CHAPTER ONE

1.1. Background of the Study

Finance is a very wide and dynamic field of study. It directly affects the
decisions of individuals and organizations that earn or raise money and spend
or invest it. Finance is also an area of study that deals with how where by
whom why and through what money is transferred among and between
individuals businesses and government. It is concerned with the processes,
institutions, markets, and instruments involved in the transfer of funds.
(Pandey, 1981)

Financial management is use of funds in a proper manner in order to ensure

that a business or organization achieve the set of financial goal. The goal of
financial management is to create more wealth, generate more cash for the
business and plough back any profit to grow the business more. (Brigham
1994)

Financial analysis is the process of identifying the financial strength and

weaknesses of the firm by properly establishing relationship between the items
of the balance sheet and the profit and loss account. Financial analysis can be
undertaken by management of the firm or by parties outside the firm like
Owner’s creditors, investors and others. (Pandey, 1981)

Management should be particularly interested in knowing the financial strength

of firm to make their best use and to be able to spot out the financial
weaknesses of the firm to take suitable corrective actions. The future planes of
the firm should be laid down in view of the firm’s financial strengths and
weaknesses. Thus financial analysis is the starting Pointe for making planes
before using any sophisticated forecasting and budgeting procedures. (Pandey,
1981)
A bank is a financial intermediary that accepts deposits and channels those
deposits into lending activities. Banks are a fundamental component of the
financial system, and are also active players in financial markets. The essential
role of a bank is to connect those who have capital (such as investors or
depositors), with those who seek capital (such as individuals wanting a loan, or
businesses wanting to grow) (http://en.wikipedia.org/ wiki /Bank).
Role of Banks in a Developing Economy
Banks play a very useful and dynamic role in the economic life of every modern
state. A study of the economic history of western country shows that without
the evolution of commercial banks in the 18th and 19 the centuries, the
industrial revolution would not have taken place in Europe. The economic
importance of commercial banks to the developing countries may be viewed
thus:
 Promoting Capital Formation: - A developing economy needs a high
rate of capital formation to accelerate the tempo of economic
development, but the rate of capital formation depends upon the rate of
saving. Unfortunately, in underdeveloped countries, saving is very low.
Banks afford facilities for saving and, thus encourage the habits of thrift
and industry in the community. They mobilize the ideal and dormant
capital of the country and make it available for productive purposes.
 Encouraging Innovation: - Innovation is another factor responsible for
economic development. The entrepreneur in innovation is largely
dependent on the manner in which bank credit is allocated and utilized
in the process of economic growth. Bank credit enables entrepreneurs to
innovate and invest, and thus uplift economic activity and progress.
 Influence Economic Activity: - Banks are in a position to influence
economic activity in a country by their influence on the rate interest.
They can influence the rate of interest in the money market through its
supply of funds. Banks may follow a cheap money policy with low interest
rates which will tend to stimulate economic activity.
  Facilitator of Monetary Policy: - Thus monetary policy of a country
should be conductive to economic development. But a well-developed
banking system is on essential pre-condition to the effective
implementation of monetary policy. Under-developed countries cannot
afford to ignore this fact. A fine, an efficient and comprehensive banking
system is a crucial factor of the developmental process.
 Netting and settlement of payments: – banks act as both collection
and paying agents for customers, participating in inter-bank clearing and
settlement systems to collect, present, be presented with, and pay
payment instruments. This enables banks to economize on reserves held
for settlement of payments, since inward and outward payments offset
each other. It also enables the offsetting of payment flows between
geographical areas, reducing the cost of settlement between them.
 Maturity transformation: – banks borrow more on demand debt and
short term debt, but provide more long term loans. In other words, they
borrow short and lend long. With a stronger credit quality than most
other borrowers, banks can do this by aggregating issues (e.g. accepting
deposits and issuing banknotes) and redemptions (e.g. withdrawals and
redemptions of banknotes), maintaining reserves of cash, investing in
marketable securities that can be readily converted to cash if needed, and
raising replacement funding as needed from various sources (e.g.
wholesale cash markets and securities markets).
Financial analysts often assess firm’s production and productivity performance,
profitability performance, liquidity performance working capital performance
and fixed assets performance. (Pandey, 1981)

Generally, financial statements capture and report on four key business

activities planning, financing, investing, and operating activities. Knowing what
information is to be found plus where to find it and how to use it in financial
statement is imperative to intelligently understanding, analyzing, and
interpreting financial data. To sum up analysis of financial statements provides
the essential concepts and tools needed by security analysts who make
decisions on the basis of information found in financial statements. (Pamela
2010)


Conversely, Banks are susceptible to many forms of risk which have triggered
occasional systemic crises. These include liquidity risk (where many depositors may
request withdrawals beyond available funds), credit risk (the chance that those who owe
money to the bank will not repay it), and interest rate risk (the possibility that the bank
will become unprofitable, if rising interest rates force it to pay relatively more on its
deposits than it receives on its loans)

Banking crises have developed many times throughout history, when one or more risks
have materialized for a banking sector as a whole. Prominent examples include the bank
run that occurred during the Great Depression, the U.S. Savings and Loan crisis in the
1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime
mortgage crisis in the 2000s. Usually, the governments bail out the bank through rescue
plan or individual public intervention (Michele, 2009).

Moreover, Rising and stiff competition, deregulation, globalization, and continuous

innovation to provide acceptable financial services to customers have given rise to the
interest of all the concerned and interested parties in detailed critical evaluation of banks
(Banking 2010). Unlike in the past, banks can no longer earn legally mandated yield spreads
between the average interest rates earned on sources and uses of funds. Nor can banks
continue to reap monopoly rents from bank charters that naturally endowed them with a
considerable degree of market power. Instead, today’s more competitive banking
environment is causing banking institutions to evaluate carefully the risks and returns
involved in serving the needs of the public (Benton and James2005).
Various groups of individuals are particularly interested in evaluating bank
performance. First and foremost, bank shareholders are directly affected by bank
performance. Investors take advantage of bank information to develop expectations
concerning future performance that can be used to help price common shares (in
addition to capital notes and debentures that may be issued by the bank). Second, bank
management traditionally is evaluated on the basis of how well the bank performs
relative to previous years and compared with similar (or peer group) banks. Hence,
employees’ salaries and promotions are frequently tied to the performance of the bank.
Bankers also need to be informed about the condition of other banks with which they
have business dealings. Third, regulators, concerned about the safety and soundness of
the banking system and the preservation of public confidence, monitor banks using on-
site examinations and computer based “early warning systems” to keep track of bank
performance. Fourth, depositors may also be interested in evaluating the performance of
the bank, as the nominal values of their deposits are not guaranteed. Fifth, and last the
business community and general public should be concerned about their banks’
performance to the extent that their access to credit and other financial services is linked
to the success or failure of their bank (Benton and James2005).

Furthermore, numerous studies argue that the efficiency of financial intermediation

affects economic growth while others indicate that bank insolvencies can result in
systemic crises, which have adverse consequences for the economy as a whole, (Levine,
2005). Thus, the performance of banks has been an issue of major interest for various
stakeholders such as depositors, regulators, customers, and investors.

Financial statements for banks present a different analytical problem than

manufacturing and other service companies. As a result, analysis of the bank's financial
statements requires a distinct approach that recognizes the bank's somewhat unique
functions and risks.

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As banking is one of the most highly liquid industries, investors have some level of
assurance in the soundness of the banking system. As a result, investors can focus most
of their efforts on how a bank will perform in different economic environments.

Hence, to evaluate banks’ performance, we can use different methods. These methods
can be classified in three ways: The traditional method of financial indices based on
balance sheet and income statement analysis, parametric methods based on the
knowledge of production function and non-parametric methods that do not require
production function (Wozniewska, 2008).

If the financial market were efficient, market price for banks' stock price would be one
of the most appropriate tools for measuring banks' performances. The alternative to the
market approach is the accounting-based financial ratio approach, which has commonly
been used for measuring the financial performance of firms (Abdu, 2004).

Since the stock price data for Ethiopia’s commercial banks are not available, the
accounting based financial ratios was used as a measure of financial performance in this
study.

Financial performance analysis trough the traditional method of financial indices based
on balance sheet, and income statement analysis is an important theme and it is widely
used to summarize the information in a company's financial statements in assessing its
financial health.

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1.2. Statement of the problem

Mobilization of financial resources arises from the fact that the amount of
financial resources for the purpose of productive investment is very low. In
order to relieve financial constraints on investment, financial intermediaries are
expected to play a decisive role in bringing about efficient ways of raising the
required level of funds through the application of proper financial management
system.

Financial institutions like Wegagen banks are very important in diverting

unutilized resources to the productive sector of the economy. Today in every
developing country the central issue of economic development is the problem of
managing scarce resources through effective and efficient way of financial
management system for bringing a better economic growth of a country.

Some of the research problems that is relevant to inquire in to:

Has the bank managed its working capital effectively and efficiently?
How far the bank utilize its financial its resources (debts and owners
equity) to finance its financial requirements?
What implications does trend analysis of financial statement and
working capital items reveal on management’s effort?
What are the trends and relations of accounts that are listed in financial
statements of Wegagen bank?
1.3. Objective of the study

The general objective of the study is to assess the financial management

performance of Wegagen bank. More specifically, the objectives of the paper are
the following.

 To combine the actual practice of bank and the theoretical aspects.

 To identify its strengths and weakness concerning the financial
management system in previous year.

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  To know the relations and trends of financial statement items.
 To recommend some constructive points to correct the mistakes of
the bank.
 The research paper will initiate other researchers for further
studies.
1.4. Significance of the study

This research initiated to study the financial management of Wegagen bank in

light of the following importance.

 It is hoped that the paper can give some information and

knowledge for financial performance and problems and also to
project assumes future results.
 The result of this study will provide the key financial relations of
different accounts that are indicate on the financial statements.
 Moreover, the findings and recommendations of the study may
serve as the starting point for other researchers who want to
carry out the same study in a wider scale and in depth.
1.5. Scope and Limitation of the study
1.5.1. Scope of the study

Since our topic, financial management is a very wide and vast in content,
which covers the overall financial matter of bank, the group is forced to limit
the study only on Balance sheet, income statement and major components of
working capital. The reason we limit our study on the above mentioned area is
the bank we try to contact are unwilling to give as the full and detail data
about their financial management there risen not to give the full data woes the
issues related with their competitors.

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1.5.2. Limitations of the study

The scope of this study is limited to issue that the study only on Balance sheet,
income statement and major components of working capital. The reason we
limit our study because of the following limitations:-

 Lack of experiences: because the researchers are under graduate, and

thus it is for the first time, lack of experiences might limit the technique
of the study.
 Limited source: shortage of reference books and other reading materials
relate to financial institutions.
 Lack of clear information from documents observes.

Therefore, this paper is not expected to provide all details of the performance of
the bank and the conditions affecting its performance. However, it is hoped to
serve as a reference for further study and research on the subject.

1.7. Research design and methodology

1.7.1. Research methodology

The Research method used is descriptive method. That is, the techniques for
the statistical evaluation and analysis used. The situations were analyzed by
the comparative method as well to bring a solution to the problem.

1.7.2. Data Source and Collection Methods

For this study, the researchers used both primary and secondary source of
data. From primary method of data collection unstructured interview used
rather than other method of data collection with those individuals that are
worked on the finance department of the bank in order to overcome some draw
backs of secondary data. On the other hand the secondary data have collected
by reviewing the bank annual audited financial statement and audit report.

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1.7.3. Method of Data Analysis

After the relevant data collected from the bank financial statement, in order to
describe the real financial matter of the bank the researcher used different
accounting tools such as ratio analysis including liquidity ratio, debt ratio,
profitability ratio and asset management ratio, Horizontal analysis and vertical
analysis.

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 CHAPTER TWO

2. A REVIEW OF LITERATURE

2.1. An Overview of Financial Management

Financial Management was emerged as a separate field of study in the early

1900s. When it was emerged the emphasis was on the legal aspects of mergers,
the formation of new firms, and the various types of securities firms could
issue to raise capital. During the depression era of the 1930s, the emphasis
shifted to bankruptcy and reorganization to corporate liquidity, and to
regulation of security markets. During the 1940s and early 1950s, finance
continued to be taught as a descriptive, institution subject, viewed more from
the stand point of an outsider rather than from that of management. However,
a movement toward theoretical analysis began during the late 1950s, and the
focus of financial management shifted to managerial decision regarding the
choice of assets and liabilities with the goal of maximizing the value of the firm.
(Fundamentals of financial management, 7thed., 1995, p.5)

2.2. Objective of financial management

It is obvious the discussion of the modern approach to financial management

that the firm has to make, at least, three fundamental financial decisions. It
must determine:

1. Where to invest funds and in what amount?

2. How much to pay in dividends?
3. Where to raise funds and in what amount?

This decision relate to the firm’s investment and financing policies. The
financial decision is unavoidable and continues. In order to make them
rationally, the firm must have an objective. It is generally agreed that the
financial objective of the firm should be the maximization of owners’ economic
welfare. However, there is disagreement as to how the economic welfare of
13
owners can be maximized. Two well-known criteria, which are put forth for
these purposes are profit maximization and wealth maximization (Pundey,
1981. P.10)

2.3. Working capital management

Working capital management refers to the decision making with respect to the
level and mix of current assets and current liabilities. In terms of time, this
area commands the greatest attention for financial managers since so many of
the variables can change in a short period of time. (Financial management
concepts applications, p. 155)

2.3.1. Current asset management

Besides managing the long-term assets, the financial manager has a duty to
manage current assets efficiently to safeguard the firm against illiquidity or
insolvency. Investment in current assets affects firm’s profitability and
liquidity. If the firm does not invest sufficient funds in current assets, it may
become illiquid. But it would lose profitability, as idle current assets, would not
earn anything. Thus, a proper trade-off must be achieved between profitability
and liquidity. In order to ensure that neither insufficient nor unnecessary
funds are invested in current assets the financial manager should estimate
firm’s working capital needs and make sure that funds would be made
available when needed. (Pandey, 1981 p.18)

2.3.1.1. Concept of cash management

Cash is the most important current assets for the operations of the business.
Cash is the basic input needed to keep the business running on a continuous
basis. It is also the ultimate output expected to be realized by selling the
service of product manufactured by the firm. The firm should keep sufficient
cash, neither more, nor less. Cash shortage disrupt the firm’s manufacturing
operation, while excessive cash will simply remain idle, without contributing

14
anything towards the firm’s profitability. Thus, a major function of the financial
manager is to maintain a sound cash position. (Financial management 2nded.
1981, p.355)

Cash is the money, which the firm can disburse immediately without any
restriction. The term cash includes coins, currency and checks held by the firm
and balance in its bank accounts. Sometimes near-cash items, such as
marketable securities or bank time deposits, are also included in cash. The
basic characteristics of near-cash assets are that they can readily be converted
in to cash. Generally, when a firm has excess cash, it invests it in marketable
securities. This kind of investment contributes some profit to the firm.

Cash management is concerned with the managing of:

i. Cash flows into and out of the firm,

ii. Cash flows within the firm and
iii. Cash balances held by the firm at a point of time.

Cash management assumes more important than other current assets because
cash is the most significant and the least productive assets that a firm holds. It
is significant because it is used to play the firm’s obligations. However, cash is
unproductive. Like fixed assets or inventories, it does not produce goods for
sale. Therefore, the aim of cash management should be maintain adequate
cash position to keep the firm sufficiently liquid and to use excess cash in
some profitable way.

2.4. Nature of Financial Statements

Since financial statements are the basis for most analytical efforts pertaining to
a business, we must first understand their nature; coverage and limitations
before we can use the data and observations derived from these statements for
our analytical judgments.

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Financial statements, which are prepared according to commonly accepted
accounting principles, do reflect the effects of past and current decisions made
by management. They involve considerable ambiguity, however. Financial
statements are governed by financial accounting rules that attempt to
consistently and fairly account for every business transaction and the principle
of matching revenues and costs through accrual and allocation. These rules by
their very nature leave the results, particularly the economic impact, open to
some interpretation. (Techniques of Financial Analysis, 7th ed. 1991, p.15)

2.4.1. Balance Sheet

The balance sheet as of any given date describes the categories and amounts of
assets employed by the business and offsetting liabilities incurred to lenders
and owners. Also called the statement of financial position, it must always
balance because the total assets invested in the business at any point in time,
by definition are matched precisely by the liabilities and owner’s equity
supporting these assets.

The major categories of assets or uses of funds are:

Current assets: - items that turn over in the normal course of business
with in a relatively short period of time, such as cash, marketable
securities, accounts receivables and inventories.
Fixed assets: - such as land, mineral resources, buildings, machinery,
vehicles, and so forth, all of which are used over the long term.
Other assets: - such as deposit, patents, and various intangibles like
good will.

Major Source of funds is:-

 Current liabilities: - which are obligation to vendors, tax authorities,

employees, and lenders due within one year.

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  Long term liabilities: - a variety of debts instrument repayable beyond
one year such as mortgages and bonds.
 Owners’ equity: - which represents the funds contributed by various
classes of owners of the business as well as accumulated earnings
retained in the business.

Balance sheets are static in that, like a snapshot, they are reflecting condition
on the date of their preparation. They are also cumulative in that they
represent the effects of all decisions and transactions that have taken place
and have been accounted for up to the date of preparation. (Ibid)

2.4.2. Operating Statement

The operating statement reflects the effect of management’s operating decisions

on business performance and the resulting profit or loss for the owners of the
business over a clearly specified period of time. The profit or loss calculated in
the statement increases or decreases owners’ equity on the balance sheet. The
operating statement is thus a necessary to the balance sheet in explaining the
major component of change in owners’ equity, and it provides essential
performance assessment information. (Ibid)

The operating statements, also referred to as the income statement, earnings

statement or profit and loss statement, displays the revenues recognized for a
specific period and the costs expenses charged against these revenues,
including write-offs (i.e. depreciation and amortization of various assets and
taxes.)

Again, these efforts are governed by “generally accepted accounting principles”.

How some costs and expenses are handled involves the accountants’
judgments. Among the areas subject to the judgments is the deprecation of
assets being used over more periods than one reported the cost of goods
purchased or manufactured in the previous periods, and proper allocation of
general expenses to a specific period.

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2.5. Financial Analysis

Management, creditors, investors and others to form judgments about the

operating performance and financial position of the firm use information
contained in financial statements. Users of financial statements can get better
insight about the financial strength and weakness of the firm if they properly
analyze the information reported in those statements.

Management should be particular interested in knowing the financial strength

of firm to make to make their best use and to be able to spot out the financial
weakness of the firm to take suitable corrective actions. The future plans of the
firm should be laid down in view the firm’s financial strength and weakness.
Thus, financial analysis is the starting point for making plans, before using any
sophisticated forecasting and budgeting procedures. (Pandey, 1981, p.500)

2.5.1. Uses of Financial Analysis

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by properly establishing relationships between the
items of the balance sheet and the profit and loss account. Financial analysis
can be undertaken by management of the firm or by parties outside the firm,
viz., owner’s creditors, investor and others.

The nature of analysis will differ depending on the purpose of the analyst. For
example, trade creditors are interested in the fact that the firm should be able
to meet their claims over a very short period of time. Their analysis will,
therefore, confine to the evaluation of the firms liquidity position. The suppliers
of long-term debt, on the other hand, are interested in the firm’s long- term
solvency and survival. They analyze the firms profit ability over-time its ability
to generate cash to able to pay interest and return their claims and the
relationship between various sources of funds. Similarly investors, who have
invested their money in the firm’s shares, are most concerned about the firm’s
earnings. They restore more confidence in those firms that show steady growth

18
in earnings. As such, they concentrate on the analysis of the firm’s present and
future profitability. They are also interested in the firm’s financial position to
the extent it influences the firms earnings ability. Finally, management of the
firm would be interested in every aspect of the financial analysis. It is their
overall responsibility to see that the resources of the firm are used most
effectively and efficiently, and that the firm’s financial condition is sound.
(Pandey, 1981, p.501)

2.5.2. Common-size analysis and trends

Common-size analysis is a technique that enables us to determine the makeup

and patterns of a company’s balance sheet and income statement. The
analysis can be horizontal (across years) or vertical (within a year). In the
financial statement, common-size analysis reduces absolute numbers to
percentages of components at one point in time or to percentages of change in
percentages of change in components over time, there by revealing possible
trends.

2.5.2.1. Horizontal Analysis

Horizontal analysis is a common-size analysis that compares the same

accounts from year. When we arrange several annual balance sheet and
income statements in vertical columns we can horizontal compare the annual
changes in related items. This comparison, or horizontal analysis, of the
accounts reveals a pattern that may suggest management’s underlying
philosophies, policies, and motivations. The annual financial statements are no
longer simple snapshots; instead they become important messages of
management action and decisions.

2.5.2.2. Vertical Analysis

It is a common-size analysis that compares accounts in the income statement

to net sales and amounts in the balance sheet to total assets. When we analyze

19
the financial statements for one period, we often use vertical analysis. A
vertical analysis of balance sheets how the mix of assets and financing is
changed over time.

2.5.3. Nature and Types of Ratio Analysis

2.5.3.1. Nature of Ratio Analysis

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the

indicated quotient of two mathematical expressions” and as “the relationship
between two or more things”. In financial analysis, a ratio is used as an index
or yardstick for evaluating the financial position and performance of a firm. The
absolute accounting figures reported in the financial statement do not provide
a meaningful understanding of the performance and financial position of a
firm. An accounting figure conveys mining when it is related to some other
relevant information.

The relationship between tow accounting figures, expressed mathematically, is

known as a financial ratio (or simply as a ratio). A ratio helps the analyst to
make qualitative judgment about the firm’s financial position performance.

2.5.3.2. Standards of comparison for ratio analysis

The ratio analysis involves comparison for a useful interpretation of the

financial statements. A single ratio in itself does not indicate favorable or
unfavorable condition. It should be compared with some standard. Standards
of comparison of;

1. Ratios calculated from the past financial statements of the same firm.
2. Ratios developed using the projected or Performa financial statements of
the same firm.
3. Ratios are some selected firms, especially the most progressive and
successful at the same points in time.
4. Ratios of the industry to which the firms belongs

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The easiest way of to evaluate the performance of the firm is to compare it
present ratios with the past ratios. When a financial ratio over a period of time
are compared, it gives an indication of the direction of changes and reflects
whether the firm’s financial position and performance has improved,
deteriorated or remained constant over time. This kind of comparison is valid
only when the firm’s accounting policies and procedures have not changed.

Sometimes future ratios are used as a standard of comparison. Future ratios

can be developed from the projected or Performa financial statements. The
comparison of the past ratios with future ratios shows the firm’s relative
strengths and weakness in the past and in the future. If the future ratios
indicate weak financial position, corrective actions should be initiated.

Another way of comparison is to compare the ratios of one firm with some
selected firms in the same point in time. In most of the cases, it is more useful
to compare the firm’s ratios with the ratios of a few carefully selected
competitors, who have similar operations. This kind of a comparison indicated
the relative financial position and performance of the firm. A firm can easily
resort to such a comparison, as it is not difficult to get the published financial
statements of similar firms.

To determine the financial condition and performance of a firm, its ratios may
be compared with average ratios of the industry of which the firm is a member.
Industry ratios are important standards in view of the fact that each industry
has its characteristics, which influence the financial and operating
relationships. But there are certain particular difficulties in using the industry
ratios. First, it is difficult to get average ratios for the industry. Second, even if
industry ratios are available, they are averages- averages of ratios of strong and
weak firms. Sometimes the spread may be though wide that the average may
be of little utility. Third, the averages will be meaningless and the comparison
will be also useless, if the firms with in the same industry widely differ in their
accounting data for the companies in the industry ratios will prove to be very

21
useful in evaluating the financial condition and performance of a firm. (Pandey,
1981, p.501)

2.5.3.3. Types of Ratios Analysis

Several ratios can be calculated from the accounting data contained in the
financial statements. These ratios can be grouped in to various classes
according to the financial activity or function to be evaluated. The parties,
which generally undertake financial analysis, are short-term creditors, long-
term creditors, owners and management. Short-term creditors’ main interest is
in the liquidity position or the short-term solvency of the firm. Long term
creditors on the other hand are most interested in the long term creditors on
the other hand are more interested in the long term solvency and profitability
of the firm. Similarly owners concentrated on firm’s profitability analysis and
the analysis of the firm’s financial conditions. The management is interested in
evaluating every activity of the firm. They have to protect the interest of all
parties and see that the firm grows profitability.

2.5.3.3.1. Liquidity Ratios

It is extremely essential for a firm to be meeting its obligations as they become

due. Liquidity ratios measure the ability of the firm to meet its current
obligations. In fact, analysis of liquidity needs the preparation of each budgets
and cash flows statements, but liquidity ratios, by establishing a relationship
between cash and other current assets to current obligations, provides a quick
measures of liquidity. A firm should ensures that it does not suffer from lack of
liquidity (illiquidity), and also that it is not too much highly liquid. The failure
of a company to meet its obligations, due to lack of sufficient liquidity, will
result in bad credit ratings, closure of the company. A very high degree of
liquidity is also bad; idle assets earn nothing. The firm’s funds will be
unnecessarily tied up in current assets. Therefore, it is necessary to strike a
proper balance between liquidity and lack of liquidity. ( Pandey, 1981, p.503)

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2.5.3.3.2. Leverage (Capital Structure) Ratios

The short-term creditors, like bankers and suppliers of raw materials, are more
concerned with the firm’s current debt-paying ability. On the other hand, long-
term creditor’s, like debentures holders’ financial institutions etc., are more
concerned with the firm’s long-term financial strength. In fact, a firm should
have a strong short term as well as long term financial position. To judge the
long-term financial position of the firm, leverage or capital structure, ratios are
calculated. These ratios indicate the funds provided by owners and creditors.

As a general rule, there should be an “appropriate” mix of debt and owners

equity in financing the firm’s assets. The manner in which assets have been
financed has a number of implications. First, between debt and equity, debt is
more risky from the firm’s point of view. The firm has a legal obligation to pay
interest to debt-holders, irrespective of the profits made or loss incurred by the
firm. If the firms fail to pay-holders in time, they can take legal action against
the firm to get payments and in extreme cases, can force the firm in to
liquidation. Second, employment of debt is advantageous to share holders in
two ways:

 They can retain control of the firm with a limited stake and
 Their earnings will be magnified, when the firm earns a rate higher
than the interest rate on the invested funds.

However, leverage can work in positive direction as well. If the cost of debt is
higher than the firm’s overall rate of return, the earnings of shareholders will
be reduced. In addition, there is threat of insolvency. Thus, use of debt
magnifies the shareholders’ earnings as well as increases their risk. Third, a
highly debt-burdened firm will find difficult in raising funds from creditors and
owners in future. The owners’ equity is treated as a margin of safety by
creditors; if the equity base is thin, the creditors risk will be high.

23
Thus, leverage ratios are calculated to measure the financial risk and the firms’
ability of using debt for the benefit of shareholders. (Pandey, 1981, p.508)

2.5.3.3.3. Activity (Asset utilization) Ratios

The funds of ratios and owners are invested are various kinds of assets to
generate sales and profits; the better the management of assets, the larger the
amounts of sales. Activity ratios are employed to evaluate the efficiency with
which the firms manages and utilities its assets. These ratios are also called
turnover ratios because they indicate the speed with which assets are being
converted or turned over into sales. Activity ratios, thus, involves a relationship
between sales and various assets.

A proper balance between sales and assets generally reflects that assets are
managed well. Several activity ratios can be calculated to judges the
effectiveness of assets utilization (Pandey, 1981, p.512).

2.5.3.3.4. Profitability Ratios

Profit is the difference between total revenues and total expenses over a period
of time. Profit is the ultimate output of a company, and it will have no future if
it fails to make sufficient profits. Therefore, the financial manager should
continuously evaluate the efficiency of its company in terms of profits.

The profitability ratios are calculated to measure the operating efficiency of the
company. Besides management of the company, creditors and owners are also
interested in the profit ability of the firm. Creditor wants to get interest
regularly and return of principal at maturity. Owners want to get a responsible
return on their investment. This principal only when the company earns
enough profits. (Pandey, 1981, p.517)

24
2.5.4. Limitations of Financial Analysis

Ratios of a company have meaning only when they are compared with some
standards. It is difficult to find out a proper basis of comparison. Usually it is
recommended that ratios should be compared with the industry averages. But
the industry average is not easily available.

The situations of two companies are never same. Similarly, the factors
influencing the performance of a company in one year may change in another
year. Thus, the comparison of the ratios of two companies becomes difficult
and meaningless when they are operating in different situations.

The interpretation and comparison of ratios are rendered invalid by the

changing value of money. The accounting figures, presented in the financial
statements, are expressed in the monetary unit, which is assumed to remain
constant. In fact, price change over years and, as a result, assets acquired at
different dates will be expressed in different Birr in the balance sheet. This
makes comparison meaningless.

In practice, differences exist as to the meaning of certain terms. Diversity of

views exists as to what should be included in shareholders’ equity, current
assets or current liabilities. Whether preference share capital should be
included in debt or should current liabilities be included in debt in calculating
debt-equity ratios? Should intangibles assets be exchanged to calculate the
rate of return on investment? If tangible assets have to be included, how will
they be valued? Similarity, profit means different things to different peoples.

The ratios do not have much use if they are not analyzed over years. The ratios
as a moment of times may suffer from temporary changes. This problem can be
resolved by analyzing the trends of ratios over year; although trend analysis is
more useful but still the analysis is static in nature. The balance sheet
prepared at different points of time, are static in nature. They do not reveal the
changes, which have taken place between dates of two balance sheets.

25
The statements of changes in financial position reveal this information, but
these statements are not available to outside analysis.

The bases to calculate ratios are historical financial statements. The financial
analyst is more interested in what happens in future, while the ratios indicate
what happened in the past. Management of the company has information
about the company’s future plans and polices and, therefore, is able to predict
future happening to a certain extent, but the outside analyst as to rely on the
past ratios, which may not necessarily reflects the firm’s financial position and
performance in future. (Pandey, 1981, p.533)

26
 CHAPTER THREE

3. FINANCIAL ANALYSIS

3.1. An Overviews of Financial Statements of the Bank

An essential link in the communication function is the preparation and

issuance of financial statements help for the purpose of providing useful
information to people who make rational investment, creditors, organization’s
investors, lenders, managers, suppliers, customers and other decision-makers.
The statements are useful because they describe the organization’s financial
health and performance in a condensed and highly informative way.

The Wegagen bank share company has prepared two financial statements these
are balance sheet and income statements. Each branch of the bank prepares
interim financial statements monthly and also semi-annual and annual
financial statements. At the same time the consolidated financial statements
are prepared at the consolidated financial statements are prepared at the head
office.

The bank follows the International Financial Reporting Standard (IFRS) i.e. it
uses the “accrual system” of accounting. This method recognizes transactions
in the period in which they occur regardless of when cash is paid or received.
However the bank uses for loans overdue interest is kept under receivable
account until collected, and interest on loans in legal hands is recorded under
memorandum accounts.

The financial year of the bank starts on July 1 and ends on June 30. It is,
therefore safe to say that budget year conforms to the government’s financial
year. However, transaction dates and monthly closing of books will be on the
basis of Gregorian calendar.

27
3.2. Working Capital Management

3.2.1. Current Asset Management

Asset classification are listed on properly classified balance sheets in order of

their liquidity, which shows how quickly the bank convert them to cash as part
of operations.

3.2.1.1. Cash Management

Cash is often called a “non earning asset”. The goal of cash management is to
maintain the minimum cash balance that will provide the bank with sufficient
liquidity to meet its financial obligations and to enhance the profitability. The
purpose of this section is mainly to know whether the bank has effective cash
management procedure and maintaining adequate cash amount for use in
conducting its normal activities. The financial manager of the bank is
responsible for the effectiveness of the cash management program.

The cash balance of the bank includes:

Cash Local Currency: - cash local currency is held in two forms-petty cash
and vault cash.

 Petty Cash: - Mainly consist of Birr notes and coins forming part of it.
The holding remains under the control of the executive banking officer of
the branch for daily use.
 Vault Cash: - which also include Birr notes and coins, is the bulk of
cash held in the vault for servicing the petty cash. This is kept under
dual control at all times.

Cash Foreign Currency: - it includes cash, notes of various foreign currencies

and coins in some cases. The balance shown in this account is the counter-
value of the foreign currency cash holding in birr.

28
The bank has a cash holding limits in accordance with the needs of the cash
requirements of branches (i.e. based on their operations). In some of shortages,
the bank replenished from the head office the head office of the bank in Addis
Abeba and through the branches of the commercial bank of Ethiopia where the
bank has no branch office. Cash excesses that maintained by branches above
their cash holding limit are also lodged to the bank’s treasury in Addis Abeba
in branches of commercial bank of Ethiopia to facilitate transfer of cash
whenever cash shortage excess occur.

Cash is more susceptible to theft than any other asset. Furthermore a large
portion of total transaction of the bank involves the receipt or disbursement of
cash. For both these reasons, the bank applies the following procedures:-

 Physically safeguarding the cash

 There is a separation of duties of that of custody of cash from those who
keep the accounting records.
TABLE 1
Trends of Cash
ITEM 2010/11 2011/12 2012/13
Cash on hand 675,696,500 571,211,274 576,206,441
Shares from the current asset 8.59% 7.14% 5.76%

As stated on the above table, the cash balance of Wegagen bank accounted for
8.59%, 7.14% and 5.76% from the total current assets for the last three years.
This shows, as there is a decrease from year to year, so we can say that the
bank is able to find way to generate profit from the cash over the time.
Specifically in the year 2012/13 the amount decrease by 2.77% compare to
year 2010/2011. Which show the bank operation over the years to generate
revenue is increasing continuously from the continuous declines over the year
in cash balance the amount of idle cash using might incurs for the future
which able the bank to generate more profit for future.

29
3.2.1.2. Deposits

The bank has a separate general ledger accounts in each bank that reflects the
balance of the bank current (reserve) accounts i.e. National Banks of Ethiopia
(NBE), Commercial Bank of Ethiopia (CBE), other domestic banks and foreign
banks account. All payments, receipts, borrowing and repayments that take
place between the bank and the bank are cleared against NBE account. In line
with NBE’s reserve requirement a minimum balance of 5% of the bank’s
current liabilities should also be kept in this account at all times. A deficiency
in the required reserves balance is subject to penalty. The penalty shall be
assessed at the rate twice the current average rate of interest fixed on loans
and advances. (Refer SBB/14/96 of NBE)

The amount of cash deposited in the Commercial Bank of Ethiopia branches

and other domestic banks are also reflected by its own accounts. The foreign
banks general account balance shows the amount of foreign currency
deposited in foreign banks and shown the counter value in Birr. Individual
subsidiary accounts are maintained under each correspondent’s name with
which the bank keeps account.

TABLE 2

Trends of Deposits

ITENS 2010/11 2011/12 2012/13

Deposit with CBE 429,772,799 223,458,868 155,912,517
Reserve account with NBE 1,117,258,211 314,930,076 308,501,862
Deposit with foreign Banks 1,051,971,662 913,317,516 826,635,615
Total Deposit 2,662,002,582 1,451,704,460 1,291,056,994
Shares from current asset 33.66% 18.15% 12.91%
The deposit balance of the bank as shown in the above table is a current
account that facilitates its transactions with different banks. The trends of

30
deposit over the shows a continue declines this is because of the increment of
the amount give as a lone by the bank and increment in NBE bill.

3.2.1.3. Treasury Bills, NBE Bills and Equity investment

Cash that the bank does not need at certain point in time is considered excess
or idle cash, which the bank can invest to earn a return. By investing idle cash
temporary, the bank can earn return that increase its net income in order to
remain in a position to pay its current liabilities as they become due. The bank
invests its excess cash by buying treasury bills, NBE bills and equity
investment. But the purchase of the bills amount is not always the willingness
of the bank for example, buying NBE Bills is mandatory for the bank which is
increasing in amount continuously.

3.2.1.4. Loans and Advances

Loans and advances are one part of current assets that indicates the amount of
loans provided to loan customers.

TABLE 3

Trends of Loans and Advances

ITEMS 2010/11 2011/12 2012/13

Loans & advances 2,777,875,585 3,478,972,954 4,585,105,694
Shares from the current asset 35.12% 43.5% 45.86%

As the table show the amount of loans and advance show an increment over
the past year. It’s sheer of current asset is also grown over the year this implies
that the bank is able to landed mach more money to its lone demanders over
the year.

This increment also shows the increment on the amount of interest income
collected from the lone.

31
As suggested by the managers the amount of lone and advance cued increase
mach more as related to the existing demand in 2011/12 the amount could
been higher but as result of unprecedented deposit withdrawal over the year
the amount of loans and advance cant increase mach higher. When we came to
the year 2012/13 as compared to the increment in the amount in loan in
advance can be much higher if the amount of funds canalled towards NBE Bill
purchased taken in to account.

The managers suggested that the increment on NBE Bill purchase on

accelerated rate put strain on both earning as well as liquidity position of the
bank because the amount is in bill not in cash.

3.2.2. Current Liability Management

The banks current liabilities are listed first the liabilities section of the balance
sheet, the receipt of cash from saving customers.

TABLE 4

Trends of Current Liabilities

ITEMS 2010/11 2011/12 2012/13

Deposit from Customer 5,733,716,853 5,428,296,886 7,148,158,883
Deposit from financial 223,766,980 329,884,003 402,687,270
institution
Margin held on letters of 234,612,645 346,914,581 358,230,310
credit
Other Liabilities 385,944,214 505,505,925 539,640,612
Provision for Taxation 139,812,023 122,622,767 109,609,779
Total Current Liabilities 6,712,892,755 6,733,229,62 8,558,326,853
Increment C.L over the year. Base year 3.02% 21.56%

32
 TABLE 5

Trends of Current Liabilities in percentage

ITEMS 2010/11 2011/12 2012/13

Deposit from Customer 85.4% 86.6% 83.5%
Deposit from financial institution 3.33% 4.89% 4.7%
Margin held on letters of credit 3.49% 5.15% 4.18%
Other Liabilities 5.74% 7.5% 6.3%
Provision for Taxation 2.08% 1.82% 1.28%
Total Current Liabilities 100% 100% 100%
Increment C.L over the year. Base year 3.02% 21.56%

As the above table shows the receipt of deposit from customer create the most
common type of current liabilities. The structure of deposit consist payable on
demand, saving deposit and term deposit with saving deposit and payable on
demand having the high share . The deposit from customers in 2011/12 was
the least of the periods this is due to various external events and phenomena
for example the unexpected withdrawal by depositors. But on the year 2012/13
the bank deposit base grow at an accelerated pace in the industry. This
remarkable performance was mainly achieved due to at most effort exerted by
all branch of the bank and improvement made in branch network expansion.
So to achieve the objective of the bank should continue its appreciated job by
2012/13 for the future periods.

3.2.3. The Trends of Working Capital

So as to obtain a clear picture about working capital management, tabulating

comparative working capital and net working capital position of the bank
makes convenient. The table also helps renders to judge how the bank operates
its business.

33
 TABLE 6

The Trends of Working Capital

No. Description 2010/11 2011/12 2012/13

1 Total current assets 7,908,387,984 7,996,900,747 9,997,975,43
2 Total current Liabilities 6,712,829,755 6,733,229,162 8,558,326,853
3 Net working capital 1,195,495,229 1,263,671,585 1,439,648,290
4 Current Ratio 1.17% 1,18% 1.16%
Source: - Balance sheet of each year prepared by bank.

The above table shows that current assets are more than current liabilities
with a little bite of incremental fluctuation were a reason of ups and downs of
the amount of deposit over the year. Any way the bank is a position to resolve
short term commitment and obligations using its current assets.

3.3. Common-Size Analysis and Trends

Common-size analysis is a technique that enables us to determine the makeup

and patterns of the bank balance sheet and income statement. The analysis
can be either horizontal (across years) or vertical (within a year) or both. In the
financial statement, common-size analysis reduces absolute numbers to
percentage of changes in components over time, there by reveling possible
trends.

This analysis includes the past years that are 2010/11-2012/13 statement
and balance sheet statements. It helps to show trends concerning the financial
position and results of operation and to forecast the future conditions of the
bank.

3.3.1. Vertical and Horizontal Analysis

So as to indicate periodic changes in the financial statements the year 2010/11

is taken as a base year.

34
3.3.1.1. Income Statement
Income:
The income statement shows the results of operations of the bank for a period
of time. The first item in this statement is revenue, which is the gross monetary
value of services delivered to customers.

The major components of income of the bank are:

Interest earned on loans and advance that are provided for customers in
the form overdraft and term loans.
Commission income which includes commissions that are collected from
export transactions, on both local and foreign letters of guarantees
issued by the bank, both local and foreign transfer of mail, telegraphic
and demand draft, revenue stamps, sale of travelers check, and
commission charges when a cash payment order is cashed at branch
located outside the vicinity of the issuing branch, etc.
The other major sources of revenues is the interest earned on surplus
fund that comprises dividend earned on local investments, interest
earned on treasury bill, government bonds, on deposit with domestic
banks and interest earned on correspondents. Lastly, the components of
revenue also include other incomes that are not mentioned in the above
categories.

35
 TABLE 7

WEGAGEN BANK SC

COMPARATIVE PROFIT OR LOSS STATEMENTS

VERTICAL ANALYSIS

For the year ended Jun 30th 2010/11-2012/13

2010/11 2011/12 2012/13

% change % change % change
Revenue: 100 100 100
Operating Income
Interest Income 38.6 52 60.3
Fees, Charges & commotion 30.4 14.4 12
Other Income 30.9 33.6 27.6
Expenses: 12.3 16.45 17.8
Interest Expenses
Salaries and Benefits 14.8 17 19
General Expenses 11.3 12.2 14.3
Other General Expense 0.44 0.46 0.34
Reversal/Additional Provision 4.32 (5.34) 1.95
held for loan and advance
Provision for Doubtful Account 0.63 (*) 0.35
Operating Expenses 43.8 46.1 53.4
Income Before Tax 56.2 54 46.6
Income Tax 16.54 14.4 11.3
Net Income After Tax 39.7 39.6 35.3
Total Operating Revenue 814,929,048 850,117,184 970,090,070
Source: The annual Financial Report of 2010/11-2012/13

(*) This symbol shows insignificant

36
During the year 2010/11 the bank has generated a total operating income of
birr 814,929,048 the largest amount of which was generated from interest
income on loan & advance. Interest earned accounted for 38.6% followed by
other income contributing 30.9% and commotions 30.4%. Under normal
circumstance the interest earned from loans and advance should take the
highest share of the interest on total income this share of interest on total
income continues to grow for the year 2011/12. During 2011/12 the bank has
generated a total operating income of 850,117,184 compared to the previous
year it has grown by 4.3% like the previous year the very largest share was
came from interest income contributing 52% of the total income followed by
other income and commission 33.6% and 14.4% respectively. The manager
suggested that the 2011/12 income earned could be larger than what it was
but the unexpected withdrawal over the year decrease the bank ability to loan
to customers which reduce the bank ability to earn much more interest
income.

During the year2012/13 the bank was able to generate a total income of birr
970,090,070 compared to the base year (2010/11) it has grown by 19%.in this
year also the interest income grown highly compared to the past two years
contributing 60.3% of the total income this higher contribution of the interest
income was due to higher increment in loan and advance compared to the past
two years. The total income also contains other income and commission
contributing 27.6%and 12% respectively.

In the above three years we can notice that the contribution and share of other
income and commission show decline an stagnation or fluctuation the reason
for this was the high computation exist in the industry the researchers
suggested that if the bank was able to increase commission and other income
as like interest income its total earning might be larger than what is shown in
the income statement so for the coming periods the bank should try to focus its
earning option on more paths than only on interest income even if it is there

37
major operation income because opening many options has more
contributions.

Expanse

The total expanse for the year 2010/11 include interest expense, salary and
benefit, general and administration expense and other general expanse
amounts to 356,799,299.in the same year total expanse has 43.8%of the total
operating income out of this total expense salary and benefit consist the
highest share of 34%followed by interest expense and administrative expense
contributing 28% and 26% respectively.

Exibit2 of the income statement shows the overall expense of 2011/12and

2012/13 has increase by 11.24% and 46% respectively as compared to the
amount register in the base year 2010/11.this is principally due to significant
increment of total deposit as result of this increment interest paid on deposit
has increased by 39.6% and 72% respectively than the base year the other
main factor that increase expanse were the rapid growth of banks business
activity reflected by more branch from 54 in 2010/11 to 63 in 2011/12 and to
76 in 2012/13 which also result increment in the number of employees.

Profit analysis

Despite the regulatory measures imposed on the lending capacity of the banks
as a result of NBE bills effect and prevailing stiff computation and deposit
mobilization in the industry the bank remains profitable for the past three
years.

The reported profit before tax on the past three years amount 458.1,458.1 and
450 million respectively as shown above the profit before tax show fluctuation
amount despite the increment in the total amount of income this is due to the
increment rate of expense was higher than the increment rate of total income.
Even though there is stiff computation in the industry the bank should try to

38
reduce some of its expenditure to acceptable amount like the very high amount
of salary and benefit package of the bank and other general expenses. The
profit after tax show slight increment over the year as reported showing
323.6,335 and 340 million respectively which is increasing over the year this is
due to the ability of the bank to reduce its tax payment over the years this is
because the income generated from interest earned on treasury bills NBE bails
and other related tax free incomes and also incomes in which the tax whit hold
by third party increase over the past years.

39
 TABLE 8

WEGAGEN BANK SC

COMPARATIVE PROFIT OR LOSS STATEMENTS

HORZONTAL ANALYSIS

For the year ended Jun 30th 2010/11-2012/13

2010/11 2011/12 2012/13

Amount Amount % Amount %
Revenue: 4.34
Operating Income 814,929,048 850,117,184 970,090,070 19.03
Interest Income 314,852,236 441,664,543 40.3 585,446,928 79.1

Fees, Charges & 248,516,005 122,769,950 (50.6) 116,719,888 (53)

commotion
Other Income 25,560,807 240,261,016 (4.5) 267,923,254 6.5
Expenses:
Interest Expenses 100,194,471 139,882,171 39.6 172,375,006 72
Salaries and 120,492,787 144,385,986 183,824,304
Benefits 19.8 52.6
General Expenses 92,133,867 103,652,993 12.5 138,655,183 50.5
Other General
Expense 3,617,770 3,950,230 9.18 3,261,762 (9.8)
Reversal Provision
held for loan and 35,256,376 (45,471,675) (229) 18,941,444 (46.2)
advance
Provision for
Doubtful Account 5,104,028 39,737 (99.2) 3,365,012 (34)
Operating 356,799,299 396,911,111 520,422,661
Expenses 11.24 45.8
EBIT 458,129,740 458,256,072 * 449,667,409 (1.84)
Income Tax 134,852,023 122,622,767 (9) 109,609,779 (18.7)
NIAT 323,277,726 335,633,305 3.8 340,057,631 5.1
Source: The annual Financial Report of 2010/11-2012/13

% = Current year – Base year

Base year Base year 2010/11

40
3.3.1.2. Balance Sheet

The bank uses report form of balance sheet as of any given date to describe the
categories and amounts of assets employed by the bank and the offsetting
liabilities incurred to lenders and owners equity. Its purpose is to provide
information that helps readers to understand the bank financial status or
position by analyzing the types and amounts of assets, liabilities and equity’s of
the bank using percentage composition and trend analysis.

41
 TABLE 9
WEGAGEN BANK SC

COMPARATIVE BALANCE SHEET

2010/11 2011/12 2012/13

1.ASSET
Cash & bank balance local 2,285,727,420 1,109,600,218 1,040,627,850
Reserve account with NBE 803,388,527 578,388,527 361,105,527
Deposit with foreign bank 1,051,971,662 913,317,516 826,635,615
Treasury bill * 189,567,760 209,517,840
Fixed time deposit with NBE * * 337,283,000
NBE Bills 899,887,000 1,597,430,000 2,358,984,000
Equity investment * 5,030,000 25,030,000
Loan & advance 2,777,875,000 3,478,972,954 4,585,105,644
Stock of supply 20,352,762 25,302,770 45,121,740
Other assets 69,185,028 99,295,002 208,563,928
Differed charge 36,592,435 41,160,133 35,139,290
Lease hold land 16,429,506 16,429,505 9,714,740
Fixed Asset 99,527,453 292,664,403 350,974,228
Total Asset 8,060,937,378 8,347,154,788 10,393,803,401
2. Liabilities
Deposit from customers 5,733,716,853 5,428,296,886 7,148,158,883
Deposit from financial institution 223,766,980 329,884,003 402,687,270
Margin held on letter of credit 234,612,645 346,919,581 358,230,310
Other liability 385,944,254 505,505,925 539,640,612
Provision for taxation 134,852,023 122,622,767 109,609,779
Lease hold land payable 10,709,466 9,792,458 5,051,728
Total Liability 6,723,602,221 6,743,021,620 8,563,378,581
3. CAPITAL & RESERVE
Paid up-capital 779,316,000 952,939,000 1,090,898,000
Share premium 25,424,100 25,424,100 25,424,100
Legal reserve 290,136,763 374,045,089 459,059,779
Retain earning 242,458,294 251,724,979 255,043,223
Total Liability & Capital 8,060,937,378 8,347,154,788 10,393,803,401

Source: The annual Financial Report of 2010/11-2012/13

42
 TABLE 10

WEGAGEN BANK SC

COMPARATIVE BALANCE SHEET

VERTICAL ANALYSIS

2010/11 2011/12 2012/13

1.ASSET
Cash & bank balance local 28.3 13.3 10
Reserve account with NBE 9.4 6.9 3.5
Deposit with foreign bank 13 10.9 7.95
Treasury bill * 2.3 2
Fixed time deposit with NBE * * 3.2
NBE Bills 11.2 19.13 22.7
Equity investment * * 0.24
Loan & advance 34.5 41.7 44.1
Stock of supply 0.25 0.3 0.43
Other assets 0.86 1.19 2
Differed charge 0.45 0.5 0.34
Lease hold land 0.2 0.16 *
Fixed Asset 1.23 3.5 3.4
Total Asset 100 100 100
2. LIABILTIES
Deposit from customers 85.2 85 83.5
Deposit from financial institution 3.3 4.9 4.7
Margin held on letter of credit 3.5 5.1 4.2
Other liability 5.74 7.5 6.3
Provision for taxation 2 1.8 1.27
Lease hold land payable 0.16 0.14 *
Total Liability 100 100 100
3. CAPITAL & RESERVE
Paid up-capital 58.2 59.4 59.5
Share premium 1.9 1.5 1.4
Legal reserve 21.7 23.3 25
Retain earning 18.1 15.7 13.9
Total Capital 100 100 100

43
 TABLE 11

WEGAGEN BANK SC

COMPARATIVE BALANCE SHEET

HORZONTAL ANALYSIS

2010/11 2011/12 2012/13

1.ASSET
Cash & bank balance local 100 (51.4) (54.4)
Reserve account with NBE 100 (28) (55)
Deposit with foreign bank 100 (11.5) (21.4)
Treasury bill 100
Fixed time deposit with NBE 100
NBE Bills 100 77.5 163.25
Equity investment 100
Loan & advance 100 25.2 65
Stock of supply 100 24.3 121.7
Other assets 100 43.5 201.4
Differed charge 100 13.1 (4)
Lease hold land 100 (40.9)
Fixed Asset 100 194 252.6
Total Asset 100 3.55 28.9
2. Current liabilities
Deposit from customers 100 (5.6) 24.6
Deposit from financial institution 100 47.4 79.9
Margin held on letter of credit 100 47.8 52.6
Other liability 100 30.9 39.8
Provision for taxation 100 (9) (18.7)
Lease hold land payable 100 (8.5) (52.8)
Total Liability 100 0.3 27.3
3. CAPITAL & RESERVE
Paid up-capital 100 22.3 40
Share premium 100
Legal reserve 100 28.9 58.2
Retain earning 100 3.8 5.1
Total Capital 100 19.9 36.9
Total Liability & Capital 100 3.55 28.9

% = Current year – Base year

Base year Base year 2010/11

44
Structure of Asset:

At the end of 2011/12 fiscal year the balance sheet the bank depicts that
aggregate asset at birr 8,060,937,378 out of the total asset net loans and
advances accounted for largest share of birr 2,777,875,585 which is 34.5% of
the total asset followed by cash and bank balance with local bank birr
2,285,727,420 which is 28.3% of the total asset, deposit with foreign bank
10%, NBE bills 11.2%, reserve account with NBE 9.4% and other assets as
stated on the exhibit -1.

As stated on exhibit the balance sheet of the bank continued to grow from year
to year. The total asset at the end of the year 2011/12 stood at birr
8,347,154,788 showing an increase of 286.2 million (3.6%) this is due to the
increment in loan and advance by 25.2% and NBE bills by 77.5% and also an
increment on banks fixed asset, other asset, stock of supply and other
additional accounts like equity investment and treasury bills.

As stated above the cash and bank balance of the bank, reserve account with
NBE and deposit with foreign bank decrease over the fiscal year this shows the
bank was managing its reserve balance for loan and advance to earn more
interest income if you see in the year 2011/12 the bank total deposit from
customer shows a decrease amount by 5.6% from the least year but the bank’s
loan in advance show on increment of 25.2% from the least year.

At this class of 2012/13 fiscal year the total assets show a balance of
10,393,803,401 showing 28.9% increment over the base year change is
resulted from an increasing of loans and advances amounted 4,585,105,644
(65%) from the base year and 31.8% from last year, If we compare it with the
amount of mobilization saving increase by 31.7% from the last year which is
almost the same growth rate. The other major increment on the year 2012/13
balance sheet is very high increment in NBE bills by 63.25% from base year
increment on investment on equity, treasury bills and fixed asset of the bank.

45
In contrast the bank cash and bank balance reserve account with NBE and
deposit with foreign bank continues to declines over the year this shows the
bank was transferring it reserved cash and deposit to a more interest earning a
year and to fulfills it requirement of NBE bills.

In normal operation of the bank loan and advance should take transits portion
of the assets of the banks, if we see in the past three years operation of the
bank we can know that loan and advance of the bank consisting the highest
share of the total asset at increased amount. The other major contain this
years is the very high increment on NBE bills which becomes the second
largest assets of the bank. The manager suggest that the loan and advance of
the bank mach more significant the amount of fund channeled towards NBE
bills purchase was taken in to accounts the continuing accelerated grow the
rate of NBE bills is putting strains on both earnings as well as liquidity position
of the bank.

Structure of Liabilities:

As shown on exhibit the aggregate liabilities of the bank were birr 6.72 billion
as of June 30 2010/11 fiscal year which is 83.4% of the total liabilities and
capital. On these customer deposit accounted for a largest share of birr 5.73
billion (85.2%) followed by other liability, margin hold on letter of credit add
posit from financial institution and provision for taxation consisting 5.7%,
3.3%, 3.3% and 2% respectively.

From the total deposit from customer balance payable demand constituted the
largest share of birr 3.09 billion (53.9%) followed by saving deposit constitute
2.51 billion (43%) the remaining 2.8% was fixed deposit.

The total amount of liabilities as of 30 June 2011/12 has increase by 19.4

million (0.28%) over that of the preceding fiscal year. This slight is due to an
increment on deposit from financial institution, margin held on letter of credit
and other liabilities during the fiscal year the bank deposit mobilization saw

46
several impediments showing a decrement of 193 million (3%) from the
preceding year balance this is mainly due to the unexpected withdrawals over
the year. During this year also deposit from customer constitutes the largest
share of the banks liability (80.5%) followed by other liability (7.5%), margin
held on letter of credit (5.1%) and deposit from financial institution (4.9%).

From the overall deposit customers demand deposit total birr 2.34 billion
dropping by 25% (birr 781.1 million) year on year. Unlike demand deposit
saving and fixed time deposit registered an increment of 14% and 79% and
reaching birr 2.87 billion and 555.6 million respectively.

Saving deposit constituted the largest share by slicing a 50% share out of the
total deposit followed by demand deposit (40%) and fixed time deposit (10%). As
the figure shows at the end of 2012/13 aggregate liabilities of the bank reached
birr 856 billion exceeding the balance of 2010/11 and 2011/12 by birr 83
billion (27.3%) and 1.82 billion (26.7%). This grows resulted mainly from the
increment of total deposit by 24.6% and 31.6% from the base year and
preceding year respectively amount 7.14 billion. In the same way as the
previous year deposit from customer constitute the highest share (83.5%)
followed by other liability (6.3%), deposit from financial institution (4.7%) and
margin held on later of credit (4.2%).

In 2012/13 the banks deposit base grew at an accelerated pace in the face of
stiff competition over resources. A look at the composition of total deposits
indicated that except fixed time deposits indicated that except fixed time
deposit both saving and demand deposits positively contributed to the recorded
overall growth saving deposit which accounted for 53% of the total deposits
reached birr 4 billion expanding at an annual growth rate of 39%, similarly
demand deposits grow by 30% to rich birr 3 billion and constituted 40% of total
deposits. As at end of the fiscal year fixed time deposits reached birr 532.7
million taking about 7% of the total deposits.

47
As it can be seen from the past three year liability of the bank deposit from
customer create the most common type of current liability for the bank the
more bank has more deposit the more its able to land to its loan demanders
and more profit so the bank should work highly to mobilize more deposit but
highly downing so the bank should make acceptable expenditure to mobilized
the deposit.

Structure of Capital

The total capital of the bank is a summation of paid up capital, legal reserve,
retained earnings and share premium. As of June 30 2010/11 the capital of
the bank was birr 1.33 billion the balance has increased to birr 1.6 billion with
on annual increment of 20% in 2011/12 and rich 1.8 billion with an annual
growth of 13% in 2012/13. This improvement is resulted from the net profit
obtained in both year and the additional share issues and sold by the bank
from the overall structure of capital paid up capital constitute the largest share
of 779.3 million, 952.9 million and 1.1 billion making the bank to be among
those in premier positions in the entire private commercial banking industry.

3.4. Ratio Analysis

Ratio analysis is perhaps the most commonly used tool in finance statement
analysis. It is a mathematical relationship among numbers usually started in
the form of percentages or times.

The purpose of this section is to discuss the ratio analysis as a technical of

analyzing the financial information, contained in the balance sheet and the
profit and loss statement account.

For a more meaningful understanding of the financial position and

performance of Wegagen bank, the writers use two types of comparisons among
the various standards of comparison:

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1. Time Series (Trend) Analysis

This is the easiest way to evaluate the performance of the bank, which
compares its current ratios with the past ratios. It gives an indication of the
direction of changes and reflects whether the bank financial performance has
improved, deteriorated or remained constant over time. Although it may not be
sufficient, Wegagen’s time series analysis for 2010/11, 2011/12 and 2012/13
is presented.

2. Cross Sectional Analysis (Competitor’s Average)

This compares the ratios of the firm with average ratio of the industry of which
the firm is a member. These ratios are important standards in view of the fact
each industry has its characteristics, which influence the financial and
operating relationship. But there are practical difficulties in using the industry
average (competitor’s average).

3.4.1. Liquidity Ratio

It is extremely essential for a firm to be able to meet its obligations as they

become due. Liquidity ratio is a measure of a company ability to convert to
cash to meet its current liability. If the liquidity ratio is low, the firm has
difficulty in paying its current liability. This will result in the closure of the
company. In order to improve low ratio the firm should take the following
action:

 Reduce current liability by borrowing long-term basis and apply for

payment of current liability.
 Increase current asset by borrowing on long term basis or by sealing
capital stock and applying the fund for investment in current assets.

On the other hand, a very high degree of liquidity is also indicate that the firm
may sacrificing some profit because too much financial capital is tied up in
current asset.

49
 TABLE 12
WEGAGEN BANK SC

Summary of Ratios

ITEMS 2010/11 2011/12 2012/13 Formula

A.LIQUIDITY RQTIO
 Current ratio 1.17 1.18 1.16 Current Asset
Current Liabilities
 Loan to total assets 0.34 0.4 0.44 Loan & Advances
Total Asset
 Total Loan to total deposit 0.48 0.64 0.69 Loan & Advances
Total Deposit
B.DEBT UTILIZATION RATIOS
 Deposit Ratio 0.71 0.65 0.68 Total Deposit
Total Asset
 Interest-Coverage Ratio 4.2 4.3 3.6 EBIT
Interest Charges
C.ACTIVITY RATIO
 Fixed Asset Turn Over 8.18 2.9 3.6 Operating Income
Fixed Asset
 Total Asset Turn Over 0.1 0.1 0.09 Operating Income
Total Asset
 Total Capital Employed 0.61 0.52 0.53 Operating Income
Capital Employed
D.PROFITABILITY RATIOS
 Return on Asset (%) 4% 4% 3.2% Net Income
Total Asset
 Return on Owners Equity 24% 21% 18.5% Net Income
(%) Owners Equity
 Net Profit Margin (%) 40% 39.4% 35% Net Income
Operating Income
 Total Expense to Total 60% 60.5% 65% Total Expense
Income Operating Income
 Non-Interest Income to 61% 48% 40% Non-Interest Income
Total Income Operating Income
 Non-Interest Expense to 48% 44% 47% Non-Interest Expense
Total Income Operating Income
 Net-Interest Margin 7.7% 8.6% 9% -
E.CAPITAL ADEQUACY
 Capital to Asset Ratio 16% 19% 17% Owners Equity
Total Asset
 Earning Per Shares 448 378 330 Net Income
No of Shares
*Note: - Net interest margin is the ratio of interest income less interest expense
to average earning assets (loan and advances)

50
51
A. Current Ratio (CR)

It is a measure of firm short term solvency; it indicates the availability of

current assets for availability of current asset for every one birr current
liability. When we consider the bank liquidity ratio over year, it reveled ups and
downs that is a conventional role a current ratio of 2-1 (current asset is twice
of current liability) or more is considered to be satisfactory but the banks
current ratio is less than the conventional rule, therefore it may not be
interpreted sufficiently liquid. Even if the 2012/13 current ratio of the bank is
lower than the past two years it is steal more than the sample competitor’s
average ratio which is 1.13.

B. Loan to Deposit Ratio (LDR)

This ratio indicates the proportion of loan and advances to total deposit. The
loan to deposit ratio of the bank over the past three year was 0.48, 0.64 and
0.64 from the figure we can notes that the share of loans over deposit increase
highly in 2011/12 compared to 2010/12 but in 2012/13 it was the same as
2011/12. As the NBE stated the maximum limit of loan to deposit ratio should
be 0.8 but the loan did not rich its upper limit for the past three years. Even if
the bank did not rich its limit loan to deposit ratio 2012/13 which is the
sample competitors average of 0.57 the different reasons stay of for not
reaching their higher limit of loan to deposit ratio is the stiff competition exist
in the industry and different regulations.

C. Loan to Total Asset Ratio (LTAR)

It is the relation of loans to total assets and calculated by dividing the loans
and advances by total assets. Loan to total assets of the bank for the past three
years showed increment from year to year which is 0.34, 0.4 and o.44
consecutively and also its ratio for the fiscal year 2012/13 slightly higher than
the sample competitors average which is 0.438. The contemporarily acceptable

52
range ratio by the NBE is between 0.45 - 0.80 any ting above 0.65 is assumed
to be high.

3.4.2. Activity (Asset Utilization) Ratio (AUR)

Activity ratio, also called efficiently or turnover ratios, used to measures the
effectiveness of management in using the bank assets. The better management
effectiveness on utilizing their asset is better exchange of the bank over its
resource.

A. Fixed Asset Turnover (FAT)

The fixed asset show how much is the bank earnings per Birr of its total
investment over fixed asset. In case of Wegagen bank the ratio indicate a very
high decline from earning 8.18 from per Birr investment on fixed asset to 2.9
and 2.76 per Birr investment on fixed asset in 2011/12 and 2012/13
respectively. From the balance sheet of the bank we can see that the fixed asset
of the bank grown year to year but it contribution to earning per Birr
investment is decline; so we can say that the bank is not using its full potential
in utilize its fixed asset. When we compare 2012/13 fixed asset turnover with
its sample competitor’s average 5.6, it shows a very lower amount from this we
can notes effective utilization problem and future earning probability.

B. Total Asset Turnover (TAT)

This also shows how much is the bank is earning per Birr of its total asset. In
case of Wegagen bank the ratio indicates that it is producing 0.1, 0.1 and 0.09
revenue per Birr of investment in total assets in the past three years. The ratio
has declined from 0.1 to 0.09 again like that of fixed asset the asset of the bank
increased in the past three years but its turnover even declined to 0.09, so
again it shows utilization problem. But when we compare it sample
competitor’s averages of 2012/13 0.085, it has a better turnover than its

53
competitors. From the amount of asset increment we can say that the bank has
future earnings possibility if it utilizes its asset effectively.

C. Capital Employed Turnover (CET)

Like the fixed assets and total assets turnover ratios, this ratio indicates the
bank ability of generating revenue per Birr of long term investment.

As stated on the ratio analysis table capital employed turnover ratio declined to
0.52 and 0.53 in 2011/12 and 2012/13 respectively from 0.61 in 2010/11. In
those past three years like that of fixed total asset the amount of capital is also
increased over the years but when we see its turnover it is low. It is only with
its own performance over the year it is also lower than its competitor’s ratios
average 0.68 and its competitor’s ratio.

3.4.3. Debt Utilization Ratio (DUR)

Debt management ratio refers to the bank’s ability to pay all of its debts as they
come due, whether current or non-current. It shows the extent to which the
bank uses debt to finance investment and its ability to meet interest charge
and other fixed payments. In order to serve its creditors the bank must earn
not only sufficient income to pay its interest expense, and all other expense, it
must also have a sufficient cash flow to serve the debt.

A. Deposit Ratio (DR)

This ratio measures the percentage of total asset financed by depositors. From
its nature of business majority of assets are financed from savings it can be
seen from the ratio analysis table the deposits ratio shows declining from 0.71
to 0.65 and 0.68 over the past year respectively.

The bank is the least when it compared with sample competitors averages 0.76
and similar bank ratio. The higher the ratios shows the more of the assets are
provided by saving clients relative to owners and it’s efficiently for mobilization

54
of savings but the higher the ratios may be disadvantageous to the bank if it is
not properly utilized in the form of loans and advances.

B. Interest Coverage Ratio (ICR)

This is one of the most conventional coverage ratios used to test the bank’s
debt servicing capacity. It show how many times the interest charges are
covered by funds that are ordinarily available to pay the interest charges the
interest coverage ratio is the sum of net profit before interest and taxes divided
by interest changes.

The interest coverage ratios given in the above table variations during the past
fiscal year and drop to 3.6 times from 4.3 times in 2012/13 the reason for the
declines’ is the very high increment of interest expense compare to EBIT. Even
it if a decline in 2012/13 it is the second largest from the sample competitors
and obviously higher than competitors averages. In principle higher ratio is
desirable but too high ratio indicate that the bank is very conservative in using
debt and that it is not using credit to the best advantage of owners. On the
contrary a lower ratio indicates excessive use of debit or inefficient operations.

3.4.4. Profitability Ratios

Profitability is the net result of policies and decision. It measures the earning
power of firms. It is a fact that sufficient profit must be earned to sufficient
profit must be earned to sustain the operation of the business to be able to
obtain funds from investors for expansion and to contribute towards the social
overheads for the welfare of the society, they indicate the bank’s management
generate profit.

A. Return on Assets (ROA)

Return on assets also called return on investment and it measures the overall
effectiveness of management in generating profit from its total investment in
assets. As shown on the banks return on assets (ROA) ratios shows a decline

55
over the years from 4% to 3.2% in 2012/13 this is because of the increment of
banks assets to 8.34 billion to 10.39 million and almost stable net income over
the past three year from this we can notes that the management effectiveness
in generating profit from its total assets is not at optimal as it should be. But
its effectiveness compared to its sample competitors ratio it show the bank was
effective comparatively in generating profit from total asset because it shows
the secured largest amount 3.2%.

B. Return on Equity (ROE)

The return on equity indicates how well the firm has used the resources of the
owners. In fact, this ratio is one of the most important relationships in ratio
analysis. The earnings of a satisfactory return are the most desirable objective
of a business. The ratio of net profit to owners’ equity reflects the extent to
which this objective has been accomplished. The return on equity ratio has
declines from 24% to 21% and to 18.5% respectively over the years this
declines is also as of increment on owners equity and stable net income over
the years the 2012/13 return on equity 18.5% is not only the lowest of the
years and also the lowest of the sample competitors ratios average which is
21%. The higher ratio will reveal the relative strength of the bank in attracting
future investment and has a great interest to present as well as prospective
shareholders. So the bank should work hardly to increase its return on equity
because it has on investment of the bank.

C. Net Profit Margin (NPM)

A reasonable gross profit margin is necessary to earn adequate net profit. Net
profit is obtained when operating expenses and income tax are subtracted from
the gross profit. This ratio is measured by dividing net profit after tax by
revenues.

Wegagen bank’s profit margin ratio revealed a declined over the past three year
which is 40%, 39% and 35% respectively. The very reason for this decline is the

56
accelerating increment on the total expenditure over this year’s even the
revenue was increasing also from this we can notes that the bank was
extending more and more in the year to earn almost equal profit over the year.

Even though we so a decline amount in net profit margin the 2012/13 net
profit margin of the bank was sedf larges of the sample competitor’s ratios and
also above the sample competitor’s average ratio 21%.

D. Total Expenses to Total Income (TETI)

This ratio indicates the portions of total expenses to total income of the bank
i.e. it shows how much the bank is spending to earned a given revenues in the
past three years this ratio has been increasing from 60% to 65%. The bank
expense to income of 2012/13 is the second lowest next to Lion bank and also
lower than the sample competitors average 0.68. Having a reasonable low total
expense to total income ratio indicates the bank effectiveness in generating
revenue by using low expenses.

E. Net Interest Margin (NIM)

Net interest margin is the ratios of interest income less interest expense to
average earning assets (loans and advances). The net interest margin of the
bank has improved from 7.7% to 8.6% in 2011/12 and 9% in the 2012/13.
When comparing with a sample competitor’s average and similar banks ratios
of the year 2012/13 it has a higher ratio. The typical margin is between 3%-
10%. This shows a successful asset/liability management of the bank
in2012/13 fiscal year.

F. Non-Interest Income to Total Income (NIITI)

This ratio measures contribution of non interest income to the total revenue of
the bank or it shows the bank ability to generate revenue other than their main
revenue shares interest income.

57
Wegagen bank interest income to total income was declining over the past
three years from 60% to 48% and 40% respectively. This shows the bank focus
more on its interest income and leasing its gowned to its competitors on
earning income from non-interest income sources; even though it shares a
decline the 2012/13 ratio of the bank is above the competitors’ average of 38%.

G. Non-Interest Expense to Total Income (NIETI)

Like that of total expenses to total income ratio, it show how much the bank is
spending on non-interest expenses (operating expenses like general
administrative salary and other) to earn a given level of revenue.

This ratio of the bank decreased to 44% from 48% in 2011/12 but again
increased to 47% in 2012/13. When we compare with the sample competitors
average of 2012/13 it is above the average of 44% which show the bank is
expanding more on non-interest expenses than most of its competitors.

3.4.5. Capital Adequacy

Capital adequacy measures the cushion available to protect depositors against

loss in the event of shrinkage in asset value and deposits against loss in the
event of shrinkages in asset value and possible insolvency.

A. Capital to Asset Ratio (CAR)

Capital to asset ratio is a ratio that shows the percentage of owners’ equity to
total asset of the bank. The capital to asset ratio of the bank show a fluctuate
amount increase to 16% to 19% in 2011/12 and decline to 17% in 2012/13 the
result of the decline in the ratio is the result of the decline in the ratio is the
higher increment of the total assets mainly as a result of an increment on
deposit from customers and comparatively low increment on stockholders’
equity of the bank on the other hand the ratio of the bank in 2012/13 a higher
performance like that of Lion bank and it is greater than competitors averages
13%.

58
B. Earnings per Share (EPS)

The earnings per share simply show the profitability of the bank on a per-share
basis. It does not reflect how much is paid as a dividend and how much is
retained in the business. But as a profitability index, it is a valuable and widely
used ratio. The earning per-share calculated the net profit after tax by the total
number of common share outstanding.

The Wegagen bank earnings per share have decreased from Birr 448 in
2010/11 to Birr 378 in 2011/12 and to 330 in 2012/13. This decline is manly
the slight decrement over the net profit and increment in number of shares. It
is greeter when we compare it with the competitor’s average.

59
 CHAPTER FOUR

4.1. CONCLUSION
Working capital for the purpose of the paper is considered as it embraces both
current liabilities which were accounted for 96% and 100% on the average out
of the total asset and liabilities for the last three years. The growth of current
liabilities has been increase higher than current asset the working capital of
the bank was managed in a better way with respect to business norms.

Both the cash balance and amount of fund in current accounts that the bank
has in different banks for facilitating its transaction revealed a declining
amount for the last three years consecutively. This decline may indicate the
bank was utilizing its idle cash in order to increase its revenue.

The amount of loans provided for loan customers expended at higher rate than
the overall deposits for the last three year that is the outstanding loans and
advance cash increased on average by 45.25%. Whereas the amount of deposit
by saving customer increased by 9.5%. Hence it has great impact on interest
income and expense.

All liabilities of the bank are current liabilities because the bank has no long
term liabilities out of the total liabilities deposit constituted a higher percentage
for the last three years of this saving and demand deposit constituted the
highest share.

When we see the operation of the bank over the years the bank was able to
increase its total revenue to 970 million but the net profit of the bank was
almost equal over the year this is due to the higher increment of the bank
operating expenditure as the revenue increase.

The liquidity ratio of the bank revealed the bank was has a good liquidity
position compare to its competitors ratio. The debt utilization ratio the bank
has great interest coverage ratio but the portion of deposit after the total asset

60
show fluctuating amount and lower amount comprised to it sample
competitors.

The activity ratio of the bank shows the bank is not utilizing its asset, fixed
asset and capital equity appropriately. The researcher say because while the
above three increase in amount from year but their share to operating income
decrease year by year. It even shows lowest ratio compared to this sample
competitor average except for total asset turnover.

The profitability ratio of the bank indicates that a decreasing percent on return
and revenue related ratios and increase on expense related ratios but the bank
was able to maintain an amount above competitor average on this ratio except
return on owners’ equity which shows a lowest percentage from the
competitors’ ratio.

4.2. Recommendation

 To be the bank a thriving business entity so as to attain its ultimate

objectives of establishment, some remedial measures shall be taken.
What the writers believe as corrective actions are the following.
 During the past three year the bank interest income share from the total
revenue had been growing but in comparison the other source of
revenues has been decline as it can seen from the income statement of
ratio analysis of the share of other income sources had increased like
that of interest income the bank might had more net profit during the
year so the bank should try to increase its other source of income while
forecasting on its major operating income.
 As it can be seen from the balance sheet the bank asset, fixed asset and
owners equity had been growing but in comparison with its growth the
bank earning or the their turnover over its assets had been declined.
Even when we compare with its competitors ratio it resulted lowest
amount if the bank had utilize its assets in effective manner earning of

61
 2011/12 and 2012/13 could been much higher so the bank should work
its best to utilize its assets on effective manner.
 In the year 2011/12 the bank manages suggested that the unexpected
(unanticipated withdrawal) over the year affected their earning. This kind
of things should have been seen as one of the risk the bank has against
its earning and property identified and managed to decrease its effect to
the lowest amount, so in the future the bank should manage this kind of
risk properly before the occur.
 We can so that the bank has low total expenses to total income ratio
compared to sample competitors ratios but we can notes that the bank
expenditure during the years had been in an increasing rate than
increment on its total earning. So the bank should try to lower its total
expenses growing rate in order to increase its profit.
 The deposit ratio share of deposit from the total assets shows a declining
amount over the year and it is lower when we compare it with 2012/13
competitor average. This show the bank ability to mobilize deposit is low
so the bank ability to mobilize deposit is low so the bank should utilize it
asset effectively and efficiently to increase it deposit mobilization
capacity.
 Higher return on equity shows how the bank has used the resources of
the higher this resource enable the bank to attract potential investors in
the bank stokes. But Wegagen bank return on equity had been declared
over the years and it is the lowest of its sample competitor’s ratio so the
bank should raise its return on equity by the best effort they can because
it has an effect on future capital of the bank.

62
 Reference

 Evgene F. Brigham and Joel F. Houston, (1998), Fundamental of

Financial Management 8th edition, Horcort Brace College publishers.
 Pamela 2010 (Financial performance analysis)
 Brigham, E.F (1981), Fundamental Financial Management 7th edition,
Dryden Press, Forth Worth.
 Brigham. E.F (2002), intermediate Financial Management.
 Chandra P., Fundamentals of Financial Management, 3rd edition, Mc
GrawHill Inc,
 Dickesson B; B.J Company, Introduction to Financial Management,
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 IM Pandey: Financial Management, 6th Revised Ed. New Delhi, Vikas
Publishing House Put Ltd. 1995.
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Fundamental of Corporate Finance eth edition, California MC – GRAW
Hill, 1998.
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New Jercy, Prentice Jell 1998.
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 Abyssinia Bank Annual Report 2012/13

 Dashen Bank Annual Report 2012/13

 United Bank Annual Report 2012/13

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 WWW Answer .Com
 Wikipedia, the Free Encyclopedia.

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