Commercial Banking

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Assignment 1

Executive Summary

The purpose of this report is to evaluate the performance of both Hong Leong Bank and its peer bank RHB Bank for the financial year ended in 2010. The DuPont model is used to provide the information on the bank’s liquidity, profitability, efficiency and leverage status that allows financial analyst to evaluate on the performance of the bank as a result of the changes of these factors. A trend comparison for year 2010, 2009 and 2008 is conducted and evaluated its respective ratios and other financial data. The peer comparison of financial ratios between RHB Bank & Hong Leong Bank is evaluated and analysed to see which bank performs better in 2010. The other key ratios are also calculated in for deep analysis on to see how well these two banks in Malaysia perform in 2010. In addition, its credit risk that includes the risk management and its policy of both banks is then evaluated and compared to see which bank manages its credit risk properly. Finally, this report provides an overview of the performance of both RHB Bank and Hong Leong Bank for the financial year ended in 2010 and conclude which bank perform better in terms of various financial ration and management of credit risk.

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Assignment 1

Part A: Bank Performance
Question 1: Dupont Model:
a. Dopont Model:

The DuPont model analysis is a common form of financial statement analysis and this model provides information on the bank’s liquidity, profitability, efficiency and leverage status that allows financial analyst to evaluate on the performance of the firm as a result of changes in one or more of these factors (Milbourn & Haight, 2005). According to Narayanan (2010), the DuPont model provides a starting point to determine the strength and weakness of the firm. It is also a very powerful financial tool to assist financial analyst, shareholders, investors and bankers in understanding the profitability of the firm and a tool that evaluate the firm’s financial statements by comparing the relationships within the income statement and balance sheet, or between the two statements. (Milbourn & Haight, 2005).

The DuPont Model starts with the return of equity (ROE). The ROE is a strong measure on how well the management of the bank creates value to the shareholders (Pinsent, 2010). It is also a good starting point in the analysis of a bank’s financial condition. ROE is calculated by dividing the net income by total equity (Gup, Avram, Beal, Lambert & Kolari, 2007). The formula is as follows.

ROE= Net incomeEquity

According to Gup et at, (2007), the ROE ratio is equal to the Return of Assets (ROA) ratio times the Leverage multiplier that shows the dollar amount of assets that are financed by each dollar of the equity. The leverage multiplier is one indicator of financial leverage. ROE=ROA x Leverage Multiplier

Net IncomeEquity = Net IncomeTotal Assets x Total AssetsEquity

Leverage multiplier shows the extent to which the bank relies on debt financing. The higher the leverage multiplier, the more debt the bank is carrying.
Leverage Multiplier= Total AssetsEquity

The Return of Assets (ROA) measures the bank profits as a percent of its assets and also measures the ability of the firm to use the real financial resources of the bank to generate revenue. It is commonly used to evaluate bank management (Gup et al, 2007). ROA is calculated by dividing net income by total assets.

ROA= Net IncomeTotal Assets

In the DuPont model analysis, the ROA is expended into another equation:
Net IncomeTotal Assets = RevenueTotal Assets x Net IncomeRevenue

Thus the DuPont model translates the ROA equation into the following: ROA=Asset Utilisation x Net Profit Margin

The net margin ratio shows how much profit the bank makes for every $ 1.00 it generates from the revenue. Generally, the higher the ratio, the better the net margin. In order to obtain more revenue,...
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