BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services

FINANCIAL STATEMENT ANALYSIS OF FINANCIAL SECTOR

Performance Indicators

Pakistan’s financial sector is an integration of institutions of diversified nature including Banks

DFIs, Leasing Companies, Modaraba Companies, Insurance Companies, Investment Banks, etc.
Therefore, ratios used to analyze these sectors may be different in some cases as different sectors
have peculiar business activities but some ratios are common to all sectors. Some important
ratios and their explanations are given below which may be read in combination with the
analysis sheet of each sector separately.

EFFICIENCY / PROFITABILITY RATIOS

∗ 100
Net Markup /Interest Income
Spread Ratio ¿
Markup/ Interest Earned

It is the amount of Net Markup/Interest Income divided by Markup/Interest Earned . This ratio is
useful for Banks, DFIs and MFBs.

Net Markup /Interest Income

Net Markup / Interest Margin Ratio ¿ * 100
Total Assets

This ratio indicates the earning capacity through core banking business by utilizing all assets.
Banks normally borrow from savers and lend to investors. It is the ratio between the difference
of interest income and interest expense to total assets. It is also useful for Banks, DFIs and
MFBs.

Profit After Taxation

Return on Assets (ROA) ¿ ∗100
Total Assets

This ratio expresses the capacity of earning profit by a bank on its total assets employed in the
business. It is calculated as percentage of net profit after tax to total assets. It is useful for whole
financial sector.

 Shows how efficiently assets generate profit.

 A higher ROA means better asset utilization.

Profit After Taxation

Return on Equity (ROE) ¿ ∗100
Total Equity

Total Shareholders’ Equity (Pakistani Banks) = Share Capital + Reserves + Un-appropriated

Profit (Loss)

Page 1
BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services

This ratio expresses the return on shareholders’ equity. ROE is a direct measure of returns to the
shareholders. It is calculated as a percentage of the net profit after tax to total Shareholders’
equity. It is also useful for whole financial sector.

 Measures profitability relative to equity capital.

 Higher ROE is favorable for investors.

Non Markup/ Interest Income

Non-Interest Income to Total Assets Ratio ¿ ∗100
Total Assets

Ratio on incomes earned other than mark-up e.g. capital gains, commission, fee to total assets
etc. This ratio expresses how much income is earned other than mark-up through other functions
of the bank by employing total assets. It is useful for Banks, DFIs and MFBs.

Interest Paid
Interest Ratio ¿ * 100
Interest Earned

This ratio expresses the payment of interest mainly to depositors. The lower the ratio, the less the
company is burdened by debt expenses. It is useful for Banks, DFIs and MFBs.

Non−Interest Expenses
Non-Interest Expenses to Total Income ¿ ∗100
Total Income

The ratio expresses the percentage of non-interest expenses to total income which reflects
efficiency of management in applying the banks’ resources. It is useful for Banks, DFIs and
MFBs.

Income after Taxation

Earnings per Share (EPS) ¿
No . of Ordinary Shares

EPS is the ratio between net profit after tax to number of shares outstanding at the end of the
year as shown in balance sheet and its relevant notes to accounts. It is useful for whole financial
sector except for Modaraba Companies where certificates are issued for raising capital.

2. LIQUIDITY RATIOS

Cash∧Balance with Treasury∧other banks

Cash & Cash Equivalent to Total Assets ¿ ∗100
Total Assets

This ratio expresses the percentage of total assets available in the form of highly liquid assets.

∗ 100
Deposits∧other Accounts
Total Deposit to Total Assets ¿
Total Assets

The ratio shows what percentage of total assets comprises total deposits and other accounts.
Page 2
BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services

∗ 100
Total Investments
Investment and Total Assets ¿
Total Assets

The ratio between Investment and total assets shows investment activity with reference to its
total assets. It indicates the portion of total assets used for investment in various venues. This
ratio is useful for banks, DFIs and insurance companies.

∗ 100
Total Advances
Advances and Total Assets ¿
Total Assets

This ratio expresses the relationship of advances (net) to total assets. This ratio is useful for
banks, DFIs and MFBs.

∗ 100
Total Liabilities
Total Liabilities to Total Assets ¿
Total Assets

The ratio shows the proportion of banks assets, which are financed through debt. This ratio is
useful for banks, DFIs and MFBs.

∗ 100
Total Advances
Advances to Deposits Ratio ¿
Total Deposits∧other Accounts

The ratio expresses the percentage of advances to deposits and expresses the utilization of
deposits in the core business of a bank, i.e., intermediation. This ratio is useful for banks, DFIs
and MFBs.

∗ 100
Total Advances
Advances to Borrowing & Deposits Ratio ¿
Total Borrowings andd Deposits

The ratio expresses the percentage of gross advances to deposits and borrowings. This ratio
shows activity of a banking business as it reflects that advances are being made more/less than
deposits. This ratio is useful for banks, DFIs and MFBs.

3. ASSETS QUALITY RATIOS

∗ 100
Non Performing Loans
Non-Performing Loans (NPLs) to Advances ¿
Total Advances

This ratio expresses the quality of loan portfolio of a bank. It shows the percentage of NPLs as
advances made by a bank and evaluates assets quality based on loan portfolio. This ratio is useful
for banks, DFIs and MFBs.

 Higher NPL ratio indicates poor asset quality.

 A lower ratio means better credit risk management.

Page 3
BSAF (6th Semester) Hailey College of Commerce Accounting for Financial Services

∗ 100
Non Performing Loans
Non-Performing Loans (NPLs) to Equity Ratio ¿
Total Shareholders' Equity

Where,

Total Shareholders’ Equity (Pakistani Banks) = Share Capital + Reserves + Un-appropriated

Profit (Loss)

Total Shareholders’ Equity (Foreign Banks) =H.O Capital Account + Reserves +Unremitted
Profit

The ratio between NPLs to shareholders’ equity indicates the exposure of the common
shareholders to NPLs. This ratio is useful for banks, DFIs and MFBs.

4. CAPITAL / LEVERAGE RATIOS

∗ 100
Total Shareholders' Equity
Capital Ratio =
Total Assets

Where,

Total Shareholders’ Equity (Pakistani Banks) = Share Capital + Reserves + Un-appropriated

Profit (Loss)

Total Shareholders’ Equity (Foreign Banks) =H.O Capital Account + Reserves +Unremitted
Profit

The ratio between shareholders’ equity and total assets expresses the percentage of equity in total
assets.

(Answer in Times)
Total Deposits∧Other Accounts
Deposit to Equity Ratio =
Total Shareholders' Equity

The ratio shows the relationship between total deposits in a bank to the total shareholders’
equity.

5. CASH FLOW RATIO

¿
Cash Flow to Profit after Tax = Cash Generated ¿ Operating Activities Profit After Taxation
(Answer in Times)

The ratio expresses proportions of cash being spun off from ongoing operations. This ratio is
useful for the whole financial sector.

Page 4