Financial Statement Of QNB Year Ended 2003-2005 - Example

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EXECUTIVE SUMMARY

This report presents an analysis of the financial performance and operations of Qatar National Bank (QNB) based on ratio analysis in the context of the Islamic banking industry. The purpose of the report is to evaluate the objectives of the bank alongside those of personal shareholders with a view of determining the extent to which the bank meets the shareholder’s objectives (Thygerson, 1995; Sinkey, 2002). The analysis focuses on the major strategies adopted by the bank in the years 2003, 2004, and 2005 by making a comparative analysis of the strategies and the corresponding trends in performance. The report also analyses the value of the financial information provided in this analysis to the shareholders and how the objectives of the shareholders are aligned with that of the bank. The report starts by outlining the business environment upon which the bank operates and the overview of the bank, for purposes of setting the tone of the report and the succeeding sections of the report. The report expands further to ratio analysis and focuses of five classes of ratios: operating, liquidity, activity, return ratios and shareholder ratios from the year 2003 to year 2005. The last part of this report provides a conclusion and recommendations to existing shareholders who may be considering either holding or selling their GNB shares.

Introduction

Qatar National Bank (QNB) was established in 1964 and has grown to become the leading bank in Qatar in terms market share of assets & deposits and loans. The bank offers a variety of segmented services across the banking services such as investment banking, corporate, retail, private banking segments and asset management. QNB is the government’s preferred bank and one of the leading banks in the MENA region. The bank also prides in having a presence in over 75 countries including the Qatar, the UK, UAE, Kuwait, Egypt, Iraq, Singapore, France, and Switzerland. QNB derives 5% of its revenues to consumer banking, 6% revenue share is from the Asset and Wealth Management, 20% of its revenue share is derived from the International Banking while the largest share of its revenues comes from Corporate Banking, which accounts for approximately 68%.

In the year 2005, the bank recorded a strong growth compared to the preceding two years; 2003 and 2004. The highest growth in 2005 was attributed to the increase in the spending rate of its customers, especially in the upgrading of the country’s infrastructure and the rise in the energy prices. With an increase of the country’s GDP by 20% in 2005 and the further projected rise in the ensuring years, the role of the government as QNB’s major customer continues to accelerate the overall development and financial performance of the bank. The bank recorded an 87.7% increase in the net profit in 2005 to reach QR1, 537 million compared to 2004 net profit of QR827.5 million. This trend shows the bank’s strength in diversift9ication of its revenue based and increasing the volume of business hence increasing its income share to 41.3% in 2005 from 23.8% in 2004. Moreover, the return in shareholder’s equity increased from 18.3% in 2004 to 30.8% in 2005.

This report seeks to analyse the financial performance and operation of QNB through the ratio analysis from the perspective of a prospective and existing shareholders, with an aim of deriving an informed conclusion and recommendations on whether current shareholders should hold or buy their existing stock.

Overview of Islamic Banking

This report seeks to provide an overview of Islamic banking, as it is the industry environment where QNB operates and shareholders should understand the central principles of operation of the banks and how the shareholder’s objectives best aligns with that of the bank’s management.

The Islamic banking industry implements the Sharia law and the principle of value addition (Kettel, 2011). The application of the sharia law prohibits the payment of riba (interest) and proposes that the income from the banking activities be generated from investment in profitable venture (Geelani, 2005). In the same light, the Sharia law prohibits making of profits through means such as speculation, gambling and interest earnings (Lewis, 2005). Such transactions are viewed as unlawful, selfish driven and socially unacceptable (Chong and Liu, 2008). The banks, borrowers and the depositors are governed by the scheme of profit and loss sharing as it encourages the people to save money in banks so as to empower their future lives (Athanasoglou et al., 2005).

Islamic banking is one of the fastest growing economic sectors in the world, with operations in over 75 countries in over 300 financial institutions (Srairi, 2009). Although the Islamic banks were first introduced to cater for the banking needs of the Muslims, it extensively developed to gain a worldwide recognition and it is greatly rising to the level of other conventional banks as reported by the Global Finance Report (2012).Islamic banking operates under the application of the principles of Shari law which originate in the propositions of harmony and justice with human nature and reality (Kahf and Khan, 2007).

According to Hudgins and Rose (2013), Islamic banking has gained worldwide acceptance and recognition of both the Islamic and non-Islamic economies as these banks are operating on a global arena as a feasible and practical alternative system to the secular banks. Ernst and Young (2012) published a report by the World Islamic Banking Competitiveness which reported that "Islamic banking assets with commercial banks globally grew to $1.3 trillion in 2011, suggesting an average annual growth of 19% over past four years. The Islamic banking growth story continues to be positive, growing 50% faster than the overall banking sector." In 2013, Pizzi (2013) reported the declaration by London to establish the first Islamic Finance and British Islamic Market Index for purposes of making such institutions compete with other leading financial institutions in the Muslim world (Akhter et al., 2011; Halkos and Salamouris, 1994). These new trends demonstrate the development of the Islamic banking, not only in the MENA region, but also in other parts of the globe, making them a major investment venture (Khan and Bhatti, 2008).

Recent research published by Hassan and Dridi (2010), Khamis and Senhadji, (2010), Merchant (2012) and Rashwan (2012) examine the efficiency and success of survival of Islamic banks compared to conventional banks in the context of the 2008 financial crisis. These studies show that the Islamic banks recorded a more efficient performance in the recovery phase compared to the alternative conventional banks (Rose, 2012). This proved that the application of the Shari laws in the operation of the Islamic banks enabled the banks to be more resilient to speculation and negative profitability. Following the 2008 financial crisis, the fast stabilization of the Islamic banking systems boosted the confidence of the investors in the industry (Jusufovic, 2009).

The Importance of Qatar National Bank (QNB) Financial Information to Current and Potential Shareholders

The financial information provided in QNB’s annual reports has great importance to the shareholders as they rely on the information provided therein to make prudent investment decisions of whether to continue with their investment in the bank or dispose it. Moreover, this information is important to prospective shareholders who are seeking to invest in QNB. Financial information acts a major investment tool for investment decision making as it allows the shareholders to know the bank’s activities and strategies adopted by the management in ensuring the achievement of the bank’s objectives and maximisation of the shareholder’s value.

Financial information allows the shareholders with important insights about the performance of QNB, thereby giving them an opportunity to make long term decisions and plans. Given that the shareholders own the bank, they have their own personal objectives, which may be consistent with that of the bank or different. In this view, shareholders need to evaluate whether the strategies adopted by the management will be able to deliver on the shareholder’s personal objectives. In the view of this analysis, shareholders can evaluate the growth strategy of the bank as QNB is exposed to a variety of major triggers for growth in the domestic market as well as the international market. This has promoted that bank to be one of the leading financial drivers for the loan growth. Given these circumstances, shareholders should remain optimistic that the key strategies adopted by QNB in propelling its loan agenda are designed to enhance the value of the shareholders and future growth. Through the analysis of the financial information related to the future strategies of the bank, shareholders can examine the management’s direction to ensure that their investment is safe (Dietrich, 1996).

The importance of financial information in helping QNB shareholders assess the liquidity of the bank and its viability to meet its financial obligation in the times of crisis (Chapra and Ahmed, 2012). When the bank is effectively liquid, the shareholders gain the trust and confidence in their investment as they are assured of the ability of their investment in securing financing to offset any short term liabilities of take advantage of any investment opportunities should they arise Casu, Molyneux, and Girardone, 2006). However, the position of the bank may be compromised should the liquidity of QNB be compromised. In this regard, QNB shareholders should recognize that the bank is set to capitalise on the large capital base and its strong liquidity position to position itself in a market base that allows for growth opportunities in the MENA region. The evaluation of the performance of QNB reveals the bank’s operation is very strong in the MENA region where most of the leading banks seem to be operating at a traditionally low valuation rates, making the company a more lucrative venture to invest in.

The strength of the balance sheet is one major aspect of the financial information that is essential to the shareholders as it determines the potential of the bank in its future plans for growth. This information is also important to prospective shareholders as it allows them evaluate their investment potential in QNB.In this case, it is prudent for QNB shareholders to consider the strong balance sheet of the bank that acts a major strategy to complement its growth potential. The strong capital base of the company as exemplified by its financial performance in 2003, 2004 and 2005 which is underpinned in the strong liquidity, prudent risk management and a strong capital base (Saunders, 2002; Ramanathan, 2007).

The Financial Objective of Qatar National Bank Financial (QNB)

The financial objective of the bank as outlined in the management’s objective remains in the commitment to boost the return on shareholder’s equity with an aim of rivalling and surpassing all the best performing banks in the MENA region.

The financial objective of QNB is aligned with shareholder’s objective of value maximisation and increase future growth in revenue. In 2005, the company experienced an exceptional performance to record an improved shareholder’s equity. Moreover, the earnings per share increased in 2015 to QR14.8 from QR8.0 in 2004. This is a great sign to the shareholders that the management of QNB is committed to ensuring that the maximisation of the shareholder’s equity in the bank is given the first priority in the formulation of performance strategies. The continued exceptional performance of the bank is also a sign of the bank’s capability in delivering quality value to the customers and the shareholders as QNB management has demonstrated capabilities and confidence in delivering value of the shareholders.

In line with the growth objectives of the shareholders, QNB is committed to expanding its operation within the domestic market and internationally. In 2005, the bank launched an Islamic banking subsidiary as part of its expansion strategy. This decision was remarkable in ensuring an improvement in the financial performance of the bank given that it was the most successful financial institution by far among most of the other banks in Qatar that considered launching Islamic windows. This launch had a positive impact on the asset growth on the bank, consequently boosting the shareholder’s value. It is also worth noting the short term and medium term outlook of the bank’s loan growth given that enhanced strength on the government spending in 2005 and the projected future.

The commitment of QNB’s management to maximisation of shareholder’s value is also seen in their efforts to increase the return on the shares of the bank. It is in consistence with the maximisation of the return on shareholders’ investment that the bank was in 2005 committed to an increase in payment of share bonus. The Board of Directors recommended the payment of a bonus share of 25% of share capital and distribution of cash dividend of 75% of share capital to QNB shareholders. Moreover, shareholders also profited from an increase in the bank’s share price by 88%. This trend shows that QNB has precisely articulated its growth strategy while prioritising the maximisation of shareholder’s value.

Ratio Analysis

The measurement of bank performance and in particular the commercial banks has been well researched across the globe, and there is unending attention (Seiford and Zhu, 1999; Lacewell, 2003). There are numerous empirical studies on the performance of commercial banks such as QNB (see Halkos and Salamouris, 2004; Lacewell, 2003; Tarawneh, 2006; Webb, 2003). However, there is very little research that has been done on the performance of commercial banks in Qatar. Financial ratio analysis can be used to determine the performance of a commercial bank listed in a capital market, and from the results current or potential investor can make an informed decision. The use of ratio analysis is has been the best method that has been considered in assessing the performance of a bank (Ncube, 2009). The main reason for measuring the bank performance is to assess the banks that are performing well (Berger and Humphrey, 1997). The financial ratio that are calculated are based on the Qatar National Bank (QNB) financial statements that are extracted from the bank’s annual report. This ratio will focus on five categories including profitability, liquidity, activity, return, and shareholder ratios, and they are analyzed in the following sections. The computation of the ratios is indicated in Appendix A.

Profitability Ratio

The profitability ratio measures the company’s ability to generate a good return on its resources which is primarily derived from the income statement. The ratios used in this computation are the operating profit margin and returns on capital employed.

Return on Capital Employed (ROCE)

ROCE is the profit or return that are generated on the total capital invested into Qatar National Bank (QNB) operations and it measures the company’s long-term investment in the business or owner’s capital plus long-term liabilities. In most cases ROCE has been regarded as the pre-eminent measure of a company’s profitability. Figure 1 shows ROCE of Qatar National Bank (QNB).

Figure 1: Return on Capital Employed (ROCE)

The return on capital employed of Qatar National Bank (QNB) increased from 15.04% in 2003 to 15.32% in 2004 which was very slight increase as shown in figure 1. However this figure increased to 20% in 2005. This shows that the capital employed in the bank’s operations was used more efficiently in the financial year 2004/2005 thereby creating more operating profits compared to the previous years. This YoY increase of the bank’s increase in ROCE is a reflection on how the bank’s growth in these three years. (ACCA Paper F7, 2009). Capital employed comprises equity and long-term finance (ACCA Paper F7, 2009). The increase in the ROCE between 2003 and 2005 implies that the increase in the long-term sources of finance was successfully used properly to generate profits. If there was a decline in ROCE between 2003 and 20045 it could have implied implies that the bank had not yet utilized the sources of finance at its disposal to generate profits. The higher ROCE in 2005 is an indication that the Bank’s operation are improving, and if the trend continued, the share price of the bank in the capital market was bound to increase.

Operating Profit Margin

Operating Profit Margin measures what proportion of a company's revenue is surplus, after paying for variable costs that relate to the on-going operation of the company. This ratio is important for the shareholders of Qatar National Bank (QNB) as it provides important insights related to the extent to which the bank is able to reduce its lending price without compromising on its profitability. A good operating margin is required for Qatar National Bank (QNB) to be able to pay for its operating costs and promote its profitability. The trend is exemplified by figure 2 below.

Figure 2: Operating Profit Margin

The operating profit margin increased from 2003 to 2005, from 79.03% to 100.76%, which denotes that the bank had a higher cost efficiency in operating expenditure. This increase can also be attributed to the decrease in total expenses payable by the bank. However, moreover, the operating profit margin increased further to 100.76% in 2005, a remarkable growth in operating profit and a reduction in the total expenses of the company. Given the capital injection in the bank in 2004, the growth in the operating profit margin can be attributed to the ability of the bank to finance its expenses and not using a large percentage of sales for the same. This ratio implies that the bank can generate more operating profit from sales, which promotes a stronger profitability (Hudgins and Rose, 2013). Consequently, this will equip the bank with the required ability to survive in the current economic times in the country.

Gross Profit Margin

The bank’s gross profit margin has been decreasing, this is the amount of money left after the bank has catered for the cost of goods sold (COGS). The fact that is has been decreasing it is not a strong fundamental for a shareholder. The trend in shown in figure 3 below.

Figure 3: Gross Profit Margin

Liquidity Ratio

Current Ratio

The current ratio examines the ability of a company to meet its financial obligation by utilising its current assets to offset its current liabilities. This ratio is important to the shareholders of Qatar National Bank (QNB) as it is related to the liquidity of the bank and may affect the chances of the bank from taking advantage of investment opportunities due to low liquidity. Figure 4 shows the trend in current ratio from 2003 to 2005

Figure 4: Current Ratio

The current ratio for Qatar National Bank (QNB) in 2003 was 15%, which is lower than 1. This means that the company has a reduced ability to meet its short term financial obligation. Such a lower current ratio means that for every QR 1 in current liabilities, there is only QR 7 of current assets. As such, it places the bank at a risky position. In 2004, the current ratio dropped to 12.7%, which indicates a decline in the liquidity of the bank. Although this was a slight decline, still it does not equip the bank with enough financial freedom when it comes to financing of short term liabilities. The current ratio increased slightly to 25.36% in 2005 despite the increase in customers’ deposits. Hence, the shareholders should not only consider the current ratio of the bank, but also its operating cash flow as it is in a better position to provide a true reflection of the bank’s state of liquidity. In this case, Qatar National Bank (QNB) high current ratio in the recent year (2005), which is supported by a strong operating cash flow indicates that the company has a more enhanced power to finance it short term liabilities.

Quick Ratio

This ratio is important to the shareholders of Qatar National Bank (QNB) as it is an essential analytical tool used in determining whether the bank operates efficiently in turning the working capital into sales. An increase indicates that the share is performing well as shown in figure 5.

Figure 5: Quick ratio

Networking capital to sales ratio

The working capital turnover ratio measures the extent of a company’s liquidity by examining the extent to which the company is able to efficiently utilize its working capital. This ratio is important to the shareholders of Qatar National Bank (QNB) as it is an essential analytical tool used in determining whether the bank operates efficiently in turning the working capital into sales.

The networking capital to sales ratio of Qatar National Bank (QNB)shows a very low trend as it is negative for the three years under analysis in this research. In 2003, the networking capital to sales ratio was at a low of -18.22 which never improved 2004 since it was -20181. However, the ratio declined significantly in 2005 to reach a low of –14.53. This is very weak fundamental, however it cannot be a true reflection since the customers’ deposits are huge compared to the cash and amount deposited in the central bank. However, it is worth noting that the networking capital to sales ratio is generally dependent on the industry upon which the company operates as each industry has its own liquidity needs (Athanasoglou et al., 2005), and this can be a reason why it is very different. Despite the low networking capital to sales ratio, it would be prudent for the shareholders to examine the historical trends in the productivity of the working capital and use it to make more informed decisions as the dynamics in the Islamic banking institutions may limit the extent to which the efficiency of the working capital may be reflected in the ratio (Khan and Bhatti, 2008; Drake, 2001).

Activity Ratios

Inventory Turnover

An increase from YoY is an indication that the company is performing well, which is depicted in the trend shown in figure 6:

Figure 6: Inventory Turnover

Total Asset Turnover

An increase from YoY is an indication that the company is performing well, which is depicted in the progress exemplified in figure 7:

Figure 7: Total Asset Turnover

Fixed Asset Turnover

An increase from YoY is an indication that the company is performing well, which is depicted in the calculations in the Appendix section.

Shareholder Ratio

Price/Earning (P/E)

The price is the current price of the stock, and the current price of QNB is 138.60. The EPS used is the most recent in the financial statements, from the company’s income statement the bank uses basic and diluted earnings per share (EPS). The P/E is illustrated in figure 8.

Figure 8: Price/Earning

To determine the growth, the P/E of the last three years will be used. From the ratios as calculated on the appendix, the P/E has been decreasing YoY, which is an indication that the company’s expected growth is increasing. For the last three using the current stock of QNB it is clear that P/E has been decreasing, which implies that the shareholders of the company should anticipate a higher growth of the company in the future.

Dividend payment ratio

An increase in dividend payment ratio is an indication that the company is performing well. This ratio explains how much money the company is paying its shareholder’s. Therefore, a very important ratio for the investor that is very interested in dividends. QNB has been increasing its dividend ratio from 2003-2005.

Price/Book Ratio

This type of ratio is used to compare the company’s current market price to its book value, the main approach used is to dividend the company’s current share price by the book value per share. The book value is the total assets less intangible assets and liabilities divide by total owners’ equity. The trend is shown in figure 9.

Figure 9: Price/Book Ratio

The P/B ratio is very vital in relation to value investing, and it can be used as score card to evaluate whether the stock is valuable to a current or potential shareholder of thee company. High P/B is can be an indication that the company is overvalued, and low P/B can be an indication that the company is undervalued, however it can be a true reflection of the company’s status.

Return Ratios

Operating Return on Assets (ROA)

The company demonstrates a very low ROA which slightly increases to 0.044 in 2015 from 0.03 in both 2013 and 2014.

Return on Assets

This ratio analysis is meant to ascertain the ability of the management to acquire deposits at a cost that is reasonable and then invest them in an investment that is profitable (Ahmed, 2009; Hampel, Simonson, and Coleman, 1994). This ratio is calculated below and it indicates the how much net income is generated per QR of assets. Therefore, the higher the ROA the more profitable the bank. From the calculation the ROE has been increasing from YoY of consideration. The year 2003 it was 0.018, 2004 it was 0.021 and in 2005 it was 0.13. The increase indicate that the bank has been performing well for the three years, which is very significant to a person with the company’s share.

Return on Equity (ROE)

This is also a very important ratio since it assesses the bank’s profitability as well as potential growth. ROE is the rate of return to the shareholders or it can be regarded as the percentage return on each QR of the equity that is invested in the bank. Therefore, the higher the ROE the more the profitable the bank is. From the calculation below the ROE has been increasing YoY, and this is a true reflection of the bank’s performance as indicated on the appendices, the profit of the bank has been increasing. In 2003 the ROE was 11%, in 2004 it was 12%, and in 2005 it was 18%. The increase is an indication that the bank is growing from one year to the next, and if the trend continues the bank’s share price will increase to reflect the growth.

Conclusion

Qatar National Bank (QNB) has made identifiable growth from 2003 to 2005 which indicates that the shareholder of the bank should have confidence with the banks performance. The bank performed extremely well in 2005, which can be attributed to increase in customers’ deposit and the increase in the spending rate of its customers. With an increase of the country’s GDP by 20% in 2005 and the further projected rise in the ensuring years, the role of the government as QNB’s major customer continues to accelerate the overall development and financial performance of the bank. The bank recorded an 87.7% increase in the net profit in 2005 to reach QR1, 537 million compared to 2004 net profit of QR827.5 million. The ratio analysis of the company also indicated that the fundamentals of the bank from a shareholders perspective are very strong such as the shareholder’s ratio and the profitability ratio. The loan book is also very important, when the loan book improves the company is expected to have a strong fundamental that will improve the shareholders’ value, since it is the main source of the bank’s income. Increase in the customers deposit as depicted by QNB reflects the increase in liquidity of the bank.

Recommendation

The investment strategy for Qatar National Bank (QNB)is neutral, and this is based on the potential growth of the bank for the last three years, as analyzed from the accounting ratios. The earning per share has been increasing over the years due to an enhanced profitability, and this would be recommended as a “buy” for an investor who is looking for dividends, speculative, or a short term purposes. As a shareholder Qatar National Bank (QNB), I will hold my shares since the fundamentals of the bank are very strong and improving YoY. There is potential increase and this is also asserted by the chairman and the CEO in the annual report of 2005. Therefore, I would buy more shares for speculative purposes and hold them in wait for the new growth trend, and this s problem going to increase my shares value on QNB counter.