CHAPTER ONE

1.1. Background of the organization

Wegagen bank is privately owned share company which started operation s

on June 11,1997 with subscribed capital of birr 60 million and paid - up

capital of 30 million. The number of shareholders reached 2,130 while the

total capital ( including paid - up capital; share premium and legal

reserves ) reached over birr 1.5 billion as at march 31,2012 Wegagen

bank has a network of 63 branches of which 28 are in Addis Abeba and the

remaining 35 located in the cities and towns of the country.

Vision

Becoming the most preferred bank in Ethiopia

Mission statement

To provide wide range of quality banking services through a dynamic work force

and up- to dated IT solutions to satisfy the desires of all stockholders

Main Objectives

A) Maximizing profitability through increased efficiency

B) Enhance growing market share

C) Expanding the banks capital base

D) Ensuring excellence in customer services

E) Provide differentiated, varied and value added banking services

Principle and values

1. outstanding customers service

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 2. business integrity, honesty and loyalty

3. effective, efficient and expanding operations

4. strong capital and liquidity positions

5. prudent lending

6. reasonable control discipline

7. fair and objectives employment practice

8. play a responsible role in aligning objectives with those of the local

communities and

9. commitment to imply with the spirit and letter of the law

Major services given by the bank

Accept different types of deposit

Grant varieties of loan facilities

Offer full- fledged international banking services

Render local and international money transfer and

Payment card service through ATM and pos network.

1.2. Background of the Study

Finance is a very wide and dynamic field of study. It directly affects the

decisions of individuals and organizations that earn or raise money and spend

or invest it. Finance is also an area of study that deals with how where by

whom why and through what money is transferred among and between

2
individuals businesses and government. It is concerned with the processes,

institutions, markets, and instruments involved in the transfer of funds.

(Pandey, 1981)

Financial management is use of funds in a proper manner in order to ensure

that a business or organization achieve the set of financial goal. The goal of

financial management is to create more wealth, generate more cash for the

business and plough back any profit to grow the business more. (Brigham

1994)

Financial analysis is the process of identifying the financial strength and

weaknesses of the firm by properly establishing relationship between the items

of the balance sheet and the profit and loss account. Financial analysis can be

undertaken by management of the firm or by parties outside the firm like

Owners creditors, investors and others. (Pandey, 1981)

Management should be particularly interested in knowing the financial

strength of firm to make their best use and to be able to spot out the financial

weaknesses of the firm to take suitable corrective actions. The future planes of

the firm should be laid down in view of the firms financial strengths and

weaknesses. Thus financial analysis is the starting Pointe for making planes

before using any sophisticated forecasting and budgeting procedures. (Pandey,

1981)

Financial analysts often assess firms production and productivity

performance, profitability performance, liquidity performance working capital

performance and fixed assets performance. (Pandey, 1981)

Generally, financial statements capture and report on four key business

activities planning, financing, investing, and operating activities. Knowing what

3
information is to be found plus where to find it and how to use it in financial

statement is imperative to intelligently understanding, analyzing, and

interpreting financial data. To sum up analysis of financial statements provides

the essential concepts and tools needed by security analysts who make

decisions on the basis of information found in financial statements. (Pamela

2010)

1.3. Statement of the problem

Mobilization of financial resources arises from the fact that the amount of

financial resources for the purpose of productive investment is very low. In

order to relieve financial constraints on investment, financial intermediaries are

expected to play a decisive role in bringing about efficient ways of raising the

required level of funds through the application of proper financial management

system.

Financial institutions like Wegagen banks are very important in diverting

unutilized resources to the productive sector of the economy. Today in every

developing country the central issue of economic development is the problem of

managing scarce resources through effective and efficient way of financial

management system for bringing a better economic growth of a country.

Some of the research problems that is relevant to inquire in to:

Has the bank managed its working capital effectively and efficiently?
How far the bank utilize its financial its resources (debts and owners

equity) to finance its financial requirements?

What implications does trend analysis of financial statement and working

capital items reveal on managements effort?

What are the trends and relations of accounts that are listed in financial

statements of Wegagen bank?

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1.4. Objective of the study

The general objective of the study is to assess the financial management

performance of Wegagen bank. More specifically, the objectives of the paper are

the following.

To combine the actual practice of bank and the theoretical aspects.

To identify its strengths and weakness concerning the financial

management system in previous year.

To know the relations and trends of financial statement items.
To recommend some constructive points to correct the mistakes of

the bank.
The research paper will initiate other researchers for further

studies.
1.5. Significance of the study

This research initiated to study the financial management of Wegagen bank in

light of the following importance.

It is hoped that the paper can give some information and

knowledge for financial performance and problems and also to

project assumes future results.

The result of this study will provide the key financial relations of

different accounts that are indicate on the financial statements.

Moreover, the findings and recommendations of the study may

serve as the starting point for other researchers who want to

carry out the same study in a wider scale and in depth.

1.6. Scope and Limitation of the study
1.6.1. Scope of the study

Since our topic, financial management is a very wide and vast in content,

which covers the overall financial matter of bank, the group is forced to limit

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the study only on Balance sheet, income statement and major components of

working capital. The reason we limit our study on the above mentioned area is

the bank we try to contact are unwilling to give as the full and detail data

about their financial management there risen not to give the full data woes the

issues related with their competitors.

1.6.2. Limitations of the study

The scope of this study is limited to issue that the study only on Balance sheet,

income statement and major components of working capital. The reason we

limit our study because of the following limitations:-

Lack of experiences: because the researchers are under graduate, and

thus it is for the first time, lack of experiences might limit the technique

of the study.
Limited source: shortage of reference books and other reading materials

relate to financial institutions.

Lack of clear information from documents observes.

Therefore, this paper is not expected to provide all details of the performance of

the bank and the conditions affecting its performance. However, it is hoped to

serve as a reference for further study and research on the subject.

1.7. Research design and methodology

1.7.1. Research methodology

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The Research method used is descriptive method. That is, the techniques for

the statistical evaluation and analysis used. The situations were analyzed by

the comparative method as well to bring a solution to the problem.

1.7.2. Data Source and Collection Methods

For this study, the researchers used both primary and secondary source of

data. From primary method of data collection unstructured interview used

rather than other method of data collection with those individuals that are

worked on the finance department of the bank in order to overcome some draw

backs of secondary data. On the other hand the secondary data have collected

by reviewing the bank annual audited financial statement and audit report.

1.7.3. Method of Data Analysis

After the relevant data collected from the bank financial statement, in order to

describe the real financial matter of the bank the researcher used different

accounting tools such as ratio analysis including liquidity ratio, debt ratio,

profitability ratio and asset management ratio, Horizontal analysis and vertical

analysis.

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 CHAPTER TWO

2. A REVIEW OF LITERATURE

2.1. An Overview of Financial Management

Financial Management was emerged as a separate field of study in the early

1900s. When it was emerged the emphasis was on the legal aspects of mergers,

the formation of new firms, and the various types of securities firms could

issue to raise capital. During the depression era of the 1930s, the emphasis

shifted to bankruptcy and reorganization to corporate liquidity, and to

regulation of security markets. During the 1940s and early 1950s, finance

continued to be taught as a descriptive, institution subject, viewed more from

the stand point of an outsider rather than from that of management. However,

a movement toward theoretical analysis began during the late 1950s, and the

8
focus of financial management shifted to managerial decision regarding the

choice of assets and liabilities with the goal of maximizing the value of the firm.

(Fundamentals of financial management, 7thed., 1995, p.5)

2.2. Objective of financial management

It is obvious the discussion of the modern approach to financial management

that the firm has to make, at least, three fundamental financial decisions. It

must determine:

1. Where to invest funds and in what amount?

2. How much to pay in dividends?
3. Where to raise funds and in what amount?

This decision relate to the firms investment and financing policies. The

financial decision is unavoidable and continues. In order to make them

rationally, the firm must have an objective. It is generally agreed that the

financial objective of the firm should be the maximization of owners economic

welfare. However, there is disagreement as to how the economic welfare of

owners can be maximized. Two well-known criteria, which are put forth for

these purposes are profit maximization and wealth maximization (Pundey,

1981. P.10)

2.3. Working capital management

Working capital management refers to the decision making with respect to the

level and mix of current assets and current liabilities. In terms of time, this

area commands the greatest attention for financial managers since so many of

the variables can change in a short period of time. (Financial management

concepts applications, p. 155)

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2.3.1. Current asset management

Besides managing the long-term assets, the financial manager has a duty to

manage current assets efficiently to safeguard the firm against illiquidity or

insolvency. Investment in current assets affects firms profitability and liquidity.

If the firm does not invest sufficient funds in current assets, it may become

illiquid. But it would lose profitability, as idle current assets, would not earn

anything. Thus, a proper trade-off must be achieved between profitability and

liquidity. In order to ensure that neither insufficient nor unnecessary funds are

invested in current assets the financial manager should estimate firms working

capital needs and make sure that funds would be made available when needed.

(Pandey, 1981 p.18)

2.3.1.1. Concept of cash management

Cash is the most important current assets for the operations of the business.

Cash is the basic input needed to keep the business running on a continuous

basis. It is also the ultimate output expected to be realized by selling the

service of product manufactured by the firm. The firm should keep sufficient

cash, neither more, nor less. Cash shortage disrupt the firms manufacturing

operation, while excessive cash will simply remain idle, without contributing

anything towards the firms profitability. Thus, a major function of the financial

manager is to maintain a sound cash position. (Financial management 2 nded.

1981, p.355)

Cash is the money, which the firm can disburse immediately without any

restriction. The term cash includes coins, currency and checks held by the firm

and balance in its bank accounts. Sometimes near-cash items, such as

marketable securities or bank time deposits, are also included in cash. The

10
basic characteristics of near-cash assets are that they can readily be converted

in to cash. Generally, when a firm has excess cash, it invests it in marketable

securities. This kind of investment contributes some profit to the firm.

Cash management is concerned with the managing of:

i. Cash flows into and out of the firm,

ii. Cash flows within the firm and
iii. Cash balances held by the firm at a point of time.

Cash management assumes more important than other current assets because

cash is the most significant and the least productive assets that a firm holds. It

is significant because it is used to play the firms obligations. However, cash is

unproductive. Like fixed assets or inventories, it does not produce goods for

sale. Therefore, the aim of cash management should be maintain adequate

cash position to keep the firm sufficiently liquid and to use excess cash in

some profitable way.

2.4. Nature of Financial Statements

Since financial statements are the basis for most analytical efforts pertaining to

a business, we must first understand their nature; coverage and limitations

before we can use the data and observations derived from these statements for

our analytical judgments.

Financial statements, which are prepared according to commonly accepted

accounting principles, do reflect the effects of past and current decisions made

by management. They involve considerable ambiguity, however. Financial

statements are governed by financial accounting rules that attempt to

consistently and fairly account for every business transaction and the principle

of matching revenues and costs through accrual and allocation. These rules by

11
their very nature leave the results, particularly the economic impact, open to

some interpretation. (Techniques of Financial Analysis, 7th ed. 1991, p.15)

2.4.1. Balance Sheet

The balance sheet as of any given date describes the categories and amounts of

assets employed by the business and offsetting liabilities incurred to lenders

and owners. Also called the statement of financial position, it must always

balance because the total assets invested in the business at any point in time,

by definition are matched precisely by the liabilities and owners equity

supporting these assets.

The major categories of assets or uses of funds are:

Current assets: - items that turn over in the normal course of business

with in a relatively short period of time, such as cash, marketable

securities, accounts receivables and inventories.

Fixed assets: - such as land, mineral resources, buildings, machinery,

vehicles, and so forth, all of which are used over the long term.
Other assets: - such as deposit, patents, and various intangibles like

good will.

Major Source of funds is:-

Current liabilities: - which are obligation to vendors, tax authorities,

employees, and lenders due within one year.

Long term liabilities: - a variety of debts instrument repayable beyond

one year such as mortgages and bonds.

Owners equity: - which represents the funds contributed by various

classes of owners of the business as well as accumulated earnings

retained in the business.

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Balance sheets are static in that, like a snapshot, they are reflecting condition

on the date of their preparation. They are also cumulative in that they

represent the effects of all decisions and transactions that have taken place

and have been accounted for up to the date of preparation. (Ibid)

2.4.2. Operating Statement

The operating statement reflects the effect of managements operating decisions

on business performance and the resulting profit or loss for the owners of the

business over a clearly specified period of time. The profit or loss calculated in

the statement increases or decreases owners equity on the balance sheet. The

operating statement is thus a necessary to the balance sheet in explaining the

major component of change in owners equity, and it provides essential

performance assessment information. (Ibid)

The operating statements, also referred to as the income statement, earnings

statement or profit and loss statement, displays the revenues recognized for a

specific period and the costs expenses charged against these revenues,

including write-offs (i.e. depreciation and amortization of various assets and

taxes.)

Again, these efforts are governed by generally accepted accounting principles.

How some costs and expenses are handled involves the accountants

judgments. Among the areas subject to the judgments is the deprecation of

assets being used over more periods than one reported the cost of goods

purchased or manufactured in the previous periods, and proper allocation of

general expenses to a specific period.

2.5. Financial Analysis

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Management, creditors, investors and others to form judgments about the

operating performance and financial position of the firm use information

contained in financial statements. Users of financial statements can get better

insight about the financial strength and weakness of the firm if they properly

analyze the information reported in those statements.

Management should be particular interested in knowing the financial strength

of firm to make to make their best use and to be able to spot out the financial

weakness of the firm to take suitable corrective actions. The future plans of the

firm should be laid down in view the firms financial strength and weakness.

Thus, financial analysis is the starting point for making plans, before using any

sophisticated forecasting and budgeting procedures. (Pandey, 1981, p.500)

2.5.1. Uses of Financial Analysis

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by properly establishing relationships between the

items of the balance sheet and the profit and loss account. Financial analysis

can be undertaken by management of the firm or by parties outside the firm,

viz., owners creditors, investor and others.

The nature of analysis will differ depending on the purpose of the analyst. For

example, trade creditors are interested in the fact that the firm should be able

to meet their claims over a very short period of time. Their analysis will,

therefore, confine to the evaluation of the firms liquidity position. The suppliers

of long-term debt, on the other hand, are interested in the firms long- term

solvency and survival. They analyze the firms profit ability over-time its ability

to generate cash to able to pay interest and return their claims and the

relationship between various sources of funds. Similarly investors, who have

14
invested their money in the firms shares, are most concerned about the firms

earnings. They restore more confidence in those firms that show steady growth

in earnings. As such, they concentrate on the analysis of the firms present and

future profitability. They are also interested in the firms financial position to

the extent it influences the firms earnings ability. Finally, management of the

firm would be interested in every aspect of the financial analysis. It is their

overall responsibility to see that the resources of the firm are used most

effectively and efficiently, and that the firms financial condition is sound.

(Pandey, 1981, p.501)

2.5.2. Common-size analysis and trends

Common-size analysis is a technique that enables us to determine the makeup

and patterns of a companys balance sheet and income statement. The

analysis can be horizontal (across years) or vertical (within a year). In the

financial statement, common-size analysis reduces absolute numbers to

percentages of components at one point in time or to percentages of change in

percentages of change in components over time, there by revealing possible

trends.

2.5.2.1. Horizontal Analysis

Horizontal analysis is a common-size analysis that compares the same

accounts from year. When we arrange several annual balance sheet and income

statements in vertical columns we can horizontal compare the annual changes

in related items. This comparison, or horizontal analysis, of the accounts

reveals a pattern that may suggest managements underlying philosophies,

policies, and motivations. The annual financial statements are no longer simple

15
snapshots; instead they become important messages of management action

and decisions.

2.5.2.2. Vertical Analysis

It is a common-size analysis that compares accounts in the income statement

to net sales and amounts in the balance sheet to total assets. When we analyze

the financial statements for one period, we often use vertical analysis. A

vertical analysis of balance sheets how the mix of assets and financing is
changed over time.

2.5.3. Nature and Types of Ratio Analysis

2.5.3.1. Nature of Ratio Analysis

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as the

indicated quotient of two mathematical expressions and as the relationship

between two or more things. In financial analysis, a ratio is used as an index

or yardstick for evaluating the financial position and performance of a firm. The

absolute accounting figures reported in the financial statement do not provide

a meaningful understanding of the performance and financial position of a

firm. An accounting figure conveys mining when it is related to some other

relevant information.

The relationship between tow accounting figures, expressed mathematically, is

known as a financial ratio (or simply as a ratio). A ratio helps the analyst to

make qualitative judgment about the firms financial position performance.

2.5.3.2. Standards of comparison for ratio analysis

The ratio analysis involves comparison for a useful interpretation of the

financial statements. A single ratio in itself does not indicate favorable or

16
unfavorable condition. It should be compared with some standard. Standards

of comparison of;

1. Ratios calculated from the past financial statements of the same firm.
2. Ratios developed using the projected or Performa financial statements of

the same firm.

3. Ratios are some selected firms, especially the most progressive and

successful at the same points in time.

4. Ratios of the industry to which the firms belongs

The easiest way of to evaluate the performance of the firm is to compare it

present ratios with the past ratios. When a financial ratio over a period of time

are compared, it gives an indication of the direction of changes and reflects

whether the firms financial position and performance has improved,

deteriorated or remained constant over time. This kind of comparison is valid

only when the firms accounting policies and procedures have not changed.

Sometimes future ratios are used as a standard of comparison. Future ratios

can be developed from the projected or Performa financial statements. The

comparison of the past ratios with future ratios shows the firms relative

strengths and weakness in the past and in the future. If the future ratios

indicate weak financial position, corrective actions should be initiated.

Another way of comparison is to compare the ratios of one firm with some

selected firms in the same point in time. In most of the cases, it is more useful

to compare the firms ratios with the ratios of a few carefully selected

competitors, who have similar operations. This kind of a comparison indicated

the relative financial position and performance of the firm. A firm can easily

resort to such a comparison, as it is not difficult to get the published financial

statements of similar firms.

17
To determine the financial condition and performance of a firm, its ratios may

be compared with average ratios of the industry of which the firm is a member.

Industry ratios are important standards in view of the fact that each industry

has its characteristics, which influence the financial and operating

relationships. But there are certain particular difficulties in using the industry

ratios. First, it is difficult to get average ratios for the industry. Second, even if

industry ratios are available, they are averages- averages of ratios of strong and

weak firms. Sometimes the spread may be though wide that the average may be

of little utility. Third, the averages will be meaningless and the comparison will

be also useless, if the firms with in the same industry widely differ in their

accounting data for the companies in the industry ratios will prove to be very

useful in evaluating the financial condition and performance of a firm. (Pandey,

1981, p.501)

2.5.3.3. Types of Ratios Analysis

Several ratios can be calculated from the accounting data contained in the

financial statements. These ratios can be grouped in to various classes

according to the financial activity or function to be evaluated. The parties,

which generally undertake financial analysis, are short-term creditors, long-

term creditors, owners and management. Short-term creditors main interest is

in the liquidity position or the short-term solvency of the firm. Long term

creditors on the other hand are most interested in the long term creditors on

the other hand are more interested in the long term solvency and profitability

of the firm. Similarly owners concentrated on firms profitability analysis and

the analysis of the firms financial conditions. The management is interested in

evaluating every activity of the firm. They have to protect the interest of all

parties and see that the firm grows profitability.

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2.5.3.3.1. Liquidity Ratios

It is extremely essential for a firm to be meeting its obligations as they become

due. Liquidity ratios measure the ability of the firm to meet its current

obligations. In fact, analysis of liquidity needs the preparation of each budgets

and cash flows statements, but liquidity ratios, by establishing a relationship

between cash and other current assets to current obligations, provides a quick

measures of liquidity. A firm should ensures that it does not suffer from lack of

liquidity (illiquidity), and also that it is not too much highly liquid. The failure

of a company to meet its obligations, due to lack of sufficient liquidity, will

result in bad credit ratings, closure of the company. A very high degree of

liquidity is also bad; idle assets earn nothing. The firms funds will be

unnecessarily tied up in current assets. Therefore, it is necessary to strike a

proper balance between liquidity and lack of liquidity. ( Pandey, 1981, p.503)

2.5.3.3.2. Leverage (Capital Structure) Ratios

The short-term creditors, like bankers and suppliers of raw materials, are more

concerned with the firms current debt-paying ability. On the other hand, long-

term creditors, like debentures holders financial institutions etc., are more

concerned with the firms long-term financial strength. In fact, a firm should

have a strong short term as well as long term financial position. To judge the

long-term financial position of the firm, leverage or capital structure, ratios are

calculated. These ratios indicate the funds provided by owners and creditors.

As a general rule, there should be an appropriate mix of debt and owners

equity in financing the firms assets. The manner in which assets have been

financed has a number of implications. First, between debt and equity, debt is

more risky from the firms point of view. The firm has a legal obligation to pay

19
interest to debt-holders, irrespective of the profits made or loss incurred by the

firm. If the firms fail to pay-holders in time, they can take legal action against

the firm to get payments and in extreme cases, can force the firm in to

liquidation. Second, employment of debt is advantageous to share holders in

two ways:

They can retain control of the firm with a limited stake and
Their earnings will be magnified, when the firm earns a rate higher

than the interest rate on the invested funds.

However, leverage can work in positive direction as well. If the cost of debt is

higher than the firms overall rate of return, the earnings of shareholders will

be reduced. In addition, there is threat of insolvency. Thus, use of debt

magnifies the shareholders earnings as well as increases their risk. Third, a

highly debt-burdened firm will find difficult in raising funds from creditors and

owners in future. The owners equity is treated as a margin of safety by

creditors; if the equity base is thin, the creditors risk will be high.

Thus, leverage ratios are calculated to measure the financial risk and the firms

ability of using debt for the benefit of shareholders. (Pandey, 1981, p.508)

2.5.3.3.3. Activity (Asset utilization) Ratios

The funds of ratios and owners are invested are various kinds of assets to

generate sales and profits; the better the management of assets, the larger the

amounts of sales. Activity ratios are employed to evaluate the efficiency with

which the firms manages and utilities its assets. These ratios are also called

turnover ratios because they indicate the speed with which assets are being

converted or turned over into sales. Activity ratios, thus, involves a relationship

between sales and various assets.

20
A proper balance between sales and assets generally reflects that assets are

managed well. Several activity ratios can be calculated to judges the

effectiveness of assets utilization (Pandey, 1981, p.512).

2.5.3.3.4. Profitability Ratios

Profit is the difference between total revenues and total expenses over a period

of time. Profit is the ultimate output of a company, and it will have no future if

it fails to make sufficient profits. Therefore, the financial manager should

continuously evaluate the efficiency of its company in terms of profits.

The profitability ratios are calculated to measure the operating efficiency of the

company. Besides management of the company, creditors and owners are also

interested in the profit ability of the firm. Creditor wants to get interest

regularly and return of principal at maturity. Owners want to get a responsible

return on their investment. This principal only when the company earns

enough profits. (Pandey, 1981, p.517)

2.5.4. Limitations of Financial Analysis

Ratios of a company have meaning only when they are compared with some

standards. It is difficult to find out a proper basis of comparison. Usually it is

recommended that ratios should be compared with the industry averages. But

the industry average is not easily available.

The situations of two companies are never same. Similarly, the factors

influencing the performance of a company in one year may change in another

21
year. Thus, the comparison of the ratios of two companies becomes difficult

and meaningless when they are operating in different situations.

The interpretation and comparison of ratios are rendered invalid by the

changing value of money. The accounting figures, presented in the financial

statements, are expressed in the monetary unit, which is assumed to remain

constant. In fact, price change over years and, as a result, assets acquired at

different dates will be expressed in different Birr in the balance sheet. This

makes comparison meaningless.

In practice, differences exist as to the meaning of certain terms. Diversity of

views exists as to what should be included in shareholders equity, current

assets or current liabilities. Whether preference share capital should be

included in debt or should current liabilities be included in debt in calculating

debt-equity ratios? Should intangibles assets be exchanged to calculate the rate

of return on investment? If tangible assets have to be included, how will they be

valued? Similarity, profit means different things to different peoples.

The ratios do not have much use if they are not analyzed over years. The ratios

as a moment of times may suffer from temporary changes. This problem can be

resolved by analyzing the trends of ratios over year; although trend analysis is

more useful but still the analysis is static in nature. The balance sheet

prepared at different points of time, are static in nature. They do not reveal the

changes, which have taken place between dates of two balance sheets.

The statements of changes in financial position reveal this information, but

these statements are not available to outside analysis.

The bases to calculate ratios are historical financial statements. The financial

analyst is more interested in what happens in future, while the ratios indicate

22
what happened in the past. Management of the company has information

about the companys future plans and polices and, therefore, is able to predict

future happening to a certain extent, but the outside analyst as to rely on the

past ratios, which may not necessarily reflects the firms financial position and

performance in future. (Pandey, 1981, p.533)

CHAPTER THREE

23
3. FINANCIAL ANALYSIS

3.1. An Overviews of Financial Statements of the Bank

An essential link in the communication function is the preparation and

issuance of financial statements help for the purpose of providing useful

information to people who make rational investment, creditors, organizations

investors, lenders, managers, suppliers, customers and other decision-makers.

The statements are useful because they describe the organizations financial

health and performance in a condensed and highly informative way.

The Wegagen bank share company has prepared two financial statements these

are balance sheet and income statements. Each branch of the bank prepares

interim financial statements monthly and also semi-annual and annual

financial statements. At the same time the consolidated financial statements

are prepared at the consolidated financial statements are prepared at the head

office.

The bank follows the International Financial Reporting Standard (IFRS) i.e. it

uses the accrual system of accounting. This method recognizes transactions

in the period in which they occur regardless of when cash is paid or received.

However the bank uses for loans overdue interest is kept under receivable

account until collected, and interest on loans in legal hands is recorded under

memorandum accounts.

The financial year of the bank starts on July 1 and ends on June 30. It is,

therefore safe to say that budget year conforms to the governments financial

year. However, transaction dates and monthly closing of books will be on the

basis of Gregorian calendar.

24
3.2. Working Capital Management

3.2.1. Current Asset Management

Asset classification are listed on properly classified balance sheets in order of

their liquidity, which shows how quickly the bank convert them to cash as part

of operations.

3.2.1.1. Cash Management

Cash is often called a non earning asset. The goal of cash management is to

maintain the minimum cash balance that will provide the bank with sufficient

liquidity to meet its financial obligations and to enhance the profitability. The

purpose of this section is mainly to know whether the bank has effective cash

management procedure and maintaining adequate cash amount for use in

conducting its normal activities. The financial manager of the bank is

responsible for the effectiveness of the cash management program.

The cash balance of the bank includes:

Cash Local Currency: - cash local currency is held in two forms-petty cash

and vault cash.

Petty Cash: - Mainly consist of Birr notes and coins forming part of it.

The holding remains under the control of the executive banking officer of

the branch for daily use.

Vault Cash: - which also include Birr notes and coins, is the bulk of

cash held in the vault for servicing the petty cash. This is kept under

dual control at all times.

25
Cash Foreign Currency: - it includes cash, notes of various foreign currencies

and coins in some cases. The balance shown in this account is the counter-

value of the foreign currency cash holding in birr.

The bank has a cash holding limits in accordance with the needs of the cash

requirements of branches (i.e. based on their operations). In some of shortages,

the bank replenished from the head office the head office of the bank in Addis

Abeba and through the branches of the commercial bank of Ethiopia where the

bank has no branch office. Cash excesses that maintained by branches above
their cash holding limit are also lodged to the banks treasury in Addis Abeba

in branches of commercial bank of Ethiopia to facilitate transfer of cash

whenever cash shortage excess occur.

Cash is more susceptible to theft than any other asset. Furthermore a large

portion of total transaction of the bank involves the receipt or disbursement of

cash. For both these reasons, the bank applies the following procedures:-

Physically safeguarding the cash

There is a separation of duties of that of custody of cash from those who

keep the accounting records.

TABLE 1
Trends of Cash

ITEM 2010/11 2011/12 2012/13

Cash on hand 675,696,500 571,211,274 576,206,441
Shares from the current asset 8.59% 7.14% 5.76%

As stated on the above table, the cash balance of Wegagen bank accounted for

8.59%, 7.14% and 5.76% from the total current assets for the last three years.

This shows, as there is a decrease from year to year, so we can say that the

26
bank is able to find way to generate profit from the cash over the time.

Specifically in the year 2012/13 the amount decrease by 2.77% compare to

year 2010/2011. Which show the bank operation over the years to generate

revenue is increasing continuously from the continuous declines over the year

in cash balance the amount of idle cash using might incurs for the future

which able the bank to generate more profit for future.

3.2.1.2. Deposits

The bank has a separate general ledger accounts in each bank that reflects the

balance of the bank current (reserve) accounts i.e. National Banks of Ethiopia

(NBE), Commercial Bank of Ethiopia (CBE), other domestic banks and foreign

banks account. All payments, receipts, borrowing and repayments that take

place between the bank and the bank are cleared against NBE account. In line

with NBEs reserve requirement a minimum balance of 5% of the banks

current liabilities should also be kept in this account at all times. A deficiency

in the required reserves balance is subject to penalty. The penalty shall be

assessed at the rate twice the current average rate of interest fixed on loans

and advances. (Refer SBB/14/96 of NBE)

The amount of cash deposited in the Commercial Bank of Ethiopia branches

and other domestic banks are also reflected by its own accounts. The foreign

banks general account balance shows the amount of foreign currency

deposited in foreign banks and shown the counter value in Birr. Individual

subsidiary accounts are maintained under each correspondents name with

which the bank keeps account.

TABLE 2

Trends of Deposits

27
 ITENS 2010/11 2011/12 2012/13
Deposit with CBE 429,772,799 223,458,868 155,912,517
Reserve account with NBE 1,117,258,21 314,930,076 308,501,862

1
Deposit with foreign Banks 1,051,971,66 913,317,516 826,635,615

2
Total Deposit 2,662,002,58 1,451,704,460 1,291,056,99

2 4
Shares from current asset 33.66% 18.15% 12.91%
The deposit balance of the bank as shown in the above table is a current

account that facilitates its transactions with different banks. The trends of

deposit over the shows a continue declines this is because of the increment of

the amount give as a lone by the bank and increment in NBE bill.

3.2.1.3. Treasury Bills, NBE Bills and Equity investment

Cash that the bank does not need at certain point in time is considered excess

or idle cash, which the bank can invest to earn a return. By investing idle cash

temporary, the bank can earn return that increase its net income in order to

remain in a position to pay its current liabilities as they become due. The bank

invests its excess cash by buying treasury bills, NBE bills and equity

investment. But the purchase of the bills amount is not always the willingness

of the bank for example, buying NBE Bills is mandatory for the bank which is

increasing in amount continuously.

3.2.1.4. Loans and Advances

Loans and advances are one part of current assets that indicates the amount

of loans provided to loan customers.

TABLE 3

28
 Trends of Loans and Advances

ITEMS 2010/11 2011/12 2012/13

Loans & advances 2,777,875,585 3,478,972,95 4,585,105,694

4
Shares from the current asset 35.12% 43.5% 45.86%

As the table show the amount of loans and advance show an increment over

the past year. Its sheer of current asset is also grown over the year this implies

that the bank is able to landed mach more money to its lone demanders over
the year.

This increment also shows the increment on the amount of interest income

collected from the lone.

As suggested by the managers the amount of lone and advance cued increase

mach more as related to the existing demand in 2011/12 the amount could

been higher but as result of unprecedented deposit withdrawal over the year

the amount of loans and advance cant increase mach higher. When we came to

the year 2012/13 as compared to the increment in the amount in loan in

advance can be much higher if the amount of funds canalled towards NBE Bill

purchased taken in to account.

The managers suggested that the increment on NBE Bill purchase on

accelerated rate put strain on both earning as well as liquidity position of the

bank because the amount is in bill not in cash.

3.2.2. Current Liability Management

The banks current liabilities are listed first the liabilities section of the balance

sheet, the receipt of cash from saving customers.

29
 TABLE 4

Trends of Current Liabilities

ITEMS 2010/11 2011/12 2012/13

Deposit from Customer 5,733,716,85 5,428,296,88 7,148,158,88

3 6 3
Deposit from financial 223,766,980 329,884,003 402,687,270

institution
Margin held on letters of 234,612,645 346,914,581 358,230,310

credit
Other Liabilities 385,944,214 505,505,925 539,640,612
Provision for Taxation 139,812,023 122,622,767 109,609,779
Total Current Liabilities 6,712,892,75 6,733,229,62 8,558,326,85

5 3
Increment C.L over the year. Base year 3.02% 21.56%

TABLE 5

Trends of Current Liabilities in percentage

ITEMS 2010/11 2011/12 2012/13

Deposit from Customer 85.4% 86.6% 83.5%
Deposit from financial institution 3.33% 4.89% 4.7%
Margin held on letters of credit 3.49% 5.15% 4.18%
Other Liabilities 5.74% 7.5% 6.3%
Provision for Taxation 2.08% 1.82% 1.28%
Total Current Liabilities 100% 100% 100%
Increment C.L over the year. Base year 3.02% 21.56%

As the above table shows the receipt of deposit from customer create the most

common type of current liabilities. The structure of deposit consist payable on

30
demand, saving deposit and term deposit with saving deposit and payable on

demand having the high share . The deposit from customers in 2011/12 was

the least of the periods this is due to various external events and phenomena

for example the unexpected withdrawal by depositors. But on the year 2012/13

the bank deposit base grow at an accelerated pace in the industry. This

remarkable performance was mainly achieved due to at most effort exerted by

all branch of the bank and improvement made in branch network expansion.

So to achieve the objective of the bank should continue its appreciated job by

2012/13 for the future periods.

3.2.3. The Trends of Working Capital

So as to obtain a clear picture about working capital management, tabulating

comparative working capital and net working capital position of the bank

makes convenient. The table also helps renders to judge how the bank operates

its business.

TABLE 6

The Trends of Working Capital

No. Description 2010/11 2011/12 2012/13

1 Total current assets 7,908,387,98 7,996,900,74 9,997,975,43

4 7
2 Total current Liabilities 6,712,829,75 6,733,229,16 8,558,326,85

5 2 3
3 Net working capital 1,195,495,22 1,263,671,58 1,439,648,29

9 5 0
4 Current Ratio 1.17% 1,18% 1.16%
Source: - Balance sheet of each year prepared by bank.

31
The above table shows that current assets are more than current liabilities

with a little bite of incremental fluctuation were a reason of ups and downs of

the amount of deposit over the year. Any way the bank is a position to resolve

short term commitment and obligations using its current assets.

3.3. Common-Size Analysis and Trends

Common-size analysis is a technique that enables us to determine the makeup

and patterns of the bank balance sheet and income statement. The analysis

can be either horizontal (across years) or vertical (within a year) or both. In the

financial statement, common-size analysis reduces absolute numbers to

percentage of changes in components over time, there by reveling possible

trends.

This analysis includes the past years that are 2010/11-2012/13 statement and

balance sheet statements. It helps to show trends concerning the financial

position and results of operation and to forecast the future conditions of the

bank.

3.3.1. Vertical and Horizontal Analysis

So as to indicate periodic changes in the financial statements the year 2010/11

is taken as a base year.

3.3.1.1. Income Statement

Income:
The income statement shows the results of operations of the bank for a period

of time. The first item in this statement is revenue, which is the gross monetary

value of services delivered to customers.

The major components of income of the bank are:

32
Interest earned on loans and advance that are provided for customers in

the form overdraft and term loans.

Commission income which includes commissions that are collected from

export transactions, on both local and foreign letters of guarantees

issued by the bank, both local and foreign transfer of mail, telegraphic

and demand draft, revenue stamps, sale of travelers check, and

commission charges when a cash payment order is cashed at branch

located outside the vicinity of the issuing branch, etc.

The other major sources of revenues is the interest earned on surplus

fund that comprises dividend earned on local investments, interest

earned on treasury bill, government bonds, on deposit with domestic

banks and interest earned on correspondents. Lastly, the components of

revenue also include other incomes that are not mentioned in the above

categories.

TABLE 7

WEGAGEN BANK SC

COMPARATIVE PROFIT OR LOSS STATEMENTS

33
 VERTICAL ANALYSIS

For the year ended Jun 30th 2010/11-2012/13

2010/11 2011/12 2012/13

% change % change % change
Revenue: 100 100 100

Operating Income
Interest Income 38.6 52 60.3
Fees, Charges & commotion 30.4 14.4 12
Other Income 30.9 33.6 27.6
Expenses: 12.3 16.45 17.8

Interest Expenses
Salaries and Benefits 14.8 17 19
General Expenses 11.3 12.2 14.3
Other General Expense 0.44 0.46 0.34
Reversal/Additional Provision 4.32 (5.34) 1.95

held for loan and advance

Provision for Doubtful Account 0.63 (*) 0.35
Operating Expenses 43.8 46.1 53.4
Income Before Tax 56.2 54 46.6
Income Tax 16.54 14.4 11.3
Net Income After Tax 39.7 39.6 35.3
Total Operating Revenue 814,929,048 850,117,18 970,090,070

4
Source: The annual Financial Report of 2010/11-2012/13

(*) This symbol shows insignificant

During the year 2010/11 the bank has generated a total operating income of

birr 814,929,048 the largest amount of which was generated from interest

income on loan & advance. Interest earned accounted for 38.6% followed by

other income contributing 30.9% and commotions 30.4%. Under normal

circumstance the interest earned from loans and advance should take the

34
highest share of the interest on total income this share of interest on total

income continues to grow for the year 2011/12. During 2011/12 the bank has

generated a total operating income of 850,117,184 compared to the previous

year it has grown by 4.3% like the previous year the very largest share was

came from interest income contributing 52% of the total income followed by

other income and commission 33.6% and 14.4% respectively. The manager

suggested that the 2011/12 income earned could be larger than what it was

but the unexpected withdrawal over the year decrease the bank ability to loan

to customers which reduce the bank ability to earn much more interest

income.

During the year2012/13 the bank was able to generate a total income of birr

970,090,070 compared to the base year (2010/11) it has grown by 19%.in this

year also the interest income grown highly compared to the past two years

contributing 60.3% of the total income this higher contribution of the interest

income was due to higher increment in loan and advance compared to the past

two years. The total income also contains other income and commission

contributing 27.6%and 12% respectively.

In the above three years we can notice that the contribution and share of other

income and commission show decline an stagnation or fluctuation the reason

for this was the high computation exist in the industry the researchers

suggested that if the bank was able to increase commission and other income

as like interest income its total earning might be larger than what is shown in

the income statement so for the coming periods the bank should try to focus

its earning option on more paths than only on interest income even if it is there

major operation income because opening many options has more

contributions.

35
Expanse

The total expanse for the year 2010/11 include interest expense, salary and

benefit, general and administration expense and other general expanse

amounts to 356,799,299.in the same year total expanse has 43.8%of the total

operating income out of this total expense salary and benefit consist the

highest share of 34%followed by interest expense and administrative expense

contributing 28% and 26% respectively.

Exibit2 of the income statement shows the overall expense of 2011/12and

2012/13 has increase by 11.24% and 46% respectively as compared to the

amount register in the base year 2010/11.this is principally due to significant

increment of total deposit as result of this increment interest paid on deposit

has increased by 39.6% and 72% respectively than the base year the other

main factor that increase expanse were the rapid growth of banks business

activity reflected by more branch from 54 in 2010/11 to 63 in 2011/12 and to

76 in 2012/13 which also result increment in the number of employees.

Profit analysis

Despite the regulatory measures imposed on the lending capacity of the banks

as a result of NBE bills effect and prevailing stiff computation and deposit

mobilization in the industry the bank remains profitable for the past three

years.

The reported profit before tax on the past three years amount 458.1,458.1 and

450 million respectively as shown above the profit before tax show fluctuation

amount despite the increment in the total amount of income this is due to the

increment rate of expense was higher than the increment rate of total income.

Even though there is stiff computation in the industry the bank should try to

36
reduce some of its expenditure to acceptable amount like the very high amount

of salary and benefit package of the bank and other general expenses. The

profit after tax show slight increment over the year as reported showing

323.6,335 and 340 million respectively which is increasing over the year this is

due to the ability of the bank to reduce its tax payment over the years this is

because the income generated from interest earned on treasury bills NBE bails

and other related tax free incomes and also incomes in which the tax whit hold

by third party increase over the past years.

37
 TABLE 8

WEGAGEN BANK SC

COMPARATIVE PROFIT OR LOSS STATEMENTS

HORZONTAL ANALYSIS

For the year ended Jun 30th 2010/11-2012/13

2010/11 2011/12 2012/13

Amount Amount % Amount %
Revenue: 81 850,117,18 4.34 970,090,07 19.0
Operating Income 4,929,048 4 0 3
Interest Income 314,852,23 441,664,54 40.3 585,446,928 79.1
6 3
Fees, Charges & 248,516,00 122,769,95 (50.6) 116,719,888 (53)
commotion 5 0
Other Income 25,560,807 240,261,01 (4.5) 267,923,254 6.5
6
Expenses: 100,194,47 139,882,17 39. 172,375,00 7
Interest Expenses 1 1 6 6 2
Salaries and 120,492,78 144,385,98 19. 183,824,304 52.
Benefits 7 6 8 6
General Expenses 92,133,867 103,652,99 12.5 138,655,183 50.5
3
Other General 3,617, 3,950,23 9.1 3,261,76 (9.
Expense 770 0 8 2 8)
Reversal Provision 35,256,37 (45,471,67 (22 18,941,44 (46.
held for loan and 6 5) 9) 4 2)
advance
Provision for 5,104,02 39,73 (99. 3,365,01 (3
Doubtful Account 8 7 2) 2 4)

38
 Operating 356,799,29 396,911,11 11.2 520,422,661 45.
Expenses 9 1 4 8
EBIT 458,129,74 458,256,07 * 449,667,409 (1.84)
0 2
Income Tax 134,852,02 122,622,76 (9) 109,609,779 (18.7)
3 7
NIAT 323,277,72 335,633,30 3.8 340,057,631 5.1
6 5
Source: The annual Financial Report of 2010/11-2012/13

% = Current year Base year

Base year Base year 2010/11

3.3.1.2. Balance Sheet

The bank uses report form of balance sheet as of any given date to describe the

categories and amounts of assets employed by the bank and the offsetting

liabilities incurred to lenders and owners equity. Its purpose is to provide

information that helps readers to understand the bank financial status or

position by analyzing the types and amounts of assets, liabilities and equitys of

the bank using percentage composition and trend analysis.

39
 TABLE 9

WEGAGEN BANK SC

COMPARATIVE BALANCE SHEET

2010/11 2011/12 2012/13

1.ASSET
Cash & bank balance local 2,285,727,420 1,109,600,218 1,040,627,850
Reserve account with NBE 803,388,527 578,388,52 361,105,527
7
Deposit with foreign bank 1,051,971,662 913,317,51 826,635,615
6
Treasury bill * 189,567,76 209,517,840
0
Fixed time deposit with NBE * * 337,283,000
NBE Bills 899,887,000 1,597,430,000 2,358,984,000
Equity investment * 5,030,000 25,030,000
Loan & advance 2,777,875,000 3,478,972,954 4,585,105,644
Stock of supply 20,352,762 25,302,770 45,121,740
Other assets 69,185,028 99,295,002 208,563,928
Differed charge 36,592,435 41,160,133 35,139,290

40
Lease hold land 16,429,506 16,429,505 9,714,740
Fixed Asset 99,527,453 292,664,403 350,974,228
Total Asset 8,060,937,378 8,347,154,788 10,393,803,40
1
2. Liabilities
Deposit from customers 5,733,716,853 5,428,296,886 7,148,158,883
Deposit from financial institution 223,766,980 329,884,003 402,687,270
Margin held on letter of credit 234,612,645 346,919,581 358,230,310
Other liability 385,944,254 505,505,925 539,640,612
Provision for taxation 134,852,023 122,622,767 109,609,779
Lease hold land payable 10,709,466 9,792,458 5,051,728
Total Liability 6,723,602,221 6,743,021,620 8,563,378,581
3. CAPITAL & RESERVE
Paid up-capital 779,316,000 952,939,00 1,090,898,000
0
Share premium 25,424,100 25,424,10 25,424,100
0
Legal reserve 290,136,763 374,045,08 459,059,779
9
Retain earning 242,458,294 251,724,97 255,043,223
9
Total Liability & Capital 8,060,937,378 8,347,154,788 10,393,803,40
1

Source: The annual Financial Report of 2010/11-2012/13

TABLE 10

WEGAGEN BANK SC

COMPARATIVE BALANCE SHEET

VERTICAL ANALYSIS

2010/11 2011/12 2012/13

1.ASSET
Cash & bank balance local 28.3 13.3 10

41
Reserve account with NBE 9.4 6.9 3.5
Deposit with foreign bank 13 10.9 7.95
Treasury bill * 2.3 2
Fixed time deposit with NBE * * 3.2
NBE Bills 11.2 19.13 22.7
Equity investment * * 0.24
Loan & advance 34.5 41.7 44.1
Stock of supply 0.25 0.3 0.43
Other assets 0.86 1.19 2
Differed charge 0.45 0.5 0.34
Lease hold land 0.2 0.16 *
Fixed Asset 1.23 3.5 3.4
Total Asset 100 100 100
2. LIABILTIES
Deposit from customers 85.2 85 83.5
Deposit from financial institution 3.3 4.9 4.7
Margin held on letter of credit 3.5 5.1 4.2
Other liability 5.74 7.5 6.3
Provision for taxation 2 1.8 1.27
Lease hold land payable 0.16 0.14 *
Total Liability 100 100 100
3. CAPITAL & RESERVE
Paid up-capital 58.2 59.4 59.5
Share premium 1.9 1.5 1.4
Legal reserve 21.7 23.3 25
Retain earning 18.1 15.7 13.9
Total Capital 100 100 100

TABLE 11

WEGAGEN BANK SC

COMPARATIVE BALANCE SHEET

HORZONTAL ANALYSIS

2010/11 2011/12 2012/13

42
1.ASSET
Cash & bank balance local 100 (51.4) (54.4)
Reserve account with NBE 100 (28) (55)
Deposit with foreign bank 100 (11.5) (21.4)
Treasury bill 100
Fixed time deposit with NBE 100
NBE Bills 100 77.5 163.25
Equity investment 100
Loan & advance 100 25.2 65
Stock of supply 100 24.3 121.7
Other assets 100 43.5 201.4
Differed charge 100 13.1 (4)
Lease hold land 100 (40.9)
Fixed Asset 100 194 252.6
Total Asset 100 3.55 28.9
2. Current liabilities
Deposit from customers 100 (5.6) 24.6
Deposit from financial institution 100 47.4 79.9
Margin held on letter of credit 100 47.8 52.6
Other liability 100 30.9 39.8
Provision for taxation 100 (9) (18.7)
Lease hold land payable 100 (8.5) (52.8)
Total Liability 100 0.3 27.3
3. CAPITAL & RESERVE
Paid up-capital 100 22.3 40
Share premium 100
Legal reserve 100 28.9 58.2
Retain earning 100 3.8 5.1
Total Capital 100 19.9 36.9
Total Liability & Capital 100 3.55 28.9

% = Current year Base year

Base year Base year 2010/11

Structure of Asset:

At the end of 2011/12 fiscal year the balance sheet the bank depicts that

aggregate asset at birr 8,060,937,378 out of the total asset net loans and

advances accounted for largest share of birr 2,777,875,585 which is 34.5% of

43
the total asset followed by cash and bank balance with local bank birr

2,285,727,420 which is 28.3% of the total asset, deposit with foreign bank

10%, NBE bills 11.2%, reserve account with NBE 9.4% and other assets as

stated on the exhibit -1.

As stated on exhibit the balance sheet of the bank continued to grow from year

to year. The total asset at the end of the year 2011/12 stood at birr

8,347,154,788 showing an increase of 286.2 million (3.6%) this is due to the

increment in loan and advance by 25.2% and NBE bills by 77.5% and also an

increment on banks fixed asset, other asset, stock of supply and other

additional accounts like equity investment and treasury bills.

As stated above the cash and bank balance of the bank, reserve account with

NBE and deposit with foreign bank decrease over the fiscal year this shows the

bank was managing its reserve balance for loan and advance to earn more

interest income if you see in the year 2011/12 the bank total deposit from

customer shows a decrease amount by 5.6% from the least year but the banks

loan in advance show on increment of 25.2% from the least year.

At this class of 2012/13 fiscal year the total assets show a balance of

10,393,803,401 showing 28.9% increment over the base year change is

resulted from an increasing of loans and advances amounted 4,585,105,644

(65%) from the base year and 31.8% from last year, If we compare it with the

amount of mobilization saving increase by 31.7% from the last year which is

almost the same growth rate. The other major increment on the year 2012/13

balance sheet is very high increment in NBE bills by 63.25% from base year

increment on investment on equity, treasury bills and fixed asset of the bank.

In contrast the bank cash and bank balance reserve account with NBE and

deposit with foreign bank continues to declines over the year this shows the

44
bank was transferring it reserved cash and deposit to a more interest earning a

year and to fulfills it requirement of NBE bills.

In normal operation of the bank loan and advance should take transits portion

of the assets of the banks, if we see in the past three years operation of the

bank we can know that loan and advance of the bank consisting the highest

share of the total asset at increased amount. The other major contain this

years is the very high increment on NBE bills which becomes the second

largest assets of the bank. The manager suggest that the loan and advance of

the bank mach more significant the amount of fund channeled towards NBE

bills purchase was taken in to accounts the continuing accelerated grow the

rate of NBE bills is putting strains on both earnings as well as liquidity position

of the bank.

Structure of Liabilities:

As shown on exhibit the aggregate liabilities of the bank were birr 6.72 billion

as of June 30 2010/11 fiscal year which is 83.4% of the total liabilities and

capital. On these customer deposit accounted for a largest share of birr 5.73

billion (85.2%) followed by other liability, margin hold on letter of credit add

posit from financial institution and provision for taxation consisting 5.7%,

3.3%, 3.3% and 2% respectively.

From the total deposit from customer balance payable demand constituted the

largest share of birr 3.09 billion (53.9%) followed by saving deposit constitute

2.51 billion (43%) the remaining 2.8% was fixed deposit.

The total amount of liabilities as of 30 June 2011/12 has increase by 19.4

million (0.28%) over that of the preceding fiscal year. This slight is due to an

increment on deposit from financial institution, margin held on letter of credit

45
and other liabilities during the fiscal year the bank deposit mobilization saw

several impediments showing a decrement of 193 million (3%) from the

preceding year balance this is mainly due to the unexpected withdrawals over

the year. During this year also deposit from customer constitutes the largest

share of the banks liability (80.5%) followed by other liability (7.5%), margin

held on letter of credit (5.1%) and deposit from financial institution (4.9%).

From the overall deposit customers demand deposit total birr 2.34 billion

dropping by 25% (birr 781.1 million) year on year. Unlike demand deposit

saving and fixed time deposit registered an increment of 14% and 79% and

reaching birr 2.87 billion and 555.6 million respectively.

Saving deposit constituted the largest share by slicing a 50% share out of the

total deposit followed by demand deposit (40%) and fixed time deposit (10%). As

the figure shows at the end of 2012/13 aggregate liabilities of the bank reached

birr 856 billion exceeding the balance of 2010/11 and 2011/12 by birr 83

billion (27.3%) and 1.82 billion (26.7%). This grows resulted mainly from the

increment of total deposit by 24.6% and 31.6% from the base year and

preceding year respectively amount 7.14 billion. In the same way as the

previous year deposit from customer constitute the highest share (83.5%)

followed by other liability (6.3%), deposit from financial institution (4.7%) and

margin held on later of credit (4.2%).

In 2012/13 the banks deposit base grew at an accelerated pace in the face of

stiff competition over resources. A look at the composition of total deposits

indicated that except fixed time deposits indicated that except fixed time

deposit both saving and demand deposits positively contributed to the recorded

overall growth saving deposit which accounted for 53% of the total deposits

reached birr 4 billion expanding at an annual growth rate of 39%, similarly

46
demand deposits grow by 30% to rich birr 3 billion and constituted 40% of total

deposits. As at end of the fiscal year fixed time deposits reached birr 532.7

million taking about 7% of the total deposits.

As it can be seen from the past three year liability of the bank deposit from

customer create the most common type of current liability for the bank the

more bank has more deposit the more its able to land to its loan demanders

and more profit so the bank should work highly to mobilize more deposit but

highly downing so the bank should make acceptable expenditure to mobilized

the deposit.

Structure of Capital

The total capital of the bank is a summation of paid up capital, legal reserve,

retained earnings and share premium. As of June 30 2010/11 the capital of

the bank was birr 1.33 billion the balance has increased to birr 1.6 billion with

on annual increment of 20% in 2011/12 and rich 1.8 billion with an annual

growth of 13% in 2012/13. This improvement is resulted from the net profit

obtained in both year and the additional share issues and sold by the bank

from the overall structure of capital paid up capital constitute the largest share

of 779.3 million, 952.9 million and 1.1 billion making the bank to be among

those in premier positions in the entire private commercial banking industry.

3.4. Ratio Analysis

Ratio analysis is perhaps the most commonly used tool in finance statement

analysis. It is a mathematical relationship among numbers usually started in

the form of percentages or times.

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The purpose of this section is to discuss the ratio analysis as a technical of

analyzing the financial information, contained in the balance sheet and the

profit and loss statement account.

For a more meaningful understanding of the financial position and

performance of Wegagen bank, the writers use two types of comparisons among

the various standards of comparison:

1. Time Series (Trend) Analysis

This is the easiest way to evaluate the performance of the bank, which

compares its current ratios with the past ratios. It gives an indication of the

direction of changes and reflects whether the bank financial performance has

improved, deteriorated or remained constant over time. Although it may not be

sufficient, Wegagens time series analysis for 2010/11, 2011/12 and 2012/13

is presented.

2. Cross Sectional Analysis (Competitors Average)

This compares the ratios of the firm with average ratio of the industry of which

the firm is a member. These ratios are important standards in view of the fact

each industry has its characteristics, which influence the financial and

operating relationship. But there are practical difficulties in using the industry

average (competitors average).

3.4.1. Liquidity Ratio

It is extremely essential for a firm to be able to meet its obligations as they

become due. Liquidity ratio is a measure of a company ability to convert to

48
cash to meet its current liability. If the liquidity ratio is low, the firm has

difficulty in paying its current liability. This will result in the closure of the

company. In order to improve low ratio the firm should take the following

action:

Reduce current liability by borrowing long-term basis and apply for

payment of current liability.

Increase current asset by borrowing on long term basis or by sealing

capital stock and applying the fund for investment in current assets.

On the other hand, a very high degree of liquidity is also indicate that the firm

may sacrificing some profit because too much financial capital is tied up in

current asset.

TABLE 12
WEGAGEN BANK SC

Summary of Ratios

ITEMS 2010/1 2011/1 2012/1 Formula

1 2 3
A.LIQUIDITY RQTIO
Current ratio 1.17 1.18 1.16 Current Asset
Current Liabilities
Loan to total assets 0.34 0.4 0.44 Loan & Advances
Total Asset
Total Loan to total deposit 0.48 0.64 0.69 Loan & Advances
Total Deposit
B.DEBT UTILIZATION RATIOS
Deposit Ratio 0.71 0.65 0.68 Total Deposit
Total Asset
Interest-Coverage Ratio 4.2 4.3 3.6 EBIT
Interest Charges
C.ACTIVITY RATIO
Fixed Asset Turn Over 8.18 2.9 3.6 Operating Income
Fixed Asset
Total Asset Turn Over 0.1 0.1 0.09 Operating Income
Total Asset

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 Total Capital Employed 0.61 0.52 0.53 Operating Income
Capital Employed
D.PROFITABILITY RATIOS
Return on Asset (%) 4% 4% 3.2% Net Income
Total Asset
Return on Owners Equity 24% 21% 18.5% Net Income
(%) Owners Equity
Net Profit Margin (%) 40% 39.4% 35% Net Income
Operating Income
Total Expense to Total 60% 60.5% 65% Total Expense
Income Operating Income
Non-Interest Income to 61% 48% 40% Non-Interest
Total Income Income
Operating Income
Non-Interest Expense to 48% 44% 47% Non-Interest
Total Income Expense
Operating Income
Net-Interest Margin 7.7% 8.6% 9% -
E.CAPITAL ADEQUACY
Capital to Asset Ratio 16% 19% 17% Owners Equity
Total Asset
Earning Per Shares 448 378 330 Net Income
No of Shares
*Note: - Net interest margin is the ratio of interest income less interest expense

to average earning assets (loan and advances)

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A. Current Ratio (CR)

It is a measure of firm short term solvency; it indicates the availability of

current assets for availability of current asset for every one birr current

liability. When we consider the bank liquidity ratio over year, it reveled ups and

downs that is a conventional role a current ratio of 2-1 (current asset is twice

51
of current liability) or more is considered to be satisfactory but the banks

current ratio is less than the conventional rule, therefore it may not be

interpreted sufficiently liquid. Even if the 2012/13 current ratio of the bank is

lower than the past two years it is steal more than the sample competitors

average ratio which is 1.13.

B. Loan to Deposit Ratio (LDR)

This ratio indicates the proportion of loan and advances to total deposit. The

loan to deposit ratio of the bank over the past three year was 0.48, 0.64 and

0.64 from the figure we can notes that the share of loans over deposit increase

highly in 2011/12 compared to 2010/12 but in 2012/13 it was the same as

2011/12. As the NBE stated the maximum limit of loan to deposit ratio should

be 0.8 but the loan did not rich its upper limit for the past three years. Even if

the bank did not rich its limit loan to deposit ratio 2012/13 which is the

sample competitors average of 0.57 the different reasons stay of for not

reaching their higher limit of loan to deposit ratio is the stiff competition exist

in the industry and different regulations.

C. Loan to Total Asset Ratio (LTAR)

It is the relation of loans to total assets and calculated by dividing the loans

and advances by total assets. Loan to total assets of the bank for the past three

years showed increment from year to year which is 0.34, 0.4 and o.44

consecutively and also its ratio for the fiscal year 2012/13 slightly higher than

the sample competitors average which is 0.438. The contemporarily acceptable

range ratio by the NBE is between 0.45 - 0.80 any ting above 0.65 is assumed

to be high.

3.4.2. Activity (Asset Utilization) Ratio (AUR)

52
Activity ratio, also called efficiently or turnover ratios, used to measures the

effectiveness of management in using the bank assets. The better management

effectiveness on utilizing their asset is better exchange of the bank over its

resource.

A. Fixed Asset Turnover (FAT)

The fixed asset show how much is the bank earnings per Birr of its total

investment over fixed asset. In case of Wegagen bank the ratio indicate a very

high decline from earning 8.18 from per Birr investment on fixed asset to 2.9

and 2.76 per Birr investment on fixed asset in 2011/12 and 2012/13

respectively. From the balance sheet of the bank we can see that the fixed asset

of the bank grown year to year but it contribution to earning per Birr

investment is decline; so we can say that the bank is not using its full potential

in utilize its fixed asset. When we compare 2012/13 fixed asset turnover with

its sample competitors average 5.6, it shows a very lower amount from this we

can notes effective utilization problem and future earning probability.

B. Total Asset Turnover (TAT)

This also shows how much is the bank is earning per Birr of its total asset. In

case of Wegagen bank the ratio indicates that it is producing 0.1, 0.1 and 0.09

revenue per Birr of investment in total assets in the past three years. The ratio

has declined from 0.1 to 0.09 again like that of fixed asset the asset of the bank

increased in the past three years but its turnover even declined to 0.09, so

again it shows utilization problem. But when we compare it sample competitors

averages of 2012/13 0.085, it has a better turnover than its competitors. From

the amount of asset increment we can say that the bank has future earnings

possibility if it utilizes its asset effectively.

53
C. Capital Employed Turnover (CET)

Like the fixed assets and total assets turnover ratios, this ratio indicates the

bank ability of generating revenue per Birr of long term investment.

As stated on the ratio analysis table capital employed turnover ratio declined to

0.52 and 0.53 in 2011/12 and 2012/13 respectively from 0.61 in 2010/11. In

those past three years like that of fixed total asset the amount of capital is also

increased over the years but when we see its turnover it is low. It is only with

its own performance over the year it is also lower than its competitors ratios

average 0.68 and its competitors ratio.

3.4.3. Debt Utilization Ratio (DUR)

Debt management ratio refers to the banks ability to pay all of its debts as they

come due, whether current or non-current. It shows the extent to which the

bank uses debt to finance investment and its ability to meet interest charge and

other fixed payments. In order to serve its creditors the bank must earn not

only sufficient income to pay its interest expense, and all other expense, it

must also have a sufficient cash flow to serve the debt.

A. Deposit Ratio (DR)

This ratio measures the percentage of total asset financed by depositors. From

its nature of business majority of assets are financed from savings it can be

seen from the ratio analysis table the deposits ratio shows declining from 0.71

to 0.65 and 0.68 over the past year respectively.

The bank is the least when it compared with sample competitors averages 0.76

and similar bank ratio. The higher the ratios shows the more of the assets are

provided by saving clients relative to owners and its efficiently for mobilization

54
of savings but the higher the ratios may be disadvantageous to the bank if it is

not properly utilized in the form of loans and advances.

B. Interest Coverage Ratio (ICR)

This is one of the most conventional coverage ratios used to test the banks

debt servicing capacity. It show how many times the interest charges are

covered by funds that are ordinarily available to pay the interest charges the

interest coverage ratio is the sum of net profit before interest and taxes divided

by interest changes.

The interest coverage ratios given in the above table variations during the past

fiscal year and drop to 3.6 times from 4.3 times in 2012/13 the reason for the

declines is the very high increment of interest expense compare to EBIT. Even

it if a decline in 2012/13 it is the second largest from the sample competitors

and obviously higher than competitors averages. In principle higher ratio is

desirable but too high ratio indicate that the bank is very conservative in using

debt and that it is not using credit to the best advantage of owners. On the

contrary a lower ratio indicates excessive use of debit or inefficient operations.

3.4.4. Profitability Ratios

Profitability is the net result of policies and decision. It measures the earning

power of firms. It is a fact that sufficient profit must be earned to sufficient

profit must be earned to sustain the operation of the business to be able to

obtain funds from investors for expansion and to contribute towards the social

overheads for the welfare of the society, they indicate the banks management

generate profit.

A. Return on Assets (ROA)

55
Return on assets also called return on investment and it measures the overall

effectiveness of management in generating profit from its total investment in

assets. As shown on the banks return on assets (ROA) ratios shows a decline

over the years from 4% to 3.2% in 2012/13 this is because of the increment of

banks assets to 8.34 billion to 10.39 million and almost stable net income over

the past three year from this we can notes that the management effectiveness

in generating profit from its total assets is not at optimal as it should be. But

its effectiveness compared to its sample competitors ratio it show the bank was

effective comparatively in generating profit from total asset because it shows

the secured largest amount 3.2%.

B. Return on Equity (ROE)

The return on equity indicates how well the firm has used the resources of the

owners. In fact, this ratio is one of the most important relationships in ratio

analysis. The earnings of a satisfactory return are the most desirable objective

of a business. The ratio of net profit to owners equity reflects the extent to

which this objective has been accomplished. The return on equity ratio has

declines from 24% to 21% and to 18.5% respectively over the years this

declines is also as of increment on owners equity and stable net income over

the years the 2012/13 return on equity 18.5% is not only the lowest of the

years and also the lowest of the sample competitors ratios average which is

21%. The higher ratio will reveal the relative strength of the bank in attracting

future investment and has a great interest to present as well as prospective

shareholders. So the bank should work hardly to increase its return on equity

because it has on investment of the bank.

C. Net Profit Margin (NPM)

56
A reasonable gross profit margin is necessary to earn adequate net profit. Net

profit is obtained when operating expenses and income tax are subtracted from

the gross profit. This ratio is measured by dividing net profit after tax by

revenues.

Wegagen banks profit margin ratio revealed a declined over the past three year

which is 40%, 39% and 35% respectively. The very reason for this decline is the

accelerating increment on the total expenditure over this years even the

revenue was increasing also from this we can notes that the bank was

extending more and more in the year to earn almost equal profit over the year.

Even though we so a decline amount in net profit margin the 2012/13 net

profit margin of the bank was sedf larges of the sample competitors ratios and

also above the sample competitors average ratio 21%.

D. Total Expenses to Total Income (TETI)

This ratio indicates the portions of total expenses to total income of the bank

i.e. it shows how much the bank is spending to earned a given revenues in the

past three years this ratio has been increasing from 60% to 65%. The bank

expense to income of 2012/13 is the second lowest next to Lion bank and also

lower than the sample competitors average 0.68. Having a reasonable low total

expense to total income ratio indicates the bank effectiveness in generating

revenue by using low expenses.

E. Net Interest Margin (NIM)

Net interest margin is the ratios of interest income less interest expense to

average earning assets (loans and advances). The net interest margin of the

bank has improved from 7.7% to 8.6% in 2011/12 and 9% in the 2012/13.

57
When comparing with a sample competitors average and similar banks ratios

of the year 2012/13 it has a higher ratio. The typical margin is between 3%-

10%. This shows a successful asset/liability management of the bank

in2012/13 fiscal year.

F. Non-Interest Income to Total Income (NIITI)

This ratio measures contribution of non interest income to the total revenue of

the bank or it shows the bank ability to generate revenue other than their main

revenue shares interest income.

Wegagen bank interest income to total income was declining over the past three

years from 60% to 48% and 40% respectively. This shows the bank focus more

on its interest income and leasing its gowned to its competitors on earning

income from non-interest income sources; even though it shares a decline the

2012/13 ratio of the bank is above the competitors average of 38%.

G. Non-Interest Expense to Total Income (NIETI)

Like that of total expenses to total income ratio, it show how much the bank is

spending on non-interest expenses (operating expenses like general

administrative salary and other) to earn a given level of revenue.

This ratio of the bank decreased to 44% from 48% in 2011/12 but again

increased to 47% in 2012/13. When we compare with the sample competitors

average of 2012/13 it is above the average of 44% which show the bank is

expanding more on non-interest expenses than most of its competitors.

3.4.5. Capital Adequacy

58
Capital adequacy measures the cushion available to protect depositors against

loss in the event of shrinkage in asset value and deposits against loss in the

event of shrinkages in asset value and possible insolvency.

A. Capital to Asset Ratio (CAR)

Capital to asset ratio is a ratio that shows the percentage of owners equity to

total asset of the bank. The capital to asset ratio of the bank show a fluctuate

amount increase to 16% to 19% in 2011/12 and decline to 17% in 2012/13 the

result of the decline in the ratio is the result of the decline in the ratio is the

higher increment of the total assets mainly as a result of an increment on

deposit from customers and comparatively low increment on stockholders

equity of the bank on the other hand the ratio of the bank in 2012/13 a higher

performance like that of Lion bank and it is greater than competitors averages

13%.

B. Earnings per Share (EPS)

The earnings per share simply show the profitability of the bank on a per-share

basis. It does not reflect how much is paid as a dividend and how much is

retained in the business. But as a profitability index, it is a valuable and widely

used ratio. The earning per-share calculated the net profit after tax by the total

number of common share outstanding.

The Wegagen bank earnings per share have decreased from Birr 448 in

2010/11 to Birr 378 in 2011/12 and to 330 in 2012/13. This decline is manly

the slight decrement over the net profit and increment in number of shares. It

is greeter when we compare it with the competitors average.

59
 CHAPTER FOUR

4.1. CONCLUSION

Working capital for the purpose of the paper is considered as it embraces both

current liabilities which were accounted for 96% and 100% on the average out

of the total asset and liabilities for the last three years. The growth of current

liabilities has been increase higher than current asset the working capital of

the bank was managed in a better way with respect to business norms.

Both the cash balance and amount of fund in current accounts that the bank

has in different banks for facilitating its transaction revealed a declining

60
amount for the last three years consecutively. This decline may indicate the

bank was utilizing its idle cash in order to increase its revenue.

The amount of loans provided for loan customers expended at higher rate than

the overall deposits for the last three year that is the outstanding loans and

advance cash increased on average by 45.25%. Whereas the amount of deposit

by saving customer increased by 9.5%. Hence it has great impact on interest

income and expense.

All liabilities of the bank are current liabilities because the bank has no long

term liabilities out of the total liabilities deposit constituted a higher percentage

for the last three years of this saving and demand deposit constituted the

highest share.

When we see the operation of the bank over the years the bank was able to

increase its total revenue to 970 million but the net profit of the bank was

almost equal over the year this is due to the higher increment of the bank

operating expenditure as the revenue increase.

The liquidity ratio of the bank revealed the bank was has a good liquidity

position compare to its competitors ratio. The debt utilization ratio the bank

has great interest coverage ratio but the portion of deposit after the total asset

show fluctuating amount and lower amount comprised to it sample

competitors.

The activity ratio of the bank shows the bank is not utilizing its asset, fixed

asset and capital equity appropriately. The researcher say because while the

above three increase in amount from year but their share to operating income

decrease year by year. It even shows lowest ratio compared to this sample

competitor average except for total asset turnover.

61
The profitability ratio of the bank indicates that a decreasing percent on return

and revenue related ratios and increase on expense related ratios but the bank

was able to maintain an amount above competitor average on this ratio except

return on owners equity which shows a lowest percentage from the

competitors ratio.

4.2. Recommendation

To be the bank a thriving business entity so as to attain its ultimate

objectives of establishment, some remedial measures shall be taken.

What the writers believe as corrective actions are the following.
During the past three year the bank interest income share from the total

revenue had been growing but in comparison the other source of

revenues has been decline as it can seen from the income statement of

ratio analysis of the share of other income sources had increased like

that of interest income the bank might had more net profit during the

year so the bank should try to increase its other source of income while

forecasting on its major operating income.

As it can be seen from the balance sheet the bank asset, fixed asset and

owners equity had been growing but in comparison with its growth the
bank earning or the their turnover over its assets had been declined.

Even when we compare with its competitors ratio it resulted lowest

amount if the bank had utilize its assets in effective manner earning of

2011/12 and 2012/13 could been much higher so the bank should work

its best to utilize its assets on effective manner.

In the year 2011/12 the bank manages suggested that the unexpected

(unanticipated withdrawal) over the year affected their earning. This kind

of things should have been seen as one of the risk the bank has against

its earning and property identified and managed to decrease its effect to

62
 the lowest amount, so in the future the bank should manage this kind of

risk properly before the occur.

We can so that the bank has low total expenses to total income ratio

compared to sample competitors ratios but we can notes that the bank

expenditure during the years had been in an increasing rate than

increment on its total earning. So the bank should try to lower its total

expenses growing rate in order to increase its profit.

The deposit ratio share of deposit from the total assets shows a declining

amount over the year and it is lower when we compare it with 2012/13

competitor average. This show the bank ability to mobilize deposit is low

so the bank ability to mobilize deposit is low so the bank should utilize it

asset effectively and efficiently to increase it deposit mobilization

capacity.
Higher return on equity shows how the bank has used the resources of

the higher this resource enable the bank to attract potential investors in

the bank stokes. But Wegagen bank return on equity had been declared

over the years and it is the lowest of its sample competitors ratio so the

bank should raise its return on equity by the best effort they can

because it has an effect on future capital of the bank.

Reference

63
 Evgene F. Brigham and Joel F. Houston, (1998), Fundamental of

Financial Management 8th edition, Horcort Brace College publishers.

Pamela 2010 (Financial performance analysis)
Brigham, E.F (1981), Fundamental Financial Management 7th edition,

Dryden Press, Forth Worth.

Brigham. E.F (2002), intermediate Financial Management.
Chandra P., Fundamentals of Financial Management, 3rd edition, Mc

GrawHill Inc,
Dickesson B; B.J Company, Introduction to Financial Management, 4th

edition, 1995.
IM Pandey: Financial Management, 6th Revised Ed. New Delhi, Vikas

Publishing House Put Ltd. 1995.

Stephen A. Ross, Randolph W. Westar Field, and Brand Ford. Jordan

Fundamental of Corporate Finance eth edition, California MC GRAW

Hill, 1998.
Van Horne James C; Financial Management and Policy 11th edition,

New Jercy, Prentice Jell 1998.

Wegagen Bank Annual Report 2010/11-2012/13
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Dashen Bank Annual Report 2012/13
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Wikipedia, the Free Encyclopedia.

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