Financial ratio analysis of selected banks in KSA and UAE

Research proposal

Financial ratio analysis of selected banks in KSA and UAE

Institute unanalyzed:
Samba Al & Rajhi Banks in KSA
Sharja & Commercial Bank of Dubai in UAE

Manal Alsabti

200801150
Assessment 3

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 Financial ratio analysis of selected banks in KSA and UAE

Introduction

In any economy a strong financial sector is an indicator of economic growth. A strong financial

sector attracts investors to invest in such an economy. The financial sector includes banking, insurance and

financial services companies. In analyzing the performance of these companies a financial ration analysis is

used to give a perspective on the performance and productivity of the companies (Clausen, 2009). Financial

analysis is much more relevant when comparing companies in the same sector . Therefore this research aims

at looking at the financial ratio analysis between Samba & Al Rajhi Bank in Saudi Arabia and Sharja &

commercial Bank of Dubai in the UAE.

Performance evaluation of a corporation is an indicator of how well the organization uses its

resource, shareholder equity, assets and liability. The banking sector is quite unique in that a larger

proportion of the assets are inform of cash or near cash assets and therefore need much more attention to

detail. Financial ration analysis is one of the tools that can be used to evaluate the performances of two or

three banking institutions (Clausen, 2009; Karacaer & Kapusuzoğlu, 2008).

The ratio analysis is used to measure the liquidity position, profitability, and the asset management

condition and debt coverage situation of the banking institutions being evaluated. The financial ration

analysis determines how the different companies use their assets and control their expenses (Palmer, 1983).

This research determines the extent of their efficient use of resource, and the shortage they have, and hence

give an indication of the ability of the companies to meet their short term and long term liabilities due. This

analysis is also an efficiency comparison between the various companies based on past financial

performance published by the company’s annual financial statements. (Morley, 1984)

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 Financial ratio analysis of selected banks in KSA and UAE

Motivation

This research aims to provide a comparative performance appraisal for the four banks, to have a

deep understanding of how different banks from different countries manage their sources and research about

the external or internal causes of either having a performance above or below the industry average. The

results of the research will be very important to management of different organizations, investors and

shareholders on the financial performance of the companies and help in critical decision making and

formulation of strategies for the preceding financial years. It would add value to investor and management,

if i succeeded to provide a decent calculation and analysis.

Problem Statement

The purpose of this study is to measure and evaluate the performance of the selected banks operating

in the UAE and KSA, and compare them to each other. The analysis of the financial conditions of the

companies would help in reaching to conclusions. There is evidence that financial management affects the

overall performance of a banking institution. The question arises is whether the accounting ratios especially

liquidity and leverage can be used to give strategies for better financial performance in terms of cash

management for optimal profitability. The study will give an insight into the financial condition of the two

countries based on the financial statements that lead to the level of their performance.

Research Methodology

Data Collection

The main financial statements namely income statements, balance sheets, cash flow statements and

statements of shareholder’s equity and footnote will be used in the study. These statements are obtained

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 Financial ratio analysis of selected banks in KSA and UAE

from annual reports from the company websites or from Tdawul and others, and will be used in the financial

ration analysis

Data analysis

A model for performance evaluation of the four banks was used. The model consists of six steps:

selection of financial statements, identification of income statement, balance sheets and statements of cash

flow, ration analysis, the mathematical and statistical calculation, and comparison of the four banks and

declaration of the best performer among the chosen banks depends on the average of the industry.

The first step involves choosing of financial reports. These reports are produced by banks periodically as a

regulation to give the company’s performance, fund flow and financial position in a certain accounting

period, the annual financial statements for the last 5 years, 2007-2008-2009-2010-2011.

The second step of the model is to identify the suitable ratios for evaluating financial performance of

the companies and explain what do they measure. There are various ratios such as asset management ratios,

debt ratio, liquidity ratio, market value, coverage ratio & etc. Most of the ratios are important in giving a

picture of how a company is well suited to generate assets, manage its debts, liquidity levels, efficiency in

terms expenses and level of shareholder equity profit or loss among others.

The third step involves calculating the identified figures from the statements of financial reports for

each of the four banks. For each year separately

In the fourth step, a graphical analysis of the evaluations of the banks is tabulated. This is an easy to

understand and clear method that can be used to present the performance for all the banks for each 5 years,

so 5 charts will be provided. This will be created in Microsoft Excel to graph and draw pie charts for the

four companies’ performance.

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 Financial ratio analysis of selected banks in KSA and UAE

The fifth step involves the comparison of the four banks with regards to liquidity position, debt

coverage facilities and profitability, asset management condition, share equity position from the ration

analysis. Based on this comparison, a recommendation can be made and explanations of good or poor

performance could be made.

Sixth, based on the ratio analysis and graphical representation, the research can conclude on the best

performing company based on the kind of ratio used and analyzed.

Clarification of important concepts

Financial ratio derives from the information in a company’s financial statement calculated to measure facts

and figure of the company’s financial and operation. These are the ratios that will be computed in the

research and will analysis the performance upon.

Liquidity ratio

Current ration = current assets/ current liabilities

Quick or Acid Ratio = (current assets – inventories) / current liabilities

Cash ratio = cash/ current liabilities

Profitability ratios

Net profit margin = net profit after tax/ sales

Gross profit margin ratio = gross profit/ sales

Return on total assets = net profits after taxes/ total assets

Return on common stock equity = net income / common stockholders’ equity

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 Financial ratio analysis of selected banks in KSA and UAE

Operating profit margin = operating profits / sales

Debt Coverage ratio

Debt ratio = total liabilities / total assets

Time interest earned = EBIT / Interest Charged

Book value per share = common stockholder’s equity / outstanding shares

Market value ratio

Earnings per share ratio = net income / weighted average number of share outstanding

Market/ book ratio = market price per share / book value per share

Research Framework

The research papers comprise of six to seven chapters namely introduction, literature review, methodology,

results and analysis, conclusion and recommendation and finally a list of references.

Chapter 1- introduction: this chapter basically gives the overview of the research, general structure and

framework and state the purpose and research question. The chapter introduces the big picture of the

research and the relevant information and assumptions made in the research. This helps in introducing the

readers to have an idea of banks performance and resource management and captures their interest based on

the importance and the analysis of this study. In this chapter, the motivation and rationale in this study

conducted and discuss expected results biased on past and market facts. It also gives the limitations of the

research and gives the general outline of the research paper presented.

Chapter 2 literature review: this chapter reviews, summarizes and analyzes previous studies and those

used by the research. In this chapter, the writer summarizes works by other scholars and researcher on ratio

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 Financial ratio analysis of selected banks in KSA and UAE

analysis in the banking secretor, also about some facts and conditions that lead to the level of performance

of the selected banks. Provide some reports about financial ratio analysis researches and papers on banks in

the Gulf Co-operation countries and especially comparative studies between Saudi Arabia and UAE if any.

Also relevant publications on financial ratios in the recent past that give the current trends among scholars

and researchers. Based on these findings the researcher would be able to develop a proper research

methodology to validated and build on these previous studies based on the recommendations of previous

researchers.

Chapter 3- Details about the banks: this chapter will give a brief history and give an idea of the operation

and management and investment of each bank and illustrate some differences between banks in Saudi

Arabia and UAE. And will also provide some facts and figures of their performance in the past few years to

give an idea of the level of their performance.

Chapter 4 – Analysis & Interoperation: in this chapter the actual calculation will be computed from data

collected from financial statement of the company, it will be analyzed and presented in a chart for the four

banks and declaration on the best bank is also given.

Chapter 5- Finding, conclusion: In this chapter the ratios are calculated and the results tabulated. The

results are then compared with the hypothesis formulated and tested to see if the hypothesis formulated

would be accepted or rejected. Then will reach to a conclusion of the best performing bank is given among

the chosen banks in the research. Based on the best performing banks, also the poor performing banks could

be explained in terms of their financial performance based on their ratios.

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 Financial ratio analysis of selected banks in KSA and UAE

References

Clausen, J. (2009). Accounting 101 – Financial Statement Analysis in Accounting: Liquidity

Ratio Analysis Balance Sheet Assets and Liabilities. Journal of financial statement.

Morley, M. F. (1984). Ratio analysis. (I. o. Scotland, Ed.) Published for the Institute of Chartered

Accountants of Scotland by Gee & Co.

Weygandt, J. J., & Kieso, D. E. (1996). Accounting Principles (4th ed.). New York: John Wiley

& Sons.

Data analysis: Analyzing data - ratio analysis. (1995, May ).

Qualification and experience

senior student that have background of economic, accounting and finance and have done ratio

analysis report in the past, also done some analysis, I have a decent knowledge and skills for preparing this

research, and also worked at “Pricewater house cooper” and done some Tax return and auditing, but will

defiantly face some limitation in some area such as, some miss judgment when comparing their

performance and discussing the environmental condition surrounded by banks, because it requires updated

and deep reading in finance because i am still in the process of learning and I hope this report will improve

my skills and understanding.