Fin320 Personal Finance Course Assessment Answers

Overview of bank and services provided by it

First ABU Dhabi Bank offers different services associated with financial and banking services and products in UAE and international market. It offers savings, current and margin accounts, time and notice deposits and deposits certifications. Further, it offers trade, term, real estate, personal, mortgage, and loans for vehicle financing. Apart from that it is engaged in securities and shares business, insurance activities and fund managements. Further, it is also engaged in brokerages, leases, managing of real estate properties and providing information technology related services. It was established in the year 1979 and has it’s headquarter in Abu Dhabi. It provides wide range of the tailor made solutions, services and products. Further, through the strategic offerings the bank meets the banking requirements of the customers all over the world through investment banking, market leading corporate and franchises of personal banking (First Abu Dhabi Bank, 2018).

Overview of balance sheet and income statement

Balance sheet of First ABU Dhabi Bank is segregated into 3 sections. 1^st section represents all the assets headed by the term ‘Total assets’. From the annual report of the bank as at 31^st December 2017 it can be identified that the amount of total assets is AED 668,968,295 thousands (Busch & Memmel, 2017). Total asset component is comprised of liabilities and equities. Liabilities amounted to AED 566,758,882 thousand whereas total equity amount for the same period was AED 102,209,419 thousands. The value has been significantly similar when assessed with the last ten years.

Income statement of the bank represented details regarding the interest expenses as well as interest income. It is found from the income statement of the bank for the year ended 31^st December 2017 that the net interest income amounted to AED 11,396,193 thousands. Operating income of the bank amounted to AED 16,380,457 thousands. Profit for the year after tax expenses amounted to AED 91,67,255 thousands. When the performance of the bank is assessed for the past 10 years, it is seen that the performance of the company has not been that much effective.  

Analysis of components

Balance sheet component –

It can be identified that major part of the assets that is 84.72% of the bank has been raised through borrowing.  On the other hand, only 15.28% of the assets have been raised through owner’s fund. Therefore, it can be stated that the company is highly leverage and a bug portion of bank’s income will be spend for meeting liabilities. Further, high level of borrowing indicates that the bank is financially unstable (Kamar, 2017). It is even seen that by looking into the financial report of the bank for the past ten years, the performance has lowered and this has been found by assessing the financial statements. The financial instability of the bank increases their extent of liability and thereby reduces their image.  

Income statement component –

It can be identified from that net interest income of the company was 1.70% of total assets. Further, the operating income is 2.45% of total assets, profit before tax is 1.40% of total asset and profit after tax or return on assets of the company is 1.37%. Return on assets that indicates the profitability of the bank with regard to the total assets of the company is revealing that the bank is able to generate income from its assets. Hence, the bank is profitable (Al Nimer, Warrad & Al Omari, 2015). The assessment of the income statement for the last ten years shows that the bank has been profitable like the current time period as the bank has been able to generate income with the help of their available assets.  

Measurement and evaluation of performance

It can be stated that the net interest margin of the company over the last 10 years period are majorly in decreasing trend and ranged between 0.071 and 0.727. From 2008 to 2009 it increased from 0.369 to 0.727, however, since then it is in reducing trend and reached to 0.071 in 2016 (Wani, Haque & Raina, 2019). The non-interest margin of the bank followed the same trend and reduced to 0.039 in 2017 from 0.442 in 2009. Bank has been deteriorated in terms of providing return on shareholder’s fund (Heikal, Khaddafi & Ummah, 2014). It has been reduced to 0.118 in 2017 from 0.224 in the year 2008. PLL to total loan ratio of the bank also increased to 0.038 in 2017 from 0.007 in 2013. It states that the company is increasing its provision towards provision for loan losses as against the total amount of loans over the last 10 years. ALL to total loan ratio of the bank also increased for the bank keeping the pace with PLL. It has been increased to 0.044 in 2017 from 0.039 in the year 2013. It states that the company is increasing its allowance towards provision for loan losses as against the total amount of loans over the last 5 years.

Comparison with HSBC

It can be stated that net interest margin of as well as non-interest margin of HSBC is better as compared to First ABU Dhabi Bank. However, return on equity for First ABU Dhabi Bank is slightly better as compared to HSBC. ROA for both the banks are same. Equity multiplier that indicates that financial leverage of the bank indicates that the First ABU Dhabi Bank has higher EM as compared to HSBC. It reveals that First ABU Dhabi Bank is highly leveraged as compared to HSBC (Hsbc.ae, 2018). Provision and allowance both as compared to total loans of First ABU Dhabi Bank is higher as compared to HSBC. However, both the banks did not have any non performing loans for last 5 years.

Standard deviation of First ABU Dhabi Bank

Standard deviation is the statistic measure used for measuring the dispersion of dataset as compared to the means and is computed through square root of variance. From it can be found that Standard deviation for ROE as well as ROA is moderate and that indicates the data dispersion is low. However, in case of EM the data dispersion is high as the EM is 1.837.

Return on assets (ROA)

It indicates the profitability of the company as compared to total assets of the company. It reveals the efficiency of the company with regard to management of the assets. In other words, it measures total income that is produced by the bank’s total assets during the period under consideration. In case of First ABU Dhabi Bank it can be stated that ROA of 1.40% indicates that for each dollar of asset it earns 0.14 dollar of income that is quite low (Anugrah & Syaichu, 2017).

Reference 

Al Nimer, M., Warrad, L., & Al Omari, R. (2015). The impact of liquidity on Jordanian banks profitability through return on assets. European Journal of Business and Management, 7(7), 229-232.

Anugrah, A., & Syaichu, M. (2017). Analisis Pengaruh Return On Equity, Debt To Equity Ratio, Current Ratio, Dan Price To Book Value Terhadap Return Saham Syariah (Studi Kasus Pada Perusahaan yang Terdaftar Dalam Jakarta Islamic Index Periode 2011-2015)(Doctoral dissertation, Fakultas Ekonomika dan Bisnis).

Busch, R., & Memmel, C. (2017). Banks' net interest margin and the level of interest rates. Credit and Capital Markets–Kredit und Kapital, 50(3), 363-392.

First Abu Dhabi Bank, U. (2018). [online] First Abu Dhabi Bank, UAE. Retrieved 22 October 2018, from https://www.bankfab.ae/

Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.

Hsbc.ae. (2018). Personal banking - Banks in UAE | HSBC UAE . [online] Retrieved 22 October 2018, from https://www.hsbc.ae/1/2/

Kamar, K. (2017). Analysis of The Effect of Return on Equity (ROE) and Debt to Equity Ratio (DER) on Stock Price on Cement Industry Listed in Indonesia Stock Exchange (IDX) in The Year of 2011-2015. IOSR Journal Of Business and Management, 19(5), 66-76.

Wani, A. A., Haque, S. I., & Raina, S. H. (2019). Impact of Macroeconomic and Bank-Specific Indicators on Net Interest Margin: An Empirical Analysis. In Understanding the Role of Business Analytics (pp. 45-64). Springer, Singapore.