Dubai Islamic Bank
Financial Analysis for the Fiscal Period that Ended on 30 September 2012 in AED’ 000.
Liquidity Ratios
Current Ratio = Total Current Assets / Total Current Liabilities
Total current assets=93,050,371
Total current liabilities=70,490,459
Current ratio=93,050,371/70,490,459=132%
A high liquidity ratio implies that the bank has more current assets than current liabilities. Hence, it is in a good position to service the short-term liabilities.
Quick Ratio = (Total Current Assets – Inventories) / Total Current Liabilities
Total inventories= 498,074
Total current assets=93,050,371
Total current liabilities=70,490,459
Quick Ratio= (93,050,371-498,074)/ 70,490,459=131%
It is nearly equal to the current ratio but includes the inventories. It measures the ability of a bank to service the short term loans using current assets where cash is the most preferable. The 13.1 percentage quick ratio indicates the bank’s current assets are 31% more than the short-term loans. Hence, it can service the loan without posing any financial risk to equity holders.
Debt to Equity Ratio = Total Debt / Total Equity
Total Debt=4,200,346
Total Equity=10,719,510
Debt to Equity ratio= 4,200,346/10,719,510=39.2%
This measures the ratio of creditors’ wealth to the equity holders’ wealth. Creditors, in this case, include suppliers, employees, lenders, and government authorities. It is used to measure the financial strength of the bank about cash income and outgoes. The ratio of 39.2% implies that the bank has 39.2% more equity holders’ wealth than the creditors.
Debt to Assets Ratio = Total Debt / Total assets
Total Debt=4,200,346
Total Assets= 93,719,510
Debt to Assets Ratio=4,200,346/93,719,510=4.5%
This is a measure of the bank’s financial strength concerning its assets and debts. It is a good measure of financial position where a higher amount of assets than total debts indicates that the bank is financially stable.
Net cash flow = Net Income +/- non-cash items (e.g. -equity income + minority interest in earnings of subsidiary + deferred income taxes + depreciation + depletion + amortization expenses)
Net Income= 966,847
Equity income=17,058
Depreciation and Amortization=100,073
Accumulated Depreciation=98,832
Income from Non-Cash items= (-17,058+100,073+98,832) =181,847
Net Cash Flow=966,847+181,847=1,148,694
This indicates that the bank has a positive financial growth in the performance of the last fiscal period.
Return on Assets (ROA) = Profit after taxes / Total Assets
Profit after Taxes=303,629
Total Assets=93,719,510
Return on Assets= 303,629/93,719,510=0.3240%
This is a measure of assets that contributed to the growth of the bank’s financial strength. It indicates that 0.324% proportion of the bank’s profit is as a result of utilized assets.
Return on Equity (ROE) = Profit after taxes / Shareholders Equity (book value)
Net Profit/Profit after Tax= 303,629
Total Equity=10,719,510
Return on Equity (ROE) =303,629/10,719,510=2.832%
This measures the proportion of profit that is as a result of equity’s contribution. In this case, the bank’s total equity contributed 2.832% growth of the net profit in the 2011/2012 fiscal year.
Earnings per Common Share (EPS) = (Profits after taxes – Preferred Dividend) /(# of common shares outstanding)
Net Profit/Profit after Tax= 303,629
Preferred Dividend = 256
No. of common shares Outstanding=2,941.2
EPS= (303,629-256)/2,914.2=104.101
This measures the percentage of growth of common shares. It indicates that the bank’s common share grew by 4.101%
Total Assets Turnover = Sales / Average Total Assets
Sales=498,074
Average Total Assets=93,719,510
Total Assets Turnover=498,074/93,719,510=0.5315
This is a measure of the ratio of sales/ property for sales to the total assets. In this case, the total assets contributed to 0.5315 of the sales in the year 2011/2012.
Return on Investment (ROI) = Net Income/Total Assets
Net Income=966,847
Total Assets=93,719,510
Return on Investment=966,847/93,719,510=1.032%
This is a ratio of net income to the total assets of the bank. It indicates that the bank’s total assets contributed to 1.032% of the net income in the fiscal year 2011/2012.
Return on Assets (ROA) = Net Income/Total Assets
Net Income=966,847
Total Assets=93,719,510
Return on Investment=966,847/93,719,510=1.032%
This is a ratio of net income to the total assets of the bank. It indicates that the bank’s total assets contributed to 1.032% of the net income in the fiscal year 2011/2012. It is equal to the return on investments.
Net Working Capital= Current Assets –Current Liabilities
Total current assets=93,050,371
Total current liabilities=70,490,459
Net Working Capital=93,050,371-70,490,459=22,559,912
This is a measure of the bank’s liquid assets within the period of less than twelve months.
Acid-Test Ratio= (Cash +Accounts Receivable+ Short Term Investments)/ Current Liabilities
Total Cash =12,922,484
Accounts Receivable=4,766,314
Short-Term Investments=54,659,758
Current Liabilities=70,490,459
Acid-Test Ratio= (12,922,484+4,766,314+54,659,758)/ 70,490,459=1.02
This is a measure of the bank’s ability to liquidity short term liabilities in order to service a due short-term loan. A1.02 acid-test ratio indicates than liquid current acids are 0.02 more than the short-term liabilities or loans.
Profitability Ratios
Net Profit Margin = Profit after taxes / Sales
Net Profit/Profit after Tax= 880,410
Total Sales=498,074
Net Profit Margin= 880,410/498,074=176.76%
This is a measure of the profitability of sales or total assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form76.76percentage of the net profit.
Gross Profit Margin=Profit before taxes/Sales
Profit before taxes=889,931
Sales=498,074
Gross Profit Margin=889,931/498,074=178.7%
This is a measure of the profitability of sales or gross assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form78.7percentage of the gross profit.
Return on Equity=Return on Equity = Net Income/Shareholder’s Equity
Net income=880,410
Shareholder’s equity= 797,826
Return on Equity=880,410/797,826=110.35%
This is a measure of the contribution of equity to the profit of the bank. Results indicate that 10.35%of the bank’s total profit was a contribution of equity.
Overhead Ratio= Operating Expenses / (taxable net interest income + operating income)
Operating expenses= 1,951,465
Taxable net interest income= 0.00
Operating income=1,798,754
Overhead Ratio=1,951,465/1,798,754=108.5%
This is a measure of the contribution of operating income to the net income in relation to the operating expenses. Results indicate that the bank’s operating income formed 8.5% of the net income.
Operating Margin= Operating Income/ Net Sales
Operating income=1,798,754
Net sales=assets held for sale= 498,074
Operating Margin=1,798,754/498,074=3.611
Return on debt= net profit/total debt
Net profit=880,410
Total debt=4,200,346
Return on debt= 880,410/4,200,346=20.96%
This is a measure of returns on the debt fund in relation to the net profit of the bank over the last fiscal year. Results indicate that the debt fund formed 20.96% of the net profit.
Return on Equity= Net profit/total equity
Net profit=880,410
Total Equity=10,719,510
Return on Equity= 880,410/10,719,510=8.21%
This is a measure of returns on equity funds in relation to the net profit of the bank over the last fiscal year. Results indicate that the equity fund formed 8.21% of the net profit.
Return on Invested Capital= (Total Income-Dividends)/Total Capital
Total income=3,750,219
Dividends=256
Total Capital= total assets + liabilities= 93,719,510+83,122,905=176,842,415
Return on Invested Capital= (3,750,219-256)/176,842,415=2.12%
This is a measure of returns on invested capital in relation to the total income of the bank over the last fiscal year. Results indicate that invested capital formed 2.12% of the total income.
Solvency Ratios
This ratio measures the ability of a company to settle long-term debts.
It is computed using the formula; solvency ratio= (net profit+ depreciation)/ total liabilities
Net profit=880,410
Depreciation=25,371
Total liabilities= short term liabilities+ long term liabilities= 83,122,905
Solvency ratio= (880,410+25,371)/83,122,905=1.08%
The ratio of net profit to the liabilities is very small hence the bank has weak solvency ability. The bank made a profit that is far less than required to service the liabilities in the fiscal period 2011/2012.
Financial Risk Ratios
Debt to total capital
This measures debt proportion given total capital of the bank.
=total debt/total capital
Total debt=4,200,346
Total capital= total equity +total debt=10,596,605+83,122,905=93,719,510
Debt to total capital= 4,200,346/93,719,510=4.48%
This implies that equity holders’ debt to capital is nearly zero and therefore the bank has zero financial debt risk.
Times Interest Earned= earnings before interest and tax expenses on interest
Earnings before interest and tax=3,750,219
Expenses on interest=0.00
Times interest earned= 3,750,219
This is also referred to as the coverage ratio and it indicates the degree of protection to creditors. It covers the risk of interest payments. However, the Islamic Bank of Dubai charges no interest on debtors and pays no interest to creditors as well.
Cash flow to debt= income from operations/total debt Income from operations= 1,798,754
Total debt=83,122,905
Cash flow to debt= 1,798,754/83,122,905=2.16%
This measures the amount of cash that the company generates from operations that are purposely undertaken for servicing the debts.
Capital expenditure ratio= cash flow from operations/capital expenditures
The capital expenditure ratio provides information on the amount of cash balance after servicing debts using capital wealth.
Cash flow from operations=3,750,219
Capital expenditures=1,951,465
Capital expenditure ratio=3,750,219/1,951,465=1.922
This implies that the bank generates 1.922 more than required cash to service the debts.
Bank of Baroda, Dubai
Liquidity Ratios
Current Ratio = Total Current Assets / Total Current Liabilities
Total current assets=446909, 08, 24
Total current liabilities=444979, 96, 50
Current ratio=4,469,090,824/444979, 96, 50=100.4%
A high liquidity ratio implies that the bank has more current assets than current liabilities. Hence, it is in a good position to service the short term liabilities.
Quick Ratio = (Total Current Assets – Inventories) / Total Current Liabilities
Total inventories= 10224, 73, 02
Total current assets=446909, 08, 24
Total current liabilities=444979, 96, 50
Quick Ratio= (446909, 08, 24-10224, 73, 02)/ 444979, 96, 50=98.14%
It is nearly equal to the current ratio but includes the inventories. It measures the ability of a bank to service the short term loans using current assets where cash is the most preferable.98.14% quick ratio indicates the bank’s current assets are 1.87% more than the short term loans. Hence it can service the loan without posing any financial risk to equity holders.
Debt to Equity Ratio = Total Debt / Total Equity
Total Debt=152502, 81, 31
Total Equity=83209, 40, 01
Debt to Equity ratio= 152502, 81, 31/83209, 40, 01 =18.3%
This measures the ratio of creditors to the equity holders. Creditors, in this case, include suppliers, employees, lenders and government authorities. It is used to measure the financial strength of the bank in relation to cash income and outgoes. The ratio of 1.83% implies that the bank has 18.3% more equity holders’ wealth than the creditors.
Debt to Assets Ratio = Total Debt / Total assets
Total Debt=152502, 81, 31
Total Assets= 447321, 46, 70
Debt to Assets Ratio=152502, 81, 31 /447321, 46, 70=34.1%
This is a measure of the bank’s financial strength in relation to its assets and debts. It is a good measure of financial position where a higher amount of assets than total debts indicates that the bank is financially stable.
Net cash flow = Net Income +/- non-cash items (e.g. -equity income + minority interest in earnings of subsidiary + deferred income taxes + depreciation + depletion + amortization expenses)
Net Income= 33096, 05, 24
Equity income=3422, 32, 82
Depreciation and Amortization=76, 55, 26
Accumulated Depreciation=353, 00, 90
Income from Non-Cash items= (-3422, 32, 82+353, 00, 90+76, 55, 26) =
Net Cash Flow=33096, 05, 24-2992, 76, 66=30103, 28, 58
This indicates that the bank has a positive financial growth in relation to the performance of the last fiscal period.
Return on Assets (ROA) = Profit after taxes / Total Assets
Profit after Taxes=5006, 95, 62
Total Assets=447321, 46, 70
Return on Assets= 5006, 95, 62/447321, 46, 70=1.12%
This is a measure of assets that contributed to the growth of the bank’s financial strength. It indicates that 1.12% proportion of the bank’s profit is because of utilized assets.
Return on Equity (ROE) = Profit after taxes / Shareholders Equity (book value)
Net Profit/Profit after Tax= 5006, 95, 62
Total Equity=3422, 32, 82
Return on Equity (ROE) =5006, 95, 62/3422, 32, 82 =1.463%
This measures the proportion of profit that is as a result of equity’s contribution. In this case, the bank’s total equity contributed 1.463%growth of the net profit in the 2011/2012 fiscal year.
Earnings per Common Share (EPS) = (Profits after taxes – Preferred Dividend) /(# of common shares outstanding)
Net Profit/Profit after Tax= 5006, 95, 62
Preferred Dividend = 17
No. of common shares Outstanding=1459, 93, 49
EPS= (5006, 95, 62-17)/ 1459, 93, 49 =3.42%
This measures the percentage of growth of common shares. It indicates that the bank’s common share grew by 3.42%.
Total Assets Turnover = Sales / Average Total Assets
Sales/other assets=10224, 73, 02
Average Total Assets=447321, 46, 70
Total Assets Turnover=447321, 46, 70/10224, 73, 02=43.75%
This is a measure of the ratio of sales/ property for sales to the total assets. In this case, the total assets contributed to 43.75% of the sales in the year 2011/2012.
Return on Investment (ROI) = Net Income/Total Assets
Net Income=33096, 05, 24
Total Assets=447321, 46, 70
Return on Investment=33096, 05, 24/447321, 46, 70=7.40%
This is a ratio of net income to the total assets of the bank. It indicates that the bank’s total assets contributed to 7.4% of the net income in the fiscal year 2011/2012.
Return on Assets (ROA) = Net Income/Total Assets
Net Income=33096, 05, 24
Total Assets=447321, 46, 70
Return on Investment=33096, 05, 24/447321, 46, 70 =7.40%
This is a ratio of net income to the total assets of the bank. It indicates that the bank’s total assets contributed to 7.4% of the net income in the fiscal year 2011/2012. It is equal to the return on investments.
Net Working Capital= Current Assets –Current Liabilities
Total current assets=444979, 96, 50
Total current liabilities=11400, 45, 92
Net Working Capital=444979, 96, 50-11400, 45, 92=433579, 50, 58
This is a measure of the bank’s liquid assets within a period of fewer than twelve months.
Acid-Test Ratio= (Cash +Accounts Receivable+ Short Term Investments)/ Current Liabilities
Total Cash =21651, 45, 46
Accounts Receivable=33096, 05, 24
Short-Term Investments=83209, 40, 01
Current Liabilities=444979, 96, 50
Acid-Test Ratio= (21651, 45, 46+4,766,314+54,659,758)/ 70,490,459=1.02
This is a measure of banks ability to liquidity short term liabilities in order to service a due short term loan. A1.02 acid-test ratio indicates than liquid current acids are 0.02 more than the short term liabilities or loans.
Profitability Ratios
Net Profit Margin = Profit after taxes / Sales
Net Profit/Profit after Tax= 5006, 95, 62
Total Sales=384871, 10, 91
Net Profit Margin= 5006, 95, 62/384871, 10, 91=1.3%
This is a measure of the profitability of sales or total assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form 0.3percentage of the net profit.
Gross Profit Margin=Profit before taxes/Sales
Profit before taxes=6579, 87, 33
Sales=384871, 10, 91
Gross Profit Margin=6579, 87, 33/384871, 10, 91=1.71%
This is a measure of the profitability of sales or gross assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form 0.71% of the gross profit.
Return on Equity=Return on Equity = Net Income/Shareholder’s Equity
Net income=33096, 05, 24
Shareholder’s equity= 64168, 54, 12
Return on Equity=33096, 05, 24/64168, 54, 12=51.6%
This is a measure of the contribution of equity to the profit of the bank. Results indicate that 51.6%of the bank’s total profit was a contribution of equity.
Return on debt= net profit/total debt
Net profit=5006, 95, 62
Total debt=64168, 54, 12
Return on debt= 5006, 95, 62/64168, 54, 12=7.80%
This is a measure of returns on the debt fund in relation to the net profit of the bank over the last fiscal year. Results indicate that the debt fund formed 7.80% of the net profit.
Return on Equity= Net profit/total equity
Net profit=5006, 95, 62
Total Equity=89979, 76, 92
Return on Equity= 5006, 95, 62/89979, 76, 92=5.56%
This is a measure of returns on equity funds in relation to the net profit of the bank over the last fiscal year. Results indicate that the equity fund formed 5.56% of the net profit.
Return on Invested Capital= (Total Income-Dividends)/Total Capital
Total income=33096, 50, 24
Dividends=134
Total Capital= total assets + liabilities =894230, 54, 94
Return on Invested Capital= (33096, 50 24 -134)/ 894230, 54, 94=3.70%
This is a measure of returns on invested capital concerning the total income of the bank over the last fiscal year. Results indicate that invested capital formed 3.7% of the total income.
Risk and Solvency Ratios
The ratio measures the ability of a company to settle long-term debts.
It is computed using the formula; solvency ratio= (net profit+ depreciation)/ total liabilities
Net profit=5006, 95, 62
Depreciation=76456, 44, 38
Total liabilities= short term liabilities+ long term liabilities= 446909, 08, 24
Solvency ratio= (5006, 95, 62+76456, 44, 38)/ 446909, 08, 24= 18.23%
The ratio of net profit to the liabilities is very small hence the low solvency ratio. The bank made a profit that is far less than required to service the liabilities in the fiscal period 2011/2012.
Financial Risk Ratios
Debt to total capital
This measures debt proportion given the total capital of the bank.
=total debt/total capital
Total debt=64168, 54, 12
Total capital= total equity +total debt=154148, 31, 04
Debt to total capital= 64168, 54, 12 /154148, 31, 04=0.4163
This implies that equity holders’ debt to capital is nearly zero and therefore the bank has zero financial debt risk.
Times Interest Earned= earnings before interest and tax expenses on interest
Earnings before interest and tax=29673, 72, 42
Expenses on interest=5158, 71, 73
Times interest earned= 29673, 72, 42-5158, 71, 73= 24515, 00, 69
This is also referred to as the coverage ratio and it indicates the degree of protection to creditors. It covers the risk of interest payments. However, the Islamic Bank of Dubai charges no interest on debtors and pays no interest to creditors as well.
Cash flow to debt= income from operations/total debt Income from operations= 3422, 32, 82
Total debt=64168, 54, 12
Cash flow to debt= 3422, 32, 82 /64168, 54, 12=5.33%
This measures the amount of cash that the company generates from operations that are purposely undertaken for servicing the debts.
Capital expenditure ratio= cash flow from operations/capital expenditures
The capital expenditure ratio provides information on the amount of cash balance after servicing debts using capital wealth.
Cash flow from operations=3422, 32, 82
Capital expenditures=5158, 71, 73
Capital expenditure ratio=3422, 32, 82/5158, 71, 73 =0.663
This implies that the bank generates 66.3% more than required cash to service the debts.
Profitability Ratio
Islamic banks have higher performance than conventional banks in the United Arabs region. That is reflected by the high profitability ratios of the Dubai Islamic Bank as compared with the Bank of Baroda. It has a high return of equity of 110.35% as compared to Bank of Baroda’s 51.6%. It also has a high return on debt of 20.96%. A high return on debt indicates that the bank is capable of settling all its debts within a fiscal year and making a profit from the debt capital (Kettell, 2011).
Solvency Ratio
A high solvency ratio indicates a low bankruptcy risk. Maintenance of a high solvency ratio of more than 20% is highly recommended by financial regulatory authorities. Bank of Baroda has a low solvency ratio than Dubai Islamic Bank. That indicates that it has operational constraints in the market. It has a solvency ratio of 18.23% which indicates the bank’s low ability to settle long-term debts (Hanif, 2011).
Financial Risk Ratio
The two banks have different financial risk ratios. For instance, Dubai Islamic Bank has a debt to total capital of 4.48%, which indicates its stability on debt settlements. On the other hand, the Bank of Baroda has a higher ratio of 41.63%, which is a high risk for the bank (Kintar, 2012).
Bank of Baroda also has a higher cash flow of debt than the Dubai Islamic Bank. This indicates that the bank has higher debts that are evidenced by its borrowing from the mother bank (Bank of Baroda, 2012).
Interpret your Results
The Dubai Islamic Bank performs better than the Bank of Baroda. There are many factors, which render into that difference in performance. They include culture, religion, and business policies. Islamic culture contributes to the growth of Islamic banks in the UAE because the vast majority of the population in the region are Muslims.
Conventional banks in the region have stuck to business policies that do not conform to the Islamic cultural beliefs. They rely on interests as a source of income whereas religious beliefs of the population oppose such policies. That renders the banks either losing customers or getting a few. That explains one of the main reasons that Dubai Islamic Bank performed better than the Bank of Baroda.
Secondly, the two banks are located in Dubai which acts as the UAE’s main trade hub. Hence, there is a large customer base for the two banks because of many trading activities in the region. Islamic Bank of Dubai relies heavily on the rich Islamic traders whereas Bank of Baroda and other conventional banks rely on Non-Islamic traders.
Summarize your Findings
The United Arabs Emirates is an Islamic region where business policies conform to the Islamic religion. Multinational business organizations willing to invest in the region have to readjust their policies to gain a large market share in the region. In most cases, financial institutions that normally charge interest on loans and grants are the most affected (Rehman, 2008).
However, other types of businesses run with fewer struggles if at all they do not interfere with residents’ cultural and religious beliefs.
The bank of Baroda relied heavily on the Indian bank for financing and investments because of the difficulties of running a business in the Islamic region. That shows that multinational financial institutions rely on their mother banks in their home countries for financing due to hardships in operating in the region (Rehman, 2008).
References
Bank of Baroda. (2012). Annual Report 2011-12. Web.
Hanif, M. (2011). Differences and Similarities in Islamic and Conventional Banking. International Journal of Business and Social Science 2(2), 166-175.
Kettell, B. (2011). Introduction to Islamic Banking and Finance. New York: John Wiley & Sons.
Kintar, T. (2012). Report on Review of Interim Financial Information. Dubai Islamic Bank, pp. 56-98.
Rehman, A. (2008). Dubai and Co: Global Strategies for Doing Business in the Gulf States. New York: McGraw Hill Professional.