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FA3 Assignment Bank Dhofar

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Financial Accounting 3 (S.A.O.G)

Bank Dhofar

Table of ContentsParticularsIntroduction Company Background Ratio Analysis Analysis of Additional Techniques Analysis of Cash Flow Statements SWOT Analysis of Bank Dhofar PEST Analysis Users of Financial Statements Limitations Performance Report Appendices Bibliography

Page No.2 3-4 3-17 18-24 25-27 28 29 30-32 32-33 34 35-37 38

Taher AL Belushi (25257)

1

Assessment 1

Financial Accounting 3 (S.A.O.G)

Bank Dhofar

Bank Dhofar (S.A.O.G)

Introduction:The purpose of this study is to analyze and evaluate the financial data of Bank Dhofar (S.A.O.G) for the financial periods from 2002 to 2005. Furthermore, an overview of banking sector in Oman will be discussed or assessed in this study by PEST analysis. Also SWOT analysis of Bank Dhofar will be included in this study. In addition, the performance of Bank Dhofar (S.A.O.G) will be critically evaluated by using relevant ratio analysis and additional techniques for example, Horizontal Analysis, Vertical Analysis and Z scores. Moreover, a critical analysis of cash flow statements will be stated with examination of users of financial statements and limitations of ratio analysis.

Company Background:Bank Dhofar started operations in 1990, by acquiring the Muscat branch of BNPParibas and was incorporated as an Omani commercial bank. Moreover, it took over the 11 branches of Bank of Credit & Commerce International (BCCI) in 1992. Bank Dhofar is wholly owned and managed by Omanis. In 1998, it divested 40% of its share in a public offer and got listed in the Muscat Securities Market and was converted into a SAOG company Bank Dhofar Al Omani Al Fransi SAOG. In 2001, it acquired 16 branches of Commercial Bank of Oman after the latter was merged with Bank Muscat. In 2003, the Bank acquired Majan International Bank SAOC (MIB), an Omani closed joint stock company. Furthermore, on 30 September 2003 the bank held an Extra-ordinary General Meeting and decided to change the name of the Bank from Bank Dhofar Al Omani Al Fransi SAOG to Bank Dhofar SAOG.

Taher AL Belushi (25257)

2

Assessment 1

Financial Accounting 3 (S.A.O.G)

Bank Dhofar

Bank Dhofar currently operates through a network of 48 branches and 66 ATMs with staff strength of 598.

Shareholding: The authorized share capital of the bank consists of 50,000,000 shares of RO 1 each. At 31 December 2005, the issued and paid up share capital comprise 41,961,818 shares of RO 1 each. The following shareholders of the Bank own 10% or more of the Banks shares:Name of Shareholder Dhofar International Development and Investment Company SAOG Civil Service Pension FundSource: Bank Dhofar Annual Report

Share holding %

2005 No. of Shares

30.00% 10.00%

12,588,545 4,196,181

Regarding to the above table, Dhofar International Development and Investment Company SAOG owns the largest individual shareholding with 30% stake in the Bank, while the Civil Service Pension Fund holds 10% stake and the remaining 60% is owned by others including general public.

Ratio Analysis:Ratios provide very useful tools to assess the organization by making two basic types of comparisons: i. ii. The analyst can compare a present ratio with past (or expected) ratios for the organization to determine if there has been an improvement or deterioration or no change over time. The ratios of one organization may be compared with similar organizations.

Perhaps the most commonly used ratios in business are Financial Ratios. These are developed by use of the income statement and the balance sheet. In fact, ratio analysis will give clues but not answers. In this study, the Financial Ratios will be applied to the Bank Dhofars Financial Statements for the periods from 2002 to 2005 as well as these ratios will be discussed and analyzed. Taher AL Belushi (25257) Assessment 1

3

Financial Accounting 3 (S.A.O.G)

Bank Dhofar

As we know, financial institutions such as banks, financial services companies and insurance companies have different ways of reporting financial information. This study will give the most relevant information to analyze the Bank Dhofars Financial Statements.

1. Profitability Ratios:The profitability ratios measure profit in relation to revenue generally the higher percentage the better. Gross Profit Ratio: This tells how much profit the product or service is making without overhead considerations. As such, it indicates the efficiency of operations as well as how products are priced. It is calculated by dividing the organizations Gross Profit by the total Revenue: Gross Profit Ratio =Amount in 000 Omani Rial

Gross Profit 100 Revenue 2003 11,423 27,675 41.28% 2004 12,600 30,019 41.97% 2005 16,131 34,738 46.44%

Gross Profit Revenue Gross Profit Ratio

2002 9,335 24,640 37.89%

Ratio Calculation based on Bank Dhofars Annual Reports

From the above table, the Gross Profit Ratio increased in 2003 and reached at 41.28% compared with 37.89% for 2002. In 2005, Bank Dhofar significantly raised the gross profit ratio to 46.44% which was the higher gross profit ratio over the study period. This is due to grew in the gross profit of the Bank by 22% from RO 9,335 K for the year 2002 to RO 11,423 K for 2003. This increase was a result of higher interest income coupled with increased fee income and profit from investments. Again in 2005 the gross profit of the Bank grew by 28% from RO 12,600 K for the year 2004 to RO 16,131 K for 2005. One of the main reasons behind the 28% jump in gross profit in 2005 was the decrease in provisions for impaired loans from (RO 5,314 k) in 2004 to (RO 2,781 k) in 2005 by -48%.

Taher AL Belushi (25257)

4

Assessment 1

Financial Accounting 3 (S.A.O.G)

Bank Dhofar

Gross Profit Ratio40,000 30,000 20,000 10,000 0 2002 2003 2004 200537.89% 41.28% 41.97% 46.44%

50% 40% 30% 20% 10% 0%

Gross Profit

Revenue

Gross Profit Ratio

Net Profit Ratio (Return on Revenue): This ratio indicates the relative efficiency of the firm after taking into account all expenses and income taxes. In other word, it is the relationship between the net profit after tax and total revenue. It is calculated as follows: Net Profit Ratio = Profit after tax Revenue 2002 8,295 24,640 33.66% 2003 10,156 27,675 36.70% 100

Amount in 000 Omani Rial

Profit after tax Revenue Net Profit Ratio

2004 11,078 30,019 36.90%

2005 14,199 34,738 40.87%

Ratio Calculation based on Bank Dhofars Annual Reports

As stated above, the net profit of the Bank has been consistently on upward trend during the last 4 years. Bank Dhofar reported a net profit of RO 10,156 K for the year 2003 as compared to RO 8,295 K for the year 2002 and a net profit of RO 14,199 K for the year 2005 as compared to RO 11,078 K for the year 2004, which represented an increase in Net Profit Ratio from 33.66% in 2002 to 36.70% in 2003 and from 36.90% in 2004 to 40.87% in 2005. This increase was mainly a result of the banks expansion in the retail business, which resulted in a sharp increase in commission earnings from a consistently growing loan book. Commission earnings grew from RO 1,039 K in 2002 to RO 2,198 K in 2005 resulted an increase by 112.0%. Moreover, Bank Dhofar diversified its operating earnings through fees and commissions from trade financing, brokerage, credit card operations, investment banking and asset management services. The increase in the Net Profit Ratio trend can be seen in the following graph: Taher AL Belushi (25257) 5 Assessment 1

Financial Accounting 3 (S.A.O.G)

Bank Dhofar

Net Profit Ratio40,000 30,000 20,000 10,000 0 2002 2003 2004 200533.66% 36.70% 36.90% 40.87%

50% 40% 30% 20% 10% 0%

Profit after tax

Revenue

Net Profit Ratio

Rate of Return on Equity (ROE): This ratio is calculated by dividing the net profit after tax (net earnings) by the net worth (shareholders Equity). This shows the earning power on shareholders book investment. Return on Equity (ROE) = Profit after tax 100 Shareholders Equity

Amount in 000 Omani Rial

Profit after tax Shareholders Equity Return on Equity (ROE)

2002 8,295 47,408 17.50%

2003 10,156 63,127 18.38%

2004 11,078 67,771 16.93%

2005 14,199 79,405 19.30%

Ratio Calculation based on Bank Dhofars Annual Reports

This ratio indicates how much company is making on the money that was invested in the firm. Furthermore, the calculation of this ratio indicates to investors how efficiently the company operates and how well the firm is being managed. From the view point of Bank Dhofar, the bank generated a 17.50% return on the capital invested by the owners of the bank in 2002. This return increased to 18.38% in 2003 and slightly decreased to 16.93% in 2004. In 2005, the return on the capital invested jumped to 19.30%. Generally, the rate of Return on Equity of the Bank Dhofar was desirable to provide a good percentage of dividends to owners and have funds for future growth of the Bank. Taher AL Belushi (25257) Assessment 1

6

Financial Accounting 3 (S.A.O.G)

Bank Dhofar

Return on Equity (ROE)18.38% 19.30%

75,000 60,000 45,000 30,000 15,000 0

20% 19% 18% 17% 16% 15%

17.50%

2002

2003

2004

16.93%

2005

P rofit after tax

Shareholders Equity

Return on Equity

Return on Assets (ROA): This ratio is one of the most widely used in the analysis of profitability since it indicates how efficiently the assets are being used. Moreover, it measures the earning power of firms assets. Net Profit Ratio = Profi

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