5.Consider the following financial ratios based on published financial statements of AB Bank and IDLC Limited. The ratios include return on common equity (ROCE), return on net operating assets (RNOA), financial leverage (FLEV), net borrowing costs (NBC) and spread between RNOA and NBC. t_c is the effective corporate tax rate. NAV represents net asset value per share.

1

Financial Statement Analysis of Banks and Financial Institutions

ID

Company

Year

NAV

ROCE

(1-t_c )

RNOA

FLEV

NBC

SPREAD

11101

ABBANK

2008

30.2

50.98%

63.88%

16.85%

10.75

11.00%

5.85%

11101

ABBANK

2009

40.1

50.82%

64.84%

16.11%

9.54

9.58%

6.53%

11101

ABBANK

2010

44.1

38.75%

56.12%

15.09%

7.85

8.21%

6.88%

11101

ABBANK

2011

40.7

9.83%

40.04%

12.07%

6.86

10.78%

1.29%

11101

ABBANK

2012

36.6

9.75%

41.81%

12.72%

7.32

11.55%

1.17%

11101

ABBANK

2013

34.8

6.78%

34.61%

12.52%

7.61

11.59%

0.93%

11101

ABBANK

2014

35.2

8.68%

34.28%

11.75%

8.89

10.06%

1.69%

11101

ABBANK

2015

50.2

7.77%

47.47%

9.47%

10.08

8.79%

0.68%

11101

ABBANK

2016

36.0

5.53%

53.38%

7.99%

7.03

7.65%

0.34%

11111

IDLC

2008

64.5

32.58%

57.43%

16.37%

7.76

16.04%

0.33%

11111

IDLC

2009

79.8

51.01%

64.54%

21.74%

7.56

13.85%

7.89%

11111

IDLC

2010

61.5

55.46%

67.84%

22.21%

6.11

12.47%

9.75%

11111

IDLC

2011

40.2

13.56%

41.12%

20.32%

3.78

16.97%

3.35%

11111

IDLC

2012

37.9

17.91%

56.92%

18.96%

4.77

16.34%

2.62%

11111

IDLC

2013

33.6

14.27%

50.52%

19.41%

5.00

17.64%

1.77%

11111

IDLC

2014

32.5

23.03%

56.96%

18.40%

5.76

14.58%

3.82%

11111

IDLC

2015

31.0

22.35%

55.51%

16.83%

5.79

12.78%

4.05%

11111

IDLC

2016

33.8

22.99%

57.93%

14.73%

5.75

10.39%

4.34%

Required:

(a) What factors are driving AB Bank profitability to decline from 51% in 2008 to 5.5% in 2016? How do you compare between AB Bank and IDLC?