1.1. Rationale of the Report
In today’s world, banking sector has become an integral part of overall economy around the world. Millions of people are involved in banking sector. In Bangladesh, banking sector has experienced enormous growth over the past few decades. Millions of depositors, borrowers and other related parties have interest in this sector. Creditworthiness of banks is rated by CRAB and CRISL in Bangladesh.
The idea behind our report on “Credit Rating Report on Uttara Bank Limited (UBL)” is to give credit rating of UBL by considering both qualitative and quantitative factors with judgement.
1.2 Origin of the Report
This report has been prepared as a requirement for completion of MBA program under University of Dhaka. We have prepared the report under course F-504(Fixed Income Securities) with directions and valuable guidelines from our honorable course teacher Muhammad Mujibul Kabir, Associate Professor, Department Of Finance, University Of Dhaka.
3. Objectives of the Report
Broad Objective: To do credit rating of Uttara Bank Limited (UBL) by considering important qualitative and quantitative information along with application of proper judgment.
Specific Objectives: The objectives of the report are-
➢ To have an overall picture regarding the credit rating procedure of banking sector.
➢ To be informed with the trend and performance of the bank.
➢ To get an idea of factors affecting credit rating score of UBL.
4. Scope of the Report
This report has been prepared to do credit rating of a particular bank (UBL) as assigned by our course teacher.
1.5.1 Data Collection: The report is primarily based on secondary and published information. The major sources of information are published research reports and papers, DSE library, newspapers, data from annual report of UBL and peer banks, rating methodology of S&P etc.
1.5.2 Techniques of Data Analysis
Both qualitative and quantitative statistical techniques were used for this research.
• Qualitative tools: bar graphs and trend line were used to present the collected data.
• Software used: Microsoft Excel 2007, Microsoft word 2007, stata software version 10.
In preparing the report, the main limitations that we faced were-
• Reliance on secondary data, mainly annual reports of banks. Sometimes, published data suffer from accounting manipulation.
• We had to prepare the credit rating report within a short time frame. Taking more time would have made the report more comprehensive.
SECTION-II: THEORETICAL DISCUSSION ON CREDIT RATING
2.1. Why Credit Rating Is Necessary
A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtor’s ability to pay back the debt and the likelihood of default. Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency’s evaluation of qualitative and quantitative information for a company. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. A poor credit rating indicates a credit rating agency’s opinion that the company or government has a high risk of defaulting, based on the agency’s analysis of the entity’s history and analysis of long term economic prospects.
2.1. Corporate Credit Ratings
The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation. There are two types of corporate credit rating: 1. entity rating
2. issue rating
In Bangladesh, credit rating agencies conduct entity rating. However, issue rating may be different from or similar to or better than entity rating. Issue rating may be higher than entity rating if a particular issue is backed by sufficient collateral, third party guarantee. 2.3. Rating Methodology
For the credit rating of the selected companies we have considered the guidelines provided by our course teacher. Credit rating is “an objective and impartial opinion on the ability and willingness of an issuer to make full and timely payments of financial obligations.” This opinion is conveyed in a simple alphanumerical scale, for easy reference and comparability.
We have analyzed both the qualitative and the quantitative factors of the banking industry as a whole and also various factors of the companies itself. In the part of qualitative analysis we have analyze the industry risk, keys to success, diversification factors, firm size, management quality, quality of the financial reporting, performance in the industry. In the quantitative analysis we consider the profitability, cash flow adequacy, capital structure and financial flexibility. We have assigned some points on both the qualitative and quantitative information to get the exact rating. As for the sustainability of an organization both the quality of the management and quantitative figure that means company’s financial performances are equally important. We have assigned more weight for qualitative part than quantitative part.
2.4. Company Background
Uttara Bank is one of the largest and oldest private-sector commercial banks in Bangladesh, with years of experience. Adaptation of modern technology both in terms of equipment and banking practice ensures efficient service to clients. 215 branches at home and 600 affiliates worldwide create efficient networking and reach capability. Uttara is a bank that serves both clients and country.
The Bank had been a nationalized bank in the name of Uttara Bank under the Bangladesh Bank (Nationalization) order 1972, formerly known as the Eastern Banking Corporation Limited which started functioning on and from 28.01.1965. Consequent upon the amendment of Bangladesh Bank (Nationalization) order 1972, the Uttara Bank was converted into Uttara Bank Limited as a public limited company in the year 1983. The Uttara Bank Limited was incorporated as a banking company on 29.06.1983 and obtained business commencement certificate on 21.08.1983. The Bank floated its shares in the year 1984. It has 215 branches all over Bangladesh through which it carries out all its banking activities. The Bank is listed in the Dhaka Stock Exchange and Chittagong Stock Exchange Ltd. as a listed company for trading of its shares.
At present, the authorized capital of the bank was Tk 5000 million divided into 500 million shares of Tk 10 each. The issued and paid up capital is Tk 3306 million.
Since beginning, the bank acquired confidence and trust of the public and business houses by rendering high quality services in different areas of banking operations, professional competence and employment of the state of art technology. During the last 47 years, UTTARA Bank Limited has opened 215 Branches in different Business Centers of the country
SECTION-III: QUALITATIVE ANALYSIS
A. Industry Risk
In preparing credit rating report, industry analysis is a subject of great importance. Level of competition in the industry affect the profitability of a company. Different industries react differently to economic changes. Cyclical industries do much better than the aggregate economy during the expansion whereas they suffer more during contraction. In contrast, non-cyclical industries such as banking industry would experience a significant decline during a recession and also would do better during an economic expansion. Competitive advantage and disadvantage of banking industry can be examined by Michel Porter’s 5 factors model.
The potential threat of new entrants is moderate for banking industry due to following reasons –
• Growth of the industry is very high which is creating field for the new company that is observed during the past several years. • Huge population of the country provides a large customer base. • Entry into the banking sector requires huge equity capital investment for establishing branches and related infrastructures. • Established companies have absolute cost advantage relative to potential entrants. • There exists Government regulation to enter into the industry.
The level of profitability is primarily influenced by the nature of rivalry among firms within the industry. Several factors determine the intensity of competition among existing players in an industry. The rivalry among existing competitors is high for banking industry due to following reasons –
• Price and non-price Competition among banks has increased recent years.
• High fixed costs.
• Exit barriers are high as the firm can’t exit as they wish and there is regulatory burden.
• Banks are trying to grab market share by offering various price and non-price products
• Banking products are not differentiated and easy to copy by other banks.
The third dimension of competition in an industry is the threat of substitute products or services. The threat of substitute product in banking industry is high for the following reasons: • New Products are easily and quickly adopted by other competing banks.
• Non-bank financial institutions (NBFIs) offer many of products and services offered by banks.
There are two factors which determine the bargaining power of buyers; price sensitivity and relative bargaining power of buyers. By focusing these two issues, the bargaining power of buyers in banking industry is discussed below –
• There are large numbers of banks.
• Banks depend on the buyers for a large percentage of its total revenue.
• Customer switching cost is low.
• Inability to backward integration.
• Buyers are highly price sensitive.
The bargaining power of suppliers is high for banking industry due to following reasons
• Banks depend on loan and deposits as their primary products.
• There are a large number of banks already operating in the country.
|Rating |Rating Score | |Industry Risk |7.5 |
B. Key to success Factors
❖ Strategic focus
Uttara Bank has prioritized the areas depending upon the business need and regulatory requirements with the change in technologies and delivery process. The Bank rendered special focus on growth and expansion to comply with the changing characteristics of capital market. As a result of this, “UB Capital and Investment Limited” a fully owned subsidiary company has been formed in 2010 to carry out merchant banking operation in compliance with the regulation of the Securities and Exchange Commission. In the meanwhile the company is operating its activities in related field.
Resource mobilization was centered round delivery channels, technology, people and brand. Bank’s operation has achieved the confidence of its customers with sound fundamentals in respect of deposit accumulation, loans and advances, export-import business, remittance collecting from abroad and profitability. The Bank has also put special emphasized on SME financing considering the sector as a tool of diversifying portfolio to minimize risk. Again the bank has also rendering its services in Women Empowerment Development Scheme, Agricultural sector and Rural Financing sector.
❖ Corporate Credit
Uttara Bank’s business is focused to a considerable extent on the corporate clients by maintaining a relationship and extending financial assistance based on a deep understanding of the clients’ business environments, financial needs and internal strategies for growth. The bank extends its financial support to the corporate clients either from own finance or by arranging syndicated/club finance. The investment in corporate sector is the combination of a mixed and balanced allocation in various natures of business based on the socio-economic perspectives and long term planning.
The bank distributed Tk. 2774.1 million as funded and non-funded facilities in Syndication Finance. The outstanding balance of same was as on 31.12.2011 was Tk. 1596.2 million. The Bank participated in syndication finance with 21 companies. Some of them were BSRM Steels Ltd., Pacific Telecom Bangladesh Tel Ltd.(Citicell), Ranks Tel Ltd., Samuda Chemical Complex Ltd., Banga Building Materials Ltd., Pran Foods Ltd., Capital Board Mills Ltd., Creative Paper Mills Ltd., Everest Power Generation Company Ltd., Appolo Ispat Complex Ltd., PHP Float Glass Ind. Ltd., Dhaka Telephone Co. Ltd. (DTCL), Tele Barta Ltd.(TBL), Orascom Telecom Bangladesh Ltd. (Banglalink), Venture Capital Energy Ltd and many other reputed organization. The Bank worked as a participating financial institution in syndication finance.
❖ Branch Network
As on 31 December 2011, Uttara Bank Ltd had 211 branches in different geographical locations of the country. Branches are classified under different zonal office. Out of these 211 branches, 23 branches are under Dhaka Central Zone, 23 branches are under Dhaka North Zone, 20 branches are under Dhaka South Zone, 13 branches are under Narayangonj Zone, 08 branches are under Mymensingh Zone, 17 branches are under Camilla Zone, 19 branches are under Chittagong Zone, 21 branches are under Sylhet Zone, 16 branches are under Khulna Zone, 18 branches are under Barisal Zone, 12 branches are under Rajshahi Zone and 19 branches are under Bogra Zone.
As one of the oldest commercial banks in the country, Uttara Bank uses latest information and communication technology. The extensive use of ICT in banking operations is increasingly a matter of concern about the risk associated with information technology. The bank has formulated well defined ICT policy in line with the international best practices and prudential guidelines of Bangladesh Bank on ICT Security. In all branches of the bank, banking operations are conducted through computerized system to minimize cost and to optimize benefits and increase overall efficiency for improved services. The branches have ability to prepare the financial statements at the end of the day. Bank has a guideline named “Guideline on information and Communication Technology (ICT)” as per Bangladesh Bank BRPD circular 14 dated 23.10.05.
The bank has signed an agreement with LEADS Corporation limited, Software Company, for implementation of Core Banking Solution “Bank Ultimas” in the Bank.
The Bank continues maintenance of the latest financial service products REUTERS-3000 Xtra and REUTERS Dealing System (RDS) for collecting accurate information of rapid changing position of international money market with Bank’s own independent Dealing Room. As a result the Bank has been able to render Treasury service up to the international standard through its Treasury Division which is equipped with most modern technology and expertise manpower.
At present International Division of Head Office and 38 branches are under SWIFT operation. As a result the bank has been able to conduct international trade including transmission of letter of credit, fund and message instantly throughout the world at low cost.
❖ Human Resource
The Bank has always recognizes the contributions of its human resources as they individually and collectively render their force to the achievement of the objectives of the organization. Human Resources Division of UBL worked with the business as the core strategic partner through performing the job of recruitment, training, placement, and through introduction of the performance management tools. UBL is an employer of equal opportunity irrespective of gender equality. The total manpower of the Bank as on 31 December, 2011 is 3,780 out of which 2,687 are officers and 1,093 are the supporting staffs. Efforts have been made to rationalize the use of manpower by improving their efficiency and productivity.
The Bank’s own Training Institute is nicely decorated and equipped with the sophisticated instruments has been striving to bring about a qualitative change and improvement in human resources of the Bank by imparting continuous different raining throughout the whole year. Guest speakers specialized in Banking participate in each of the training program excluding highly educated faculty members of the bank. Besides, a number of executives and officers were sent to various Training Institutions including BIBM and abroad for higher training.
In 2011, the training institute of the bank arranged 17 different training courses and 13 workshops for the officers and members of the staff of the Bank in which as many as 628 and 845 officers and members of the staff of the bank participated respectively. At the same time, 92 officers and members of the staff of the bank attended training courses arranged by BIBM, 44 officers received training from Bangladesh Bank, 22 officers received others and 2 executive received training from abroad.