Commercial Bank Management Project Fall 2017-2018
Student Learning Outcome:
This is a practical group project to help students in:
(1) Analyzing the lending policies applied in commercial banks.
(2) Team work
(3) Financial Ratio Analysis
(4) Due Date to submit project: Tuesday, Dec 24, 2017 @ 11:00 am: Hard and Soft Copy.
II. PROJECT CONTENT:
Section (1): Loan Application Project
Company (X) is asking for a SR 45 million line-of-credits for a period of 18 months.
**This company is promising to repay the loan based on an assumption of a strong base of liquid assets, inventory and sales for the coming 3 years and an efficient management of all its expenses and short-term (current liabilities) –due to an increased demand on its products, strong pricing strategies, increased market share and high level of accounts receivable during the last 3 years which is and will reflect in increased sales and revenues.
**Company (X) has an outstanding loan with another bank = SR 10 million since 5 years and it matures this current year (current year is the last year of your analysis). The loan remaining maturity is end of the current year (current year is the last year of your analysis). At the end of the current year, the company must pay back SR 250,000 of its long-term debt (annual interest payments) and SR10 million (the principal amount).
**Company (X) is unhappy with its present banking relationship.
Section (2): General Requirements & Guidelines:
Choose a company that operates inside Saudi Arabia.
In this project, you will assume that you are a team of Bank Loan Officers to whom this company (X) is applying its above loan application to.
The company must provide you with a good background regarding its historical background, its business segment, its operations, its products and services, its market share and major competitors in the Saudi Market (if any)
The company is required to submit to your Bank TWO major financial statements: Balance Sheet Statements and Income Statements of at least 3 consecutive years (if 5 years better).
Optional: The Company may also submit to the Bank Loan Officer(s) the latest year Cash-Flow statement (if available). (the latest year pertains to the last year of your analysis)
The Bank is required to analyze all the submitted financial statements: Balance Sheet, Income statements and Cash Flow (optional) statements to make a decision about the loan applying the methodology, tools and techniques discussed in the course chapters about business loans.
All the financial statements used in analysis of the project must be enclosed in the submitted copy of the project as complete original statements inclusive of the attached notes. It will be enclosed in the appendix section of the project (hard copy only).
It is not advisable (but you may use) to use consolidated financial statements because it does not reflect the actual financial status of your company as the consolidated financial statements refer to the financial status of the mother holding company.
Your financial analysis must show the detailed equations + chosen numbers or accounts of all financial ratios used in the project analysis. The equations and mathematical work could be enclosed in the appendix section or as a footnote but not as a major part of the project analysis or presented in Excel sheet. Refer to chapter (17) in your Text Book and follow a similar display of analysis of data tables in your project.
All financial ratios and tables presented in the project must be accompanied with your analysis or comments. Any ratios or numbers provided unexplained will lose grades.
The last section in your project must present a complete summarized table of all financial ratios used in the analysis to make the final decision( as explained to you in chapter 17 in your course)
Your conclusion and recommendation sections must include a clear statement about details of the decision taken by the Bank. If loan is approved, draft details about the loan contract/agreement + covenants/collateral must be supplemented.
If the Loan is not approved, explanations need to be provided as well.
Some companies submit consolidated financial statements of their Holding companies. It is not advised to use consolidated financial statements as these are not reflective of the company that you have chosen. However, if you want to use consolidated financial statements that are related to the company of your choice, make sure that you are using consolidated financial statements for all the years of your analysis.
The selected financial statements must be as detailed as possible (not summarized) because this will help you to apply a comprehensive financial ratio analysis to make up a sound conclusion.
It is highly advised that the chosen financial statements are expressed in English, however, Arabic financial statements can also be used for your analysis provided that you are comfortable using it. However the analysis part of these Arabic financial statements must be written in English language.
Due date to submit the project is Dec 24, 2017. All projects must be typed and includes the following sections:
** Cover page
** Page stating the name of the student who worked on the different sections of the project
**Purpose of the project/paper
** Introduction about the company.
** Details about the loan application (section 1 above)
** Complete financial ratio analysis of the loan application of the company.
** Final Decision
**References (if any)
** Appendix (must include the complete financial statements used in the analysis).
You can view the rubric used to correct these projects as posted on BB.
Soft and hard copy must be submitted of the project on due date. Soft copy/hard copy will be submitted to Ms Hadeel Gandil.
Purpose of the project
The purpose of the project is to apply commercial bank management course in situation of real life. For this project, we as loan officers are going to analyze a company request for a business loan. The decision will take place according to analyzing its income statement and balance sheet. As a result, we will determine if the company is qualified enough to take the loan. At the end, the loan officers will give recommendation and suggestions to the company.
About the company
Saudi Kayan is a Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia under Commercial Registration in 12 June 2007. Saudi Kayan has a capital of 15 Million Saudi Riyals and it is an affiliate of Saudi Basic Industries Corporation (SABIC). The Saudi Kayan petrochemical complex is one of the largest in the world and is located in the Jubail Industrial City.
Saudi Kayan moved into commercial phase on 1 October 2011 and has commenced production of some specialized chemicals produced for the first time in Saudi Arabia. These products include Ethanolamines (MEA, DEA & TEA), Ethoxylates, Phenol, Cumene and Polycarbonate which will provide wide web of opportunities for the downstream industries within the Kingdom. Besides the products mentioned above, Saudi Kayan is also producing Ethylene, Propylene, Polyethylene, Polypropylene, Ethylene Glycol, Natural Detergent Alcohol, Bisphenol-A, Acetone and other products. The main competitors of Saudi Kayan are Sahara Petrochemical Company and Yanbu National Petrochemicals Company.
The Loan Application
Saudi Kayan is asking for a SR 45 million line-of-credits for a period of 18 months. This company is promising to repay the loan based on an assumption of a strong base of liquid assets, inventory and sales for the coming 3 years and an efficient management of all its expenses and short-term (current liabilities) –due to an increased demand on its products, strong pricing strategies, increased market share and high level of accounts receivable during the last 3 years which is and will reflect in increased sales and revenues.
Saudi Kayan has an outstanding loan with another bank = SR 10 million since 5 years and it matures this current year (current year is the last year of your analysis). The loan remaining maturity is end of the current year (current year is the last year of your analysis). At the end of the current year, the company must pay back SR 280,000 of its long-term debt (annual interest payments) and SR10 million (the principal amount). Saudi Kayan is unhappy with its present banking relationship.
Raghad HD:Users:Raghadkhair:Desktop:Screen Shot 2016-05-02 at 7.45.08 PM.pngHistorical Financial Statements of Saudi Kayan company (All amount in Saudi Riyal thousands)
Raghad HD:Users:Raghadkhair:Desktop:Screen Shot 2016-05-02 at 7.45.32 PM.png
Looking to the most significant accounts in the balance sheet, the loan officers going to roughly analyze the percentage among those accounts.
· The percentage of cash and cash equivalent is increasing by (3.48%) over the three years which is a positive indicator.
· Account receivables is decreasing by (2.08%) between 2013 and 2015.
· By looking at the Current assets there is an increase from 2013 (13.89%) to 2014 (16.27%), and a decrease from 2014 to 2015 (14.28%). Have an overall increase is a good indicator.
· The loan officer’s notice that Saudi Kayan total non-current assets (Fixed assets) is having slightly decrease by (2.38%) from 2013 to 2014, they compensate this decrease by increase in their current assets in 2014 by (2.38%), while there is an increase in 2015 by (1.99%). Also, it is a good indicator.
· Moving on to the current liability, the percentage shows a slightly decrease between 2013 (9.22%) to 2014 (8.53%), while there is an increase in 2015 (10.06%) which is a bad indicator for the loan officers.
· There is a slight decrease in the Total liabilities in 2014 by (0.39%) while there is a slight increase by (0.72%) so, overall it is approximately flat which means that Saudi Kayan is not highly depending on liabilities to finance their assets and operation.
· Net worth is slightly decreased by (0.33%) from 2013 to 2015 which is almost stable.
Looking to the most significant accounts in the Income Statement, the loan officers going to roughly analyze the percentage among those accounts.
· Sales revenue is fluctuated. From 2013 to 2014 it slightly increase while a sharp decrease from 2014 to 2015.This is a negative indicator that shows decline in revenue and could give the loan officers a bad impression of the company.
· There is highly increase in Cost of good sales between 2013 and 2015 by (8.66%) it is a negative indicator which means that the company is not controlling their cost efficiently.
· Selling and administrative expenses shows a bad indicators as it is increased from (3.54%) to (4.82%) within the three years.
· The loan officers start worrying about giving this amount of loan to Saudi Kayan as their results in Net loss over the past three years. There is a decrease by (2.97%) between 2013 and 2014, while there is vast increase in the losses when it reaches 2015 (15.2%). Which means that the company is facing a real financial trouble during the last year.
In depth ratios analysis:
There are seven financial ratios analysis for financial statements:
Business Customer’s Control over Expenses
These ratios measure the company’s efficiency to control their expenses, so the bank expect this ratio to decrease over the three years, if those ratios were increasing, it shows a negative indicator to the bank.
The wages and salaries/net sales ratio is slightly increasing from (0.09%) to (0.16%), Also the depreciation expenses/Net sales is overall increasing by (69.24%), however, the depreciation expense is declining over the past three years which is a good indicator. Moreover, the Cost of good sold/Net sales is increasing too while the cost of good sold is decreasing overall. In addition, the Selling and Administrative Expenses/Net Sales ratio is rising from (3.54%) to (4.82%) as selling and administrative expenses increases. An interest expense/Net sale has been fluctuating, but increased in 2015 which shows that their interest expense (financial charge) has increased in 2015 and this is shown on the income statement. Lastly, Zakat/Net Sales is fluctuating but overall is increasing as income before Zakat is fluctuating. As a result, Saudi Kayan is inefficient in controlling their expenses as all the ratios in this section are increasing.
Screen Shot 1437-07-16 at 4.08.08 PM.pngThese ratios are measured to know how managers operate efficiency in utilizing their assets to generate sales and how efficiently those sales converted to cash. The bank wants all of these ratios to increase except for the average collection period ratio.
Cost of goods/Average inventory is slightly increasing by 0.4 in the three years which is a positive indicator of the company’s management in turning their inventory into actual sales. In addition, the average collection period is decreasing overall from 111.3 days to 93 days as the number of days to collect receivables reduced which means that the management are efficient in collecting their receivables. Moreover, Net sales/Net fixed assets and the Net sales/Total assets are approximately flat as total fixed assets and total assets as somehow stable. However, Net sales/ Accounts and notes receivables are increasing. The bank noticed that the ratios are positive in this area.
Screen Shot 1437-07-16 at 4.09.15 PM.pngThese ratios indicate the profitability of the company. Marketability means the market share of the company. An increase in this ratio means that the company’s shares in the market are doing well. Thus the bank wants these ratios to increase.
Gross profit margin is decreasing by 8.66% and Net profit margin is decreasing by 12.23% in the three years, which means that the company’s profitability facing a huge reduction, especially in 2015 there is a massive loss. This means that products of the company is not selling well which is going to affect their market shares, hence the company is facing some difficulties in their shares price which explained why this area is not efficient.
Refers to the ability of the company’s earning to cover their expense. These ratios should be one or above to show that the company is fulfilling their obligations.
These ratios are weak in the past three years; even the positives ratios are below one, which means that they are not covering their expenses and their financial charges. This is because they have a negative income among the three years. As this area is not in a strong position, the loan officers would suggest to Saudi Kayan to use less debt but more owner’s equity to finance itself by issuing more stocks, and find ways to increase its income.
These ratios reflect the company’s ability to raise cash to pay off its short-terms debts obligations. The bank officers want these ratios to increase reasonably to avoid opportunity cost.
The current ratio and the Acid test ratio are facing instability with a decrease in 2015. The current liability decreased from 2013 to 2014 by SR 373,909, while the current asset increased by SR 578,531, which led to the raise in the ratios. On the other hand, the drop in the ratios goes to the increase in the current liability by SR 386,839, and the decrease in the current assets by SR 1,333,371 from 2014 to 2015. Net working capital has fall in 2015, however, their current liability are covering their current assets since they got a positive numbers. Moving to the Net liquid assets, it shows a huge increase generally. The company in a good situation among these ratios as their current assets is able to cover their current liability, although the loan officers are worried about the company as their ratios are declining which add additional risk to their liquidity position.
These ratios show the company’s ability to generate net income after all their expenses and other relevant costs incurred. The loan officers and the company itself want these ratios to increase as they measure the company’s profitability, which is the main purpose of any company, otherwise there is no hope for the company.
Since the company got a negative income among the three years, all of the profitability ratios are declining. In addition, the total assets, net worth, and the total sales are not generating earnings. As a consequence, this area is extremely miserably. So, the loan officers suggest that the loan could be granted by sufficient collateral; however, it is considered a weak substitute for earnings and cash flow in repaying loan.
These ratios show how much the company is using debt to finance their capital. The more debt financing a company uses, the higher its financial leverage. A high degree of financial leverage means high interest payments, which negatively affect the company’s earnings per share. So, the loan officers want these ratios to decrease.
The leverage ratio is approximately flat with a slight increase in 2015 with almost 0.70 Halala of every 1 Riyal in asset financed through debt. This indicates that the company’s strategy towards its debt to equity ratio has not heavily changed in the past 3 years, which tell us that the company’s preference is to finance its assets through debt rather than equity. The capitalization ratio describes the company’s capital structure or its method of supporting its operations and growth. A common theme in the financial leverage ratios is the company’s preference of debt, which is not a good sign of financial fitness.
Summary of the key Financial Ratios
The loan officer’s noticed that, there is one out of seven areas is good which is operating efficiency as Saudi Kayan managers are operating efficiency in utilizing their assets to generate sales and use those sales to be convert it to cash. Moreover, there is another area out of the seven with an acceptable results which is liquidity ratios; which shows that Saudi Kayan is in a good situation, as their current assets are able to cover their current liability, although the loan officers are worried about the company as their ratios are declining which add an additional risk to their liquidity position. On the other hand, the remaining of the ratios are inefficient.
The bank have realized that Saudi Kayan most ratios has a huge declined especially in 2015 which could be explained by the economy of Saudi Arabia as it’s currently undergoing a mild recession due to the drastic drop in oil prices. The effect of low oil prices has affected the market as whole and various industries have declined as a result, other factors have negatively affected the economic status of the country.
The bank loan officers have decided to give the loan to Saudi Kayan, however, there will be many provisions and conditions.
1) The loan officers are going to lengthen the line of credit to be 10 million SAR for six months. If all payments on this credit are efficiently made and there is no worsen in the Saudi Kayan’s financial position, therefore, so they can renew the credit line on semiannually basis.
2) All their fixed assets in addition to 80% of their account receivables and 50% of their inventories will secure any drawings against the loan. Also, the loan officers reduced the loan amount because they want Saudi Kayan to depend more on the equity side than taking more debts.
3) Interest payments will be assessed monthly.
4) Saudi Kayan have to keep deposit with the bank equal to 30% of the loan amount that is drawn and 7% of any unused portion of the loan.
5) The loan officers require monthly reports of Saudi Kayan’s sales, expenses, net income, fixed assets, account receivables, inventory level. Besides, the loan officers require quarterly audited financial statements.
6) If Saudi Kayan wish to go into merger agreement/ joint venture for any reason, the company approach any other bank for additional loan or any further adjustment could affect the repayment of the loan, sales of assets and liquidation, or any changes occur in the management team of Saudi Kayan company, the bank must give its approval in advance.
7) The company must maintain at least their level of the current operating efficiency in addition to reasonably increase in their liquidity ratios and decrease the financial leverage ratios.
8) Any significant changes in the Saudi Kayan’s financial position must be reported to the bank directly.
9) Any failure to comply with these covenants or failure to make payments on time will cause the loan to be immediately due and terminated.
The Petrochemical industry is one the most complex sectors in the world where it is quite difficult to enter the market and be well positioned. Despite its relatively recent inception, Saudi Kayan was able to perfectly position itself in the market thanks to its part ownership by SABIC, which is the fourth largest chemical producer in the world. SABIC, which is 70% owned by the government of Saudi Arabia, is a large contributor to the Saudi GDP and plays a great role in the development of the new oil-free era. The Saudi government’s vision of the oil-free future entails heavily investing in non-oil industries including Petrochemicals. Saudi Kayan’s position in the market, which is driven by its relationship with SABIC and other governmental agencies such as the Ministry of Petroleum and Mineral Resources, will allow the company to flourish and expand in upcoming years and exploit any forthcoming opportunities. This positive outlook for the company offsets its mediocre performance and provides comfort over the company’s ability to solvency. By granting the company the loan the bank is able to develop a business relationship with the company, one that will entail many other arrangements and further business between the two entities. The bank can also be a part of the new movement and development occurring that industry through Kayan by gaining the company as a customer. The company’s performance and ratios will dictate the interest charges to be paid on the loan in order to mitigate the risks of default. For those reasons and more, the loan officers see that granting the loan to Saudi Kayan is the optimal decision as one of the bank features is to “never say no to any customer”.