Accounts in the Balance Sheet and Income Statement of the Bank of Abu Dhabi - Assignment Example

Executive Summary This paper analyzes the various accounts in the balance sheet and income statement of the Bank of Abu Dhabi. This bank is one of the leading banks in the United Arab Emirates and offers quality services to its customers. The analysis shows that the bank’s assets have increased and so did its customer base. Overall the bank expanded by attaining a 6% growth in fixed asset-property plan equipment and a 25% increase in customer deposits showing an increase in customer base. The bank has not defaulted on its term borrowings and has performed well in terms of their equity base. Overall the bank’s statements reflect the quality of the banks operations. Although there can be a few improvements in the operations of the bank and its customer base, however the bank has performed remarkably well showing high revenues and net profits. Contents Executive Summary 1 Introduction 3 Definitions of Various Accounts 3 Assets 3 Liabilities 4 Financial Institutions and Euro Commercial Papers 5 Repurchase agreements 5 Transactions Deposits 5 Term borrowing 5 Subordinated notes 5 Equity 5 Statutory reserves 5 Share capital 6 Share option scheme 6 Income and Expense 6 Interest 6 Fee and commission 6 Net gain on investments 6 Foreign currency 6 Zakat 6 Changes in Balance Sheet Accounts 7 Assets 7 Changes in Income Statement Accounts 7 Recommendations 8 Works Cited 9 Introduction The National Bank of Abu Dhabi was founded in 1968 in the United Arab Emirates. It is the market leader amongst lending banks in the Emirate of Abu Dhabi and the second largest player in the United Arab Emirate lending market. The bank has presence in various regions including Hong Kong, Shanghai and Kuala Lumpur. The National Bank of Abu Dhabi is a premier bank offering the complete range of financial services in 18 countries. It is ranked in the Worlds 50 Safest Banks and the Safest Bank in emerging banks. This is a testament to the quality of the services and the operations of the bank. This assignment aims to analyze the balance sheet and income statements of the bank for the year 2012 and 2011. All accounts under assets, liabilities, equity, expenses and revenue will be defined and analyzed in this report. Definitions of Various Accounts Assets An asset in a balance sheet represents what a firm owns. They can be categorized as current assets and fixed assets. Current assets are ones that are consumed in a years’ time and the fixed assets are those that provide benefit over a certain period of time. I will now defining the assets that are in the financial statements of the National Bank of Abu Dhabi. Cash and balances with central banks This account includes all the cash that is currently with the bank, the balances with the central bank and the dues from other banks (maturing within 3 months). Cash is the most liquid of all the current assets. The balance at the central bank is a percentage of the total customer deposits given to the central bank as a measure of avoiding bank runs. Investments at fair value through profit or loss These are identified as financial assets which are held for the purpose of trading them in the market. These are assets measured at fair value and the gains and losses are recorded in the income statements under the subheading of “Gains or Losses on Derivative Financial Instrument Transactions”.[wik02] Due from banks and financial institutions These are simply amounts that other banks owe to National Bank of Abu Dhabi. These are amounts that are amortized and allowances for any impairment are also withdrawn. Loans and advances These are the number of derivative financial assets with payments that are fixed and they are held with no intention of selling them in near future. Moreover these assets are not quoted in the active market. Example: A car given on lease. Islamic financing and investing contracts These include the Islamic laws of banking – the sharia compliant financing which includes ijara, Mudaraba, Wakala and Murabaha. The Islamic law forbids the receiving of any interest (Riba) or fixed or floating payment when lending a loan to an interested party. Non trading expense These are assets that are not for sale. They are recorded at the fair value initially along with added transaction cost straight away attributed to the purchase. Reverse repurchase agreements This is asset that has to be sold out before a specified future date at a comparatively higher price.[Inv13] Property and equipment These are categorized as fixed assets that the company owns and they provide benefits over a certain period of time. However, with time they depreciate and its value declines. Liabilities All that the bank owes and the debts that it has incurred are categorized as liabilities. A major part of bank liabilities are the financial (legal claims) or IOUS’s issued by the bank. The minor liabilities are the traditional business liabilities like electricity bills, rent, wages etc. The most important liability for a bank is the deposit (financial wealth) placed within the bank. [Enc14] Financial Institutions and Euro Commercial Papers This is the total amount that the bank owes to other financial institution. Euro commercial paper is an unsecured short term loan that denominates in a currency that differs from the company's local currency.[inv13] Repurchase agreements This is a government security and has a short term trading life in the market, usually selling overnight. Within a given date, the dealer is to buy these securities back. [Inv131] Transactions Deposits Also called a checkable deposit, it is the most important liability for a bank. They are part of M1-money supply. They make the biggest contribution to the total liabilities and are a principal block of the banking system. Term borrowing It is a form of a loan for specific amount with fixed principal repayment and a floating rate of interest. It has a maturity time span of 1 to 10 years.[inv131] Subordinated notes Sub ordinate notes are convertible notes. The holder has the option to convert it to share capital where the fair value is constant with the number of shares issued.[Nat12] Equity This is the amount of fund contributed by the owners plus the retained earnings. Statutory reserves These are reserve requirements as mandated by the State. Insurance companies and financial institutions are required to hold a portion of their assets as either marketable investments or cash. These reserves are the liquid assets that the firm must maintain to protect itself from insolvency and investment loss. [Nat12] Share capital Share capital is the amount of share capital the bank shows on its balance sheets. This is the initial amount for which the initial shareholders purchased the shares from the issuing company. Share option scheme This is a staff cost and is provided at fair value to the staff on the grant date. It results in an increase in equity.[Nat12] Income and Expense Interest Interest is the general interest accumulated on the loans, trading securities and available for sale investment securities provided by the bank. It is calculated using the effective interest method in the case of the Bank of Abu Dhabi. Fee and commission This is the income earned by the services provided by the bank. This is accounted for as income earned from provision of services (revenue) and from the execution of a significant act. Fee and commission expenses relate to the transaction and service fees. Net gain on investments Net gain on investment consists of the realized and unrealized gains and losses on investments are fair value through gains and losses on dividend income and trading investments. Foreign currency Income earned when a foreign currency is translated to a local currency at a spot exchange rates. Zakat Zakat is the business zakat payable by the bank so that is complies with the principles of the sharia supervisory board. Changes in Balance Sheet Accounts Assets Overall the total assets increased by a 17.6% which reflects the position of the bank as a market leader. The most significant of all the changes in the assets, were the cash and balances with the central banks which increased by 124.5%. Investments in the bank also increased by more than 100% which shows the positive market image and confidence in the bank. The banks fixed asset-property plant equipment also increased by almost 6% showing that bank actually expanded as compared to 2011. The report mentioned that in 2012 they set up offices in China and Malaysia while continuing expansion in UAE, Egypt and Sudan. The reverse repurchase agreements rose up by 12.7%, showing a slight increase in the risk. The non-trading expense increased by 21.5% and was in favor of the company as it includes equity instruments which carry no risks. [Cai12] The liabilities account of the bank increased by 17.5%. The due amount to other financial institutions decreased by 10.9% in 2011. This benefits the bank as it decreases their liabilities. There was a huge decline of 42.6% in the repurchase agreements which is good for the short term. A customer deposit increased by 25% and this Increase is an achievement for the company as it tells that the company has increased its consumer base. The term borrowings also increased by 25.9%. The company did not default on any of the term borrowings which reflects the stability of the bank. [Nat12] The equity base of the company increased by 18% with an increase in the share capital by 35%. It’s a good measure as the number of the shares of the company increased by 1000 million. The retained earnings increased by 14.2 which benefits the bank and shows its profitability. The company paid a dividend of 0.3 per share. [Nat12] Changes in Income Statement Accounts In a year marked by ongoing global challenges, National Bank of Abu Dhabi achieved a 16.8% growth in profits. A review by the Groups Chief Executive, mentions that, “NBAD delivered record top line revenues of AED 8.7 billion and net profits of AED 4.3 billion in 2012”[Nat12]. The growth was mainly due to higher investment and interest income. The increase in the operation expense of 11.8% reflected continued investments in the business which shows how the bank is expanding. [Nat12] Recommendations The NBAD still has a few areas on which it has to work upon to increase the efficiency and effectiveness of its operations. It should focus on reducing losses and increasing its customer base. Moreover the bank is currently a taking high risk on its reverse purchase agreements; it should try to be risk averse in the future. Although the bank has a leading position in the retail banking services it should come up with a long terms strategy to keep up with this leading position which is based on customer retention and loyalty. The bank should also look into promoting its brand by offering e-services more comprehensively and expand into the e-banking market more extensively..(Cairo) Works Cited wik02: , (Financial assets at fair value through profit or loss), Inv13: , (Investopedia), Enc14: , (Encyclonomic), inv13: , (investopedia), Inv131: , (Investopedia), inv131: , (what is a term loan), Nat12: , (Natioanal bank of Abudhabi report 2012), Nat12: , (Natioanal bank of Abudhabi report 2012), Cai12: , (Cairo), Read More