Financial statement analysis of Seylan Bank

1. Introduction

The process of reviewing and evaluating a company's financial statements, thereby gaining an understanding of the financial health of the company and enabling more effective decision making. Financial statements record financial data; however, this information must be evaluated through financial statement analysis to become more useful to investors, shareholders, managers and other interested parties.

Users of financial statement information include managers, creditors, stockholders, potential investors, and regulatory agencies. These individuals and organizations use financial statements for different purposes and bring varying levels of sophistication to understanding business activities. For example, investors range from private individuals who know little about financial statements to large investment brokers and institutional investors capable of using complex statistical analysis techniques.

At what level of user knowledge should financial statements be aimed? Condensing and reporting complex business transactions at a level easily understood by nonprofessional investors is increasingly difficult. Current reporting standards target users that have a reasonably informed knowledge of business, though that level of sophistication is difficult to define.

Financial statement analysis should focus primarily on isolating information useful for making a particular decision. The information required can take many forms but usually involves comparisons, such as comparing changes in the same item for the same company over a number of years, comparing key relationships within the same year, or comparing the operations of several different companies in the same industry.

2. Background of the company

Seylan Bank is the public limited liability company incorporates in Sri Lanka in 1987.The bank focuses on conventional banking and operates from its head office in Colombo and through its Island wide network of branches. It has branches both in urban as well as rural areas of Sri Lanka. Seylan bank had 11 banking centers island wide with 4900 staff members in 2013.

Seylan Bank established its first subsidiary, Seylan Merchant Bank Limited, in 1992. A second subsidiary, Ceylinco Seylan Developme Hrfbhnts Limited was also established in 1992, primarily for the purpose of constructing the Bank's head office building, Ceylinco Seylan Towers.

When Seylan Bank was incorporated in 1987 as a public limited liability company, it was launched with a mission to be a strong bank that would truly epitomize the ideals of service excellence, from the heart. Seylan Bank Asset Management came into being in 1999, in response to the Central Bank requirement for primary dealers in government securities to be run as separate corporate entities. SMB Money Brokers, SMB Real Estate and Seylan Merchant Leasing are Seylan’s other subsidiaries, all projecting the strong brand presence of their parent entity.

Seylan Bank's troubles started when the Golden Key Credit Card Company, an unregulated firm of the Ceylinco group was unable to repay its customers due to financial instability.

The collapse of the Golden Key Credit Card Company which was a subsidiary of the Ceylinco Consolidated and the mismanagement of funds by the Former Chairman in 2008, resulted in a liquidity crisis in the last weeks of 2008. This prompted the monetary board of the Central Bank of Sri Lanka to bring Seylan Bank under the control of state owned Bank of Ceylon (BOC) on the 28 December 2008. This took place under Section 30(1) of the Monetary Law Act No.58 of 1949.

3. Financial Statement Analysis of Seylan Bank

Financial statement analysis is an evaluative method of determining the past, current and projected performance of a company. Several techniques are commonly used as part of financial statement analysis including horizontal analysis, which compares two or more years of financial data in both dollar and percentage form; vertical analysis, where each category of accounts on the balance sheet is shown as a percentage of the total account; and ratio analysis, which calculates statistical relationships between data.

The first method is the use of horizontal and vertical analysis. Horizontal analysis is the comparison of financial information over a series of reporting periods, while vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item. Typically, this means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets. Thus, horizontal analysis is the review of the results of multiple time periods, while vertical analysis is the review of the proportion of accounts to each other within a single period.

The second method for analyzing financial statements is the use of many kinds of ratios. We use ratios to calculate the relative size of one number in relation to another. After we calculate a ratio, we can then compare it to the same ratio calculated for a prior period, or that is based on an industry average, to see if the company is performing in accordance with expectations. In a typical financial statement analysis, most ratios will be within expectations, while a small number will flag potential problems that will attract the attention of the reviewer.

3.1 Horizontal Analysis

Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. The intent is to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reason for the difference. The analysis is most commonly a simple grouping of information that is sorted by period, but the numbers in each succeeding period can also be expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

In considering the Seylan bank the historical analysis as shown in the following table,

Dollar  change=Analysis period amount- Based period Amount

Percentage change=Dollar change/Based period amount *100

Base year - 2009

Assets	2010	2011	2012	2013	2014
Cash and Cash equivalents	4.53	-2.85	39.93	10.59	42.46
Balance with Central Bank of Sri Lanka	7.26	39.07	57.91	47.61	46.18
Securities Purchased under resale Agreement	-57.10	11.97	-94.12	94.11	501.75
Investment Securities	47.49	18.57	33.06	-	-
Loan and Advances	12.60	39.91	64.03	79.58	103.79
Investment in Subsidiary companies	-58.27	-7.77	-7.77	-6.92	28.59
Group receivables	-42.88	-98.06	-92.49	-98.14	-96.29
investment properties	-6.16	-54.37	-54.37	-78.02	-78.02
Deferd taxation	-39.111068	-42.81	15.21	-95.92	-61.46
PPE	-10.66	-28.66	-28.05	-13.14	-10.72
Leasehold	-35.26	-37.23	-36.73	-23.45	-26.66
Other Assets	12.67	38.51	67.61	42.24	71.25
Total Asset	12.90	24.99	38.33	62.06	87.78
Liabilities
Derivatives financial instruments
Deposits	4.84	18.28	39.98	60.63	77.38
Borrowings	43.55	139.46	101.17	-99.58	-99.52
Repurchase Agreement	401.90	400.89	95.60	143.46	561.08
Payable	-13.78	942.72	2163.42	1937.86	1918.74
Debentures	-5.53	-34.16	-71.35	-23.33	80.97
other Liabilities	23.04	-44.25	-29.73	-39.22	-27.53
Total Liabilities	12.77	21.48	34.78	58.27	84.38
Equity
Stated capital	0	84.26	83.65	89.11	89.11
Statuary reserved fund	12.12	22.02	43.00	66.09	96.46
Reserves	32.57	15.61	38.90	-29.26	-24.39
Total Equity	14.43	65.47	79.34	105.86	127.11
Total Liability & Equity	12.90	38.33	24.65	62.06	87.78

The horizontal analysis shows that the significant increase of cash and cash equivalent from 2012 to 2014. However it recorded a negative amount in 2011. In considering the securities purchased under resale agreement recorded negative amount in 2010 and 2012. However it is increase in 2013 and drastically increases in 2014.

Investment in securities is decreasing compared with the base period. 2010 it recorded at 47 increase and it decrease to 18% in 2011. However in 2012 it again increased. In 2014 and 2015 there were no amount invested in the investment securities.

 In considering the loan and advances it shows the significant increasing from 2010 to 2014. It recorded high amount in 2014. Investment in subsidiary companies is relatively low amount and it recorded the negative value throughout the period except 2014. Group receivables recorded negative value and investment in properties also has negative balances. But common feature of this is to decrease large amount in 2014.

Differed tax also decrease compared with the base year. However in 2012 it recorded positive value. 

Property Plant and equipment also decreasing and recorded the negative value. Leasehold assets also decrease throughout the period.

However considering the total asset it shows that it increases considerably the study period. It is good sing of the company. Some assets are decreasing throughout the study period however the total assets shows positive increase compared with the base year. 

Then it is needed to analysis the nature of the liabilities throughout the period. It shows that deposits increases in a large amount compared with the based year. It increases from 4.8 to 77.38. It shows that in 2013 and 2014 deposits are increase more than 60% compared with the base year. If we consider about the Repurchase Agreement from 2010 to 2011 it shows high increase but it is decrease  in 2012.Then again start to increase in 2013 and 2014.

Payable plays a significant increase during the study period. It recorded minus value in 2010 however it is sharp increase after 2010. Debentures shows the negative value during the period except 2014. However the overall figure show that total liability increase gradually from 2010 to 2014 compared with the base year.

3.2 Trend Analysis

Trend analysis is the process of comparing business data over time to identify any consistent results or trends. Trend analysis helps to understand how the business has performed and predict where current business operations and practices. .It will give the ideas about how might change things to move business in the right direction.

Trend analysis to help improve business by:

• identifying areas where your business is performing well
• identifying areas where the business is underperforming
• providing evidence to decision making.

Trend Period= Analysis period amount /Base period amount*100

Assets	2009	2010 %	2011 %	2012 %	2013 %	2014 %
Cash and Cash equivalents	100	104.53	97.14	139.937	110.598	142.46
Balance with Central Bank of Sri Lanka	100	107.26	139.07	157.91	147.61	146.18
Securities Purchased under resale Agreement	100	42.89	1128.56	5.87	194.11	601.75
Investment Securities	100	147.49	118.57	133.06	0	0
Loan and Advances		112.60	139.91	164.03	179.58	203.79
Investment in Subsidiary companies	100	41.72	92.22	92.22	93.077	128.59
Rreceivables	100	57.11	1.94	7.50	1.85	3.70
investment properties	100	93.83	45.62	45.62	21.97	21.97
Deferred taxation	100	60.88	57.18	115.21	4.07	38.53
PPE	100	89.33	71.33	71.94	86.85	89.27
Leasehold	100	64.73	62.76	63.26	76.54	73.33
Other Assets	100	112.67	138.51	167.61	142.24	171.25
Total Asset	100	112.90	124.99	138.33	162.06	187.78
Liabilities
Derivatives financial instruments
Deposits	100	104.84	118.28	139.98	160.63	177.38
Borrowings	100	143.55	239.46	201.17	0.41	0.47
Repurchase Agreement	100	501.90	500.89	195.60	243.46	661.08
Payable	100	86.21	1042.72	2263.43	2037.86	2018.74
Debentures	100	94.46	65.83	28.64	76.66	180.97
other Liabilities	100	123.04	55.74	70.26	60.77	72.46
Total Liabilities	100	112.77655	121.4891	134.78	158.27	184.38
Equity
Stated capital	100	100	184.26158	183.653	189.1175	189.11754
Statuary reserved fund	100	112.12206	122.02482	143.002	166.0944	196.46018
Reserves	100	132.57402	115.61138	138.91	70.73366	75.600575
Total Equity	100	114.43626	165.47407	179.34	205.862	227.11761
Total Equity& Liability		112.9087	138.33657	124.652	162.0622	187.78424

Trend Analysis- Assets

The following figures show the behavior of the assets throughout of the study period. The balance with Central Bank of Sri Lanka shows the normal pattern increase from 2010 to 2014.  Securities purchase under resale agreement recorded the drastically increase in 2011 and then decrease in 2012 then it again increase in 2014. Cash and cash equivalent also recorded the normal pattern throughout the period.

In considering the investment securities is decrease and loan and advances increase throughout the period. Receivables and investment properties also decrease throughout the study period while PPE increase. It considering the total asset it recorded the increment throughout the period.

                             

Trend Analysis- Liabilities

In considering the deposits it increase slightly. However the borrowings increase till 2012 then decrease in 2013 and 2014.Repurchase agreement is decrease considerably in 2012 then it increase in 2013 and 2014.

It is a remarkable increase of payable during the period from 2011 to 2014. The figure shows that 2000% increase compared with the base year. The total liability figure shows that slight increase during the study period.

Trend analysis – Income statement

	2009	2010	2011	2012	2013	2014
Operating income	100	119.63	108.72	119.67	120.41	146.08
Operating Expenses	100	108.89	101.75	87.45	84.31	93.58
Profit before Taxation	100	223.80	176.45	432.53	470.85	655.68
Tax	100	220.07	260.57	518.65	540.30	794.18
Net profit	100	226.20	122.37	377.16	426.19	566.64

According the above figure it is clear that operating income is increase from 2010 while operating expenses decrease. Profit before taxation decrease in 2011 and increase after 2012. In considering the net profit it shows that slightly decreases in 2011 and then increase in 2012, 2013 and 2015.

3.3 Vertical Analysis

A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business.

Vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item. Typically, this means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets.

                                                                  

The most common use of vertical analysis is within a financial statement for a single time period, so that one can see the relative proportions of account balances. Vertical analysis is also useful for timeline analysis, to see relative changes in accounts over time, such as on a comparative basis over a five-year period.

Vertical Analysis of the statement of financial position.

The central issue when creating a vertical analysis of a statement of financial position is what to use as the denominator in the percentage calculation. The usual denominator is the asset total, but one can also use the total of all liabilities when calculating all liability line item percentages, and the total of all equity accounts when calculating all equity line item percentages.

Common size percent=Analysis amount/ Base amount*100

Vertical Analysis- Base year 2009

Assets	2010	2011	2012	2013	2014
Cash and Cash equivalents	3.68	2.74	3.52	2.40	2.67
Balance with Central Bank of Sri Lanka	4.10	4.26	3.82	3.48	2.98
Securities Purchased under resale Agreement	0.95	20.07	2.22	2.66	7.12
Investment Securities	16.54	10.64	11.22	0	0
Loan and Advances	64.49	64.11	57.27	63.46	62.15
Investment in Subsidiary companies	0.27	0.47	0.64	0.37	0.44
Group receivables	0.34	0.009	0.60	0.006	0.012
investment properties	0.36	0.14	0.39	0.05	0.045
Deferred taxation	0.20	0.15	0.33	0.008	0.068
PPE	2.23	1.42	2.50	1.34	1.19
Leasehold	0.03	0.02	0.04	0.02	0.01
Other Assets	3.29	3.24	2.92	2.56	2.66
Total Asset	100	100	100	100	100
Liabilities
Derivatives financial instruments		0.045	0.16	0.19	0.09
Deposits	79.74	83.51	89.08	87.05	82.52
Borrowings	3.18	4.92	3.73	0.006	0.006
Repurchase Agreement	6.84	6.33	2.23	2.36	5.51
Payable	0.005	0.06	0.13	0.10	0.085
Debentures	2.90	1.87	0.73	1.67	3.39
other Liabilities	7.32	3.08	3.49	2.57	2.63
Total Liabilities	100	100	100	100	100
Equity
Stated capital	46.02	58.65	53.93	48.38	43.85
Statuary reserved fund	4.69	3.53	3.82	3.86	4.14
Reserves	49.27	29.71	32.94	14.61	14.15
Total Equity	100	100	100	100	100
Total Liability & Equity

In considering the vertical analysis the cash and cash equivalent represent the 3.68 from the total assets. But it shows a slightly decrease in 2011, 2013 and 2014 compared with 2010.  Balance with the Central Bank of Sri Lanka reported 4.10 in 2010 from the total assets. In considering the amount of investment in securities decrease from 2010 to 2013. But in 2013 to 2014 it reported the zero value. The Loan and advances reported high value compared with the total value. It represent 64% from the total assets.

It is remarkable issue is the percentage of PPE from the total asset is very low amount. It is considerably low. It is not good for the long run of the company.

In considering the liability deposits represent high value from the total liability. Repurchase agreement represent 6.84 in and it decrease 2,23 in 2012 and again increase in 2014. Payables is  quite low amount compared with the other liability. Debentures also decreasing throughout the period however it is increase in 2012.

In considering the stated capital represents the 46% of the total equity while reserves represented 49% from the total equity. However the reserves value decreasing throughout the period. 

According to the above analysis it shows that the company should maintain the good percentage of PPE from the total assets. The payable amount is quite low it is good remark of the company.

3.4 Ratio Analysis

 3.4.1 Debt ratio

Total liabilities/ Total Assets

This ratio measures what portion of a company’s assets is contributed by creditors. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt.

In considering the Seylan bank the debt ratio for the years as follows

	2010	2011	2012	2013	2014
Debt Ratio
	92	89.45	89.67	89.88	90.37

The above results show that the debt ratio is very high in the Seylan Bank throughout the study period. The higher this ratio, the more leveraged the company and the greater its financial risk.

3.4.2 Equity Ratio

The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a company's assets.
Equity Ratio= Total Shareholders Equity/ Total Assets
Equity Ratio is a good indicator of the level of leverage used by a company. The Equity ratio measures the proportion of the total assets that are financed by stockholders and not creditors. A low equity ratio will produce good results for stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditor.

Equity Ratio    2010                2011                2012                2013                2014
                        8.06                 10.54               10.32               10.11               9.62
In considering the study period in 2009 it shows 8.06 but it gradually increases. However it is again dropped to 9.62. in 2014.
In general, higher equity ratios are typically favorable for companies. But in the Seylan Bank it is low. It is not favorable to the company. Because higher investment levels by shareholders shows potential shareholders that the company is worth investing in since so many investors are willing to finance the company. A higher ratio also shows potential creditors that the company is more sustainable and less risky to lend future loans. However considering the low ratio investors are not willing to invest the company 
3.4.3 Cost to income ratio
Operating cost/ Operating income
The cost-to-income ratio shows the efficiency of a firm in minimizing costs while increasing profits.
Year                                   2010                     2011                2012    2013    2014

Cost to income ratio          68.69                     82.02               67.31   62.59   57.37

The cost to income ratio of the Seylan bank throughout the study period is shown above. The lower the cost-to-income ratio, the more efficient the firm is running. The higher the ratio, the less efficient management is at reducing costs. So that it is obvious that the ratio is higher trough out the period. However it is slight decrease in 2014 compared with the 2011 and 2010.

3.4.4 Return on Equity

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested

                                                                2010                       2011                       2012                       2013                       2014

ROE                                         10.88              4.43                 11.42               11.40               13.45

In considering the above situation the ROE of the Seylan bank is decrease  in 2011 then it increase from 2012 to 2014. The ROE allows an investor to determine the change in profitability over the period.

3.4.5 Price Earnings Ratio

Market Value per Share / Earnings per Share

Price earnings Ratio                 21.26              20.61               9,24                 9.53                 10.65

In Considering the price earning ratio Seylan bank P/E ratio decreasing from 2010. It decrease at 9.24 in 2012 and 9.53 in 2013.It is slightly increase in 2014.  If company has a P/E higher than the market or industry average, this means that the market is expecting big things over the next few months or years. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop.

3.4.6 Interest earning Assets/ Total Assets

Normally bank wants to know what percentage of a company’s assets is actually generating income. They determine this with the earning assets to total assets ratio. Of all the assets that a company owns  and what percentage of them are actually generating income.

Earning assets usually include any assets that are directly generating income, such as interest-generating investments or income-generating rentals, but in some cases, they include other forms of assets that directly contribute to income, such as machinery, computers, or anything that is directly involved in producing goods and services that will be sold to customers.

                                                2010                2011                2012                2013                2014

Interest earning Assets/ Total Assets

                                                  85.76             87.48               85.83               89.06               88.76

In considering the Seylan Bank the percentage of companies interest earning asset into the total asset at a high percentage. It recorded 80% throughout the study period. This determines how effectively the companies are generating earnings with their underutilized assets.
3.4.7  Earning per share
Earning per share, also called net income per share, is a market prospect ratio that measures the amount of net income earned per share of stock outstanding. In other words, this is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year.
The EPS of the Seylan Bank throughout the study period is as follows.
                        2010                            2011                2012                2013                2014

EPS

4.83

2

6

6.74

9

Earning per share is the same as any profitability or market prospect ratio. Higher earnings per share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders. In considering Seylan Bank EPS shows increase from 2012 to 2013. However it is decrease in 2011 due to some problem faced by the company.
Many investors don't pay much attention to the EPS, a higher earnings per share ratio often makes the stock price of a company rise. Since so many things can manipulate this ratio, investors tend to look at it but don't let it influence their decisions based only EPS of the company.

3.4.8  Capital Adequacy Ratio(CAR)

This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

                        2010                2011                2012                2013                2014               

CAR                12.07               15,55               14.37%                        15.75%                        14.73%

According to the Central Bank of Sri Lanka  it is need to maintain 5%- 10% capital adequacy ratio. According to the Seylan Bank date the bank also maintain the good CAR ratio throughout the study period. Banks are highly leverage institute which function on borrowing with the minimum capital. Therefore regulators mandate the minimum level of  capital. However the data shows that Seylan Bank maintain good capital adequacy ratio.

Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and efficiency of the financial system

Conclusion

Sri lankan economic growth has been one of the fastest in the Asian region exceeding its south Asian peers. The service sector continued as the lead sector followed by the industrial sector. The banking industry saw a high level of liquidity during the 2013 and 2014. The banking sector moved towards its consolidation process while assisting and harmonizing with the emerging needs in the growing economy in Sri Lanka. The key policy initiative taken during the year was the implementation of the financial sector consolidation programme aimed at future strengthening the domestic financial system.

After the 2011 the Seylan recorded good performance and maintain the stable growth momentum.

The capital adequacy ratio maintained well above the regulatory requirement by the company. In considering the account of the improvement EPS rose from 4 to 9 in 2014. It is a considerable improvement.

The total revenue and net interest income is considerable increase in the study period. Total revenue increases 19 million from 2010 to 26 million in 2014.However operating income is little bit increase in 2014 compared with the 2013.