Evaluation of Performance of Sampath Bank & Hatton National Bank, Thesis of Economics

Download Evaluation of Performance of Sampath Bank & Hatton National Bank and more Thesis Economics in PDF only on Docsity! CERTIFIED MANAGEMENT ACCOUNTANTS (AUSTRALIA) An Evaluation of Performance of Sampath Bank & Hatton National Bank By M.A. Nimarsha Rashanth Dias Arumugam Vinotharan P.R.R.W.M. Chethya Madhumanthi Abhayasinghe Financial Statement Analysis THE ACADEMY OF FINANCE (PVT) LTD SRI LANKA May 2020 TABLE OF CONTENT 6 1. INTRODUCTION TO THE INDUSTRY....................................................................................1 1.1 SAMPATH BANK...............................................................................................................2 1.1.1 OVERVIEW OF OPERATIONS......................................................................................3 1.2 HATTON NATIONAL BANK............................................................................................6 1.2.1 OVERVIEW OF OPERATIONS......................................................................................7 2. FINANCIAL POSITION.............................................................................................................9 2.1 SAMPATH BANK’S COMPOSITION OF ASSESTS.....................................................11 2.2 HNB’S COMPOSITION OF ASSETS..............................................................................12 2.3 COMPOSITION OF LIABILITIES...................................................................................13 2.4 COMPOSITION OF DEPOSITS.......................................................................................14 2.5 SAMPATH BANK’S EQUITY COMPOSITION.............................................................15 2.6 HNB EQUITY COMPOSITION.......................................................................................16 3. INTRODUCTION TO FINANCIAL PERFORMANCE............................................................17 3.1 SOURCES OF INCOME...................................................................................................17 3.2 COMPOSITION OF INCOME..........................................................................................18 3.3 SOURCES OF EXPENCES...............................................................................................20 4. CALCULATION OF FINANCIAL PERFORMANCE RATIOS & PERFORMANCE EVALUATION WITH DUPONT ANALYSIS...............................................................................21 4.1 SUMMARY OF RATIOS..................................................................................................21 4.1.1 RETURN ON ASSETS...................................................................................................22 4.1.2 RETURN ON EQUITY - DUPONT ANALYSIS & DECOMPOSITION OF ROE.....25 4.1.2.1 DUPONT ANALYSIS.................................................................................................25 4.1.2.2 DECOMPOSITION OF ROE......................................................................................26 4.1.2.3 NET PROFIT RATIO..................................................................................................27 4.1.2.4 NET INCOME RATIO................................................................................................29 4.1.2.5 NET INTEREST INCOME RATIO & NET FEE / COMMISSION INCOME RATIO ..................................................................................................................................................30 4.1.2.6 NET OTHER INCOME MARGIN..............................................................................32 4.1.2.7 COST TO INCOME RATIO........................................................................................34 4.1.2.8 ASSEST TURNOVER RATIO....................................................................................37 Table 6 : Sources of Non-Interest Income....................................................................................18 Table 7 : Sources of Interest Expenses.........................................................................................20 Table 8 : Sources of Non-Interest Expenses................................................................................21 Table 9 : Return on Equity...........................................................................................................27 Table 10 : Income & Cost Drivers...............................................................................................29 TABLE OF GRAPHS Graph 1 : Sampath Bank - Asset Composition Chart...................................................................12 Graph 2 : HNB - Asset Composition Chart..................................................................................13 Graph 3 : Deposits – Sampath Bank............................................................................................14 Graph 4 : Deposits – HNB...........................................................................................................15 Graph 5 : Return on Assets Comparison......................................................................................23 Graph 6 : Net Profit Margin/Ratio Comparison...........................................................................28 Graph 7 : DuPont Analysis - HNB – Financial Year 2019..........................................................41 Graph 8: DuPont Analysis - HNB – Financial Year 2018...........................................................41 Graph 9: DuPont Analysis - Sampath Bank – Financial Year 2019............................................42 Graph 10 : DuPont Analysis – Sampath Bank – Financial Year 2018.........................................42 1. INTRODUCTION TO THE INDUSTRY Sri Lanka has a financial system 26 licensed commercial banks, 7 specialized banks, and 43 licensed finance companies (as at 30th June 2019) and lots more other financial intermediaries & regulators like Central Bank of Sri Lanka. In a financial system a commercial bank plays a vital role through its services provide to the public mainly through the deposits and loans granted. The commercial banking sector had a total asset base of Rs. 10,372.4 Billion, total deposits amounting to Rs. Rs.8,492 Billions & total loans advances of Rs. 7,693.4 Billion as at 31st December 2018 (Central Bank Annual Report – 2018, p250 - p253). In terms of the financial performance of the banks, a net interest income of Rs. 397.6 Billion was earned by the banking sector in 2018, which ultimately resulted in a profit after tax amounting to Rs. 125.9 Billion. Any financial intermediary plays a significantly vital role within the financial system. Therefore, the performance of these financial intermediaries is worthy to be analyzed. Hence, this report intends to analyze the performance of two selected licensed commercial banks; Sampath Bank & Hatton National Bank, which both are, listed in the Colombo Stock Exchange. These two banks are similar in terms their operations, assets base, revenue, profits etc. Both the banks have an asset base of nearly Rs.1000Billion and during the most recent financial year (2018) both the banks earned a net profit around Rs.13 Billions. Financial Performance of these two banks for the financial year 2018 & financial year 2017 is analyzed in respect of their financial position, financial performance, liquidity and risk management. 1 Business Model Produ tt Category Table 1 : Product Portfolio of Sampath Bank Sampath Bank follows a customer-focused strategy to serve their 2.9Bn customer base & the, in order to achieve these strategic goals & objectives invest in four main capabilities. 1) People 2) Technology 3) Productivity 4) Financial Strength 5 Current Accounts Savings Accounts Term Deposits Foreign Currency Accounts Loans Leasing Professional Accounts Pawning Branchless Banking Gift Vouchers Sampath Cards Foreign Remittances Relationship Banking Digital/Electronic Banking Safety Lockers Clubs & Societies Accounts Entrepreneurial Development Personal Banking Foreign Currency Accounts Commercial Credit Corporate Credit Corporate Finance Development Banking Money Market Accounts Export House Trade Services Correspondent Bank Corporate Banking Spot Contracts T-Bills T-Bonds Forward Exchange Contracts Repo, Reverse Repo Treasury As a further step towards its eco-friendly, paperless banking process goal Sampath Bank introduced Sampath Slip less Banking in 2018, which allows the customers to carry out transactions without filling any documents. Sampath Bank has its mobile app as well, which was a result of its commitment towards paperless banking. By urging other banks to move with the technology, Sampath Bank accelerating our ongoing investments in technology, they achieved some key milestones in 2019. The launch of wepay mobile wallet is an example that demonstrates our ability to leverage on digital innovation to provide superior customer experience on par with Global Standards. Not only that Sampath Bank has consistently reported the highest currency repatriation volumes among local Banks, Enabling the Bank to claim the No 1 position since its inception. In addition, 2011, Introduced the super branch concept offering 365-days banking. Sampath Bank received the awards of “Best Retail Bank” & “Best Commercial Bank” for the fifth consecutive year at the World Finance Banking Awards organized by UK Based World Finance Magazine. And locally it was recognized as one of the Business Today Top 30 Award & was recognized as one of Sri Lanka’s 10 Most Admired Companies at the Sri Lanka’s 10 Most Admired Companies award organized by International Chamber of Commerce & Chartered Institute of Management Accountants of Sri Lanka. Sampath Bank is the employer of more than 4134 employees and considered to be one of the largest private commercial bank employers. 1.2 HATTON NATIONAL BANK 6 In 2019, team strength in branches 2,883 people 59% of Bank employees, and great place to work, top 25 in Asia Top 10 in Sri Lanka. HNB received Gold Award for best Rural Activation for Brand Awareness at 8th ACEF Asian Leaders forum & awards, India. Banks strategy is directed towards sustainable profits & growth through superior customer satisfaction, digital development & employee satisfaction HNB will focus on product proposition, channel strategies, service excellence, and technology infrastructure under their strategy. HNB’s Fit App, WallyE, Omni Channel Centers, Business Card, Web X-Pay were some innovative products & concepts which HNB introduced in recent years to enhance the customer experience. HNB has its subsidiaries specialized in insurance (HNB Assurance Ltd. & HNB General Insurance Ltd.), Investment Banking (Acuity Partners), financing (HNB Finance), real estate (Sithma Development Pvt. Ltd.). HNB is one of the banks which participates in government-sponsored loan schemes to empower SME sector. HNB participated in Enterprise Sri Lanka program partnering with the Government of Sri Lanka. HNB has a very strong trade service in its business model which has a network of more than 950 correspondent banks all over the world. HNB currently has a workforce of about 4913 of which 43% are females (as at 31st December 2019). 2. FINANCIAL POSITION Commercial banks financial statements are different from other companies. There are several unique characteristics of bank financial statements. Here we aimed at analyzing financial position of commercial banks. The financial position of a bank is crucial since it represents the 9 strength of the bank. A bank’s financial position presents financial information comparing what a bank owns, what it owes and the ownership interest of stockholders. General Bank Asset Categories are as below, Loans Major assets in most banks. They have higher default risk and some are relatively illiquid Investment securities held to earn interest, help meet liquidity needs, taking risk on interest rate movements, meet pledging requirements Non-interest cash and due from banks consist of vault cash deposits held at central bank, deposits held at other financial institutions and cash items in the process of collection Other assets Remaining assets of relatively small magnitudes such as banker’s acceptances, premises and equipment, other real estate owned, and other smaller amounts Table 3 : General Bank Asset Categories 10 Bank liability categories are composed as below; Table 4 : General Bank liability categories Capital represents stockholders equity or ownership interest in the bank. Equity represent, Share Capital, Statutory Reserve Funds, Reserves, and Retained Earnings. 2.1 SAMPATH BANK’S COMPOSITION OF ASSESTS 11 Bank Liabilities Transactions accounts Savings and time deposits Other borrowings Borrowings from banks & debt issued 1,511 0.18% 88,193 9% Other borrowed funds & liabilities 28,276 3.3% 57,146 5.7% Deferred tax liabilities - - 1,381 0.14% Total liabilities 857,344 997,504 Figure 3: Composition of Liabilities In both banks, customer deposit represents the largest percentage of total liabilities hence the main source of interest expense. Furthermore, we can identify the impact of deposits on interest expense by decomposing the banks’ total deposits. 2.4 COMPOSITION OF DEPOSITS Graph 3 : Deposits – Sampath Bank 14 Margin Deposits Certificate of Deposits Term Deposits Saving Deposits Demand Deposits 0 10 20 30 40 50 60 70 10.41 3.64 62.83 30.26 4.89 Sampth Bank Graph 4 : Deposits – HNB According to the above analysis, there is significance difference between Certificate of Deposits and Margin Deposits in banks’ deposits composition. Compared to HNB bank it is derived that Sampath bank keep more Certificate of Deposits and Margin Deposits. This will produce in a high interest for Sampath bank, since both Deposits are earning more interest compare to regular saving account. Term deposits are the main component of customer deposits and it will help to reduce the liquidity issues face by the bank. Compared to Sampath bank it is observed that HNB keep more demand deposits. This will result in a lower interest expense for HNB, since demand deposits do not offer interest. 2.5 SAMPATH BANK’S EQUITY COMPOSITION Equity 2019 Rs 000 2018 Rs 000 Stated capital 47,622,493 32,795,952 Reserves Statutory reserve 4,040,000 3,470,000 Other reserves 47,236,649 42,479,716 15 Margin Deposits Certificate of Deposits Term Deposits Saving Deposits Demand Deposits 0 10 20 30 40 50 60 70 0.18 0.05 64.62 29.01 6.14 HNB Retained earnings 6,106,642 5,643,642 Total equity 105,005,784 84,389,310 Figure 4 : Sampath Bank’s Equity Composition The increase in number of shares during the year due to the new capital infusion and capitalization of the scrip dividend. Net asset value per share too, decreased by Rs 25.15 compared to 2018 and stood at Rs 275.27 due to above noted increase in number of shares. And Scrip Dividend compared to 2018, it is reduced in 2019 respectively Rs 3,9 Mn to Rs 2,7 Mn. The statutory reserve fund is maintained as required by the section 20 (1) of the banking act no: 30 of 1988. A sum of equivalent to not less than 5% of the profit after tax before a dividend is declared or any profits are transferred to elsewhere, should be transferred to above reserve until reserve is equal to 50% of the bank’s stated capital. Thereafter, a further sum equivalent to 2% of such profits should be transferred to the statutory reserve fund until the amount of the said reserve fund is equal to the stated capital of the bank. 2.6 HNB EQUITY COMPOSITION Equity 2019 Rs 000 2018 Rs 000 Stated capital 33,820,905 32,338,026 Statutory reserve fund 7,060,000 6,260,000 Other reserves 68,643,091 61,427,433 16 Rs 000 Rs 000 Interest Income 103,566,877 97,934,195 Fee & Commission income 11,719,108 11,605,802 Net Gain From Trading 2,205,878 (2,332,524) Net Gain From Financial Assets 113,670 74,378 Net Other Operating Income 1,249,016 8,028,400 Figure 6 : Composition of Income – Sampath Bank Sampath Bank has marginal different at Operating Income in respectively both years (42Bn), and they manage to Net Gain from Trading in 2019 compared to previous year. At the same time Sampath Bank maintained 5.3% Growth of Interest income in 2019, which shows Sampath Bank increased the lone facilities to improve the Interest Income. HNB Income 2019 Rs 000 2018 Rs 000 Interest Income 49,213,636 47,579,581 Net Fee & Commission income 8,993,223 9,399,270 Net losses From Trading (2,332,524) (356,594) Net Gain From Financial Assets 187,512 215,551 Net Other Operating Income 3,674,375 3,851,347 Figure 7 : Composition of Income – HNB 19 3.3 SOURCES OF EXPENCES A bank has two main buckets of expenses: Interest expense and Non-interest expense. Interest expense Interest expenses are incurred from deposits, short term and long-term loans and trading account liabilities. Table 7 : Sources of Interest Expenses Non-Interest Expenses A non-interest expense is an operating expense of a bank that is classified separately from interest expense and provision for credit losses. Examples of non-interest expenses are employee salaries, bonuses and benefits, equipment rental or leasing, information technology (IT) cost, rent, telecommunication services, taxes, professional services, marketing and the amortization of intangibles. 20 Sources of Interest Expenses Due to Banks Securities Sold under Repurchase Agreements Due to Depositors Other Borrowings Debt Securities Issued Subordinated Term Debits Table 8 : Sources of Non-Interest Expenses 4. CALCULATION OF FINANCIAL PERFORMANCE RATIOS & PERFORMANCE EVALUATION WITH DUPONT ANALYSIS 4.1 SUMMARY OF RATIOS Financial ratios are a way to measure an institution’s Financial Performance. The following ratios of Sampath Bank compare to HNB over two years of Sampath Bank has been analyzed and interpreted in the section below. TIME SERIES ANALYSIS         21 Sources of Non-Interest Expense Personnel Expenses Securities Sold under Repurchase Agreements Due to Depositors Other Borrowings Debt Securities Issued Subordinated Term Debits Figure 11: Detail Summary of Changes in Total Assets As illustrated in Figure 9 comparative analysis, the return on assets ratio is showing 2.11% & 1.64% respectively in 2018 to 2019 at HNB and Sampath bank is showing 2.01% & 1.61% respectively in 2018 to 2019. Moreover, it can be concluded that both banks are in a same level of in managing/utilizing its total assets to generate profits. The higher the return on assets the better. But compare to previous year (2018) the return on asset ratio has declined by 22% in HNB due to while reporting 4% (39Bn) increase in total assets and 20% (4Bn) decrease in net profit after tax. There is a 20% declined in Sampath bank due to while reporting 5% (48Bn) increase in total assets and 16% (3Bn) decrease in net profit after tax. The major reasons for the above variances can be further drill down as follows, 24 According to the Figure 10, HNB has 4% (4Bn) increase in gross income and total expense has increased by 6% (6Bn) from 2018 to2019. Sampath Bank has 3% (3Bn) increase in gross income and total expense has increased by 4% (4Bn) from 2018 to2019. Further, elastration was given under NET PROFIT RATIO analysis section. According to the Figure 11, as a major highlight in HNB, There is a big increment of 84% (58Bn) in “Financial assets measured at fair value through other comprehensive income” due to the HNB has recognized the fair value & re invested 33.2Bn in Government of Sri Lanka Treasury Bills and Newly Invested 31.3 Bn Government of Sri Lanka Sovereign Bonds - Bank [Annual Report Note 32 (g & h)] from 2018-2019 and recorded a decrease of 7% (11Bn) in “Financial assets measured at amortized cost - debt and other instruments” due to impairment allowance for Sri Lanka sovereign bonds, Quoted debentures and other assets’ amortization charges. Compare to HNB, in Sampath Bank, There is a decrease of 37% (10Bn) in “Financial assets measured at fair value through other comprehensive income” due to the recognized the amortized cost of Government Securities - Treasury Bills (11Bn) and decline market value in quoted equity security (600Mn from ordinary share’s value). Further, there is an increase of 29% (35Bn) in “Financial assets measured at amortized cost - debt and other instruments” due to increase of value by Sri Lankan Rupee 22Bn & Other Currency 13Bn. All the above factors were affected on ROA declining from 2018 to2019 and maintained to a same level in both banks. 4.1.2 RETURN ON EQUITY - DUPONT ANALYSIS & DECOMPOSITION OF ROE 4.1.2.1 DUPONT ANALYSIS DuPont analysis is a widely used decomposition model by practitioners in the finance field to analyze the key drivers of their Return on Equity (ROE). DuPont analysis, which is also referred as, “DuPont Identity, DuPont Equation, DuPont Model, and DuPont Method”, can be used to analyze the fundamental performance of a company. Frank Donaldson Brown (1885 – 1965) who was an employee3 in DuPont de Nemourous Inc in 1912 invented this DuPont equation. Later, in 1920 DuPont Inc. started using this equation, which then became popular in 25 the finance field. DuPont Analysis focuses on analyzing the entities’ performance by focusing on three major financial and performance aspects i.e. operating efficiency, assets utilization efficiency & financial leverage. 4.1.2.2 DECOMPOSITION OF ROE Return on equity measures how efficiently a firm can use its shareholder’s investments in the business to generate profits and grow the company. ROE is a profitability ratio from the investor’s point of view. In other words, this ratio calculates how much money is made based on the investors’ investment in the company, not the company’s investment in assets. Equation 2: Return on Equity 1 Figure 12: Return on Equity Calculation & Comparison According to Figure 12 comparative analysis, ROE of HNB has decreased 13.41% to 11.01% from 2018-2019 and Sampath bank ROE have decreased 14.39% to 10.62% from 2018-2019. There is a declining of ROE in both bank (HNB & Sampath Bank) respectively 18% to 26%. Although ROE is a good measure which shows how much return was generated on the equity holder’s investment it can be further analyzed under DUPONT ANALYSIS to have more insights about the - Operational Efficiency - Assets Utilization Efficiency - Financial Leverage For this purpose, the ROE is decomposed into a set of performance indicators as follows, 26 NET PROFIT (PAT) AVERAGE SHAREHOLDER'S EQUITY RETURN ON EQUITY = 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % PROFIT FOR THE YEAR 14,032,252 15,518,203 -10% 11,150,887 12,142,817 -8% TOTAL EQUITY 127,504,156 115,753,972 10% 105,005,784 84,389,310 24% RETURN ON EQUITY 11.01% 13.41% -18% 10.62% 14.39% -26% HNB SAMPATH 1 Interest income Net Interest Margin Net Income Ratio 2 Interest Expenses 3 Fee and commission income Net Fee & Commission Margin 4 Fee and commission expenses 5 Net Other operating income Net Other operating income Margin 6 Operating expenses Cost to Income Ratio Cost to Income Ratio Table 10 : Income & Cost Drivers Above factors are subject to many changes which happened during the reporting period. Hence Evaluation of performances further to be drill down as follows, 4.1.2.4 NET INCOME RATIO Net income ratio measures the how effective the bank is generating profit on its gross income. Equation 5: Net Income Ratio 29 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % NET INCOME 50,131,767 51,396,734 -2% 42,603,657 42,519,956 0% GROSS INCOME 125,998,086 121,356,089 4% 118,854,549 115,310,251 3% NET INCOME RATIO 39.79% 42.35% -6% 35.85% 36.87% -3% HNB SAMPATH NET PROFIT (PAT) REVENUE/INCOME NET INCOME RATIO = Figure 14 : Net Income Ratio Calculation & comparison According to the above Figure 14 comparative analysis, HNB net income is 39.79% in 2018 and 42.35% out of its gross income. But compare to HNB, Sampath bank net income is 35.85% in 2018 and 36.87% out of its gross income. The HNB net income has decreased by 6% from 2018-2019 and compare to HNB, Sampath bank has only decreased 3% 2018-2019. Compared to HNB, Sampath bank has the lowest declining ratio than HNB. The reason for the variances further explained in below section. 4.1.2.5 NET INTEREST INCOME RATIO & NET FEE / COMMISSION INCOME RATIO Net Interest, Fee & Commission incomes are the main income sources of the both banks. It includes all the interest, Fee & Commission Income & Expenses. Equation 6: Net Interest Margin / Net Interest Income Ratio Figure 15 : Net Interest Margin / Net Interest Income Calculation & Comparison According to Figure 15 comparative analysis, HNB net interest margin is 39.06% in 2018 and 39.21% in 2019 out of its gross income and It has maintained to same level in both years. Sampath bank net interest margin is 34.98% in 2018 and 33.00% in 2019 out of its gross 30 NET INTEREST INCOME REVENUE/INCOME NET INTEREST INCOME RATIO / NET INTEREST MARGIN = 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % NET INTEREST INCOME 49,213,636 47,579,581 3% 41,575,205 38,053,704 9% GROSS INCOME 125,998,086 121,356,089 4% 118,854,549 115,310,251 3% NET INTEREST MARGIN 39.06% 39.21% 0% 34.98% 33.00% 6% HNB SAMPATH income and Compare to HNB, Sampath bank has increased its net interest margin by 6% from 2018-2019. The reason for the variances were given in below section. Equation 7: Net Fee & Commission Ratio Figure 16 : Net Fee & Commission Ratio Calculation & Comparative Analysis According to Figure 16 comparative analysis, HNB net fee & commission margin is 7.14% in 2018 and 7.75% in 2019 from its gross income and Sampath bank net fee & commission margin is 8.44% in 2018 and 8.60% in 2019 from its gross income. Compare to HNB, Sampath bank has the lowest declining in net fee & commission margin by 2% from 2018-2019. The reason for the variances were given in below comparison analysis. 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % Interest income 115,210,769 108,104,923 7% 103,566,877 97,934,195 6% Less : Interest expenses (65,997,133) (60,525,342) 9% (61,991,672) (59,880,491) 4% Net Interest Income 49,213,636 47,579,581 3% 41,575,205 38,053,704 9% Fee & Commission income 9,206,399 9,540,862 -4% 11,719,108 11,605,802 1% Less: Fee & Commission expenses (213,176) (141,592) 51% (1,686,195) (1,686,995) 0% Net Fee & Commission income 8,993,223 9,399,270 -4% 10,032,913 9,918,807 1% Net Interest / Fee & Commission Income 58,206,859 56,978,851 2% 51,608,118 47,972,511 8% HNB SAMPATH Figure 17 : Changes in Net Interest/Fee & Commission Income 31 NET FEE & COMMISSION INCOME REVENUE/INCOME NET FEE & COMMISSION RATIO = 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % FEE & COMMISSION INCOME 8,993,223 9,399,270 -4% 10,032,913 9,918,807 1% GROSS INCOME 125,998,086 121,356,089 4% 118,854,549 115,310,251 3% NET FEE & COMMISSION MARGIN 7.14% 7.75% -8% 8.44% 8.60% -2% HNB SAMPATH Figure 19 : Detail Changes in Net Other Operating Income According to the above Figure 19 comparative analysis, The HNB total net other operating income has decreased by 45% from 2018-2019 due to having loss on revaluation of foreign currency derivatives with other banks (3.7Bn) and other operating income decrease by 5% due to Foreign exchange loss. Compared to HNB, Sampath bank has the highest total net other operating income decrease by 65% from 2018-2019 due to huge Impairment charge for loans and other losses of 12.5Bn and the increment by 12% in 2019 compare to 2018. Further, there are increments of forward exchange contract revaluation gain (1.9Bn) in 2019 on interbank financial assets measured at fair value through profit or loss as compared to the previous year it stated as a loss 2.2Bn. As well in 2018 there was a huge foreign exchange of 8.1Bn and 2019 it shows only 549Mn. 4.1.2.7 COST TO INCOME RATIO Cost to income ratio measures bank’s performance where bank’s operating expenses are expressed as a percentage of gross income. Lower the ratio better is the performance. The operating expenses includes, - Personnel expenses (Salaries and bonus, terminal benefit charges and other related expenses) - Other all expenses incurred in the running of the business and maintaining the property, plant, and equipment (Office administration and establishment expenses, Advertising and 34 related expenses, Business promotion and product expenses, depreciation, and amortization, other overhead expenses & Etc.) Equation 9: Cost to Income Ratio Figure 20 : Cost to Income Calculation & Comparative Analysis According to the Figure 20 comparative analysis, HNB cost to income ratio has increased by 4% from 2018-2019 and compare to HNB, Sampath bank cost to income ratio has increased by only 2% from 2018-2019. The reason for the variances were given in below comparison analysis. 35 TOTAL OPERATING EXPENSES REVENUE/INCOME COST TO INCOME RATIO = 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % TOTAL OPERATING EXPENSES 23,758,237 22,075,966 8% 20,365,768 19,306,916 5% GROSS INCOME 125,998,086 121,356,089 4% 118,854,549 115,310,251 3% COST TO INCOME RATIO 18.86% 18.19% 4% 17.14% 16.74% 2% HNB SAMPATH 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % Personnel expenses 11,444,259 10,717,978 7% 9,718,692 8,836,372 10% Directors’ emoluments 109,126 85,187 28% 82,852 64,398 29% Auditors’ remuneration 27,841 22,156 26% 36,087 28,156 28% Professional & Legal Expenses 97,497 79,780 22% 148,702 120,395 24% Deposit insurance premium 730,121 692,980 5% 640,145 606,197 6% Donations 6,551 14,258 -54% 466 3,838 -88% Other Operating Lease Expense - - - 89,557 1,198,933 -93% Office administration and establishment expenses 6,315,511 6,576,184 -4% 3,578,849 3,448,844 4% Depreciation and amortisation 2,246,114 1,354,762 66% 2,434,058 1,099,898 121% Other Expenses (Advertising, Promotion & Other Overhead Expenses) 2,781,217 2,532,681 10% 3,636,360 3,899,885 -7% Total Other Expenses 12,313,978 11,357,988 8% 10,647,076 10,470,544 2% TOTAL OPERATING EXPENSES 23,758,237 22,075,966 8% 20,365,768 19,306,916 5% HNB SAMPATH Figure 21 : Detail Changes in Operating Expenses & Comparative Analysis According to the Figure 25 comparative analysis, HNB shows the highest increment of operating expenses by 8% from 2018-2019 and Sampath bank has an increment of operating expenses by 5% in 2018-2019. Compared to HNB, Sampath bank has an increment of personnel expenses (Salaries, Wages & employment benefits) by 10% and HNB shows the lowest 7%. Compared to HNB (8%), Sampath Bank has the lowest increment (2%) on the Other Expenses, Out of that Sampath bank has managed to reduce their operating lease expenses by 93% and the value is 1.1Bn. HNB has incurred 6.3Bn with 4% decrease from 2018-2019 on Office administration and establishment expenses and Sampath bank has increased by 4% from 2018-209 and incurred 3.5Bn on the same. Sampath bank has a huge increment in depreciation & amortization cost by 121% (130Mn) and HNB has an increment by only 66% (261Mn). HNB has an increment in Advertising, Promotion & Other Overhead Expenses by 10% (249Mn). Compare to HNB, Sampath bank has a decrease on same by 7% (263Mn) 36 2019 2018 2019 2018 NET PROFIT RATIO (%) 11.14% 12.79% 9.38% 10.53% NET INCOME RATIO (%) 39.79% 42.35% 35.85% 36.87% NET INTEREST MARGIN (%) 39.06% 39.21% 34.98% 33.00% NET FEE & COMMISSION MARGIN (%) 7.14% 7.75% 8.44% 8.60% NET OTHER INCOME MARGIN 6.41% 4.60% 7.58% 4.73% COST TO INCOME RATIO (%) 18.86% 18.19% 17.14% 16.74% HNB SAMPATH PROFITABILITY RATIOS Sampath bank’s other assets has increased by 23% (2.2Bn) in 2019 compare to HNB has decreased by 11% (1.6Bn) in 2019 on same such as Deposits and expenses prepayments, Reimbursement under special senior citizen deposit scheme, staff loans, Other debtors & other etc. Sampath bank’s deferred tax assets has increased drastically by 278% (2.7Bn) in 2019, compare to HNB has not any deferred tax assets in the company books. The above reasons were mainly affected to increase in Sampath bank’s total assets base. Even through there is an increase of 10% compare to 2018, Sampath bank has decrease in asset turnover ratio 0.1349 to 0.1267 from 2018-2019. But compare to HNB, Sampath Bank has managed its use of assets efficiently to generate revenue than the HNB from 2018-2019  FINANCIAL LEVERAGE 4.1.2.9 EQUITY MULTIPLIER Equity multiplier is a leverage ratio that measures the portion of the bank’s assets that are financed by equity. The equity multiplier is also used to indicate the level of debt financing that the bank has used to acquire assets and maintain operations. A high multiplier indicates that a significant portion of the bank’s assets are financed by debt, while a low multiplier shows that either the bank is unable to obtain debt from lenders or the management is avoiding the use of debt to purchase assets. Equation 11: Equity Multiplier Figure 25: Equity Multiplier Calculation and Comparative Analysis According to Figure 25 comparative analysis, HNB’s equity multiplier shows 8.82 in 2018 & 8.67 in 2019. There is a decrease of ratio by 2% from 2018-2019. Whereas Sampath bank’s equity multiplier shows 10.13 in 2018 & 8.94 in 2019. There is a decrease of ratio by 12% from 2018-2019. Compare to HNB, Sampath bank’s total equity has increased by 24% (20.6Bn) in 2019 and Compare to HNB Sampath bank use its shareholder’s equity to do financing over its assets. Further, elastration is given in below. 39 TOTAL AVERAGE ASSETS TOTAL EQUITY EQUITY MULTIPLIER = 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % EQUITY Stated capital 33,820,905 32,338,026 5% 47,622,493 32,795,952 45% Statutory reserve fund 7,060,000 6,260,000 13% 4,040,000 3,470,000 16% Retained earnings 17,980,160 15,728,513 14% 6,106,642 5,643,642 8% Other reserves 68,643,091 61,427,433 12% 47,236,649 42,479,716 11% TOTAL SHAREHOLDERS’ EQUITY 127,504,156 115,753,972 10% 105,005,784 84,389,310 24% Non-controlling interests - - - - - - TOTAL EQUITY 127,504,156 115,753,972 10% 105,005,784 84,389,310 24% HNB SAMPATH 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % TOTAL AVERAGE ASSETS 1,105,748,912 1,020,683,629 8% 938,287,715 854,663,466 10% TOTAL EQUITY 127,504,156 115,753,972 10% 105,005,784 84,389,310 24% EQUITY MULTIPIER 8.67 8.82 -2% 8.94 10.13 -12% HNB SAMPATH Figure 26: Changes in Equity & Comparative Analysis According to Figure 26 comparative analysis, Compare to HNB, Sampath bank’s Stated capital has increased by 45% (14.8Bn) in 2019 due to the Sampath bank has done a Share right issue in 2019. Its total value is 12.1Bn over 89,006,863 number of shares & issued 11,548,874 number of shares through scrip dividend for 2018/2017 and the value is 2.7Bn. HNB has only issued 292,571 number of shares through scrip dividend for 2018/2017 and the value is 1.1Bn. Compare to HNB Sampath bank use its shareholder’s equity to do financing over its assets. 4.1.2.10 SUMMARY OF ROE UNDER DUPONT ANALYSIS As per the above ROE comparison of Sampath bank compare to HNB under DuPont Analysis can be summarize as per Figure 20, Graph 3 - 6 in below, Figure 27: Summary of ROE under DuPont Analysis  DuPont Analysis – HNB - Financial Year 2019 40 RETURN ON EQITY (ROE) 11.01% NET PROFIT RATIO 11.14% NET INCOME RATIO 39.79% NET INTEREST MARGIN 39.06% NET FEE & COMMISSION MARGIN 7.14% NET OTHER INCOME MARGIN 6.41% COST TO INCOME RATIO 18.86% ASSET TURNOVER RATIO 11.39% EQUITY MULTIPLIER 8.67 2019 2018 CHANGE 2019 2018 CHANGE Rs '000 Rs '000 % Rs '000 Rs '000 % NET PROFIT MARGIN/RATIO 0.1114 0.1279 -13% 0.0938 0.1053 -11% ASSET TURNOVER RATIO 0.1139 0.1189 -4% 0.1267 0.1349 -6% EQUITY MULTIPIER 8.6723 8.8177 -2% 8.9356 10.1276 -12% RETURN ON EQUITY 11.01% 13.41% -18% 10.62% 14.39% -26% HNB SAMPATH Graph 7 : DuPont Analysis - HNB – Financial Year 2019  DuPont Analysis – HNB - Financial Year 2018 Graph 8: DuPont Analysis - HNB – Financial Year 2018  DuPont Analysis – Sampath Bank - Financial Year 2019 41 RETURN ON EQITY (ROE) 11.01% NET PROFIT RATIO 11.14% NET INCOME RATIO 39.79% NET INTEREST MARGIN 39.06% NET FEE & COMMISSION MARGIN 7.14% NET OTHER INCOME MARGIN 6.41% COST TO INCOME RATIO 18.86% ASSET TURNOVER RATIO 11.39% EQUITY MULTIPLIER 8.67 RETURN ON EQITY (ROE) 13.41% NET PROFIT RATIO 12.79% NET INCOME RATIO 42.35% NET INTEREST MARGIN 39.21% NET FEE & COMMISSION MARGIN 7.75% NET OTHER INCOME MARGIN 6.60% COST TO INCOME RATIO 18.19% ASSET TURNOVER RATIO 11.89% EQUITY MULTIPLIER 8.82 RETURN ON EQITY (ROE) 10.62% NET PROFIT RATIO 9.38% NET INCOME RATIO 35.85% NET INTEREST MARGIN 34.98% NET FEE & COMMISSION MARGIN 8.44% NET OTHER INCOME MARGIN 7.58% COST TO INCOME RATIO 17.14% ASSET TURNOVER RATIO 12.67% EQUITY MULTIPLIER 8.94 - Hence, by considering industry future risk on the market Sampath Bank & HNB should be more focused on their fee & commission expense management practices. During this period, Sampath bank total net other loss margin has increase from 4.73% - 7.58% 2018-2019 by 60%. But HNB total net other loss margin has increase from 4.6% - 6.41 2018- 2019 by 39%. This is mainly due to having loss on revaluation of foreign currency derivatives & Foreign exchange loss due to Impairment charge for loans. - Hence both banks have to more concern and make strict policies about the foreign currency practices and transactions. The impact of the slow growth in world economy and the condition prevailed in Sri Lankan economy can possibly reasons for this increase and the political crisis took place at the latter part of the financial year causing a downturn in the economy would be a reason for this. As per DuPont analysis on Equity Multiplier, it is stated that Sampath bank’s equity multiplier shows 10.13 in 2018 & 8.94 in 2019 whereas HNB’s equity multiplier shows 8.82 in 2018 & 8.67 in 2019.While HNB is recording decrease of ratio by 12%. Compare to HNB, Sampath bank’s total equity has increased by 24% (20.6Bn) in 2019. This is mainly due to, - Increase in Stated capital doing Share right issue 89,006,863 number of shares @ value of 12.1Bn. - Issued 11,548,874 number of shares through scrip dividend for 2018/2017 and the value is 2.7Bn. As it is stated that Sampath bank is using its shareholder’s equity to do financing over its assets. As generally this is good indicator, since using debt equity would make it a potentially risky investment, due to its high financial leverage, the growth prospects might be enticing. But low equity multiplier reveals a company that is mostly funded by stockholders and that the debt financing is low making it a fairly conservative investment. The flip side is that its growth prospects might not be too high given its low financial leverage. Hence, the ideal method would be to balance both equity and debt so that it can outperform its peers. Market consensus, though it can vary by sectors and industries, is that an equity multiplier of 2:1 is an optimal balance of debt and equity for a company to finance its assets. So, the both banks should be practiced the industry average by analyzing market and economic risk & constrains. 6. REFERENCES About Us. (2020, May 01). Retrieved from Sampath Bank: https://www.sampath.lk/en/ 44 Bank, H. N. (2020, April 26). About Us. Retrieved from HNB: https://www.hnb.net/ CSE. (2018-2019). Retrieved from Quaterly data- Sampath Bank PLC: https://www.cse.lk/home/company-info/SAMP.N0000/financial CSE. (2018-2019). Retrieved from Quaterly data- HNB: https://www.cse.lk/home/company- info/HNB.N0000/financial CSE. (2018-2019). Retrieved from Press Releases- HNB: https://www.cse.lk/home/company- info/HNB.N0000/financial CSE. (2018-2019). Retrieved from Press Releases- Sampath: https://www.cse.lk/home/company-info/SAMP.N0000/financial PLC, H. N. (2018-2019). Annual Report . PLC, S. B. (2018-2019). Annual Report . 45