Introduction

• The regulators and managers of the financial system around the globe have developed a number of
quantitative techniques to assess the potential risks to the individual institutions as well as financial system.

• A range of quantitative techniques that could serve the purpose is widely known as “stress testing” & another
one is “Ratio Analysis”.

• Prime Bank Limited has been taken into consideration to conduct “Stress testing”& “Ratio Analysis”.
Objectives of the report
• To give a brief conceptual idea of stress testing.
• To analyze the shocks or risk factors of stress testing.
• To find out the Performance evaluation through ratio analysis.
• To derive findings of the study.

Limitations of the report

Lack of thorough knowledge and experience on stress testing.
Time provided for conducting the study is another important constraint.
Another limitation was that the information gathered could not be verified for accuracy.
Deficiencies in data required for the study.
 Methodology

Data collection
• The purpose of the paper is to identify the financial condition of the Prime Bank Limited in
different types of adverse events.
• Here data will be collected systematically and the data which will be collected from secondary
source
• Here the only source of collecting secondary data is annual report of Prime bank ltd. The data are
collected for the year of 2015 & 2016 to show the effects in different years.
Analysis of Data
• In the report, we use the techniques which are discussed in the guideline of Bangladesh bank to
identify the degree of shocks in the Capital Adequacy Ratio (CAR) & to analyze the Financial
Performance of Prime Bank Ltd.
Stress Testing
What is Stress Testing?
• Quantitative techniques to asses the potential risks to the FIs
• A simulation technique, used to determine the reactions of FIs under a set of exceptional yet
plausible through a series of battery of tests.
• Suggested by IMF and Basel committee on banking supervision.
• Primarily designed to quantify impacts of possible changes in economic and financial
environment.
Techniques for Stress Testing
• Simple Sensitivity analysis—underlying relationship is not considered

• Scenario Analysis—encompasses simultaneous move in a group of risk factors

• Extreme Value/Maximum shock Scenario—measures risk factor in worst case scenario

Scope of stress test—
Assumption of 3 different hypothetical scenarios

Minor
Moderate Level
level Shocks
shocks
Major
level
shocks

Scope of stress testing

6 types of shocks to assess stress test for credit risk
• Increase in the NPLs
• Negative shift in the NPL Categories
• Fall in the FSV of Mortgaged collateral
• Increase of NPL in particular sectors
• Increase of NPL due to default of top 10 large borrowers
• 6th shock deals with extreme events for which whole capital position of the bank will be wiped out

Other risk factors considered while stress test

•Interest rate risk—estimated by duration gap & price sensitivity
•Exchange rate risk—unexpected fluctuations
•Equity Price risk—arises from stock index fall
•Liquidity risk—measures resilience of banks to the fall of liquid liabilities
Financial position of PBL

Year 2016
CAR (%) 12.71%
RWA 214,891,840,014
Regulatory Capital 27,312,752,866
A. Increase in NPL
Year 2016
Calibration in CAR: Scenario 1 Scenario 2 Scenario 3
Increase in NPLs (%) 1% 2% 3%
CAR 12.71% 12.71% 12.71%
Risk weighted assets 214,891,840,014 214,891,840,014 214,891,840,014
Regulatory capital 27,312,752,866 27,312,752,866 27,312,752,866

Total Loan 172,964,721,444 172,964,721,444 172,964,721,444

NPL ratio 5.26% 5.26% 5.26%
Total Non-Performing Loans (NPLs) 9,097,944,347.95 9,097,944,347.95 9,097,944,347.95
Total Performing Loans 163,866,777,096.046 163,866,777,096.046 163,866,777,096.046
Magnitude of Shock 1% 2% 3%
Increase in NPLs 90979443.48 181958887 272938330.4
Increase in provisions (after adjustment of eligible securities; if any) 90,979,443.48 181,958,887 272,938,330.40
Tax Adjusted Provision (not yet applicable) 90,979,443.48 181,958,887 272,938,330.40
Revised Regulatory Capital 27,221,773,422.30 27,130,793,978.78 27,039,814,535.38
Revised risk weighted assets 214,800,860,570.52 214,709,881,127.00 214,618,901,683.60
Revised CAR (%) 12.67% 12.64% 12.60%
Fall in CAR (%) 0.04% 0.07% 0.11%
Revised NPLs 9,188,923,791.43 9,279,903,234.91 9,370,882,678.39
Revised NPLs to Loans (%) 5.31% 5.37% 5.42%
Fall of CAR in different level of magnitude in 2016

Revised CAR (%) 2016

12.67%
12.68%

12.66%
12.64%
12.64%
Revised CAR (%)
12.62%
12.60%
12.60%

12.58%

12.56%
1 2 3
B. Shifts in NPL Categories:
Year 2016
CAR 12.71%
Magnitude of Shock 50% 80% 100%
Revised CAR 12.16% 11.30% 10.37%
Fall in CAR 0.55% 1.41% 2.34%

C. Increase of NPLs in particular 1 or 2 sectors

Magnitude of Shocks:

5% 7.5% 10%

Textile
Year 2016
Magnitude of Shocks 5.00% 7.50% 10.00%
Revised CAR (%) 12.59% 12.52% 12.46%
Fall in CAR (%) 0.12% 0.19% 0.25%
 D. Increase in NPLs due to default of Top 10

Year 2016
Magnitude of Shock 5.00% 7.50% 10.00%
Revised CAR (%) 12.27% 12.05% 11.82%
Fall in CAR (%) 0.44% 0.66% 0.89%

E. Fall in the FSV of Mortgaged Collateral

Year 2016
CAR 12.71%
Magnitude of Shock 10% 20% 40%
Revised CAR (%) 9.12% 5.22% -3.67%
 E. Extreme Events
Year 2016
CAR (%) 12.71%
Risk Weighted Assets 214,891,840,014
Total Regulatory Capital 27,312,752,866
Total Loan 172,964,721,444
NPL ratio 5.26%
Total Non-Performing Loans (NPLs) 9097944348
Increase in NPLs 27,312,752,866
Increase in provisions (after adjustment of eligible securities; if any) 27,312,752,866
Revised Regulatory Capital 0
Revised risk weighted assets 187,579,087,148
Revised CAR (%) 0%
Fall in CAR (%) 12.71%
Revised NPLs 36,410,697,214
Revised NPLs to Loans (%) 21.05%
 Exchange Rate Risk
Year 2016
Calibration in CAR: Scenario 1 Scenario 2 Scenario 3
Change in exchange rate 5% 10% 15%
Tax Rate 40.00% 40.00% 40.00%
CAR 12.71% 12.71% 12.71%
Risk weighted assets 214,891,840,014 214,891,840,014 214,891,840,014
Regulatory capital 27,312,752,866 27,312,752,866 27,312,752,866
Magnitude of Shock 5% 10% 15%
Net on-balance sheet and off-balance sheet currency exposure (212,733,197) (212,733,197) (212,733,197)
Exchange rate loss on % change (10,636,660) (21,273,320) (31,909,980)
Tax adjusted loss (6,381,996) (12,763,992) (19,145,988)
Revised Regulatory Capital 27,319,134,862 27,325,516,858 27,331,898,854
Revised risk weighted assets 214,898,222,010 214,904,604,006 214,910,986,002
Revised CAR (%) 12.71% 12.72% 12.72%
Fall in CAR (%) 0.00% -0.01% -0.01%
Interest Rate Shock (Cont’d)
•The rise in interest rate would lower the CAR as the duration gap is positive.
•The increase in interest rate would decrease the value of assets more than the value of
liabilities.

PARTICULARS 2016
Cumulative Duration - A 2.661
Cumulative Duration - L 0.8633
Leverage Adjusted Duration Gap 2.506

The impact of interest rate shocks on the CAR of PBL:

2016
1% 2% 3%
Revised CAR (%) 12.35% 12.00% 11.65%
Fall in CAR (%) -0.36% -0.71% -1.06%
 Equity Price Risk: Prime Bank Limited
•Assesses the impact of the fall in the stock market index
•Appropriate shocks to be absorbed if current market value falls at the rate of 10%, 25% & 50%
•Impact of loss calibrated in the CAR

Year 2016
Calibration in CAR: Scenario 1 Scenario 2 Scenario 3
Fall in the stock prices (%) 10% 20% 40%
Tax Rate 40.00% 40.00% 40.00%
CAR 12.71% 12.71% 12.71%
Risk weighted assets 214,891,840,014 214,891,840,014 214,891,840,014
Regulatory capital 27,312,752,866 27,312,752,866 27,312,752,866
Magnitude of Shock 10% 20% 40%
Total exposure in stock market 324,475,510 324,475,510 324,475,510
Fall in the stock prices 32,447,551 64,895,102 129,790,204
Tax adjusted loss 19,468,531 38,937,061 77,874,122
Revised Regulatory Capital 27,293,284,335 27,273,815,805 27,234,878,743
Revised risk weighted assets 214,872,371,483 a 214,852,902,953 214,813,965,892
Revised CAR (%) 12.702% 12.69% 12.68%
Fall in CAR (%) 0.008% 0.02% 0.03%
Liquidity Risk
Not more 1-3 months 3-12 1-5 years Above 5-
Particulars than months
term term years term
1 month term term
Shock of 0% 15.57% -14.26% 58.93% 0.28% 6.61%
Shock of 5% 2.07% -13.65% 53.60% 1.48% 12.54%
Mismatch (%)
Shock of 7% -2.81% -13.40% 51.53% 1.97% 15.09%
Shock of 10% -9.65% -13.02% 48.48% 2.70% 19.13%
Summary

2016
Sl. No. Reason for Fall in CAR (%)
Minor Moderate Major
1 Interest Rate Shock -0.36% -0.71% -1.06%
2 Exchange Rate Shock 0.00% -0.01% -0.01%
3 Equity Price Shock 0.008% 0.016% 0.032%
4 Credit Shock : Increase in NPLs 0.059% 0.024% 0.047%
5 Credit Shock : Downward Shift in NPLs Catagories 0.55% 1.41% 2.34%

6 Credit Risk : Fall in the FSV of Mortgaged Collateral 3.59% 7.49% 16.38%

7 Credit Risk : Increase in NPLs B/L Category in 1 or 2 Sectors 0.12% 0.19% 0.25%

8 Credit Risk : Increase in NPLs Due to Top 10 Borrowers: 0.982% 0.071% 0.107%
Total 4.95% 10.00% 18.08%
 Ratio Analysis
Ratio analysis is the calculation and comparison of ratios which are derived from the information in a
company's financial statements. The financial ratios can be analyzed based on three criteria:
1. Benchmark Analysis: A benchmark is a point of reference with which the financial ratios of the
specific company can be compared.
2. Time Series Analysis: It involves comparing a present ratio with past and expected future ratios for the
company.
3. Cross Section Analysis: The third method of comparison involves comparing the ratios of one with
those of similar firms or with industry averages at the same point in time.
 Profitability Ratios

Ratio 2015 2016

Gross Profit Ratio (%)= (Gross Profit/Net Sales) × 100 42.15% 43.33%
Operating Profit Ratio (%)=(Operating profit / Net sales) × 100 3.11% 2.47%
Net Interest Margin (%)= (Investment Return-Investment Expenses)/Avg. 2.75% 1.91%
Earning assets
Return On Assets (%)= Net Income/Total Asset 0.96% 0.76%
Return On Equity (%) = Net Income/ Avg. shareholder Equity 10.08% 8.35%
Asset utilization(%)= Rev/Avg. Total Asset 12.72% 11.02%
 Profitability Ratios
•Gross Profit Margin

In 2016, every TK 100 sale generated TK 43.33 of gross profit. This ratio increased acutely from 2015 to 2016. The Gross Profit increased by 1.18%
from year 2015 to 2016. In 2016 the ratio increased because the relative change in gross profit was more than the relative change in sales.

• Operating Profit Ratio

In 2016, for every TK 100 of sales generated TK 2.47 of operating profit. The ratio was decreased from 2016 to 2015. The ratio is higher in 2015 than
2016. So, the company isn’t in good position. The ratio decreased in 2016 was because of the proportionate change in sales was lower than the
proportionate change in operating profit.

•Return On Assets
In 2016, for every TK100 worth of total assets the company generated TK.96 of net profit. This ratio has decreased huge from 2015 to 2016. Here,
the proportionate increase in net profits is higher than the proportionate increase in total assets. 2015 was in a good position compared to 2016, as the return
on assets of 2015 was much higher than that of 2016.
 Profitability Ratios
•Return On Equity

In 2016, the company’s shareholders have earned tk.8.35 for every tk100 investment in the company. The ratio declined from 2015 to 2016.

Comparing the years 2015 and 2016, the proportionate increase in net common equities were lower than the proportionate increase in net profits.

That is why the ratio has decreased huge. Compared to 2015, 2016 isn’t satisfactory level. 2016 has a much lower return on assets ratio than

2015.

•Net Interest Margin

The net interest margin was 2.75 percent in 2015 and 1.91 percent in 2016. This means that for every $100 of invested assets the

bank made 2.75 of income in 2015 and 1.91 in 2016. As the net Interest margin is higher in 2015 than 2016. The company made

good investment decisions in year 2015 and used its resources effectively to earn a higher percent return compare to year 2016.
 Liquidity Ratios
Ratio 2015 2016

Quick Ratio(%)=(Total Current Asset-Inventory-Prepaid 1.12% 1.17%

Expenses)/Current Liabilities
Current Ratio (%)= Current Assets/Current Liabilities 1.12% 1.17%
 Liquidity Ratios
•Quick Ratio
In 2016, the quick ratio was higher than 2015. In 2015 the ratio was 1.12 and increased by .05 and it became 1.17 in 2016. The above
graph suggests that the company has more liquid assets than liquid liabilities, it is a positive sign for the company, and company should
not be able to meet the liquid liabilities which are lower as compare to liquid assets. The company liquid assets are continuously shows
positive impact on liquid assets.

•Current Ratio
In 2016 the ratio was 1.17 and increased by .05 from year 2015. In 2016, the current ratio was higher than 2015. For the good
position the ratio should be above the one and here the Prime Bank Ltd has a current ratio is more than one, the assets stabilities are more
than liabilities are lower as compare to liquid assets. The company liquid assets are continuously shows positive impact on liquid assets
Asset Management Ratio

Asset Turnover Ratio

0.056

0.054 0.054

0.052

0.050

0.048 0.048

0.046

0.044
2015 2016

Interpretation:
• The asset turnover ratio of Prime Bank Limited decreased in 2016 than that of 2015 by 0.01 percentage points.
• It implies that Prime Bank’s asset utilization in terms of generating revenue deteriorated in 2015.
Asset Management Ratio

Fixed Asset Turnover Ratio

2.10

2.06
2.05

2.00

1.95

1.90

1.85 1.83
1.80

1.75

1.70
2015 2016

Interpretation:
• Generally, the ratio is not significant in case of any bank, since these are not revenue generating assets of a bank.
Risk Ratio
Equity Multiplier
10.65

10.60 10.59

10.55

10.50

10.45
10.42
10.40

10.35

10.30
2015 2016

Interpretation:
• In 2016, Prime Bank witnessed a lower EM ration than that of 2013 because it was depending more on assets,
which is a good sign for the bank.
Risk Ratio
Loss Rate
8%
8%

7%

6%

5%
5%

4%

3%

2%

1%

0%
2015 2016

Interpretation:
• A higher loss rate certainly indicated bad performance of the bank’s credit part. It implies the amount of Non-
performing and portfolio at risk are on increasing trend
Risk Ratio
Loan Ratio
0.64
0.63
0.63

0.62

0.61

0.60

0.59

0.58 0.58

0.57

0.56

0.55
2015 2016

Interpretation:
• An immense fall in loan ratio implies that the bank could not generate enough profit in 2016. That is why, in
2015, the loss rate is also higher due to having smaller loan ratio.
Findings and Conclusion
• After analyzing the financial data regarding the ratio analysis, strategy analysis, accounting
analysis and prospective analysis we have some key findings and those are given below:
• The company has the motivation to pay out the long term liabilities against their assets
• To make the shareholders happy the company also paid regular dividends. Again, the company has
a tendency of increasing non-interest bearing short term liabilities every year to keep the cost of
net working capital is low.
• From time series study of ratio analysis, we see that the company is showing improvement in
every ratio. It was capable to improve its asset turnover ratio, debt ratio, profit margin, ROA, ROE
etc.
• In terms of market value ratios the company also showing improvement that indicates that the
investors have trust on the company management.
• The investors are keeping trust on the company because they believe that it has a great potentiality
of future growth because company utilizing its cash for further investment.