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Opinion Vol. 2, No. 2, December 2012

Portfolio structure & PerformanceA study on Selected Financial Organization in Sri Lanka
Pratheepkanth. P* Dr. T. Velnampy**

ABSTRACT
The main objective of the study is to identify the impact of Portfolio structure on Performance, In the present study, Portfolio structure [i.e., Income from Deposit, Income from pawning, Income from loan as independent variable and Performance (i.e., Net Profit, Return on Capital Employed (ROCE) and Return on Equity (ROE)] as the dependent variable are considered. In order to select the sample, convenience sampling techniques method is used. The study suitably used both secondary data. Operational hypotheses are formulated, results revealed that Portfolio system has a positive association with Performance. Further, Portfolio structure is enhanced by Income from Deposit, Income from pawning, Income from loan in the selected financial institutions where the beneficial impacts are observed on Performance. Therefore, they have to pay more attention for tuning Portfolio structure techniques. This study would hopefully benefit the academicians, researchers, policy-makers and practitioners of Sri Lanka and other similar

countries through exploring the impact of Portfolio structure on profitability, and pursuing policy to improve the current status of it. Keywords: Portfolio structure, Performance, Financial Organization

I. BACKGROUND AND SIGNIFICANCE

The banking sector has become extremely competitive powerful industry in the world today. There are so many different banks are functional for their business. Such as commercial banks, saving banks, development banks etc.. The Commercial banks which are large sub sector in the financial market. These banks are providing various services to the people, and to economic development. In order to provide various service to economic development, bank should concern its financial system, loan system, information system so and so, In which that the portfolio system is very important aspects to the bank to perform their business efficiently, and also to compete with competitors in the world. The portfolio system defines capital arrangements Any banking institution care operated their business process for aim of profit. So the profitability of every banking

*Lecturer, ** Professor Faculty of Management Studies & Commerce, University of Jaffna, Sri Lanka.

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institution is dependent on its total advances portfolio. Power evaluation of this portfolio has made banks vulnerable to rise in non performing advances which is turn has led to liquidity problem effecting profitability. The survival of a firms depends very much on its ability to generate returns from its investments (Mustapha & Mooi, 2001). Capital expenditures required in investment normally involve large sums of money and the benefits of the expenditures may extend over the future. Utilizing a systematic capital budgeting process would enhance capital expenditures decisions (Mustapha & Mooi, 2001). Now a day investments of Financial Institutions are considered as a very important aspects of the development of any country. It is and investment only the main profit of such banks depends. In conformity to this principal analysis on port folio management of Financial Institutions is launched. The main motive behind this survey is to analysis the organized and arranged methodology adapted to the achieve development, profit and reduce the risk and manage the risk. After the ending of the 30 years continuous domestic war Sri Lankan companies are entering into a new era, especially in the North East part of Sri Lanka is needed to develop infrastructural facilities. For the long term financial management development Portfolio analysis will be life blood of the development of the companies. Therefore this study is very needed for the Financial Intuitions

RQ 1- Why there is disproportion of the portfolio structure of bank continuously for the recent fast?

III. LITERATURE REVIEW

A review of the risk management literature indicates that both the definition of risk and also our understanding of the term risk management have evolved over time. Spira and Page (2003) chart in some detail the evolution of risk definitions from the pre-seventeenth century onwards. In pre-rationalism times risk was seen as a consequence of natural causes that could not be anticipated or managed, but with more modern, scientific based thinking there emerged a view that risk was both quantifiable and manageable via the judicious use of avoidance and protection strategies. Risk management became institutionalized with the application of science (Beck, 1998) and in the process the public were led to expect risks to be managed. As a consequence, risk management led to some diffusion of responsibility for the adverse effects of risk whilst the notion of accountability required some demonstration of risk management effort (Spira and Page, 2003) Roland Robinsons(1962) insightful analysis is an excellent example of the traditional banking approach. Robinson sought to describe methods of achieving the most profitable employment of commercial bank finds consistent with safety. For him, there methods essentially consist of setting and following a hierarchy of priorities in the employment of bank funds. The priorities in decending order are legally required reserves,secondary reserves, customer credit demands and open market investment for income. Bank Performance and Credit risk management (Takang Felix Achou, Ntui Claudine Tenguh,2008). The axle of this study is to have a clearer picture of how banks manage their credit risk. This leads to conclude that banks with good credit risk management policies have a lower loan default rate and relatively higher interest income. This thesis takes a fast look on Banking and Credit risk management and further probes into bank risk exposure, assessment, management and control. An attempt will be made to unfold the use of
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II. STATEMENT OF THE PROBLEM

According to financial theory, the objective of the firm is to maximize the wealth of its shareholders. The optimal investment decision is hence the one that maximizes the present value of shareholders wealth (Copeland ,Thoman & Weston, 1992). Sophisticated Portfolio procedures can under the assumption of economic rationality all be regarded as means, which a firm uses in order to fulfill its objective, i.e., to maximize shareholders wealth. This fact indicates that firms can increase or even maximize its shareholder wealth by using sophisticated Portfolio system analysis
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Opinion Vol. 2, No. 2, December 2012

some risk management, evaluation and assessment tools, models, and techniques. Bank Portfolio Model and Monetary Policy in Indonesia (Doddy Zulverdi, Iman Gunadi, and Bambang Pramono, August 2006) This paper analyzes the banks behavior in selecting its portfolio composition and its impact on the effectiveness of monetary policy transmission process in Indonesia. they employ an analytical model of the banking portfolio behavior based on microeconomic theory to understand how banks portfolio behavior in maximizing its profit links to the efficacy of monetary policy. This study finds that micro banking condition and prudential regulation affects the effectiveness of monetary policy. This study also finds structural changes in banks and borrowers have altered the smoothness and effectiveness of monetary policy to encourage the economic growth and hindered the process of economic recovery. As perception on risk has large impact in supporting the effectiveness of the monetary policy, effort to reduce risk through the formation as credit bureau, credit guarantee scheme, and rating agencies is critical as it will improve transparency and availability of debtor information. Banks Loan Portfolio diversification(Csongor David,Curtis Dionne, University of Gothenburg,2005) This paper is a qualitative study about how large bank in Sweden manage their loan portfolis. And found that the majority of large banks in to a certain degree intuitively diversify their loan portfolio. On the othr hand, they found that due to the practical complexities the banks do not manage using loan portfolio diversification. Due to the size of these large banks it is assumed that loan portfolio diversification will happen naturally. Measuring and handling risk -how different financial institutions face the same problem( Sarah Rrden & Kristofer Wille, Mlardalen University ,2010) The objective of this research paper is to understand how different financial institutions handle and attempt to reduce risk in order to optimize portfolio returns for their clients, as well as highlight contrasts. This analysis has highlighted that each company uses different theories in different ways, because the level of trust in the models explaining risk varies among the institutions. In other
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words, which models are used and why depends on the philosophy of the firm. Since financial models are built on the idea that investors act rationally, many of the models do not hold in times of crisis when humans act irrationally. Modern Banking and Strategic Portfolio Management (Reza G. Hamzaee, Missouri, Western State University & Walden University Bob Hughs, Missouri Western State University) Hodgmans(1963) view banks are concerned not only with the composition of their asset portfolio but also with the relationship between deposits and loan over time. Hodgmans work is useful for understanding such aspects of contemporary banking as prime rate conventions and compensating balance requirements. Chambers and Charnes (1961) improved upon this informal traditional analysis by suggesting a linear programming frame work. By introducing interest rate in an objective function and by viewing the hierarchy of traditional decision rules as constraints they produced a model of bank behavior that consistent with both traditional theory and maximization of bank profits. The important of random deposit variations for the determination of banks optimum portfolio was first suggested by Edgeworth(1988). Porter applied an inventory model to descripe bank portfolio behavior under uncertainity. Porters model suggest that a bank maximizes expected profits will generally hold a diversified portfolio in an uncertain world. He also demonstrate that if bank profits are random variable, that is, determined by the joint probability distribution describing deposits flows and assets yield, then profit maximization, liquidity and capital certainity are insight ful constructs for modelking bank behavior (Bank Management and Portfolio BehaviourDonald D.Hester, James L. Pierce, New Haven and London, Yale University Press, )

IV. OBJECTIVES OF THE STUDY

The study is considered the following objectives. To identify the portfolio system of Financial Institutions of Sri Lanka To manage the various risk securing the market share of Financial Institutions
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To identify its risk and return preference of Financial Institutions To compare its desired relationship among the portfolio structure It is summarize the objectives of this study is find out the impact of Portfolio system on firms performance and attempts to provide information on the current portfolio system utilized by Sri Lankan Financial firms

and Ofek (1995) does not allow us to decide on the nature of this relationship and therefore justifies new tests H1: Portfolio analysis are significantly correlated with firms performance

VIII. METHODOLOGY
Five years data representing the period of 2006- 2010 were used to measure the portfolio and performance of selected finance Companies in Sri Lanka. In a way the following measures were used to measure the portfolio and performance.

V. DATA COLLECTION
The secondary data were used to the study. The data required for the study means gathered from the annual report of the respective company through the website and journals books, etc

8.1 Correlation Analysis

Correlation is concern describing the strength of relationship between two variables. In this study the correlation co-efficient analysis is under taken to find out the relationship between Portfolio System and performance. It shows the amount of relationship exist between Portfolio System and performance Table 1 Multiple correlation matrix
ID Income from Deposit (ID) Income from Loan (IL) 1 0.160 1 1 0.264 1 0.315 1 IL IP NP ROI ROCE

VI. SAMPLING DESIGN

The study will use data of listed financial companies in the CSE, Sri Lanka, as the sample. In order to select the sample, stratified random sampling method is used. Companies with missing data are will be excluded from the study. The study also will exclude the financial and securities sector companies, as their financial characteristics and use of leverage will substantially different from other companies. After eliminating outliers, the sample size is 10 companies are selecting for this study (1)Citizen Developments Bank, (2) Sampath Bank, (3) Central Finance, (4) Nation Trust Bank, (5) Seylan Bank, (6) National Development Bank, (7) DFCC, (8) LB Finance, (9) Hatton National Bank, (10) Commercial Bank of Ceylon

Income from 0.291** 0.321 Pawning (IP) Net profit (NP) Return on Investment (ROI) Return on Capital Employed 0.124** 0.184*

0.413** 0.529** 0.485*

VII. HYPOTHESES
A large and a well developed literature were interested to the survey of the gains and costs of the Diversification strategy (Comment and Jarrel (1995), Denis and al (1997), Rajan and al (1998), Rajan and Zingales (2000), Bhagat and al (1999), Campa and al (2002). Despite a general agreement that seems to be observed concerning the negative impact of the diversification strategy on the performance of the firm (Lang and Stulz (1994), Berger
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0.264

0.654* 0.111** 0.614** 0.241**

Table 1 shows the relationship between the variables. Accordingly Income from Deposit is correlated with NP, ROI and ROCE with the r-values of 0.124, 0.413 and 0.264 which are significant at 0.01 levels. Similarly the correlation value between Income
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from Loan (IL) and NP, ROI and ROCE is 0.184, 0.529, 0.654 which is significant at 0.01 levels. These indicate that Income from Deposit (ID)and Income from Loan (IL) are associated with determinants of firms performance.

Table 5
Model Un standardized Standardized Coefficients Coefficients B 1(constant) portfolio 0.124 -0.015 Std.Error 0.083 0.026 -0.110 Beta t 1.498 sig 0.145

8.2 Regression Analysis

Regression analysis is used to test the impact of performance on Portfolio of the listed financial companies traded in Colombo stock exchange Table 2
Model R R Square Adjusted R Square 0.098 Std.Error of the Estimate 0.32306

-0.584 0.564

The above table indicates the coefficient of correlation between the portfolio and ROI. Multiple r2 is 0.010. Only 1.0% of variance of net profit is accurate by the portfolio. But, remaining 99 % of variance with ROI is attributed to other factors

8.4 Portfolio and ROCE

Table 6
Model R R Square Adjusted R Square -0.025 Std.Error of the Estimate 115.19484

0.360a

0.129

The above table shows the weak positive correlation between the portfolio and net profit. Table 3
Model Un standardized Standardized Coefficients Coefficients B 1(constant) portfolio 0.187 0.047 Std.Error 0.073 0.023 0.360 Beta t 2.556 2.039 sig 0.016 0.051

-0.196

0.038

The above table shows the weak native correlation between the Portfolio and ROCE. Table 7
Model Un standardized Standardized Coefficients Coefficients B 1(constant) portfolio 31.283 -4.563 Std.Error 26.050 8.250 -0.104 Beta t 1.201 sig 0.240

The above table indicates the coefficient of correlation between the portfolio and net profit. Multiple r2 is 0.1296. only 1.29% of variance of net profit is accurate by the portfolio. But, remaining 98.21% of variance with net profit is attributed to other factors.

-0.553 0.585

8.3 Portfolio and ROI

Table 4
Model R R Square Adjusted R Square -0.023 Std.Error of the Estimate 0.36514

The above table indicates the coefficient of correlation between the portfolio and ROCE. Multiple r2 is 0.038. Only 3.8% of variance of ROCE is accurate by the portfolio. But, remaining 96.2% of variance with ROCE is attributed to other factors

-0.101

0.038

IX. FINDING
The overall result of efficiency and effectiveness performance of portfolio system has high view in the portfolio structure. According to the system the efficiency
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The above table shows the weak negative correlation between the portfolio and ROI.
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Opinion Vol. 2, No. 2, December 2012

and effectiveness performance rate is 60% as high level. The research of portfolio management of commercial bank, the researcher finds out the following according to the secondary data. The researcher can observe that there is down in the (ROCE) return on capital employed of Finance Companies in 2010. That is to say that it had been observed that the ROCE which was at 18% in 2005, had grown up to the level 23% in 2006and in the 2007 it was 26% There after it had increased by 2% in 2008. In other words that ROCE had grown up to the 28% in 2008. Even though, little increased was in 2009 as 29%. Therefore it could be observed that the income derived from the assets of Finance Companies is increasing. When return on Investment (ROI) of Finance Companies is observed, the researcher could see a slight increase was in the 2005-2006 but in the 2007it decrease to 12.7% after that in the 2008 it increased rapidly to 17%. But in the 2009 & 20q0 small decrease was taking. That is ROI appeared at 15% in 2010 and Analyzing these data it could be observed that there was high fluctuation in the earning capacity of the Finance Companies during the last five years. More over during the past five years the ROCE/ ROI of the Finance Companies never reach the ranges between 70% to 100% for the past five years period. Since 2006 to 2010 over 100% is seen. But if that establishment had reached its ROCE/ROI between ranges of the 70% to 100% it would have efficiency of capitalization. However, during the past five years as the ratio of ROCE/ROI of Finance Companies did not reached a range between 70% and 100%. It could be determined that its capital has not used efficiency and also during the past five years the EPS ratio indicates slight decreases. Then, when a Finance Companies reaches its capital adequacy ratio, it could invest its capital on risk or risk free investments. At present in year 2009 the capital base is recognized as 10% requirement. It is observed that the Finance Companies has sufficiency in capital base during the past five years. Its goal must be Tier I over 7% and Tier II over 10%. However it seems that

the capital base of Finance Companies reaches its target during the past 5 years. This emphasizes that the Finance Companies has acquired its capital requirements.

X. RECOMMENDATIONS
Recommendations are the main objective of any research. If there is a problem, there will be some recommendation to reduce it. The following recommendations are given by the researcher about the portfolio management of Companies. The Finance Companies can helps by way of granting high amounts of loans to its customers for what it must receive proper security to reducing the amount of risk associated with the loan. It can lend and invest some other mean full resources could increase its income. The Finance Companies wishes to earn high profit and less risk by way of reducing the amount of high risk loans which are given by the Finance Companies, it helps to reduce the total amount bad debts. That may be utilized to risk less loans or any other safety investment. By this way it could increase its profit and reduce the level of risk. By introducing different variety of new fixed deposits to its customers it can increase its own long term fund and also by investing these funds to long term investments it could arrange the portfolio structure efficient way that will help to make more profit. It should obtain more liquidity assts from the alternative investment opportunities and also it should correct the deviation between the liquidity and profitability it help to the management to maintaining the portfolio structure effectively. Based on the new technical revolution. The finance companies should introduce balance score card to measure the efficiency and effectiveness performance Commercial bank and also it help the executive committee to carry out every financial activities efficient and effective way.
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XI. REFERENCES
1. Arbeleche, S. &Dempster, M.A.H. (2003). Econometric modelling for global asset and liability management. Working Paper, Centre for Financial Research, University of Cambridge. 2. Bodie Z., Kane A., Marcus A. J. Investments (6th ed.). McGraw-Hill, NY USA 2005. 3. Fabozzi F. J. Financial Instuments. John Wiley & Sons, NJ USA 2002. 4. Fama E., MacBeth J. Risk, Return and Equilibrium: Empirical Tests, The Journal of Political Economy 1973. 5. Friend I., Blume M. E. The Demand for Risky Assets, American Economic Review vol. 65, no. 5, Dec. 1975. 6. Galstyan M. Management of international reserves and the foreign exchange rate, Ph.D. thesis, Yerevan 2003. 7. Markowitz H. Portfolio Selection, Journal of Finance vol. 7, no. 1, March 1952. 8. Markowitz H. The Optimization of a Quadratic Function Subject to Linear Constraints, Naval Research Logistics Quarterly vol. 3, no. 1-2, March-June 1956.

9. Nugee J. Foreign Exchange Reserves Management, Bank of England Centre for Central Banking Studies, Handbook No. 19, Nov. 2000. 10. Pindyck R. Risk aversion and determinants of stock market behavior, NBER Working Paper No. 1921, May 1986. 11. Schooley D., Worden D. D. Risk Aversion Measures: Comparing Attitudes and Asset Allocation, Financial Services Review 5(2), 1996; p. 98. 12. Sharpe W. F., Alexander G. J. Investments (4th ed.). Prentice-Hall, Inc., NJ USA 1990. 13. Scherer, A. (2002). Portfolio construction and risk budgeting. Risk Books 14. Wilkie, A. D. (1986). A stochastic investment model for actuarial use. Transactions of the Faculty of Actuaries, 39, 391-403. 15. Wilkie, A. D. (1995). More on a stochastic asset model for actuarial use. British Actuarial Journal, 1, 777-964.

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