My attention has been drawn on a report regarding the ranking of banks in a daily newspaper where it ranked top ten banks among the 29 listed private commercial banks based on their published annual reports for the year 2013. The report considered seven parameters in evaluating the performance of the banks. Being finance professional, I had the opportunity to rigorously review the model used in the evaluation process.
The seven parameters which have been taken into account are: Return on Assets (ROA), Return on Equity (ROE), Non-performing Loan Ratio (NPL), Earning per Share (EPS), Net Asset Value per Share (NAV), Capital Adequacy Ratio (CAR) and Operating Profit per Branch (OPB). Same weightage has been given in each parameter having 10 points each resulting to total marking of 70 points. However, a close look into the matter reveals that out of the seven parameters, five parameters (ROA, ROE, EPS, NAV and OPB) have been chosen under 'profitability' dimension which constitute more than 71 per cent of the total marking scheme. On the other hand, only one indicator each has been considered for 'capital adequacy' (CAR) and 'asset quality' (NPL) which contribute slight over 28 per cent in the total evaluation process. Higher emphasis given on one single dimension (that is profitability) has made the model bias and purposive.
It may be mentioned here that long-run sustainability of a bank is more important than short-run profitability. In cricket there is a proverb "Class is permanent but form is temporary". This is applicable in this case also. Here profitability can be regarded as 'form' and sustainability as 'class'. It is interesting to observe that the above proposition has been reflected in the model used for evaluation also. Out of top ten banks in the list, six banks have newly been included in 2013 ranking resulting to exclusion of six banks from the list of 2012 ranking. It is unrealistic to claim that the newly-included banks have outperformed the others or the excluded banks performed the worst. Rather the emphasis put on a single dimension has influenced the results and challenges the persistency of the model used. Â
Again, due to the inherent limitation of the model, low capitalised banks have more chance of obtaining more points compared with high-capitalised banks.
As the results of ROE, EPS and NAV are linked with paid-up capital or equity base of the bank, the banks having low paid-up capital and low-equity base could earn more points under these parameters compared with that of high-capitalised banks. Say, for an example, the lowest capitalised bank (DBBL), having paid-up capital of Tk. 2,000 million and one of the lowest equity base of TK. 12,641.72 million, has ranked 1st position in ROE, EPS and NAV. On the other hand, the highest capitalised bank (IBBL) in the industry with paid-up capital of Tk. 16,100 million and equity base of Tk. 43,785.28 million, was ranked 9th in ROE, 7th in EPS and 3rd in NAV among the top ten banks due to obvious reasons. Despite the limitations, the highest capitalised bank was ranked 4th in the list among the top ten banks due to its relative strength in capital adequacy (Rank 1st) and NPL (Rank 3rd) which are more related with the sustainability dimension of the banks.
Under the model, banks having higher operating profit per branch (OPB) can earn more points which is against the philosophy of financial inclusion. Thus, the 'mass banks' which have opened more rural branches with the objective of inclusivity are penalised compared with 'class banks' having comparatively few branches operating with mere profit motives.  Â
Again, the standard set for each parameter has not been rationally determined. The standard set for ROA was 5.0 per cent, followed by ROE 30 per cent, NPL 1.0 per cent, EPS Tk. 15 per share, NAV Tk.100 per share, CAR 20 per cent and OBP Tk.100 million per branch. Most of the standards set against each parameter are not in line with the industry standard.
Finally, I would like to draw attention on price sensitivity issue since the rank has been made from the listed commercial banks. Thus, any sort of misleading information might jeopardise the interest of the banks in general and shareholders in particular. Â
The author is a banker. The opinion expressed in the article is the author's own and not necessarily of the organisation he represents.
raihan.accaglobal@gmail.com
Ranking of banks
Khaled Mahmud Raihan | Published: July 17, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
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