the existence of foreign banks has been found to proffer at

least three key advantages:

Improvement of financial intermediation in the domestic market by importing

financial institutions with a strong reputation from abroad and increasing reliance

in the banking sector,

Importing apposite risk management and consequently reducing the transaction

costs within the financial sector, and

Helping to launch a proper regulatory regime for the entire banking sector.

Moreover, economic planners of the country generally refer to a number of grounds in

favor of foreign banks operations in Bangladesh (stated in their paper Chowdhury, et. al;

1998). These rationales are as follows:

Foreign banks are accredited with import of superior banking technology

developed in the industrially advanced countries at a huge cost on research and

development;

Foreign banks are thought to be able to infuse new bank management skills and

training facilities, which can have a positive impact on the local banking practices;

Foreign banks are expected to facilitate growth of a competitive atmosphere in the

banking sector, which is necessary for a sound financial system.

1In their paper, (Khan, Ahmed & Latif, 1993) used this quotation as stated by (Drake, 1980; Howlader & Khan, 1988).


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Ever since foreign banks are implicated in our country in a greater way, evaluation of

performance of the foreign banks on the basis of recognized and significant facts may be

of some help to expose the true situation. Hence, this study is structured as follows: the

first chapter deals with some elementary issues regarding this paper and the next chapter

following the introduction gives some indication of the bank selected for the study. The

third chapter analyzes the results of financial statements and discusses the outcome. The

fourth and final chapter presents the main conclusions.

1.2 Origin of the Report

This report is an Internship Report prepared as a requirement for the completion of the

BBA program of University of Dhaka. The primary goal of internship is to provide an

on-the-job exposure to the student and an opportunity for translation of theoretical

conceptions in real life situation. Students are placed in enterprises, organizations,

research institutions as well as development projects. The program covers a period of three

months of organizational attachment.

After the completion of BBA program, I, Shah Kamal, was placed in Citibank, N.A.

Bangladesh for the internship program under the guidance of my faculty advisor Professor

Mr. Mustafizur Rahman. The duration of my organizational attachment was three months.As a requirement for the completion of the program I needed to submit this report. I was

placed in the Cash Management Operations Unit of this bank, under the supervision of Mr.

Md. Saiful Malik, the head of Domestic Account Services of Citibank N.A. Bangladesh.

1.3 Objectives of the Study

The objectives of the paper are:

Present a brief view of the Citigroup, Citibank and its operations (particularly in

Bangladesh) from the viewpoint of a neutral onlooker.

To analyze the financial performance of Citibank, N.A. with the help of various

analytical models.

To test the predetermined hypothesis relating to the financial performance of

Citibank, N.A. in Bangladesh.


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To explore the financial trends of various elements with their significance as a

guide line for future development.

Make a conclusion with some recommendations which can be used further to

analyze the financial performance of Citibank, N.A. in Bangladesh.

1.4 Literature Review

Generally, the financial performance of banks and other financial institutions has been

measured using a combination of financial ratios analysis, benchmarking, measuring

performance against budget or a mix of these methodologies2. (Tarawneh, 2006) showed

in his study that the bank with higher total capital, deposits, credits, or total assets does not

always mean that has better profitability performance.

However, there is a considerable debate whether foreign banks are really performing better

than the domestic banks in a country. In their paper, (Juan-Ramon,V.H., Randall, R. &

Williams, O., 2001) found that private foreign banks dominate the banking system in the

Eastern Caribbean Currency Union. Private foreign and private indigenous banks

exhibited similar distributions with respect to operating expenses but private foreign banks

were most profitable. (Sung-kyoo, H., Wikil, K. & Jong-Dae, J., 1995) also agreed with

this result by stating that net earnings of foreign banks operating in Korea in the past years

have been consistently increased. Further, (Engerer, H. & Schrooten, M., 2004) revealed

that in the EU accession countries on their way toward joining the European Monetary

Union (EMU), the share of foreign banks is extremely high. Usually, the presence of

foreign banks is considered to have a positive effect on financial sector development,

financial discipline, and institution building in emerging economies.

A comparative analysis of commercial banking performance in Bangladesh was

conducted by (Malek, May-June, 2005) who, for this purpose only, have takenNationalized Commercial Bank, Local Private Commercial Banks and Foreign

Commercial Banks operating during 1999 to 2002. He found that though majority of total

assets, total foreign business and total deposits are held by the local private and

2Stated by (Tarawneh,M.,2006) as suggested by (Avkiran,1995).


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nationalized banks but foreign bank outperformed other in performance. Moreover, in

their paper, (Bayraktar & Wang, 2004) investigated firstly the impact of foreign bank

entry on the performance of domestic banks, and secondly how this relationship is affected

by the sequence of financial liberalization. Their data set is constructed from the

BANKSCOPE database including 30 developed and developing countries and covering

the period from 1995 to 2002. They observed that the degree of openness to foreign bank

entry varies a great deal which is not correlated with average income levels or with GDP

growth.

Furthermore, (Bayraktar & Wang, 2004) revealed that the sequence of financial

liberalization matters for the performance of domestic banking sector. After controlling for

macroeconomic variables and grouping countries by their sequence of liberalization,

foreign bank entry has significantly improved domestic bank competitiveness in countries

which liberalized their stock market first. In these countries, both profit and cost indicators

are negatively related to the share of foreign banks. Countries which liberalized their

capital account first seem to have benefited less from foreign bank entry as compared to

the other two sets of countries.

Predicting the profitability and efficiency of banks, searching for some key banking

characteristics is a relevant isssue. For this purpose, (Bashir, 2001) examined the

determinants of Islamic banks performance across eight Middle Eastern countries

between 1993 and 1998. The results indicate that high leverage and large loans to asset

ratios lead to higher profitability. The results also indicate that foreign-owned banks are

more profitable than their domestic counterparts. Everything remaining equal, there is

evidence that implicit and explicit taxes affect the bank performance measures negatively.

Moreover, favorable macroeconomic conditions impact performance measures positively.

Even stock markets are complementary to bank financing. (Grigorian & Manole, 2002)

suggested that foreign ownership with controlling power and enterprise restructuring

enhance commercial bank efficiency. Also, the effects of prudential tightening on the

efficiency of banks vary across different prudential norms, and consolidation is likely to

improve efficiency of banking operations.


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In their paper, (Chowdhury, Anwar & Masum, 1998) revealed that almost all the

performance measures show good performance on the part of foreign banks. These

findings suggest that the Government decision to involve foreign banks in a greater way is

a right one and it will have a positive impact on the economy of the country. However,

(Khan, Ahmed & Latif, 1993) expressed that in Bangladesh a small number of foreign

banks with very slow rate of expansion are in operation and are providing large part of

capital in financing foreign trade and large scale activities, which reflects their risk

aversion psychology and profit oriented objective and lack of adequate concern to local

priorities i.e. the socio economic goals. But they concluded that despite all the criticism

foreign banks play important role in attracting international capital and in mobilizing

domestic resources.

1.5 Hypothesis

A test of hypothesis is a process that focuses on making a decision between two

hypotheses and the two hypotheses are formulated so that only one hypothesis can be true.

I have taken the following hypothesis regarding this study. (Tarawneh, 2006) also

hypothesized it. The result of this hypothesis testing is shown in Chapter III (section

3.3.6).

H0: There is a positive correlation among the financial performance measuredby ROA & interest income, and the independent variables (operating

expense to net interest income, operating income to total assets, and total

assets).

H1: There is no positive correlation among the financial performance measured

by ROA & interest income, and the independent variables (operating

expense to net interest income, operating income to total assets, and total

assets).

Null hypothesis (H0) is accepted if the coefficients of correlations of selected variables are

significant at 0.01 and/or 0.05 level of significance. Otherwise, alternative hypothesis (H1)

is accepted.


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1.7 Limitations of the Study

There are numerous approaches to measure the performance of a bank. Calculation of

average cost and presenting it through curvature is one of the means to judge the

efficiency of commercial bank. Such curvature will demonstrate a relationship between

bank size and unit of production. The other most widely used methods are Data

Envelopment Analysis and the Stochastic Frontier Approach. Nevertheless, because of

data insufficiency neither of this method is trailed.

This study is also not without its limitations like any other study. One of its limitations

that it does not include all financial statements of Citibank, N.A. Bangladesh since it starts

producing financial statements in Bangladesh, because the policy of the company is not to

disclose those financial statements beyond the management of the company that were not

published in newspapers. Hence, financial data before 2003 were unavailable to the

researcher. There are other limitations that I have faced while preparing this report like the

time to prepare a report on such an important analytical topic was not sufficient and

knowledge of the makers was not sufficient to solve such an important issue.


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HAPTER II

COMPANY OVERVIEW


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An Analysis of Financial Performance of Citibank, N.A. in Bangladesh CHAPTER II

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2.1 The Background of Citigroup (Citicorp & Travelers Group)

Citicorp is the parent company of Citibank, which serves consumer and corporate

customers in over 100 countries around the world. Its Global Consumer Business is the

worlds largest issuer of credit cards with 60 million bank cards and provides financial

services through more than a thousand Citibank braches in over 40 countries. Through its

international network of offices, Citibank also provides funding and transaction services

for global corporations and local growth companies in emerging markets.

Travelers Group is a diversified, integrated financial services company engaged in

investment services, asset management, life insurance and property casualty insurance and

consumer lending. Its operating companies include Salomon Smith Barney, Salomon

Smith Barney Asset Management, travelers Life & Annuity, Primerica Financial Services,

Travelers Property Casualty Corp and Commercial Credit.

The merged company is named: Citigroup Inc. and it uses the trademark Travelers red

umbrella as its logo. The principal thrusts of the company are in traditional banking,

consumer finance, credit cards, investment banking, securities brokerage and asset

management, and property casualty and life insurance. The combined company serves

over 100 million customers in 104 countries around the world.

Figure 2.1:Logos of units operating under Citigroup

Source: Collected from official database of Citibank, N.A. Bangladesh


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Dhaka branch of Citibank, N.A. are to provide all kinds of commercial and merchant

banking services to its customers. Deposit mobilization of the bank during the initial six

months of its operations in Bangladesh amounted to Tk.541.89 million, which rose to

Tk.1,577 million in 2000.

2.3 Citibank, N.A. Bangladesh as a branch of Citibank

Citibank is virtually present throughout the entire globe with branches in more than 100

countries. For ease of operation Citibank broadly divides its market into two geographic

segments. GRB (Global Relationship Banking) includes all the markets in the developed

world, while EM (Emerging Market) indicates to markets in the developing world.Naturally Bangladesh is one of 74 countries that fall under the head of Emerging Markets.

Emerging Market is again divided into three geographic segments: Latin America, Asia

Pacific and CEEMA (Central and Eastern Europe, Middle East and Africa). For various

historical reasons Middle East and South Asia was a single cluster within the CEEMA

group and was known as MESA. However only a few years back (in 1997 -98) South Asia

was given the status of a separate cluster still within CEEMA. This cluster includes India,

Bangladesh, Srilanka and Nepal. So, the position of Bangladesh in Citibanks global

market can be shown as:

Figure 2.2: Position of Bangladesh in Citibanks global marketSource: Collected from official database of Citibank, N.A. Bangladesh


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2.4 Organizational Structure of Citibank, N.A. Bangladesh

The formal organogram of Citibank, N.A. Bangladesh has been presented in the appendix

figure 9 of this report. However, this organogram does not completely reflect the principle

on which the structure is based. Before we go into the details of department-by-department

description of the organization, it would helpful to get an overview of how these

departments are interlinked in terms of dealing with the customers. The entire organization

can be viewed as a three-tier entity encompassing the customers:

Figure 2.3:Three-Tier View of the Organizational Structure of Citibank N.A. Bangladesh

Source:Collected from official database of Citibank, N.A. Bangladesh

In the first tier, closest to the customer, there are the Relationship Managers (RMs). They

specialize in specific customers or groups of customers, and they are the primary point of

contact between the bank and the customer. They usually belong to either of the two

departments, which specialize in managing relationships: the Corporate Banking Group

(CBG) and the Financial Institutions (FI). The Treasury department also maintains direct

relationship with some specialized customers of treasury products.

In the second tier, there are product managers. They also interact with the customers, but

in doing so, the closely coordinate with the relationship managers. They may directly

interact with customers who are not designated to any specific RM or may interact with adifferent level of managers when the customer is a corporate house. Often the RMs and


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the Product Managers pay joint visits to customers or make joint presentations. While the

RMs are specialized in dealing with specific customers and know best what the needs of

the customers are, the product managers specialize in specific products and services and

better know the technical details of each product. Mostly the product managers belong todepartments like Cash Management and Treasury who deal with products of different

kinds. A few product managers also work in the operations department. It should be

mentioned that for core products like corporate loans or corresponding banking services,

there are no separate product managers, as the RMs themselves specialize in these

products.

In the third tier there are the support departments: the Technology and Operations, the HR,

Administration and Compliance, Credit Administration and the Financial Control Unit

(FCU). Technology and Operations is the largest department, headed by the SCOO

(Senior Country Operations Officer). Under this department there are the Data Center, The

FI, Treasury and Trade Operations, The Cash Management Operations and the Internal

Control Unit. Support departments usually dont directly interact with the customers for

marketing purposes; rather they provide all type of supports to the product managers and

the relationship managers (RMs).

The organizational structure of Citibank is customized to best utilize the capabilities of

individuals. The relationships and personal network of the product managers and

relationship managers are used in the optimized way to market different offerings. Again

to make use of individuals capabilities in multiple fields, it is often seen that the same

person is working in two different positions.

2.5 Services of Citibank, N.A. in Bangladesh

Operations of Citibank, N.A. encompass corporate bank, financial institutions, treasury

and e-business under the global corporate and investment banking umbrella. They provide

a comprehensive range of financial services including treasury management, transaction

services, foreign exchange and structured finance to corporate clients, governments, and

financial institutions. The bank has been offering its customers the highest standard of

financial services backed by sophisticated technology and innovative product solutions.

The bank also provides remittance services to the expatriate community largely in MiddleEastern countries as well as across the world.


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HAPTER III

FINANCIAL

PERFORMANCEANALYSIS


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An Analysis of Financial Performance of Citibank, N.A. in Bangladesh CHAPTER III

3.1 Financial Highlights

Total Income, Total Expenses and Net Profit

During the four years (2003-2006) of study the total growth of total income, total expenses

and net profit of Citibank, N.A. Bangladesh were on average 80.3 percent, 30.9 percent

and 188.7 percent respectively (see appendix table 1). In appendix table 2, total income

ranges from Tk.1072.77 to Tk.2744.07 millions maintaining Tk.1719.21 millions on an

average with a standard deviation of Tk.746.02 millions per year. Total expenses ranges

from Tk.577.49 to Tk.1065.58 millions maintaining Tk.711.31 millions on an average

with a standard deviation of Tk.236.50 millions per year.

Moreover, net profit ranges from Tk.221.02 to Tk.881.69 millions maintaining Tk.533.73

millions on an average with a standard deviation of Tk.291.08 millions per year. Figure

3.1 shows a bar diagram of total income, total expenses and net profit for four years.

Figure 3.1: Bar Diagram of Total Income, Total Expenses and Net Profit.

Source:Data retrieved from Financial Statements of Citibank, N.A. for 2003 to 2006.

Total Deposits and Total Advances

During the four years of study the total growth of total deposits, total advances of

Citibank, N.A. Bangladesh were on average 79.6 percent, 33.9 percent respectively (see

appendix table 1). In appendix table 2, total deposits ranges from Tk.7222.55 toTk.21056.94 millions maintaining Tk.12543.47 millions on an average with a standard

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deviation of Tk.6455.33 millions per year. Total advances ranges from Tk.5827.70 to

Tk.9543.51 millions maintaining Tk.7308.05 millions on an average with a standard

deviation of Tk.1607.29 millions per year. Figure 3.2 shows a bar diagram of total

deposits and total advances for four years.

Figure 3.2: Bar Diagram of Total Deposit and Total Advance.


Interest Income, Interest Expense and Net Interest Income

During the four years of study the total growth of interest income, interest expense and net

interest income of Citibank, N.A. Bangladesh were on average 70.3 percent, 12.5 percent

and 179.1 percent respectively (see appendix table 1). In appendix table 2, interest income

ranges from Tk.572.28 to Tk.1442.40 millions maintaining Tk.874.08 millions on an

average with a standard deviation of Tk.393.79 millions per year. Interest expense ranges

from Tk.304.20 to Tk.515.66 millions maintaining Tk.408.72 millions on an average with

a standard deviation of Tk.140.85 millions per year. Net interest income ranges from

Tk.198.62 to Tk.826.74 millions maintaining Tk.465.37 millions on an average with a

standard deviation of Tk.276.35 millions per year. Figure 3.3 shows a bar diagram of

interest income, interest expenses and net interest income for four years.

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Figure 3.3: Bar Diagram of Interest Income, Interest Expense and Net Interest Income.


Total Assets and Shareholders Equity

During the four years of study the total growth of total assets and shareholders equity of

Citibank, N.A. Bangladesh were on average 77.7 percent, 126.1 percent respectively (see

appendix table 1). In appendix table 2, total assets ranges from Tk.10337.16 to

Tk.26140.48 millions maintaining Tk.16359.87 millions on an average with a standard

deviation of Tk.7402.63 millions per year. Shareholders equity ranges from Tk.1158.74

to Tk.3762.64 millions maintaining Tk.2254.34 millions on an average with a standard

deviation of Tk.1166.31 millions per year. Figure 3.4 shows a bar diagram of total assets

and shareholders equity for four years.

Figure 3.4: Bar Diagram of Total Assets and Shareholders Equity.Source:Data retrieved from Financial Statements of Citibank, N.A. for 2003 to 2006.

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3.2 Variable Definitions

Table 3.1:Selected financial ratios with their definitions

Symbol Ratio Numerator Denominator IndicatorATD Advances to Deposit Total Advances Total Deposits Liquidity

ATLAdvances to Liability

RatioTotal Advances Total Liabilities Liquidity

AUR Assets Utilization RatioTotal Operating

IncomeTotal Assets Profitability

CAR Capital Adequacy RatioTier 1 Capital plus

Tier 2 Capital

Total Risk Weighted

Assets

Capital

Adequacy

CTI Cost to Income Total Cost Total Income Efficiency

DTA Debt to Assets Total Liabilities Total Assets Leverage

DTE Debt to Equity Total Liabilities Shareholders Equity Leverage

EM Equity Multiplier Total Assets Shareholders Equity LeverageIDR Implicit Deposit Rate Interest Expense Total Deposits Profitability

IIRSImplicit Interest Rate

SpreadILR-IDR Profitability

ILR Implicit Lending Rate Interest Income Total Advances Profitability

LATL Liquid Asset to Liability Liquid Assets Total Liabilities Liquidity

NIM Net Interest Margin Net Interest Income Total Assets Profitability

NITANoninterest Income to

AssetsNoninterest Income Total Assets Profitability

NITOINoninterest Income to

Operating IncomeNoninterest Income

Total Operating

IncomeProfitability

OETA Operating Expense toAssets

Total OperatingExpense

Total Assets Efficiency

OETNIIOperating Expense to

Net Interest Income

Total Operating

ExpenseNet Interest Income Efficiency

OETOIOperating Expense to

Operating Income

Total Operating

Expense

Total Operating

IncomeEfficiency

PLLProvision for Loan

LossesProvision for Loans Total Advances Efficiency

ROA Return On Assets Net Profit Total Assets Profitability

ROD Return On Deposit Net Profit Total Deposits Profitability

ROE Return On Equity Net Profit Shareholders Equity Profitability

RI Risk Index 1+EMROA ROA Risk

T1CTRWATier 1 Capital to Total

Risk Weighted AssetsTier 1 Capital

Total Risk Weighted

AssetsSolvency

Source: These ratios are retrieved from various papers, websites, etc. Their

respective sources are stated in section 3.3.2.

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3.3 Results and Discussion

3.3.1 Common Size Financial Statements

Common Size Income Statement

In appendix table 4, there is a greater percentage of interest income in 2003 (81.86

percent) whereas 2005 has lower percentage of this item (56.01 percent). On an average,

the bank has maintained 68.87 percent of interest income. The percentage of interest

income is fluctuating over the years. There is a greater percentage of interest expense in

2003 (53.45 percent) whereas 2005 has lower percentage of this item (20.55 percent). On

an average, the bank has maintained 34.87 percent of interest expense. The percentage of

interest expense is decreasing over the years except it increases in 2006. There is a greater

percentage of net interest income in 2006 (38.84 percent) whereas 2003 has lower

percentage of this item (28.41 percent). On an average, the bank has maintained 34.01

percent of net interest income. The percentage of net interest income is increasing over the

years.

The other earnings of the bank came from income from investments made in the Treasury

Bills, commissions and other operating income. The latter constituted mainly of

consultancy fee. There is a greater percentage of noninterest income in 2003 (71.59

percent) whereas 2006 has lower percentage of this item (61.16 percent). On an average,

the bank has maintained 65.99 percent of noninterest income. The percentage of

noninterest income is decreasing over the years. There is a greater percentage of operating

expense in 2003 (29.16 percent) whereas 2005 has lower percentage of this item (20.49

percent). On an average, the bank has maintained 24.48 percent of operating expense. The

percentage of operating expense is decreasing over the years except it slightly increases in

2006.

Net profit is the final item of income statements. There is a greater percentage of net profit

in 2005 (43.75 percent) whereas 2003 has lower percentage of this item (31.61 percent).

On an average, the bank has maintained 39.49 percent of net profit. The percentage of net

profit is increasing over the years except it slightly decreases in 2006.

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Common Size Balance Sheet

In the asset side of the balance sheet of Citibank N. A. Bangladesh (see appendix table 5),

cash in hand is increasing over the years except it decreases in 2006 (0.31 percent). The

highest and the lowest percentage of this item was 1.10 percent in 2005 and 0.31 percent

in 2006 respectively. On an average, the bank maintained 0.56 percent cash in hand per

year. Balance with Bangladesh Bank and Sonali bank is fluctuating over the years. The

highest and the lowest percentage of this item was 26.04 percent in 2005 and 11.72

percent in 2004 respectively. On an average, the bank maintained 19.38 percent balance

with Bangladesh Bank and Sonali bank per year.

Money at call and short notice is fluctuating over the years. The highest and the lowest

percentage of this item was 15.22 percent in 2004 and 0.28 percent in 2005 respectively.

On an average, the bank maintained 5.85 percent money at call and short notice per year.

Total investment is decreasing over the years except it increases in 2006 (15.06 percent).

The highest and the lowest percentage of this item was 15.06 percent in 2006 and 7.33

percent in 2005 respectively. On an average, the bank maintained 11.57 percent total

investments per year. Total loans & advance is decreasing over the years except it

increases in 2006 from 2004 (56.38 percent to 60.08 percent). The highest and the lowest

percentage of this item was 60.08 percent in 2004 and 36.51 percent in 2006 respectively.

On an average, the bank maintained 48.36 percent total loans & advances per year.

In the liabilities & equity side of the balance sheet of Citibank N. A. Bangladesh, deposits

& other account is fluctuating over the years. The highest and the lowest percentage of this

item was 80.55 percent in 2006 and 66.16 percent in 2004 respectively. On an average, the

bank maintained 75.13 percent deposits & other accounts per year. Total liabilities account

is decreasing over the years. The highest and the lowest percentage of this item was 88.79

percent in 2003 and 85.61 percent in 2006 respectively. On an average, the bank

maintained 86.53 percent total liabilities per year. Shareholders equity is increasing over

the years. The highest and the lowest percentage of this item was 14.39 percent in 2006

and 11.21 percent in 2003 respectively. On an average, the bank maintained 13.47 percent

shareholders equity per year.

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3.3.2 Ratio Analysis

A banks balance sheet and income statement are valuable information sources for

identifying risk taking and assessing risk management effectiveness. Although the taka

amounts found on these statements provide valuable insights into the performance and

condition of a bank, financial analysts, bankers and bank supervisors typically use data

from them to develop financial ratios to evaluate bank performance. This is done to

provide perspective and facilitate making comparisons. There are literally hundreds of

useful financial ratios we can use to evaluate banks performance. However, in most

instances, directors only need a few basic ratios to identify fundamental performance

issues and help them formulate questions regarding any underlying problems and asking

managements plans for correcting them. This section will discuss some selected ratios

from various perspectives.

Liquidity Measurement

Advances to Deposit

Advance to deposit (ATD) ratio is the most commonly used liquidity ratio of a bank.

(Misir, 1998) and (Hossain & Bhuiyan, 1990) have used this ratio for measuring liquidity

of a bank. Federal Reserve Bank of Dallas also uses this ratio. A low ratio of ATD

indicates excess liquidity, and potentially low profits, compared to other banks. A high

ATD ratio presents the risk that some loans may have to be sold at a loss to meet

depositors' claims. The ATD ratios of Citibank, N.A. Bangladesh are given below:

Year 2006 2005 2004 2003 AVG

ATD 45.32% 52.01% 90.81% 74.19% 65.58%

The banks ATD ratio increases from 2003 to 2004, after then it decreases till 2006. The

lowest ATD ratio was in 2006 which surely helps to lower risk of loan losses but it also

reduces profits in that period. On an average, the bank maintained 65.58 percent ATD

ratio which is moderate in terms of lesser risk and greater profits.

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Efficiency Measurement

Cost to Income

The Cost-to-Income (CTI) ratio is one of the most important performance indicators forbanks both locally and globally. The intention of a bank is to work hard towards driving

this ratio down significantly. (Peter, Raad, & Sinkey; 2004) have used this ratio for

measuring the efficiency of a bank. South African Reserve Bank also preferred to use this

ratio for such purposes. CTI ratios of Citibank, N.A. for selected years are given below:

Year 2006 2005 2004 2003 AVG

CTI 38.83% 34.04% 46.63% 53.83% 43.33%

The CTI ratios of Citibank, N.A. decreases from 2003 to 2004 (53.83 percent to 46.63

percent) and 2004 to 2005 (46.63 percent to 34.04 percent) which is a positive sign to me.

But it slightly increases in 2006 from 2005 (34.04 percent to 38.83 percent). On an

average the bank maintained 43.33 percent CTI ratio.

Operating Expense to Assets

Operating Expense to Assets (OETA) ratio is another important tool for measuring the

efficiency of a bank. The lesser the OETA ratio, the better for the company; and vice-

versa. (Juan-Ramon, Randall, & Williams; 2001) have used this ratio for measuring the

efficiency of a bank. (Public Bank Berhad, 2004) have also used this ratio in their

economic review. OETA ratios of Citibank, N.A. Bangladesh for selected years are given

below:

Year 2006 2005 2004 2003 AVG

OETA 1.72% 1.68% 2.32% 1.97% 1.92%

The banks OETA ratios look interesting to me because it consistently follows up-down-

up-down strategy. The lowest OETA ratio in sample years was 1.68 percent in 2005 and

the highest OETA ratio was 2.32 percent in 2004. On an average, the bank maintained

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1.92 percent OETA ratio. According to CAMELS rating by Chowdhury S. K. (2007),

Operating Expense to Assets:

Criteria Indicator

9% or less Strong

11% to more than 9% Satisfactory

12% to more than 11% Fair

13% to less than 12% Marginal

Above 13% Unsatisfactory

The banks OETA ratios of selected years are less than 9 percent which is a strong

indicator according to Chowdhury (2007).

Operating Expense to Net Interest Income

In their paper, (Tarawneh, 2006) have used Operating Expense to Net Interest Income

(OETNII) ratio for measuring operational efficiency. It is also a good measure for

understanding the requirement of operating expense to generate the net interest income.

OETNII ratios of Citibank, N.A. for the selected years are depicted in the following table:

Year 2006 2005 2004 2003 AVG

OETNII 54.42% 57.78% 81.42% 102.62% 74.06%

Since 2003 (where the operating expense exceeds net interest income), the bank

continuously reduces OETNII ratio till 2006 (102.62 percent to 54.42 percent) which

indicates an outstanding performance and efficiency for maintaining the operation of the

bank. On an average, the bank maintained 74.06 percent OETNII ratio but I do feel that it

will decrease over the following years.

Operating Expense to Operating Income

In their economic review, (Public Bank Berhad, 2004) have used Operating Expense to

Operating Income (OETOI) ratio. It is an important tool for understanding the requirement

of operating expense to generate operating income and it only considers operating

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activities other than non-operating activities. In that sense, its an effective tool for

measuring the efficiency. The selected banks OETOI ratios for four years are given

below:

Year 2006 2005 2004 2003 AVG

OETOI 21.14% 20.49% 27.12% 29.16% 24.48%

The highest OETOI ratio was 29.16 percent in 2003 and the lowest OETOI ratio was

20.49 percent in 2005. The bank successfully reduces this ratio from 2003 to 2005 but it

slightly increases in 2006 (21.14 percent). On an average, the bank maintained 24.48

percent OETOI ratio for four years. According to CAMELS rating by Chowdhury S. K.(2007), Operating Expense to Operating Income:

Criteria Indicator

85% or below Strong

More than 85% to 90% Satisfactory

More than 90% to 95% Fair

More than 95% to 100% Marginal

Over 100% Unsatisfactory

The banks OETOI ratios of selected years are much less than 85 percent which is a strong


Provision for Loan Losses

The provision for loan losses (PFLL) is a charge to current earnings to build the

Allowance for Loan and Lease Losses (ALLL). Ideally this ratio should be low. The

ALLL is a general reserve kept by banks to absorb loan losses. The responsibility of a

director is to ensure that the loan loss reserve is sufficient to absorb probable loan losses.

When considering how much to take out of earnings to add to the ALLL, we should

consider factors that may affect loan losses. These include changing market conditions

where the bank operates, rising numbers of delinquent loans and significant loan growth.

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All may bear on loan loss and the need to increase ALLL reserves. (Koch & MacDonald,

2006) clearly depicted the flow of PFLL shown in figure 3.5.

Figure 3.5: Flow of Provision for Loan LossesSource:Koch, T. W., & MacDonald, S. S. (2006).

(Juan-Ramon, Randall, & Williams; 2001), (Peters, Raad & Sinkey; 2004), US Business

Reporter; and many more have used PFLL ratio as an effective tool for measuring the

operating efficiency of a bank. Citibanks PFLL ratios are as follows:

Year 2006 2005 2004 2003 AVG

PFLL 0.27% 0.09% (0.31)% 0.74% 0.20%

The banks PFLL ratio was higher in 2003 (0.74 percent). In 2004, it has an excess

provision (0.31 percent) but PFLL ratio again increases from 2005 to 2006 (0.09 percent

to 0.27 percent). On an average, the bank maintained 0.20 percent PFLL ratio which is a

very positive sign to me.

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Leverage Measurement

Debt to Equity

Debt to Equity (DTE) ratio is rarely used for measuring the financial performance of abank because usually the portion of debt of a bank is significantly higher than the portion

of its equities. My objective is to see whether this ratio is increasing over the years.

Though DTE ratio is a measure of leverage, it cannot be interpreted for the banking sector

in such a way which we usually do for several industries other than banking sector. DTE

ratios of Citibank, N.A. are shown in the following table.

Year 2006 2005 2004 2003 AVG

DTE 594.74% 605.41% 609.86% 792.10% 650.53%

The highest DTE ratio was in 2003 (792.10 percent) and the lowest DTE ratio was in 2006

(594.74 percent). Citibanks DTE ratio is decreasing year by year which is a positive sign

to me. On an average, the bank maintained 650.53 percent DTE ratio.

Debt to Assets

Debt to Assets (DTA) is another tool for measuring the leverage of a company. The higher

the portion of DTA, the greater is the degree of risk because creditors must be satisfied

before owners in the event of bankruptcy. The lower ratio of DTA provides a cushion of

protection for the suppliers of debt. In Liabilities & Shareholders Equity side of a banks

balance sheet, it is very usual to see greater portion of debt than shareholders equity. So

DTA ratio of a bank can be interpreted in such a way that is only relevant for the banking

industry. The following table shows DTA ratios of Citibank, N.A. for four years.

Year 2006 2005 2004 2003 AVG

DTA 85.61% 85.82% 85.91% 88.79% 86.53%

The DTA ratio of Citibank is decreasing at a slower rate from 2003 to 2006. The highest

DTA ratio was 88.79 percent in 2003 and the lowest DTA ratio was 85.61 percent in 2006.

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On an average, the bank maintained 86.53 percent DTA ratio. We can expect this ratio

will be much lower after 2006.

Solvency Measurement

Tier 1 Capital to Total Risk Weighted Assets

For most banks, Tier 1 Capital (Core Capital) generally consists of only common equity,

which is the sum of common stock, surplus and retained earnings. Because of this, the

leverage ratio gives an indication of the equity support for a banks assets. In other words,

this ratio is designed to indicate the amount of equity or capital support or assets that can

protect the bank from unexpected events. The smaller this support gets, the greater the

likelihood the bank may become insolvent. Thus, any significant decline in a banks

leverage ratio presents increased risk to the deposit insurance fund and raises regulatory

concern, especially if the bank becomes undercapitalized. Tier 1 Capital to Total Risk

Weighted Assets (T1CTRWA) ratios of Citibank, N.A. Bangladesh are as follows.

Year 2006 2005 2004 2003 AVG

T1CTRWA 30.34% 24.39% 23.45% 19.80% 24.50%

According to (Bangladesh Bank Annual Report, 2005), on an average the T1CTRWA

ratio for foreign commercial banks (FCB) was 20.33 percent taking eight years (1998 to

2005). In Citibank, N.A., such average is higher (24.50 percent) than that of FCBs. Also,

Citibanks T1CTRWA ratio is increasing which is a very good sign for any bank.

According to CAMELS rating by Chowdhury S. K. (2007), Tier 1 Capital to Risk-

weighted Assets:

Criteria Indicator

More than 5% Strong

4.5% to 5% Satisfactory

3.5% to less than 4.5% Fair

3% to less than 3.5% Marginal

Below 3% Unsatisfactory

Citibanks T1CTRWA ratios of selected years are much more than 5 percent which is a

strong indicator according to Chowdhury (2007).

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Profitability Measurement

Profitability in the banking sector has been extensively examined in developed countries,

especially in North America and Europe. Evidence from these studies shows that bank

profitability depends on several factors (Peters, Raad & Sinkey, 2004). A model was

developed by (Koch & MacDonald, 2006) to measure bank performance which is given

below:

Figure 3.6:Bank Performance Model

Source:Koch, T. W., & MacDonald, S. S. (2006).

Return on Assets

Numerous researchers have used Return on Assets (ROA) ratio for measuring the

profitability of a bank. (Peters, Raad & Sinkey, 2004), (Wang, 2004), (Malek, 2005),

(Tarawneh, 2006); and many more have extensively used ROA ratio. The greater the ROA

ratio, the better for the bank. ROA ratios of Citibank, N.A. Bangladesh are shown below.

Year 2006 2005 2004 2003 AVG

ROA 3.37% 3.59% 3.52% 2.14% 3.16%

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According to (Bangladesh Bank Annual Report, 2005), on an average the ROA ratio for

foreign commercial banks (FCB) was 3.13 percent taking eight years (1998 to 2005). In

Citibank, N.A., such average is higher (3.16 percent) than that of FCBs. Also, Citibanks

ROA ratio is increasing which is a very good sign for any bank though it slightlydecreases in 2006 from 2005 (3.59 percent to 3.37 percent). According to CAMELS rating

by Chowdhury S. K. (2007), Return On Assets:

Criteria Indicator

1.3% or more Strong

0.8% to less than 1.3% Satisfactory


0.16% to less than 0.4% Marginal

Below 0.16% Unsatisfactory

Citibanks ROA ratios of selected years are more than 1.3 percent which is a strong


Return on Equity

Numerous researchers have used Return on Equity (ROE) ratio for measuring the

profitability of a bank. (Peters, Raad & Sinkey, 2004), (Malek, 2005), (Tarawneh, 2006);

and many more have extensively used ROE ratio. The greater the ROE ratio, the better for

the bank. ROE ratios of Citibank, N.A. Bangladesh are shown below.

Year 2006 2005 2004 2003 AVG

ROE 23.43% 25.32% 25.00% 19.07% 23.21%

According to (Bangladesh Bank Annual Report, 2005), on an average the ROE ratio for

foreign commercial banks (FCB) was 28.13 percent taking eight years (1998 to 2005). In

Citibank, N.A., such average is slightly lower (23.21 percent) than that of FCBs. But the

average ROE ratio for FCBs is 23.75 percent taking six years (2000 to 2005). We can

consider the ROE ratio of FCBs for two years (1998 and 1999) as outliers because they are

much greater in comparison to other years (40.7 percent and 41.8 percent respectively). If

we exclude outliers, we can say Citibanks average ROE ratio is higher than that of FCBs.

Also, Citibanks ROE ratio is increasing which is a very good sign for any bank though it

slightly decreases in 2006 from 2005 (25.32 percent to 23.43 percent).

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Return on Deposit

To most financial analysts, Return on Deposit (ROD) is one of the best measures of bank

profitability performance. This ratio reflects the bank management ability to utilize the

customers deposits in order to generate profits. (Tarawneh, 2006) have used this ratio as a

profitability measurement. ROD ratio for Citibank, N.A. Bangladesh is shown below.

Year 2006 2005 2004 2003 AVG

ROD 4.19% 4.61% 5.32% 2.81% 4.23%

Above table shows that ROD ratios over the years are positive and strong too. We can

clearly see that ROD ratios were fluctuating through the period. The highest ROD ratio

was 5.32 percent in 2004 and the lowest ROE ratio was 2.81 percent. The average of ROD

for Citibank is 4.23 percent during the period 2003-2006.

Implicit Interest Rate Spread

(Pak & Huh, 1995) and (Juan-Ramon, Randall & Williams; 2001) have used Implicit

Interest Rate Spread (IIRS) ratio in their paper for measuring the profitability of a bank.

IIRS can be found by deducting Implicit Deposit Rate (IDR) from Implicit Lending Rate

(ILR). ILR, IDR and IIRS ratios of Citibank, N.A. Bangladesh are as follows.

Year 2006 2005 2004 2003 AVG

ILR 15.11% 11.36% 9.95% 9.82% 11.56%

IDR 2.92% 2.17% 4.73% 4.76% 3.64%

IIRS 12.19% 9.19% 5.22% 5.06% 7.92%

On an average, Citibank, N.A. charges 11.56 percent interest for loans and pay 3.64

percent for deposits. ILR is significantly greater in 2006 (15.11 percent) and IDR is much

lower in 2005 (2.17 percent). The banks IIRS is increasing over the years at an increasing

rate which is strengthening the profitability of Citibank, N.A. Bangladesh. On an average,

the bank maintained 7.92 percent IIRS. According to CAMELS rating by Chowdhury S.

K. (2007), Net Spread:

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Criteria Indicator

2% or more Strong

1.25% to less than 2% Satisfactory


0% to less than 0.5% Marginal


IIRS ratios of Citibank, N.A. Bangladesh for selected years are much more than 2 percent

which is a strong indicator according to Chowdhury (2007).

Net Interest Margin

Net interest income is the difference between interest income and interest expense. It is the

gross margin on a banks lending and investment activities. Analysts focus on Net Interest

Margin (NIM) ratio because small changes in a banks lending margin can translate into

large bottom line changes. The higher the ratio the cheaper the funding or the higher the

margin the bank is obtaining. A banks net interest margin is a key performance measure

that drives ROA. (Juan-Ramon, Randall & Williams; 2001), (Peters, Raad & Sinkey,

2004), (South African Reserve Bank, 2003); and many more have used this ratio. The

following data shows NIMs for Citibank, N.A. for four years.

Year 2006 2005 2004 2003 AVG

NIM 3.16% 2.91% 2.85% 1.92% 2.71%

NIM of Citibank is continuously increasing at an average rate of 2.71 percent per year.

The lowest NIM was 1.92 percent in 2003 and the highest NIM was 3.16 percent in 2006.

We can expect that this ratio will be increasing after 2006. According to CAMELS rating

by Chowdhury S. K. (2007), Net Interest Margin:

Criteria Indicator

5% or more Strong

4.5% to less than 5% Satisfactory

4% to less than 4.5% Fair



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NIM ratios of Citibank, N.A. Bangladesh for selected years are less than 3 percent which

is an unsatisfactory indicator according to Chowdhury (2007) except in 2006 (3.16 percent

grouped as marginal indicator).

Noninterest Income to Assets

Noninterest Income to Assets (NITA) is an indicator of the operational performance. It

indicates the proportion of fees and other income in respect of total assets of banks. The

higher this ratio is the better. (Pak & Huh, 1995), (Juan-Ramon, Randall & Williams;

2001) have used this ratio as a measure of profitability indicator. NITA ratios of Citibank,

N.A. Bangladesh are shown below.

Year 2006 2005 2004 2003 AVG

NITA 4.98% 5.30% 5.70% 4.84% 5.21%

NITA of Citibank is continuously increasing at an average rate of 5.21 percent per year

but it slightly decreases in 2006 (4.98 percent). The lowest NITA was 4.84 percent in 2003

and the highest NITA was 5.70 percent in 2004. We can expect that this ratio will be

increasing after 2006.

Noninterest Income to Operating Income

Noninterest Income to Operating Income (NITOI) ratio is another indicator of the

operational performance. It indicates to what extent fees and other income represent a

percentage of operating income of banks. (South African Reserve Bank, 2003) have used

this ratio as a measure of profitability indicator. NITOI ratios of Citibank, N.A.

Bangladesh are shown below.

Year 2006 2005 2004 2003 AVG

NITOI 61.16% 64.54% 66.69% 71.59% 65.99%

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NITOI of Citibank is continuously decreasing at an average rate of 65.99 percent per year.

The lowest NITOI was 61.16 percent in 2006 and the highest NITOI was 71.59 percent in

2003. We can say that Citibank, N.A. Bangladesh is not interested in increasing NITOI

ratios further.

Asset Utilization Ratio

In their paper, (Tarawneh, 2006) have used Asset Utilization Ratio (AUR). This ratio

indicates the proportion of total operating income to total assets. The higher this ratio is

the better. The following data shows AUR of Citibank, N.A. Bangladesh for four years.

Year 2006 2005 2004 2003 AVG

AUR 8.14% 8.20% 8.55% 6.76% 7.92%

AUR of Citibank is fluctuating at an average rate of 7.92 percent per year. The lowest

AUR was 6.76 percent in 2003 and the highest AUR was 8.55 percent in 2004. We can

expect this ratio will increase further. According to CAMELS rating by Chowdhury S. K.

(2007), Asset Utilization Ratio:

Criteria Indicator

13% or more Strong

11% to less than 13% Satisfactory

8% to less than 11% Fair



AURs of Citibank, N.A. Bangladesh falls into two categories according to CAMELS

rating. AUR in 2003 was marginal (6.73 percent) and AURs from 2004 to 2006 were fair

(8.55 percent, 8.20 percent and 8.14 percent respectively).

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3.3.3 Measuring Bank Riskiness:

To investigate bank riskiness and the probability of book-value insolvency, I have used the

risk index as used by (Peters, Raad, & Sinkey; 2004) and suggested by Hannan and

Hanweck (stated in their paper Peters, Raad, & Sinkey; 2004). The empirical version of

the risk index (RI) is calculated as follows:

)ROA

EMROARI

1+

=

Where,

ROA = average return on assets,

EM-1

= the reciprocal of EM or the ratio of shareholders' equity to total assets, and

ROA = the standard deviation of ROA.

Hannan and Hanweck [1988] derive the upper bound probability of book value insolvency

(p) and show that it equals 1/[2(RI)2

]. The RI and values of Citibank, N.A. Bangladesh

in 2006 are as follows:

( )[ ]00076.

65.252

1

65.25

00684.

94738.603156.

2

1

==

=+

=

p

RI

The result shows that, there is a safety of Citibank, N.A. in Bangladesh because RI is not

significantly higher (25.65) and its associated probability of book-value insolvency is very

insignificant (.076 percent) in 2006. Another measure of risk I have used in this study is

the variability of ROA as measured by its standard deviation. Appendix table 3 shows that

the standard deviation is 0.683 with a mean standard error of 0.341, another indicator of

the reduced riskiness of Citibank, N.A. Bangladesh. The coefficient of variation (standard

deviation of ROA / mean ROA) is a relative measure of dispersion. This value is 21.64

percent over the sample period. Above all, all three measures of risk- the risk index, the

standard deviation of ROA, and the coefficient of variation of ROA, indicate that

Citibank, N.A. is safer in 2006.

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3.3.4 Regression Analysis

Simple Regression

Simple linear regression analysis analyzes the linear relationship that exists between a

dependent variable and a single independent variable. Simple linear regression model is

described as:

++= xy 10

where:

y= Value of the dependent variable

x= Value of the independent variable

0= Populations y-intercept

1= Slope of the population regression line

= Error term, or residual

Regression equation of Net Profit on Total Deposits

Table 3.4:Regression results of Net Profit & Total Deposits

Model Summary

.957a .916 .873 103.58492

Model

1

R R Square

Adjusted

R Square

Std. Error of

the Estimate

Predictors: (Constant), Total Depositsa.

Coefficientsa

-7.459 127.227 -.059 .959

.043 .009 .957 4.657 .043

(Constant)

Total Deposits

Model

1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.

Dependent Variable: Net Profita.

Source: Estimated regression results by SPSS software package using data from

financial statements of Citibank, N.A. Bangladesh for 2003 to 2006.

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In table 3.4, the model summary table reports the strength of the relationship between

Total Deposits and Net Profit. R, the multiple correlation coefficient, is the linear

correlation between the observed and model-predicted values of Net Profit. Here it

indicates a high positive correlation (.957) between Total Deposits & Net Profit.R Square,the coefficient of determination, is the squared value of the multiple correlation

coefficient. It shows that about 91.6 percent of Net Profit can be explained by Total

Deposits.

As a further measure of the strength of the model fit, I can compare the standard error of

the estimate in the model summary table to the standard deviation of Net Profit reported in

the descriptive statistics table (see appendix table 2). Without prior knowledge of Total

Deposits for the coming period, my best guess for Net Profit would be about Tk.533.73

millions, with a standard deviation of Tk.291.08 millions. With the linear regression

model, the error of my estimate is considerably lower, about 103.6.

Table 3.4 also shows the coefficients of the regression line. It states that the expected Net

Profit is equal to .043 * Total Deposits 7.459. If the director of Citibank, N.A.

Bangladesh plans to deposit Tk. 24149.38 millions in 2007 according to trend equation for

total deposits (see appendix figure 1), the predicted net profit would be .043 * 24149.38

7.459 = 1030.96 millions taka. The model fit looks positive. The first section of the

coefficients table shows that there is a significant coefficient (.043) for Total Deposits,

indicating that this variable contribute to the model. To determine the relative importance

of the significant predictors, I can look at the standardized coefficients. Even though Total

Deposits has a small coefficient (.043), it actually contributes to the model because it has a

large absolute standardized coefficient (.957).

Regression equation of Net Profit on Total Advances

Table 3.5:Regression results of Net Profit & Total Advances

Model Summary

.963a .928 .892 95.72238

Model1

R R Square

Adjusted

R Square

Std. Error of

the Estimate

Predictors: (Constant), Total Advancesa.

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Coefficientsa

-741.128 255.798 -2.897 .101.174 .034 .963 5.073 .037

(Constant)Total Advances

Model

1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.





Total Advances and Net Profit. R, the multiple correlation coefficient, is the linearcorrelation between the observed and model-predicted values of Net Profit. Here it

indicates a high positive correlation (.963) between Total Deposits & Net Profit.R Square,

the coefficient of determination, is the squared value of the multiple correlation

coefficient. It shows that about 92.8 percent of Net Profit can be explained by Total

Advances.




Advances for the coming period, my best guess for Net Profit would be about Tk.533.73




Profit is equal to .174 * Total Advances 741.128. If the director of Citibank, N.A.

Bangladesh plans to keep Advance Tk. 10280.78 millions in 2007 according to trend

equation for Total Advances (see appendix figure 6), the predicted Net Profit would be

.174 * 10280.78 741.128 = 1047.73 millions taka. The model fit looks positive. The first

section of the coefficients table shows that there is a significant coefficient (.037) for Total

Advances, indicating that this variable contribute to the model. To determine the relative

importance of the significant predictors, I can look at the standardized coefficients. Even

though Total Advances has a small coefficient (.174), it actually contributes to the model

because it has a large absolute standardized coefficient (.963).

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Regression equation of Net Profit on ATD ratio

Table 3.6:Regression results of Net Profit & ATD ratio

Model Summary

.827a .683 .525 200.59358

Model

1

R R Square

Adjusted

R Square

Std. Error of

the Estimate

Predictors: (Constant), ATDa.

Coefficientsa

1290.272 377.685 3.416 .076

-11.536 5.552 -.827 -2.078 .173

(Constant)

ATD

Model

1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.





ATD ratio and Net Profit. R, the multiple correlation coefficient, is the linear correlation

between the observed and model-predicted values of Net Profit. Here it indicates a high

positive correlation (.827) between ATD ratio & Net Profit. R Square, the coefficient of

determination, is the squared value of the multiple correlation coefficient. It shows that

about 68.3 percent of Net Profit can be explained by ATD ratio.


the estimate in the model summary table to the standard deviation of Net Profit reported inthe descriptive statistics table (see appendix table 2). Without prior knowledge of ATD

ratio for the coming period, my best guess for Net Profit would be about Tk.533.73


model, the error of my estimate is slightly lower, about 200.6.


Profit is equal to -11.536 * ATD ratio + 1290.272. If the director of Citibank, N.A.

Bangladesh plans to keep ATD ratio 65.58 percent on an average in 2007 according to

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average ATD ratio (see appendix table 3-A), the predicted Net Profit would be -11.536 *

65.58 + 1290.272 = 533.74 millions taka. The first section of the coefficients table shows

that there is a non-significant coefficient (.173) for ATD ratio, indicating that this variable

does not contribute to the model.

Regression equation of Net Profit on Total Assets

Table 3.7:Regression results of Net Profit & Total Assets

Model Summary

.973a .947 .921 81.83065Model1 R R Square

Adjusted

R Square

Std. Error of

the Estimate

Predictors: (Constant), Total Assetsa.

Coefficientsa

-92.370 112.142 -.824 .497

.038 .006 .973 5.996 .027

(Constant)

Total Assets

Model

1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.





Total Assets and Net Profit.R, the multiple correlation coefficient, is the linear correlation

between the observed and model-predicted values of Net Profit. Here it indicates a high

positive correlation (.973) between Total Assets & Net Profit.R Square, the coefficient of

determination, is the squared value of the multiple correlation coefficient. It shows that

about 94.7 percent of Net Profit can be explained by Total Assets.




Assets for the coming period, my best guess for Net Profit would be about Tk.533.73

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Profit is equal to .038 * Total Assets 92.37. If the director of Citibank, N.A. Bangladesh

plans to keep Total Assets Tk. 29994.29 millions in 2007 according to trend equation for

Total Assets (see appendix figure 7), the predicted Net Profit would be .038 * 29994.29

92.37 = 1047.41 millions taka.

The model fit looks positive. The first section of the coefficients table shows that there is a

significant coefficient (.027) for Total Assets, indicating that this variable contribute to the

model. To determine the relative importance of the significant predictors, I can look at the

standardized coefficients. Even though Total Assets has a small coefficient (.038), it

actually contributes to the model because it has a large absolute standardized coefficient

(.973).

Regression equation of Operating Expense on Total Assets

Table 3.8:Regression results of Operating Expenses & Total Assets

Model Summary

.977a .954 .931 27.93642

Model1

R R Square

Adjusted

R Square

Std. Error of

the Estimate

Predictors: (Constant), Total Assetsa.

Coefficientsa

73.170 38.285 1.911 .196

.014 .002 .977 6.436 .023

(Constant)

Total Assets

Model1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.

Dependent Variable: Operating Expensesa.



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Total Assets and Operating Expenses. R, the multiple correlation coefficient, is the linear

correlation between the observed and model-predicted values of Operating Expenses. Here

it indicates a high positive correlation (.977) between Total Assets & Operating Expenses.R Square, the coefficient of determination, is the squared value of the multiple correlation

coefficient. It shows that about 95.4 percent of Operating Expenses can be explained by

Total Assets.


the estimate in the model summary table to the standard deviation of Operating Expenses

manually calculated. Without prior knowledge of Total Assets for the coming period, my

best guess for Operating Expenses would be about Tk.302.60 millions, with a standard

deviation of Tk.106.29 millions. With the linear regression model, the error of my estimate

is considerably lower, about 27.9.

Table 3.8 also shows the coefficients of the regression line. It states that the expected

Operating Expenses is equal to .014 * Total Assets + 73.17. If the director of Citibank,

N.A. Bangladesh plans to keep Total Assets Tk. 29994.29 millions in 2007 according to

trend equation for Total Assets (see appendix figure 7), the predicted Operating Expenses

would be .014 * 29994.29 + 73.17 = 493.09 millions taka.

The model fit looks positive. The first section of the coefficients table shows that there is a

significant coefficient (.023) for Total Assets, indicating that this variable contribute to the


standardized coefficients. Even though Total Assets has a small coefficient (.014), it

actually contributes to the model because it has a large absolute standardized coefficient

(.977).

Multiple Regression

Multiple regression enables us to determine the simultaneous effect of several independent

variables on a dependent variable using the least squares principle. Multiple regression

model can be described as:

+++++= kkxxxy K

22110

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where:

0= Populations regression constant

j= Populations regression coefficient for variablej; j=1, 2, k

k=Number of independent variables

= Model error

Regression equation of Net Profit on Total Deposits & Total Advances

Table 3.9:Regression results of Net Profit, Total Deposits & Total Advances

Coefficientsa

-454.936 717.051 -.634 .640

.018 .041 .404 .450 .731

.104 .163 .574 .638 .638

(Constant)

Total Deposits

Total Advances

Model1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.




In their paper, (Hossain & Bhuiyan, 1990) have used this multiple regression equation. In

table 3.9, the model summary table reports the strength of the relationship among Net

Profit on Total Deposits and Total Advances. The coefficients of the regression line states

that the expected Net Profit is equal to .104 * Total Advances + .018 Total Deposits

454.936. If the director of Citibank, N.A. Bangladesh plans to Deposit Tk. 24149.38

millions in 2007 according to trend equation for total deposits (see appendix figure 1) and

Advances Tk. 10280.78 millions in 2007 according to trend equation for Total Advances

(see appendix figure 6), the predicted Net Profit would be .104 * 10280.78 + .018 *

24149.38 454.936 = 1048.95 millions taka.

The model fit does not look positive. The first section of the coefficients table shows that

there is a non-significant coefficient (.731) for Total Deposits and a non-significant

coefficient (.638) for Total Advances, indicating that these variables do not contribute to

the model. To determine the relative importance of the significant predictors, I can look at

the standardized coefficients. Total Advances has a greater coefficient (.104) and it

actually contributes more to the model because it has a larger absolute standardizedcoefficient (.574).

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Regression equation of Net Profit on Total Advances & Total Assets

Table 3.10:Regression results of Net Profit, Total Advances & Total Assets

Coefficientsa

-286.128 727.799 -.393 .762

.050 .185 .279 .272 .831

.028 .040 .701 .685 .617

(Constant)

Total Advances

Total Assets

Model1

B Std. Error

Unstandardized

Coefficients

Beta

Standardized

Coefficients

t Sig.




In table 3.10, the model summary table reports the strength of the relationship among Net

Profit on Total Assets and Total Advances. The coefficients of the regression line states

that the expected Net Profit is equal to .050 * Total Advances + .028 Total Deposits

286.128. If the director of Citibank, N.A. Bangladesh plans to keep Advances Tk.

10280.78 millions in 2007 according to trend equation for Total Advances (see appendix

figure 6) and Total Assets Tk. 29994.29 millions in 2007 according to trend equation for

Total Assets (see appendix figure 7), the predicted Net Profit would be .050 * 10280.78 +

.028 * 29994.29 286.128 = 1067.75 millions taka.

The model fit does not look positive. The first section of the coefficients table shows that

there is a non-significant coefficient (.831) for Total Advances and a non-significant

coefficient (.617) for Total Assets, indicating that these variables do not contribute to the


standardized coefficients. Even though Total Assets has a smaller coefficient (.028), it

actually contributes more to the model because it has a larger absolute standardized

coefficient (.701).

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3.3.5 Trend Analysis

Trend analysis for total deposits

According to MINITAB, fitted trend equation for total deposits:

(Yt = 937.575 + 4642.36*t) with a 20.93 percent mean absolute percentage error (MAPE)

and a mean absolute deviation (MAD) value 1912.39 (see appendix figure 1). The

forecasted total deposits in 2007 according to trend equation is Tk.24149.40 millions.

Trend analysis for net interest income

According to MINITAB, fitted trend equation for net interest income:

(Yt = -59.205 + 209.828*t) with a 13.57 percent MAPE and a MAD value 47.32 (see

Documents

15074491 an Analysis of Financial Performance