Qatar National Bank - Financial Assessment 2012-2015 - Example

Executive Summary

The assessment of the financial statements for the Qatar National Bank (QNB) provides the shareholder with insights on the company’s financial position between the 2012 and 2015. The information in the statements is crucial in the development of a sound investment decision; poor performance and uncertain future can lead to sale of equity while acceptable performance and seemingly better future can prompt the acquisition of a larger share. The financial assessment mainly involved the identification of the company’s financial objectives, conduction of the ratio analysis and evaluation of company’s capital structure. From the assessment on the four financial years, it is possible to recommend a buy of a larger stake, which is informed by the gradually increasing returns on investment, alignment of financial goals with personal objectives, and an acceptable capital structure. However, the reduction of the company’s debt is likely to provide better security for the shareholder’s wealth.

Introduction

Founded in 1964, Qatar National Bank (QNB) has grown to become the largest bank in Qatar and second largest in Middle East in consideration of asset value. Currently, the bank is present in 27 countries with its headquarters in Doha, Qatar where it was founded. Like other companies, QNB releases annual financial statements that present the financial position of the company at the end of a financial year. The financial statements also give direction into the future of a company based on the priorities provided by the management. The assessment of the financial reports over a period of time can help shareholders determine their investment decisions as illustrated by this report.

Value of Information to the Shareholder

One of the most notable physical aspects of the QNB financial statements is the layout. Despite changing the auditor from KPMG to Earnest and Young between 2012 and 2013, the structure of the financial statements was not largely affected, which provides the comfort of consistency to the shareholder as the statements are much easier to compare and contrast. The first section of the financial statements provides a broad overview of the vital performance indicators during the financial period. Using the information in the section dubbed ‘Consolidated Statement of Financial Position’, shareholders can get comparable information on the assets, liabilities, income, profits, and cash flows. This is based on the understanding that investment decisions are largely influenced and determined by the financial performance of a company as investor tend to shy away from poorly performing entities, especially when they do not have input on the firm’s management (Lee & Marlowe, 2003, 54).

In consideration of the growth in total assets, QNB performed better in 2015 than in2014, which presented the lowest growth during the assessment period. On the other hand, the liabilities grew by the lowest margin since 2012, which is a positive indicator on the firm’s financial direction. In addition, the profits have increased gradually, which has been replicated in the basic and diluted earnings per share, which has increased from 11.3 in 2013 and 16.1 in 2015. This information shows that the firm is quite consistent in its performance in spite of possible variations in the performance of distinct economies (Abele, Liebeck, & Wörn, 2006, 437). Being a multinational, it is challenging to consider the implication of a single economy, such as Qatar, on performance; instead, the economy in the larger Middle East would be a better indicator. The consolidated statements prompt the shareholder into digging deeper into the financial statements and find out the actions taken by the firm to realize consistency or even find out if there are discrepancies in performance (Davis, 1996, 218).

The rest of the financial statements provide an in-depth analysis of the financial position. A very notable section of the Significant Accounting Policies gives details on the approach undertaken in the preparation of the financial statements. The section is critical in understanding of major issues such as the criteria used in the consolidation of the financial statements, the conversion of currencies, and classification of assets and liabilities among others. As a shareholder, the segment clears out any doubts regarding the preparation of the financial statements, especially with the consideration that some approaches, such as the use of the pick currency rates, may lead to the submission of unrealistic figures (Myers & Majluf, 1984, 193); (Fried & Hisrich, 1994, 28). In this regard, QNB uses the closing exchange rates of the reporting date in the submission of assets and liabilities for foreign operations (beyond Qatar) while the average rate is used in reporting the expenditure and income primarily because their accumulation spreads over a long financial period.

The Financial Risk Management section is of great interest among shareholders. The segment provides a well-articulated layout of the approach instrumented in the definition and assessment of risks by the bank. Risk assessment is a key concept in investment. Opportunities that have the highest returns usually have higher risk levels than those with lower returns (Fried & Hisrich, 1995, 102). Despite the promising returns on investment, firms should not place the shareholder’s wealth in ventures that have the potential for loss (Schwienbacher, 2008, 205); (Ashley et al., 2008, 206). As a result, the risk management section guides the shareholder in evaluating the degree of acceptability of the firm’s investment options and, therefore, know if their wealth is at risk (Clemen, Reilly, & Clemen, 2001, 86).

The institution has a sound risk management framework that enables proper auditing before decision-making. For instance, the credit risk is controlled through a thorough customer evaluation process to realize their potential (Aouni, Colapinto, & La Torre, 2014, 141). Information about the type of business and location are crucial in determining credit worthiness, which helps avoid concentration of risks among clients in the similar categories. QNB seeks collateral for credit where necessary, mainly in the form of mortgages over real estates, cash, treasury bills and bonds, and pledges on shares. This information is indicative of the measures undertaken to protect the shareholder’s equity when investment is very risky.

As a shareholder, I find the information in the financial statements is of high value to my investment endeavours. Although some parts of the statements are not comparable as they remain the same throughout the assessment period, such as the Significant Accounting Policies, the information presented is invaluable in making investment decisions besides reflecting on the internal operation of the bank.

Financial Objectives

Understanding the financial objectives of a company is critical in the determination of the company’s desired future, which is invaluable in investment decisions. For instance, financial objectives can aid in the determination of the approximate amount of earning per share that the shareholders will get in subsequent financial period or the possible gain in the value of shares.

Business Continuity

The statements indicate the value tied to business continuity in the firm as a financial objective. The content of the statements places emphasis on the internal operations of the group towards the sustenance of its leadership position in the Islamic banking sector. QNB specializes in various finance-related ventures such as the management of assets and wealth for high net worth clients, especially in Qatar. The bank also works in the provision of loans, holding customer deposits, and brokerage both in the local and international markets. The company categorizes its operations into two distinct areas including Qatar operations (corporate banking, customer banking, and asset and wealth management) and international banking. To ensure that there is continuity of business in is domestic and foreign operations, which has value to the shareholder, the company emphasizes on the application of a strict doctrine to ensure that its policies are accepted and embedded in all operations, including the subsidiaries (Hassan Al‐Tamimi & Anood Bin Kalli, 2009, 511); (al-Turabi, 2009, 69).

The consistency of the Group in performance is an indication of the desire and action towards business continuity. Most importantly, the company has continued to foster the growth of the shareholder’s wealth and profits as indicated by the earnings per share and increasing assets base. While it may be seen as the fulfilment of its promise to the shareholder, the institution can be seen to build on its reputation that has become one of its key strengths. For instance, the bank is one of the biggest institutional lenders in Africa and Middle East considering that it extends loans and overdrafts to the government and government agencies. In addition, the company also provides banking solutions for various commercial and service industries as well as contractors, real estate and personal services. To sustain all the operations, the Group’s management must be fully engaged in the business continuity agenda.

A company that assures it clients that it will be there in the future is highly likely to create a better bond of trust with the clients compared to new entrants. Having being there for as significantly long time besides performing remarkably well in consideration of the assets and global presence, QNB is a firm that aligns with my financial goals

Growth

Growth and expansion is another major financial objective of the company. The management of the company seemingly understands the interplay between the size of the company and the level of income in consideration of the market share and diversification as well as influence (Hassan Al‐Tamimi & Mohammed Al‐Mazrooei, 2007, 396); (Hassan Al-Tamimi, 2006, 39). Over the years, the company has identified the most suitable areas for investment mainly through fully and partially owned subsidiaries. Global expansion can, therefore, be seen as one of the company’s financial objectives, especially with consideration of the need to grow the shareholders’ wealth. Since 2012, the company has made significant steps towards the achievement of the global expansion goal. For instance, the company obtained a controlling stake of the Al-Mansour Investment Bank in Iraq by acquiring 27.7% more from the 23.1% initially acquired. After the acquisition, QNB had a stake of 50.8%.

The Group made the biggest expansion efforts in 2013 (for the assessment period) through the acquisition of QNB ALAHLI, which was initially known as NSGB in Egypt. QNB acquired a controlling stake of 97.12% on 31st March 2013. Although the new subsidiary had a relatively low cash flow, the assets and liabilities had an acceptable ratio. The integration of QNB’s monetary policies and brand awareness would result in a turn-around for the company within time. In the same year, QNB continued with the step acquisition of the Tunisian subsidiary, QNB Tunisia where it acquired an additional 49.96 percent stake, which made its total share rise to 99.96 percent for a cost of QR235 million. The acquisitions indicate that the firm has the objective of reaching to all Arab economy both in North Africa and the Middle East as it strategy to acquire a large market share. It is also important to note that the company’s expansion largely involves acquisitions, which reduces the strain related to entry in new markets (Kenneth Shaw, 2015); (Lymbersky, 2008, 78). Despite a company having a reputable brand, entry in new markets has always been a challenge (Kretzberg, 2008, 119), especially when there is competition from large domestic companies (Chen, Griffith, & Hu, 2006, 642); the case is not different from QNB’s.

Another aspect of growth is the creation of relationships or associations for particular interests who QNB identifies as Investment Associates. The company has a significant ownership share of the associates ranging from 5 to 49 percent. The associates include Housing Bank for Trade and Finance, Al Jazeera Finance Company, Commercial Bank International, and Société Générale Asset Management Egypt (SGAM). Three of the seven associates are in Egypt while the others are distributed between Jordan, Qatar, United Arab Emirates, and Libya (in 2013). Considering that the associates are for strategic financial objectives, the number has been variant during the assessment period with 5 in 2012 and 6 in 2014 and 2015. According to the 2015 financial statements, the number was more evenly distributed where no country had more than one associate, which illustrates the willingness of the company to explore new opportunities in new markets in the banking, financing, and construction sectors. Notably, the company does not concentrate all resources in a single sector, which reduces the risks associated with the failure of one sector or industry of the economy (Tarlock, 2009, 54); (Kochendörfer-Lucius & Pleskovic, 2005, 257).

The growth objective of the company is aligned with my financial objectives. One of the most important aspects of QNB’s expansion is that the company does not concentrate on a single economy, sector or industry. As a result, slow growth of one of the ventures will not affect the performance by significant margins, which will assure me of consistent growth of the share price and earnings per share (Hermann Simon., 2010, 58). Growth of share value and their earnings at the end of a financial period are imperative in making a long-term investment decision (He, 2009, 193).

Value of the Shareholder

Business operations at QNB are guided by the company’s value for the shareholder. The maximization of the shareholder’s wealth should be principal objective of every profit-making business. As pointed out earlier, the company’s financial objectives are aligned with its duty to increase the shareholders’ wealth through the identification of the best investment opportunities at a global scale. The use of subsidiaries and associates can also be seen as a means to achieve this goal.

Besides the formation of the most contextually appropriate associations, the company has also made plans concerning the control of finances. One of the most important financial control, as pointed out earlier, is risk control (Wilkinson, 2003, 16); (Chorafas, 2007, 51). The company’s risk management framework places high value on the need to control credit risk, risk concentration, credit quality, market and operational risks, liquidity, and the risks arising from interest rates. As a shareholder, I would preferably invest in an organization that does not only promise to increase the value of my stake but also one that guarantees the safety of the current and future values. In this regard, QNB provides an ideal long-term investment opportunity to shareholders who have the will to get the best returns on their share.

Ratio Analysis

In financial management, ratio analysis is a key performance metric of the company’s performance for a particular period of time (Polimenis & Neokosmidis, 2016, 37). Ratio analysis determines the relationship between variables in the financial statements of a company so as to measure the efficiency of a company in generating revenues from its sales, ability to repay its short-term debt when it becomes due and the efficiency in using its assets (Mulligan, 2013, 455). Ratio analysis also helps to make a comparison of the company’s performance in the past years, the industry benchmark as well as comparing with other companies in the same industry (Fosu, 2013, 149). This helps to ascertain the future prospects of the company both in the short-term and long-term. Financial ratios are classified under five major classifications; liquidity ratios, leverage/gearing ratios, activity/efficiency ratios, profitability ratios and equity/investment ratios (Penman, 2011, 56). For the purpose of this study, we will seek to analyze the financial statements of QNB using different ratios for the four years starting 2012 to 2015

Liquidity Ratios

Liquidity ratios are financial ratios that help to ascertain how much current assets a company has compared to its current liabilities; ability to settle its short-term debts (Chiaramonte & Casu, 2016). The higher the liquidity ratio, the more liquid the company is and the lower the liquidity ratio, the less liquid the company is (Cifuentes, Shin, &Ferrucci, 2005, 558). Inability to meet the short term obligations on the part of the company implies that the company has insufficient assets to cater for its liabilities and a prolonged lower liquidity might lead to a company going bankrupt (Haldane & May, 2011, 353). There are two liquidity ratios namely; current ratio and quick/acid test ratio. Acid test ratio is an improvement of the current ratio since it recognizes the fact that inventories cannot be easily converted into cash (Eljelly, 2004, 51). Since Qatar National bank does not have inventories for the four years, we will not calculate the acid test ratio.

The ratios are computed as follows;

Current ratio = current assets / current liabilities

Year

2012

2013

2014

2015

Current ratio

306,787,660/304,916,437

= 1.01:1

347,223,757/368,861,438

= 0.94:1

398,839,182/401,384,545

= 0.99:1

436,958,664/447,813,960

=0.98:1

Qatar National bank had a higher current ratio in 2012 of 1.01 with a slight decline in the subsequent years. This means that the bank is more liquid with more current assets to settle the current liabilities as and when they fall due.

Leverage Ratios

Leverage ratios measures the prospects that a company will fail to settle its debts: a measure of a company’s financial risk (Collin-Dufresne & Goldstein, 2001, 1235). The more debt the company uses to finance its operations, the higher the financial risk and the less debt the company uses to finance its operations, the lower the financial risk (Barclay & Smith, 2005, 13). Leverage ratios include; debt ratio and debt equity ratio. Debt ratio measures the proportion of total assets that is financed by debt while debt equity ratio measures the extent to which the company has been financed by debt in relation to equity financing (Welch, 2011, 8). The ratios are computed as;

Debt ratio = total liabilities / total assets

Debt equity ratio = total liabilities / total equity

Year

2012

2013

2014

2015

Debt ratio

318,865,140/366,853,832

= 86.72%

389,758,824/443,486,108

= 87.89%

428,394,750/486,356,676

= 88.08%

476,551,742/538,607,140

= 88.48%

Debt equity ratio

318,865,140/47,988,692

= 6.64

389,758,824/53,727,284

= 7.25

428,394,750/57,961,926

= 7.39

476,551,742/62,055,398

= 7.68

From the ratios computed above, QNB has a debt ratio greater than 50% which shows a higher financial risk with 2015 recording the highest debt ratio of 88.48%. Similarly, the debt/equity ratio increased from 6.64 in 2012 to 7.68 in 2015 which is high. This means that the bank has more debt financing compared to equity financing thus a higher financial risk.

Activity / efficiency Ratios

Activity ratios also referred to as efficiency ratios measures the efficiency with which the company is using various assets to generate sales revenues (di Giovanni, 2005, 130). They also show how active the company has been within a particular financial period. The higher the efficiency ratio is, the more active the company has been (Dunham-Taylor &Pinczuk, 2006, 77). Activity ratios include fixed asset turnover which indicates the amount of sales generated by the fixed assets of a company. Accounts receivable turnover which indicates the number of times the company’s debtors pay their dues within the year. The two ratios are calculated using the following formulas:

Fixed asset turnover = sales revenue / total fixed assets

Accounts receivable turnover = sales / accounts receivable

Year

2012

2013

2014

2015

Fixed asset turnover

11,238,282/957,056

= 11.74

14,447,311/1,390,966

= 10.39

15,414,849/1,779,344

= 8.66

15,902,436/1,753,715

= 9.07

Accounts receivable turnover

11,238,282/673,000

= 16.70

14,447,311/5,113,000

= 2.83

15,414,849/6,273,000

= 2.46

15,902,436/7,758,000

= 2.05

Qatar National bank had a higher fixed asset turnover and accounts receivable in 2012 which continued to decline significantly up to 2015 with 9.07 and 2.05 respectively. This implies that the bank was not very efficient in 2013, 2014 and 2015 in using its fixed assets to generate sales. Consequently, the credit policy of QNB is not efficient since the number of times that they pay their dues within a year is very minimal which might result into bad debts.

Profitability Ratios

Profitability ratio, as the name suggests, measure the efficiency with which the company uses various funds to generate profits (Gibson, 2013, 486). The ratio also determines the management’s capability to control the expenses incurred in a particular year. The higher the profitability ratios, the more profitable the company is and the lower the profitability ratios, the lower the profits generated by the company (Thukaram Rao, 2003, 99). Profitability ratios include return on investment which shows how efficient the company has been in using its total assets to generate profits within a year. Net profit margin determines the ability of a company to control its production, operating and financing costs (Dewenter & Malatesta, 2001, 329). In addition, return on equity (ROE) ratio measures the efficiency with which a company uses non-owner supplied funds to generate returns to the shareholders. The ratios are given by the following formulas;

Return on investment = net profit after tax / total assets

Net profit margin = net profit after tax / sales

Return on equity = net profit after tax / total equity

Year

2012

2013

2014

2015

Return on investment

8,423,040/366,853,832

= 2.30%

9,537,260/443,486,108

= 2.15%

10,517,638/486,356,676

= 2.16%

11,328,764/538,607,140

= 2.10%

Net profit margin

8,423,040/11,238,282

= 74.95%

9,537,260/14,447,311

= 66.01%

10,517,638/15,414,849

= 68.23%

11,328,764/15,902,436

= 71.24%

Return on equity

8,423,040/47,988,692

= 17.55%

9,537,260/53,727,284

= 17.75%

10,517,638/57,961,926

= 18.15%

11,328,764/62,055,398

= 18.26%

From the analysis of the profitability ratios, return on investment for QNB showed a slight decline in 2015 compared to the previous years which means that the profitability of the bank decreased through the four years. Net profit margin and return on equity improved significantly in 2015 by 71.24% and 18.26% respectively. This means that the bank controlled its expense efficiently and also generated sufficient returns for its shareholders.

Investment ratios

These are ratios that determine the relative value of the company and returns expected by the shareholders of the company (Tsai, Wang, & Tzeng, 2010, 239). The investment ratios also measure the overall performance and the going concern of the company. These ratios include; earnings per share (EPS) which is the return expected by an investor for every share held in the company. A higher EPS is favorable. Dividend retention ratio is an investment ratio that determines the amount of profits that are ploughed back into retained earnings at the end of the year. The ratios are given by the formula below;

Earnings per share (EPS) = earnings attributable to ordinary shareholders / number of ordinary shares outstanding

Dividend retention ratio = retained earnings / earnings attributable to equity shareholders

Year

2012

2013

2014

2015

Earnings per share

8,338,822/699,729

= 13.5

9,478,637/699,729

= 11.9

10,454,701/699,729

= 14.9

11,264,242/699,729

= 16.1

Dividend retention

Ratio

13,721,522/8,338,822

= 1.65

17,830,304/9,478,637

= 1.88

22,448,494/10,454,701

= 2.15

26,556,932/11,264,242

= 2.36

QNB has higher earnings per share in 2015 of 16.1 which implies that for every share held by an investors, the return expected is 16.1. The dividend retention rate increased from 1.65 in 2012 to 2.36 in 2015 which means that the amount that was being ploughed back to retained earnings continued to increase in the four year period.

Capital Structure

The capital structure of a company is crucial in the determination of its capacity to remain standing during and after an economic crisis (Baker & Martin, 2011, 56). Regardless of the absence of an economic crisis, the capacity of a company to perform well is also tied to its capital structure (Myers, 2001, 95). Previous economic crisis especially the 2008 global recession largely affected companies mainly in Europe and North America that have the largest number of developed and developing economies (Bierman, 2003, 134). Most of the companies affected by the recession had very high debts in relation to the value of equity. Following the slow growth of the global economy, which has influenced largely by the Chinese economy, the ability of companies to pay their debts may lead to the liquidation of assets, bail out or acquisition. To avoid such circumstances, it is crucial to ensure that the debt-equity ratio is acceptable (Korajczyk& Levy, 2003, 83). QNB shows some consistency in the ratio; however, the debt level has been increasing at a significantly high margin. Between 2012 and 2015, liabilities increased from QR318,865,140,000 to QR476,551,742,000 while the shareholder’s equity increased from QR47,988,692,000 toQR62,055,398,000 during the same period. Calculating the debt-equity ratio for the assessment period yields the following table:

2012

2013

2014

2015

Debt – Equity Ratio

6.6446

7.2544

7.3910

8.6795

The table shows that the debt/equity ratio of QNB has been increasing gradually. It therefore implies that the company has been using too many loans to finance its operations. The high ratio shows that QNB is largely leveraged and may pose a major threat to the lenders, which means that it may face challenges if economic growth shrunk by significant margins. Financing debts is one of the major challenges during the expansion of a company as it requires more capital to finance new operations (Funke, 2007, 49). High debts in an economically challenging environment may force a company to liquidate some assets and exit some markets, which may lead to collapse in the long-term (Baker & Wurgler, 2002, 23). In addition, it is possible that lenders influence the investment decisions of a company, which may lower profitability (Puntaier, 2010, 87).

Nonetheless, it is important to note that the acceptable debt/equity ratio varies with the industry in which a company operates as well as the economic environment of the firm. For instance, companies that have a regular revenue flow from an established customer base can rely on long-term debts to finance operations (Milesi-Ferretti & Lane, 2000, 91). In this case, QNB is at a better financial position, especially due to its client base where the largest fraction of liabilities is attributable to customer deposits. On the other hand, it is acceptable for a growing firm to use long-term liabilities such as bonds and loans to finance expansion, especially when the economy grows at a fast rate (Faulkender & Petersen, 2005, 60). It means that QNB may not necessarily have a properly-oriented financial structure under the current economic terrain. Conclusively, the debt/equity ratio should be in check regardless of the justification given by the type of business.

Conclusion and Recommendations

The financial statements provide crucial information on the company’s financial position and are invaluable in the development of investment decisions. Much of the information shows that QNB presents a good investment opportunity, especially with consideration of the financial objectives. All the identified financial objectives indicate the duty that the company has for its shareholders – one of maximizing and protecting their wealth. The company has undertaken various steps towards that end including global expansion through subsidiaries and associates, assurance of business continuity, and proper risk management. The objectives are in line with my personal objectives as a long-term investor, which are to leap the highest returns on investment and have security for equity. In this regard, it is recommendable to buy more equity, especially in consideration of the consistent growth in the earnings per share.

From the ratio analysis conducted, the bank is more liquid in the year 2012 but a slight decrease is observed which means that the current assets are declining in relation to the current liabilities. The bank should aim to maintain a current ratio of 1.0 to avert cases of bankruptcy. The leverage position shows a worrying trend since the ratio are more than 50% thus the bank is being funded more by debt as compared to equity. In addition, the efficiency of generating sales from assets of the bank is also decreasing and as a result the bank experiences reduced sales as well as low profitability levels. In regards to the overall performance, it is evident that there is an improvement as evidenced by the returns generated to the shareholders which is an important trend to attract more investors in the bank. However, there is need for improved efficiency in operations and reduce heavy reliance on debt financing that might be burdensome.

The assessment of the capital structure also shows that the company is highly dependent on debts to facilitate growth as demonstrated by the debt/equity ratio. Further increase in the ratio may have significant implications on the firm’s performance during an economic crisis or substantially slow growth. While the debt/equity is alarmingly high, the type of business allows reliance on long-term debt to finance growth. After growth, the company may find it easy to finance the liabilities. However, it is important the company reduces the debt/equity ratio, especially through the settlement of short-term liabilities and reduction of the reliance on debts. In this regard, it is prudent to recommend a buy as the company offers security for equity besides having increasing returns. In addition, the financial objectives of the company align with my personal long-term investment goals. However, it is important for the company to reduce the debt level for security during challenging economic times.

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