Presentation on theme: "Shahul Hameed bin Mohamed Ibrahim. Definition of performance analysis Financial and non financial performance analysis Requirements for performance."— Presentation transcript:
Definition of performance analysis Financial and non financial performance analysis Requirements for performance analysis Financial Analysis Liquidity and profitability NPL and NPF ratios CAR
Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project.businessproject It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may:financial statements Continue or discontinue its main operation or part of its business; Acquire or rent/lease certain machineries and equipments in the production of its goods; Issue stocks or negotiate for a bank loan to increase its working capital.stocksloanworking capital Make decisions regarding investing or lending capital other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.
Financial analysts often assess the firm's: 1. Profitability- its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;income statement 2. Solvency- its ability to pay its obligation to creditors and other third parties in the long-term; 3. Liquidity- its ability to maintain positive cash flow, while satisfying immediate obligations;cash flow Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time.balance sheet 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. Social, environmental and shariah goals in case of islamic institutions
Evaluation refers to making an assessment of achievement as opposed to objectives, targets, goals or other criteria Criteria could be : Budgets and strategic plans Other firms in the same industry Past years performance Social, environmental and shariah goals (maqasid)
Financial analysts often compare financial ratios (of solvency, profitability, growth...):financial ratios solvencyprofitability Past Performance: Across historical time periods for the same firm (the last 5 years for example), This is known as a time series Future Performance: Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects. Business and strategic plans Comparative Performance: Comparison between similar firms. Cross sectional i.e same time period
These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example :balance sheetincome statement Net profit / equity = return on equity Gross profit / balance sheet total = return on assets Stock price / earnings per share = P/E-ratio Comparing financial ratios are merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:Gross profit They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms. One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance. Seasonal factors may prevent year-end values from being representative. A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible. Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values. They fail to account for exogenous factors like investor behavior that are not based upon economic fundamentals of the firm or the general economy (fundamental analysis) .fundamental analysis 
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis.financial statements competitorsmarkets investment analysisquantitative analysis technical analysis Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives: forecasts to conduct a company stock valuation and predict its probable price evolution,stock valuation to make a projection on its business performance, to evaluate its management and make internal business decisions, to calculate its credit risk.credit risk
The analysis of a business' health starts with financial statement analysis that includes ratios. It looks at dividends paid, operating cash flow, new equity issues and capital financing. The earnings estimates and growth rate projections published widely by Thomson Reuters and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their validity.ratiosThomson Reuters The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the futurediscount ratediscounted cash flow dividends received by the investor, along with the eventual sale price. (Gordon model) dividendsGordon model earnings of the company, or cash flows of the company. cash flows
The amount of debt is also a major consideration in determining a company's health. It can be quickly assessed using the debt to equity ratio and the current ratio (current assets/current liabilities).debt to equity ratio The simple model commonly used is the Price/Earnings ratio. Implicit in this model of a perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the business. The multiple accepted is adjusted for expected growth (that is not built into the model).Price/EarningsTime value of money Growth estimates are incorporated into the PEG ratio but the math does not hold up to analysis. [neutrality disputed] Its validity depends on the length of time you think the growth will cont ] inue.PEG rationeutrality disputed ] Computer modelling of stock prices has now replaced much of the subjective interpretation of fundamental data (along with technical data) in the industry. Since about year 2000, with the power of computers to crunch vast quantities of data, a new career has been invented. At some funds (called Quant Funds) the manager's decisions have been replaced by proprietary mathematical models. [2 [2
Efficiency and productivity indicators Operating expenses ratio (oe/average portfolios. Portfolio yield ( (financial income/average portfolio Cost per client (operating expenses/number of clients Cost per unit of capital allocated (operating expenses/value of financing) Staff ratios (active clients/officers;financing/officer Client retention: number of new clients, number of clients lost, client turnover, average number of clients trend Asset size
Financing- asset productivity Financing income/category of financing Deposits Return on deposits= net operating income/ave deposits Capital and capital adequacy Financing provisions/loan losses Profit margins Net operating income/total revenue Sustainability Operating revenue/operating expenses
Portfolio (financing) quality indicators (credit risk) Non performing financing/non current financing Non accrual financing= 90days past due/total financing Past due financing/total financing Allowance for non financing and lease losses/non- current financing (one to one or 100%) Portfolio at risk (PAR)- considering the percentage of financing at risk when even when it is one day late. Delinquency – 30, days, 60 days, trend Write offs% (/average portfolio) Financing loss reserve based on risk E.g 30 days -10%, 100 days 75%.
GROWTH AND OUTREACH INDICATORS % growth = final amount - initial amount/initial amount Number of clients in each category e.g. Gender, rural/urban etc.
ASSET LIABILITY MANAGEMENT PROFIT RATE MANAGEMENT ASSET MANAGEMENT LIQUIDITY MANAGEMENT LEVERAGE Non current financing/total financing LEVERAGE RATIO ASSET PRODUCTIVITY MATURITY GAP = DIVIDE ALL ASSET and LIABILITIES IN CATEGORIES OF MATURITIES to compare av maturities of assets with av maturies of liabilities. FOREIGN CURRENCY GAP (fx assets/fx liabilites)
CAPITAL ADEQUACY (leverage ratio) Tier 1 capital/average assets Sum of commone equity including surplus and retained earnings, qualifying non cumulative prepetual preferred stocks and MI Serves as protection to depositors Otherwise depositors will be paid out of PDRM if any Are these necessary of IAH?
EARNINGS PERFORMANCE NET INCOME TO AVERAGE ASSETS PROVISION FOR FINANCING LOSSES TO AVG ASSETS NET REALISED GAINS TO AVG ASSETS NON CURRENT FINANCING TO TOTAL FINANCING
Non performing financing /total financing Profit attributable to depositors/investment account deposits (return on investment account deposits) Profit attributable to IAH/IAH funds invested Profit attributable to RIAH/Avg. RIAH Deposits Net income from RIAH funds/RIAH/Avg. RIAH Deposits % or RIAH funds invested % of IAH funds invested
Islamic banks are sociao-economic institutions not capitalist profit making institutions Need to measure non financial and socio- economic performance based on Maqasid shariah Need to calculate islamicity ratios based on Maqasid shariah Maqasid shariah objectives are: Tahdhib al-Fard (Educating the individual) Iqamah al-`Adl (Establishing justice) Jalb al-Maslahah (Promoting Welfare)
Educating bank personnel : Customer service and retention Product knowledge Customer care especially retirees/small business/old people and poorer sections of society Shariah aspects of products Good Muslim – ibadat and respon to Allah Punctuality, cleanliness, friendliness, efficiency, effectiveness Educating public (customers) Avoidance of riba,gharar and maysir in financial products Awareness of the risks and rewards of islamic financial products
In terms of promoting socio-economic justice Financing of small businesses Promotion of small and medium cost house financing Education financing on favorable terms. Provision of risk sharing products ie. Musharaka and mudharaba as opposed to fixed income products i.e murabaha and ijarah Reduction of controversial products eg. BBA, tawarruq Qardal hasan financing for education, marriage etc. Contribution to charitable and social causes Payment of zakat
Risk sharing financing/fixed income financing Zakat/share Zakat/Investment Account Deposit Charitable contributions/net income Qard financing/total financing Education financing/total financing Medium and low cost house financing/total house Prohibited income/total income Tawid and penalty income/total income