Al Rajhi Bank and Commerce International Merchant Bankers Berhad - Research Paper Example

Banking Project: Alrajhi Bank and CIMB Bank The present report aims to to evaluate similarities and differences between the bank of Saudi Arabia (Al-Rajhi Bank) and International Bank (CIMB Berand Islamic Bank – Malaysia). The financial ratios analysis of both companies for the period 2010-2013 is compared. In addition, the discussion of the information from the company’s management and financial statement is used to identify differences and similarities between both companies. Market and management strategies of the banks are also analyzed to investigate how the changes in the global industry impact these banks. Financial Analysis CIMB Berhad Islamic Bank Al-Rajhi Bank   2010 2011 2012 2013 2010 2011 2012 2013 Liquidity Ratio Liquid assets to Deposit-borrowing ratio 0.34 0.26 0.12 0.12 0.33 0.30 0.32 0.10 Loan to deposit 0.61 0.68 0.57 0.62 0.78 0.69 0.70 0.79 Net Loan to total asset 0.06 0.65 0.52 0.57 0.68 0.60 0.62 0.71 Credit Expansion Loan loss reserve to gross loan 0.0062 0.0040 0.0004 0.0017 0.0094 0.0151 0.0114 0.0032 Profitability Ratio Cost to Income 0.37 0.36 0.06 0.07 2.66 2.83 6.58 29.17 Return on Assets 0.84% 0.78% 0.12% 0.91% 0.41% 0.51% 0.20% 0.05% Return on Equity 22% 17% 14% 11% 3% 4% 2% 0.04% The above table shows the three profitability Ratios, one creditability ratios and three liquidity ratios. Liquidity The three liquidity ratios for the financial analysis are liquid assets to deposit-borrowing ratio, Loan to deposit and Net loan to total asset. These three ratios of both banks are discussed and analyzed below. Liquid asset to deposit-borrowing Liquid asset to deposit borrowing ratio measures the availability of the fund with respect to its obligations. In the year 2010, CIMB Berand Islamic Bank- Malaysia had the capability of covering 34 % of short term obligations while Al-Rajhi Bank was capable of covering 33 % of their short term obligations. In the following year, The Malaysian bank liquid asset to deposit-borrowing percentage dropped down to 26 % and that of Al-Rajhi Bank dropped down to 30 %, this indicated that the liquidity of the Malaysian Bank was less in comparison to Al-Rajhi Bank. In the year 2012, Al-Rajhi Bank liquidity further increased making them capable of covering short-term obligations to about 32% while the CIMB Berand Islamic Bank- Malaysia was not able to increase or maintain its liquidity, which resulted in a major decrease in their liquidity. CIMB Berand Islamic Bank- Malaysia in 2012 was only capable of covering 12 % of short-term obligations. 2013 was a completely shocking for Al-Rajhi Bank as they were only capable of covering 10 % of their short term obligations, which shows that their liquidity dropped down by 22 % while CIMB Berand Islamic Bank- Malaysia maintained their ratio at 12 %. Loan to Deposit CIMB Berand Islamic Bank- Malaysia loan to deposit ratio in 2010 was 61% and that of Saudi Arabia Bank was 78%, which indicated that the Al-Rajhi Bank had low liquidity as compared to the Malaysian Bank. Year 2011 was other way round as the Al-Rajhi Bank had more liquidity as compared to that of the Malaysian Bank. A reverse patter n was again observed in 2012, which means that both banks were not affected by the external factor. In 2013 the liquidity of both banks increased which means that the both banks had more loans and comparatively less deposits. Net Loan to Total Asset Analyzing the net loan to total asset ratio determines that the CIMB Berand Islamic Bank- Malaysia was highly liquid as its total assets were more than the its net loan and the Saudi Arabia Bank had low liquidity. The Malaysian Bank’s net loans increased drastically in comparison to its assets, which reduced its liquidity while Al-Rajhi Bank, had an increase in its total assets. It is observed that the external factors were not the reason of the change in liquidity of both banks. The changing ratio pattern in 2013 determines that due to some external factors both banks had more loans than the previous years and lesser increase in the total assets which reduced the liquidity of both banks (Pock 59). Profitability The fluctuation in the three profitable ratios of the company reflects variation in the profit trends of the banks. It indicates that profitability of the banks are affected by the internal and external market environment. The analysis and comparison of the three ratios are below. Cost to Income The cost to income ratio determines the performance of the bank, the lower the cost to income ratio the better is the performance of the bank (Pock). The total income of CIMB Berand Islamic Bank- Malaysia was more as compared to the total cost, which determines that the performance of the kept on improving and it rapidly improved a lot. The total income of the Al-Rajhi Bank was less than the total cost which indicates the poor performance of the bank (Besley and Brigham 67-70). Returns on Assets There is a mixed trend if we compare the Return on asset ratios of both banks. From 2010 to 2012, it can be observed that the external forces were not influencing the returns and performance of the banks as when the returns of Al-Rajhi Bank increased the returns of CIMB Berand Islamic Bank- Malaysia decreased and vice versa (“Annual Report: Al-Rajhi Bank”). In the year 2014, both banks had a decrease in their returns, which indicates that the external factor affected it as there was recession in the banking industry. Returns on Equity It is the return on the money invested in the bank. If the ratio of ROE is higher more people will be interested in investing in that bank (Besley and Brigham). The trend of the ratios of both banks indicates that return on equity of both banks had decreased during the passage of time, which is influenced by the external factors. The return on equity of Al-Rajhi Bank dropped down to 0.04%, which indicates that, the net profit and equity of the bank is same (“Annual Report: Al-Rajhi Bank”). Credit Expansion In order to identify credit performance of the both banks, Asset Credit Quality ratio is calculated. The Asset Credit Quality ratio evaluates the risks that are associated with the loans provided by the bank. During the period (2011-2013) significant deterioration in the credit quality of the banks is evident. The trend line depicted when the credit quality of Al-Rajhi Bank increased, decline in the CIMB bank is evident. It can be noted that during (2010-2011) the credit performance of Al-Rajhi Bank improved (“Annual Report: Al-Rajhi Bank”). On the contrary, decline in the CIMB Bank’s credit performance decline. The period 2011-2012 is marked by the increase in the credit losses that has exposed banks to higher credit risks due to which decline in the credit quality of the banks is observed (“Annual Report: CIMB Islamic Bank”). In 2012-2013, the improvement in the market condition, increase in the loans and decline in the loan reserves have improved the credit quality of CIMB Bank, whereas there the loans were riskier for Al-Rajhi Bank because of the increase in the credit losses (“Annual Report: CIMB Islamic Bank”). ERM is a method used by organizations to meet the overall objective. It aims to seize the opportunities and overcome the risks of an organization. ERM is a framework for risk management, which intends to discover the circumstances or events to meet the objective and minimize the risk of an organization. Bank Al Rajhi and CIMB Islamic bank both employs the Enterprise Risk Management framework in order to run the functions of the banks efficiently and effectively. The framework provides a process of identifying, evaluating, monitoring, managing, and reporting major risks affecting to meet the overall objective of the banks. Both banks use almost same procedure as the banks uses Limits and controls, Analysis and reports, and stress testing in the procedure of handling risks and seizing the opportunities. ERM plays an effective role when it is implemented with strong strategy and good teamwork. Market Segment Approach The challenges in the banking sector have impacted regulatory systems in the global banking industry. Thus, Al-Rajhi Bank focuses on geographic segment to strengthen its positioning in the new market. In the similar manner, CIMB bank also focuses on improvement in the retail business segment focuses on the development of the new income, customers and deposits in its franchising. The management structure of Al-Rajhi Bank and CIMB Bank is composed of five directors and three independent directors. Both companies regulated under similar risk management framework. Hence, the operational structure of the company is also similar. However, CIMB Bank’s parent board of directors regulates operations and management of the company. The information depicted that there the performance of the both banks were impacted by the local market conditions. Al-Rajhi’s financial performance had significantly improved that has provided the company a stable platform. On the other hand, CIMB bank faces severe challenges and intense competition that has slowed down the growth of the company. It can be noted that the government policies of Saudi Arabia and Malaysia play a major role for the banks to structure its financial innovation and new products (“Annual Report: CIMB Islamic Bank”). The strict policies in Saudi Arabia for the foreign banks restricted entrance of the new banks in the region due to which the competition for Al-Rajhi Bank were modest. The strict regulation of Shariah in Saudi Arabia had the major contribution for the bank to launch new Islamic products in the region. On the contrary, CIMB Bank faces challenges and tough competition, as it an international bank and has several local and international banks for its competition (“Annual Report: CIMB Islamic Bank”). Thus, CIMB bank is inclined towards the GRM monitoring risk assessment activities for the coordination, development and deployment of the new product’s pricing frameworks. It can also be noted that the both banks have significantly investment in information technology system, process and development to improve their efficiency of its services. The investments of CIMB were relatively higher than Al-Rajhi Bank in terms of technological investments. One of the major deriving reasons for CIMB bank in the information system was evident on the new strategic program “ASEAN Vision 2015” that stressed on the improvement in consumer banking (“Annual Report: CIMB Islamic Bank”). The influence of the local market conditions has imposed pressure on the banks to align the operations in accordance to the Sharia Principles. The regional and international market conditions have significantly impacted the growth strategies of the banks. Works Cited “Annual Report: Al-Rajhi Bank". Riyadh: Al-Rajhi Bank, 2013. Print. "Annual Report: CIMB Islamic Bank". Kuaula Lampur: CIMB Bank, 2013. Print. Besley, Scott and Eugene Brigham. Essentials of Managerial Finance. Stamford: Cengage Learning, 2007. Print. Pock, Alexander von. Strategic Management in Islamic Finance. Berlin: Springer Science & Business Media, 2007. Print. Read More