RATIO ANALYSIS OF COMMERCIAL BANK

1. Analysis of Financial Statements of Commercial Bank of Ceylon Plc
Based on Annual Report 2011/2012
A Comprehensive Report for the Existing and Prospective Investors
Prepared to: Dr.E.M.A.S.B.Ekanayake
Senior Lecturer,
Dept of Management Studies
University of Peradeniya
Prepared By:
N.Mohamed Nithal HD/DIP/12/13/136
MGT506: Financial Statement Analysis
Post Graduate Diploma in Accounting & Finance
University of Peradeniya

2. Executive Summary
This report analyzes the financial statements of Commercial Bank of Ceylon Plc based on the
2011/2012 Annual Report. Comparative Financial Analysis and Ratio Analysis are employed to
measure the Profitability, Liquidity and Market Performance of Commercial Bank of Ceylon Plc.
A significant trend is noticed at the Financial year 2012, has been excellent one for the Bank as
evident from its Assets Portfolio crossing Rs.500 Bn and Profit After Taxation reaching Rs10.
Bn.

3. Table of Contents
1. Introduction.................................................................................................................................. 1
2. Industry & Strategy Analysis ....................................................................................................... 2
3. Accounting Analysis....................................................................................................................... 3
4. Financial Analysis.......................................................................................................................... 3
4.1 Comparative Financial Statements Analysis..........................................................................3-4
4.2 Ratio Analysis ........................................................................................................................... 5
4.2.1 Profitability Ratios........................................................................................................ 5
4.2.2 Liquidity Ratios............................................................................................................. 5
4.2.3 Efficiency Ratios ........................................................................................................... 5
4.2.4 Market/ Investor Ratios ............................................................................................6-7
5. Conclusions and Recommendations............................................................................................. 8
6. Appendices...................................................................................................................................... 9
Appendix- Income Statement.......................................................................................................... 9
Appendix- Statement of Financial Position.................................................................................... 10
7. References..................................................................................................................................... 11
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4. 1. Introduction
During the financial year under review (FY 2012), significant fluctuations in key economic
variables, most notably the exchange and local interest rates, remained the norm. Over the
course of the reporting period, the Sri Lankan Rupee (LKR) peaked to 134 against the USD,
reflecting a depreciation of over 17% compared to the beginning of the year. Likewise, interest
rates maintained an upward momentum throughout the year with the Average Weighted Prime
Lending Rate (AWPLR) increasing from 10.8% at the start of 2012 to reach 14.4% by year end.
Nevertheless, the Banking sector benefited from these fluctuations, with notable gains from
foreign exchange movements and improved interest margins.
2. Industry & Strategy Analysis
“Commercial Bank of Ceylon PLC”, also known as Commercial Bank is identified as the
benchmark private bank in Sri Lanka operating 227 branches in Sri Lanka and 17 branches in
Bangladesh. Commercial Bank is the only Sri Lankan bank operating in Bangladesh. The
company has plans for covering a wider area by extending the market to South Asian countries
such as India and Maldives. The company’s vision is "To be the most technologically advanced,
innovative and customer friendly financial services organisation in Sri Lanka, poised for further
expansion in South Asia". Commercial Bank has an extended vision of becoming the number 1
private bank in Sri Lanka, and simultaneously to overtake all the government banks in 10 years
time. The bank is also considered as one of the most profitable bank in Sri Lanka assuring
excellent and diverse facilities and services for both employees and customers.
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5. This comprehensive SWOT profile of Commercial Bank of Ceylon PLC provides an in-depth strategic
SWOT analysis of the company’s businesses and operations. This table shows a clear and an unbiased
view of the company’s key strengths and weaknesses and the potential opportunities and threats.
Strengths
1. The Bank had the largest market
capitalization.
2. Customer base, our highly trained and
motivated staff, our superior
technological platform & IT driven
processes and our highly developed
work ethic and culture.A very customer
centric Bank maintaining the highest
levels of engagement with its
customers.
3. Taking the number of branches to 227
and 55 ATMs coming on line making a
total of 555 by end of 2012 & Operates
17 delivery points and 17 ATMs in
Bangaldesh.
Weaknesses
1. Countrywide loan write-offs, claims,
and settlements.
2. Unable to capture the Retails Banking
since the other competitive player in the
industry have a huge market share of
the industry.
Threats
1. Loan growth due to regulatory barriers
and economic trend.Creating economic
value addition while minimizing
adverse impacts on people and planet.
2. Stiff competition in the Local Market.
3. Adverse macro economic variables both
locally and globally & Stakeholder’s
dissatisfaction due to lapses in the
Bank’s engagement process.
Opportunities
1. Lending opportunities thriving from
large scale infrastructure development
taking place in the country in its
journey to become “Miracle of Asia”
2. Serving unnoticed market niches with
the gamut of sustainability merits &
customers loyalty being the benchmark
private sector Bank which is a definite
advantage in perking up the market
share.
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6. 3. Accounting Analysis
Changes to Financial Reporting Standards
With the new Sri Lanka Accounting Standards (SLFRS / LKAS) issued in line with the
International Financial Reporting Standards becoming effective from 1st January 2012, business
entities were required to apply these standards retrospectively, with all adjustments to equity up
to the transitional date of 1stJanuary 2011, recognized under Statement of Change in Equity.
As required by these standards, the Bank prepared its opening Statement of Financial Position as
at 1stJanuary 2011 based on the assumption that the Bank had applied these standards
retrospectively with all the adjustments to equity being recognized directly on the Statement of
Changes in Equity.
4. Financial Analysis
4.1 Comparative Financial Statement Analysis
Statement of Comprehensive Income
Income
The Bank’s interest income for the reporting period grew by 37.36%, prompted by increase in
yields coupled with growth in interest earning assets. Interest cost mirrored this upward
movement with perceptible increase of 51.81%. Higher deposit rates, deposit growth as well as
conversion of low cost deposits to fixed deposits at higher rates pushed the interest costs
upwards. Nevertheless, the Bank witnessed a growth of 22.19% in net interest income amounting
to LKR 4 Bn during the financial year 2012. Efforts in this regard yielded positive results with
the Bank increasing its commission income by 10.13% in 2012 against that of the previous
financial year.
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7. Operating expenses
Commercial bank is one of the best managed banks in the country today. The operational
excellence is primarily achieved through optimal and lean cost structures adopted by the bank.
Other expenses including premises, equipment and establishment costs increased by 9.82%
during the year 2012 and despite the stated increases in operating expenses, the higher
percentage growth in income compared to expenses was facilitated by new branches that
augmented the network during 2010 and 2011. These contributed positively towards the bottom
line.
Profitability
The Bank’s pre-tax profits recorded a strong growth of 31.18% to LKR 14.2 Bn compared to
2011 while Group pre-tax profits also improved by 30.35% to LKR 14.3 Bn. The net profit after
tax for the Bank recorded a growth of 28.10% to stand at LKR 4.1 Bn while the Group net profit
after tax recorded a year on year growth of 27.09% to LKR 10.08 Bn for the year ended 31st
December 2012.The Return On Assets (ROA) for the Bank in 2012 improved to 2.12%
compared to 1.94% in the previous year, with improved margins, higher non-interest income to
net income and reduction in cost to income ratios positively contributing towards same while
Return on Equity was maintained at 20.96%.
Statement of Financial Position
The greatest challenge in 2012 was to source adequate funding to support the unprecedented
growth in credit witnessed in 2011, which also spilt over to the early part of 2012. As the Central
Bank imposed conditional restrictions on the loan growth, obtaining foreign funding (to have the
flexibility to increase the asset growth up to 23% if required) was also a key objective at the start
of the financial year. In totality, gross loans and advances grew by 18.68% and other interest
earning assets by 4.8 %. There was no major change in the stated capital of the Bank.
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8. 4.2 Ratio Analysis
4.2.1 Profitability Ratios
Return on Assets & Return on Equity
Bank continued to maintain excellent levels of profitability as depicted by the ROA and ROE.
Inf8act ROE is much higher than the underlying cost of equity.
The trend reflected by ROA and ROE is reflected in the cost to income ratio, which improved by
4 .2% from 51.7 in 2011 to 47.50 in 2012 indicating better efficiency and profitability
performance.
4.2.2 Liquidity Ratios
Liquid Asset Ratio
The bank liquid assets ratio stood above 25%.During most part of the year Deposit mobilization
efforts as well as provident fund management enabled the Bank to main satisfactory LAR. The
LAR of 25.8% as at Dec 31, 2012 was well above 20% minimum stipulated by the CBSL. The
ratio increase by 0.8% from 25% in 2011 to 25.8 in 2012 indicating a increase in the amount of
customer and short term funds that could be met if they were not suddenly withdrawn.
4.2.3 Efficiency Ratios/Debt Management Ratio
Debt to Equity Ratio
The debt to equity ratio has been increased from 2.35% to 18.25% in 2012.This shows a high
risk on investors. This is mainly due to the Bank was raised long term loan of US $ 65 Mn from
International Finance Corporation (IFC), to improve financial assistance to SME sector. There
was no major change in the stated capital of the Bank.
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9. Interest Cover Ratio (Times)
The Interest Cover Ratio has been reduced from 49.07 to 48.61 in 2012.The ability of the
company to pay the Fixed interest slightly came down by significant amount followed the long
term loan obtained from international Finance Corporation (IFC) in 2012.
4.2.4 Market/ Investors Ratios
Earnings per Share
The significant growth in profits during the year resulted in a 28.09% rise in the Company’s
Earnings per Share to
Rs.12.13 compared with Rs. 9.47 the previous year.
Price Earnings Ratio
The price Earnings ratio declined by three times from 11 times in 2011 to 9 times in 2012,mainly
due to the lower improvement in Market Shares Value during 2012, while the Earning Per share
has been increased to Rs.12 in 2012 from Rs.9 in 2011.
Dividend per share
In accordance with the dividend policy of the Bank which ensures a reasonable to the
shareholders while funding future growth, the Bank has been paying a fairly consistent dividend
in the past. The dividend per share improved by 8.33% from Rs.6 to Rs. 6.50, indicating a better
return to the Shareholders.
Dividend Payout Ratio
Total dividend payout ratio of the Bank amounted to 53.7% compared to 62.3% in
2011.similarly the cash dividend payout ratio amounted to 37.1% compared to 41.5% in 2011.the
total dividend payout ratio was well above the minimum level of prescribed by the deemed
dividend rules of the Department of the Inland Revenue.
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10. Net assets value per share
Net assets value per share has been increased from Rs.54 in 2011 to Rs.63 in 2012, mainly due to
shareholders funds recorded a growth of Rs.8.8 Bn in 2012.
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11. 5. Conclusions and Recommendations
The main issue considered in this analysis was whether to make the investment in Commercial
Bank of Ceylon Plc, is a viable option for the existing and Prospective Shareholders. Based on
the preceding analysis, the conclusion drawn is that such an investment is likely to be a sound
investment. Accordingly, the following recommendations are made:
1. It is noted through our Analysis the Bank strong market position as Sri Lanka’s
largest privately owned licensed commercial bank (“LCB”) and third-largest
overall LCB. The Analysis also reflects Commercial Bank’s strong franchise and
healthy financial performance, funding and liquidity, as well as good
capitalization levels.
2. Year on year basis Commercial Bank of Ceylon PLC grew revenues 38.94%
from 44.55bn to 61.90bn while net income improved 27.08% from 7.93bn to
10.08bn
3. Year on year, both dividends per share and earnings per share excluding
extraordinary items growth increased 14.50% and 27.08%, respectively.
4. The positive trend in dividend payments is noteworthy since only some
companies in the Regional Banks industry pay a dividend. Additionally when
measured on a five year annualized basis, both dividend per share and earnings
per share growth ranked in-line with the industry average relative to its peers
5. The Banks uses little or no debt in its capital structure
6. The Bank’s performance is deemed healthy owing to the operational cost
efficiencies achieved through its low-cost delivery channels and economies of
scale. This has translated into an ROA that is among the industry’s best.
7. In the short to medium term, Commercial Bank’s performance is expected to
remain healthy, backed by its expanding loan base and operational efficiencies
despite a lower Net Interest Margin. 8
Net profit margin 30.74%
Operating margin 43.66%

12. References
(Annual Report, Commercial Bank of Ceylon Plc, 2012), Retrieved from
http://www.combank.net/newweb/investor-relations
John Wild et al.(2001). Financial Statement Analyis.7th
Edition. McGraw-Hill. Irwin.
Budgeting and Finance (First Books for Business) by Peter Engel. (McGraw-Hill, 1996).
Fundamentals of Financial Management, 11th ed. by James C. Van Horne and John Martin Wachowicz.
(Prentice Hall, 2001).
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