Effect Of Financial Analysis In Predicting The Financial Performance Of Banks – A Comparative Study On BCA And DBS

Previous studies on financial institutions in Australia

Financial measures have long been considered as the foundation for measure of business performance. In general, the financial environment of any economy typically consists of mainly five components namely, money, regulations, financial instruments, financial institutions and financial markets. Among the aforementioned components of financial environment, banks are identified as one of the most active players in the financial system. Ratio analysis forms the main determinant to analyze and monitor the financial performance in banks. The basic inputs of the ratio analysis are considered from the income statement and balance sheet of the concerned bank. The use of popular financial ratios in banks such as capital adequacy ratio, rate of non-performing loans ratio, loan to deposit ratio and return on assets is able to assess the key performance in areas such as capital, earning assets, rentability and liquidity. The computation of the aforementioned ratios helps in highlighting areas of good and bad performance and may be conducive in assisting the management to know about their strengths and weaknesses and put an augmented focus on the opportunities. Ratios are useful in identifying the success and compared the pre-and post-action results of taking a particular decision. It is necessary that the financial statements of banks are analyzed using progressive ratios (Adam 2014).

Previous studies in Australian financial institutions have proved that the measurement of financial indicators such as return on assets, capital adequacy and interest margin rates have a positive correlation with the scores of customer service. Several others studies have revealed that negative correlation between return on assets and size of the bank and a positive correlation among return on assets with asset management ratio (Al Karim and Alam 2013). The study has emphasized on depicting the effect of financial Analysis in predicting the financial performance of banks by doing a comparative study on Bank Central Asia (BCA) and DBS Bank of Singapore (Berger and Bouwman 2013).

DBS is identified as the leading financial group of service in Asia, which is headquartered in Singapore. DBS is recognized with a growing presence in South Asia, greater China and Southeast Asia and is well positioned as a partner to capture different opportunities in these regions. It has been recognized as bank of the year by Asia by The Banker, which is a member of financial Times group. It has been also named as one of the safest bank in Asia by global finance for consecutive period of eight years from thousand 2009-2016 (Dbs.com. 2017).

Overview of Bank Central Asia (BCA) and DBS Bank of Singapore

BCA is identified as an Indonesian bank which has overtaken DBS in 2016. The Asian financial crisis in 1997 had a significant impact on the banking system with particular relevance to cash flow. The main strategy focus of BCA has been given on focusing on growth, efficiency and credit quality to enhance its role as a transaction Banker to provide payment settlement services across Indonesia. Apart from the general banking services BCA has been particularly recognized with providing export import facilities, letter of credit or bank guarantees, bank assurance and product investment bond (BCA. (2017). 

Financial statement analysis has been identified as the main process for evaluation and the review of the financial statement. This has been seen with profit & loss statement and balance sheet. Thereby understanding the financial health of the company and enabling effective decision making. The various types of the financial statements are seen to record the financial data with the information evaluated from the financial statement analysis by making use of interested parties, investors, shareholders and managers.

The analysis of the financial statement is seen to identify the trends by the comparison of the ratios with multiple statements and time period. The use of the aforementioned statement has been seen to make used of the liquidity, cash flow, companywide efficiency and profitability. The three main types of the financial statements have been identified with income statement, balance sheet and cash flow. The balance sheet of the company highlights the shareholder’s equity, assets and liabilities. The analysts make use of the balance sheet to analyze the different types of the trends which are seen to analyze the debts and assets. The income statement is seen to include the various aspects of sales and net income. The analysts are able to determine the gross profit, net profit and operating profit. The aforementioned components are seen to divide with the sales to ascertain the gross profit, operating profit and net profit margin. The cash flow statement is seen depict the cash flows from operating activities, financing activities and investing activities. The various types of the financial analysis have been seen to provide various track records in multiple years.

“Monetary Authority of Singapore (MAS)” has been seen to monitor the various types of the developments which are seen to be associated to the external environment and the impacts which are having an impact on the economy of Singapore. Based on the economic analysis the Singapore economy increased by 2.2% in the second quarter, this has been seen as a decrease of 2.1% than the previous quarter. The overall turnaround was seen with the improvement in the performance of the trade related sector for the performance in the financial services. The GDP growth rate of the country has been further discerned as 4.2%. The GDP growth rate of the country has been further seen to be forecasted to be 2%-3% stronger in 2017. Due to the several types of the external developments of the country the various types of the financial parameters has been identified with an increasing trend for Bank Central Asia. It has been further discerned that the Capital Adequacy of the company has increased from 16.86% in 2014 to 18.65% in 2015. It has been further identified that the significant improvement in the economy of Singapore has shown a linear growth in the Core Capital performance. This has been evident with 17.76% growth in 2015 from 15.99% in 2014. As per the present financial standings the core capital of BCA has shown enormous growth with 20.97%.  However, the Non-Performing Loan rate has also considerably identified to increase from 2015 to 2016 (Tremewan 2016).

Use of financial statements in evaluating the financial health of banks

Indonesia has been identified as one of the largest economies in Southeast Asia and has been considered as one of the emerging economies in the world. Indonesia has been further seen to be a member of major G-20 economies and categorized under newly industrialized nation. It has been further seen that Indonesian economy has been seen with one of the sixteenth largest economy in the world. It has been also seen that the GDP per capita of the country is considerably below the average global average. The economy of the country has been seen to be related to the various types of the associations which are seen to be dependent on the domestic market and the spending of the government along with the various types the ownership of the states.  Due to the negative growth in the economy the main effect of this has been seen to be discerned in terms of the CAR of “DBS Bank Limited (DBS)”. The loan to deposit has been considerably seen to reduce from 81.10% in 2015 to 77.10% in 2016. The slow growth potential of the GDP of the Indonesian economy has been further considered to affect the return on the asset. This has been observed to reduce from 0.96% in 2015 to 2016. The similar effect has been further seen to be identified in the Non performing Loan rate. This percentage for the company has been seen with an increase of 1.3% in 2016 from 0.9% in the previous year (Aissa and Hartono 2016). 

The main objectives of the research are listed below as follows:

1. To perform a comparative financial performance of BCA and DBS by financial analysis.
2. To examine whether the financial analysis has helped in evaluating whether the banks has been able to maintain the minimum Common equity Tier 1 ratio as per the prescribed rules and regulations.
3. To investigate whether the various types of factors such as capital ratio, return on assets and loans to deposit ratio has an impact on profitability of the bank.
4. Reflecting on the role of financial analysis benefiting from financial statements and highlighting on the strengths and weaknesses for assessing the banking performance.
5. To identify whether the factors such as risk weighting assets and bank size has an impact on the internal performance among both BCA and DBS.
6. To suggest and recommend measures on the basis of the results for improving further financial performance of both the banks under study.

The main research questions set for the study are provided below as follows:

1. Is there any impact of capital ratios on profitability of the bank?
2. Has the financial analysis helped in evaluating whether the bank has been able to maintain the minimum Common equity Tier 1 ratio as per the rules and regulations?
3. Is there any impact of return on assets ratio, non-performing loan rate ratio and loan to deposit ratio on profitability of the bank?
4. Has the financial analysis able to cover key performance areas such as capital, earning assets, rentability and liquidity?

The main source of information of the study is based on the evaluation of the annual reports of the banks in the last three years. Hence, the main approach of the research strategy is based on a deductive research, mostly based on a quantitative analysis and graphical representation to assess the financial performance.

The Tier 1 capital is identified as the core measure for the financial strength of a bank from the regulator’s viewpoint. It mainly comprises of non-redeemable noncumulative preferred stock and components from core capital such as common stock and retained earnings. The Basel Committee has considered the Tier 1 capital with stringent conditions which are limited to a maximum of 15% of the total Tier 1 capital. However, this part of the year one capital is intended to be phased out during the implementation process of Basel III (Beltratti et al. 2013). It has been often seen that Tier 1 capital is considered as the core capital of the bank holds in the reserves and considered as their primary source of funds. As the bank typically provides capital to their customers this may involve substantial risks. The total amount of the one capital held and sure is that there is a substantial amount of depository held it the bank to fulfill the needs of the customers. Some of the main components of Tier 1 capital consist of retained earnings, preferred stock and common stock. The total amount of Tier 1 capital held with the bank demonstrates its strength as a financial preparedness towards emergencies (Fu, Lin and Molyneux 2014).

Impact of external factors on the financial performance of banks

The Tier 1 capital ratio is identified as a ratio of banks core equity capital to its risk-weighted assets (RWA). RWA are identified as the total of the assets which are seen to be held by credit risk and determined by the regulator. In general, there are two conventions followed court and calculate the Tier 1 capital ratio. The first being Tier 1, one capital ratio and the second being Tier 1 total capital ratio. The various types of preferred shares and the non-controlling interests are taken into consideration with Tier 1 total capital ratio but not the Tier 1 common ratio. Due to this, the common ratio will always be considered less than or equal with the total capital ratio (Akins et al. 2016). 

Tier 2 capital often referred to as supplementary capital consists of various types of important and legitimate components of a bank’s capital. Tier 2 capital is identified as the secondary component of the capital of the bank in addition to the Tier 1 which makes up for the overall reserves. These forms of capital in banking are standardized as per the accord of Basel 1, issued by Basel Committee on Banking Supervision. As per the national regulators in most of the countries around the world, then the condition of the standards has been set as per the local legislations (Berger and Bouwman 2015). The calculations pertaining to the regulatory capital, Tier 2 is limited to hundred percent of Tier 1 capital. As Tier 2 capital is designated to be a supplementary capital of the most common items included in it involves undisclosed reserves, hybrid instruments, subordinated term debts and revaluation reserves. The calculation of the bank’s reserves requirement with the Tier 2 is regarded to be less secure than Tier 1 capital and in several countries the bank capital requirement is partially based on RWA (Cohen et al. 2014).

The primary component of Tier 2 capital considers revaluation reserves, which are created as a result of evaluation of an asset. The evaluation reserve is seen to typically consider the building owned by the bank. With time the value of real estate assets tends to increase which needs to be revalued. The second most important component includes general provisions. The general provisions are the losses which are bank may have and is yet to be determined. The total amount of the general provisions is 1.2% of the banks risk-weighted assets (Lee and Hsieh 2014). The third most important element of Tier 2 capital is seen with hybrid capital which has mixed characteristics of both the debt and equity instruments. An example of hybrid instrument is seen with preferred stock. The bank may consider hybrid instrument as a Tier 2 capital as long as the assets are seen to be sufficiently comparable to equity so the losses may get taken over by the face value of the instrument without the need for liquidation of the bank. The final important consideration for the Tier 2 capital is seen with minimum original term debt of five years or more. The debt is about innate as per the ordinary bank depositors and the securities and the loans which constitutes higher ranking of the senior debts. In most of the countries that undisclosed reserves which are profits are not disclosed in the bank reserves which are to be used to meet the reserve requirements (Doumpos, Gaganis and Pasiouras 2015).

Core capital is defined as the minimum amount of the capital which are thrift bank like loan company or a savings bank need to have in order to comply with the Home loan bank regulations. The main component of core capital has been seen with equity capital and the various types of declared reserves (Lin, Doan and Doong 2016). The minimum amount of requirements it needs to ensure that consumers are protected she seemed to be carried out with the inclusion of core capital. Several deaths of other studies have suggested that financial institutions capital which comprises of beauty and the various types of undisclosed reserves are often considered as core capital. The other section of the core capital includes loan loss provisions, undisclosed reserves, subordinated debt and supplementary capital. As per the definition given by the capital adequacy standards established by the bank for International settlements go capital is defined as the sum of supplementary capital and the Tier 1 capital. The core capital forms an integral part of the Tier 1 capital as it acts as the most significant measure of the financial performance of a particular bank. The calculation of core capital ratio involves dividing the amount of Tier 1 capital by the total of risk-weighted assets (Adam 2014). 

A non-performing loan (NPL) is termed as the total amount of some borrowed a debtor who has not able to make his scheduled payments for a minimum of 90 days. The consideration of a non-performing loan is held either in default or close to being in default. Once a loan is recognized as non-performing, the odds of it getting repaid in full are substantially lower. In case a day to start making payments on a non-performing loan it is considered as a re-performing loan even if the debtor has not caught up on all the payments which he has missed. The banking institutions and various types of other financial institutions holding non-performing loans in the portfolio may choose to sell them to the various types of other investors to get rid of the risky assets and clean their balance sheets. The sales associated to the non-performing loans should be carefully considered as there have been numerous financial implications involved with it. Some of the numerical implications have been seen to be affecting the company’s profit and losses and various types of tax situations (Cubillas and Gonzalez 2014).

A non-performing loan is considered as any loan has a reasonable chance of entering into default. Hence, very often in case a loan isn’t paid in default, the borrower has not been able to make a number of payments within a specified period. Most commonly it has been observed that NPL is considered if no payment has been made within 90 days then also a loan can be qualified for NPL. One is a loan is recognized as non-performing, lenders have the opportunity to make an attempt for recovering the principal amount. This is especially applicable to the loans which are backed by specific assets like vehicle loan or home loan (Hermes and Meesters 2015). In such instances the lender may start the process of foreclosure on a home or considered to season the property such as with vehicle. In cases where there is no specified asset, as being the case of unsecured lines of credit, a lender may choose to use internal collection of services for recovering the missing amounts. In case the extenuating circumstances affect the borrower, the lender may consider putting the loan into forbearance and suspending the same for making payments until the situation changes. Forbearance is considered very common with student loans; especially the borrower is attending the classes of the entire course and has been unable to secure employment after graduation (Luo, Tanna and De Vita 2016).

In case the borrower is not able to make payments on the debt, the debt may be sold at a notably reduced price to various types of external collection agencies. Alternatively the lender/financial institution may partner with a collection agency to offer a percentage of the week award amount owned. At this stage the lender can address any losses which are taken into consideration based on the difference of the principal owned and the price that it was sold or the amount recovered minus any fees. The partner agencies then makes an attempt for making a profit by securing the payment either in full or close amount as possible from the borrower.

NPAs have a detrimental effect on the balance sheet of the banks. Carrying the non-performing assets is also considered as carrying the burden of non-performing loans on the balance sheet with three distinct burdens on the lenders. The first burden being the non-payment of interest on the principle diminishes the cash flow for the lender which may disrupt the earnings or budget. Secondly, the loan loss provisions which are set to cover for the potential losses reduce the capital available to provide subsequent loans. Henceforth, one of the actual losses from the default of the loans are determined they are written off in terms of the earnings (Gaganis and Pasiouras 2013).

It has been further observed that lenders have generally for options to recoup some of the losses which are resulting from the non-performing assets. In situations when the individuals/business concerns are struggling with service debt the lenders can initiate a proactive step to restructure the various types of loans to maintain a steady cash flow and avoid the classification of loans as a non-performing one. During situations when the loans are collateralized by the assets of the borrower’s, the lenders have the ability to take possession of the various types of collateral and fill it to cover for the losses with the extent of the market value. The lenders have also the ability to convert bad loans into equity which may be appreciative to certain extent for full recovery of the principal last on the defaulted loan. During situations when bonds are converted into new equity shares, the original values of the shares are seen to be usually wiped out. In order to consider as a last resort the bank can decide to sell bad debts at deep discounts to the company which specializes in collection of loans. The lender typically sells the defaulted loans which are not seen to be secured with the co-lateral with any means of recovering the losses and are not cost-effective. Cash basis loan is a loan in which the interest is recorded in terms of on one when the payment is collected. The ordinary interest income is seen to back crude on the loans as the regular payment of both interest and principal is assumed. However, in case the loan goes bad, the continuing payments are doubtful. Cash basis loans are seen to be non-performing loans and the interest income can only be recorded when the funds have been actually received (Berger and Bouwman 2013).

Capital adequacy ratio often termed as (CAR) is considered as the measure of bank’s capital. The capital adequacy ratio is expressed in terms of the percentage of a risk of bank with the weighted credit exposures. It has been also seen that in various cases CAR is often termed as capital-to-risk weighted assets ratio or (CRAR). It is mainly conducive in protecting the stability and promotes efficiency in the financial systems around the world. The capital adequacy ratio is mainly composed of the two types of capital measures which has been previously discussed last year one capital and tier 2 capital. This capital can be absorbed with the losses without a bank seen to seize the trade and Tier 2 capital is seen to observe the losses on an event of winding up to provide lesser degree of protection to the depositors. The calculation of capital adequacy ratio involves addition of that year one capital with tier 2 capital and dividing the sum total of these fake risk-weighted assets. The reason for maintaining minimum capital adequacy ratios is critical for the bank is to have enough support to absorb the reasonable amount of losses in case of insolvency or incidence of consequently losing depositors funds. The Capital adequacy ratio is also seen to ensure the efficiency and stability in the financial system of the nation by lowering the various types of risks of becoming insolvent. In case a bank is declared insolvent, then it creates loss of confidence in the financial system and leads to unsettlement of the entire financial market system. At the time of winding up of the funds, the depositors are given more priority than the bank’s capital so that the depositors can only lose their savings if a bag registers a loss exceeding to the amount of capital it possesses. Hence the higher is the capital adequacy ratio of the bank; the higher is the degree of protection for the depositor’s money (Carvalho, Ferreira and Matos 2013).

Hence, the capital adequacy ratio determined the capacity of the bank to meet the time liabilities and various types of other credit risk or operational risk. CAR is often considered similar to leverage in the most basic formation and is comparable to the inverse of debt to equity leveraged formulations. Unlike the traditional leveraged, CAR is considered as an asset with different levels of risk (Coffinet, Pop and Tiesset 2013).

The loan to deposit ratio (LTD) also termed as loan to funding ratio (LFR) is used as the main statistic technique for assessing the equity of bank by dividing the total of bank loans by its total deposits. This particular ratio is expressed as a percentage. In case of a very high loan to deposit ratio, it will signify that the bank may not have enough liquidity to manage any unforeseen fund requirement and vice versa. In case the ratio is identified to be too low then the bank may not have the earnings as much as it could be (DeYoung and Torna 2013).

The calculation of the LTD ratio needs to take into consideration the total amount of loan which has been granted by financial institution over a certain period of time and divide the same with the deposit received by the bank in the same financial period. For instance, in case a bank loans $ 7 million and accepts $ 14 million as deposit then it has a LTD ratio of 50% or half.

In general several factors can cause changes in the loan to deposit ratio. For instance, when the Federal Reserve’s has a lower interest rate, the low rate of interest encourages the customers to take out loans. Similarly, these rates often change on buying securities or any kind of investing activity which leads to increasing the amount of cash which they tend to deposit in the bank. In such a case the loan to deposit ratio can be lowered. For instance in 2008, the total LTD ratio in US for the commercial banks was hundred percent. But after some years of low interest due to global financial crisis, the interest rate dropped to 77% in 2015 (Ko??ak et al. 2015).

As per the tradition and the concept of prudence, the ideal loan to deposit ratio is 80 and 90%. However, several banks have to keep relevant regulations in mind. The agency is associated to these such as “Office of the Comptroller of the Currency (OCC)”, does not need to set a maximum or a minimum loan to deposit ratio for the banks. Still, these agencies need to monitor to see if the ratios are compliant with the various sections as per the local banking legislations. With reference to section 109, the banks are not permissible to set up branches in states other than their home states, solely for collection of deposits. In case the loan to deposit ratio deferred too much then the bank is not serving the credit needs of its communities and hence this will be considered as a breach of the law and may be subject to sanctions. In addition to this, the LTD ratio is often seen to be used by the various types of policymakers to make that assessment related to lending practices of the financial institutions.

The loan to deposit ratio is calculated by adding the net loans of the previous year with the current year and dividing the same by 2 to obtain the average net loans. The deposit of the current year and the previous year needs to be divided by 2 in order to obtain the average deposits. To arrive at the final value of loans to deposit ratio the average net loans needs to be divided with the average deposits.

In general return on assets (ROA) is identified as a financial ratio which depicts the percentage of profit on by a company in terms of overall resources. Most commonly the ROA is obtained by dividing the net income with the total assets. The net income is derived from the company’s income statement and is considered as profit after tax. The various types of assets are read from the balance sheet which includes cash and the cash equivalents. In general, the return on assets and equity are considered as well established as your which has been long used in the fundamental analysis across a wide range of industries. The return on equity is especially useful in the valuation of banks has the traditional cash flow models can be very intricate construct for the financial companies and return on equity models which can offer similar type of information.

The interest rates are seen to fluctuate and this is a huge role on the profitability of a bank. Banks therefore intend to maintain a steady performance by getting away from this dependency and generating more revenue on fee-based services. In several cases, many banks have considered showing the breakup of the revenue figures into fee-based non-interest and non-fee or interest generated revenues. The forms with the higher fee-based revenue are seen to typically have a higher return on the assets in compared to the competitors. With the consideration of several types of tangible and intangible jobs, evaluating the management is a difficult task. One key financial indicator evaluating the management is seen as the net interest margin. While the calculation of return on assets, the banks have a high leveraged hence a 1% change in return on assets indicates a huge change in the profit. This particular area attracts several investors, as the technology companies which might have a return on assets more than 5% is not directly comparable to the banks. In terms of the other industries bank have costs which are under control for ensuring that the things are run efficiently. A closer analysis on the operating expenses of the banks remains an important concern to determine the financial performance. Hence, the management needs to take important decision and make good choices in allocating the resources to have a very high financial position determined in terms of return on assets.

Based on the decisions taken by the management the allocators will be able to create more assets from the existing assets ones which have been already paid for and create more income for the company with the same. The major assets of the bank are its loans to the individuals. Hence if the liabilities in the deposits are either from bank or by selling commercial paper in the money market, bank will be able to increase profitability by using leverage and in turn the profits can be evaluated with return on equity return on assets (Lee, Hsieh and Yang 2014).

Based on the given case, the research has gathering information only from secondary sources. The most common type of the secondary sources has been seen in terms of the annual report of both Bank Central Asia and DBS Bank of Singapore. Some of the various types of other sources of data in the literature review have been included through articles, peer-reviewed journals, associated books, websites and many more other sources. Several types of information about the bank have been further collected through their official website. The main researcher approach has been identified with the adaptive research approach. The main rationale for choosing deductive approach has been seen with the motive to develop an already existing theory with the formulated research questions. And the research study has been further based on the consideration of existing theories and answering of the research questions which emerge out of these theories.

The main assumptions for the Common equity Tier 1 for Bank Central Asia has been considered with maintaining a minimum ratio at 4.50% from Risk Weighted Assets (“RWA”) and the core capital ratio at a minimum of 6% from the risk weighted assets both individually and at consolidated level for all the three years. The main assumptions for the Common equity Tier 1 for DBS have been seen with maintaining a minimum Tier 1 CAR percentage of 6.5% for all the three years. 

The various types of information gathered from the secondary sources of the study have been implemented primarily based on the quantitative research methodology. The research methodology has further followed the depiction of financial performance by the use of bar graphs. The several types of qualitative aspects of the studies have been considered from correlating the information with the previous journals and articles with the present research topic. Some of the main consideration for the quantitative aspect of the resort has been identified with the evaluation of the major financial performance ratios.

The use of quantitative techniques has been implemented by calculation of ratios such as core capital ratio, capital adequacy ratio, return on total assets ratio, non-performing loan rate ratio and loan to deposit ratio. Several types of computation of the ratio have been performed in MS Excel and the comparison of the same has been depicted by using graphs. The quantitative analysis of the data has been shown with an analysis of the financial data of 2016, 2015 and 2014 of both the banks.

The comparative nature of the analysis has been mostly shown with following the trends in the last three years of both the bank’s financial performance. The comparative evaluation has been further based on the appropriate selection of the specific criteria of the issues. For instance, the loan to deposit ratio will signify that the bank may not have enough liquidity to manage any unforeseen fund requirement and vice versa. In case the ratio is identified to be too low then the bank may not have the earnings as much as it could be. Similarly, the comparative analysis with a capital ratios has been able to depict that higher is the core capital and CAR the better it is for the financial performance of the banks. The comparative analysis has also shown whether the bank has been able to meet the minimum Common equity Tier 1 ratio as per the rules and regulations. The comparison of minimum standards has been respectively shown with the minimum common equity Tier 1 requirements of Indonesia and Singapore. Comparative analysis has been further depicted with the ratio of non-performing loan rate. This is has been considered with the lower is the NPL rate better is the financial performance of the bank. The various types of other financial considerations has been evaluated with which bank has been able to maintain higher return on assets ratio. 

Financial Ratio Analysis
	DBS Group	BCA
	2016	2015	2014	2016	2015	2014
	(in $ Millions)	(in $ Millions)	(in $ Millions)	(in Rupiah Millions)	(in Rupiah Millions)	(in Rupiah Millions)
Tier 1 Capital (A)	40909	37068	34703	105542	83684	64370
Total Risk-Weighting Assets(RWA) (F)	278618	274029	264186	503237	471242	402458
Tier 2 Capital (L)	4118	5045		4648	4203	3470
Total Equity/Capital (M)	45027	42113	40360	110190	87887	67840
Core Capital Ratio (A/F)	14.68%	13.53%	13.14%	20.97%	17.76%	15.99%
Capital Adequacy Ratio (M/F)	16.16%	15.37%	15.28%	21.90%	18.65%	16.86%
Return on assets Ratio	0.92%	0.96%	0.91%	4.00%	3.80%	3.90%
Non-Performing Loan Rate Ratio	1.40%	0.90%	0.90%	1.30%	0.70%	0.60%
Loan to Deposit Ratio	86.80%	88.50%	86.90%	77.10%	81.10%	76.80%

 

Figure 1: Trend of Capital Adequacy Ratio in DBS and BCA

(Source: As created by the author)

The calculation of CAR has been done by 

Based on the depiction of capital adequacy ratio in the last three years it could be seen that both the banks have an increasing rate of capital adequacy ratio. It can be further depicted that BCA has been performing comparatively better in terms of generating higher profit than DBS since last year and this is evident from maintaining a linear progression of CAR than DBS. Hence although both the banks have been shown with an increasing trend of maintaining CAR, BCA is clearly in a better position than DBS and hence it can be clearly stated that there is a significant amount of impact of CAR on the profitability of the bank.

 

Figure 2: Trend of Core Capital Ratio of BCA and DBS

(Source: As created by the author)

The core capital ratio has been calculated by using the formula

Similarly the various evaluations of the core capital ratio has depicted that BCA is maintaining a better core capital ratio than DBS with 15.99% in 2014, 17.76% in 2015 and 20.97% in 2016. On the contrary, DBS has depicted only feeble increase of 13.14% in 2014, 13.53% in 2015 to 14.68% in 2016. BCA is clearly in a better position than DBS and hence it can be clearly stated that there is a significant amount of impact of core capital ratio on the profitability of the bank. 

The minimum Common equity Tier 1 ratios as per the rules and regulations of Singapore for DBS have been seen with maintaining a minimum Tier 1 CAR percentage of 6.5% for all the three years.  Based on the computation of core capital ratio it can be clearly inferred that DBS has been able to maintain a core capital ratio of 13.14% in 2014, 13.53% in 2015 and 14.68% in 2016. This can be clearly seen to be more than the specified benchmark of maintaining a minimum of 6.5% Tier 1 CAR percentage.

The minimum Common equity Tier 1 ratios as per the rules and regulations of Indonesia for BCA has been considered with maintaining a minimum ratio at 4.50% from Risk Weighted Assets (“RWA”) and the core capital ratio at a minimum of 6% from the risk weighted assets both individually and at consolidated level for all the three years. Based on the depictions made from the core capital analysis it can be clearly stated that BCA has been able to maintain core capital ratio of 15.99% in 2014, 17.76% in 2015 and 20.97% in 2016 respectively. As per the prescribed regulation the bank needed to maintain a minimum of 6%, which has been duly met. It can be further observed that 4.50% from Risk Weighted Assets (“RWA”) condition has been met with maintaining a steady capital adequacy ratio of 16.86% in 2014, 18.65% in 2015 and 21.90% in 2016.

The computation of loan to deposit ratio, non-performing loan rate ratio and return on assets has been evaluated using the following formulas:

 

Figure 3: Trend of loan to deposit ratio in BCA and DBS

(Source: As created by the author)

Based on the financial analysis of loan to deposit ratio can be clearly stated that BCA has been able to maintain the most out of customer’s deposit with loan to deposit ratio of 76.80% in 2015, 81.10% in 2015 and 77.10% in 2016. However, based on the standard of prudence the ideal LTD ratio should be between 80 and 90%. Hence, it can be also stated that has not adequately utilized its deposit to increase its income even further. Based on the depictions of LDR ratio for DBS group it can be clearly inferred that the bank has been able to maintain the prescribed LTD ratio between 80 to 90%. This has been observed with 86.90% in 2014, 88.5% in 2015 and 86.80% in 2016. It can be stated that as BCA has been able to sufficiently use its customer’s deposit to fund the loan, it has been able to make more profit in 2016 than DBS Group.

 

Figure 4: Trend of NPL Rate in BCA and DBS

(Source: As created by the author)

Based on the depictions of NPL rate ratio, BCA is clearly seen to be in a better position with only 0.6% in 2014, 0.70% in 2015 and 1.30% in 2016. The NPL rate ratio for DBS group is slightly on the downside with the .90% in both 2015 and 2014 and 1.40% in 2016. Despite of the increase in the non-performing loans the profit has not been affected. Hence, both the bank has been able to adequately compensate its deposits with the total amount of loans which has been marked as non-performing.

 

Figure 5:Trend of Return on assets ratio of BCA and DBS

(Source: As created by the author)

In general, higher is the return on assets higher is the profitability of a company. Similarly, the increased nature of ROA of BCA has been depicted with 3.9% in 2014, 3.8% in 2015 and 4% in 2016. It can be clearly seen that BCA has been able to utilize its assets in the best way possible to generate higher income and more profit. DBS group has been seen to make only slight improvements on return on assets which has been depicted with 0.91 % in 2014, 0.96% in 2015 and 0.92% in 2016. As the ROA of DBS is lower than BCA, it can be clearly seen that the profit of the former is also lower than the latter.

The consideration of the financial ratios for both the banks has been very strategic in nature. In order to depict financial performance of capital, the study has considered CAR and Core capital ratio, which are identified as the most popular form of measuring capital performance of banks. In order to consider the Rentability aspect the key ratio is busy in terms of depicting return on assets. The liquidity of the company has been evaluated by computing loan to deposit ratio. The main consideration for the earnings assets has been seen in terms of evaluating the rate of non-performing loans ratio.

Conclusion and Recommendation 

Based on the findings of the study it can be discerned that BCA has been performing comparatively better in terms of generating higher profit than DBS since last year and this is evident from maintaining a better capital adequacy ratio than DBS. Hence although both the banks have been shown with an increasing trend of maintaining CAR, BCA is clearly in a better position than DBS and hence it can be clearly stated that there is a significant amount of impact of CAR on the profitability of the bank. Based on the depictions made from the core capital analysis it can be clearly stated that BCA has been safely able to maintain minimum core capital ratio of 6 % which has been evident with 15.99% in 2014, 17.76% in 2015 and 20.97% in 2016 respectively. Similarly, DBS has been able to maintain a steady growth in core capital ratio which has been evident with 13.14% in 2014, 13.53% in 2015 and 14.68% in 2016. This can be clearly seen to be more than the specified benchmark of maintaining a minimum of 6.5% Tier 1 CAR percentage. Based on the depictions of loan to deposit ratio of BCA it can be stated that the bank has not adequately utilized its deposit to increase its income even further. Based on the depictions of LDR ratio for DBS group it can be clearly inferred that the bank has been able to maintain the prescribed LTD ratio between 80 to 90%. However, BCA has been able to sufficiently use its customer’s deposit to fund the loan; it has been able to make more profit in 2016 than DBS Group. Based on the evaluation of NPL rate ration both the bank has been able to adequately compensate its deposits with the total amount of loans which has been marked as non-performing. It has been further inferred from the study that It can be clearly seen that BCA has been able to utilize its assets in the best way possible to generate higher income and more profit. DBS group has been seen to make only slight improvements on return on assets. As the ROA of DBS is lower than BCA, it can be clearly seen that the profit of the former is also lower than the latter. The consideration of the financial ratios for both the banks has been very strategic in nature. In order to depict financial performance of capital, the study has considered CAR and Core capital ratio, which are identified as the most popular form of measuring capital performance of banks. In order to consider the rentability aspect the key ratio is busy in terms of depicting return on assets. The liquidity of the company has been evaluated by computing loan to deposit ratio. The main consideration for the earnings assets has been seen in terms of evaluating the rate of non-performing loans ratio.

The main recommendation for DBS Group has seen terms of maintaining a higher capital adequacy and core capital ratios as the prescribed standard for maintaining minimum capital adequacy ratio in Singapore is higher than that of in Indonesia. This can be done by increasing the Tier 1 capital and decreasing the total risk weighted assets. Based on the financial analysis with capital ratios it has been discerned that BCA is in a better position in meeting its financial obligations than DBS. The most considerable amount of effort needs to be given on increasing the return on assets for DBS group. The main recommendation for Bank Central Asia has been seen in terms of slightly increasing its loan to deposit ratio. By maintaining a loan to deposit ratio of 80% to 90%, BCA will be able to better utilize its available deposit fund the loans and generate more profit through the interest charged on the disbursements.

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