Financial performance Evaluation of NBB 1

FINANCIAL PERFORMANCE EVALUATION OF NBB

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 Financial performance Evaluation of NBB 2

Table of Contents

Introduction......................................................................................................................................3

Profitability......................................................................................................................................3

Asset Valuation.......................................................................................................................3

Deposits..................................................................................................................................4

Capital.....................................................................................................................................4

ROA and ROE........................................................................................................................5

Net Interest Income and Net Interest Margin.........................................................................6

Geographical Location and Profitability Performance...........................................................7

Business Risks.................................................................................................................................7

Risk Identification..................................................................................................................8

Credit Risk.....................................................................................................................8

Operational Risk............................................................................................................8

Market Risk...................................................................................................................9

Risk Management..................................................................................................................9

Risk Mitigation....................................................................................................................10

Regulatory Policies........................................................................................................................10

Conclusion.....................................................................................................................................11

Bibliography..................................................................................................................................12
 Financial performance Evaluation of NBB 3

Introduction

Financial performance evaluation enables businesses to generate knowledge that supports

their evidence-based decision-making processes. Specifically, the evaluation procedure allows

these companies to comprehend their performance, market position, and stability. External users

also depend on financial analysis procedures in identifying investment opportunities and possible

organizational risks (Henry et al., 2012). The analysis procedure enables experts to convert

corporate financials into easily understandable ratios and percentages. The analysis procedure

provides accurate and understandable details about an organization’s standing financial aspects

like overall profitability, liabilities, revenue, assets, expenses, and equity. In this case, the

financial performance evaluation provides information about the performance and condition of

the Bahrain-based National Bank of Bahrain (NBB).

Profitability

Asset Valuation

No. Year Total Assets (BHD Total Liabilities (BHD Net Assets/ Shareholders'
billion) billion) Equity (BHD billion)

1 2020 4.3614 3.8345 0.5269

2. 2021 4.5356 3.9996 0.5360

Table 1: The NBB Asset Valuation

Table 1 indicates that total assets increased from BHD 4.361 billion to BHD 4.536 billion

between 2020 and 2021. In particular, the bank experienced a 4.0% increase in total assets

between December 2020 and December 2021 because of the growing demand for its loan

products (Palepu et al., 2020). Ensuring that advances and loans constituted around 52.8 percent
 Financial performance Evaluation of NBB 4

of total assets enabled the bank to maintain a properly diversified asset profile (NBB, 2021). The

banking institution further depended on treasury bills in improving its liquidity ratio between

2020 and 2021. The growth in net asset value demonstrates an increase in the market value of

NBB’s investment securities within this period.

Deposits

Year 2021 2020

Loans and Advances (BHD billion) 2.3958 2.1731
Customer Deposits (BHD billion) 3.1842 3.0843
Loan-to-Deposit Ratio 75.24% 70.45%
Table 2: Loan-Deposit Gap

Table 2 above indicates that customer deposits for the NBB increased from BHD 3.0843

billion in 2020 to BHD 3.1842 billion in 2021. The financial performance data indicates that the

banking institution successfully increased customer deposits within this period. Similarly, Table

2 indicates that the bank’s loans and advances increased from BHD 2.1731 billion in 2020 to

BHD 2.3958 billion in 2021 (NBB, 2021). Nonetheless, the progressive growth in the NBB’s

loan-to-deposit ratio (LDR) from 70.45% in 2020 to 75.24% in 2021 indicates that its liquidity

improved significantly within the 5-year period (NBB, 2021; Disalvo & Johnston, 2017). Hence,

the financial performance data suggests that customer deposits served as a crucial funding source

for the bank in 2020 and 2021.

Capital

Year 2021 2020

Equity-to-Asset Ratio 0.118 0.121
Debt-to-Equity Ratio 7.5 7.3
Table 3: Capital
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The financial performance data shows that NBB’s capital and shareholders' equity

increased in the 2020-2021 period. For instance, Table 1 indicates that shareholders' equity grew

from BHD 526.90 million in 2020 to BHD 536.0 million in 2021 (NBB, 2021). In particular, the

table indicates that shareholders’ equity in this bank increased by 1.72% between December

2020 and December 2021 (NBB, 2021). The increase is associated with the growth in NBB’s

capital and earnings due to technological improvement and a brand-strengthening approach

(Helstrom, 2023). Factors that have enabled NBB to maintain a high CAR are off-balance sheet

exposures, effective risk management tactics, and a high capital base. In particular, the bank has

off-balance sheet commitments like derivatives and unused commitments.

ROA and ROE

Year 2021 2020

Return on Asset (ROA) 1.2 1.2
Return on Equity (ROE) 10.5 10.1
Cost-to-Income Ratio 49.0 47.1
Table 4: NBB Earnings Ratios

The ROE value shows that NBB utilized shareholders’ money efficiently in optimizing its

profitability. A consistently high ROE proves that the financial institution made good investment

decisions in the 2020-2021 period. This indicates the ROE increased slightly between 2021 and

2020 due to COVID-19 economic aftershocks. The performance data indicates that the company

was a bit far from attaining a good ROE of 15-20 percent. Still, the ROE increase from 10.1% to

10.5% between 2020 and 2021 proves that the bank has become an attractive investment target in

the Middle East. The ROE growth indicates that the professional team utilized effective financial

management strategies in promoting continuous growth in the bank’s profits. A high ROE also

suggests that NBB depended on a good earnings retention strategy in maintaining a good capital
 Financial performance Evaluation of NBB 6

base during this period. The ROE increase further suggests that the company successfully

generated income from its retained earnings.

However, the bank’s ROA remained constant during this period due to the challenge of

generating adequate revenue. The table indicates that the ROA stuck at 1.2 percent between 2020

and 2021 due to the demand decline for bank services in the market after the pandemic. ROA

demonstrates a company’s capacity to generate revenues and profits using its assets. Experts

consider a ROA value in the 10-15% range as an indicator of excellent financial health in

business organizations (Rockwell Automation, 2023). A ROA of under 5% demonstrates poor

financial health in non-asset-intensive companies like banks. In this case, a ROA indicates that

the bank had poor financial health in the 2020-2021 period despite maintaining profitability.

Notably, an ROA of 15% and below indicates that a business has a serious challenge in

generating profit from its assets (Rockwell Automation, 2023). The profit generation problem for

NBB is associated with the peak COVID-19 situation between 2020 and 2021. Notably, the

management should focus on addressing its NBB’s expansion and liquidity concerns to attract

investors.

Net Interest Income and Net Interest Margin

Year 2021 2020

Net Interest Income (BHD million) 120.5 116.0
Net Interest Margin 3.1% 3.0%
Table 5: Net Interest Income and Net Interest Margin

Net Interest Income (NII) showcases the financial health and profitability of a financial

institution. Table 5 indicates that NBB’s NII increased continuously from BHD 116.0 million in

2020 to BHD 120.5 million in 2021. The figures imply that the Bank’s NII increased by 3.9%
 Financial performance Evaluation of NBB 7

between 2020 and 2021. The continuous growth and stability in this metric suggest that the bank

has been making profits and funding its operations sustainably within this period. The increase in

Net Interest Margin (NIM) from 3.0% in 2020 to 3.1% in 2021 shows that the bank recovered

quickly from the pandemic. A positive NIM proves that NBB invested efficiently in the 2020-

2021 period, which helped in increasing its profitability. The value indicates that the bank’s

management made good investment decisions within that period.

Geographical Location and Profitability Performance

The NBB is a Manama-based banking company that provides banking services and

products in Bahrain, Saudi Arabia, and the UAE. Product diversification, customer-centric

approach, and international operation allow the NBB to generate approximately BHD 150.90

million and BHD 55.0 million in annual revenues and profits, respectively (WSJ, 2023). Today,

the banking institution has a huge market share in Bahrain’s banking market and runs numerous

ATMs and branches locally. Current statistics indicate that the NBB operates 100 ATMs and 27

branches in Bahrain. However, the international and regional expansion plan has enabled the

bank to optimize its revenues and profitability. For instance, the bank operates 2 ATMs and 2

branches in the UAE and additional branches in the KSA.

Business Risks

Current dynamics in business environments, technologies, and regulations have increased

the intricacy of the financial sector. Technological advancement has created new opportunities

and challenges for banking institutions. Technological changes have forced banks to adopt new

tactics to address emerging external and internal threats. Basically, various changes happening in

the current market have forced businesses to strengthen their risk management systems.

Maintaining an active and prudent risk management program has allowed the banking institution
 Financial performance Evaluation of NBB 8

to maintain a balance between protected income and risks. The risk management procedure for

NBB comprises steps like risk identification, risk assessment, and risk mitigation.

Risk Identification

Credit Risk

Today, Bahrain-based banking institutions manage risks like operational risk, credit risk,

and market risk. Credit risk refers to the potential financial loss resulting from a client’s inability

to adhere to a credit facility’s conditions. Experts measure the credit risk based on counterparties

for off-balance sheet and on-balance sheet elements. The NBB considers the credit risk to be a

significant cost that can be positioned against income. The management team considers that

credit risk threatens NBB’s profit due to its resulting financial losses. The financial loss happens

once a borrower defaults in repaying a loan provided by the bank. Failure to repay loans prevents

banks from generating profit from loans and recovering a loan’s principal. The situation means

that a bank incurs losses from funds that are invested as loans, which discourages investors and

inhibits the financial institution’s growth process.

Operational Risk

Operational risk represents the potential for failing to accomplish organizational goals

due to failures and inadequacies in organizational systems, human resources, and internal

processes. The risk results from external events and daily organizational operations that impact

multiple areas of an organization. Specifically, factors that create this risk in businesses are

physical events, criminal activities, and employee errors (NBB, 2021). For instance, fraudulent

activities create a major disruption in a bank’s operations due to the accompanying legal tussles.

Experts observe that the risk affects all organizational elements and results from external events
 Financial performance Evaluation of NBB 9

and daily business operations. NBB’s management considers that this can create a major

disruption in its operation, which leads to complications like revenue decline, reputational

damage, and investor discouragement.

Market Risk

Market risk refers to the potential losses resulting from uncertainties in natural, political,

and economic environments. The market forces normally create dynamism in factors like

commodity holdings, interest rates, service/product prices, and foreign exchange. Dynamics in

factors like foreign exchange, service/product prices, and interest rates make banks vulnerable to

financial losses (NBB, 2021). For instance, price volatility normally results from unforeseen

forces that affect the financial market. The risk impacts financial instruments like derivatives,

stocks, currencies, commodities, and currencies. Financial analysts consider that the decline in

financial products’ market value exposes banks to challenges in optimizing their revenues and

profits.

Risk Management

The risk assessment procedure provides comprehensive details about organizational risks

and their impacts. The evaluation strategy also enables NBB’s professional team to identify the

impact of specific risks on vulnerable sectors and clients. For instance, the banking institution

relies on the 16-point scale in evaluating the borrower’s behavioral characteristics and financial

strength to minimize credit risk (NBB, 2021). Assigning risk rates to individual borrowers allows

the bank to develop proper monitoring plans to prevent borrower default. The bank also relies on

the bank to utilize risk event losses in assessing the operational risk in relation to capital

management. The assessment procedure is based on the knowledge that operational risk creates

financial losses that affect financial institutions’ capital and profit margins. The professional team
 Financial performance Evaluation of NBB 10

further depends on the VaR (value-at-risk) method in evaluating its market risk. The evaluation

helps in quantifying the portfolio’s and stock’s chances for financial loss.

Risk Mitigation

The risk mitigation strategy offers NBB an opportunity for assessing and reducing

impacts of specific risks. The statistical result already indicates that the bank had a debt-to-equity

ratio of above 2-2.5, which implies that it had high credit risk in the 2017-2021 period. The

situation creates the need to implement a risk reduction strategy to mitigate the risk. In this

regard, a financial report indicates that the NBB performs an annual credit rating for its clients to

determine their likelihood of defaulting on loans. Stringent controls, conservative policies,

competition, and technological changes makes the market risk high for banking institutions. In

this regard, NBB depends on a standardized procedure in reducing the market risk and protecting

its profitability interests (NBB, 2021). Noticeably, NBB also depends on clearly documented

policies in governing its trading activities. The bank’s workforce adheres to comprehensive

regulations on product/service quality and stakeholders’ safety The assessment indicates that the

bank has a high operational risk that can be reduced using the ORMF (operational risk

management framework). Noticeably, the NBB’s professional team depends on the ORMF

(operational risk management framework) in designing effective internal controls and

determining key risk indicators (NBB, 2021). ORMF encourages collaboration between multiple

departments for this banking institution in managing operational risk.

Regulatory Policies

Basel III comprises multiple regulations that facilitate risk mitigation in the global

banking industry. The regulation expects banks to maintain specific financial ratios to prevent

economic problems that emerge when banks take many risks. Notably, NBB adheres to various
 Financial performance Evaluation of NBB 11

Basel III regulations, including the non-risk-based leverage ratio and minimum capital

requirements (King & Tarbert, 2011). The non-risk-based leverage ratio specifies the minimum

leverage ratio that limits banks’ access to leverage. The regulation requires banks to maintain a

leverage ratio of approximately 3 percent to ensure compliance with risk-based capital

requirements. The minimum capital requirement legislation requires financial institutions to

maintain buffer capital to improve their capacity to overcome financial stress. Specifically, the

legislation requires banks to sets the minimum buffer capital requirement at 7% of common

equity to overcome unforeseen financial constraints.

Conclusion

Financial performance assessment allows companies to make informed decisions and

manage different risks. The financial performance analysis demonstrates the NBB’s performance

and condition. For instance, the financial performance evaluation procedure indicates that the

bank’s total assets grew from $11.569 billion to $12.031 between 2020 and 2021. The asset

growth process within this period is associated with the increased demand for the bank’s

products and services. Brand strengthening and technological upgrade procedure are associated

with capital, profitability, and shareholders' equity increases in the 2020-2021 period. The

business further adopted effective risk management measures to protect stakeholders from

operational, credit, and market risks.

 Financial performance Evaluation of NBB 12

Bibliography

Disalvo, J. and Johnston, R., 2017. The Rise in Loan to Deposit Ratios: Is 80 the New 60.

Economic Insights, 2(3), pp.18-23.

Helstrom, K., 2023. Two Possible Reasons for an Increase in Stockholder's Equity. Chron.

https://smallbusiness.chron.com/two-possible-reasons-increase-stockholders-equity-

58014.html

Henry, E., Robinson, T.R. and Van Greuning, J.H., 2012. Financial analysis techniques.

Financial Reporting & Analysis, pp.327-385.

King, P., & Tarbert, H., 2011. Basel III: an overview. Banking & Financial Services Policy

Report, 30(5), 1-18.

Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis and

valuation: Using financial statements. Boston: Cengage AU.

Myšková, R. and Hájek, P., 2017. Comprehensive assessment of firm financial performance

using financial ratios and linguistic analysis of annual reports. Journal of International

Studies, volume 10, issue: 4.

NBB, 2021. Closer to you Closer to our future: Annual Financial and Sustainability Report

2021. Manama: National Bank of Bahrain.

Rockwell Automation. (2023). Return on assets (ROA). Fiix.

https://www.fiixsoftware.com/maintenance-metrics/what-is-return-on-assets/
 Financial performance Evaluation of NBB 13

WSJ., 2023. National Bank of Bahrain B.S.C. The Wall Street Journal.

https://www.wsj.com/market-data/quotes/BH/XBAH/NBB/company-people