CHITTAGONGINDEPENDENTUNIVERSITY

PROJECT ON:

An Analysis of Financial Management of Non

Bank Financial Institutions (NBFI) In
Bangladesh:
A Study on LankaBangla Finance Limited

SUBMITTED TO:

Dr. Syed Manzur Quader

CIU Business School

SUBMITTED BY:
Md. Minhaz Uddin

ID: 19151003
Course Title:
Financial
Management

Code: MBA 531

DATE OF SUBMISSION:

21 August, 2020.

1
An Analysis of Financial Management
of Non-bank Financial Institutions
(NBFI) in Bangladesh:
A Study on Lanka-Bangla Finance
Limited

2
3
 Table of Contents

CHAPTER 1INRODUCTION................................................................................................................4
Introduction...............................................................................................................................................5
Background of LBFL...............................................................................................................................6
Mission.......................................................................................................................................................7
Core Values...............................................................................................................................................7
Share - Holding Pattern Analysis............................................................................................................8
Chapter 29
Corporate Governance & CSR Activities of Lankabangla Finance Limited.....................................9
Corporate Governance............................................................................................................................10
Corporate Governance Structure...........................................................................................................11
CORPORATE SOCIAL RESPONSIBILITY (CSR) OF LANKABANGLA..........................12
Risk Management...................................................................................................................................13
Risk Management in LankaBangla.......................................................................................................14
Financial risk management........................................................................................................14
Credit risk...................................................................................................................................15
Exposure to credit risk:..............................................................................................................15
Liquidity risk..............................................................................................................................15
Market risk.................................................................................................................................15
Interest Rate Risk.......................................................................................................................16
Chapter 4........................................................................................................................................17
Investment Profile...................................................................................................................................17
Investment Profile of Lankabangla:......................................................................................................18
Investment Income..................................................................................................................................19
Chapter 5..................................................................................................................................................21
Performance Analysis through Financial ratios...................................................................................21
Liquidity Ratios.......................................................................................................................................22
Solvency Ratio or Financial Leverage Ratio.......................................................................................23

4
 Debt to Equity Ratio:.................................................................................................................23
Equity Ratio:............................................................................................................................................25
Profitability Ratios:.................................................................................................................................28
Profit Margin..............................................................................................................................28
Return on asset or ROA.............................................................................................................29
Return on Equity or ROE...........................................................................................................29
Market Prospect Ratios..........................................................................................................................30
Earnings per share or EPS..........................................................................................................30
Chapter 6..................................................................................................................................................32
Profitability and Performance Analysis of LBFL Compared to its Peers........................................32
Overview of the selected Banks............................................................................................................33
Return on Equity:....................................................................................................................................34
Net Profit Margin-......................................................................................................................34
Earnings Per Share-....................................................................................................................35

5
 CHAPTER 1

INRODUCTION

6
Introduction

Merchant Banking is a combination of Banking and consultancy services. It provides

consultancy, to its clients, for financial, marketing, managerial and legal matters. Consultancy
means to provide advice, guidance and service for a fee. It helps a businessman to start a
business. It helps to raise (collect) finance. It helps to expand and modernize the business. It
helps in restructuring of a business. It helps to revive sick business units. It also helps companies
to register, buy and sell shares at the stock exchange. According to Investopedia, a bank that
deals mostly in (but is not limited to) international finance, long-term loans for companies and
underwriting. Merchant banks do not provide regular banking services to the general public.

According to the US Federal Deposit Insurance Corporation (acronym FDIC),

"The term merchant banking is generally understood to mean negotiated private equity
investment by financial institutions in the unregistered securities of either privately or publicly
held companies."

In banking, a merchant bank is a financial institution primarily engaged in offering financial

services and advice to corporations and wealthy individuals on how to us their money. The term
can also used to describe the private equity activity of banking[ CITATION Jef02 \l 1033 ].

Investment Banking is an American synonym of merchant banking. Investment banks provide

advice on mergers and acquisitions and are involved in financing industrial corporations through
buying shares and selling them in relatively small lots to investors. In the context of Bangladesh,
merchant banking includes all financial institutions that combine the functions of both
development banking and investment banking.

7
Background of LBFL

Two decades back LankaBangla Finance Limited started its journey in 1997 as a joint-venture
financial institution in multinational collaboration with a license from Bangladesh Bank under
Financial Institution Act-1993. Today, LankaBangla is the country’s leading integrated financial
services provider that include Corporate Financial Services, Retail Financial Services, SME
Financial Services, Liability Management, Stockbroking, Corporate Advisory and Wealth
Management Services

LankaBangla has implemented business process re-engineering to build capacity for its clients’
superior service experience. The company now operates from a centralized administrative
framework through cutting edge technological environment. LankaBangla is fueling a wide
operational periphery covering major business hubs of the country.

Under a wide umbrella of products and services, LankaBangla is the only financial institution to
operate credit card (Master and VISA) and also provide third party card processing services to
different banks in Bangladesh.

LankaBangla is the market leader in the capital market services and has been giving an all-out
effort to develop an efficient, vibrant and transparent capital market in Bangladesh. Its
subsidiary, LankaBangla Securities Limited is providing top-notch brokerage services and
leading the industry with cutting edge trading, top rated research information, and customer
service. The group has another subsidiary, LankaBangla Investments Limited. It is a premier
investment bank in the country providing corporate advisory, issue management, and portfolio
management services. LankaBangla Asset Management Company Limited is providing
professional wealth management services to some of its customers. In quest of sustainable
business, LankaBangla is positioning itself to provide enduring value to the people, customers,
shareholders and the communities. There are other key divisions involved in setting up strategic
priorities and upholding the living standard of our community. These divisions are involved
among many others in prudent balance sheet management operation and maintenance of a strong
IT infrastructure and recruiting as well as nurturing topnotch human resources.

8
LankaBangla practices participatory management and adheres to industry’s best practices in all
its endeavors. Increasing stakeholders’ value is a natural driving force for the people at
LankaBangla. It dreams to go further and grow bigger. Its ethos is simple. The company
envisions its success lies in becoming the growth partner of its enterprising clients. LankaBangla
is committed to empowering lives and inspire changes in community.

Lanka Bangla also has four subsidies companies:

• Lanka Bangla Securities Limited.

• Lanka Bangla Investments Limited.

• Lanka Bangla Asset Management Company Limited

• Lanka Bangla IT Investment Limited.

Mission
• Be a growth partner for our customers, ensuring financing and superior experience.

• Maintain a culture of meritocracy in the DNA of the company.

• Be sustainable and ensure quality returns to our valued shareholders.

• Uphold efforts to develop our community.

Core Values
LBFL has strong values that are well embedded in our culture.Our values create the following
goals to help us deliver our strategy:

• Cherish a sense of ownership

• Be customer centric

• Grow as a team

• Act with Integrity and Professionalism

• Deal with respect.

9
Share - Holding Pattern Analysis

shares is being held by the sponsor director

Shareholding Structure of LBFLof the company and rest 61.23% which is
equal to 340,973,865 shares is being
9%
regularly traded among the general public
Foreign
Sponsors people. The government holding and
and/or
directors institute investors have no shares in their
24%
name.
Local Sponsors
and/or Though it is not a good sign for the
directors
66% company that institutional investors are
General reluctant to invest in this company but the
Shareholders
company is fundamentally very strong.
Because of the excessive public holding the
Out of 513,179,641 shares 33.56% of shares
share price fluctuation is very high of LBFL.
which is equal to 172,205,776 numbers of

Sponsors % of Shareholding

a. Foreign Sponsor

Sampath Bank Ltd, Srilanka 9.47%

b. Local Sponsor

One Bank Ltd. Bangladesh 3.78%

Individuals 20.31%

Sponsors and/or directors 33.56%

Total

10
 Chapter 2

Corporate Governance & CSR Activities

of Lankabangla Finance Limited

11
Corporate Governance

Corporate Governance is the system by which a Company is directed, controlled and managed.
In LankaBangla Finance Limited (LBFL), the Corporate Governance Framework guides our
drives towards progress by way of developing and implementing appropriate corporate
strategies. The approach to governance is predicated on the belief that there is a link between
high-quality governance and the creation of long-term stakeholder value. In pursuing the
Corporate Objectives, we have committed to the highest level of governance and strive to foster
a culture that values and rewards exemplary ethical standards, personal and corporate integrity
and mutual respect. The Board of Directors, led by the Chairman, is responsible for the
governance of LBFL, and developing effective Governance Framework to meet challenges, both
in the short and long term. The Board is committed to reviewing and improving our systems to
provide transparency and accountability, and initiate transformational changes whenever
necessary to ensure best practices are maintained and enhanced according to the principles of
Corporate Governance.

Governance Processes

Board Composition and Frequency: The present Board comprises of nine non-executive
directors of whom four are nominee directors and two are independent directors

Selection and Term of Appointment of New Director The Directors are appointed by the
shareholders in the Annual General Meeting (AGM). Casual vacancies, if any, are filled by
board in accordance with the stipulation of the Companies Act 1994 and the Articles of
Association of LankaBangla Finance Limited

Separation of the role of Chairman and the Managing Director: At LankaBangla, in

accordance with the DFIM Circular No. 07, dated 25-09-2007, a clear division of responsibilities
between The Chairman and The Managing Director, allows the Chairman to assume the formal
role of an independent leader that chairs all Board meetings and lead the Board in its oversight of
management. At annual general meetings and other shareholder meetings, the Chairman plays a

12
pivotal role in fostering constructive dialogue between shareholders, the Board and management.
Any questions from shareholders are attended to and addressed at such shareholder meetings

Corporate Governance Structure

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13
CORPORATE SOCIAL RESPONSIBILITY (CSR) OF LANKABANGLA

Corporate Social Responsibility of LankaBangla is a form of corporate self-regulation integrated

into our business model based on the objective of good business for good society. LankaBangla
in its core management concept and corporate responsibility integrated CSR with focus on social
and environmental concerns in all business operations and interactions with its stakeholders.
LankaBangla believes to achieve a balance of economic environmental and social imperatives
(“Triple-Bottom-LineApproach”) besides safeguarding interest of stakeholders.We have also
considerably achieved efficient business operations and conscience corporate governance and
compliance to facilitate smooth and effective business. As a result we have been able to
contribute for our sustainable society. LankaBangla through its Foundation has extended its
support for the underprivileged people of the community in particular to ensure their education,
health and living.

Risk Profile of Lankabangla

14
b
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ti
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a
R
S
C
 Chapter 3

Risk Management

15
Risk Management in LankaBangla

We believe that sound risk management is essential to ensuring success in our risk-taking
activities. Our philosophy is to ensure risks and returns remain consistent with our established
risk appetite. To achieve this, we regularly refine our risk management approaches to ensure we
thoroughly understand the risks we are taking to identify any emerging portfolio threats at an
early stage, and to develop timely and appropriate risk response strategies.

Financial risk management

The Board of Directors has overall responsibility for the establishment and oversight of the
Company's risk management framework. The Company's risk management policies are
established to identify and analyze the risks faced by the Company, to set appropriate risk limits
and controls, and to monitor risks and adherence to limits. Risk management policies, procedures
and systems are reviewed regularly to reflect changes in market conditions and the Company's
activities[ CITATION Rob94 \l 1033 ]. The company has exposure to the following risks from its use
of financial instruments:
* Credit risk
* Liquidity risk
* Market risk

16
Credit risk
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a
financial instrument fails to meet its contractual obligations, and arises principally from the
company's receivables from customers.

Exposure to credit risk:

The carrying amount of financial assets represents the maximum credit exposure. The maximum
exposure to credit risk at the reporting date was:Figures in BDT Million

2018 2017

Margin loan 1,538,262,645 1,915,459,376

Investments 765,010,436 669,942,537
Receivable from group entities (LBSL) 6,880,901 78,040,781
Other receivables 47,605,183 42,427,463
Cash and cash equivalents 289,096,256237,698,683
2,646,855,421 2,943,568,841
Liquidity risk
Liquidity risk is the risk that the company will not be able to meet its financial obligations as
they fall due. The Company's approach to managing liquidity (cash and cash equivalents) is
toensure, as far as possible, that it will always have sufficientliquidity to meet its liabilities
whendue, under both normal and stressed conditions, without incurring unacceptable losses or
risking damage to the Company's reputation. Typically, the Company ensures that it has
sufficient cash and cash equivalents to meet expected operational expenses, including financial
obligations through preparation of the cash flow forecast, prepared based on time line of
payment of the financial obligation and accordingly arrange for sufficient liquidity/ fund to make
the expected payment within due date.

Market risk
Market risk is the risk that any change in market prices, such as interest rates and capital market
condition will affect the Company's income or the value of its holdings of financial instruments.

17
The objective of market risk management is to manage and control market risk exposures within
acceptable parameters.

The risk of exchange rate movements does not impact LBFL directly because as a NBFI, LBFL
cannot deal with foreign currency. Interest rate risk, being a significant risk factor for the
industry, is managed closely by the Company, to ensure there are no erosion of spreads and no
impact to final profitability. Equity risk remains the other main market risk, considering the
Company has an equity portfolio in excess of Taka 1 billion. This is managed at individual
investment level, as well as on a portfolio basis, based on whether the portfolio is trading or
nontrading or strategic Ivestment

Interest Rate Risk

Interest rate risk arises when changes in interest rates have an impact to the future cash flows of
financial instruments’ fair values. This remained a potential concern for the finance industry, as
market interest rates continued to fall during the period. As LBFL deals in a number of interest
bearing financial assets that are mainly grouped under loans and advances there was close focus
on safeguarding core business interest spreads. Downward movements in interest rates were
continued both for lending and borrowing to be influenced by monetary policy changes whereas
the decrease in lending rates remained at a relatively faster pace and resulting decreases in
interest income too then the decrease in the borrowing rates. Apart from the resulting pressure
exerted on our core margins, interest rate fluctuations continued to also influence;
 our ability to canvass deposits
 the fair values of financial assets and liabilities and
 Average duration of mortgage backed lease portfolios and other interest earning assets.

18
 Chapter 4

Investment Profile, Revenue and

Dividend

19
Investment Profile of Lankabangla:

Income from investment has reduced to BDT 434.00 million in 2018 from that of 914.00 million
in previous year due to bearish stock market performance throughout the year. We had to make
provision of BDT 342.29 million for diminution in value of investments and BDT 368.77 million
for loans and advances. NPL increased to 3.60% in 2018 compared to 3.07% in 2017

Total Asset disbursement of LankaBangla Finance for the year 2018 reduced by 31.70%
compared to 2017, due to liquidity crisis in the whole of year. Total disbursed amount in 2018
was BDT 38,754 million compared to BDT 56,726 million in 2017. On the deposit side, our total
deposits grew by 03.26% from BDT 51,553 million in 2017 to BDT 53,231 million in 2018,
largely driven by our strong liability sales team who has provided uncompromised service. The
company’s investment portfolio reached BDT 77,531 million in 2017 compared to BDT 75,505
million in 2017. NPL showed a negative picture as the percentage of classified loans for the
company increased to 3.60% in 2018 compared to 3.07% in 2017.

Investment in Marketable securities: Investment in listed securities are carried at cost. Adequate
provision has been made considering each individual investment (where market price is less than
cost) as guided by Bangladesh Bank. Unrealized gains are not recognized in the profit and loss
account.
Investment in Non-Marketable securities: Investment in unlisted securities are reported at cost
under cost method. Adjustment is given for any shortage of book value over cost for determining
the carrying amount of investment in unlisted securities. Investment in subsidiaries: Investments
in subsidiaries are accounted for under the cost method of accounting in the Company’s separate
financial statements in accordance with IAS-27. Accordingly, investments in subsidiaries are
stated in the Company’s statement of financial position at cost, less impairment losses (if any).

Quantitative Disclosures as on 31st December 2018:

Figures in BDT Million

Particulars At Cost At Market VAlue

Value of Quoted Securities 5,283.1 5,125.2
Value of Unquoted Securities 230.5 230.5
20
Investment Income
It was a difficult year for the capital market due to bearish capital market condition. Transaction
volume in DSE decreased by nearly 39% and DSE general index decreased by 13.8% compared
to last year. On the other hand, liquidity shortage of money market also affected the capital
market. As a result, group investment income experienced a significant reduction of 53%
compared to 2017. Out of investment income, income from investment in share reduced by 54%
and group dividend income reduced by 30%. In contrast, LBFL’s investment income reduced by
75% and dividend income reduced by 91%. In 2017, LBFL earned cash dividend of BDT 245
million from one of its subsidiaries (LankaBangla Securities Limited) but in 2018, there was no
dividend from subsidiaries. Moreover, provision for diminution in value of investment has
increased by BDT 108 million for 2018. Income from Commercial Paper reduced by 82% as
investment in Commercial Paper of BDT 450 million was realized and at the end of the year,
BDT 200 million was invested in Commercial Paper.

Figures in BDT Million

Income from Investment 2018 2017

Income from Investment 352.64 770.75

in Share
Dividend Income 74.86 107.10

Coommercial Paper 6.53 36.36

Total Investment Income 434.03 914.22

21
Revenue
Total Revenue of the Group for the year 2018 was BDT 11,061.16 million registering a 10.82%
growth over 9,980.78 million of 2017. Total revenue of LBFL for the year 2018 was BDT
9,232.98 million which was 18.08% higher than the previous year’s BDT 7,818.98 million. An
analysis of the revenue is given in pages from 138 to 139 of the annual report.
Profitability
The Group has recorded a reduced in operating profit and profit after tax of 31.79% and 79.93%
respectively in 2018. LBFL’s operating profit and profit after tax reduced by 21.29% and
47.21% respectively in 2018. Consolidated net profit after tax for the year 2018 was BDT 444.44
million which was BDT 1,926.29 million in previous year. LBFL's net profit after tax for the
year 2018 was BDT 714.16 million compared to BDT 1,352.79 million in 2017.

Particualrs 2018 2017

Total Revenue 11,061.16 9,980.78
Total Expenses 9,375.75 7,510.02
Operating Profit 1,685.41 2,470.76
Provisions 976.34 206.95
Profit Before tax 709.07 2,263.81
tax 264.63 337.52
Profit after tax 444.44 1,926.29

Dividend

Considering the overall environment of financial market, current financial strength of the
Company, and future investment prospect the Directors recommended that dividend of BDT 1.5
per share as cash dividend of BDT 10.00 each compared to BDT 0.75 per share as stock divided
and BDT 0.75 per share in the form of cash dividend for the year 2017. The dividend is subject
to approval of the shareholders at the Annual General Meeting.

Therefore Lankabangla total dividend paid 769.77 million taka for 513,179,641 shares.

22
 Chapter 5

Performance Analysis through Financial

ratios

23
Financial ratios are mathematical comparison of different components of financial statements.
These ratios help investors; creditors & company management to understand how well the
company is performing & what are the areas of improvement[ CITATION DDe13 \l 1033 ]. Financial
ratios are the most commonly used tool for analyzing the position of a business. Ratios can also
be used to analyze the position & comparison between different companies from different
industries. Ratios do not take into consideration the size of the company. In our study on Lanka
Bangla Finance Limited, we have divided the ratios
into several categories:
(a) Liquidity Ratio.
(b) Solvency Ratio or Financial Leverage Ratio.
(c) Profitability Ratio.
(d) Market Prospect Ratio.
Other than these four broad categories we have also included several other ratios.

Liquidity Ratios
Liquidity ratios show a company’s ability to pay off the current liabilities as they become due.
Liquidity ratios show the cash level of the company & shows the ability to convert other assets
into cash to pay off liabilities & other
obligations. Liquidity ratios not only show how much cash the company has but also show how
easy it will be for a
company to raise cash or convert assets into cash. Here are some common liquidity ratios:
Current Ratio:
Current ratio is a liquidity ratio that measures a company’s ability to pay off its short term
liabilities with its current
assets. This ratio is very important because the short term liabilities will become due in the next
year. This means a company has limited time to raise fund to pay off these liabilities. So, the
companies that have larger amount of current assets will more easily be able to pay off the
current liabilities when they become due.

Current Ratio= Current Assets

Current Liabilities

24
As we can see from the Chart & the graph that current ratio of LBFL was higher till 2016. After
that the ratio went down. It indicates LBFL managed it’s current debts better with it’s current
liabilities before 2017. It also indicates that the company is losing money as its current assets are
decreasing. It also means that the company might be in a problem in collecting it’s receivables

Current Ratio
1.6
1.38
1.4
1.2
0.98
1 0.83
0.80.7
0.6
0.4
0.2
0
2018 2017 2016 2015

Current Ratio

Solvency Ratio or Financial Leverage Ratio: Solvency ratios or the financial

leverage ratio showsa company’s ability to sustain operations by comparing the debt levels with
equity assets & earnings[ CITATION Tho16 \l 1033 ]. In other word the solvency ratios indentify
how well the company is able to pay of its expenses in the long term. Solvency ratio is mainly
focused on long term liabilities than the payment of short term or current liabilities.
The most common solvency ratios are:

25
Debt to Equity Ratio:The debt to equity ratio is the ratio that compares the company’s total
debt to it’s total equity. This ratio shows a percentage that how much financing for the company
comes from the creditors & investors. A higher ratio show the higher creditor’s investment is
used than the investors financing. Formula
Debt to Equity ratio=Total Liabilities
Total Equity

Analysis for LBFL:

Different industries have different debt to equity benchmarks. A debt ratio 0.5 means the
company has half liabilities as it is in equity. A debt to equity ratio of 1 means, investors &
creditors have equal stake in the business. A lower debt to equity ratio is always expected as it
shows a much stable financial position. Companies with higher debt to equity ratio are
considered to be more risky to the investors & creditors. A higher debt to equity ratio is risky
tocreditors because they think that investors are not contributing to the company as the creditors
do. It implies that that the investors are not investing in the business because the company is not
performing well.

Debt to Equity ratio

10 9.18
9
7.86 A lower Debt Ratio is
8 7.29
6.67
7 always expected as it
6 Debt Equity ratio
sho A lower Debt
5
4 Ratio is always
3
expected as it shows a
2
1 better financial
0 stability. But in case
2014 2015 2016 2017 2018 2019
of LBFL, the situation
was not so favorable.
In last four years the debt ratio was well over 1. The lowest was in 2014 at 6.67. In 2017 it was

26
highest at 9.18. In 2018, the Ratio is 7.29. LBFL always had a problem in paying the liabilities
with the equity.

Equity Ratio:
Equity ratio is the solvency ratio which measures the amount of assets that is financed by
owner’s investments.
This ratio is calculated by comparing total equity to company’s total assets. Firstly the equity
ratio expresses how much of the company’s total assets is owned by the owners. This means
after paying off all the liabilities, how much the investor will end up? Secondly this ratio also
measures, how much of the company’s assets is financed by debt. This means, by equity ratio we
will find out how much of the company’s assets is financed by owners. The inverse of this ratio
is the percentage that points out how much is invested by debt. This means how much leveraged
is the company.
Analysis for LBFL:
A higher equity ratio is always favorable for the company. Higher equity ratio shows to the
potential investors that, the company is sustainable enough & less risky to the future loans. As
equity financing is much cheaper than debt financing because of the interest obligations related
to debt. More equity financing is expected by the investors.

27
 Equity ratio
0.3
0.26
0.25
0.21
0.2
0.16 Equity ratio
0.15 0.12

0.1

0.05

0
2014.5 2015 2015.5 2016 2016.5 2017 2017.5 2018 2018.5

28
The equity ratio indicates the sustainability of the company. It attracts investors to invest more in
the business. As we can see in the chart & the graph, the ratio was in decline in the last 4 years. It
means that the company has received higher debt financing in last 4 years.

Debt Ratio:

Debt ratio is the ratio that calculates the total liabilities of a company compared to its total assets.
In other word, it can also be said that, this ratio shows how many asset s must be sold to pay off
all the liabilities of the company. This ratio helps investors to analyze the overall debt burden of
the company & the firm’s ability to pay off all of its liabilities.

Analysis for LBFL:

The debt ratio calculates the total liabilities as the percentage of total assets. Because of that, a
lower debt ratio is always favorable. A lower debt ratio means that the company has a more
stable business with a sound potential longevity because the company has lower amount of debt
compared to its total assets. A debt ratio of 0.5 means the company has liabilities which are only
50% of its total assets. A debt ratio of 1 means the company have to sell all of its assets to pay
off all of its liabilities. But once all of the assets are sold the business will no longer run. The
debt ratio is so important because, creditors are always concerned of getting repaid. But when
there will be a higher debt ratio, the company will be under a higher debt burden. Then the
creditors will no longer provide the company fund. Companies must look for equity financing
rather than debt financing.

29
 Debt Ratio
0.9
0.86
0.85 0.84

0.8 0.78 Debt Ratio

0.75 0.74

0.7

0.65
2014.5 2015 2015.5 2016 2016.5 2017 2017.5 2018 2018.5

30
Profitability Ratios:
Profitability ratios compare income statements to find out whether a company has the ability to
generate profit from its operation. This ratio mainly shows how well a company can generate
profit from its operations[ CITATION DSC00 \l 1033 ]. Investors normally use profitability ratios to
judge the company’s return on investment.

Profit Margin

Analysis for LBFL:

The profit margin ratio indicates what percentage of income is generated from a certain level of
sales. This ratio also measures that how well the company is managing its debts & liabilities to
its net sales. Companies can do that by two ways. One, they can increase sales & keep the
expenses constant or they can keep the sales constant & decrease the expenses. As in this ratio
the net income is compared to net sales, then a higher profit margin is always expected.

Profit Margin
40% 38%
35%
30%
24%
25%
Profit Margin
20%
15%
10%
10%
5%
0%
2015.5 2016 2016.5 2017 2017.5 2018 2018.5

Profit margin shows how much profit is generated from a certain amount of sales. The profit
margin ratio directly measures what percentage of sales is made up of net income. A higher
profit margin is always expected. But in case of LBFL, the ratio is in decled from 2017 to 2018.
Earlier, the company had a bumpy graph of profit margin. The graph also indicates that LBFL
always had problem in keeping up its profit margin.

31
Return on asset or ROA
The return on asset or ROA is the ratio which measures the percentage of net income is produced
by using the total asset of a company in a period. This is calculated by comparing the net income
to the total assets. This ratio helps both creditors & the investors. They will see how well the
company is converting its investments in assets into profits.

Return on Assets (ROA)

0.03 0.02

0.02

0.02 Return on Assets (ROA)

0.01

0.01
0.01
0.01

0
2015.5 2016 2016.5 2017 2017.5 2018 2018.5

The return on assets ratio measures how effectively a company can earn a return on its
investment in assets. That means how much profit is generated from a certain amount of invested
assets. So a higher ROA is always expected. But in case of LBFL, the ratio was always much
lower than 1. That means the assets of LBFL are not generating enough profit for the company.
But the ratio declined more from 2017 to 2018. This means the company is not properly
managing the assets to effectively produce profit.

Return on Equity or ROE

Return on equity is the ratio that shows the ability of a company to produce profits from the
investment of the shareholders of the company. In other words, this ratio shows how much
income is generated from each dollar invested or each dollar of common shareholder’s equity.
This ratio is important to the shareholders because they want to see how efficiently the company
is using their money.

32
 Return on Equity (ROE)
0.25 0.23

0.2

0.15 Return on Equity (ROE)

0.12

0.1

0.05
0.05

0
2015.5 2016 2016.5 2017 2017.5 2018 2018.5

The investors want to see a higher ratio because this indicates that the company is using its
investors' funds effectively. As we can see here, the ratio declined from 2017 to 2018 drastically.
It means that the company is not using its investors fund to generate profit. It also indicates that
the trend of earning is not satisfactory.

Market Prospect Ratios

Market prospect ratio IS used to compare the stock price with other financial component as
earnings & dividend payments of the publicly traded companies. Investors use market prospect
ratio to analyze the stock price trend & dividend payment trend & per share earnings trend of the
company. These ratios are helpful for investors to predict how changes
in stock prices will be based on current earnings and dividend measurements.
Here are some of the important market prospect ratios:

Earnings per share or EPS

Earnings per share are also known as the net income per share. It is the market prospect ratio that
measures how much income is earned per share. In other words, this is the amount of money
each share of stock would receive if all of the profits were distributed to the outstanding shares at
the end of the year.

Analysis for LBFL:

Earnings per share ratio show the income that is generated from every share. For this reason a

33
higher EPS is always favorable for the investor. Higher EPS means they have more nprofit to be
distributed among the shareholders than the lower
EPS.

Earning Per Share (EPS)

7
6.05
6

4 Earning Per Share (EPS)

2.88
3
1.75
2
0.85
1

0
2014 2015 2016 2017 2018 2019

34
 Chapter 6

Profitability and Performance Analysis

of LBFL Compared to its Peers

35
Overview of the selected Peer Banks
City Bank Capital Resource Limited- CBCRL have been operating in the Capital Market since
2010 as division of The City Bank Ltd. CBCRL has acquired full-fledged Merchant Banking
License from the Bangladesh Securities and Exchange Commission (BSEC) in 2010. It is a
wholly owned subsidiary of The City Bank Ltd. It is one of the largest private commercial banks
in Bangladesh with a paid-up capital of BDT 2.55 billion. Recently, the company is providing a
broad range of investment banking such as portfolio management, corporate advisory, structured
finance and impact investment services to institutions, high net worth individuals and financial
sponsors. City Bank Capital strives to cater to international and local clients with investment
banking and consulting solutions to sustain, enable and catalyze growth to clients and
stakeholders and their mission is to bring Bangladesh to the frontier of global finance.

EBL Investment Limited- EBL Investments Limited (EBLIL) from its inception 2013,
have been elevating its capacities to meet the demands of changes, to serve its clients better.
EBL Investments Limited is a Limited company, obtaining merchant bank license from the
Securities and Exchange Commission. EBLIL provides a full range of investment banking
facilities including conventional merchant banking activities. EBLIL team focuses on
originating, structuring, underwriting and executing debt financing including syndications
of both foreign and local, corporate bonds, and other debt linked products. EBLIL also has a
strong foothold in Mergers & Acquisitions and private equity, aligning the goals of those
who seek to funding for joint venture opportunities in Bangladesh.
AB Bank Investment Limited- AB Investment Limited (ABIL), a company limited by
shares has incorporated in Dhaka on December 24, 2009 to deal with Merchant Banking
business and started its commercial operation on March 10, 2010. ABIL is also a subsidiary
company of AB Bank Limited, provides all types of Merchant Banking services permitted
under existing law of the country. AB Bank Limited is the pioneer in banking industry,
started its Merchant Banking operation on 2003. Since its inception, AB Bank Merchant
Banking wing provided various services which include Issue Management, Portfolio
Management & Underwriting and gained an excellent reputation in the market.

IDLC Investment Limited- The first Lease Agreement was signed in 1985. Listed on

36
theDhaka Stock Exchange in 1996. It gets licensed as a Merchant Banker by the Securities
and Exchange Commission in 1998. IDLC Investments Limited is a wholly-owned
subsidiary of IDLC, commences operations. IDLC offers Portfolio Management services to
both individual and institutional investors through their subsidiary, IDLC Investments
Limited.

Return on Equity: Return on equity measures the profitability of five banks by how
much they generate with the shareholders have invested. A chart is given below

Year LBFL EBLIL CBCRL ABBIL IDLCIL

2016 12% 8.30% 6.12% 6.94% 37.90%
2017 23% 5.92% 8.81% 5.57% 8.52%
2018 5% 11.20% 2.75% 5.64% 12.15%
Table 4 Return on Equity

Return on Equity
40%
35%
30%
2016
25% 2017
20% 2018
15%
10%
5%
0%
LBIL EBLIL CBCRL ABBIL IDLCIL

From the chart and graph we see that,LankaBanglaInvestmentLimitedhadthe best positive

trendthroughoutthethreeyears. IDLC Investment Limited recorded the highest ROE in
2014. EBL Investment Limited and City Bank Capital Resource Limited had a average run
from 2016to 2018

37
 Net Profit Margin-Net profit margin (NPM) is one of the most important indicators
of a business's financial health. It’s giving a more accurate view of how profitable
the merchant banks are than its cash flow. A chart is given below:

Year LBFL EBLIL CBRCL ABBIL IDLCIL

2016 10% 47.73% 40.20% 10.37% 67.40%
2017 38% 35.10% 45.17% 11.93% 38.97%
2018 24% 61.03% 46.74% 11.84% 52.73%
Table 5 Net Profit Margin

Net Profit Margin

70%

60%

50% 2016
40% 2017
2018
30%

20%

10%

0%
LBFL EBLIL CBRCL ABBIL IDLCIL

From the chart and graph we see that, Lanka Bangla Finance Limited had an average NPM
in 2017.IDLC Investment Limited had a good positive trend throughout the three years.
Moreover, AB Bank Investment Limited’s Net Profit Margin curve is very low throughout
the three years. EBL Investment Limited and City Bank Capital Resource Limited had a
very good run from 2016-2018.

38
 Earnings Per Share-Earning per Share serves as an indicator for a company’s
profitability. A chart is given below:

Year LBFL EBIL CBCRL ABBIL IDLCIL

2016 2.88 0.09 0.68 2.37 0.38
2017 6.05 0.06 0.9 2.12 0.85
2018 0.85 0.12 0.29 1.94 1.21
Table: Earning Per Share

EPS
7
6.05
6

5
2016
4 2017
2.88 2018
3 2.37
2.12
1.94
2 1.21
0.85 0.9 0.85
0.68
1 0.29 0.38
0.09 0.12
0.06
0
LBFL EBIL CBCRL ABBIL IDLCIL

From the chart and graph it is seen that LankaBanglaFinanceLimitedhad their best run in
perspective of Earningpersharefrom2016to2017atfirst and then thenitagain became reduced
drastically in2018. In contrast, ABBILhave a good Earning per share from 2016 to 2018.EPS of
City Bank Capital was very low in the three years.

39
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D Delen, C.K.A.U., 2013. Measuring firm performance using financial ratios: A decision tree approach.
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