Financial Analysis of Abu Dhabi National Bank in UAE - Case Study Example

Insert Name Grade Course Tutor’s Name DateContents FINANCIAL ANALYSIS REPORT FOR ABU DHABI NATIONAL BANK IN UAE 3 Introduction 3 Assets 3 Deposits 4 Investments 4 Loans and advances to customers 4 Net income 5 Products and services 5 Competitors 7 Customers 8 Marketing and distribution chain 8 Company strategies 9 Critical business processes 9 Accounting concepts 10 Ratios 10 References 11 FINANCIAL ANALYSIS REPORT FOR ABU DHABI NATIONAL BANK IN UAE Introduction This analysis considers Abu Dhabi National Bank in UAE and its branches all within the country. It bases its arguments on the published financial reports of the 2010 trading period though some comparisons are used with other previous periods and other competitors. The actual documents were taken from their official website nbad.com (NBAD annual report 2010) This analysis tries to analyze the company’s sales, net income, cash flows, total assets, products & services, competitors, customers, market and distribution strategies, company’s strategies, critical business processes and other important areas of accounting policies and effects. The study also analyses the accounting ratios of the National Bank of Abu Dhabi. Note that the currency used in UAE dirham. On average 1 US dollar =3.67 UAE dirham. The bank was listed in the Abu Dhabi securities exchange in year 2000 and has a relatively good performance. It is rated as the second wealthiest bank in the UAE. It is a full service bank that has wide coverage of the whole population of the UAE. Assets The amount of total assets (both owned and borrowed) of the bank is a good figure i.e. AED 211.427billion. This is a good value for a national bank since it assures the clients and other stakeholders of stability and strength of the bank. The total equity is around 24 billion of which about 70% is owned by the government. This is commendable since the interests of the general public are safeguarded and the company is supported by the state (national bank of Abu Dhabi overview). The bank’s liabilities have increased by about AED 5.5 billion over the past one year. Technically, this is not commendable, though it represents an increase in transactions of the bank thus, growth in relations and transactions. This is the wealthiest bank in the UAE. Deposits The annual deposits have grown by about 1.589% over the past year (consolidated balance sheet). This shows that the bank has increased the number of customers as well as the rate and intensity of deposits. The bank should adopt a massive programme to encourage more deposits, higher intensity of deposits and opening of more bank accounts. This will help the bank to make more money available for loans and at lower rates. The overall effect of this is to gain more clients and to hold them more firmly through close relationships. Investments The bank has recorded a good increase in its investments over the year. An approximate value is 13.168% as compared to the other year (2009). This shows that the growth prospects of NBADs shares are increasing highly and the investors have a positive attitude towards the movement of NBADs shares. This rate is very high as compared to other companies thus; the bank should expect an increase in share purchases from the public. This could in turn hike the value of the share. Loans and advances to customers The bank has a relatively good record for offering loans to its clients in simple terms and at lower rates. This means that the observed growth in loans and advances increases the customer relationships of the bank and the interest income since loans have interests charged. On the other hand, the loans represent a risk of the client’s deposits thus a good balance should be maintained between the two. The rate of growth for the year has been 3.459%. This is about double the increase in the deposit rates. The bank should be alert that if such a trend continues, it will have little or no funds for loans to clients. This means that the bank has to formulate a strategy for increasing its deposits and the intensity of deposits. This could be done through massive advertising, promotion, lotteries and sweepstakes. Net income The net income of the bank has increased. The rate as compared to the previous year is 12.1894%. This means that the bank has performed relatively well and the turnover is good. This income assures the bank of improved stakeholder value and increased growth prospects. The largest contribution is from the interest income 73.12%. The bank should take note of the main source of their income and employ more efforts to increase the income. It should also try to spread the risk of losing income by making more cash in-flow sources like in a portfolio of securities. This net income is the direct factor for profit. Therefore, a growth in this area means that the bank will be more profitable. The profits made in this year increased by about 21.95% over the previous year (consolidated income statement). Products and services In the domestic banking sector, the bank has accounts for generally almost everyone in the society. The accounts range from student accounts, ladies accounts, NBAD one account, savings account, current account, smart deposit account, offshore deposit and call & notice account under the deposits section. Under the lending sector, NBAD has personal, auto, mortgage and overdraft loans available for its clients (domestic banking division). This means that clients have a wide range of products to choose from. Clients can open bank accounts that best fit them. The loan services are not quite developed since other banks have got better segregation methods that attract more customers. I would suggest that the bank develop more loan products that are more appealing than just the ordinary loans offered by other banks. This includes school fees loans, SME loans, asset loans, medical loans and so on. This segregation of different services would help focus on different needs of clients and offer better services than generalizing the whole idea. The bank also offers credit, debit, corporate and prepaid cards under the personal cards section. This helps reduce queues in the bank since most customers use ATM machines. It also helps increase monthly transactions since clients will often use cards to make payments and subscriptions. This is an aspect that is expected to grow rapidly due to increased rate of revolution in technology and markets. The bank also offers Islamic banking where they follow sharia laws. This specification helps them to hold the Islamic community closely. Their relationship with Islam is strengthened through this specification in service provision. Another specification is the Al Nada ladies banking. This captures ladies and their needs hence increasing their customers and customer satisfaction levels. They are able to offer better services to ladies hence a closer relationship and trust. The bank has another service called NBAD direct that helps client do banking at the comfort of their home and workplaces provided they have internet. This helps them to offer more personal services in a more convenient way that suits the current generation. Electronic banking is done through this portal. This helps capture clients over a wide geographical region at relatively low costs, high speeds and efficiency. Business loans are also offered by the bank. This is where all businesses are serviced by the bank. NBAD tries to segregate the businesses at this stage where they offer various kinds of services to clients. This includes small loans and overdrafts to SMEs. They also have a WALADI (NBADs children savings account) programme that helps clients save for their kids. This programme has some insurance characteristics/services that safeguard the status of the savings. People are encouraged to save for their children. This initiative gains support from the government since it helps make a good future of the country’s future generation. However, there is one problem in this program. The minimum monthly deposit is too high for poor people to afford. Perhaps a lesser amount should be passed to help even the poor to save for their children (bloomberg business week 3rd November 2011). Competitors The bank is facing a lot of competitors at the moment who threaten to take a larger market share than ever before. This is due to the rapidly evolving banking industry with technology. The competitors in order of strength are Emirates NBD, Abu Dhabi Commercial bank, Ajman bank, First Gulf bank, Mashreq bank, Dubai Islamic bank, Union National bank, Commercial Bank of Dubai and Emirates Islamic Bank (Kumar B. R. 2009). The competitors are specialized in different strengths though Emirates NBD is very strong in most areas. It is the wealthiest bank and the highest competitor of NBAD. They have the highest fee income, operating income and are the largest loan providers. If NBAD could either focus on particular weaknesses or focus on a good share of each section of banking, it would earn a higher competitive edge over other banks. A good suggestion is the e-commerce since it is new, promising, and resourceful and unexplored (slideshare.com 3rd November 2011). Kumar’s analysis showed that NBAD was number one in overall average growth only. All other sectors, it was mostly number two. This shows that a substantial share in each sector could help the bank compete better. Customers The bank’s main customers are the whole population of UAE though there are other customers in other countries. The bank has done very well in trying to separate the customers into ladies, students, businesses, and Islamic community and so on. This has helped them specialize on each king of service to give a more personal appeal to the clients. There is a chance of increased customers especially through internet banking section (NBAD direct). This may include customers from the whole world which is greatly encouraged. The customers are more satisfied when served in smaller groups. For example, a particular account for people in the civil service would help serve the common interests of the group. This includes loans, similar crediting dates, common employer and similar movements in the deposit and withdrawal rates. Marketing and distribution chain The bank organizes global financial markets workshops regularly that help educate their managers and outsource more knowledge about marketing the bank’s products and services. They also host the global Islamic financial markets workshop and forum that helps them formulate better services to the Islamic community. The company offers promotional facilities to online users to promote online banking. This includes prizes such as laptops. They have NBAD cash deposit machines all over the country plus ATM machines that help people avoid queues. This helps offer more services at low costs. It also helps the bank in providing services 24/7 at efficient locations i.e. near large shopping malls, petrol stations, bus terminus and other populated places. Company strategies The company is currently outsourcing in other projects to reduce risk and to increase income sources. A good example is the AED 200 million used to finance a real estate project. They are also offering mutual funds that help people unite together. This is an initiative that is greatly supported by the state. They are also embarking on opening more branches to reach more customers and to provide more services. They have the largest number of branches and the largest ATM network in the country. This helps them meet customers everywhere. Critical business processes The most critical business processes of NBAD are deposits, loans, cards and online banking services. The bank has applied a number of strategies to improve these services since they generate the highest income. Another critical aspect of the bank is the shares in the exchange market since it is listed (Bloomberg November 3rd 2011). The bank has expanded all over the country with deposit machines and ATMs. It has also improved the staff quality through frequent trainings and workshops. It has also employed new skilled staff in the e-banking sector to improve the utilization by NBAD. The bank is considered the best bank in the UAE due to its huge value of assets and shareholder quality. This has enabled it gain trust of the clients and thus a chance to serve them. Accounting concepts The bank has been presenting its financial records and statements in an internationally recognized way. The methods help make impact to the stakeholders through correctly displaying results on the webpage, on magazines and newspapers. This helps the reader to capture important characteristics of the bank and make inference. Ratios The key ratios as shown in their web page (key ratios 2011), explain the major trends in the bank. The non-interest income has shown a negative trend over the past five years, therefore the bank has to do something about it or embark on another source of income to cover for that. The total fees and commission income has been reducing over time though in little percentages. This is because the bank lowers fees every now and then in order to encourage more customers. Over the past two years, the bank has maintained a level interest expense without much variation. The general expenses have also maintained a similar trend. This is good for the bank since the turnover is not reduced much by expenses. The capital adequacy ratio has been calculated using base 2. The bank has recorded a good ratio of about 22.6% in 2010 down from 17.4% in 2009 and 15.4% in 2008. Key ratios 1. Sales growth =(sales yr2 –sales yr1)/sales yr1 Sales growth =7179-6399)/6399 =0.121894 =12.2% year 2 = 6399-5301)/5301 =20.71% 2. Current ratio =current assets/current liabilities Current ratio =161895/187314 =0.8643 =86.43% Year 2 =118553/176366 =67.22% 3. Gearing =long term debt/(equity + long term debt) `Gearing =4000/24113 =0.1659 =16.59% Year 2 =4000/20441 =129.57% 4. Return on investment ROI=net profit after tax/shareholder’s equity Return on investment ROI=3683/2392 = 1.5397 Year 2 =3020/2174 =138.91% 5. Return on capital employed ROCE=profit before interest and tax/ (long term debt + shareholder’s equity) Return on capital employed ROCE= 4993/24113 =0.2071 =20.71% Year 2 =4901/20441 =23.98% 6. Asset turn over =sales /total assets Asset turn over =7179/211427 = 0.03395 =3.395% Year 2 =6399/196807 =3.251% 7. Interest cover =profit before interest and tax/interest payable Interest cover =4993/2181 =2.289 Year 2 =4501/2306 =1.95 RATIOS IN PERCENTAGES (%) YEARS Sales Growth Gearing 2009 12.2 16.59 2010 20.71 19.58 The growth of sales and the gearing increases with time. This is so because of the growth of the company/ organization. RATIOS IN PERCENTAGES (%) YEARS Return on invested Return on employed 2009 153.97 20.71 2010 138.91 23.98 Return on capital employed increases from 20.71 to 23.98 while return on invested capital decreases with time. RATIOS IN PERCENTAGES (%) YEARS Asset Turn over Interest Cover 2009 3.4 228.9 2010 3.25 195 There is a slight fall in asset turn over from year 2009 to year 2010. Interest cover also decreases from 2.289 to 1.95. References Bloomberg (November 3rd 2011): Bloomberg.com: National Bank of Abu Dhabi PJSC retrieved from http://www.bloomberg.com/quote/NBAD:UH Bloomberg business week (November 3rd 2011): national bank of Abu Dhabi retrieved from http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=NBAD: UH Consolidated income statement (2010) http://www.nbad.com/investor/financial/Summ_PL.htm Consolidated balance sheet (2010): http://www.nbad.com/investor/financial/Summ_BS.htm Domestic banking division (3rd November 2011): http://nbad.com/domestic/ Key ratios (2011): http://nbad.com/investor/financial/Ratios.htm Kumar B. R. (2009): Middle East Journal of Business UAE’s best banks in 2008- A Survey retrieved from http://www.mejb.com/upgrade_flash/Vol%205%20Issue%201/banks.htm National bank of Abu Dhabi; overview (3rd November 2011) http://www.nbad.com/investor/index.php NBAD Annual report (2010) http://www.nbad.com/investor/pdf/annual_report_2010.pdfhttp://www.nbad.com/investor /pdf/annual_report_2010.pdf Appendix Interest income (incl income from Islamic financing) 7,430 6,877 7,383 7,084 5,458 3,852 1,956 1,418 1,368 2,016 Interest expense (incl Depositors' share of profits) (2,181) (2,306) (3,776) (4,679) (3,437) (2,175) (947) (647) (653) (1,280) Net interest income (incl net income from Islamic financing) 5,249 4,571 3,607 2,405 2,021 1,677 1,009 771 715 736 Non-interest income  1,930 1,828 1,694 1,261 935 1,734 723 492 392 274 Operating Income 7,179 6,399 5,301 3,666 2,956 3,411 1,732 1,263 1,107 1,010 Operating Expenses (2,186) (1,898) (1,493) (1,054) (700) (622) (488) (414) (378) (353) Operating Profit 4,993 4,501 3,808 2,612 2,256 2,789 1,244 849 729 657 Impaired assets charge, net (1,207) (1,408) (717) (42) (99) (155) (81) (19) (68) (25) Overseas income tax expense (103) (73) (72) (65) (51) (54) (26) (25) (6) (24) Net Profit 3,683 3,020 3,019 2,505 2,106 2,580 1,137 805 655 608                       Read More