On the positive side, the expansion of bank branches reduces transaction costs associated with the mobilization and transfer of funds and to thereby to increase savings and investment, and deposit creation. But due to corruption, mismanagement, and government interference, many branches of the commercial banks cannot work properly and some branches incurred heavy losses, and some of these branches were subsequently closed down. The central bank has finally approved nine more banks in addition to existing 47 commercial banks in Bangladesh. Three new NRB commercial banks, sponsored by non-resident Bangladeshis (NRBs), and six private commercial banks (PCBs), have been approved aiming to help boost the inflow of foreign exchange and strengthen the ongoing financial inclusion programmes through bringing unbanked people under the banking network respectively. The letters of intent (LoIs) `have already been issued to the sponsors of such approved banks. There have been many significant developments in the economy of Bangladesh since 2000-2001, the central bank stated, explaining the economic context and rationale behind issuing licenses in favor of new banks. The economy has grown and the banking system has become more competitive but there are still a large number of under-banked people in Bangladesh.
Banking industry analysis If there is one industry that has the stigma of being old and boring, it would have to be banking; however, a global trend of deregulation has opened up many new businesses to the banks. Coupling that with technological developments like internet banking and ATMs, the banking industry is obviously trying its hardest to shed its lackluster-image. There is no question that bank stocks are among the hardest to analyze. Many banks hold billions of dollars in assets and have several subsidiaries in different industries. A perfect example of what makes analyzing a bank stock so difficult is the length of their financials - they are typically well over 100 pages. While it would take an entire textbook to explain all the ins and outs of the banking industry, here we'll shed some light on the more important areas to look at when analyzing a bank as an investment.
We could not imagine a world without banks. Banks (and financial institutions) have become cornerstones of our economy for several reasons. They transfer risk, provide liquidity, facilitate both major and minor transactions and provide financial information for both individuals and businesses. Running a bank is just as difficult as analyzing it for investment purposes. A bank's management must look at the following criteria before it decides how many loans to extend, to whom the loans can be given, what rates to set, and so on:
Capital Adequacy and the Role of Capital
Asset and Liability Management - There is a happy medium between banks overextending themselves (lending too much) and lending enough to make a profit.
Interest Rate Risk - This indicates how changes in interest rates affect profitability.
Liquidity - This is formulated as the proportion of outstanding loans to total assets. If more than 60-70% of total assets are loaned out, the bank is considered to be highly illiquid.
Profitability- This refers the earnings & revenue growth that is relevant to bank industry.
Key-ratios/Terms Interest Rates: In the U.S., the Federal Reserve decides the interest rates.
Because interest rates directly affect the credit market (loans), banks constantly try to predict the next interest rate moves, so they can adjust their own rates. Bad predictions on the movement of interest rates can cost million.
Gap: This refers to the difference, over time, between the assets and liabilities of a financial institution. A "negative gap" occurs when liabilities are higher than assets. Conversely, when there are more assets than liabilities, there is a positive gap. When interest rates are going up, banks with a positive gap will profit. The opposite is true when interest rates are falling.
Capital Adequacy: A bank's capital, or equity, is the margin by which creditors are covered if the bank has to liquidate assets. A good measure of a bank's health is its capital/asset ratio, which, by law, is required to be above a prescribed minimum.
Interest rate fluctuations play a huge role in the profitability of a bank. Banks are, therefore, trying to get away from this dependency by generating more revenue on fee-based services. Many bank financial statements will break up the revenue figures into fee-based (or non interest) and non-fee (interest) generated revenue. Make sure to take a close look at the fee-based revenue: firms with higher fee-based revenue will typically earn a higher return on assets than competitors.
Evaluating management can be difficult because so many aspects of the job are intangible. One key figure for evaluating management is the net interest margin (NIM) (defined above). Look at the past NIM across several years to determine its trends. Ideally, one wants to see an even or upward trend. Most banks will have NIMs in the 2-5% range; this might appear low, but a .01% change from the previous year means big changes in profits. Another good metric for evaluating management performance is a bank's return on assets (ROA). When calculating ROA, one should remember that banks are highly leveraged, so a 1% ROA indicates huge profits.
This is one area that catches a lot of investors: technology companies might have an ROA of 5% or more, but these figures cannot be directly compared to banks. As with other industries, one wants to know that a bank has costs under control, and that things are being run efficiently. Operating expenses should be analyzes closely. Ideally, one want to see operating expenses remain the same as previous years or to decrease. This isn't to say that an increase in operating expenses is a bad thing, as long as revenues are also increasing.
A measure of a bank's financial health is its capital adequacy. If a bank is having difficulty meeting the capital ratio requirements, it can use a number of ways to increase the ratio. If it is publicly traded, it can issue new stock or sell more subordinated debt. That, however, may be costly if the bank is in a weak financial position. Small banks, most of which are not publicly traded, generally do not have the option of selling new stock. If the bank cannot increase its equity, it can reduce its assets to improve the capital ratio. Shrinking the balance sheet, however, is not attractive because it hurts profitability. The last option is to seek a merger with a stronger bank.
Over the last decade the way we bank has dramatically changed as banks move from a "bricks and mortar" operation to a "virtual online operation". Whilst most banks will probably never get rid of all their "brick and mortar" operations, there are some that have successfully started up with no shop fronts and yet they are successful. Banking is big business, everywhere in the world they are big and powerful, but as Keen observes "bank offers basically the same product to the same customer base". So what makes a consumer choose one bank over another? Not all banks make huge profits but banks position themselves to attract customers through product differentiation, pricing, marketing and promotion and this makes the difference and thus will be examined using Porter's five forces of competition.