Table of Content 1. Introduction................................ ................................ ................................ ....................

3
1.1 Methodology ................................ ................................ ................................ ................................ ..... 3

2.

Industry Description and Analysis ................................ ................................ ................ 4

2.1 Current Trends in the Industry ................................ ................................ ................................ .......... 5

3.

Company Description and Analysis ................................ ................................ .............. 6

3.1 3.2 3.3 a. b. c. d. e. 3.4 The Banks Shareholders are: ................................ ................................ ................................ ........... 6 Corporate Mission of the Bank ................................ ................................ ................................ .......... 6 Products and services ................................ ................................ ................................ ....................... 7 Domestic Banking ................................ ................................ ................................ ........................... 7 Specialized Retail Banking Services ................................ ................................ ............................... 7 International Banking ................................ ................................ ................................ ..................... 7 Non- traditional exports/projects financing................................ ................................ .................... 8 PBLs e-Banking Products and Services Include: ................................ ................................ .......... 8 Success Story and what is impressive about Prudential Bank Ltd. ................................ ...................... 9

4.

Identification of Significant Accounting polices................................ .......................... 11

4.1 4.2 4.3 a. b. c. d. e. f. g. h. i. Basis of Accounting ................................ ................................ ................................ ......................... 11 Functional and Presentation Currency ................................ ................................ ............................ 11 Revenue Recognition ................................ ................................ ................................ ....................... 11 Interest Income and Expense ................................ ................................ ................................ ........... 11 Non-Interest Income ................................ ................................ ................................ ....................... 11 Income Tax ................................ ................................ ................................ ................................ ..... 12 Regulatory Impairment Reserve ................................ ................................ ................................ ...... 12 Property, plant and equipment ................................ ................................ ................................ ......... 12 Intangible Assets- Computer Software ................................ ................................ ............................. 12 Provisions ................................ ................................ ................................ ................................ ....... 12 Foreign Currency ................................ ................................ ................................ ............................ 12 Post Balance Sheet Events ................................ ................................ ................................ ............... 13

5.

Analysis of the Banks Financials ................................ ................................ ................ 13

5.1 a. b. c. d. e. 5.2 a. b. c. 5.3 a. b. c. Trend Analysis ................................ ................................ ................................ ................................ 13 Net Interest Income ................................ ................................ ................................ ......................... 14 Net Operating Income [Total (Gross) Income] and Operating Expenses ................................ ........... 14 Profit before Tax ................................ ................................ ................................ ............................. 14 Assets ................................ ................................ ................................ ................................ ............. 14 Shareholders Fund ................................ ................................ ................................ ......................... 15 Vertical Analysis ................................ ................................ ................................ ............................. 15 Net Interest Income and Net Operating Income................................ ................................ ........... 16 Pre-Tax Profit ................................ ................................ ................................ ............................... 16 Assets and Liabilities ................................ ................................ ................................ ..................... 17 Key Ratios Analysis ................................ ................................ ................................ ......................... Profitability Ratios ................................ ................................ ................................ ........................ Liquidity Ratio ................................ ................................ ................................ .............................. Solvency Ratios ................................ ................................ ................................ ............................. 18 18 19 20

6. 7. 8.

Evaluation and Summary ................................ ................................ ............................ 20 Limitations of Ratio and Financial Statement Analysis ................................ ............. 21 Appendices ................................ ................................ ................................ ................... 24
Appendix A - Final Accounts of Prudential Bank Limited between the Periods of 2005 - 2009........................ 24

Appendix B Graphical representation of the Profit and Loss Account Trend Analysis.............................. 26 Appendix C - Graphical representation of the Balance Trend Analysis ................................ ....................... 26

9.

Reference ................................ ................................ ................................ ...................... 27

1. Introduction
The purpose of this project is to apply the knowledge acquired in Financial Management to analyze and evaluate the financial performance of a non listed organization, specifically Prudential Bank, Ghana Limited. To achieve this objective, the financial strengths and weaknesses of the bank were assessed using the methodology mentioned below. Results of the evaluation will be valuable in making investment and other business related decisions.

1.1 Methodology

The methods used in computing and analyzing the financial performance for the organization includes the use of the following tools: Calculation of relevant financial ratios Profitability Liquidity Efficiency (activity) Solvency

Assessment by trend analysis and Assessment by vertical analysis

2. Industry Descri ti n and Analysis

As at December 2009 t e number of commercial Banks in Ghana stood at 26, a considerable upshot from the lower numbers of the late 1990s. However, the commercial banking terrain has ard not changed dramaticall with about four major banks, Barclays, GCB, Stand charted and SG- SSB jointly accounting for over 60% of the total banking sector assets and deposits (B G Report, 2008). As at 2008 year-end only two banks, Barclays and Ghana Commercial Bank, have more than a hundred branches nationwide and 17 banks ha less than 20 branches each ve across the country, showing glaring disparities in outreach strategies of thecommercial banks.

Despite the renewed interest in the banking sector and the overall competitiveness of the financial services sector some urban areas and most rural areas continue to remain underserved by commercial banks, a situation that offers some opportunity to Micro Finance Institutions. For example, there are only 5 commercial banks which have a presence in Upper East and Upper West Regions: Barclays, NIB, ADB, GCB and SG-SB. These banks, plus four others (each with only one branch bank), are the only commercial banks in the Northern Region. As indicated in Figure 1, the total number of banks branches in these three regions (34) is lesser than the number of total banks branches in the Eastern Region alone (38) and less than 13% of the total banks branches in Greater Accra alone (264).

Figure 1: Total of Commercial Banks' Branch Networks In Each Region

Bank of Ghana (May 2008)

This situation will not change in the medium to long-term given the considerable hurdle to overcome in generating the level of commercial activity in most of the underserved areas; and 4

the kind of activity that will necessitate the required geographical spread by the commercial banks.

The Central bank have sought to engender healthy competition among banks by admitting new banks into the system, while encouraging existing banks to beef up their capital and adopt universal banking. The result is an evolving competitive banking sector that has witnessed continuing growth in banking sector assets, liabilities and incomes. A number of critical factors that have to underpin banking operations for success in the market includes the provision of quality products and services, competitive pricing of these products and services, operational efficiency and enhanced access by customers to products and services that meet their needs. And there is the need to satisfy the growing needs of the market without compromising standards.

Ghana's financial sector reforms have increased the banking system's resilience to potential financial shocks. Moreover, the central bank is carefully monitoring the system's financial stability; it publishes a periodic financial stability report that is discussed by the central bank's monetary policy committee.

2.1 Current Trends in the Industry Most banks now employ cutting edge technologies to roll out their products to the Ghanaian customer. Banking halls are housed in ultra modern buildings, staffed with well trained smart looking ladies and gentlemen.

The re-denomination of the cedi and the development of appropriate technological solutions such as cash cards, mobile and internet banking, and biometric solutions are all reshaping the financial sector and redefining the way forward in doing modern business with the financial sector as a vital backbone for sustenance and growth.

The Bank of Ghana, in pursuance of its objective to enhance the efficiency and security of existing payment systems to bring them up to international standards, introduced the Cheque Codeline Clearing System in the year 2009. The system currently ensures clearance of cheques within two days and is intended to enhance efficiency, reliability and timeliness in the clearing of cheques. A further addition to the payment automation process is a system to manage non-cheque interbank transfers through the Automated Clearing House System.

The Base II Framework for Capital Measurement and Capital Standards has been adopted with implementation to commence in 2010. This would ensure that banks maintain adequate capital at all times to manage the various types of risks inherent in their operations.

3. Company Description and Analysis

Prudential Bank Limited (PBL) was incorporated as a private limited liability company in 1993 under the Companies Code 1963 (Act 179). The Bank opened its doors for business on 15th August, 1996 with its first Branch in Accra. As at the end of August 2008, the bank had 14 branches located in the Accra/Tema metropolis and Kumasi. The Bank is licensed to carry on the business of banking and to provide ancillary services. The Bank has two wholly owned subsidiary companies namely: PBL Properties Limited which is engaged in real estates, the sale, purchase and rental of vehicles and Prudential Securities Limited (PSL), an investment and stock broking firm.

The Bank has embarked on an aggressive expansion of its Branch network in Accra/Tema and Kumasi and plans to open branches in Takoradi and other regional centres outside its current locations. As of the time this report was written the bank had 26 branches in all with new entrance into the Northern and Central Regions. The Bank as part of its branch network expansion is envisaged to open nine (9) new branches in various parts of the Country by the end of the year 2010.

3.1 The Banks Shareholders are:

y y y y y y

Messrs J.S. Addo Consultants Ltd The Social Security & National Insurance Trust (SSNIT) National Trust Holding Company Ltd. (NTHC) Ghana Union Assurance Company Ltd. (GUA) PBL Staff Provident Fund; and Four individual Ghanaians 3.2 Corporate Mission of the Bank

To provide domestic and international banking services with a strategic focus on project financing and export development. Prudential Bank Limited is committed to play a positive and innovative role in the financial intermediation process and, most importantly, to offer the best and the most remunerative banking services to the business community. Quality, creativity and innovation are the hallmarks of PBL.

Prudential bank is fast positioning it self to becoming one of the leading banks in Ghana by venturing into almost all sectors financial banking and investments. The bank initially started with the typical domestic banking services and expanded to cover International banking as well 6

as non-traditional exports/projects financing. The bank can also boast of some innovative products that it has developed and offered to its cherished customers.

3.3 Products and services Details of some of the activities and services and products provided by the bank are given as below: a. Domestic Banking Our Domestic Banking Services are designed to mobilize deposits, offer credit facilities and provide services to facilitate the general payment system. E-banking and e-zwich products and services have been introduced recently to augment the traditional banking products and services which have hitherto been offered by the Bank.

PBLs Domestic Banking Products and Services include:

y y y y y y y y y y y y y

Current Account Savings Account Prudential Business Savings Account Prudential Welfare Savings Account Fixed/Time Deposit Account Call Deposit Account Certificates of Deposit Local Currency Funds Transfer Mobile Cash Collection Service Issue of Bonds and Guarantees Cash Wise ATM Services Credit and Debit Cards Instant Money Transfer Service (IMT) b. Specialized Retail Banking Services

y y y

Fee Collection Services Salaries, Dividends and Bonuses Administration Utility Bills Collection c. International Banking

Prudential Bank Limited offers a one stop shop for all International Banking activities. PBL has got a team of knowledgeable personnel who offer their services and give expert advice and guidance to help grow international business.

The following services are provided at the International Banking Department

y y y y

Provision of Foreign Currency and Foreign Exchange Accounts Handling of Foreign Transfers, Remittances and Collection of Foreign Cheques Issue of Bonds and Guarantees Export Advisory Services 7

d. Non- traditional exports/projects financing The corporate mission of PBL among others is to provide Domestic and International Banking services with a strategic focus on Project Financing and Export Development. Prudential Bank Limited, in line with its mission, has therefore set up a department of welltrained and dedicated staff to specifically attend to Non-Traditional Exports and Special Projects (NTE/SPD). This department focuses on providing special export finance schemes for the production and marketing of Non-Traditional Exports as well as providing term financing for projects.

e. PBLs e-Banking Products and Services Include: I. cashWise Automated Teller Machines (ATMS) PBL cashWise ATMs provide selfservice banking facilities such as Cash Withdrawal, Cheque Book Request, Full/Mini Statement Request, Account Balance Enquiry, Funds Transfer, Personal Information Number (PIN) Change, etc.

II.

textWise (SMS Banking) SMS Banking enables customers to monitor their account status via a mobile phone anytime, anywhere. textWise offers the existing banking facilities of cashWise ATMs, except cash withdrawals. It is simple and easy to use. All a customer needs is a mobile phone.

III.

netWise (Internet Banking) PBLs internet banking which is incorporated in the Banks website takes banking activities to the door step of every one irrespective of your geographical location. netWise gives you the opportunity of banking around the clock. You can download your financial statement and access your account information anytime on the internet.

IV.

E-zwich Platform this enables a cross-transaction channel where customers from PBL, other Banks and the unbanked perform all Point of Sale (POS) transactions from a common platform. Such transactions include cash transfers, retail payments, cash pay back 8

and 3rd party bill payments. PBL offers interested merchants POS devices for installation at their retail premises. PBL also issues e-zwich smart cards to customers and non-customers. 3.4 Success Story and what is impressive about Prudential Bank Ltd. Prudential bank is a socio-economic oriented bank which provides the most remunerative banking services to the business community especially the small and medium scale enterprises. As part of the banks mission, the company continually strives to provide quality, innovative products in leading the way in the management of project financing and export development. Ghana is a developing country and heavily depends on exports of traditional and nontraditional commodities which could be very challenging considering the cost of capital involved; this is where Prudential Bank Limited comes in to offer its expertise and financial support. Prudential Bank in no small way is helping to keep the wheels of industries running.

Prudential bank has over the years been recognised as one of the distinguished banks in Ghana and has won a lot of award to its credit. Below is a summary of some of the awards it has won:

Year 2003 2004 2005 2005 2006 2007 2007 2008 2008 2008

Award category Short-term loan financing 2003 Most socially responsible bank 2004 Long-term loan financing 2005 Competitive pricing 2005 Best bank in long-term loan financing Best bank, short term loan financing Best bank competitive pricing Best bank, trade finance Best bank, corporate social responsibility Best bank, medium term loan financing

Position Won 1st 3rd 1st 2nd 1st 3rd 1st 2nd 3rd 2nd

As the awards clearly spells out, the bank stands out in the area of Loan Financing and to me this a very impressive and remarkable achievement and much needed support to industry to drive the development agenda of the country.

Prudential Bank Limited, as a good corporate citizen, recognizes the positive relationships between being socially responsible and building of its public image. For this reason, the Bank has formally incorporated social responsibility objectives in its decision making process. The Bank during the year, continued to discharge its social responsibilities by giving back an amount of GH 77,568 to the society which represents a 36 % increase of that of the previous year of an amount of GH 57,052. Some of the institutions that have benefited from this kind gesture include: 9

West Africa College of Surgeons; National Cardiothoracic Centre; Aid to Artisans; Ghana Export Promotion Council; National Farmers Day; Best Teachers Awards ceremonies; SOS Childrens Village; African University College of Communication; The Ghana Police Service and Methodist University College. In recognition of the banks outstanding support to various institutions, the bank can also boast of the following awards: GHANA EXPORT PROMOTIONS COUNCIL  1997- 9th National Award for Export Achievement in recognition of creditable performance in Export Service.  2001- 13th National Award for Export Achievement, Gold Award for Export Financing  2006- 18th National Award for Export Achievement. GHANA INVESTMENT PROMOTION CENTRE  Leader in the Banking (Commercial and Merchant) Sector for the year 2004. GHANA CLUB 100  2002-Ghanas Top 100 Companies  2003- Ghanas Top 100 Companies  2004- Ghanas Top 100 Companies  2005-Ghanas Top 100 Companies 3RD ASHANTI FINANCIAL SERVICES EXCELLENCE AWARDS 2006.  Best Bank in Small and Medium Enterprise Finance. (Gold Award) COPAL (COCOA PRODUCERS ALLIANCE)  Award of Appreciation in recognition of Prudential Banks outstanding support for 2009 Copal Cocoa Day Celebration as a silver sponsor. All the above mentioned awards and recognitions say it all, that, the bank is a remarkable bank and really is promoting the Ghanaian Industry toward growth and prosperity.

10

4. Identification of Significant Accounting polices

The significant accounting policies adopted by the Bank and which have been applied in preparing their financial statements are stated below:

4.1

Basis of Accounting

The banks financial statements are prepared under the historical cost convention as modified by the adoption of fair value measurement basis, in compliance with IFRS requirements, for available for sale (AFS) investments and financial assets and financial liabilities held at fair value through profit or loss (FVTPL). 4.2 Functional and Presentation Currency

The financial statements are presented in Ghana Cedi (GH) which is the functional and presentation currency of the Bank.

4.3

Revenue Recognition

Revenue is recognized to the extent that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria apply to revenue recognition.

a. Interest Income and Expense

Interest income and expense are recognised in the income statement for all interest bearing financial instruments including loans and advances as interest accrues using the effective interest rate method.

b. Non-Interest Income
The Bank earns commission and fees from a wide range of services provided to its customers. Fee income is accounted for as follows: Income earned on performance of discrete services (such as funds transfers, special clearing, transaction negotiation with third parties etc) is recognized as revenue upon completion of the act or service Income arising from service fees (such as special statement requests, safe custody, commission on turnover, etc) is recognized as the services are provided Loan origination fees and similar fees form an integral part of the effective interest rate of a financial instrument and are not shown as part of non-interest income. 11

c. Income Tax
Income Tax in the Profit and Loss Account comprises current tax and deferred tax. Current tax is the tax expected to be payable, under the Internal Revenue Act 2000 (Act 592), on the taxable profit for the year. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts.

d. Regulatory Impairment Reserve

To cater for any shortfall between the Bank of Ghanas credit loss provision requirements and loans and advances impairments based on IFRS principles, a charge is made to Income Surplus in respect of the difference required to bring up the cumulative provision to the level required under the Bank of Ghana regulations.

e. Property, plant and equipment

The Bank recognizes an item of property, plant and equipment as an asset when it is probable that future economic benefits will flow to it and the amount meets the materiality threshold set by the Bank. Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. Depreciation is provided on the depreciable amount of each component on a straight-line basis over the anticipated useful life of the asset.

f. Intangible Assets- Computer Software

Cost incurred to acquire and bring to use specific computer software licenses are capitalized and amortised on the basis of the expected useful lives using the straight-line method. Maximum useful live ranges between 4 and 5 years.

g. Provisions
The Bank recognizes provisions when it has a present obligation (legal or constructive) as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

h. Foreign Currency
Transactions denominated in foreign currency are translated into cedis at the rates of exchange ruling on the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated into cedis at exchange rates ruling at the balance sheet date. Any gains or losses resulting from foreign currency translation or exchange are dealt with through the profit and loss account for the year.

12

i. Post Balance Sheet Events

Events subsequent to the balance sheet date are reflected only to the extent that they relate directly to the financial statement and the effect is material.

5. Analysis of the Banks Financials

Prudential Banks activities over the period being observed have grown steadily over time. The bank registered its most impressive profit before tax in the 2007 financial year, however it could not maintain the growth trend; and even though it did significantly well in 2008, the bank profit before tax was on the plunge in 2009. The following analysis will try to reveal and explain some of the realities that could have contribute to the observed trends in the banks financial activities.

5.1 Trend Analysis Trend analysis is calculated by computing changes in like items from a base year relative to two or more other years. This is done by selecting a base year whose amount is set equal to 100%.

Description/ Year

2005 %

2006 % 100 100 100 100 100 100 100 100 100 100 125 110 137 115 128 143 107 95 157 75

2007 % 185 189 182 155 174 170 238 167 316 120

2008 % 246 272 225 166 229 249 74 218 302 191

2009 % 350 473 248 241 255 309 186 133 81 149

Interest Income Interest Expense Net Interest Income Commissions and fees Total (Gross) Income Operating Expenses Provision for bad & doubtful debts Profit Before Tax Taxation Profit After Tax

(Table 1.0 Calculations for the trend analysis for the profit and loss account)

13

a. Net Interest Income

The analysis of the Net Interest Income shows a study upward trend with an average growth of about 42% year-on-year from 2005 to 2008 and this was due to the fact that the Interest Income trend was matching up with that of the Interest Expense. However, in 2009 the trend grew below the average by only about 23% from 225% in 2008 to 248% in net interest income. This might be as a result of increase in borrowings which grew by about 48% from 2008 to 2009 and a corresponding increase in the cost of borrowing and interest expense grew by about 70% as against 18% growth in loans and advances from 2008 to 2009 and only 42% corresponding increase in Interest income. It can be deduced that the bank did not make high charges on its assets in general as against the expense on its borrowings.

b. Net Operating Income [Total (Gross) Income] and Operating Expenses

The banks Net operating income grew steadily with ratios of 128%, 174% and 229% for 2006, 2007 and 2008 respectively but grew to 255% representing a 26% year-on-year growth from 2008. This can be attributed to the quantum increase in borrowing and increase in the interest expense which is about 70% year-on-year increase from 2008 to 2009. In the case of operating expense, the company managed to record its lowest increase in 2007 with a percentage value of about 170% which represents a 27% increase from 2006 year-onyear. 2008 recorded the highest increase with a value of 79% from 2007 but managed to bring it down by 19% as compared to 2008 year-on-year.

c. Profit before Tax

Even though the bank had an upward trend with its Interest Income, commissions and fees, its profit before tax has not maintained the same trend. Its profit before tax dropped by 5% year-on year from 2005 to 2006 but recovered and made an upward increase in both 2007 and 2008. Yet again, it suffered a downward turn in 2009, and it could be largely attributed to the same issues explained above. Despite the severe competition in the banking industry and the general slowdown in the economy, the bank was able to make a reasonable profit. The banks pre-tax profit decreased by 39% to GH 4,029,763 from GH 6,611,115 in 2008.

Trend Analysis for the Balance Sheet

d. Assets
There was a marked increase in Loans and Advances over the period under consideration which has been consistent. They trended with this values 2006- 184%, 2007- 238%, 2008324% and 2009- 383%. The performance of other assts also saw an upward trend as given in the table xxx. Cash and Balances with Bank of Ghana and Government securities also appreciated significantly over the period. 14

e. Shareholders Fund
Shareholders fund trended with an impressive year-on-year growth with the following percentages registered; 2006- 127%, 2007- 181%, 2008- 250% and 2009- an all time high of 390%. The upward growth in shareholders fund can largely be attributed to the consistent increase in Income surplus which also is experiencing an upward trend. Below is the table of calculations summary.
De iption/ Yea 2005 % 2006 % 2007 % 2008 %

2009
%

Non- u ent A et

Cu ent A et

Loan and ad an e

Total A et

Depo it and u ent A ount

Cu ent Liabilitie

Non- u ent Liabilitie

Sha eholde Fund

(Table 2.0 Calculations for the trend analysis for the profit and loss account )

5.2 Vertical Analysis Vertical analysis is where all the profit and loss items and all the balance sheet items are expressed as a percentage of their respective totals. It is useful for comparing the importance of specific components in the operations of the business. Changes in the components from one year to the other are easily identified.

100

140

214

382

469 329 383 333 347 309 540 390

100

152

240

273

100

184

238

324

100

152

239

276

100

144

247

270

100

150

233

269

100

186

350

365

100

127

181

250

15

Description/ Year

2005 %

2006 % 100.00 (39.85) 60 22.03 3.59 86 (64.38) (4.94) 16 (7) 10

2007 % 100.00 (46.14) 54 20.14 4.70 79 (51.71) (7.42) 20 (9) 11

2008 % 100.00 (49.87) 50 16.13 11.54 78 (56.95) (1.73) 19 (6) 13

2009 % 100.00 (61.12) 39 16.49 5.62 61 (49.74) (3.05) 8 (1) 7

Interest Income Interest Expense Net Interest Income Commissions and fees Other Operating Income Total Income Operating Expenses Provision Provi ion for bad & doubtful debts Profit Before Tax Taxation Taxati Profit After Tax

100.00 (45.21) 55 23.94 5.03 84 (56.38) (5.75) 22 (5) 16

(Table 3.0 Calculations for the Vertical analysis for the profit and loss account )

a. Net Interest Income and Net Operating Income The vertical analysis indicates that there were significant fluctuations in this component. The bank recorded a rising Net Interest Income of 55% from 2005 to 60% in 2006. In 2007 percentage fell by 6% to 54%. The downward trend continued into 2008 registering 50% which was a 4% fall from the previous year. As if this was not enough, 2009 was the worst hit period and had a record low of 39%. Even though the bank allocated a greater proportion of its resources to loans and advances to generate higher levels of income, the interest income could not much up with the Interest Expense which was on the upward trend and this might have led to the fall in the percentage value of the Net Interest Income. The Net Operating Income followed a downward trend just like that of the Net Interest Income and the same reasons might account for it as above.

b. Pre-Tax Profit The banks pre-tax values of 2005- 22%, 2006- 16%, 2007- 20%, 2008- 19% and 2009- 8% clearly shows that the bank was making less profits over periods with it worst profit period being recorded in 2009. This was because the bank grew it assets which was mainly financed by deposits, borrowings and shareholders fund.

16

Description/ Year ASSETS: Cash and Balances with Bank of Ghana Government Securities Due from Other Banks and Financial Inst. Other Investments Securities Loans and Advances Other Assets Account Total Property, Plant and Equipment Total Assets LIABILITIES & S.HOLDERS FUNDS Deposits and Current Accounts Creditors and Accruals Total Borrowings Total liabilities Stated Capital Capital Surplus Statutory Reserve Fund Income (Deficit) Surplus Shareholders Funds Total Liabilities & Shareholders funds

2005 % 4.41 31.50 10.72 0.38 47.52 2.65 97 2.82 100.00

2006 % 8.34 11.41 17.75 0.34 57.71 1.85 97 2.59 100.00

2007 % 6.97 14.16 25.35 0.22 47.23 3.55 97 2.52 100.00

2008 % 6.75 9.56 20.46 0.19 55.84 3.29 96 3.90 100.00

2009 % 8.94 9.98 17.51 1.77 54.60 3.24 96 3.96 100.00

70.98 14.58 86 8.19 94 4.00 0.00 2.24 0.01 6 100

67.50 17.24 85 10.02 95 4.64 0.00 0.51 0.08 5 100

73.40 9.88 83 11.99 95 2.91 0.00 1.55 0.28 5 100

69.50 13.99 83 10.84 94 2.53 0.00 2.34 0.81 6 100

73.94 5.47 79 13.27 93 2.09 1.62 1.71 1.90 7 100

(Table 4.0 Calculations for the Vertical analysis for the Balance Sheet) c. Assets and Liabilities The bank maintained a fairly stable rise in its Property, Plant and Equipment with these values: 2005- 2.82%, 2006- 2.59%, 2007- 2.52%, 2008- 3.9% and 2009- 3.96%. This significant rise in pattern can be attributed to the banks implementation of its plan of expanding its Branch locations and the improvement of its infrastructure. In general, all of the banks assets saw a healthy growth which can be attributed to deposits, borrowings and shareholders fund.

17

5.3 Key Ratios Analysis

o i abili y Ra ios 100 Net profit Intere t In ome
      

De
$ %  #

rofit Margin Ratio

Return on A

et

Net profit Total A et

Liquidi y Ra ios

Current Ratio

Current A et Current Liabilitie

Current Liabilitie


E iciency Ra ios

Loan to Depo it Ratio

Total Loan Total Depo it

Bad Debt a % of Total Loan Intere t pen e to Intere t in ome ratio perating e pen e to operating in ome ratio
     

Bad debt Total Loan

 

Intere t pen e 100 Intere t In ome perating pen e 100 perating In ome
   

Solvency Ra ios Long Term Liabilitie Shareholder quity

   

Long Term Liabilitie Stareholder quity Intere t Co erage



(Table 5.0 Calculations for the Key Ratios)

a. Profitability Ratios It measures how a firm is able to make satisfactory income and whether it is able to maximize the wealth of its shareholders. i. Profit Margin:

It measures how much of interest income that is retained after taking into consideration all expenses including tax. The values registered for the various years are 2005- 16.39%, 20069.87%, 2007- 10.61%, 2008- 12.71% and for 2009- 6.99%. The bank had the best profit margin in 2005 but could not hold on its grip and 2006 registered a fall in profit margin to 9.87%.

re-Ta in ome + Int. p. Intere t pen e

   

Ca h Ratio

Ca h + Marketable Se uritie

100

"

Return on quity
   

Net profit Shareholder'

 

ription

Formula

Unit

2005

2006

2007

2008

2009

16.39

9.87

10.61

12.71

6.99

100

%
100 quity

2.98

1.87

2.08

2.35

1.19

36.08

21.38

23.84

27.55

13.81

a:bs

1.14:1

1.15:1

1.17:1

1.15:1

1.21:1

a:b

0.42:1

0.23:1

0.25:1

0.20:1

0.24:1

a:b

0.67:1

0.86:1

0.64:1

0.80:1

0.74:1

% %

1.67

0.97

1.67

0.38

0.81

45.21

39.85

46.14

49.87

61.12

%
67.32 75.07 65.71 73.20

81.55

a:b
imes

1.31:1

1.91:1

2.53:1

1.91:1

1.81:1

1.85

2.15

2.17

1.56

1.00

18

The bank was able to turn around it operations and managed to double its Due from Other Banks and Financial Institutions in 2007 which led to the increase in its Net operating interest and thereby increasing it Profit Margin for the year 2007 to 10.61%.

In 2008, PBL increased the amount of Loans and advances and this lead to an increase in its interest income which in effect increased its net operating interest and hence an improvement in it Profit Margin to 12.71%. The bank recoded it lowest Profit Margin in 2009 and this could be ascribed to the fact the bank recorded high deposits and increased its borrowing which in turn attracted high interest expense. Even though loans and advances also increased in that same year, its interest income could not much up the interest expense. This explanation might have contributed to the sharp fall in profit margin for the year at a record low, 6.99%.

ii. Return on Assets It is the primary ratio used in measuring the profitability of a firm. The ratios recorded followed the same pattern as that of the Profit Margin and similar reasons could be ascribed.

iii. Return on Equity It measures how much investors are receiving as their returns for the investment they made in the company. The ratios recorded followed the same pattern as that of the Profit

Margin and that of Return on Assets and therefore similar reasons could also be ascribed.

b. Liquidity Ratio These ratios measure the capability of the company to meet its short-term obligation when they fall due.

i.

Current Ratio

The acceptance of a particular current ratio differs among stakeholders. Whiles Short-term creditors prefer a high current ratio since it reduces their risk, shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry.

PBL recorded consistent solid levels current ratios of 1.14:1 for 2005, 1.15:1 for 2006, 1.17:1 for 2007, 1.15:1 for 2008 and an all time high 1.21:1 in 2009. The ratio in 2009 can be ascribed to the tremendous increase in the companies Cash and Balances with bank of Ghana and also the quantum increase in the value of Other Investment securities. 19

ii. Cash Ratio Current ratio might not give accurate indication of ability to meet short term obligations promptly as advances and other current assets might not be easily converted into cash. The cash ratio addresses this drawback of the current ratio. The figures recorded for the period saw a downward trend from a high of 0.42:1 in 2005 to a low of 0.24:1 in 2009. This can be explained as due to the consistent increase in Deposits and Current accounts which saw a continuous upward trend from GH 72,356,100 in 2005 to a high of GH 251,275,920 in 2009. Though the ratios for the period are low, it is considered normal for the banking industry.

c. Solvency Ratios These ratios measure the ability of the firm to survive into the foreseeable future. i. Debt to Equity Ratio

6. Evaluation and Summary

Summarizing using the data between 2008 and 2009, Interest income rose by about 42.15%, however Net profit Margin fell by about 39.05 %. This is as a result of increase in interest expenses of about 74.21%.

The increase in operating expenses is due partly to increase in obligation in terms of interest payment on Deposit and current Accounts and the servicing of interest on borrowings. This 20

was without a significant increase in receipt from investment income. Compared to last year, the percentage of Deposits and current account that went into Loans and Advances fell. The bank channeled most of its funds into branch expansion; this also explains the increase in Deposits and current Accounts and a corresponding increase in operating expenses. This is an indication of an increase in the client base of the bank. Part of the Funds from the Deposits and Current accounts went into capacity building which will yield returns in the medium to long term and ensuring that in the future it will reap the benefits and make more significant gains and profits. This is shown in the increase in property, plant & equipment, Other Investments securities and the clearing of almost half of creditors and Accruals balance

The increase in the asset base of the bank, growing client base and increase in Income surplus makes investing in the bank worthwhile.

As the debt to equity ratio indicates, the bank is making strides and becoming less geared firm whish is very positive to attract more investments and to ensure it successful.

I am therefore confident from the data and information gathered from the analysis of the banks financials that it will be worthwhile to invest in the bank. This is because all the positive indicators, like it client base growth with regard to deposits, improvement in its assets in the form of branch expansions and plant and equipment, the company is well positioned to give a good return on my investment. The banks proposed dividends went up from GH 11,900.00 in 2008 to GH 16,100.00 in 2009, an increase by about 35.30 % which represents a good leap and growth.

I will not hesitate to invest all of my 200 million cedis in the bank if it should float shares by listing on the Ghana stock Exchange.

7. Limitations of Ratio and Financial Statement Analysis

The following limitations should be kept in mind in relying on ratio analysis: Interpretation of the ratio: It is difficult to generalise about whether a particular ratio is good or bad. For example a high current ratio may indicate a strong liquidity position, which is good or excessive cash which is bad. Similarly Non current assets turnover ratio may denote either a firm that uses its assets efficiently or one that is under capitalised and cannot afford to buy enough assets. 21

Price changes: Inflation renders comparisons of results over time misleading as financial figures will not be within the same levels of purchasing power. Changes in results over time may show as if the enterprise has improved its performance and position when in fact after adjusting for inflationary changes it will show the different picture.

Technological changes: When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology. For ratios to be more meaningful the enterprise should compare its results with another of the same level of technology as this will be a good basis measurement of efficiency.

Changes in accounting policy: Changes in accounting policy may affect the comparison of results between different accounting years as misleading. The problem with this situation is that the directors may be able to manipulate the results through the changes in accounting policy. This would be done to avoid the effects of an old accounting policy or gain the effects of a new one. It is likely to be done in a sensitive period, perhaps when the businesss profits are low.

Changes in accounting standard: Accounting standards offers standard ways of recognizing, measuring and presenting financial transactions. Any change in standards will affect the reporting of an enterprise and its comparison of results over a number of years.

Different financial and business risk profile: No two companies are the same, even when they are competitors in the same industry or market. Using ratios to compare one company with another could provide misleading information. Businesses may be within the same industry but having different financial and business risk. One company may be able to obtain bank loans at reduced rates and may show high gearing levels while as another may not be successful in obtaining cheap rates and it may show that it is operating at low gearing level. To an informed analyst he may feel like company two is better when in fact its low gearing level is because it cannot be able to secure further funding.

22

23

8. Appendices

Appendix A - Final Accounts of Prudential Bank Limited between the Periods of 2005 - 2009
Profit and Loss Account
Description/ ear
9

2005 GH

2006 GH 17,537,900.00 (6,988,700.00)

E

2007 GH 25,951,253.00 (11,974,461.00)

13,976,792.00

2008 GH 34,568,029.00 (17,239,094.00)

E

2009 GH 49,137,352.00 (30,032,288.00)

19,10 ,064.00
E

Interest Income
P

14,039,000.00 (6,347,300.00)
7,691,700.00

Interest xpense
B

et Interest Income
2

10, 49,200.00

17,328,93 .00

ommissions and fees Ot er Operating Income

Total Income
P Q

3,360,800.00 705,500.00
E F

3,862,800.00 629,400.00
E

5,225,514.00 1,220,344.00
E

5,575,598.00 3,988,636.00
26,893,169.00 26, 93,169.00
F

8,101,761.00 2,760,835.00
29,967,660.00

11,7 8,000.00 ,000.00

1 ,041,400.00

20,422,6 0.00

Operating xpenses
H I

(7,915,100.00) (807,800.00)
E

(11,291,100.00) (866,700.00)
G F F

(13,419,677.00) (1,925,769.00)
E G

(19,685,402.00) (596,652.00)
E

(24,439,342.00) (1,498,555.00)
4,029,763.00 4,0 9,763.00
G

ad Provision for bad

Profit Before Tax

doubtful debts

3,03 ,100.00

2,883,600.00 , 3,600.00

,077,204.00 ,077, 04.00

6,611,11 .00

Taxation
Profit After Tax

(734,400.00)
G

(1,152,900.00)
1,730,700.00

(2,322,966.00)
G E D G F

(2,217,292.00)
D F G

(593,956.00)
D

2,300,700.00 ,300,700.00

2,7 4,238.00 ,7 , 3 .00

4,393,823.00 ,393, 3.00

3,43 ,807.00 3, 3 , 07.00

I COME SU PLUS ACCOU T

A

alance at 1st January

3

2,277,653.00 3,435,807.00 5,713,460.00

671,887.00 4,393,823.00 5,065,710.00

(113,356.00) 2,754,238.00 2,640,882.00

11,300.00 1,730,700.00 1,742,000.00 (243,456.00)

796,900.00 2,300,700.00 3,097,600.00 (709,000.00) (575,200.00) (16,100.00) 304,000.00

etained Profit

Prior ear djustment

0 3 8

Transfer to tat tory tatutory

5 7

eserve und nd
5

(858,952.00)

(2,196,912.00)

(1,614,950.00)

(600,000.00) (11,900.00)

Proposed Dividend ividend

3 3

egulatory Loan Impairment eserve lat ry L an I pairment

4 5 ) ) 0 1 2 6 ( ) (

1,605,312.00

(591,145.00)

(354,045.00) (1,000,000.00)

Transfer to tat Transf r t tated apital

'

(2,090,000.00) 11,300.00

Balance at 31st December

6,459,820.00

2,277,653.00 ,277,653.00

671,887.00

&

(113,356.00) 113,356.00)

24

Balance Sheet Statement

Description/ ear
i

Final Accounts of PBL contd

2005 GH 2006 GH 12,896,000.00 17,639,600.00 27,451,000.00 530,600.00 89,228,000.00 2,859,300.00 2007 GH 16,990,383.00 34,534,891.00 61,807,022.00 530,605.00 115,159,751.00 8,666,445.00 2008 GH 18,974,297.00 26,865,388.00 57,501,551.00 530,605.00 156,896,234.00 9,249,273.00 2009 GH 30,377,284.00 33,931,842.00 59,493,141.00 6,030,605.00 185,561,388.00 11,001,691.00

ASSETS:
a b

ash and alances with ank of Ghana Go ernment ecurities

Y h b U

4,493,800.00 32,110,600.00

Due from Ot er anks and inancial Inst. Other

h

10,928,600.00 387,900.00 48,449,700.00 2,704,300.00

Other Ot er In estments ecurities

Y

Loans and d ances

h c

Other Ot er ssets ccount

Total
Propert , Plant and
W f

99,074,900.00
uipment 2,870,900.00
g

150,604,500.00
4,006,800.00

237,689,097.00
6,142,466.00

270,017,348.00
10,962,549.00

326,395,951.00
13,460,611.00

Total Assets

101,945,800.00

154,611,300.00

243,831,563.00

280,979,897.00

339,856,562.00

LIABILITIES & S.HOLDE S FU DS

d a

Deposits and
a V

urrent ccounts
c

72,356,100.00 14,863,300.00

104,359,900.00 26,657,800.00

178,964,728.00 24,080,549.00

195,287,261.00 39,300,435.00

251,275,920.00 18,598,777.00

reditors reditor and ccruals

Total
b

87,219,400.00
8,349,000.00
V

131,017,700.00
15,497,400.00

203,045,277.00
29,234,448.00

234,587,696.00
30,446,540.00

269,874,697.00
45,100,397.00

orrowings orrowing

Total liabilities
U a

95,568,400.00
4,080,000.00 0.00
`

146,515,100.00
7,180,000.00 0.00 786,100.00 130,100.00

232,279,725.00
7,100,000.00 0.00 3,779,951.00 671,887.00

265,034,236.00
7,100,000.00 0.00 6,568,008.00 2,277,653.00

314,975,094.00
7,100,000.00 5,500,000.00 5,821,648.00 6,459,820.00

tated
a

apital
U V

apital urplu urplus

U

tatutor
T

eser e er e und
V U Y V

2,286,100.00 11,300.00

Income In ome (Deficit) urplu urplus

Shareholders Funds Total Liabilities & Sharehol ers funds Shareholders f nds
R S

6,377,400.00 101,945,800.00

8,096,200.00 154,611,300.00

11,551,838.00 243,831,563.00

15,945,661.00 280,979,897.00

24,881,468.00 339,856,562.00

25

Appendix B Graphical representation of the Profit and Loss Account Trend Analysis

Profit an Loss Account Tren Ana ysis

500
Percantage (%)

400 300 200 100 0 2005 2006 2007

Year

2008

2009

Appendix C - Graphical representation of the Balance Trend Analysis

Balance Sheet ren Analysis

500 450 400 350
Percantage (%)

300 250 200 150 100 50 0 2005

y x

2006

2007
Year

2008

on urrent Assets Tot l Assets Shareholders Fund

Loan nd d an es Deposits nd urrent A

su v t s

Interest In o e ot l (Gr ss) In o e Pr isi n f r bad & doubtful debts

q p v p v v wv u

Interest pense Oper ting E penses Pr fit Bef re

2009

ounts

26

9. Reference
Dr Acquah P. A. The emerging Ghanaian Banking Environment. Central Bank Articles and Speeches Dr Acquah P. A. Evaluating the Banking System in Ghana. (06-05-2006). Keynote address at the Fifth Banking Awards Ceremony Dyson, J.R. (2004). Accounting for Non - Accounting Students George M. & Gloria K, Milliar B. (30-04-2007). Developments in the Ghanaian Banking Sector: Gyasi, K. (2004). Accounting for the Graduate Non- Accounting Students Otieku J. & Aboagye-Otchere F. EMBA-609 Accounting Lecture Notes. Audited financial reports of Prudential Bank Limited. 2007, 2008 and 2009 http://www.accountingformanagement.com

http://en.wikipedia.org/wiki/Financial_ratio#cite_note-Groppelli.2C_p._436-2#cite_noteGroppelli.2C_p._436-2

http://www.bog.gov.gh

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