In: Accounting
During the period, 2017-2019, the Bank of Ghana (BOG) carried out a planned “financial sector restructuring”. In the process, some financial institutions were found to be wobbling out of business however, a major client (PN Bank Ltd) of your firm presented a summary of their current financial sector indicators (benchmark) to your firm for comparative assessment with BOG benchmarks.
To execute this task, the 2019 financial indicators submitted by the Financial Controller of PN Bank to your firm, are listed below:
Capital Adequacy Ratio (CAR) 9.81%
Liquidity ratio 12.5%
Return on Assets
18%
Fixed Assets/Total Assets ratio 41%
Net Interest Margin 15%
Non-performing loans (NPL) 28%
Assets Quality
35%
Official Bank of Ghana Financial
Indicators
Capital Adequacy Ratio 19.12%
Liquidity
Ratio 51.17%
Return on Assets 4.37%
Fixed Assets/Total Assets Ratio 23.92%
Non-Performing Loans 18.05%
Assets
Quality 30.56%
Required:
As a Junior partner of Nyabey and Associates, you have been tasked to write a report to the CEO of PN Bank explaining the following:
i. A comparative analysis of PN Bank’s performance (as stated above) with official Bank of Ghana financial indicators.
ii. List and explain the major banking sector performance indicators deployed by BOG to assess the performance of Banks in Ghana
iii. In your opinion, outline and explain five (5) justifications for BOGs clean-up exercise in the financial sector.
1)
Ratio | Bank of GHANA | PNB | Comparison |
Capital Adequacy ratio | 19.12 | 9.8 | it represnt efficiency of bank to protect from insolvency therefore it is lower in case of PN bank which is matter of concern |
Liquidity Ratio | 51.17 | 12.5 | it represent the cash blance to meet working expense as it is low it repersent unfavourable |
return on asset | 4.37 | 18 | it is welcome move as higher represent good income from various sources |
Fixed asset/total asset | 23.92 | 41 | it represent the higher investment hence higher is not so favourable in case of ban |
non-performing loans | 18 | 28 | lower the better as the loan which are not active cause a loss to bank |
asset quality | 30.56 | 35 | it is good sign as it has direct impact on revenue |
2) Capital Adequacy Ratio - the capital adequacy ratio (CAR) is
a measurement of a bank's available capital expressed as a
percentage of a bank's risk-weighted credit exposures. The capital
adequacy ratio, also known as capital-to-risk weighted assets ratio
(CRAR), is used to protect depositors and promote the stability and
efficiency of financial systems around the world.
Liquidity Ratio - It represent the Bank ability to meet day to day
expenses and thus has a indicaor in terms of liquidity
position
Return on Assets - the revenue from asset through different sources
is indicated through this ratio
Fixed Assets/Total Assets Ratio - it represent the total portion of
asset which comprises fixed asset and thus indicate the ability to
disopense the cash position
Non-Performing Loans - it represent the loans which are not active
for certain period of time
Assets Quality - it represent the quality of loans and other
assets
3) the followings are reasons :
i. it considered overall impact of the bank from every direction
ii. the major focus on assets as they lead to generation of revenue.
iii. the main revenue genearting asset is loan which is given higher priortiy
iv. meeting day to day crunches is most important part of bank
v. protection of depositiors is always helpul to build good reputation