Transcript Shahul Hameed bin Mohamed Ibrahim  Definition of performance analysis  Financial and non financial performance analysis  Requirements for performance analysis  Financial Analysis    Liquidity and.

Shahul Hameed bin Mohamed Ibrahim
 Definition
of performance analysis
 Financial and non financial performance
analysis
 Requirements for performance analysis
 Financial Analysis
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Liquidity and profitability
NPL and NPF ratios
CAR
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Financial analysis refers to an assessment of the viability,
stability and profitability of a business, sub-business or project.
It is performed by professionals who prepare reports using ratios
that make use of information taken from financial statements
and other reports. These reports are usually presented to top
management as one of their bases in making business decisions.
Based on these reports, management may:
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Continue or discontinue its main operation or part of its business;
Acquire or rent/lease certain machineries and equipments in the
production of its goods;
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Issue stocks or negotiate for a bank loan to increase its working
capital.
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Make decisions regarding investing or lending capital
other decisions that allow management to make an informed
selection on various alternatives in the conduct of its business.
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Financial analysts often assess the firm's:
1. Profitability- its ability to earn income and sustain growth in
both short-term and long-term. A company's degree of
profitability is usually based on the income statement, which
reports on the company's results of operations;
2. Solvency- its ability to pay its obligation to creditors and other
third parties in the long-term;
3. Liquidity- its ability to maintain positive cash flow, while
satisfying immediate obligations;
Both 2 and 3 are based on the company's balance sheet, which
indicates the financial condition of a business as of a given point
in time.
4. Stability- the firm's ability to remain in business in the long
run, without having to sustain significant losses in the conduct of
its business. Assessing a company's stability requires the use of
both the income statement and the balance sheet, as well as
other financial and non-financial indicators.
Social, environmental and shariah goals in case of islamic
institutions
 Evaluation
refers to making an assessment of
achievement as opposed to objectives,
targets, goals or other criteria
 Criteria could be :
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Budgets and strategic plans
Other firms in the same industry
Past years performance
Social, environmental and shariah goals
(maqasid)
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Financial analysts often compare financial ratios (of
solvency, profitability, growth...):
Past Performance: Across historical time periods for
the same firm (the last 5 years for example),
This is known as a time series
Future Performance: Using historical figures and
certain mathematical and statistical techniques,
including present and future values, This
extrapolation method is the main source of errors in
financial analysis as past statistics can be poor
predictors of future prospects.
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Business and strategic plans
Comparative Performance: Comparison between
similar firms. Cross sectional i.e same time period
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These ratios are calculated by dividing a (group of) account balance(s), taken from
the balance sheet and / or the income statement, by another, for example :
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Net profit / equity = return on equity Gross profit / balance sheet total = return on
assets Stock price / earnings per share = P/E-ratio Comparing financial ratios are
merely one way of conducting financial analysis. Financial ratios face several
theoretical challenges:
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They say little about the firm's prospects in an absolute sense. Their insights about
relative performance require a reference point from other time periods or similar
firms.
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One ratio holds little meaning. As indicators, ratios can be logically interpreted in at
least two ways. One can partially overcome this problem by combining several
related ratios to paint a more comprehensive picture of the firm's performance.
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Seasonal factors may prevent year-end values from being representative. A ratio's
values may be distorted as account balances change from the beginning to the end
of an accounting period. Use average values for such accounts whenever possible.
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Financial ratios are no more objective than the accounting methods employed.
Changes in accounting policies or choices can yield drastically different ratio values.
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They fail to account for exogenous factors like investor behavior that are not based
upon economic fundamentals of the firm or the general economy (fundamental
analysis)
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Fundamental analysis of a business involves
analyzing its financial statements and health, its
management and competitive advantages, and its
competitors and markets. The term is used to
distinguish such analysis from other types of
investment analysis, such as quantitative analysis and
technical analysis.
Fundamental analysis is performed on historical and
present data, but with the goal of making financial
forecasts. There are several possible objectives:
to conduct a company stock valuation and predict its
probable price evolution,
to make a projection on its business performance,
to evaluate its management and make internal
business decisions,
to calculate its credit risk.
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The analysis of a business' health starts with financial
statement analysis that includes ratios. It looks at
dividends paid, operating cash flow, new equity issues and
capital financing. The earnings estimates and growth rate
projections published widely by Thomson Reuters and
others can be considered either 'fundamental' (they are
facts) or 'technical' (they are investor sentiment) based on
your perception of their validity.
The determined growth rates (of income and cash) and risk
levels (to determine the discount rate) are used in various
valuation models. The foremost is the discounted cash flow
model, which calculates the present value of the future
dividends received by the investor, along with the eventual
sale price. (Gordon model)
earnings of the company, or
cash flows of the company.
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The amount of debt is also a major consideration in determining a
company's health. It can be quickly assessed using the debt to equity
ratio and the current ratio (current assets/current liabilities).
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The simple model commonly used is the Price/Earnings ratio. Implicit in
this model of a perpetual annuity (Time value of money) is that the 'flip'
of the P/E is the discount rate appropriate to the risk of the business.
The multiple accepted is adjusted for expected growth (that is not built
into the model).
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Growth estimates are incorporated into the PEG ratio but the math does
not hold up to analysis.[neutrality disputed] Its validity depends on the length
of time you think the growth will cont]inue.
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Computer modelling of stock prices has now replaced much of the
subjective interpretation of fundamental data (along with technical data)
in the industry. Since about year 2000, with the power of computers to
crunch vast quantities of data, a new career has been invented. At some
funds (called Quant Funds) the manager's decisions have been replaced
by proprietary mathematical models.[2
 Efficiency
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and productivity indicators
Operating expenses ratio (oe/average portfolios.
Portfolio yield ( (financial income/average
portfolio
Cost per client (operating expenses/number of
clients
Cost per unit of capital allocated (operating
expenses/value of financing)
Staff ratios (active
clients/officers;financing/officer
Client retention: number of new clients, number
of clients lost, client turnover, average number
of clients trend
Asset size
 Financing
asset productivity
Financing income/category of financing
 Deposits
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Return on deposits= net operating income/ave
deposits
 Capital
and capital adequacy
 Financing provisions/loan losses
 Profit margins
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Net operating income/total revenue
 Sustainability
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Operating revenue/operating expenses
 Portfolio
(financing) quality indicators (credit
risk)
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Non performing financing/non current financing
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Non accrual financing= 90days past due/total financing
Past due financing/total financing
Allowance for non financing and lease losses/noncurrent financing (one to one or 100%)
Portfolio at risk (PAR)- considering the
percentage of financing at risk when even when
it is one day late.
Delinquency – 30, days, 60 days , trend
Write offs% (/average portfolio)
Financing loss reserve based on risk
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E.g 30 days -10%, 100 days 75%.
 GROWTH
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AND OUTREACH INDICATORS
% growth = final amount - initial amount/initial
amount
Number of clients in each category e.g. Gender,
rural/urban etc.
 ASSET
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LIABILITY MANAGEMENT
PROFIT RATE MANAGEMENT
ASSET MANAGEMENT
LIQUIDITY MANAGEMENT
LEVERAGE
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Non current financing/total financing
LEVERAGE RATIO
ASSET PRODUCTIVITY
MATURITY GAP = DIVIDE ALL ASSET and LIABILITIES IN
CATEGORIES OF MATURITIES to compare av maturities
of assets with av maturies of liabilities.
FOREIGN CURRENCY GAP (fx assets/fx liabilites)
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CAPITAL ADEQUACY (leverage ratio)
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Tier 1 capital/average assets
Sum of commone equity including surplus and
retained earnings, qualifying non cumulative
prepetual preferred stocks and MI
Serves as protection to depositors
Otherwise depositors will be paid out of PDRM if
any
Are these necessary of IAH?
 EARNINGS
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PERFORMANCE
NET INCOME TO AVERAGE ASSETS
PROVISION FOR FINANCING LOSSES TO AVG ASSETS
NET REALISED GAINS TO AVG ASSETS
NON CURRENT FINANCING TO TOTAL FINANCING
 Non
performing financing /total financing
 Profit attributable to depositors/investment
account deposits (return on investment
account deposits)
 Profit attributable to IAH/IAH funds invested
 Profit attributable to RIAH/Avg. RIAH
Deposits
 Net income from RIAH funds/RIAH/Avg. RIAH
Deposits
 % or RIAH funds invested
 % of IAH funds invested
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Islamic banks are sociao-economic institutions
not capitalist profit making institutions
Need to measure non financial and socioeconomic performance based on Maqasid shariah
Need to calculate islamicity ratios based on
Maqasid shariah
Maqasid shariah objectives are:
 Tahdhib
al-Fard (Educating the individual)
 Iqamah al-`Adl (Establishing justice)
 Jalb al-Maslahah (Promoting Welfare)
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Educating bank personnel :
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Customer service and retention
Product knowledge
Customer care especially retirees/small business/old people
and poorer sections of society
Shariah aspects of products
Good Muslim – ibadat and respon to Allah
Punctuality, cleanliness, friendliness, efficiency, effectiveness
Educating public (customers)
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Avoidance of riba,gharar and maysir in financial products
Awareness of the risks and rewards of islamic financial
products
R1. Education grant/total income
R2.Research expense/total expense
R3.Training Expense/total expense
R4.Publicity expense/total expense
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terms of promoting socio-economic justice
Financing of small businesses
Promotion of small and medium cost house financing
Education financing on favorable terms.
Provision of risk sharing products ie. Musharaka and
mudharaba as opposed to fixed income products i.e
murabaha and ijarah
Reduction of controversial products eg. BBA, tawarruq
Qardal hasan financing for education, marriage etc.
Contribution to charitable and social causes
Payment of zakat
 Risk
sharing financing/fixed income financing
 Zakat/share
 Zakat/Investment Account Deposit
 Charitable contributions/net income
 Qard financing/total financing
 Education financing/total financing
 Medium and low cost house financing/total
house
 Prohibited income/total income
 Tawid and penalty income/total income