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The banks financial objective, like any other private sector firm, is to optimize the level of shareholder wealth, defined as the discounted stream of net cash benefits earned by the bank and available for ultimate distribution to the bank's common shareholders. This translates into practice by bank financial managers striving to:
Stabilise and selectively increase their bank's net income after taxes.
Achieve both a competitive rate of return on the assets they manage (a competitive ROA) and a competitive rate of return on the equity portion of the securities they issue (a competitive ROE).
In order to achieve their profitability targets (often stated in terms of ROA and ROE) banks and other financial services industry firms have to compete effectively by developing and marketing an attractive portfolio of financial products and services.
Introduction to Dissertation
I have chosen Bank Muscat because once it was a market leader in the banking industry in Oman, but now due to rising competition, the bank is facing threat from its competitors.
Banks face two broad financial questions: How should it pay for investments/deposits? And what investments should the bank make? The first question involves raising money and the second question involves raising it. The secret of success in financial management is to increase the overall value.
The transformation of the world economy has dramatic implications for business. American management, for example, is learning that the United States can no longer be viewed as a huge economy that does a bit of business with secondary economies around the world. Rather, the United States is merely one economy, albeit a very large one, that is part of an extremely competitive, integrated world economic system.
Financial statements gives the position of assets and liabilities of a company and a bank. Income statement is also a major constituent of the financial statement of a bank.
With assets worth over USD 15 billion, Bank Muscat (SAOG) is the leading financial services provider in Oman with a strong presence in Corporate Banking, Retail Banking, Investment Banking, Treasury, Private Banking and Asset Management. Firmly positioned to attract one million satisfied customers by 2010, the Bank has the largest network of 121 branches, 341 ATMs, 100 CDMs and 3500 PoS terminals in Oman, a branch in Riyadh, Saudi Arabia, and a representative office in Dubai (UAE).
Bank Muscat owns 49% of BMI Bank B.S.C ©, an independent bank in the Kingdom of Bahrain that is focused on becoming a truly GCC bank. The Bank also has a 43% stake in the Mangal Keshav Group, one of the oldest and most respected securities houses in the fast-growing Indian equities market, besides a 35% stake in Silkbank Ltd. (formerly Saudi Pak Commercial Bank) in Pakistan.
Bank Muscat holds the rare distinction of being voted the 'Best Bank in Oman' for seven years by The Banker, FT London; nine and eight years in a row by Global Finance and Euromoney respectively. Bank Muscat recently won the prestigious Hewitt recognition as the Middle East's Best Employer 2009. The prominent accolades won by the Bank include the 'Quality Recognition Award' from JPMorgan Chase Bank and the 'Best Place to Work in Oman' awards in surveys conducted by leading international and regional business magazines. The Bank was declared an Investor in People (IiP) organisation in January 2007, becoming the first banking organisation in the MENA region to be awarded the prestigious global recognition. In 2004, Bank Muscat became the first bank in the Middle East to be completely ISO 9000:2000 certified.
Corporate Banking Division
Bank Muscat is the leading provider of corporate banking services in Oman, catering to domestic and overseas needs of small business, medium and large corporates, offering a wide range of products ranging from traditional working capital finance to project finance. The Bank's clients include domestic and multinational companies engaged in activities across all sectors of the economy such as contracting, telecommunication, oil and gas.
Consumer Banking Division
Bank Muscat believes in investing in state-of-the-art technology to provide a complete range of value-added personal banking products and services to customers. The Bank currently offers a comprehensive suite of world class e-banking channels, including Online Banking, 24 x 7 Call Centre, and the largest network of ATMs and CDMs in the Sultanate.
Investment Banking Division
Bank Muscat plays a key role in the development of Investment Banking and Treasury in Oman. The Investment Banking division provides a comprehensive suite of financial services - corporate finance, product structuring, brokerage and research and a host of treasury products. The Bank has an unmatched record of being the first to launch a debt product, an index tracker, a guaranteed product, a private equity fund, subordinated loan, convertible bond and an international product listed on the local market.
Asset Management Division
The Asset Management division is a leading player across the region and manages investment portfolios for several premier institutional clients in Oman. In the mutual fund industry in Oman, Bank Muscat occupies a dominant position. The division offers portfolio management, custodial and accounting services and is also involved in structuring, marketing and managing new funds in various asset classes.
Private Banking Division
The Private Banking division has a distinguished track record in banking and wealth management. Whether it is maximising investment portfolio or assisting in structuring finances, the Private Banking division continues to meet and exceed the expectations of clients.
Brief Literature Review
Reference: Business Essentials: Managing Financial Resources and Decisions, BPP Learning Media, London, ISBN 9780751744743
There are different types of banks which operate within the banking system, and we will probably have come across a number of terms which describe them.
Clearing Banks: Clearing banks are the banks which operate the so-called 'clearing system' for settling payments (e.g. payments by cheque by bank customers).
Retail Banks: The term retail banks is used to describe the traditional High Street banks, Barclays, NatWest, etc. The term 'wholesale' banks refer to banks which specialize in lending in large quantities to major customers. The clearing banks are involved in both retail and wholesale banking but are commonly regarded as the main 'retail' banks.
Merchant banks are banks which offer services, often of a specialised nature, to corporate customers - companies.
All but the smallest businesses make extensive use of banks. The main functions and activities of banks can be summarised as follows.
Providing a payments mechanism i.e., a way in which individuals, firms and government can make payments to each other. The 'clearing system' of the clearing banks is the major payments mechanism in the UK, and it enables individuals and firms to make payments by cheque. The banks are also a source from which individuals and firms can obtain notes and coins.
Providing a place for individuals, firms and government to store their wealth, for example, in current accounts or deposit accounts. Banks compete with other financial institutions to attract the funds of individuals and firms.
Lending money in the form of loans or overdrafts.
Acting as 'financial intermediaries': they accept deposits from people who have surplus wealth and lend it to those that need to borrow.
Providing customers with a means of obtaining foreign currency, or selling foreign currency, whenever they require it.
If you want to borrow money the people lending it to you will usually only be prepared to do so if they are sure of the following:
They will be repaid within a reasonable time.
They will make more for themselves by lending it to you (and making you pay interest) than they would from doing something else with their money.
Banks do not lend their money to anybody who happens to walk through the door. They apply certain well-tested principles of lending:
They look at the character of the person or business asking for the loan. Can they be trusted - for example have they borrowed and repaid money in the past?
Is the borrower able to repay? If it is a business, is it a profitable one and are there enough spare profits to be able to afford the interest and the periodic repayments of portions of the loan?
Will the bank make money out of the loan? If the bank itself has to pay out 3% interest to people who deposit money in their accounts then it will have to charge more than 3% interest to people who borrow money.
The bank will want to know the purpose of the loan. They wont lend you money so that you can engage in drug-dealing, for example. If you intend to gamble the money you want to borrow on the 3.30 pm at Cheltenham the bank will not take the risk.
The amount of the loan is partly dependent on whether the borrower can afford to repay capital and interest and what security there is available. For many business loans, however, the bank prefers the customers to have a significant personal stake in whatever the loan is for - the bank will put up â‚¤10,000 to help buy a new machine, say, if the business puts up the remaining â‚¤10,000 needed.
The repayment terms of the loan are very significant. These do not just include how long the loan will continue (say, for three or five years) and how much of each regular payment is of capital, and how much of interest, but also the circumstances in which the bank can call in the loan early. For instance, the terms may state that the entire loan should become repayable, with penalty interest, if more than two consecutive payments are late.
The bank will need some form of security which it can turn to if the loan is not repaid. This is just like a mortgage: if you can't afford your mortgage repayments your house (the security) will be repossessed. Likewise, a bank will take some sort of charge over a business's assets. This means that the bank has a legal right to seize the assets if the loan is not repaid.
Character of borrower
Ability to borrow and repay
Margin of profit for the banker
Purpose of the loan
Amount of the loan
Insurance against non-payment (security)
Broadly speaking, a business will wish to borrow from the bank for one or more of three purposes.
To purchase a business as a whole
To fund the purchase of fixed assets (capital finance) like buildings or cars
To fund day-to-day activities (working capital or trading finance)
Financial Statements comprise:
Profit and loss account / income statement account
Cash flow statement
An annual report and accounts will also contain notes to the financial statements, director's and auditor's reports and usually a chairman's report.
The balance sheet shows the business's financial position as at the balance sheet date whereas the profit and loss account shows its trading results, overheads, interest, tax and dividends for the year. The cash flow statement reconciles the trading profit to operational cash flows and shows other movements in cash for capital transactions and so on. Large companies generally produce group accounts.
Limitations of Financial Statements:
Two very important drawbacks of financial statements are mentioned below:
They are often out of date by the time you receive them.
They are not audited in full, but only as far as required by statute.
To these we can add several other limitations:
Accounts can only show the performance and standing of a business in financial terms - they cannot place a value on the staff or customer base, nor assess the business's competition.
Accounts are a record of the past, not a predictor of the future.
Although the Companies Acts and accounting standards are very detailed, they sometimes leave room for choice of accounting treatment and they do not cover every type of financial transaction encountered in business.
The audit is not a guarantee that the accounts are 'correct'.
Only companies whose turnover exceeds a certain threshold (recently increased from â‚¤1 million per annum to â‚¤5.6 million per annum) have to have an audit. Companies with a level of turnover under that amount may have an audit, but it is not compulsory.
Interpretation of Financial Statements:
The income statement, the balance sheet and the cash flow statement are all sources of useful information about the condition of a business. But we need to know more about how to analyse and interpret them if they are to be truly useful.
There are a few rules to bear in mind when using any method of interpretation.
Always be aware of the context in which the business operates - manufacturing, service and finance companies will show very different results.
Compare like with like. Try to eradicate unusual items like major write-offs or changes in policy which distort the comparison and disguise underlying trends.
Findings should always be double-checked. Do not base your interpretation on the result of one fact only (such as a major decline in sales).
To interpret effectively, the statements of more than one accounting period should be analysed to give an idea of the trend.
We can gain an initial overall impression of a business just by looking at the figures: is it a multi-million pound business, does it have lots of fixed assets, does it owe large amounts of money, and so on.
Broadly speaking, accounting ratios can be grouped into four categories: profitability and return; borrowings; liquidity and working capital; and shareholder's investment ratios.
Within each heading we will identify a number of standard measures or ratios that are normally calculated and generally accepted as meaningful indicators. However each individual business must be considered separately: a ratio that is meaningful for a manufacturing company may be completely meaningless for a financial institution.
The key to obtaining meaningful information from ratio analysis is comparison. This may be:
External - comparison with similar businesses and averages for the business sector within which the company operates; or
Internal - comparison with previous periods and forecasts or budgeted results.
Ratio analysis on its own is not sufficient for interpreting company accounts. There are other items of information which should be looked at:
Comments in the chairman's report and director's report.
The age and nature of the company's assets.
Current and future developments in the company's markets, at home and overseas, recent acquisitions or disposals of a subsidiary by the company.
Sources of Information about Financial Performance:
All quality newspaper (such as The Guardian, The Independent, Daily Telegraph, The Times and, above all, the Financial Times) have detailed information and comment each day in their financial pages on the following:
The economic activities in the City of London as well as in the world (especially the Stock Exchange).
The financial results of large companies.
Announcements by large companies and financial institutions of important plans, such as proposed takeovers and mergers, sales of parts of a business, expansion into new activities or geographical markets and so on.
UK and overseas government policies on interest and exchange rates, industrial strategy, privatisation plans and so on.
Longer term developments in the business world, such as changes in management theories or consumer tastes.
When we first try to read the financial pages, they can seem very dull and difficult to understand, especially as they are full of jargon. However, if we persevere, we will gradually find that we become familiar with the jargon and we will come to realise that the financial pages can be very helpful in developing our understanding of the financial marketplace.
To identify the financial and banking system used by Bank Muscat.
To extract difficulty in the present system of banking.
To access whether the present system adopted by Bank Muscat meets its prescribed objectives or not.
To find out the exact goals of Bank Muscat by the interpretation of financial statement analysis.
To know thoroughly about financial statements and its interpretation.
To determine banking practices in Bank Muscat.
To know frequency and utility of performance review.
To give some recommendations and suggestions.
For justifying the subject, I have chosen both primary and secondary sources of data for data analysis. Primary data is the data, which is used for the first time. This kind of data is not used previously and is researched and made available to researchers. Secondary data is the kind of data, which is used many times. It could be assessed in libraries, newspapers, journals, magazines, etc.
Company published sources
Sample size of Primary Data:
Primary data will be collected for questionnaire and interview method. For questionnaire method, I will choose at least 75 - 100 individuals, either customers of Bank Muscat, or belonging to other banks. For interview method, I will have a direct interaction with at least 10 individuals, employees belonging to Bank Muscat as well as other banks.
Method of Data Analysis:
I will use some charts and diagrams to depict the financial statements of Bank Muscat. For this, I need some useful softwares like MS Excel, SPSS, and MS Office Tools. I will present the data in a graphical form so that it will be easy to evaluate and conclude the same.
Dissertation Time Table
Questionnaire Design and Testing:
Data Analysis of Research Findings:
Writing the Dissertation:
Submission of Dissertation: