Letter of Transmittal

December 24, 2012 Mr. Mokhdum Morshed Senior Lecturer School of Business North South University Plot-15, Block-B, Bashundhara R/A, Dhaka-1229 Subject: Letter of Transmittal Dear Sir, With due respect, I am a student of your course titled Bank Management had great pleasure doing this course with you. Here is the term paper on Mutual Trust Bank Ltd. This report has been prepared as a part of the course requirement. It is prepared after having extensive financial analysis of this company. I have tried my level best to follow your guidelines in every aspects of preparing the report. This report has given me an opportunity to apply theoretical knowledge in real and practical world. It has also given me a glimpse of my individual understanding and skills in various situations. I sincerely hope that you will admire this report. If you have any further enquiry concerning any information, I would be very pleased to clarify that. Sincerely

Jonaid Yousuf Siam Id: 092 0133 030

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Acknowledgement
First and foremost, I would like to thank almighty Allah for giving me the patience and the ability to work hard with tremendous devotion. I would especially like to thank Mr. Mokhdum Morshed, my course instructor, who has allowed me to do this report, and whom I have frequently consulted for guidance and advice during the preparation of this report. His wisdom and valuable insight helped me a lot to realize the value of this report and motivated me to develop the entire work. Without his support, it would not have been possible to complete and submit this report. Finally, I would like to thank some of my friends who, did this course earlier, had helped me a lot by providing necessary information to complete the report successfully.

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Executive Summary
In this report, financial performance of Mutual Trust Bank Limited (MTB) has been analyzed. The time period was from year 2009 to year 2011. For analysis comparative performance of MTB, the results have been compared with the same data obtained from one of their competitor Prime Bank Limited. There are several financial performance analyze tools have been used. First of all, to evaluate the overall performance of the bank and help the investors to make decisions, financial performance is analyzed based on different categories of ratios like liquidity ratios, efficiency ratios, leverage ratios, profitability ratios and stock market ratios. Then performance has been analyzed based on both vertical and horizontal statements-income statement & balance sheet. The major part of the report is findings & analysis section as it shows all the facts with potential understanding to an investor whether they should invest or not. And the recommendation part is based on the findings and analysis section and shows what an existing or a potential investor should decide about his investment decision for these two banks.

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Table of Contents
Letter of Transmittal ................................................................................................................1 Acknowledgement ....................................................................................................................2 Executive Summary .................................................................................................................3 Table of Contents ......................................................................................................................4 Introduction ..............................................................................................................................5 Objectives ..................................................................................................................................6 Methodology .............................................................................................................................6 Limitations ................................................................................................................................7 Overview of the Bank ...............................................................................................................8 Literature Review ................................................................................................................... 10 Ratio ..................................................................................................................................... 10 Common Size Statements .................................................................................................. 17 Findings and Analysis ............................................................................................................ 18 Ratio Analysis ....................................................................................................................... 18 Common size Statements Analysis ........................................................................................ 36 Return & Risk Analysis ......................................................................................................... 37 Required rate of return .......................................................................................................... 38 Recommendation ................................................................................................................... 40 Conclusion .............................................................................................................................. 40 Bibliography............................................................................................................................ 41 Appendix-1: Common Size Statements Appendix-2: Risk Free Rate Selection Appendix-3: Ratio Calculation Apeendix-4: Daily Return Calculation Appendix-5: Monthly Return Calculation Appendix-6: Financial Statements Page

Introduction
Bank plays a very important role in the economic life of the nation. Nowadays modern banks are very constructive for the utilization of the resources of the country. The banks are mobilizing the savings of the people for the investment purposes. In todays world, a bank performs several general banking activities in line with its different internal departments. To ensure economic stability, and to develop the rural and urban areas with necessary financial assistance, government nationalized commercial banking. Previously only government banks were here to serve the financial needs of consumers, but later private banks started dominating the market with lots of branches and many services all over the country. They have joined the banking industry to serve the common and corporate sector and to enhance their profitability in the economy. The Bangladesh banking sector relative to the size of its economy is comparatively larger than many economies of similar level of development and per capita income. The total size of the sector at 1.51% of GDP dominates the financial system, which is proportionately large for a country with a per capita income of only about US$848 in 2012. Currently there are 4 Nationalized Commercial Banks (NCBs) 32 private bank and 10 foreign banks operating in Bangladesh.

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Objectives
The basic objective of this report is to understand the financial performance of the Mutual Trust Bank Ltd. as the private commercial bank of Bangladesh whether its performance is improving or not over a certain period of time i.e. from year 2009 to 2011 and to compare the performance with one of its direct competitor, Prime Bank Ltd., in the banking industry. To be familiar with the history and operations of Mutual Trust Bank in Bangladesh To figure out operational performance of MTB in recent years To familiar with the financial statements of the bank To familiar with different types of financial performance analysis tools To gather knowledge about the financial function of different sections To fulfill the requirement of the course titled Bank Management

Methodology
This report has been prepared completely based on secondary data. Secondary sources includes Annual report of Mutual Trust Bank Limited (Year 2009 to Year 2011) Annual report of Prime Bank Limited (Year 2009 to Year 2011) Website (MTBL, Prime Bank etc.) Books, Journal and Articles

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Limitations
However, I am lucky to get the chance to prepare this report but unfortunately I have to face some difficulties. I have tried to overcome the difficulties and gave my best effort. While preparing this report, some difficulties that I have faced are-

Time Shortages
This extensive type of report needs too much time to prepare it. However, I had to prepare this report within a very short span of time. The bank officials are also very busy, so it was hard to bring their concentration on the matter.

Inconsistent Terminologies
Sometimes it was very difficult to get the correct terminologies because there are many inconsistent terminologies that bank are following now a day. There are many terminologies, which are not consistent with the Generally Acceptable Accounting Principle (GAAP). So, I need to closely look at those to find out the actual data from the financial statements.

Qualitative factors are ignored

Ratio analysis, common size statements are some of the techniques of quantitative analysis and thus which may be important in decision making but ignores qualitative factors.

Different Financial Statements

Since the financial statements of a bank are completely different from the other service or manufacturing company, it was difficult to understand some terms. As a result, it takes more time to analyze the financial performance.

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Overview of the Bank

Mutual Trust Bank Limited (MTBL) is a Public Limited Company by shares in the Bangladesh, with commendable operating performance. Directed by the mission to provide with prompt and efficient services to clients, MTBL provides a wide range of commercial banking services also. The bank has achieved success among its peer group within a short span of time with its professional and dedicated team of management having long experience, commendable knowledge and expertise in convention with modern banking. Mutual Trust Bank Limited (MTBL) was incorporated on September 29, 1999 under the companies Act 1994 as a public company limited. They introduced themselves as a pioneer in banking sector. At the time of beginning their authorized capital was BDT 38, 00,000,000 divided into 38,000,000 ordinary shares of BDT 100.00 each. The head office of the bank is in MTB center, 26 Gulshan Avenue. The bank has 78 branches all over the country; the bank carries out international business through a Global Network of Foreign Correspondent Banks. As envisaged in the Memorandum of Association and as licensed by Bangladesh Bank under the provisions of the Banking Companies Act 1991, the Company started its banking operation and entitled to carry out the following types of banking business: All types of commercial banking activities including Money Market operations Investment in Merchant Banking activities Investment in Company activities Financiers, Promoters, Capitalists etc Financial Intermediary Services Any related Financial Services

Mission
We aspire to be the most admired financial institution in the country, recognized as a dynamic, innovative and client focused company that offers an array of products and services in the search for excellence and to create an impressive economic value. MTBL Group Page

Vision
Mutual Trust Bank's vision is based on a philosophy known as MTB3V. They envision MTB to be: One of the Best Performing Banks in Bangladesh The Bank of Choice A Truly World-class Bank

Product & Services

The MTBL concentrates the following categories of bankingRetail Banking Deposit Loans Cards Wholesale Banking Term Finance Working Capital Finance Trade Finance Offshore Banking Syndication & Structured Finance Treasury Services Money Market Foreign Exchange NRB Banking NRB Savings A/C NRB DPS A/C

SME Banking MTB Bhagyoboti MTB Krishi MTB Mousumi MTB Small Business Loan MTB Digoon

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Literature Review
Financial statement plays a vital role among all of other aspects. Analysis of these statements is essential to know a company much better. One foremost purpose of the financial statement analysis is to use the past performance of a company to predict how the company will perform in future. Another purpose would be to evaluate performance of a company with a view to identify the problem areas. These statements are recognized & authorized by GAAP (Generally Accepted Accounting Principles). There are 4 main statements including income statement, Balance sheet, Statement of owners equity and Statement of cash flow, which is mandatory to disclose to the external users like shareholder, investors and creditors at the end of every fiscal year. To figure out whether a company is good or bad, it is necessary to analyze the financial statements. There are lots of tools and techniques available that would help to analyze this financial statement. It involves the relationship of both financial statement numbers and the trends in those numbers over time. It can identify the problem areas by evaluating financial statements which effects the decision making process. To analyze the performance of MTB and Prime Bank, there are several financial performance analyze technique has been used such as Ratio Analysis, Horizontal and Vertical statements, Risk & Return analysis etc.

Ratio
Ratio Analysis is the starting point in developing the information desired by the analyst. Ratio analysis provides only a single snapshot, the analysis being for one given point or period in time. In the ratio analysis it is possible to define the company ratio with a standard one. For this paper I have gone through Time Series Analysis and Cross-sectional Analysis.

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Liquidity Position Indicator Ratios

Many financial-service institutions estimate their liquidity needs based upon experience and industry average. This often means using certain liquidity indicators. For example, for depository institutions the following liquidity indicator ratios are often useful: Cash Position Indicator The ratio indicates a banks ability to handle immediate cash needs. A greater proportion of cash implies the institution is in a stronger position to handle immediate cash needs. The higher is the ratio the better the liquidity position of the bank. It is calculated as follows

= Liquid Securities Indicator

This ratio compares the most marketable securities an institution can hold with the overall size of its asset portfolio; the greater proportion of government securities, the more liquid the depository institutions position tends to be. It is calculated as follows = Capacity Ratio This is a negative liquidity indicator for the bank because the loans and leases are often the most illiquid of assets. When this ratio goes up, the liquidity position of the financial institutions goes down. It is calculated as follows

Deposit Composition Ratio suggests greater deposit stability and a lesser need for liquidity. A high ratio indicates the greater requirement for liquidity. It is calculated as follows-

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This ratio measures how stable a funding base each institution possesses. A decline in this ratio

Leverage Ratios
Debt Ratio This ratio measures the percentage of total assets that are financed through debt. The higher the debt the more an institution is exposed to risk. This ratio is very high for financial institution. It is calculated as follows = Equity multiplier This is a measure of leverage. The higher the ratio is, the more the company is relying on debt to finance its asset base. A higher equity multiplier indicates higher financial leverage, which means the company is relying more on debt to finance its assets. It is calculated as follows =

Efficiency Ratios
Operating Efficiency Ratio The efficiency ratio gives us a measure of how effectively a bank is operating. It is the cost required to generate each dollar of revenue. An increase means the company is losing a larger percentage of its income to expenses. If it is getting lower, it is good for the bank and its shareholders. This measures non-interest expenses as a proportion of operating revenue. Costs include salaries, technology, buildings, supplies, and administrative expenses. Revenue includes net interest income (interest revenue less interest expenses) plus fees. It is calculated as follows =

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Employee productivity Ratio The ratio measures the level of income that each employee generates. It helps to determine the efficiency of a bank in terms of employees. A rise in the employee productivity ratio suggests management and staffs are generating more operating revenue and/or reducing operating expense per employee, helping to squeeze out more product with a given employee base. It is calculated as follows =

Profitability Ratios
Return on Assets (ROA) It is primarily an indicator of managerial efficiency; it indicates how capable management has been in converting assets into net earnings. The higher the percentage is better, because that means the company is doing a good job using its assets to generate net earnings. It is calculated as follows = Return on Equity (ROE) It is a measure of the rate of return flowing to shareholders. It approximates the net benefit that the shareholders have received from investing their capital in the financial firm (i.e., placing their funds at risk in the hope of earning a suitable profit. This is the ratio potential investors look at when deciding whether or not to invest in the company. Net income comes from the income statement and stockholders equity comes from the balance sheet. In general, the higher the percentage is the better. It is calculated as follows =

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Net Interest Margin Net interest margin measures how large a spread between interest revenues and interest costs management has been able to achieve by close control over earning assets and pursuit of the cheapest sources of funding. It is expressed as a percentage of what the financial institutions are earning minus the interest that it pays on borrowed funds to its investors. It examines how successful a firm's investment decisions are compared to its debt situations. A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returns generated by investments. It is calculated as follows = Net Non Interest Margin It measures the amount of noninterest revenues stemming from service fees the financial firm has been able to collect relative to the amount of noninterest costs incurred (including salaries and wages, repair and maintenance of facilities, and loan loss expenses). Typically net noninterest margin is negative. Noninterest costs generally outstrip fee income; through fee income has been rising rapidly in recent years as a percentage of all revenues. It is calculated as follows = Net Bank Operating Margin A measure of how profitably the firm is operating. The ratio tells how well a company converts revenue from core operations into actual profit - how many cents of profit it gets from every dollar of sales. The operating margin shows how well the company controls costs. It is calculated as follows = Net Profit Margin It tells investors the percentage of money a company actually earns per dollar of sales. This margin is, the more effective the company is at converting revenue into actual profit. The net number is an indication of how effective a company is at cost control. The higher the net profit

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profit margin is a good way of comparing companies in the same industry. It is calculated as follows =

Asset Utilization Ratio It indicates that how efficiently the firm is utilizing the asset to generate revenue or return. It concern on portfolio management policies, especially the mix and yields on the banks assets. By carefully allocating assets to the highest yielding loans and investments while avoiding excessive risk, management can raise the average yields on assets. It is calculated as follows =

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Stock Market Ratios

Earnings per Share (EPS) Earnings per Share are the most frequently used of all the ratios and are generally felt to give the best view of performance. It indicates how much of a companys profit can be attributed to each ordinary share in the company.

Market-Book Value Ratio It measures how much a company is worth at present, in comparison with the amount of capital invested by current and past shareholders into it. This ratio is used by some investors or analysts as an indicator of over- or undervaluation. If the balance sheet assets per share are much larger than the share price, this is taken to be a buy signal. The equation is / =

Price Earnings Ratio (P/E) It is a measure of the price paid for a share relative to the annual profit earned by the firm per share. A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. It gives us an indication of the confidence that investors have in the future prosperity of the business. The equation is / =

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Common Size Statements

Vertical Balance sheet
In the vertical balance sheet all the figures of the balance sheet of a year are divided by that years total asset and expressed those as a percentage (%).

Vertical Income statement

In vertical income statement all the figures of the income statement of a year are divided by that years total operating revenue and expressed in percentage

Horizontal Balance sheet

In horizontal balance sheet each base year items amount is divided by itself and is expressed in percentage form, so all the base year items are 100%. Then next years amounts are divided by the base years amount and expressed as a percentage of the base year. Here, I have taken 2009 as the base year. In this way all the amounts of 2010 and 2011 have been calculated.

Horizontal Income statement

In horizontal income statement each base year items amount is divided by itself and is expressed in percentage form, so all the base year items are 100%. Then next years amounts are divided by the base years amount and expressed as a percentage of the base year. Here, I have taken 2009 as the base year. In this way all the amounts of 2010 and 2011 have been calculated. Then next years amounts are divided by the base years amount and expressed as a percentage of the base year.

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Findings and Analysis

Ratio Analysis
Liquidity Position Indicator Ratios Cash Position Indicator
2009 MTB Prime Bank
14% 12% 10% 8% 6% 4% 2% 0% 2009 2010 2011 MTB

2010 10.32% 6.88%

2011 7.04% 7.51%

12.72% 8.79%

Prime Bank

Year

In the year 2011, MTBs cash and due from deposit ory institutions was 7.04% of total assets. Cash position indicator of Mutual Trust Bank is decreasing year by year which is not a good sign. This indicates that their cash in hand is decreasing and will face problems to handle immediate cash needs. In the last two years, we can see that MTB had better cash indicator ratio than Prime Bank which means they had good defence against liquiditity crisis. On the other hand, in 2011, Prime Banks cash position indicator has increased over MTBs cash position indicator.

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The total assets of Mutual Trust Bank Ltd. are increasing every year with a greater proportion compared to cash and due from depository instituitions. That is the reason behind thedecreasing of this ratio.

Liquid Securities Indicator

2009 MTB Prime Bank 16.98% 15.24% 2010 14.03% 12.55% 2011 16.98% 17.20%

30% 25% 20% 15% MTB Prime Bank

10%
5% 0% 2009 2010 2011

Year

In the year 2011, MTBs investment in government securities was 23.84% of total assets. Liquid securities indicator has increased in 2011. Though it was slightly dropped in 2010. This indicates that they have invested huge amount of money in marketable securities. They can easily sell these securities when they need cash. In the last two years, we can see that MTB had slighter better liquid securities indicator than Prime Bank. On the other hand, in 2011, MTB has invested huge amount of money in government securities compare to Prime Bank. The investment in government securities of Mutual Trust Bank Ltd. are increasing every year ratio.

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with a greater proportion compared to total assets. That is the reason behind its increasing of this

Capacity Ratio
2009 MTB Prime Bank 64.20% 71.51% 2010 67.79% 75.19% 2011 60.38% 69.72%

80% 70% 60% 50% 40% 30% 20% 10% 0% 2009 2010 Year 2011

MTB Prime Bank

In the year 2011, MTBs net loan and leases was 60.38% of total assets. This is the lowest percentage among the three years which is a good sign for the company in terms of liquidity concern. In the last three years, we can see that MTB had slighter lower capacity ratio than Prime Bank. That means they had highest liquidity position than their competitor. The poportionate change in net loan and losses of Mutual Trust Bank Ltd. is lower than poportionate change in total assets. That is the reason behind its decreasing of this ratio.

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Deposit Composition Ratio

2009 MTB Prime Bank 24.82% 20.42% 2010 33.59% 25.40% 2011 25.99% 20.50%

40% 35% 30% 25% 20% 15% 10% 5% 0% 2009 2010 Year 2011

MTB Prime Bank

In the year 2011, MTBs total demand deposit was 25.99% of time deposits. This decreased in 2011 from 2010. This means MTB has taken less amount of current deposit compare to time deposit. As a result their liquidity requirement has decreased in 2011. In the last three years, we can see that MTB had higher deposit composition ratio than Prime Bank. That means their liquidity requirment is higher than Prime Bank. The poportionate change in current deposit of Mutual Trust Bank Ltd. is lower than poportionate change in time deposit. That is the reason behind its decreasing of this ratio.

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Leverage Ratios
Debt Ratio
2009 MTB Prime Bank 93.02% 90.59% 2010 92.76% 89.05% 2011 93.68% 90.59%

95% 94% 93% 92% 91% 90% 89% 88% 87% 86% 2009 2010 Year 2011

MTB Prime Bank

In 2011, Mutual Trust Bank has financed 93.68% of their assets by debt. It means for every 100 taka of total assets, 93.68 taka is financed by debt. This ratio is increased in the year 2011 from 2010. Though it dropped slightly in 2010. Debt ratio of Prime Bank Ltd. was lower than that of Mutual Trust Bank Ltd. for the last three years. Like MTB, Debt Ratio of Prime Bank has increased in 2011. It is clearly seen in the graph that MTBs dependency on debt financing is slightly higher than Prime Bank. So risk exposure for MTB is slightly higher than Prime Bank. If economy goes well than MTB will earn more profit than Prime Bank but if economy goes through recession MTB will incur more loss than Prime Bank. So Prime Bank with lower debt ratio is in a safer position. In 2011, proportionate change in MTBs total liabilities was more than proportionate change in total assets. Thats why this ratio has increased in 2011. Page

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Equity Multiplier
2009 MTB Prime Bank 14.32 times 10.63 times 2010 13.82 times 9.13 times 2011 15.83 times 10.45 times

18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2009 2010 Year 2011

Times

MTB

Prime Bank

In 2011, MTBs total assets were 15.83 times of total assets. Equity multiplier has increased from the year 2010. This means, MTB has financed their assets more by debt capital compare to equity capital. Equity Multiplier of Prime Bank Ltd. was lower than that of Mutual Trust Bank Ltd. for the last three years. Like MTB, Equity Multiplier of Prime Bank has increased in 2011. It is clearly seen in the graph that MTBs dependency on debt financing is slightly higher tha n Prime Bank. On the other hand Prime Banks dependency on equity capital to finance their assets is slightly above than MTB. In 2011, the relative changes in total assets were more than relative changes in equity capital for

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Mutual Trust Bank. Thats why this ratio has increased in 2011.

Efficiency Ratios
Operating Efficiency Ratio
2009 MTB Prime Bank 15.40% 17.49% 2010 21.53% 20.54% 2011 21.06% 17.25%

25% 20% 15% 10% 5% 0% 2009 2010 Year 2011 MTB Prime Bank

In 2011, the operating efficiency ratio of Mutual Trust Bank was 21.06%. It means MTB had to spend 21.06% of their operating revenue for operating expense. This ratio had increased at a higher percentage in the year 2010 from 2009. Though it has dropped in 2011 but the rate is very low. This shows that overall operating efficiency is not good in 2011 compare to 2009. The competitor of MTB, Prime Bank has achieved a wonderful position in terms of operating efficiency in 2011. Their operating ratio was high compare to MTB in 2009. But they have managed to control their operating expenses in 2011. This is the best position among the three years. In 2011, the proportionate change in operating revenues was slightly lower than proportionate change in operating expenses. Thats why this ration has slightly decreased in 2011. Page

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Employee Productivity Ratio

2009 MTB Prime Bank 3024994.98 4444472.17 2010 2927785.22 4579143.56 2011 2379368.67 5080856.34

6000000 5000000 Unit (BDT) 4000000 3000000 2000000 1000000 MTB Prime Bank

0
2009 2010 Year 2011

In 2011, each full time employee of Mutual Trust Bank has generated 2,379,368.67 taka revenue. The ratio is decreasing in every year. It has decreased at a great rate in 2011 compared to previous year. This indicates that the efficiency of the employees has gone down or in other words the operating expense per employee has gone up. Prime Bank, one of the competitors of MTB has done a good job in terms of employee productivity ratio. It is increasing in year by year. This ratio has increased at a higher rate in 2011. So the employees of Prime Bank are more productive than that of MTB. The relative changes in number of full time employee were more that relative changes in net operating income.

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Profitability Ratios
Return on Assets (ROA)
2009 MTB Prime Bank
2.50% 2.00% 1.50% 1.00% 0.50% 0.00% MTB Prime Bank

2010 1.34% 2.01%

2011 0.83% 1.83%

1.55% 2.23%

2009

2010
Year

2011

In 2011, every 100 taka worth of total assets of Mutual Trust Bank are generating 0.83 taka of net income. This ratio is decreasing in every year. It has decreased at a higher rate in 2011. This shows that MTB earnings is decreasing compare to investment in assets. Like MTB, return on assets of Prime Bank is decreasing in every year. In spite of, they have more than double return on assets in 2011 compared to MTBs return on assets. So, Prime Bank has used their assets more efficiently to generate net income. So the proportionate changes in net income were lower than proportionate changes in total assets in 2011 for MTB. That is the main reason for the downfall of this ratio.

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Return on Equity (ROE)

2009 MTB Prime Bank
25.00%

2010 18.56% 18.34%

2011 13.14% 19.13%

22.27% 23.71%

20.00%
15.00% 10.00% 5.00% 0.00% 2009 2010 Year 2011 MTB Prime Bank

In the year 2011, shareholders of Mutual Trust Bank have earned 13.14 taka for every 100 taka investment in the company. This ratio is decreasing every year from the initial. The decrease rate is quite high in every year. If this will happen in next few years, shareholder of MTB will lose confidence to the company The competitor of MTB, Prime Bank had higher ROE in 2009. But their return on earnings had slightly gone down to MTBs ROE in 2010. In spite of, they have recovered wonderfully in 2011. On the other hand MTBs ROE has fallen greatly in 2011. As a result, a shareholder who want to add a bank in his/her investment portfolio, will more likely to invest in Prime Bank. The Proportionate change in net income in 2011 was less than proportionate change in total shareholders equity. Page

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Net Interest Margin

2009 MTB Prime Bank
3.00% 2.50% 2.00% 1.50% 1.00% MTB Prime Bank

2010 2.04% 2.80%

2011 0.84% 2.04%

1.65% 1.95%

0.50% 0.00%
2009 2010 Year 2011

In the year 2011, Mutual Trust Banks net interest margin was only 0.84%. This ratio has decreased (almost 50 percent) greatly in 2011. This shows that the loan demand has decreased in 2011 compare to the supply of deposit. Form the graph; we can see that net interest margin of prime bank also followed similar patter over last three years. However, net profit margin of prime bank was above than that of MTB. And their net interest margin also decreased less compare to MTB.

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Net Non-Interest Margin

2009 MTB Prime Bank 1.43% 2.29% 2010 0.95% 1.20% 2011 0.83% 1.68%

2.50% 2.00% 1.50% 1.00% MTB

0.50%
0.00% 2009 2010 Year 2011

Prime Bank

In the year 2011, Mutual Trust Banks net not-interest margin was only 0.83% similar to net interest margin. . This ratio is increasing every year from the initial. This shows that the loan demand has decreased in 2011 compare to the supply of deposit. Form the graph; we can see that net interest margin of prime bank also followed similar patter over last three years. However, net profit margin of prime bank was above than that of MTB. And their net interest margin also decreased less compare to MTB.

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Net Bank Operating Margin

2009 MTB Prime Bank 3.08% 4.24% 2010 2.99% 4.00% 2011 1.66% 3.73%

4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2009 2010 Year 2011

MTB

Prime Bank

In the year 2011, the net bank operating margin of Mutual Trust Bank was 1.66%. That means the company has earned 1.66 taka. This ratio is decreasing in every year. It has decreased at a higher rate (almost 50 percent) in 2011. The proportionate change in total assets was more than proportionate in profit before provision and taxation. On the other hand, the net bank operating margin of Prime Bank has decreased in every year from the initial at a lower rate. And the net bank operating margin of prime bank was more than double in 2011. This shows that how Prime bank has controlled their expense over revenue with the increase of total assets.

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Net Profit Margin

2009 MTB Prime Bank 13.78% 16.75% 2010 12.30% 17.60% 2011 7.66% 15.07%

20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
2009 2010 Year 2011

MTB

Prime Bank

In 2011, Mutual Trust Banks net profit margin was 7.66%. This means they have converted 7.66% of their total revenue as net income. This ratio is going down in every year. This shows that they are not effectively managing their expense. The expense is increasing at a higher rate than compare to the increase in revenue. Prime Bank, one of the competitors of MTB, has managed their expense quite efficiently because they have higher net profit margin than over the three years. Though this ratio slightly dropped in 2011 but the rate was very lower compare to the net profit margin of Prime Bank.

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Asset Utilization Ratio

2009 MTB Prime Bank 11.28% 13.32% 2010 10.92% 11.42% 2011 10.85% 12.15%

14.00%
12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2009 2010 Year 2011 MTB

Prime Bank

In 2011, the

asset utilization of Mutual Trust Bank Ltd. was 10.85%. That means every 100

taka worth of total assets are generating 10.85 taka of total revenue. This ratio was quite stable (decrease at a very lower rate) over the three years. The proportionate change in total assets was slightly higher than proportionate change in total operating revenue. On the other hand, Prime Bank is generating more operating revenue by using their assets. Though this ratio dropped at a higher rate in 2010 but they have recovered successfully in 2011.

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Stock Market Ratios

Earnings per Share
2009 MTB Prime Bank 3.23 7.83 2010 3.04 5.37 2011 2.50 4.70

9.00 8.00 7.00 6.00 BDT 5.00 4.00 3.00 2.00 1.00 0.00 2009 2010 2011 MTB Prime Bank

In the year 2011, the common shareholder of Mutual Trust Bank has earned 2.50 taka for every share they hold. EPS is decreasing in every year from the base. So, the shareholders of MTB may sell their share in future due to low EPS. The total number of shares outstanding was remained same in every year where the net income has decreased in every year. That is why this ration has decreased in every year. The shareholders of Prime Bank have earned more than the share holders of prime bank in every three years though it decreased in every year. Due to higher EPS, a shareholder may want to keen the share of Prime Bank in their portfolio.

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Price to Earnings Ratio

2009 MTB Prime Bank 12.76 8.34 2010 23.31 17.60 2011 13.81 9.48

25.00 20.00 15.00 10.00 5.00 0.00 2009 2010 Year 2011 MTB Prime Bank

In the year 2011, Mutual Trust Banks shareholders were willing to pay 13.81 taka for every 1 taka of reported earnings. This ratio decreased in 2011 after a huge increase in 2010. The relative change in market price per share was less that relative change in earnings per share. The P/E ratio of Prime Bank was 9.48 in 2011. P/E ratio of Prime Bank was far below than that of MTB. It shows that the shareholders of MTB are willing to pay more money for every 1 taka of reported earnings.

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Market to Book Value Ratio

2009 MTB Prime Bank 4.12 times 6.53 times 2010 7.08 times 9.45 times 2011 3.45 times 4.45 times

10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2009 2010 2011

Unit (times)

MTB Prime Bank

Year

In the year 2011, market price per share of Mutual Trust Bank was 3.45 times higher than the book value per share. This ratio decreased in 2011 after an increase in 2010. The market price per share has decreased in 2011 where book value per share remained same. Thats why this ratio has fallen in 2011. The M/B ratio of Prime Bank in 2011 was 4.45 times. This also decreased in Prime Bank in 2011 after a increase in 2010.

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Common size Statements Analysis

Vertical Balance Sheet
Mutual Trust Bank is decreasing their balance with other banks and financial institutions while cash in hand and reserve in Bangladesh Bank is quite stable over the three years. MTB has invested huge amount of money in government securities in 2011. On the other hand loan demand has decreased in this year. Prime Banks loan demand also decreasing. Their investment in government securities also increased in 2011. MTB has borrowed highest amount of money from other banks and financial institutions in 2011. On the other hand, Prime Bank has borrowed less amount money. Both banks has collected same percentage of deposits over the three years. The total shareholders equity are higher for Prime bank. So MTB is more leveraged bank than Prime bank.

Horizontal Balance Sheet

The cash asset of MTB has increased more in 2011 than 2010 where Prime bank cash assets have not increased relative to that percentage. MTB is decreasing deposit money in other banks and financial institutions while Prime bank is increasing their deposit at a higher rate, completely different strategy. MTB has increased more percentage of their total assets in government securities than that of Prime Bank. Over the time period, demand for loan of Prime Bank has increased more than MTB. In 2011, Prime Bank has borrowed huge amount of money from other banks than MTB. Both total liability and shareholder equity has increased less over the this time period than that of Prime Bank.

Vertical Income Statement

In 2011, net interest income of both banks has decreased due to high interest paid to customer deposit compare to previous year. As well as, the no interest income also decreased. As a result total operating income also decreased. Prime Bank has controlled their costs more efficiently that MTB in 2011. As a result, net profit after tax in terms of total operating revenue has decreased

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less than that of MTB.

Horizontal Income Statement

Where Mutual Trust Banks net interest income has decreased in 2011, net interest income of Prime Bank has increased at a higher rate compare to 2010. The total operating income of MTB has decreased less compare to 2010 due to increase in non-interest income. Since n-interest income of Prime Bank also increased, their total operating income also increased more. The total operating expense of MTB has increase almost 91% from the base year where it has increased only 44% in the case of Prime Bank. The is the main reason due to downfall of net profit after tax of MTB and boost in the case of Prime Bank.

Return & Risk Analysis

Return
Average monthly return (from 2009 to 2011) and average yearly return of Mutual Trust Bank, Prime Bank and Dhaka Stock Exchange General Index are given belowMTB Average Return (Monthly) Average Return (Yearly) 1.1934% 14.3209% Prime Bank -0.0077% -0.0926% DGEN 1.5404% 18.4847%

As we can see from the table that average year return of MTB is 14.3209% where average return of Prime bank is negative (-0.0926%). So, risk adverse investor will who wants higher return will likely to invest in the stock of MTB from these two bank. Return based on daily stock price is also calculated (see in the CD).

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Risk
MTB Standard Deviation Coefficient of Variation
Beta

Prime Bank 14.7341% -159.15

0.8961

DGEN 9.7591% 0.53

14.2598% 0.996
1.22273

The beta of MTB is = 1.2273 which is the market risk is for MTBs shares. So, = + 14.2598 = 1.22273 + = . % The beta of Prime Bank is = 0.8961 which is the market risk is for Prime Banks shares. So, = + 14.7341 = 0.8961 + = . %

Required rate of return

The minimum expected yield by the investors requires in order to selecting a particular investment is called required rate of return. Here, I have used Capital Asset Pricing Model (CAPM) to calculate the required rate of return for the stock of MTB and Prime Bank in 2011. In this model, I have inserted values of Rm, Rf, and beta () in the formula of CAPM. This is the return required by investors. = +

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Here MTB Risk free rate ( ) Market return ( ) Beta Required Rate of Return 10.00% 18.48% 1.22272 20.41% Prime Bank 10.00% 18.48% 0.8961 17.60%

Intrinsic Share Price

Mutual Trust Bank has not given any kind of divided (neither cash nor stock) from 2009 to 2010. They have issued bonus share in these period. That is why the intrinsic share price has not calculated.

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Recommendation
From ratio and common size statement analysis it is clearly visible that financial performance of Mutual Trust Bank is very poor compare to Prime Bank Limited over the last three years. So they can overcome this hard situation by Decrease operating expense efficiently. Give cash or stock dividend to shareholders. MTB should engage more CSR (Corporate Social Responsibility). It will appreciate and attract new investors. Use customer deposits more efficiently to earn net interest income (by lending that money to good borrower). Use assets more efficiently to generate net income.

Conclusion
Finally after analyzing all the ratios and common size statement, it can be concluded that the performance of Mutual Trust Bank was very bad in comparison with Prime Bank. The CAMELS rating of Bangladesh Bank also tells that the performance of MTB is very poor in the previous year. MTB was B-class bank in 2007 where Prime bank was in A-class bank on that period. Now both are in B-class bank but the performance of MTB is not that much satisfactory compare to Prime Bank. As an investor of common share may like to invest in MTB because of higher return compare to Prime Bank.

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Bibliography
About us . (n.d.). Retrieved December 15, 2012, from Mutual Trust Bank Ltd.: http://www.mutualtrustbank.com/about_profile.php (2009-2011). Annual Report. Dhaka: Mutual Trust Bnak Ltd. (2009-2011). Annula Report. Dhaka: Prime Bank Ltd. Hudgins, S. C., & Rose, P. S. (2008). Bank Management & Financial Services (8th Edition ed.). New York: McGrawHill. Treasury bill/bond auctions. (n.d.). Retrieved December 16, 2012, from Bangladesh Bank: http://www.bangladesh-bank.org/monetaryactivity/treasury.php Uddin, A. Z. (2012, May 20). BB CAMELS rating. Retrieved December 2012, 23, from Newagebd: http://www.newagebd.com/detail.php?date=2012-05-20&nid=10830

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