Ranking of commercial banks in uganda a comparative

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International Journal of Multidisciplinary and Current Research

Research Article

ISSN: 2321-3124 Available at:

Ranking of Commercial Banks in Uganda: A Comparative Analysis

Tebajjukira Annet and Dr. Joji Chandran

Karunya University Business School, Mobile: +919042505708, Ph.D Management Associate Professor, Karunya University Business School, Mobile: 9447006541

Accepted 28 Nov 2015, Available online 08 Dec 2015, Vol.3 (Nov/Dec 2015 issue)

Abstract

The main aim of this study is to analyze the profitability ratios of the selected commercial banks in Uganda and rank the banks to find out which bank among the five is more profitable. The study is carried out for a period of eight years (2006-2013). The ratios have been calculated by the authors and the banks were ranked according to their overall means. The findings show that; in return on assets, Crane bank has the highest mean ((6.875) and is ranked first, followed by Centenary bank with a mean of ((4.7625) and DFCU bank is the last with a mean of ((2.9625). For return on equity, Stanbic bank is ranked 1st (41.8625) and DFCU 5th. In Net operating margin; Centenary bank is ranked 1st and DFCU 5th. In Earnings per share; Centenary bank is ranked 1st and Crane 5th.

Keywords: Return on assets, Return on equity, Net operating margin, Earnings per share, JEL Code: G21, E59

Introduction

The main objective of this study is to analyze the profitability ratios of the selected commercial banks and to rank them based on their profitability. Profitability is the capacity to earn a profit. If a company has a higher value relative to a competitor's ratio or same from the earlier period, for most of the ratios, shows that the firm is performing well. Comparing ratios between companies in the same industry is valid and good (). Banks in Uganda are facing stiff competition from the increasing growth of the banking industry. This has squeezed profits for the banks. This is evidenced as the banks are facing a declining profitability trend (Nsambu Kijjambu 2015, Bank of Uganda 2011). In addition, commercial banks in Uganda are often closed due to being regarded as insolvent by bank of Uganda example Global trust bank on July 25, 2014 and many others in the past (bou.or.ug). Research done in Uganda on the banking industry is very minimal compared to other East African countries (Sarah Sanya and Mathew Gaertner (2012). Therefore, there is a need to analyze and rank the profitability ratios of Uganda commercial banks.

Literature review

Manish Kumar (2012) examined the most profitable banks in India. The main aim of the research was to discover the highest profitable nationalized bank of India and to rank the banks according to their profitability. The data were analyzed from 2008-2012 by the descriptive ratio analysis and the banks were ranked by the

composite rank table. The findings revealed that Punjab National bank was the most profitable bank in India.

Sarah Sanya and Mathew Gaertner (2012) assessed the bank competition within the East African community. The main objective of the study was to examine the competitiveness of the four East African countries (Kenya, Tanzania, Rwanda and Uganda) in the banking industry. It was found that Uganda was ranked as the third and concluded that there are fewer studies in the banking industry done in Uganda.

Suzan Moraa (2014) examined the profitability of Kenya's top six commercial banks. The main objective of the study was to explore the function of bank specific factors on the top six commercial banks in Kenya over the period 2009-2013. The findings showed that the major important determinants of the profitability of the top six commercial banks are operating expenses, ownership, capital strength, bank size and ratio of loans.

Nsambu Kijjambu (2015) analyzed the factors affecting performance of commercial banks in Uganda for a period of 2000-2011. This study was built on the fact that the mean profits for domestic, commercial banks are declining compared to the foreign commercial banks. (Bank of Uganda 2011). The study found out that the factors affecting the performance of domestic commercial banks in Uganda are: management efficiency, capital adequacy, inflation, asset quality and interest income.

Priya. S (2014) analyzed the profitability position of private sector banks in India. The major objective of this study was to analyze the profitability position of some chosen private sector banks for a period of ten years

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Ranking of Commercial Banks in Uganda: A Comparative Analysis

(2002-2003 to 2011-2013). The tools used for analysis were: descriptive statistics, chi-square and coefficients of variation. The findings showed that individual banks perform well in some profitability ratios and score poorly in others depending on the bank.

Statement of the problem

Banks in Uganda are facing stiff competition from the growing banking industry such as telecommunication companies. Today telecommunication companies like MTN (Mobile Telephone Networks) introducing MTNs' Mobile money and Warid Telecoms' Warid Pesa just to mention a few. This has reduced bank profits and created a strategic alliance between banks and the telecommunication companies. There is also fewer research in the banking industry done in Uganda (Sarah Sanya and Mathew Gaertner (2012). All these issues call for the performance of this study.

Objectives of the study

The main objective of this study is to analyze and rank the profitability ratios of the five selected Uganda commercial banks.

Limitation of the study

1) Annual reports have been used as the source of the secondary data and the profitability ratios selected were calculated based on that data. The analysis and findings rely mostly on the correctness of such data.

2) The aim of the research was to perform an analysis for at least 10 years, but some banks missed some years hence the analysis for only eight years.

Conclusion

It can be concluded that Crane bank utilizes most of its assets to generate earnings compared to other selected banks as it is leading in return on assets. Stanbic bank is leading in return on equity, this reveals that compared to all the selected banks, Stanbic bank utilizes most the share holder's equity to generate earnings while Centenary bank is leading in net operating margin and earnings per share therefore centenary bank reduces most costs and allocates higher profits to each of the outstanding shares of common stock than other selected banks.

Scope for further research

Sample size

They were twenty five commercial banks by the time this study was conducted and five percent among the top ten banks, according to assets were selected as the sample (appendix 1). The Five commercial banks selected for the comparative ratio analysis are: Stanbic bank, Crane bank, Centenary bank, DFCU bank (Development Finance Company of Uganda) and bank of Baroda Uganda. The ratios which can be used for comparing companies in the same industry have been selected. These ratios are; return on assets, return on equity, net operating margin and earnings per share. All the ratios were calculated in SHS'000' (Uganda shilling in "thousand").

Further research should be done on analyzing and ranking the profitability of all the Uganda commercial banks or having a bigger sample size than this.

Suggestions

1) It is suggested that DFCU banks should utilize more its assets and shareholder's equity to generate earnings.

2) Baroda bank Uganda should try to reduce its costs as much as possible.

3) Crane bank should try to increase the profits it allocates to each outstanding shares of common stock.

Data collection

Findings of the study

The study used secondary data. The annual reports were obtained from individual bank websites and . Numerous articles and magazines were also used. Profitability ratios were calculated based on the data from the annual report to make a uniformity of ratios.

Period of the study

The study was carried out for a period of eight years (2006-2013).

Tools of analysis

The tools used for the study are the descriptive statistics.

The findings of the study were based on four tables, namely, 1- Return on assets, 2- Return on equity, 3 - Net operating margin, 4 - Earnings per share.

1) Return on assets

Return on assets measures how efficiently a company uses its assets to accumulate operating profits. If the firm's return on assets is huge, that means that the company is efficiently using its assets and managing them well. Return on assets is calculated as net income divided by average total assets. Table 1 shows the value of return on assets for the selected five commercial banks in Uganda. The return on assets for all the banks are not stable and non of the banks show a consistent upward

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Ranking of Commercial Banks in Uganda: A Comparative Analysis

trend or downward trend but they are all fluctuating among the years. The position of the selected banks, with overall trend, where Crane bank- 1st (6.875), Centenary2nd (4.7625), Baroda- 3rd (4.625), Stanbic- 4th (4.275) and DFCU- 5th (2.9625).

2011 2012 2013 Overall mean Rank

4.8 4.5 3.2 4.275

4

7.7 7.4 3.7 6.875

1

5.4 5.3 4.5 4.7625

2

3.5 3.1 3.1 2.9625

4.3 5.4 3.9 4.625

5

3

2) Return on equity

Calculated by the authors

Return on equity measures how much net income was earned as a percentage of share holder's equity. It measures how much profit the bank earns from the share holder's money invested. Return on equity is calculated as net income divided by the average common equity. tability-ratios. The higher the company's return on equity, the higher the bank earns from the share holder's money invested. Table-2 shows The position and means of the banks in return on equity were- Stanbic -1st (41.8625), Crane -2nd (36.55), Centenary- 3rd (30.525), Baroda- 4th (25.275), DFCU-5th (23.275).

3) Net operating margin

Table 2: Return on equity in percentages

Years 2006 2007 2008 2009 2010 2011 2012 2013 Overall mean Rank

Stanbic 40.8 47.3 55 56.3 26.6 46.3 37.5 25.1

41.8625

1

Crane 38.6 40.1 41.1 33.9 46.4 39.9 34.8 17.6 36.55

2

Centenary 25.6 36.6 33.4 29.3 28.6 35.1 30.3 25.3

30.525

DFCU 14.1 16.3 22.8 27.7 27.5 30 24.5 23.3 23.275

Baroda 24.5 26 26.5 26.5 23.8 24 28.8 22.1

25.275

3

5

4

Net operating margin analyzes how much revenue a

company is left with after subtracting off the variable

costs of production for example raw materials and wages.

Operating margin also shows how much money is left to

pay

for

non-operating

costs

.

Net operating margin is a measure that indicates how

well the bank minimizes its costs. It is calculated as (Total

operating revenues ? Total operating expenses) / Total

Assets. Pretex net = Operating income/total assets. The

higher the net operating margin, the better the company

is controlling the costs. Table- 3 reveals the values of the

net operating margin and the rank of the banks, which are Centenary- 1st (18.7375), Stanbic- 2nd (13.8), Crane- 3rd (13.4875), DFCU-4th (10.775) and lastly Baroda- 5th

(5.6125).

Calculated by the author

Table 3: Net operating margin in percentages

Year 2006 2007 2008 2009 2010 2011 2012 2013 Overall mean Rank

Stanbic 12 13.8 14 14.4 12 14 16.4 13.8 13.8

Crane 18.3 11.6 13.1 13.2 13 13.7 13.1 11.9 13.4875

Centenary 19.1 22.1 20.7 18.9 15.9 17.7 18.9 16.6

18.7375

DFCU 10.7 14.3 11.2 10.2 9.2 10.1 10.5 10 10.775

Baroda 5.6 5.7 6 5.3 5.3 6.9 5.9 4.2

5.6125

2

3

1

4

5

4) Earnings per share

Calculated by the authors

Earnings per share are the part of the bank's revenue that is to be paid to each outstanding share of common stock. Earnings per share are computed as net income-dividends on preferred stock /average outstanding shares. Table 4 shows the earnings per share of the selected banks and their overall means. Centenary-1st (51.11), DFCU- 2nd (5.04375), Stanbic- 3rd (4.9575), Baroda- 4th (2.985) and Crane-5th (0.79875).

Table 1: Return on assets in percentages

Years 2006 2007 2008 2009 2010

Stanbic 3.5 4.1 5.4 6 2.7

Crane 8 7.1 6.7 6 8.4

Centenary 3.5 5.4 5.2 4.6 4.2

DFCU 2 2.2 3.2 3.4 3.2

Baroda 4.4 4.9 5 4.9 4.2

Table 4: Earnings per share in Uganda shillings

Year 2006 2007 2008 2009 2010 2011 2012 2013 Overall Rank

Stanbic 7.72 10.32 3.84 5.15 5.73 2.37 2.55 1.98

4.9575 3

Crane 2.49 0.55 0.53 0.58 0.55 0.67 0.79 0.23 0.79875

5

Centenary 9.28 4.08 5.07 5.84 7.31 4.79 2.19 2.32 5.11 1

DFCU 0.18 9.75 2.64 3.87 4.63 6.18 6.15 6.95 5.04375

2

Baroda 2 2.7

3.36 4.17 4.63 2.27 3.44 1.31 2.985

4

Calculated by the authors

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Ranking of Commercial Banks in Uganda: A Comparative Analysis

Appendix 1

Allocation of Assets among Ugandan commercial banks as of December31/December/2014

Rank

Bank

1

Stanbic bank

2

Standard chartered bank

3

Crane bank

4

Centenary bank

5

DFCU bank

6

Barclays bank

7

Baroda bank Uganda

8

CITI bank Uganda

9

Diamond Trust bank

10

Housing finance

Source:

Assets (USD) Millions 1,260

936

620 587 513 504 409 300 252 220

Market share In percentage

19.0

14.0

9.3 8.8 7.7 7.5 6.1 4.9 3.8 3.5

References

[1]. Manish Kumar (2012). Most Profitable Bank in India: A Comparative Analysis of Indian Nationalized Banks. SMART Journal of Business Management Studies, 10 (2), 24-37.

[2]. Nsambu kijjambu Frederick (2014). Factors Affecting Performance of Commercial Banks in Uganda -A case for Domestic, Commercial banks. International Review of Business Research papers, 11 (1), 95-113.

[3]. Priya. S (2014). An Analysis of profitability position of private sector banks in India. International journal of business and Management invention, 3 (2) 45-53.

[4]. Suzan Moraa Onuonga (2014). An analysis of profitability of Kenya's Top six commercial banks: Internal factor analysis, 3 (5) 94-103.

[5]. Sarah Sanya and Matthew Gaertner (2012). Assessing bank competition within the East African community. International Monitory fund, Washington DC, IMF working paper 12/32, pp 1-23.

[6]. Tomola M. Obamuyi (2013). An Analysis of the Deposits and Lending Behaviors of banks in Nigeria. Journal of Engineering and Management Science, 4 (1), 46-54.

[7]. Anurag. B. Singh and Priyanka Tandon (2012), A Study of Financial Performance- A Comparative analysis of SBI and ICICI bank. International Journal of Marketing, Financial services and Management research. 1 (11), 56-71.

[8]. Arora, Gurpreet Kaur (2014), Evaluating the Efficiency of Indian banking Industry using Data Evelope Analysis. International Journal of Economics and Management 2(8), 1-13.

[9]. Prithwiraj Nath, Avinanden Mukherejee and Manabendranath (2001). Identification of Linkage between Strategic group and Performance of Indian commercial banks- A combined Approach using DEA and co-plot. The International Journal of Digital accounting research. 1 (2), 125-152.

[10]. Bank of Uganda (2011), annual supervision report (2) 1-39.

Websites

bou.or.ug

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