Structure of the Banking Sector in Pakistan

 

The financial sector in Pakistan is comprised of Scheduled Commercial Banks, which include nationalized, foreign and private banks; and Non-Banking Financial Institutions (NBFIs) which include Development Finance Institutions (DFIs), Investment Banks, leasing companies, modarabas, and housing finance companies.

 

Scheduled Banks and NBFIs (excluding modarabas and leasing companies) are both regulated by State Bank of Pakistan’s (SBP) Prudential Regulations although through different wings and are required to meet different regulatory requirements such as capital and liquidity reserve requirements.

 

Commercial banks engage in activities that mostly cater to short term working capital requirements while NBFIs cater to medium and long-term financing needs.  Therefore NBFIs are barred from engaging in commercial banking activities.  However in September ’97 the SBP allowed commercial bank to undertake long term project lending. Among the scheduled banks, only Pakistani commercial banks are listed.

 

 

 

History of the Banking Sector

 

1940s

Prior to partition in 1947, branches of British banks dominated banking in Pakistan.  The first domestic banking institutions emerged in the 1940s, immediately preceding or shortly after Pakistan’s independence from Britain.  These institutions include Australasia Bank (today: Allied Bank Ltd. or ABL), Habib Bank (HBL), Muslim Commercial Bank (MCB), and the National Bank of Pakistan (NBP).  Except for the NBP which was wholly government-owned, prominent merchant families established the other three banks.

 

1948

The SBP or State Bank of Pakistan (the central bank) was formed after Partition.  It assumed the supervisory and monetary policy powers of the State Bank of India.

 

1955

The Government issued the State Bank Ordinance, explaining the functions of the state bank in the emerging Pakistan.

 

1959

United Bank Limited (UBL) formed.

 

1960/70s

1960-65: During the second five-year plan (1960-65), the SBP opened six new offices.  The number of other bank branches increased from 430 to 1,591 over the period.  Total deposits increased from Rs2,943mn to Rs6,883mn, while total advances increased to

Rs5,759mn from Rs1,458mn.  During the period, comprehensive banking laws were formulated.

 

1965-70: During the third five year plan (1965-70), the total number of bank branches increased to 3,133, with a 91% increase in deposits and a 64% growth in advances.

 

The emergence of a number of specialized development finance institutions (DFIs) such as Industrial Development Bank of Pakistan (IDBP) and the Agricultural Development Bank (ADB).  These DFIs were either controlled directly by the state or through the SBP, and were intended to concentrate on specific priority sector lending.

 

 

 

 

1974

The government of Zulfiqar Ali Bhutto nationalized all domestic commercial banks.  The Pakistan Banking Council (PBC) was established, which assumed the role of a bank holding company but with limited supervisory powers.  However, PBC was dissolved in1997, leaving the SBP as the sole regulatory authority for banks and financial institutions in Pakistan (leasing companies and modarabas are now regulated by the Corporate Law Authority).  Nationalization of the banking sector led to significant government interference and resulted in directed lending to pet projects.  The branch network of the NCBs also proliferated in an effort to provide banking services to all regions/territories of the country, often with disregard to the viability or feasibility of such expansions.

 

1991-92  

1991: After the opening up of the economy, the Sharif Government introduced the second set of banking sector reforms.

 

Deregulation of the financial sector and capital markets led to mushrooming growth of banking companies in the private sector.  Several big industrial groups set up their own banks, which to date remain relatively small compared to the NCBs and other larger foreign banks.

 

1992: MCB privatized by Sharif Government.

 

1992: Allied Bank Limited was privatized.  Employees of the bank took it over matching the highest bid received by the Privatization Commission.

 

1992: Nawaz Sharif introduced a yellow cab scheme that took Rs10bn from the local banking sector.

 

1995

The SBP cancelled the privatization of United Bank, which was bought by a Saudi based group.

 

1996

The Privatization Commission called for bids for the privatization of HBL.

 

1996 

Financial sector reforms were introduced by the caretaker government of Meraj Khalid.

 

1997

Nawaz Sharif took steps to implement banking sector reforms.

 

 

Banking Sector Reforms in Pakistan

 

Early Banking Sector Reforms

 

The first Bhutto government introduced a comprehensive set of restructuring measures in 1971.  These reforms were aimed at:

• Widening the supervisory powers of the SBP;
• Increasing capital adequacy standards;
• Introducing credit ceilings;
• Establishing an institution that would monitor the credit requirements of both the public and private sectors.

 

These reforms were ineffective and short lived since even before they were fully implemented, the then Bhutto Government issued the 1974 Nationalization Act.  This act was implemented to widen the dispersion of credit and increase its availability to the agricultural sector.

 

With the replacement of professional bankers with GoP appointees, the banks quickly lost their growth momentum following nationalization.  Although the GoP was able to extensively expand its branch network of public sector banks during the early 1980s, this expansion was economically unviable leading to declining profits for the banks.  Over the same period the banks inexperienced management contributed to an increase in poor credit expansion and non-performing assets.  The limited regulatory authority of the SBP during the period led to a lack of disclosure of the banking sectors poor performance.

 

Following the partial restoration of democracy in Pakistan in 1985, the newly elected government manipulated the banks to serve its own ends in the assemblies.  Under this process, loans without adequate security were sanctioned to members to set up economically unviable industries.  This led to an increase in the level of non-performing assets for banking companies.

 

Banking Sector Reforms of the early 1990s

 

After coming to power, Nawaz introduced a comprehensive set of economic reforms that included the internationalization of capital markets and the opening up of the financial sector to private sector participation.  The key areas were capital adequacy standards, provisioning for non-performing assets, the partial independence of the central bank, opening up of foreign currency accounts by Pakistani nationals, better risk management and procedural details for T-bill auctions (OMO details).  Along with these reforms, the government also issued licenses for the opening of ten new banks in the private sector.  The Sharif government also initiated the privatization process in the country.

 

These reforms failed to boost the banking sector significantly due to various factors.  The factors included unstable macroeconomic conditions, financially poor state of public sector banks and the notorious yellow cab scheme.  The reforms were further undermined by the restricted freedom of nationalized commercial banks and the limited power of the SBP that prevented it from successfully implementing its prudential regulations.

 

The reforms did however change the landscape of the local banking sector.  The lack of market orientation of the LCBs provided the NEPB with an opportunity to firmly establish themselves in the market.  Following the granting of permission to open foreign currency accounts, the dollarisation of the economy (foreign currency deposits to total domestic liquidity) increased to 14% from 2.6% in1991.  This dollarisation and lack of local competition led to heavy investments by foreign banks in Pakistan.

 

Banking sector reforms of 1996-1997

 

On 21 January 1997, the caretaker government promulgated 3 Ordinances that were later legislated by the Parliament.  These legislations relate to the Bank Nationalization Act 1974, Banking Companies Ordinance 1962 and State Bank of Pakistan Act 1956 and encompass the following reforms:

 

• The SBP will now have singular authority to formulate and monitor monetary and credit policies in line with recommendations of the Monetary and Fiscal Policies Coordination Board.

 

• The SBP has also been granted the authority to strictly monitor the limits set by the Board for borrowing by federal and provisional governments.

 

 

• The Board of SBP will approve the credit requirements of the private sector.

 

• The SBP will be the only regulatory body (the Pakistan Banking Council has been abolished).

 

• The SBP has been empowered to nominate the President and Board of Directors of nationalized banks. All private banks are also required to seek approval from the SBP with regards to nomination of their Chief Executives.  All appointments made by the SBP will be valid for three years.  The appointee can only be removed on charges of misconduct.

 

• The federal government has been stripped of its powers to issue instructions to banks. Also, all notifications issued by the federal government with regards to leasing corporations, leasing companies and modaraba companies have been rescinded.

 

Apart from the above 3 Ordinances, other measures introduced during 1996-97 include the following:

 

• Banks have been asked by the SBP to improve their capitalization in order to improve their Tier 1 Capital Adequacy Ratio to the internationally accepted 8%. However, no specific deadline has been given for this purpose.

 

• An Ordinance has been passed for establishing a Resolution Trust Corporation of Pakistan (RTCP) as a temporary entity to acquire the infected portfolios of NCBs and DFIs. This is similar to the trust funds established in the 1980s to bail out the American Savings and Loans.  However, the exact modus operandi of RTCP’s operation has not been finalized as yet.

 

Implications of the latest banking sector reforms

 

With this latest set of reforms the SBP now has the authority to restrict government borrowing used to fund the budget deficit.  This will result in lower interest rates and a significantly larger share of credit availability for private sector borrowing.  By stripping the governments powers from interfering in a banks operations these reforms will substantially reduce political influence/intervention in the banking sector leading to improved credit quality.

 

Entrusted with the power to nominate the management of banks the SBP has appointed private sector professionals to enforce stricter credit policies and cut overheads with the aim of making NCBs more attractive for privatization.

 

The government has announced a set of new foreclosure laws to expedite the recovery of defaulted loans without having to engage in a lengthy court process.  The SBP has completely revamped the disclosure laws and introduced a highly informative new format for presenting annual accounts of banks.

 

 

Regulatory Framework and Disclosure Laws

 

In 1991, following the opening up of Pakistan’s economy, the World Bank approved a Financial Sector Adjustment Loan (FSAL) to help fund the structural changes in the Pakistani finical sector.  However, this loan carried some covenants.  These forced the State Bank of Pakistan to introduce Prudential Regulations for the banks.

 

Important Prudential Regulations

 

Limits of a bank’s exposure to a single person

The total outstanding financing facilities by a banking company to any single person shall not at any point of time exceed 30% of the bank’s unimpaired capital and reserves, subject to the condition that the maximum outstanding against fund based financing facilities do not exceed 20% of the unimpaired capital and reserves.  In the case of branches of foreign banks operating in Pakistan, the maximum exposure limit of 30% shall be calculated on the basis of their assigned capital.

 

Contingent Liabilities

Contingent liabilities of a bank shall not exceed at any point of time 10x its paid up capital and general reserves free of losses.  In case of branches of foreign banks operating in Pakistan, capital will mean capital maintained under section 13 (3) of the Banking Companies Ordinance 1962.  Contingent liabilities that arise on account of guarantees against guarantees liabilities.  For the purpose of clarification, a guarantee which does not appear in the book maintained in Pakistan by a foreign bank and if invoked does not require the said bank in Pakistan to honor the same, shall not be counted towards determining exposure for the purpose of the Prudential Regulations.

 

Financing Shares of Companies

No bank shall provide unsecured credit for the subscription of the shares floated by a public limited company.  No bank shall provide any fund or non-fund based facility against the security of shares of a non-listed company.  Financing against the shares of a public limited listed company shall carry a margin ranging from 20-50% for different cases.

 

Provisioning for loss and other assets

The provisions are to be made at the specific percentage on the ‘net difference’ (i.e., the difference between the outstanding balance of principal and amount of liquid assets realizable without recourse to a Court of Law).  The unrealized mark up and interest on classified facilities is to be kept in a Suspense Account and not to be credited to an Income Account.  The bank shall provide the following provisioning in respect of its risky assets:

 

Reserve Requirements

 

Apart from the Prudential Regulations, banks are also required to maintain the following reserve requirements:

 

Cash Reserve	5% of FC Demand and Time Liabilities and 3.5% of LC Demand and Time Liabilities must be kept as cash reserves with the SBP
Statutory Liquidity Reserve	15% of Demand and Time Liabilities must be invested in government securities and/or NIT units

 

Disclosure Laws

 

The SBP has almost completely overhauled the disclosure laws in Pakistan.  Starting 31 December 1997, all banks would be required to provide detailed information about their assets and liabilities such as: sectoral allocation of advances, maturity profile of both assets and liabilities, details of NPLs and the reserves held against them, foreign currency exposure, and asset structure.  These new disclosure laws will significantly enhance the transparency of banks’ operations and improve the analysis of banking companies.

 

 

Large Commercial Banks (NCBs and Denationalized Banks)

 

NCBs are still the markets dominant players, controlling 51% of the entire banking sector deposits and 50% of advances as of 31 Dec 1996.  There are currently three NCBs remaining National Bank of Pakistan (NBP), United Bank Ltd. (UBL), and Habib Bank Ltd. (HBL), following the privatization of Allied Bank and Muslim Commercial Bank (MCB) in which the GoP still maintains a significant stake.

 

NCBs have the most extensive branch networks extending into both the rural and urban areas of Pakistan.  This provides them with a competitive advantage over the NEPBs and foreign banks.  The extensive branch network has allowed NCBs access to a large base of stable and low cost deposits.  However, the maintenance of extensive branch networks has led to high operational cost and a large number of loss making branches causing NCBs to remain relatively less profitable than their competitors.  The loss making branches are being identified and shut down as the NCBs prepare for privatization.

 

As victims of political interference NCBs have acquired a large share (roughly 58%) of total loan defaults.  Inefficient operations and high loan defaults have resulted in huge losses, decline in shareholder equity and a low return on earning assets.  Capital adequacy ratios range between 2-5% for NCBs compared to over 8% for NEPB banks and the 8% needed to meet BIS requirements.

 

 

Deposits by banks                                               Advances by banks

 

 

 

NCBs becoming more competitive

 

The restructuring of NCBs to prepare them for privatization has involved the appointment of private sector banking professionals as heads of these institutions.  Positive changes that the new management has implemented involve:

 

• Lower interest rates and higher customer orientation allowing NCBs to become more competitive.
• The closure of loss making branches with the voluntary retirement of employees.
• Speeding up of the loan recovery process by NCBs with the shortfall being covered thru NPL provisioning. HBL has put aside Rs5.6bn for doubtful debts for the year ended 1996 and retiring 1,079 employees.  The bank intended to cut its work force by 25% by the end of 1997.

 

Denationalized Banks

ABL, MCB and Habib Credit and Exchange Bank Ltd. (HCEBL) are the first 3 banks to be denationalized.

 

• ABL was privatized in 1991 in an employee buy out deal. The government still owns 49% of its shares.
• MCB was privatized in 1992. A 51% stake of MCB was sold to National Group.  The government still retains a 24% stake in the bank.
• HCEBL, a subsidiary of HBL, was privatized in 1997. 70% stake of HCEBL was sold to an UAE-based Al Nahyan consortium.  The government still owns 20% HCEBL.

 

Of the 3 banks, only MCB is listed.  Both MCB and Allied have shown a strong performance since privatization.  From 1995-97 MCBs advances and deposits have increased at a CAGR of 22%.  However, these banks have also inherited many problems.

 

MCB was left with a Rs5bn bad debt portfolio (20% of outstanding advances in1991).  In 1996 MCB put aside Rs1.81bn to account for the shortfall in loan loss provisions.  Apparently, MCB had also decided to shut down unprofitable branches to cut costs.

 

Allied Bank’s post privatization phase has been marked by severe management problems, with successive management’s alleged of being involved in corruption.

 

Foreign Banks

 

Foreign Banks comprise 24% of total advances within the banking system, but as a percentage of total profitability are far ahead.  On an after tax basis, foreign banks constitute 70% of the total banking sector profit (excluding profits of NCBs which incurred huge losses in 1996). Traditionally, the foreign banks have focused on short-term trade finance, targeting mainly low risk blue chip clients and high net worth individuals.  More recently, foreign banks have also expanded into merchant banking, capital market operations, and consumer/retail banking.  Foreign banks have been extremely successful in capturing a major market share of consumer banking business, especially that of credit cards.  Head office support in terms of international network and technology has enabled the foreign banks to become important players in the corporate and consumer-banking arena.

 

With the turnaround possibilities of LCBs foreign banks are likely to face increased competition in the near future.  With their international branch network and access to low cost funds LCBs will be in a position to compete directly with FBs.  Although, pending WTO legislation could ease restrictions on FBs operating in Pakistan.

Sectoral CA – Newly Established Private Banks (NEPB)

 

Financial Analysis (Appendix 1)

 

Overview

 

The 1991 reforms facilitated the deepening of the financial sector by allowing private sector banks to operate in Pakistan.  The private sector showed a keen interest and new banks were opened.

 

Most NEPBs restrict operations to short term trade-related financing, with the exception of larger private banks such as Askari and Faysal that have limited long term exposure.  The larger banks typically restrict themselves to funding requirements of big blue chip clients.  While this results in lower credit risk, it is at the expense of lower interest margins.  This group of banks directly compete with Foreign Banks for retail clientele.

 

The small-medium sized corporates are a captive niche market for NEPBs.  Large Commercial Banks, which have undergone significant restructuring over the last couple of years, will soon be in a position to directly compete with NEPBs for small-medium sized companies with their extensive branch networks.  Since capitalization is an essential pre-requisite to make use of the opportunities in the middle market, small banks with a relatively small capital base are likely to face stiff competition from bigger banks.

 

Assets

 

NEPBs showed moderate asset growth during 1997 with total industry assets reaching a figure of Rs.217bn.  Assets grew by 23% (Rs.41bn) over the previous year fueled by a steady influx of deposits.

 

Liquidity

 

Cash (Appendix 2)

All NEPBs experienced a substantial decrease in their cash balances during 1997.  The industries cash balances dropped by Rs.7.8bn a 40% decrease.  This decline in cash balances came about as a consequence of changes in State Bank of Pakistan (SBP) policies regarding Special Deposit Accounts (SDA) maintained with the SBP by NEPBs under its Export Refinance Scheme.

 

In the past NEPBs were required to maintain cash balances with the SBP when they borrowed from the SBP to finance exporters.  This restricted the NEPBs independence in directing the liquidity maintained with the SBP and forced them to accept the low returns yielded by the SDA accounts.

 

Under the new policies the banks no longer maintain accounts with the SBP when they borrow funds for export refinance.  Instead the SBP hands over cash to the NEPBs when they wish to participate in export refinance.  The NEPBs are then free to direct the cash towards investments that yield the highest returns on a risk adjusted basis.

 

As a compromise the NEPBs agreed to divert their excess liquidity towards investment in government securities before the SBP implemented its new policies.  This led to a surge in investments in STFBs by NEPBs that is discussed next in the investments section.

 

The substantial decline in their cash balances did not impede NEPBs abilities to meet the

SBPs Statutory Liquidity requirements (SLR) under which NEPBs are required to maintain a cash balance which at least amounts to 5% of their Demand and Time Liabilities (DTL).  The aggregate ratio of cash/DTL is around 8% leaving the NEPBs with a comfortable margin to meet SBP requirements.

 

Investments (Appendix 3)

The investments undertaken by banks surged during the 1997 fiscal year.  Most of the investment took the form of government securities specifically STFBs with the government no longer offering the option of investments in Federal Investment Bonds.  The NEPBs aggregate investment portfolio grew to Rs.61bn with investment in government securities accounting for 96% (Rs.58bn) of this investment.  Overall investments by NEPBs grew by 71% (Rs.21bn).

 

Two main factors fueled the excessive growth of investment in STFBs by NEPBs.  With large amounts of cash freed up with the abolition of SBP SDAs the banks enjoyed surplus liquidity.  Instead of maintaining a large cash balance which would yield negligible returns the NEPBs directed their excess liquidity towards STFBs from which they could earn much better returns.  STFBs are an attractive option for banks since they offer reasonable returns and are risk free.  Investments in STFBs have allowed NEPBs to maintain a high level of liquidity and minimize the cost of maintaining this liquidity.

 

The second factor that encouraged NEPBs to invest in STFBs was a slowdown in the general economy.  This slow down led to a decrease in the demand for credit in the financial markets.  With their tight lending policies many NEPBs could not match their supply of funds with the demand for funds by viable parties.  Due to this mismatch between deposit growth and advances growth NEPBs were left with excess funds that were directed towards investments in STFBs the next best option.  This is justified by the fact that during the period in which NEPBs undertook investments in STFBs, the yields on these securities were low by historical standards.

 

The SBP also played a role in restricting Advances growth by placing a ceiling on the total credit NEPB could make available in the market.  This forced the NEPBs to divert their excess liquidity into STFBs.  This policy directly contradicts the governments effort to decrease borrowing from the private sector by lowering the yield on STFBs.

 

The large investment in STFBs has lowered the yield earned by NEPBs on their earning assets. But it has also increased the proportion of short term investments on the balance sheets of these banks making their asset bases a lot more liquid.  This will prove to be extremely useful to many banks in the near future since many of them will be facing a liquidity crunch due to recent changes in SBP Foreign Currency (FC) accounts policy (discussed later under the deposits section).  These banks will have to rely on their excess liquidity to continue to fund their advances growth.

 

Asset Quality

 

Advances (Appendix 4)

The total credit expansion for a given year is determined by the National Credit Consultative Committee and outlined in the Annual Credit Plan.  The Annual Credit Plan also specifies the credit allocation for public and private sectors and the government.  However, excessive government borrowings have often resulted in credit expansion exceeding the annual target and the crowding out of the private sector credit.  NEPBs advances growth is likely to pick up during 1998 as the SBP assumes a more accommodating credit policy and restricts government borrowing to the stipulated amount.

 

Given these circumstances total industry advances showed moderate growth during 1997 reaching a figure of Rs.78bn at years end.  This constituted a growth of 38% (Rs.22bn) over the previous year.  Although advances growth was restricted by a slow economy the growth rate still improved by 11% when compared to growth in 1996.  The increase in the growth rate was induced by changes in SBP policy regarding the liberalization of credit extension restrictions for NEPBs.  Advances growth by NEPBs also faced increased competition from foreign banks that have begun to cater to small to medium sized clients traditionally serviced by NEPBs.

 

Exposure by sector (Appendix 5)

 

Sector	Exposure
Chemical and Pharmaceuticals	4.21%
Agribusiness	2.53%
Textile	34.23%
Cement	2.95%
Sugar	2.54%
Shoes and leather garments	3.25%
Financial	2.63%
Production/Transmission of energy	2.01%
Importers, exporters and retailers	2.90%

 

The textile sector (a major chunk of the country’s economic activity) continued to receive the largest share of funding from NEPBs, which have a 35% exposure in this sector.  In an effort to diversify their portfolios and spread their risk away from the textile sector NEPBs extended credit to over 30 sectors of the economy during 1997 with exposures ranging from 0.1% to 5%.  Sectors others than those that appear above which received significant funding include Automobile/Transportation equipment, Electronics and Electric appliances, Food and Beverages as well as a variety of other sectors.  Details regarding approximately 29% of the of the industries advances portfolio are not available. This portion of the portfolio is largely comprised credit extended to various parties against Foreign Currency deposit accounts held by these parties with the NEPBs.  Hence this portion of the NEPBs advances portfolio is fully secure. This section of the advances also includes insignificant amounts of credit extended to a wide variety of different sectors of the economy.

 

Advances on Non Performing Status and Provisioning (Appendix 6)

The percentage of Advances placed on non performing status by NEPB nearly doubled in 1997 with a 96% growth.  Only 5.17% of the industry advances had been placed on a non performing status in 1996 this ratio rose to 7.35% in 1997.  These numbers however do not present a completely clear picture and are slightly misleading.  The reason being that four banks (Bolan, Khyber, Faysal and Platinum) did not disclose the advances they had placed on non performing status in 1996.  Therefore the available industry figure for advances placed on non performing status in 1996 was understated.

 

NEPBs continued to undertake significant provisioning during 1997 with total industry provisions growing by 37% almost matching the 38% growth in aggregate advances.  NEPBs pursued this strategy in an effort cleanse their balance sheets and maintain the realizability of their advances portfolio.  The banks were able to carry out high levels of provisioning with the healthy profits they continued to enjoy.  Provisioning was also encouraged by the overall conservatism of the management of NEPBs.

 

As a percentage of advances placed on non performing status provisions stood at 58% for the year which was a sharp decline from the previous year when the same ratio was 83%.  These numbers are again misleading for the same reasons discussed earlier.  The 58% figure shows the highly conservative nature of the industry.  The reason being that most of the banks are confident that they hold sufficient collateral against the advances they have placed on non performing status.  Also if collateral against these advances did not exist it would be highly unlikely for the banks to face defaults on all the advances they have placed on non performing status.  The advances placed on non  performing status are computed under stringent SBP guidelines given in its Prudential Regulations and therefore are not reflective of the banks level of bad debts.  Hence it is apparent the sufficient provisioning exists to hedge NEPBs against any losses they could possibly incur from loan defaults.

 

Capital and Liabilities

Capital Adequacy

 

Equity (Appendix 7)

The level of capitalization, as measured by the Capital Adequacy Ratio, is a key indicator of a banks inherent strength to outperform others in terms of loan growth and to pay cash dividends.  With most NEPBs having CARs in excess of the mandatory 8% (BIS standards), a lack of equity does not pose a threat.  Instead with their current levels of capitalization these banks will be able to comfortably maintain their high levels of growth.

The total equity (Paid Up Capital + reserves and retained earnings) of NEPBs grew by 15% during 1997 slightly exceeding the 14% growth rate of the previous year.  The aggregate equity of NEPBs was approximately Rs.13.6bn at the end of the 1997 fiscal year.  The sectors Capital Adequacy Ratio (Equity/Net Assets) continued to decline during the year reaching 7.81%, down from 8.92% in 1996 and 9.98% in 1995.

 

The decline was brought about by various factors.  NEPBs experienced strong growth in deposits that caused their asset bases to expand and bring down the CAR due to a lack of proportionate influx of capital.  The banks also undertook aggressive provisioning during the year bringing down retained earning and hence restricting capital growth.

 

Since the calculated CAR has not been computed on a risk adjusted asset basis it is highly understated.  All assets have been weighted at the maximum 100% although the risk associated with them is far lower.  The CAR can not be computed on a risk adjusted basis due to a lack of detailed information on the industry assets.  With the CAR at 7.81% on a non risk adjusted basis it is fair to conclude that it would be far greater if it were computed on a risk adjusted basis given the highly liquid nature of the industries asset portfolio.  Therefore NEPBs would be able to comfortably meet the Bank of International Settlement (BIS) definition of Tier one capital adequacy which according to BIS risk based guidelines must equal 8% of the risk weighted assets.

 

With sufficient levels of equity present on their balance sheets NEPBs may have welcomed the decline in equity as a means to increase/maintain their return on equity which faced a downward pull with high levels of provisioning.  This strategy was clearly apparent in the financial statements of various banks in the industry.  The banks were justified in pursuing this strategy since they had maintained surplus levels of equity on their balance sheets.

 

Deposits (Appendix 8)

NEPB continued to experience strong deposit growth in 1997.  The industries deposit base grew by 35%(Rs.34.7bn) to Rs135bn which represents a slight decline in the previous periods growth rate of 36%.  The strong growth was influenced by a favorable environment for depositors brought about by government reforms and higher interest rates offered by all banks as they competed to capture a larger share of the deposit market.  Deposit growth was also facilitated by earlier reforms undertaken by the government liberalizing the restrictions on foreign currency accounts.

 

53% (Rs.18.5bn) of the growth in deposits came from growth in current accounts while savings and fixed deposits constituted the remaining 47% (Rs.16.1bn) of the deposits growth.  The growth rate in current and fixed and savings deposits changed significantly in comparison with the previous period.  Between 1996 and 1997 the growth rate in fixed and savings deposits declined from 42% to 19% while the growth rate for current deposits increased from 10% to 119%.  These changes in growth rate substantially altered the proportion of fixed and savings to current deposits in the NEPBs deposit base.  In 1996 85%(Rs.85bn) of the NEPBs deposit base was derived from fixed and savings deposits while current accounts constituted 15% (Rs.15bn).  The proportion of fixed and savings deposits has dropped to 75% (Rs.101bn) for 1997 with the proportion of current deposits rising to 25% (Rs.34bn).  These changes in the deposit base of NEPBs have had the effect of lowering the cost of funds for these banks.

 

Of the total deposits growth LC deposits contributed 24% (Rs.8.4bn) with the difference coming from FC deposits that accounted for 76% (Rs.26bn) of the growth.  The 51% growth in FCs accounts had the affect of raising the proportion of FC deposits to LC deposits to 58% compared to the 51% ratio for the previous period.  This is likely to make the deposit base of the NEPBs somewhat unstable and prevent them from enjoying the deposit growth rate they are accustomed to in the near future.  The reason being that recent SBP reforms have restricted the freedom previously extended to FC accounts.  A brief description of these reforms follows although at the present time the complete status of FC account still remains unclear.

 

All foreign currency accounts were frozen following the imposition of an emergency, after Pakistan conducted its nuclear tests in May 1998.  This revoked the immunity provided to foreign currency account holders with the Economic Reforms Protection Act of 1992.  The SBP also disallowed the opening of new FC accounts temporarily.

 

Since then the SBP has allowed the opening of new FC accounts which banks are required to maintain on separate ledgers so that they can distinguish between accounts opened after the imposition of the emergency and those opened before.  Withdrawals from the frozen accounts can only be made in rupees at a fixed rate of Rs.46 per USD while withdrawals from new FC accounts can be made in USD.  Banks are no longer required to surrender dollars they receive from the opening of new accounts but are responsible for managing the FCs themselves.

 

Recently the SBP allowed FC account holders the facility of making deposits in their frozen FC accounts although withdrawals can still only be made in rupees.  Also the SBP reinstated the immunity provided to FC accounts restoring some degree of confidence among depositors.  Overall the unpredictable nature of SBP policies has shaken the confidence of depositors, which is likely to make them more cautious in entrusting their deposits to the SBP in the future.

 

Operations

Profitability

 

 

Return on Equity

NEPBs were able to maintain their return on equity during 1997.  But the ROE was not maintained by sustaining profitability that showed a declining trend.  Instead ROE was kept constant by increasing the level of leverage employed by the industry.  The high level of capitalization already maintained in the industry could justify this.  NEPB were able to maintain the level of revenues generated on their asset base.

 

Income

The decline in profitability among NEPBs can be attributed to a number of factors.  Slow economic growth translated into slow advances growth for the banks.  Therefore interest based income generated by the banks grew at a declining rate.  By undertaking huge investments in government securities NEPB enhanced the liquidity of their asset base while at the same time decreasing the risk associated with it.  This came at the cost of lower returns, since STFBs do not yield the high yields associated with advances.  Also most banks that extended credit during the year did so against the deposits they held.  In this way the advances acquired by the bank were low risk but also had low yields.

 

With strong deposits growth the aggregate cost of funds for NEPBs underwent a significant increase that also dampened the profitability of NEPBs.  In competing for deposits banks offered higher rates of return to depositors at the cost of diminishing spreads.

 

Non fund based income also experienced stagnant growth rates with growth in commission and brokerage stunted by slow economic activity.  Foreign Exchange earnings also did experience any growth due to the liberalization of government FX policies that have led to a high degree of competition in that market.

 

Risk and Success Factors

 

With approximately 70-80% of the total advances having maturity of less than 1 year, NEPBs have relatively little fear of facing significant defaults.  Also, as most of these banks were established only 5-6 years ago, they have a relatively clean loan portfolio.  This further reduces the need for significant provisioning.

 

Nevertheless, in seeking rapid earnings growth through aggressive lending, some of the NEPBs have accumulated a rising proportion of doubtful accounts that may require substantial provisioning in the future.  Therefore, capitalization remains a key determinant of a bank’s inherent strength to offset major defaults and the need for subsequent provisioning.

 

Most of the NEPBs have Tier 1 Capital Adequacy Ratio (CAR) of about 10%-12%, well in excess of the minimum 8% standard.  We feel that the level of capitalization is an important indicator of a bank’s inherent ability to show strong advances growth.  With advances to the private sector having the highest weightage under the BIS standards (100%), under-capitalized banks may be forced to slow advances growth in order to improve their capital status.

 

The NEPBs have passed through their initial expansion phase and will now focus more on consolidating their current operations.  This will cause operating costs to grow at a declining rate and improve efficiencies and profits.

Bank Al-Habib (BAH) (Appendix 9)

 

Business Background

 

Bank Al-Habib Ltd. was incorporated as a public limited company on 15 October 1991.  The bank belongs to one of the largest industrial groups in the country, the Habib Group, founder of the current public sector scheduled commercial bank, Habib Bank Ltd., which was nationalized back in 1974.  The Habib group is one of the most prestigious industrial groups in the country.  It has diversified interests in sugar, textiles, autos, financial services and food.  The total market capitalization of the group is around US$150m.  The group is renowned for its conservatism.

 

Board of Directors

 

Hamid D. Habib                                 Chairman

Abbas D. Habib                                  Chief Executive & Managing Director

Ali Raza D. Habib                              Director

Mohammad Usman Kushtiwala         Director

Faiz N. Abdulali                                 Director

Anwar Haji Karim                              Director

Liaquat H. Merchant                           Director

Imran Azim                                         Director

Qumail R. Habib                                 Director

Mahmood S. Allarakhia                      Company Secretary

 

Target Market

 

The bank was established to focus on a specific market segment: the high risk, high return unorganized business sector (Jodia bazar).  This business sector is comprised of the textile related trade based in the Karachi cloth market. Since the group was quite familiar with local business practices and business families, the bank’s strategy has been quite successful from the outset.  Its Strategy has been based on package transactions, involving the lending of money to small businessmen, with guarantees of fee based business in return.  This policy had proved to be very successful since the bank had achieved a high Cumulative Average Growth Rate (CAGR) in non-fund based income up until 1996.  But with the liberalization of the operations of entities that provide foreign exchange services the level of competition in the price sensitive market has intensified.  This has caused the income derived from foreign exchange transactions to remain constant leading to a decline in the banks CAGR in non-fund based income.  Also a slow down in the growth rate of the general economy has caused BAHs fee based income to decline over the last couple of years.

 

Market Risk

 

Entering into an underdeveloped, high-risk market, the bank has adopted the correct policy of not being too aggressive.  The conservative approach has enabled it to obtain a high quality loan portfolio at an acceptable degree of risk.  This market is very short term (3-6 months), and carries very high interest rates.  These higher interest rates carry a high risk.  However, one can balance this risk by selecting borrowers carefully.  Both the higher number of transactions and higher margins have enabled BAH to achieve high rates of return on its advances.

 

Categories of Shareholders  

 

Individuals	57%
Financial Institutions	27%
Joint Stock Companies	7%
Insurance Companies	6%
Others	3%

 

The policy of issuing generous proportions of bonus shares and dividends                      (approximately 50% of profit available for appropriation 96-97) indicates that the Board of Directors and management of the bank own a significant part of the shares held by individuals in the company.  This would explain the reason for not holding a larger part of the profit available for appropriation in the Reserve Fund to address the banks low CAR problem.

 

Financial Analysis

Assets

Liquidity

 

Cash

BAHs cash balance saw a 55% (Rs.1.2bn) decline with the closure of its Rs.1.3bn SDA in 1997.  The decline in BAH cash balance exceeded the average decline experienced by STFBs because of the banks high volume of trade business.

 

Investments

The excess liquidity made available form the closure of the SDA and deposits was diverted towards investments causing the banks investment portfolio to surge by 200% (Rs.4.9bn) to Rs.7.4bn.  Most of the investment was in the form of government securities that constitute nearly 100% of the banks investments.  The investment in government securities has enabled BAH to maintain the liquidity of its assets by diverting approximately 50% of its cash balance towards it.  This has the added advantage of yielding interest income for the bank.

 

Asset Quality

 

Advances

BAHs total advances saw moderate growth of 30% (Rs.1708m) during 1997 bringing the banks total portfolio to Rs.7.3bn the third largest amongst NEPBs.

 

 

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Chemical and Pharmaceuticals	1	2
Agribusiness		2
Textile	2	59
Sugar		2
Financial	3	6
Others (FC Accounts)	94	29

 

The Others category that constitutes 94% of the Deposits and 29% of the Advances is largely comprised of foreign currency accounts, and Advances drawn against them.  The Advances in this case are fully secured by the deposit accounts.  The bank allows its deposit holders credit lines of 20-30% of their total deposits at low interest rates since these lines are amply secured.  Although, such advances yield low interest margins it provides the bank with the opportunity to provide non-fund based services to these depositors a supplementary and substantial source of income for the bank.

 

Advances on Non Performing status and Provisioning

BAH has maintained extremely low levels of provisioning on its balance sheet.  Although provisions grew by 167% to Rs.56mn in 1997 they only cover 0.76% of the banks advances portfolio up form 0.37% in 1996.  These figure fall far below the industry average of 4.3%.  The increase in provisioning was prompted by the surge in advances placed on non performing status which expanded by 376% to Rs.181mn or 2.46% of the banks advances.  Current provisioning only covers 31% of this amount.  This indicates that the bank will probably undertake significant provisioning in the near future.

 

Capital and Liabilities

Capital Adequacy

 

Equity

The banks CAR declined from 6.38% to 5.13% between 1996 and 1997.  This raises some concerns considering that the bank is likely to undertake ample provisioning to hedge itself against unexpected defaults in the near future.  This will have the effect of suppressing the banks retained earnings causing its CAR to further decline unless there is a new injection of equity.  The only mitigant is that the computed CAR is not calculated on a risk adjusted basis and therefore would be considerably higher if calculated in such a way given the high level of liquidity of the banks asset base.

 

Deposits

Over 1997 BAH Total Customer Deposits grew by 57% (Rs.4873mn) 73% (Rs.9.8bn) of the deposits are derived from FC accounts and 77% (Rs.10.2bn) of the deposits are comprised of fixed and savings deposits. These deposits however form a highly unstable deposit base for the bank since foreign currency accounts are extremely volatile being sensitive to various factors.  With the recently imposed restrictions on foreign currency accounts by the State Bank of Pakistan, BAH deposit base is not likely to show strong growth in ’98 and is likely to put the bank in a liquidity crunch in the near future.  However this could possibly improve the banks CAR somewhat by slowing growth in total assets.

 

Operations

Profitability

 

 

Return on Equity

BAH has managed to maintain its ROE around 21% for ’95 and ’96 with a slight increase to 23% in 1997.  Although this is one of the highest ROEs in the industry a breakdown of the ROE reveals that its increase and maintenance are not related to improved profitability.  Instead BAH has managed to maintain its ROE by leveraging its balance sheet with a higher proportion of debt financing.  This appears to be questionable given BAHs declining CAR.  Also it manages conceal the declining profitability.

 

Administrative Expenses

The decline in profitability however has not come about because of diminishing operational efficiency that has remained relatively constant since the Administrative Exp./PBT ratio has only slightly increased from 58% in 1995 to 60% in 1997.

 

Income

The declining profitability can be attributed to increased competition in the banking sector, as well as the stagnant growth in BAHs non-fund based income arising from factors beyond its control (discussed earlier).

 

Provisioning

The decline in profitability is not as large as it appears to be but is actually quite slight.  It is magnified by the banks practice of taking on increased provisioning to hedge itself against possible defaults.  This has come at the cost of profitability appearing to decline, if the profit margin is adjusted for the provisioning undertaken the decline in the margin between ’95 and ’97 drops to around 1% which is not very significant.

 

Risk Analysis

 

BAH deposit base is highly unstable because it is largely comprised of wholesale deposits that are extremely price sensitive.  Since a stable deposit base is the key to any banks success BAH is addressing this problem by expanding its branch network to capture lucrative middle market retail deposits.  BAH is likely to face significant competition in this market since ACBL and Union have already been aggressively pursuing this market and have established a loyal customer base.

 

BAH advances portfolio has significant exposure in the textile sector with a 59% share.  Given the recent decline in this sector it is quite likely that the bank will face some defaults on its advances.  But the banks low level of provisioning (less than 1%) indicates an over optimistic outlook on the situation.  BAH will require a much higher level of provisioning in the future if such defaults do occur.

 

The declining CAR could pose a problem for BAH restricting its advances growth if the SBP decides to impose a CAR requirement on NEPB.

 

Conclusion

 

BAH may be facing a number of problems but these can be easily overcome with the foresight of its extremely professional and conservative management and strong group backing.  BAHs confidence in its Advances portfolio may be warranted given the banks close ties with its clients that enable it to extend credit only to parties in which it has strong confidence.  Meeting any possible CAR restrictions should not prove to be a problem since the groups backers can easily expand the banks capital base with an injection of equity.  Although, BAH profit margins have declined (which is also true for the industry) it still has one of the highest rates of returns in the private banking sector.

 

Askari Commercial Bank Ltd.  (ACBL) (Appendix 10)

 

Business Background

 

Askari Commercial Bank Ltd. was incorporated in October 1991 as a scheduled commercial bank, and commenced operations in April 1992 with four branches.  Since then it has expanded its network to 25 branches.  ACBL was founded by the Army Welfare Trust (AWT).  The AWT was assisted by two overseas Pakistanis, who hold a significant stake in the banks equity.

 

The bank’s constitution requires the chairman to be the Adjutant General of the Pakistani Army.  Besides the chairman, the 12 directors also include the MD of the AWT           (ex-army), four other retired senior army officers and two overseas sponsors.  Army appointed directors do not influence the daily operations of the bank, as their presence is intended to provide a general policy framework.  The remaining top management of the bank is sourced out from other Pakistani and foreign banks operating in the country.

 

Board of Directors

 

Lt. Gen. Zia ud Din                            Chairman

Mr. Shameem Ahmed                         President and Chief Executive

Lt. Gen. (R) Farrakh Khan                 Director

Brig. (R) Khalid Latif                         Director

Brig. (R) Zafar Ahmed                       Director

Brig. (R) Khalid Raza                         Director

Brig. (R) Sultan Mahmud                   Director

Dr. Safdar Ali Butt                             Director

Mr. Shahid Hafeez Azmi                    Director

Mr. Sultan Ahmed Abbasi                  Director

Mr. Razi-ur-Rahman Khan                 Director

Mr. Zafar Alam Khan Sumbal            Secretary

 

Target Market

 

The bank is targeting the middle and upper class as its desired retail deposit base.  On the wholesale side, the bank is targeting local companies other than blue chips and some defense related organizations.  The bank is channeling its services in the right direction providing services that are not as lavish as those offered by foreign banks but which still meet the needs of their target segment.  This strategy provides the bank with a relatively stable, low cost deposit base.  By extending credit to medium/large traders and other retail clientele ACBL has managed to keep a low per party leading exposure and enjoy higher spreads.  The combination of low cost deposits and high spreads have enabled ACBL to earn healthy profit margins.  By pursuing a steady growth policy in expanding its branch network ACBL is constantly expanding the base of the market it can serve.

 

 

Technology and Service

 

ACBL is the first Bank to have established a countrywide communications network based on VSAT and Radio Modems Technology.  This communication network has enabled the bank to provide on-line, real-time banking facilities to its customers, presently at 11 different cities of the country.  The bank has also installed ATMs at several branches with plans to install more ATMs gradually in the larger cities.  These moves come as part of the banks on going commitment to enhance the level of customer service it provides.  ACBL has entered the competitive credit card market with the intention of strengthening its core operations by requiring its credit card holders to hold an account in the bank.  If successful in this market the banks core operations could benefit substantially.

 

Categories of Shareholders

 

Individuals	80%
Investment Companies	1%
Insurance Companies	2%
Joint Stock Companies	1%
Financial Institutions	8%
Foreign Companies	3%
Others	5%

 

With AWT holding a 46% stake in ACBL the bank has had the opportunity to handle the groups vast business accounts and commercial interests.  The trust’s extensive business network has helped the bank achieve phenomenal growth in the past and should continue to do so in the future.  The groups backing has also established the bank’s reputation for trustworthiness and attracted deposits from defense related organizations.

 

Financial Analysis

Assets

Liquidity

 

Cash

In 1997 ACBLs cash balance declined by approximately 52% compared to its 1996 balance.  This decline was almost completely brought about by the closure of the Export Refinance Special Deposit Account (SDA) maintained with the State Bank of Pakistan.  The closure of this account resulted from changes in SBP policy with regards to its export refinance scheme.  The new policy no longer allows banks to maintain a SDA with the SBP.  The cash freed up from the closure of this account was diverted towards investments in Short Term Federal Bonds (STFBs).

 

Investments

The excess funding available to ACBL has been diverted towards investments in STFBs that offer reasonable returns.  By diverting funds from the SDA and deposits towards the purchase of government securities the banks investments surged by 48% (Rs.5593m) the majority of growth coming from the purchase of STFBs.  The banks management believes its “policy of high liquidity however is not maintained at the cost of profitability” indicating that it strives to maintain optimal liquidity.

 

Asset Quality

 

Advances

Advances grew at 25% (Rs.1.8bn) to a total sum of Rs.9.1bn, giving ACBL the second largest advances portfolio in the NEPB sector in 1997.  The slower growth in advances could be explained by the managements desire to off set phenomenal advances growth in the past and also a trend in the banking sector arising from a slow down in the growth of the general economy.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Fuel/Energy	1	6
Leather products and shoes		5
Real Estate/Construction	15	10
Textile-Export	1	21
Manufacturing	2	18
Individuals	41
Services	7	2
Others	33	38

 

ACBL maintains a well diversified Advances portfolio with credit extended to more than 36 different segments of the economy. The Others section of Advances includes a variety of industries with shares of advances ranging from 0.04-4%.  Although the largest share of advances comes from the Textile sector (39%), this level of exposure is not high when compared to other banks given that Textiles is the largest industrial sector in Pakistan.  Also ACBLs advances to the textile sector are restricted to the prime contenders in the sector making the banks exposure extremely secure.

 

Advances on Non Performing Status and Provisioning

The bank continued to display acts of conservatism during 1997 nearly doubling the amount of provisioning available on its balance sheet.  Total provisions of Rs. 375mn now exist on the banks balance sheet.  These provisions cover 4.1% of ACBLs total advances portfolio and 89% of the banks advances placed on a non performing status.  Non performing advances for the year stood at Rs.420mn or 4.6% of the total advances.  With its high level of provisioning the bank is sufficiently hedged against any possible defaults.

 

Capital and Liabilities

Capital Adequacy

 

Equity

ACBLs CAR declined from 8.8% in 1996 to 7.4% in 1997 due to the large influx of deposits the bank experienced.  The new CAR is still sufficient for the bank to maintain its growth goals.  Also the banks maintains the second largest equity base in the industry with capital and reserves totaling Rs.1.7bn which allow it to serve the credit needs of large clients, an advantage its smaller competitors can not enjoy.

 

Deposits

Deposits showed a strong growth of 38% (Rs.5356m) during 1997 growing to Rs.19bn the largest deposit base among NEPB.  The bank appears to have an extremely stable deposit base with 41% of the deposits coming from individuals.  Although 62% of ACBLs deposits come from foreign exchange accounts which are extremely volatile.  The fact that these deposits are largely held by individuals could hedge a decline in the banks deposit growth rate due to recent SBP regulations that have placed restrictions on foreign currency accounts.

 

Operations

Profitability

 

 

Return on Equity

With a sharp decline in ROE from ’95 to ’96 ACBL was able to bring this ratio back on track in 1997.  But this was not brought about by improved profitability.  Instead the increase in ROE was achieved with the combination of a slight increase in financial leverage (which had fallen in ’96) and an increase in total revenues relative to total assets.

 

Administrative Expenses

The declining profitability can not be attributed to falling efficiencies since the ratio of Administrative Exp./PBT only slightly increased from 59% to 61% between 1995 and 1997.  The decline in profitability comes due to increased competition in the industry.  It has mainly come about as a consequence of the bank undertaking significant provisioning on outstanding advances in both ’96 and ’97 as an act of conservatism.

 

Income

ACBLs fees, commission and brokerage income showed strong growth of 51% (Rs.54m) undeterred by a slow down in the general economy.  If ACBL is able to continuously maintain such growth in non-fund based income it could gain a competitive advantage over the other banks.

 

Risk Analysis

 

Apart from the problem of a destabilization in its deposit base that is likely to occur with new SBP regulations regarding foreign currency accounts, ACBL is in an extremely stable financial position with promising growth prospects.  The problem with deposit bases is one that will effect the whole industry but given its strong position ACBL should be able to endure the impact better than its competitors.

 

Conclusion

 

Although the bank maintains an extremely well diversified advances portfolio with credit extended only to the most credible clients its conservative nature is apparent in its high degree of advances provisioning currently at 4% of total advances outstanding.  The bank also maintains a high level of liquidity that will allow it to meet the withdrawal of its foreign currency deposits.  The management of the bank has been hired from multinational banks operating in the country making it extremely sound and whose expertise has been reflected in the strong performance of the bank since its inception.  Finally the involvement of the army eliminates any chances of undue political influence on the bank in credit sanctioning which will allow it to always maintain a solid advances portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bolan Bank Ltd. (BBL) (Appendix 11)

 

Business Background

 

Bolan Bank Limited was established in October 1997, as a public limited company. It opened its 50^th branch last year, making BBL’s network one of the largest among the Newly Established Private Banks. BBL is a trade finance bank – focussing on small to medium sized businesses for deposits and loans by fulfilling their import/export needs.

 

BBLs management is manned by a bunch of highly experienced technocrats.  President & CEO, Mr. Ejaz Hussain Shah, has more than 30 years of experience in Muslim Commercial Bank (MCB).  His second in command, Mr. Zia ul Hassan Laj, who heads the International Division has also had extensive experience in MCB as well as the Middle East Bank.

 

Board of Directors

 

Mr. Javed Yunus                                 Chairman

Mr. Mirza Ghulam Mustafa                Vice Chairman

Mr. Pervez Yunus                               Director

Mr. Naved Yunus                               Director

Mr. Maheen Yunus                             Director

Mrs. R.J. Yunus                                  Director

Mrs. S.P. Yunus                                  Director

Mrs. Ambreen Naved Yunus              Director

Mrs. Najmus Sehar Mustafa               Director

Mr. Mirza Ghulam Mujtaba                Director

Mr. Syed Ijaz Hussaiin Shah              Director

Mr. Ziaul Hasan Laj                            Director

Mr. A.K.M Sayeed (NIT Nominee)   Director

Mr. Shabbir Ali Kanchwala                Secretary

 

Categories of Shareholders

 

Individuals	82%
Joint Stock Companies	6%
Financial Institutions	6%
Insurance Companies	5%
Others	1%

 

51% of the banks share are owned by two families the Younus family, headed by Mr. Javed Younus and the Mustafa family, headed by Mr. Mirza Ghulam Mustafa.

 

 

 

 

Financial Analysis

Assets

Liquidity

 

Cash

BBL defied the industry trend of declining cash balances with a 39% (Rs.269mn) growth in its cash account that ended the year with a Rs.953mn balance.  This growth in the banks cash balance can be explained by the small Rs.58mn SDA account previously maintained by the bank.  Therefore the closure of this account did noticeably impact the banks cash balance.

 

Investments

The banks investments showed strong growth during the year, a trend in the industry.  BOKs total investments grew by 118%(Rs.780mn) reaching a book value of Rs.1.4bn.  The banks entire investment portfolio is invested in government securities.  With the growth in its cash balance as well as investments the banks asset base now enjoys a high level of liquidity.

 

Asset Quality

 

Advances

The bank continued to display strong advances growth during the year with advances growing at a rate of 59%(Rs.1.1bn) to end the year with a balance of Rs.3.1bn.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Textile	6	11
Shoes and Leather garments	1	3
Sugar	1	1
Financial	2
Chemical and Pharmaceuticals	7	3
Electronics/Electric Appliances	2	1
Automobile/transportation equip.		5
Others	81	76

 

The bank took a conservative lending approach during the year mainly extending credit to individuals (medium sized businessmen/traders) against their deposits held by the bank.  Thus the bank backed its new advances with cash collaterals making them highly secure.  This also explains the Others category of advances and deposits which constitute 76% and 81% shares respectively.

 

Advances on Non Performing status and Provisioning

The bank has one of the lowest levels of provisioning among the NEPBs.  Total provisioning is a mere Rs.26mn although provisioning grew by 271% during the year.  Provisioning covers less than 1% of the banks total advances.  Only Rs.49mn of the banks advances have been placed on a non performing status amounting to 1.5% of advances.  Provisioning covers 53% of the advances placed on a non performing status.  Given the banks strict lending policies current levels of provisioning are sufficient to hedge the bank against any unexpected defaults.

 

Capital and Liabilities

Capital Adequacy

 

Equity

BOKs CAR declined sharply from 10% in 1996 to around 7% in 1997.  The decline in this ratio was facilitated by the banks strong deposit growth that has expanded the banks asset base substantially.  It would be highly unlikely for the bank to be able to maintain its current growth rates while at the same time sustaining CAR without an injection of equity from an external source.

 

Deposits

The bank had the highest deposit growth among NEPBs during 1997 with year end deposits totaling Rs.5.7bn.  The 67% (Rs.2.3bn) increase was fueled by growth in all categories of deposits.  Fixed and Savings deposits grew by 58% while current deposits grew by 82% compared 28% during the previous year.  The interesting characteristic about the banks deposit mix is that the bank maintains the highest ratio of current to fixed and savings deposit among the NEPBs, and has maintained the highest ratio since 1995.  With strong current account growth the banks ratio improved from 38:62 to 41:59 in 1997.  The bank has also managed to maintain the stability of its deposit base given its unstable nature by extending credit against it.  BBLs high concentration of current account deposits, that allows it to enjoy a low effective cost of funds, is made possible by the banks extensive branch network.

 

The banks ratio of FC deposits to LC deposits is also considerably lower than the other banks in the industry.  Although the banks ratio increased from 43:57 to 49:51 between 1996 to 1997 the banks reliance FC deposits is still limited.  This will dampen the strain on the bank from recent restrictions imposed on FC accounts.

 

Operations

Profitability

 

 

Return on Equity

The banks ROE is considerably lower than its better competitors among the NEPBs.  The low returns can be directly co-related to the low level of risk the bank has decided to undertake in its operations.  The bank has managed to improve its ROE slightly in 1997 with an increase in the level of leverage it employs on its balance sheet.  The higher degree of leverage has been brought about by the strong deposit growth.  BBLs tight lending policy is made apparent by the decline in total income generated on its asset base.  Since the bank only lends against realizable collaterals the effective yield on its advances has declined.

 

Income

BBLs profit margins declined in 1997 due to a decline in trade income caused by a slowdown in the general economy.  Low profitability can also be attributed to the higher provisioning the bank undertook during the year.

 

Administrative Expenses

The banks low cost deposit base comes at the cost of relatively high administrative expenses.  Although growth in this account was controlled during the year, as a percentage of profit before taxes administrative expenses are extremely high.  The banks ratio of administrative exp./PBT was 2.8 in 1997 compared to the 0.6 ratio maintained by the better banks in the industry.  The banks high administrative costs arise due to its extensive branch network.  This explains the banks low profitability.

 

Risk Analysis

 

BBL faces the risk of being unable to sustain its strong deposit with its declining CAR.  Unless the bank finds a source of new equity the bank will have to restrict its growth.  The mitigating factor is that with the new restrictions on FC account the banks deposit growth is likely to slow along with that of its competitors and therefore the bank will not be at a disadvantage.  The bank needs to generate more income to justify its high administrative cost and improve profitability.

 

Conclusion

 

Fundamentally BBL is in a very stable position with its highly conservative management.  With this stable foundation the bank is now in a position to re-examine its strategy and join the ranks of the top players in the industry in terms of profitability.  The bank needs to find ways in which it can completely exploit the advantage of its low cost deposit base and extensive branch network.

 

 

 

 

 

 

 

 

 

 

 

 

Bank of Khyber (BOK) (Appendix 12)

 

Business Background

 

Bank of Khyber was established in 1989 under the provisions of section 28 of the Fourth Schedule of Constitution of Pakistan through an act of the provincial assembly.  Until late 1994, BOK worked as a non scheduled bank – it did not come under the SBPs Prudential Regulations.  Soon afterwards it received a foreign trade license and initiated its foreign exchange operations in early 1995.  The bank was fully owned by the provincial government of NWFP until 1996.  Last year DEG, a German development bank invested Rs.97mn – equity shareholding of 15%.

 

Categories of Shareholders

 

The proposed pattern of shareholding has been forwarded by the Management but at the time of writing this report not approved by the NWFP government.

 

NWFP Government                            49%

DEG                                                    15%

TFC                                                     10%

Employees                                           2%

General public                                     24%

 

Financial Analysis

Assets

Liquidity

 

Cash

BOKs cash balance declined by 43% (Rs.331mn) to Rs.431mn during 1997.  The decline came about as a consequence of the banks closure of its Rs.415mn SDA.  Even with its new balance the bank is able to comfortably meet the SLRs with a cash to demand and time liabilities ratio of 7%.

 

Investments

The banks investments portfolio only experienced a 22%(Rs.394mn) growth falling short of the industry growth rate of 71%.  The banks investments grew to Rs.2.1bn at the end of the year.  The slow growth in investments can be explained by the lack of funds available to the bank for investments.  The lack of funds was brought about by strong advances growth experienced by the bank.

 

Asset Quality

 

Advances

BOKs advances displayed a solid 68%(Rs.1.5bn) growth beating the industries average growth rate of 38%.  The banks advances portfolio stood at Rs.3.6bn at years end.  The strong growth in advances was fueled by steady deposits growth.  The banks management is pursuing a strategy of pursuing advances growth rather than investing in government securities.  This allows the bank to earn a higher yield on its earning asssets.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Agribusiness	5	1
Textile	3	9
Shoes and Leather garments	4	3
Sugar	1	4
Financial	1	4
Miscellaneous Services		4
Food Beverages and Healthcare	1	29
Trading	2	12
Chemical and Pharmaceuticals	2	22
Miscellaneous Manufacturing		5
Government	50
Others	31	7

 

The banks management has established a well diversified advances portfolio in an effort to spread the banks risk over a variety of different sectors.  The bank has limited its exposure in the textile sector to extremely low levels a quality that is not found in the advances mix of most of its competitors.  Also the banks exposure in chemicals and food has been restricted to top tier clients with appropriate levels of collateral held.  Overall BOK maintains a high quality advances portfolio.

 

Advances on Non Performing status and Provisioning

BOK has undertaken relatively low levels of provisioning on its balance sheet.  Although the banks advances grew by 59%(Rs.22mn) in 1997 to Rs.59mn, as a percentage of advances provisions declined from 1.7% to 1.6% compared to the industry average of around 4.2%.  The bank is justified in this strategy since only Rs.93mn worth of its advances have been placed on a non performing status, 2.54% of its advances portfolio.  Also provisioning covers 63% of the advances placed on a non performing status indicating that sufficient provisioning exists.

 

Capital and Liabilities

Capital Adequacy

 

Equity

The bank has one of the highest capital adequacy ratios among the NEPBs.  The banks CAR has declined from 15% to around 12% between 1995 and 1997 due to the strong growth in the banks asset base over this period.  The bank has been able to sustain this high level of capitalization with the injection of new equity it enjoyed in 1997. The bank received Rs.35mn from the government of NWFP and Rs.98mn from the DEG group as fresh equity.  BOKs strong CAR position allows for tremendous growth potential in the near future.

 

 

Deposits

BOKs deposit growth was slightly below average in 1997 growing 33%(Rs.1.5bn) compared to the industry average of 35%.  The banks deposit base was Rs.6.1bn at the end of the year.  Most of the growth came in the form of current account deposits that grew by 96% compared to the previous years growth of 56%.  Fixed and saving deposits continued to grow at around 20%.  The banks ratio of fixed to current deposits was altered from 84:16 to 77:23 lowering the banks cost of funds.

 

Most of the growth in BOKs deposit base came from FC Deposits that surged by 284% growing from Rs.265mn to Rs.1bn.  Although there was phenomenal growth in FC accounts they still occupy a small proportion of the banks deposit base.  The ratio of LC deposit to FC deposits was altered from 94:6 to 84:16 during the year.  The banks low reliance on FC accounts will prove to be an advantage for the bank as these accounts have become highly unstable recently with new SBP restrictions.  In addition the banks deposit base is extremely stable due to the fact that around 50% of the banks deposits are derived from the provincial government.

 

Operations

Profitability

 

 

Return on Equity

The bank has one of the lowest returns on equity among the NEPBs on account of its poor profitability position.  The bank has accepted low returns in exchange for security.  But the banks current levels of returns are unacceptable regardless of the low level of risk undertaken by the bank.

 

Income

The banks fund based income showed considerable improvement during the year but this did not benefit the banks income statement since interest income barely covered the banks cost of funds.  Non fund based income of the bank showed an overall increase due to the profit the bank earned from investment securities.

 

Administrative Expenses and Provisioning

The banks administrative expenses grew at an alarming rate of 40% (Rs.50mn) during the year significantly reducing the banks operating efficiency.  The bank also undertook Rs.46mn worth of provisioning against a decline in value of its investments further undermining the profitability of the bank.

 

 

 

Risk Analysis

 

The banks management has followed an extremely conservative route in the banks operations.  This has come at the cost of extremely low levels of returns that out do any of the benefit derived from the banks conservatism.  If the bank wishes to succeed it needs to strike a balance between conservatism and profitability.

 

Conclusion

 

The banks fundamentals are extremely stable and it has the strong group backing of a provincial government.  What it lacks is profitability that can only be brought about with a change in operating strategy.  The banks current strategy of collateralized credit extension and minimum investment in government securities has not been successful therefore the banks management needs to rechart its operating strategy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Bank of Punjab (BOP) (Appendix 13)

 

Business Background

 

The Bank of Punjab was incorporated in 1989 by Nawaz Shariff’s party, the Pakistan Muslim League (N), when Ms Bhutto became PM for the first time.  The reason for the formation of the BOP was the struggle between the federal and provincial governments, which were under opposing rule at the time.  The bank mobilized funds for the provincial government, providing financial autonomy to the province.  Its deposits were guaranteed by the Punjab government rather than the State Bank of Pakistan.  It was also not required to report or abide by any SBP regulations.  However, the political differences over the BOP were resolved in 1990, with the federal government placing the bank on its list of approved banks, equating it with nationalized banks.  The BOP was granted scheduled status in September 1994, placing it under the direct control of the SBP and making compliance with Prudential Regulations mandatory.  The Government of the Punjab, as the largest shareholder, still uses the bank to serve its own political purposes.

 

Board of Directors

 

Mr. M. Shafi Arshad                           Chairman and Managing Director

Khawaja Belal Ahmad                        Director

Mr. Afzal Hussain Tarar                     Director

Mian Muhammad Ashraf                    Director

Mr. Tariq Farook                                 Director

Mr. Shahab Anwar Khawaja              Director

Mr. Azizul Hameed                            Secretary to the Board

 

Growth

 

The bank made huge progress during its first five years.  Its branch network expanded to 250 and it attained a deposit base of over Rs.15bn by 1997.  The 250-branch network of the bank is spread over the whole country.

 

Technology and Service

 

The BOP has planned to complete its branch automation through computerization of its major working branches at the end of the year 1998.  So far 29 branches have been computerized.  The treasury at Karachi has been linked with the Head Office through an on-line system exclusively designed and developed for eliminating the communication gap.  ‘REUTERS’ information system has been installed at the International Division to maintain a track record of foreign exchange and currency fluctuations.  In order to safeguard the interest of the depositors, close circuit TV cameras have also been installed at all the main branches of the bank.

 

Keeping in view the difficulties being faced by the general public, the BOP has taken the initiative to provide services for collection/receipt of utility bills on behalf of WAPDA, Sui Gas, Paktel, Instaphone and WASA.  All the branches throughout the country are observing this practice to ease the long queues lined-up at the counters of banks.

 

The Bank of Punjab avails a rich and diverse human resource potential. In addressing the need for upgrading the academic and professional expertise of staff upto the current day’s requirements, the Bank’s training institute has played an important role.  During 1997, training was imparted to 74 officers; management and other miscellaneous courses were organized for 62 officers and refresher courses were arranged for 408 cash officers.

 

Categories of Shareholders

 

Individuals	22%
Autonomous/Semi/Firms	12%
Foreign Fund	14%
Provincial Government	52%

 

The 52% stake held by the Punjab government in the bank has provided it with numerous opportunities and a solid group backing.  With a vested interest in the bank the Government of Punjab has allowed BOP to handle most of its financial transactions.  The bank also has access to provincial government funds which has allowed it to lower the cost of its deposit base.  The majority share held by the provincial government also has certain drawbacks such as leaving the bank prone to government influence.  Also the board of directors of the bank are appointed by the Punjab government and therefore lack the expertise found in professional bankers.

 

Financial Analysis

Assets

Liquidity

 

Cash

BOP is one of the few if not the only bank whose cash balance saw an increase in 1997.  The balance grew by 16% (Rs.354m) during the year.  This increase against the industry trend of a decrease in cash balances can be explained by the small Export Refinance SDA account held by the bank with the SBP.  The cash balances of most banks fell with the closure of this account due to changes in State Bank policy.  BOPs balance in this account amounted to only Rs.100m and therefore a closure of this account did not cause its cash balance to decline.

 

Investments

BOPs investments grew by 7% (Rs.434m) during 1997.  There was a decline in the level of investment in Federal Investment Bonds of 58% (Rs.1.6bn) but investments in Short Term Federal Investment Bonds and National Investment Trust Units grew by 132%   (Rs.1bn) and 140% (Rs.1bn) respectively.  The banks recent investment trends indicate that the management is pursuing a strategy of achieving enhanced liquidity.

 

 

 

Asset Quality

 

Advances

Advances grew by 17% (Rs.856m) during 1997 which falls far below the industry average of 38%.  This indicates that the bank is somewhat tightening its credit extension policies.  The bank has found investments in STFBs a more prudent option.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Agribusiness	2	15
Textile	1	6
Cement	1	12
Sugar	1	11
Financial	2	7
Retail Traders	6	9
Construction	0	8
Communication	3	0
Fertilizer production	3	0
Others	81	32

 

BOP has one of the most well diversified advances portfolios in the industry not only in terms of the number of sectors to which credit has been extended but also in terms of the proportion of credit extended.  There are concerns that the banks exposure in Agribusiness and downstream Textile is highly risky and questionable.  Most of the credit extended to the Agribusiness and Textile sector by BOP is seasonal and therefore has maturities of less than one year which somewhat disqualifies concerns of an unstable advances portfolio.  The bank has extremely low exposure in the textile sector compared with other banks even though it is one of the largest segments of the economy.

 

Advances on Non Performing status and Provisioning

The high growth in the Income/mark-up accrued on advances and investments account raises some concern.  The balance in this account grew by 64% (Rs.445m) during the year while advances only grew by 17%.  This raises the possibility of doubtful debts in the future.  Also the amount of debt placed on the non-performing status by the bank rose to approximately Rs.1bn in 1997 approximately 20% of total advances.  This will require the bank to undertake significant provisioning in subsequent years which will put a squeeze on overall profitability.  BOP has been historically criticized for maintaining a low level of provisioning an examination of its provisioning practices reveals that provisioning exists for around 5% (Rs.276m) of its advances portfolio.  Although this level of provisioning is well above the industry average it still only covers 25% of the advances placed by the bank on a non performing status.

 

 

 

 

 

Capital and Liabilities

Capital Adequacy

 

Equity

The banks CAR has declined from around 11% in 1995 to 9% in 1997.  The decline has been brought about as a consequence of the strong deposit growth BOP has experienced over this period.  The CAR is still sufficient to support the banks aggressive growth strategy given that the 9% ratio has not been computed on a risk adjusted basis.  The banks Rs.1.6bn equity base is the third largest in the industry making BOP one of the major contenders in the NEPB sector.

 

Deposits

The banks deposits experienced moderate growth of 10% (Rs.1.5bn) in 1997.  Most of the growth was concentrated in current and call deposits with approximately half the deposit growth coming in the form of foreign currency accounts.

 

30% (Rs.4.8bn) of BOPs deposits come from the public sector, while 66% (Rs.10.4bn) of the deposits are comprised of fixed and savings deposits.  Only 10% (Rs.1.6bn) of the deposits constitute foreign currency accounts.  These three factors combined clearly provide the bank with the most stable deposit base in the industry.  The most significant characteristic of BOPs deposits is its negligible reliance on foreign currency (FC) deposits.  With recent SBP restrictions on foreign currency accounts most banks are likely to face a liquidity crunch in the coming year with the possibility of non-existent and even negative spreads.  BOP will not face this problem since its deposit base does not heavily rely on FC deposits.  Therefore it will enjoy a competitive advantage with the ability to extend credit in a period when no other banks will be able to do so.

 

Operations

Profitability

 

 

Return on Equity

BOPs ROE falls far below that of its competitors.  The two factors which contribute to this fact is the comparatively low degree of leverage employed by the bank on its balance sheet as well as the significant amount of provisioning undertaken by the bank in the last two years.

 

Administrative Expenses

The banks profitability also suffers form extremely high operating costs which are on the rise.  The banks Administrative Exp./PBT ratio has grown from 200% to 350% between ’95 and ’97 which is significant growth in an already outrageous ratio.  The banks high operating costs compared to those of its competitors arise from the fact that it has an extensive branch network with more than ten times the branches of its closest competitors.  The banks management has also been pursuing an aggressive growth strategy which results in new branches and hence new costs but not new revenues since it takes new branches a certain amount of time before they can establish themselves and start generating revenues.  The 1997 profitability was further depressed by the huge loss (Rs.126m) suffered by the bank in dealing and investment securities.

 

Risk Analysis

 

The majority share in equity held by the Punjab government allows it to practice significant influence over the operations of the bank.  By appointing political officials to the board of the bank, the banks implementation of a long term strategy has not emerged since the board lacks the expertise to implement such a plan.  Thus the bank lacks a clear cut strategy.  The banks advances portfolio can also suffer if the bank is forced to undertake politically motivated loans that are not sound credit wise.  The bank is prone to the whims of the current provincial government that changes frequently.  Therefore an unfavorable government could financially devastate the bank with its influence.  Finally the bank is unable to take certain restructuring steps such as laying off inefficient workers since such actions are not viewed favorably politically.

 

Apart from political problems the bank maintains extremely high operating costs which are a deterrent on its profitability.  These operating costs emerge from loss making branches as well as new branches that have not established themselves.  The bank can bring costs under control once it passes through its expansion phase and takes the initiative to shut down loss making branches.  Failing to do so in the near future will put it at a competitive disadvantage.  The bank has also placed approximately 20% of its advances portfolio on a non-performing status while provisioning only exists to cover less than 25% of this amount.  Therefore the bank will have to make large provisions in the future to address this issue.  The bank also needs to divert more resources towards the generation of non-fund based income since this segment of the income statement is comparatively poor.

 

Conclusion

 

The BOP is not a bank that does not have any problems.  What it does have is enormous growth potential given its unique characteristics.  It has the backing of a provincial government that has provided it with a stable deposit base and revenues from undertaking government financial transaction and a solid group backing to capitalize on.  The banks large equity base and high CAR will allow it to continue and pursue advances growth.  The banks extensive branch network is something none of its rivals poses and therefore the bank has the network to undertake the lead in consumer banking operations.  The large network has also provided the bank with a lucrative and low cost deposit base that does not rely on FC deposits.  This will prove to be the biggest advantage the bank has over its competitors in the near future.  With its competitors being highly prone to the unstability of FC deposits they are likely to face a liquidity crunch and cut down on their advances portfolio in the near future.  BOP will face no such problem and by utilizing its current liquidity it can capture a large share of solid customers in a period when credit will be in high demand.

 

Faysal Bank Ltd. (FBL) (Appendix 14)

 

Business Background

 

Faysal Bank Ltd. (FBL) was incorporated as a public limited company on 3 October 1994.  It was the first foreign commercial bank to be listed in Pakistan and has paid up capital of Rs.1.1bn.  Faysal Islamic Bank of Bahrain (FIBB), the parent of FBL, is a Manama based institution and a member of the Islamic financial institution, Dar Al-Mal-Al Islami (DMI), a Geneva based group.  The bank was established 12 years ago and is based on Islamic banking principles.  In Pakistan the, the DMI Group’s presence is through FIBB and Al-Faysal Investment Bank Ltd.  The bank has a 60% stake in FBL. FBL is organized under the Islamic system of banking and, like its parent, is committed to propagating this system in the market.  It is quite actively seeking and expanding Islamic modes of financing in Pakistan.

 

Board of Directors

 

H.E. Ahmed Salah Jamjoom                           Chairman

Mr. Nabil A. Nassief                                       Vice Chairman

Mr. Imtiaz Alam Hanfi                                   President & CEO

H.R.H Prince Amr Bin Mohammed

Al-Faisal Al-Saud                                           Director

Mr. Imtiaz Ahmad Pervez                              Director

Mr. Mahmood A. Faruqui                               Director

Mr. Mohammed Abdullah El-Khereiji            Director

Mr. Muazzam Ali                                            Director

Mr. Razi-ur-Rahman Khan                             Director

Mr. Mohammad Siddique Memon                 Secretary

 

Target Market

 

The bank is targeting upper-middle and high net worth individual clients in the retail business.  This segment is already crowded with foreign banks such as Citibank, ANZ Grindlays, Standard Chartered and the American Express Bank.  The bank could gain market share in this competitive arena by cutting its service charges, which would decline profitability in the short run but allow it to acquire valuable market share in the long run.  FBL is currently focusing on wholesale banking.  In this area, the bank again has to compete with multinational banks as they can meet the global requirements of prime clients in Pakistan.  Here Faysal is using its parent groups connections to try to get into this market.  The bank has targeted some of the major blue chips such as ICI, Levers, Engro and PSO.

 

Competitive Advantage

 

FBL has introduced very innovative products to the local market.  These include nationwide on line banking, daily profit calculation and personalized banking services.  These products can not be matched by other local banks owing to their lack of expertise and high initial set up costs.  This has placed FBL well above other local banks.  All products have been designed to mach the requirements of customers.  On line banking provides access to the bank in every major city of the country.  Personalized banking and a reasonable base for profit calculation are proving very attractive.

 

FBL has the largest capital base among private sector banks.  This has increased the gearing potential of the bank.  At current levels, it can increase its funded balance sheet size significantly.  Moreover, unlike other banks, FBL can commit long-term money due to its higher equity base and the availability of longer-term funds from its parent group.  Due to its international connections, FBL has the technical know how to launch its product.  Management’s willingness to spend huge sums on the computer networking and satellite linkage of all branches within the country reflects the bank’s superior technology compared with its local competitors.

 

Categories of Shareholders

 

Individuals	9%
Investment Companies	2%
Insurance Companies	1%
Joint Stock Companies	2%
Financial Institutions	4%
Foreign Companies	82%

 

With a 60% stake in its equity held by parent sponsor Faysal Islamic Bank of Bahrain E.C., FBL has a strong group backing which has enabled it to prosper in the past and should continue to do so in the future.  The strong group backing has provided FBL with a number of advantages such as a stable and long-term equity base.  The bank has also been able to capitalize on the backing of its sponsor’s reputation by furthering its own business interest on the basis.  The strong international presence of its sponsors has allowed FBL to directly compete with foreign banks for clients requiring services internationally.

 

Financial Analysis

Assets

Liquidity

 

Cash

FBLs cash balance declined by 38% (Rs.645m) during 1997.  This decline can largely be attributed to the closure of the State Bank of Pakistans export refinance SDA that had a balance of Rs.720m in 1996.  Most of the excess cash has been diverted towards Money at call and short notice that grew by Rs.408m, with the difference directed towards NIT units and SBP PLS deposits.

 

Investments

FBLs investments grew by 46% during 1997 reaching a figure of Rs.5.3bn at years end.  The 58% (Rs.895m) growth in PLS deposits with the State Bank of Pakistan can be attributed to FBL being required to increase investments in government securities to meet SBP Statutory Reserve Requirements.  The growth in PLS deposits is also driven by FBLs desire to hedge itself against the uncertainty of dividend payouts by NIT units.  In the past this uncertainty has impacted the banks income statement which has adversely effected its stock price.  Therefore FBLs investment in NIT units showed only modest growth of 18% (Rs.341m).  The benefits of such a strategy are unclear since the uncertainty of dividend payouts by NIT units is offset by the low tax rate of 5% on NIT dividends compared to a 55% tax rate for all other income.  Faysal Bank Ltd. also undertook a Rs.545m investment in non bank financial institutions in 1997.  This would indicate a lack of viable projects to which the bank could extend credit causing it to divert its liquidity elsewhere.

 

Asset Quality

 

Advances

FBLs advances portfolio showed slow growth of 14% (Rs.1.2bn) in 1997.  This slow growth in advances can be attributed to a decline in the country’s overall economic growth which when coupled with the banks strict lending policies did not leave many viable projects to which the bank could extend credit.

 

Exposure by Sector

 

Industry	Advances %
Chemical and Pharmaceuticals	6
Agribusiness	3
Textile	34
Cement	2
Sugar	2
Shoes and leather garments	3
Electronics and electric appliances	2
Production and transmission of energy	6
Others	43

 

FBL maintains a well diversified portfolio of advances with interests in more than 15 sectors of the economy.  The highest exposure exists in the textile sector but the level of exposure is low when compared to other banks.  Also the banks advances portfolio was largely acquired from its parent bank at the time of incorporation; this portfolio was largely exposed to cotton textiles, which later proved to be of low quality.  But the banks management has made provisions for these loans and in some cases restructured them on more favorable terms.  Therefore the bank is unlikely to face unexpected defaults in the future.

 

Advances on Non Performing Status and Provisioning

The bank has placed Rs.892mn of its advances on a non performing status.  This is a substantial sum since it constitutes 8.62% of the banks total advances portfolio.  To address this issue the banks management has created a large provision of Rs.490mn which amounts to 55% of the advances placed on a non performing status.  This will hedge the bank somewhat against possible defaults.

Capital and Liabilities

Capital Adequacy

 

Equity

FBL enjoys the largest equity base in the industry with capital and reserves totaling Rs.2.3bn.  The banks CAR ranks amongst the highest in the industry at 11% that indicates the banks significant earning potential.

 

Deposits

Deposits showed modest growth of 23% (Rs.3bn) with Rs.2.3bn of it coming from growth in current deposit accounts. The strong current account growth will lower the banks effective cost of funds allowing it to earn higher spreads Foreign currency deposits constitute 73% of FBLs deposit base this will make the banks deposits highly unstable in the near future with the recent restrictions placed on FC accounts.

 

Operations

Profitability

 

Return on Equity

FBL has shown significant improvement in its ROE since 1995, which has increased by 6%.  The increase has come about by leveraging FBLs balance sheet which has resulted in a lowered Weighted Average Cost of Capital (WACC) for the bank and hence a higher ROE.  FBL is justified in pursuing such a strategy since its CAR of 11% far exceeds the industry average.  The banks earnings potential is apparent in its ability to generate one of the highest ROEs in the industry against its comparatively low leverage.  The bank has shown prudence in not increasing leverage unnecessarily by slowing down an increase in leverage between ’96 and ’97.

 

Income

The banks profitability has declined by 3% between ’95 and ’97 which has been a trend in the industry due to increased competition and slow growth in non-fund based income.  Between ’96 and ’97 non-fund based income declined by 13% (Rs.55m).  Income from investments was the only area which showed a strong growth of 47% (Rs.311m).  Hence a lack of growth in the banks core operations is clearly apparent.  This conclusion clearly supports the banks recent strategy of investing heavily in government securities that currently provide the only avenue of steady returns.  The banks operational efficiency declined slightly over the previous year with the Administrative Exp./PBT ratio rising from 47% to 54% which would also have adversely effected profitability.  During ’96 and ’97 the bank under took significant provisioning without which profit margins would have been substantial.  But the practice of provisioning shows prudence on behalf of the banks management since it hedges the bank against possible losses in future years during years of high profitability.

 

Risk Analysis

 

The problem of the doubtful nature of its advances portfolio, at the time of acquisition, with a large exposure in the textile sector has been addressed by the banks management with significant provisioning.  The bank has created provisions of nearly 5% (Rs.490m) of its total advances portfolio which amount to 14% of its total exposure in the textile industry.

 

The problem of the banks bottom line being linked to dividends from NIT units which are highly unpredictable has also been addressed with significant investment in SBP PLS deposits.  The problem with the NIT units is not really of much consequence since it is offset by the benefit of a low tax rate 5% on NIT dividends which aids in lowering FBLs overall tax rate.

 

Conclusion

 

FBL is the only bank in the country to have a formalized and credit rating and evaluation system.  Under this system, the banks’ credit analysts first identify the sectors and then rate companies strictly in terms of fundamentals.  The bank has a very solid front line management in place.  The majority of top management has been hired from foreign banks operating in the country.  This gives management the excellent combination of know how in terms of modern banking and exposure to Pakistan.  Due to its Gulf connection, the bank has access to oil money, if required.  Owing to its international presence, FBL has huge potential for fee based business.

 

 

Metropolitan Bank Limited (MBL) (Appendix 15)

 

Business Background

 

Metropolitan Bank Ltd. was incorporated in August 1992 and began operations in October of the same year as a scheduled commercial bank.  Since then the banks branch network has expanded to seventeen banks with all branches providing its customers with a full range of banking services.  The bank has established its reputation as a specialized foreign trade bank in the industry since its inception.  MBL constantly strives to strengthen its network of foreign correspondents in an attempt to handle the international trade and foreign exchange business to the satisfaction of its clientele.

 

Board of Directors

 

Kassim Parekh                                                Chairman & Chief Executive

Kassim Dada                                                   Director

Bashir Ali Mohammad                                    Director

Dewan Asim Mushfiq Farooqui                     Director

Shahid Ghaffar                                               Director

• Habib Director

Anwar H. Japanwala                                       Director

1. R. Wadiwala Director

Saleem Ahmad Zubairi                                   Director

Fuzail Abbas Lilani                                         Secretary

 

Technology

 

MBL realises that to prosper it needs to stay ahead in technological advancement to improve the quality of service to its customers.  With this in mind the bank has installed the most sophisticated state-of-the-art computer system which will link all branches of the bank through satellite.  This system will besides strengthening the management information system, provide a number of services to the customers including electronic funds transfer through which customers can easily, safely and instantly transfer funds to and from MBLs branches.

 

Categories of Shareholders

 

Individuals	34%
Foreign Investors	31%
Financial Institutions	24%
Insurance Companies	2%
Investment Companies	3%
Others	6%

 

Sponsors of the Bank belong to well established names of the banking/corporate sector.  Habib Group, which already holds major stakes in Habib Bank AG Zurich, Bank Al Habib, Habib Sons London and Habib American Bank New York, also holds majority of shares in MBL.

 

Financial Analysis

Assets

Liquidity

 

Cash

MBLs balance declined by 65%(Rs.1.3bn) during 1997 with the closure of its Rs.1.5bn SDA.  Although this brought down the banks ratio of cash to deposits from 35% to 7% it still allows the bank to meet the SBP 5% SLR requirement comfortably.

 

Investments

The banks investment portfolio surged by 168%(Rs.3.3bn) to Rs.5.3bn for the year.  The surge in investments was facilitated by the excess liquidity made available from strong deposit growth and the closure of the SDA.  With approximately 80% of the investments portfolio comprised of STFBs the bank has managed to establish a high level of liquidity on its asset base while at the same time earning stable risk free returns.

 

Asset Quality

 

Advances

MBLs advances growth was exceptional with its portfolio growing at a rate of 64%(Rs.2.5bn) far greater than the industry rate of 38%.  The banks aggregate advances were worth Rs. 6.4bn at the end of the year.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Chemical and pharmaceuticals	1	1
Automobile and Transportation		2
Textile	14	58
Shoes and leather garments	1	2
Cement	1	1
Financial	2
Electronics and electric appliance		1
Others	81	35

 

MBL maintains a advances portfolio that lacks diversity with 58% of the advances extended to the textiles sector.  The bank feels such a strategy is justified with it strict credit extension policies that allow the bank to maintain the realisability of its portfolio.  Also most of the banks advances have been extended on the basis of cash collaterals held by the bank reducing the risk the bank could face from default.

 

Advances on Non Performing status and Provisioning

The bank maintains extremely low levels of provisioning on its balance sheet reflecting the managements confidence in the banks advances portfolio.  Although provisioning grew by 79% during 1997 to Rs.86mn it is still a mere 1.33% of the banks total advances.  This level of provisioning falls far below the industry average.  The bank is justified in pursuing this policy with only Rs.51mn of its advances placed on a non performing status.  MBL is the only bank among NEPBs who level of provisioning exceeds the advances placed on a non performing status.  Provisioning is 168% of the banks advances placed on a non performing status.  These numbers clearly display the banks tight credit extension policies.

 

Capital and Liabilities

Capital Adequacy

 

Equity

MBLs CAR continued to decline during 1997 dropping from 7.11% to 5.95%.  Although the banks entire earnings were retained and appropriated to reserves the banks strong deposit growth pulled its CAR down.  The low level of capitalization could impede the banks growth in the near future.  Therefore unless the bank sees a slowdown in its deposit growth it will require an infusion of fresh capital to maintain its growth.

 

Deposits

During 1997 MBL experienced the second highest deposit growth rate in the industry with growth of 65%(Rs. 3.7bn) which brought the banks deposit base to Rs.9.6bn at years end.  Fixed and Saving deposits grew by 46% up from 32% during the previous period while current deposits grew by 151% up from 67% in the previous year.  The strong growth in current deposits altered the banks ratio of current to fixed deposits from 17:83 to 27:83.  This will have the effect of reducing the effective cost of the banks deposit base somewhat.  Growth in LC deposits of 81% outpaced growth in FC deposits of 59% reducing MBLs reliance on FC accounts by bringing the ratio of FC deposits to total deposits down from 76% to 73%.

 

Operations

Profitability

 

 

Return on Equity

MBL maintains one of the highest ROEs in the industry although the banks profitability has declined recently.  The high ROE comes about as a consequence of the high degree of leverage maintained by the bank on it balance sheet.  Net assets that were around 12 times total equity in 1995, are now close to 17 times the banks equity.  The bank has improved the level of revenues it can generate for every ruppee of assets it holds with total asset turnover rising to 13%.  These two factor combined explain MBLs high ROE.

 

 

Income

All areas of MBLs income showed growth in 1997 including fund based and non fund based income.  The growth in non fund based income deviates from the industry trend of stagnant growth.  While most banks saw little of no growth in income from FX transactions the banks earnings in this area grew by 56% giving a boost to overall income.  The decline in profitability can be explained by the lower yield the bank earned on its earnings assets. The low yield came about as a consequence of the large concentration of government securities (nearly 50%) in the banks earning assets.  Also by undertaking cash collateralized lending the bank reduced the yield it earned on advances.  Given the conservative nature of the banks management the bank has accepted lower returns as a cost of lower risk associated with its asset base.

 

Risk Analysis

The bank is pursuing a strategy whereby it is accepting low yields in exchange for undertaking a low degree of risk.  This has resulted in more than half of the banks interest income being derived from yields on STFBs.  Thus the banks earnings are not generated through its core operations.  The declining CAR is another area of concern since it could impede the banks growth in the future which could result in lost revenues unless there is an injection of fresh equity.  With the recent restrictions imposed on FC accounts MBLs deposit growth is likely to slow in the future due to its heavy reliance on FC accounts.  This will provide the bank with the opportunity to deal with its CAR problem.  The banks deposit base is not like to see much destabalization since the bank has extended credit against most of its deposits.

 

Conclusion

With an extremely capable team of bankers at its helm and strong group backing MBL is one of the best banks among the NEPBs.  The bank yields the highest returns in the industry and has continued to show improvement in areas where other banks are ailing.  Apart from some CAR the bank is in an extremely strong financial position with a highly liquid and realizable asset base.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platinum Commercial Bank Ltd. (PlCB) (Appendix 16)

 

Business Background

 

Platinum Commercial Bank Limited was incorporated in October 1994 as a public limited company.  The bank obtained a certificate of commencement of business in January 1995, and is engaged in commercial banking and related services through thirteen branches operating in different cities.

 

Financial Analysis

Assets

Liquidity

 

Cash

PlCBs cash balance followed the industry trend of a decline dropping by 36%.  The drop was a consequence of the closure of the banks Rs.249mn SDA.

 

Investments

The bank pursued rapid investment expansion with its excess funds.  The banks investments portfolio grew by 95%(Rs.870mn) to Rs.1.7bn.  The banks high level of investments have enhanced its liquidity position significantly.

 

Asset Quality

 

Advances

PlCB has maintained a balance between investment growth and credit expansion.  During the year the banks advances showed above average growth at 73%(Rs.1.2bn) with advances totaling Rs.3bn at years end.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Chemicals and Pharmaceuticals		5
Textile	15	44
Cement		2
Shoes and leather garments		2
Automobile/transportation equip.		2
Financial	6	2
Electronics/electric appliances		2
Other trade and business		38
Others	79	3

 

The banks advances portfolio is highly lacking in diversity.  38% of the credit extended to other trade and business has probably been extended against deposits held by the bank.  The 44% extension to the textile sector is likely to be backed by sufficient collateral.  Two factors point to this conclusion, the low yield the bank earns on its advances indicating low risk and the low proportion of the banks advances placed on a non performing status discussed next.

 

Advances on Non Performing status and Provisioning

The banks total provisioning of Rs.16mn is the lowest amongst the NEPBs.  As a percentage of total advances it is an insignificant 0.5%.  The bank maintains this low level of provisioning since only Rs.29mn of its advances have been placed on a non performing status, less than 1% of its total advances.  The banks current provisioning covers 55% of these advances and can therefore be deemed sufficient.

 

Capital and Liabilities

Capital Adequacy

 

Equity

The banks CAR has been on a declining trend over the last couple of years.  The ratio dropped from 17% to 9% between 1995 and 1997.  The drop can be attributed to the recent expansion in the banks asset base.  At its current level the equity is sufficient to allow for steady growth in the banks assets for several years to come.

 

Deposits

PlCBs deposits grew by 43%(Rs.1.2bn) during 1997 to Rs.4bn.  Most of the growth came from current account growth of 316%(Rs.883mn) changing the banks ratio of fixed to current deposits from 90:10 to 71:29.  Foreign currency deposit grew by 74%(Rs.1bn) increasing the bank dependence on these accounts.  FC deposits now constitute 61% of the banks deposit base compared to 50% during the previous period.

 

Operations

Profitability

 

 

Return on Equity

The banks ROE has been consistently rising over the last couple of years but the banks profitability is on a steady declining trend.  The higher ROE has come about with the higher degree of leverage employed by the bank on its balance sheet.  Although the degree of leverage employed is still below the industry average.

 

Income

PlCB managed to show improvement in both fund based and non fund based income during the year.  The banks net income earned during the year grew by 22%(Rs.27mn) but its profit margins declined due to declining spreads brought about by high cost funds and low yield, low risk advances.

 

Administrative Expenses

The bank managed to keep administrative expenses under control during 1997.  The decline in profitability was for the most part brought about by the Rs.16mn provisioning the bank undertook during the year.

 

Risk Analysis

 

The bank faces the risk of a liquidity crunch with its increased dependence on Foreign Currency accounts recently.  Also the bank has been able to get away with relatively little provisioning so far since its operations are only a few years old and thus its advances portfolio is quite recent.  As the banks advances mature it is most likely that the bank will have to undertake increased provisioning to hedge itself against risks from possible defaults.

 

Conclusion

 

The banks operations are relatively new and so far the bank has done well in managing its affairs.  It will be interesting to see how the bank handles itself as its operations expand and become more complicated.  So far the bank has laid out a solid foundation on which it can build its future business.  Being the one of the smallest contenders, the bank will have to develop a niche market for itself where it can effectively compete with the larger players in the industry.

 

 

 

 

 

 

 

 

Prime Commercial Bank Ltd. (PCB) (Appendix 17)

 

Business Background

 

Prime Commercial Bank Ltd. was incorporated in Pakistan on September 30, 1991 as a Public Limited Company and started operations in February 1992.  It is listed on all the Stock Exchanges of Pakistan.  The bank is a fully accredited scheduled commercial bank and is principally engaged in the business of banking.

 

Board of Directors

 

Mr. Sami M. Baarma                           Chairman

Mr. Saeed I. Chaudhry                       Chief Executive

Dr. Khalid J. Chowdhry                     Director

Mian Tariq Mahmud                           Director

Mr. AbdulRahman Bin Khalid           Director

Mr. Saleh H.A. Hussain                      Director

Mr. Shaharyar Ahmad                                    Director

Mr. Bilal Hakim                                  Director

Mr. Abdulrazzak M. El-Kharaijy        Director

Ms. Shaheen Ali                                  Secretary

 

Target Market and Growth

 

Within a few months of its inception, PCB started marketing corporate banking products extensively.  After expanding its network to more than 15 branches around the country, the bank started its full-fledged consumer banking operations in October 1996.  During the last couple of years, the bank has gained reputation in the area of corporate finance.

 

Categories of Shareholders

 

Individuals	60%
Investment Companies	25%
Insurance Companies	1%
Financial Institutions	14%

 

The sponsors of PCB belong to the well-known Al Mahfouz family of Saudi Arabia.  The family also owns the largest privately owned bank in the world – National Commercial Bank of Jeddah which assets of more than USD 22bn and an equity base of USD 2bn.  Nominees of the Bin Mahfouz family hold a 40% stake in the bank.

 

With around 40% of the shares held by Investment Companies and Financial institutions PBL has a stable equity base.  Such a large share holding by these groups indicates their confidence in the bank as a viable investment.  Therefore the bank shareholding pattern indicates that it is a financially sound entity.

 

Financial Analysis

Assets

Liquidity

 

Cash

PCBs cash balance declined by 48% (Rs.461m) in 1997.  This decline was largely brought about by the closure of the export refinance SDA maintained with the SBP.

The excess liquidity was diverted towards investments in short term federal bonds and treasury bills.  This investment offers a much better option as opposed to low interest bearing cash balances.  Also the bank is still able to comfortably maintain its SLR cash balance requirements with its current cash balance.

 

Investments

Investment in government securities also showed extraordinary growth of 82% (Rs.1.6bn) with a Rs.1.5bn investment in STFBs.  The bank seems to be pursuing a policy of diverting its excess cash reserves, money at call balances and newly injected equity towards these investments with the goal of maintaining liquidity while at the same time earning reasonable returns.

 

Asset Quality

 

Advances

Advances showed strong growth with a 39% (Rs.1.2bn) increase that deviates from the industry trend of a slowdown in the growth of new advances.  This growth will allow the bank to generate substantial earnings from its core operations.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Chemical and pharmaceuticals	2	13
Food and health care	2	8
Textile	3	28
Footwear and leather garments		5
Businessmen and professionals	26	11
Metal & engineering		11
Importers, exporters & retailers	55	15
Construction	2	4
Power production/transmission	2	4
Others	8	1

 

PCB has spread its advances portfolio proportionally over several segments in the economy.  Its largest exposure is in the textiles sector that comprises 28% of its portfolio.  The bank believes it is fully secure with respect to almost all of its debts and has undertaken moderate provisioning Rs.78m to cover any loans where collateral may not prove sufficient.  The bank accommodates one of the most secure advances portfolio in the industry.

 

Advances on Non Performing status and Provisioning

PCB has created provisions for 2.85% of its advances portfolio.  Although this number falls short of the industry average of around 4% the banks management feels confident about the security of its advances portfolio given the banks strict lending policies.  Also the banks provisioning is on a rise indicating that the banks management is making efforts to hedge PCB against any unexpected losses.  Advances placed on non performing status amount to Rs.224mn 5.23% of the banks total advances.  Current provisioning covers 54% of this amount.

 

Capital and Liabilities

Capital Adequacy

 

Equity

PCBs balance sheet saw a new injection of equity in 1997 that came about as a result of a fully subscribed Rights issue during the year.  This reflects the strong confidence of PCBs shareholders in their bank.  The generation of new equity along with the addition in reserves allowed for substantial growth in the banks equity of 67% (Rs.431m).  The banks Capital Adequacy Ratio (CAR) thus rose by 3% to 12% during the year.  This provides the bank with a firm foundation on which it can pursue aggressive growth.

 

Deposits

Deposits showed a steady growth of 23% (Rs.1.5bn) almost all of which came in the form of current account deposits.  Approximately 65% of the growth came from foreign currency accounts. Roughly 70% of PCBs deposits are comprised of fixed and savings deposits with the rest coming from current accounts.  This breakdown provides a balance between the stability and low cost of deposits.  The only problem currently facing the banks deposit base is that 61% of the deposits come from FC accounts which are likely to experience large withdrawals in the near future because of recent changes in SBP policy.  Hence the liquidity of the bank will be undermined.  But this is a problem that most players in the industry will have to cope with.

 

Operations

Profitability

 

 

Return on Equity

A number of factors contribute to PCBs low ROE compared to that of its competitors.  The bank incorporates significantly less leverage on its balance sheet than the average level of leverage maintained in the industry.  The bank has been working on improving its profitability that rose somewhat in 1997.  But this rise in profitability was countered by an increase in equity forcing ROE to remain relatively constant.  The bank has also practiced increasing the level of provisioning on its balance sheet (a practice also adopted by its competitors) which has also put a strain on its profitability.

 

Income

The bank managed to maintain growth in fund based income during 1997 which was a period when many banks were relying on returns on investments to maintain revenues.  Thus the bank has a solid base in its core operations.  Growth in non fund based income was stagnant a consequence of the general slowdown of the economy.

 

Administrative Expenses

PCB maintains high operating cost relative to its competitors.  Its administrative expense to PBT ratio grew to over 100% in 1997.  If the bank wishes to see an improvement in profitability it must harness it high operating costs and bring them down to more acceptable levels.

 

Risk Analysis

 

PCB currently faces is an unstable deposit base because of its FC deposits.  But this is a problem many of its competitors will also have to cope with.  The bank with its high level of liquidity and large capital base is well positioned to face any such problems.  Another area of concern is the banks high operating costs that dampen the banks profitability.  For the bank to exploit its full potential the bank needs to take the initiative to bring these cost down to more reasonable levels.

 

Conclusion

 

Overall the bank stands among the best players in the industry.  It has a well-diversified portfolio that is backed by ample amounts of collateral.  It has a very strong group backing which will allow it to maintain its growth potential and access to an international array of services.  A solid equity promises to permit aggressive growth in the near future.  The banks high level of liquidity put it in a position to counter any possible problems.

 

 

 

Prudential Commercial Bank Ltd. (PCBL)

 

Business Background

 

Prudential commercial bank Ltd. was incorporated in Pakistan in April 1994 and commenced commercial operations in May 1995.  The banks management is pursuing an aggressive growth strategy, doubling the banks branch network from 10 to 20 branches during 1997.  The bank is gradually moving towards achieving its goal of becoming a trade financing bank.

 

 

Board of Directors

 

Mr. Rashidullah Yacoob                                             Chairman and Chief Executive

Mr. Jahangir Siddiqui                                                 Executive Committee

Mr. Muhammad Rashid Zahir                                                Executive Committee

Mrs. Sanober Akhtar Yacoob                                     Director

Mr. Muhammad Rashid Zahir                                                Director

Mr. Muhammad Nasimuddin Mirza                           Director

Mr. Noman Ahmad Qureshi                                       Director

Mrs. Saleha Rashid Umoodi                                       Director

Mr. Muhammad Salman Rashid                                 Director

Mr. Muhammad Tahir Siddiqui                                  Secretary

 

Categories of Shareholders

 

Individuals	39%
Investment Companies	3%
Joint Stock Companies	43%
Financial Institutions	15%

 

PCBLs primary sponsors belong to The House of Prudential that was first granted a license in 1987 to operate and provide financial services under one umbrella. The original idea was of Mr Rashidulla Yacoob its present Chairman and was supported by his family and professional colleagues. Prudential first established Pakistan’s first 100% private sector leasing company, Pakistan Industrial & Commercial Leasing Limited in 1987. From then on it progressed by establishing three modarbas, an investment bank, a discount house, an insurance company a fund management company and most recently PCBL.  All the groups companies are listed on the stock exchange.  The total equity base of House of Prudential is around Rs1.7 bln with total assets of over Rs10 bln.

 

 

 

 

 

Financial Analysis

Assets

Liquidity

 

Cash

PCBLs cash balance experienced a slight 10% (Rs.38mn) decline during 1997.  The decline was not as large as those seen by its peers due to the banks limited SDA that had a balance of Rs.83mn in 1996.

 

Investments

PCBL saw a limited growth in its investments portfolio which only grew by 19% (Rs.180mn) compared to the 156% (Rs.566mn) growth during the previous year.  Investments were restricted to government securities that constitute most of the banks investment portfolio.  The slow growth in investments came as the bank pursued a strategy of aggressive advances growth.

 

Asset Quality

 

Advances

The bank had the highest advances growth rate among the NEPBs with its advances literally doubling with 100%(Rs.1.6bn) growth.  The banks total advances portfolio at the end of the year was Rs.3.2bn.  Rather than pegging its earnings to government securities the bank is striving to enhance earnings from it core operations of fund based income.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Agribusiness	3	1
Textile	4	23
Sugar		22
Shoes and leather garments	1	3
Financial	11	16
Individuals	22	3
Others	59	32

 

The bank has spread its exposure somewhat proportionately across three segments of the economy textiles, sugar and the financial institutions.  The remaining portion of the banks advances are extended against deposits held by the bank.  Although the banks advances portfolio is limited, by restricting itself to a few sectors PCBL is able to manage its portfolio more efficiently and evaluate the credit worthiness of its clients more effectively.

 

Advances on Non Performing status and Provisioning

PCBL doubled the level of provisioning on its balance sheet from Rs.30mn to Rs.61mn during 1997.  But as a percentage of its total advances provisioning exists for less than 2% of the banks advances portfolio compared to the 4% industry average.  Rs.190mn of the banks advances have been placed on a non performing status.  As a proportion of advances non performing advances fell from 11% to around 6% with the banks strong advances growth.  The banks level of provisioning is somewhat insufficient since it only cover 32% of the advances on a non performing status.  It is most likely that the bank will increase its level of provisioning in the near future to hedge itself against possible defaults.

 

Capital and Liabilities

Capital Adequacy

 

Equity

PCBLs CAR has plunged from 16% in 1995 to less than 7% in 1997 due to the steady deposit growth the bank has experienced during this period without matching growth in equity.  This has left the bank with an expanding asset base against a stagnant equity base leading to the banks low CAR.

 

Deposits

The bank continued to maintain above average deposit growth in 1997 with deposit growth of 44% (Rs.913mn) compared to the industries 35% growth rate.  This deposit growth was necessary to fuel the banks advances growth.  PCBL had total deposits of Rs.3bn at the end of the fiscal year.  Growth in fixed and savings deposits was stagnant at 1% but growth in current deposits exploded at 292%(Rs.898mn) compared to the 1996s negative growth of -25%.  The banks expanding branch network was instrumental in the high level of current deposit mobilization.  PCBLs ratio of fixed to current deposits was altered from 85:15 to 60:40 significantly lowering the cost of the banks deposit base.

 

The banks growth in FC deposits was average at 53%, while growth in LC deposits of 33% was twice the industries average growth.  The banks ratio of LC deposits to FC deposits was constant at around 45:55.

 

 

Operations

Profitability

 

 

Return on Equity

PCBL has managed to maintain and more recently improve its low ROE somewhat.  The bank has managed to do so by increasing the level of revenues generated on its asset base. It has also increased the level of leverage on its balance sheet.  This has allowed the bank to maintain its ROE but has not addressed the problem of the banks declining profitability that has dropped sharply declining from 17% in 1995 to 3% in 1997.

 

Income

Both the banks fund based and non fund based income grew in 1997 but profitability continued to decline.  The decline of profitability came with declining spreads as the banks cost of funds rose.  Although PCBLs yield on earning assets grew from 14% to 16% the banks cost of funds rose from 7% to 12% forcing yields down from 7% to 4%.  The spike in cost of funds can be attributed to the increase in the banks borrowing from other banks which rose from Rs.1bn in 1996 to Rs.1.8bn in 1997, an almost 80% increase.

 

Administrative Expenses

The banks administrative expenses declined slightly during the year.  This is surprising given that the bank opened around 10 new branches during the year.

 

Risk Analysis

 

The lack of diversity in the banks advances portfolio puts it at significant risk in the sectors where its exposure lies.  PCBLs has not undertaken enough provisioning to cover itself against the possible defaults it could face.  The banks declining CAR will not allow it to maintain its current growth rates.  Also the bank will have to yield better returns to justify its operations.

 

Conclusion

 

The bank has been successful in restricting administrative costs and mobilizing deposits allowing it to fund it advances growth.  But the bank has failed to undertake sufficient provisioning which will depress its future earnings.  Also the banks current strategy has not been successful as far as profitability is concerned.  The bank needs to examine its strategy and determine ways to enhance profitabilit

 

 

Schon Bank Ltd. (ScBL)

 

Business Background

 

Schon Bank Ltd. was incorporated in Pakistan in December 1993 as a public limited company and began to undertake and carry on the business of banking in April 1994 and since then has been engaged in commercial banking and related services.  The bank is listed on the Karachi Stock Exchange

 

Board of Directors

 

Qais Bin Mohammed Al Yousef                                            Chairman

Badr-ud-Din Khan                                                                  President and CEO

Yousef Bin Salman Bin Baquer Al Saleh                               Director

Zohair Mohammed Abdullah                                                 Director

Saghir Hussain                                                                        Director

H.U. Beg                                                                                 Director

Hafeez-ur-Rehman Butt                                                         Director

Asif Dawood Sajan                                                                Director

Rahat Saeed Khan                                                                  Secretary

 

Categories of Shareholders

 

Individuals	65%
Financial Institutions	35%

 

Al Ahlia Portfolio Securities Co. acquired the controlling shares of Schon Bank Ltd. in November 1997.  Al Ahlia’s decision to acquire the controlling shares is based on the confidence it has in the management of the Bank and the business opportunities Pakistan offers.

 

Financial Analysis

Assets

Liquidity

 

Cash

ScBLs cash balance only declined by 18%(Rs.121mn) during 1997.  This decline is low considering the closure of the banks SDA that had a balance of Rs.285mn.  The bank seems to be pursuing a strategy of maintaining a high degree of liquidity.  This is apparent from its 11% cash to deposit ratio.  The banks cash balance at years end was Rs.535mn.

 

Investments

The banks growth in investments fell far short of the industry average during the year.  Its investment growth was 18% (Rs.167mn) compared to the industries average growth of 71%.  Rather than pursuing investments growth, because of the low yields offered by government securities during the year, ScBL pursued rapid expansion in credit extension.  This reduced the availability of excess liquidity and hence the low growth in investments.

 

Asset Quality

 

Advances

ScBL had the second highest advances growth in the industry at 99%(Rs.2.3bn) which was funded by its growth in deposits as well as borrowings from banks.  The banks total advances portfolio had a balance of Rs.4.5bn at the end of 1997.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Chemicals and Pharmaceuticals	1	7
Agribusiness	1	3
Textile	5	32
Shoes and leather garments		3
Automobile/transportation equip.		7
Financial	5	4
Production/transmission energy		2
Others	88	42

 

Most of the banks advances are extended against deposits held by the banks making this portion of the banks advances relatively secure.  The 32% exposure in the textile sector does pose a risk because any downturn in this sector could devastate the quality of the banks advances portfolio.  The bank has made an attempt to somewhat diversify its risk by extending credit to diverse segments of the economy.  ScBLs recent credit expansion spree does raise concerns about the quality of the banks new clients.  Unless the bank has extended credit to a few clients it would have been very difficult for the bank to evaluate the credit worthiness of its new clients given a possibly large number of them.

 

Advances on Non Performing status and Provisioning

The bank had the highest provisioning charge for the year among the NEPBs.  Total provisions grew by 1775%(Rs.213mn) with total provisions of Rs.225mn at the end of the year.  As a percentage of total advances provisions grew from 0.51% to 4.81% above the industry average of 4.25%.  The high degree of provisioning was forced by the 432%(Rs.285mn) rise in advances placed on a non performing status which ended the year at Rs.351mn.  As a percentage of total advances on non performing status increased from 2.81% to 7.5%.  The banks current provisioning covers 64% of these advances.

 

According to the banks management 70% of the increase in its loan loss reserves can be attributed to a single customer who was involved in fraudulent transactions of a large scale in several banks.  The bank is pursuing the case in the courts where the response has been favorable.  It hopes to recover some of its losses from the sale of seized assets.  The banks conservative provisioning policies can also be explained by its recent acquisition.  The banks new owners are cleaning up its balance sheet so that they can have a fresh start.

 

Capital and Liabilities

Capital Adequacy

 

Equity

ScBLs CAR has almost halved between 1995 and 1997 dropping from around 16% to 8%.  The recent decline in this ratio can be explained with the rapid expansion of the banks asset base during 1997.  Also with the its high level of provisioning during the year the bank suffered a Rs.80mn loss which translated into a deterioration of the banks equity by the same amount.  Even with its current CAR the bank can pursue reasonable growth and therefore is not at risk of insufficient equity unless it suffers further losses.

 

Deposits

The banks deposits experienced above average growth in 1997 at 54%(Rs.1.7bn) with year end deposits of Rs.4.7bn.  The strong growth was the result of exceptional growth in current account deposits that grew by 225% compared to 14% during the previous year.  Total current deposits grew from Rs.485mn to Rs.1.6bn.  The banks ratio of current to fixed and savings deposit was altered from 16:84 to 33:67.

 

Most of the growth in current deposits came in the form of foreign currency deposits which grew by 74% (Rs.1.3bn).  The proportion of FC accounts in the banks deposit base increased from 57% to 64% increasing the banks dependence on these accounts.  Given the recent restrictions on FC accounts the bank could possibly face a liquidity crunch during 1998 with its high dependence on these accounts.

 

Operations

Profitability

 

 

Return on Equity

The sharp decline in the banks ROE is directly linked to the losses the bank incurred during the current year forcing a negative profitability.  Also the banks profitability in the past years is somewhat inflated by the fact that the bank hardly undertook any provisioning during those years and therefore had to undertake heavy provisioning in 1997.  Realistically the banks 1996 ROE should be much lower.

 

Income

Although ScBLs advances showed a strong increase during the year the growth in interest income was not as encouraging because most of the credit extension was collateralized and therefore had low yields.  Also the bank funded its credit expansion with heavy growth in deposits and borrowing leading to a high aggregate cost of funds.  Therefore net interest income fell by 55%(Rs.83mn) compared to the previous year.  The banks income from trade related activity also declined due to a slow economy.  The only encouraging sign in the banks income statement was the high level of return from investment securities although the bank did expand investment much during the year, an apparently poor move by the banks management.  The bank did manage to improve earning from FC transactions somewhat.

 

Administrative Expenses

The banks administrative expenses rose sharply by 33%(Rs.48mn) indicating declining operating efficiency when viewed with the banks poor profitability.

 

Risk Analysis

ScBL has a number of problems it needs to overcome before it can see some stability in its operations.  The bank possesses a highly questionable advances portfolio which may require further provisioning before it can be completely realized.  The banks management has taken some steps in the direction of addressing this problem with it recent provisioning.  Also with its high dependence on FC accounts the banks deposit base is highly unstable.  This could force the bank into a liquidity crunch and force its asset base to shrink.  The banks profitability is on the decline with diminishing returns and rising operating costs.

 

Conclusion

Currently the bank is in a highly precarious position and its new owners will have to implement some sweeping reforms to bring the bank back on track.  The bank will have to write off reasonable losses and see a fresh influx of funds before it can experience a turnaround.

 

Soneri Bank Limited (SBL)

 

Business Background

 

Soneri Bank Limited was incorporated in Pakistan on September 28, 1991 as a public limited company and commenced operations the same year.  Since its inception the banks network has grown to 23 branches nation wide.

 

Board of Directors

 

Mr. Alauddin J. Feerasta                                Chairman

Mr. Safar Ali K. Lakhani                                Chief Executive

Mr. Jaffer Ali M. Feerasta                              Director

Mr. Nooruddinm B. Feerasta (Sr.)                  Director

Mr. Tariq Rehman                                           Director

Mr. Asadullah Khawaja (NIT Nominee)        Director

Mr. Abdul Hayee                                            Director

 

Correspondent Relations

 

With its worldwide network of foreign correspondents the bank handled foreign trade in excess of Rs.21bn showing an increase of 34% over the previous years figures.  The quality of service offered by the branches of SBL has enabled it to attract a number of new customers.  The bank expects to continue to maintain this trend in subsequent years.

 

Expansion

 

The bank opened five new branches during 1997 and intends to further enhance its network during the current year.  SBL hopes that strategically located new branches in important towns and cities would help generate sufficient new business to sustain the growth trend.

 

Human Resource Development

 

The bank has maintained its commitment towards manpower development giving the subject its maximum attention.  Its training program for new entrants continues to keep in view the needs of an expanding network and enhanced volume of business handled by the existing branches.  The bank regularly sends officers and executives to attend Banking Seminars both inside and outside the country.  During 1997 four executive were deputed to attend International Banking Seminars in the UK, USA, South Africa and UAE to enhance their technical know how and learn about recent developments in the Banking Industry.

 

 

 

 

Categories of Shareholders

 

Individuals	63%
Joint Stock Companies	3%
Financial Institutions	28%
Insurance Companies	2%
Foreign Companies	2%
Non-Resident	2%

 

A 35% stake held by the corporate sector in SBL gives weight to its viability as a solid financial entity and also provides the bank with a stable equity base.  Another 45% of the stake is held by 9 individuals leaving less than 20% in circulation for the general market allowing the banks stock to lack volatility.

 

Financial Analysis

Assets

Liquidity

 

Cash

SBLs cash balance saw a 42% (Rs.580m) decline in 1997 that came about with the closure of the banks Rs.653m SDA account with the SBP.  Not being required to maintain this account any more the bank brought its cash balance down to a level at which it could comfortably meet SLR requirements directing the excess liquidity towards investments in STFBs which offer better yields.

 

Investments

The bank undertook huge investments in government securities with a Rs.2.6bn investment in STFBs a growth of nearly 200%.  This investment strategy allows the bank to substantially improve the liquidity of its asset base.  The strategy will prove useful to the bank when it attempts to maintain advances growth while facing a liquidity crunch during the following year because of its deposit base being largely dependant on FC accounts.

 

Asset Quality

 

Advances

Advances presented a healthy growth of 46% (Rs.1.9bn) in a period when credit expansion was dampened by slow economic growth.  A provisioning charge of Rs.34m was undertaken during 1997 but a reversal of Rs.11m resulted in a net provisioning charge of Rs.23m.  Since the bank has mainly extended credit on cash collaterals it has significantly reduced its risk but has also lowered the yield earned on advances.

 

 

 

 

 

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Chemical and pharmaceuticals		2
Agribusiness	1	4
Textile	3	33
Shoes and leather garments		7
Cement		2
Sugar	1	1
Financial	1	2
Electronics and electric appliance		3
Others (small traders)	94	46

 

The bank maintains a very realizable advances portfolio as a consequence of its unique operating practices in extending credit.  Approximately half its advances portfolio is comprised of credit extended to small traders and importer/exporters.  This credit has been extended on the basis that around 90% of the banks deposit base is derived from these customers.  Therefore it is very likely that this portion of the banks advances base is fully backed by cash collaterals.  This also clarifies what comprises the Others category in advances and deposits.  The secure advances portfolio justifies the low level of provisioning undertaken by the bank on its balance sheet.

 

Advances on Non Performing status and Provisioning

The bank has maintained extremely low levels of provisioning on its Balance Sheet.  Its ratio of provisions to advances is extremely low at 1.4% (Rs.85m) which may be justified by the bank, given its confidence in its advances portfolio.  Also the banks advances placed on non performing status is small compared to industry averages since it comprises only 1.5%(Rs.93m) of the banks advances portfolio.

 

Capital and Liabilities

Capital Adequacy                                                                

 

Equity

SBLs CAR continued to decline in 1997, which raises some concerns.  Although the ratio currently stands at a reasonable rate of 7% it has been declining steadily since 1995 by one percent every year.  This decline has been brought about by the rapid growth in the banks asset base which has not been matched by growth in equity.

 

Deposits

Deposits showed a solid 48% (Rs.3.2bn) growth during 1997 with approximately 65% (Rs.2bn) of the growth coming from savings and fixed deposit accounts.  The difference coming from current accounts.  Although only 35% of the growth in deposits came from current accounts, as a whole current account balances surged by 145%(Rs.993m) lowering the banks cost of funds to some extent.  The impact of lowered cost of funds

is diminished because of the smaller proportion of current accounts in the banks total deposits balance.  The banks ratio of local currency to foreign currency deposits was maintained at around 65%.  This is likely to make the banks deposit base more volatile in the near future and restrict the banks growth in deposits due to recent changes in SBP FC accounts policy.

 

Borrowings from Other Banks

SBLs borrowing from other banks also expanded by 121% (Rs.850m) during 1997.  99% (Rs.1.5bn) of this borrowing comes from the SBP under its Export Refinance scheme allowing the bank to obtain funds at an extremely low rate of 9%.  The large growth in this account can be attributed to the banks strong trade related business.

 

Operations

Profitability

 

 

SBLs ROE ranks amongst the highest in the industry.  The banks performance for the 1996 fiscal year was spectacular making its performance during 1997 look moderate.  But overall the bank easily outperformed the industry averages during the period.  Reasons for the banks recent decline in profitability requires further analysis.  Although the bank was able to maintain its ROE somewhat, it came at the cost of increased leverage on the banks balance sheet.

 

The decline in profitability can be attributed to a number of factors.  Investments in government securities occupied a larger proportion of the assets side of the balance sheet as opposed to advances in 1997.  Since government securities do not yield as high a return as that earned on advances the banks total interest income did not grow at the same high rate experienced in 1996.  The banks interest cost on deposits and borrowings continued to grow as a total because of a large increase in the banks deposit base.  Therefore the banks overall spread declined leading to the lower profitability.  Also the banks fund based income saw insignificant growth during the year because of a slow down in the general economy and increased competition while the Administrative Exp./PBT rose slightly.  These two factors induced a downward trend on the banks profitability.  But decline in profitability brought about by the banks new asset structure did provide the benefit of a more liquid asset base.

 

Risk Analysis

 

SBLs equity balance has been declining relative to its asset base over the last couple of years, which could impede the banks growth in the future.  The mitigant for this is that SBL has historically been overcapitalized thus justifying a decline in its CAR.  SBL would be able to comfortably meet the 8% BIS requirement for capital adequacy if its CAR were calculated on a risk adjusted basis.  SBL also faces the threat of the destabilization of its deposit base due to recent restrictions on FC accounts.

Conclusion

 

SBL is one of the better run banks in the industry.  Since its inception it has shown steady growth and yielded exceptional returns.  The bank appears to have all aspects of its financials under tight control.  If the banks performance in the past is indicative of its performance in the future it should continue to be highly profitable.  During 1997 the bank received an A1 rating for short term and an A rating for long term, from the Pakistan Credit Rating Agency (Pvt) Ltd. (PACRA), an affiliate of IBCA Ltd, UK.  The ratings indicate the banks high quality of operations.  SBL obtained the rating voluntarily to generate confidence among its customers and to obtain to obtain an independent assessment of the quality of its operatio

 

Union Bank Ltd. (UBL)

 

Business Background

 

Union Bank started its operations in 1991 and within a short period of time became one of the major players in the private banking sector.  With 25 optimally placed branches spread in all principal cities the bank has managed growth in practically all facets of commercial banking, especially trade finance.

 

Board of Directors

 

Mr. M. Naseem Saigol                                    Chairman

Mr. M. Saleem Jan                                          President and Chief Executive

Mr. M. Azam Saigol                                       Director

Mrs. Sehyr Saigol                                            Director

Mrs. Amber Saigol                                          Director

Mr. Hameed Abdullah Haroon                       Director

Mr. Shahid Sethi                                             Director

Mr. Haroun Rashid                                         Director

Mr. Khalil A. Malik                                        Secretary

 

Strategic Expertise

 

The bank has concentrated on being a center of excellence in trade finance.  The bank strives to help exporters and importers maximize opportunities with its trade products and services.  The bank maintains in-house capabilities to tailor and structure Letters of Credit to suit requirements of liquidity, credit and foreign exchange.  During 1997, the bank completed full automation and computerization of its trade finance units, at all the twenty-five branches further enabling it to offer its clients prompt and efficient services.  The bank handled a high level of trade volume during 1997 amounting to Rs.21.33bn, of which imports comprised Rs.7.35bn and exports Rs.13.98bn, an increase of 25.91% over the previous year.

 

Correspondent Relationships

 

The banks expertise in Trade Finance is directly correlated to its worldwide network of correspondents.  UBLs strong performance in the past allowed the bank to receive increased credit lines from its correspondents during 1997 as well as reduced pricing and tariff, for its transactions, enabling the bank to have a competitive edge.  The bank has systematically, dynamically and with concerted effort promoted the enhancement of correspondent relations with banks globally.  Currently UBL maintains a wide and constantly expanding network of correspondents with all major banks, enabling it to offer a high standard of services to its clients.  The substantial credit lines received from major global banks and multi-lateral institutions like Asian Development Bank (ADB) and International Finance Corporation (IFC) reinforces confidence in the bank, while at the same time supplementing its capability to offer competitive products and services.

Categories of Shareholders

 

Individuals	46%
Joint Stock Companies	22%
Financial Institutions	14%
Foreign Companies	12%
Others	6%

 

UBL maintains a solid equity base with its strong group sponsorship.  With a large chunk of the shares held by the groups primary backers the Saigols who are highly reputable in the corporate sector the bank posses the credibility it needs to succeed.  A 48% stake held by corporate sponsors further enhances the credibility of the bank an important factor in a highly relationship based business.

 

Financial Analysis

Assets

Liquidity

 

Cash

UBLs cash balance saw a huge 60% (Rs.1.5bn) decline in 1997 with the closure of its Rs.1.6bn export refinance SDA with the SBP.  The excess liquidity was diverted towards investments in government securities that surged.  Money at call and short notice also saw a Rs.760m increase in a move by management to maintain the banks liquidity.  The bank is attempting to strike a balance between liquidity and earnings from STFBs that yield much better returns than the banks cash balances.  It has done so by being able to meet SBPs SLR requirements comfortably.

 

Investments

Investments in government securities more than doubled with 111% (Rs.2.7bn) increase, most of the investment occurring in STFBs.  This high growth in investment brought about as a consequence of the closure of SDAs as well as a lack of viable options to which credit could be extended.

 

Asset Quality

 

Advances

Advances showed a modest growth of 22% (Rs.1.3bn) reflective of an industry trend of conservative credit extension brought about with a slow down of the general economy.

 

 

 

 

 

 

 

 

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Agribusiness	2	3
Textile	42	29
Shoes and leather garments	3	5
Cement	1	3
Automobile and transportation	2	4
Financial	1	2
Carpet		15
Electronics and electric appliance	3	2
Power production/transmission	17	2
Others	29	35

 

UBL has spread its advances portfolio over several segments of the economy in an effort to spread its risk.  An area of concern in the banks advances portfolio is the 15% exposure in the carpet industry.  This is an industry which has come under a lot of financial strain over the last couple of years due to increased competition from foreign competitors as well as a decline in revenues stemming from allegations of exploitation of child labor in the industry.  The bank feels that it is fully secure in its exposure by holding appropriate levels of collateral, this appears to be highly unlikely.  Appropriate levels of provisioning do not exist to hedge the bank against losses that may arise from this area of concern.  Deriving 42% of its deposits from the textile sector significantly reduces the banks risk with a 29% advances exposure in the textile industry.

 

Advances on Non Performing status and Provisioning

The banks total provisioning of Rs.126m only covers 11% of its exposure in the carpet industry and 43% of its Rs.296mn of advances placed on a non performing status.  These two factors are likely to force the bank to undertake significant provisioning in the near future which will prove to be a burden on the banks profitability.

 

Capital and Liabilities

Capital Adequacy

 

Equity

UBLs Capital Adequacy Ratio has been falling steadily since 1995 when it stood at 7.90%.  Currently it stands at 6.40%, a 1.5% decline in three years.  The current ratio still comfortably meets SBP requirements but is lower than the average for the better competitors in industry.  Unless the bank takes initiatives to improve this ratio it can impede the banks growth in the future.

 

Deposits

The banks deposit base grew steadily in 1997 to end the year with a Rs.11.7bn balance.  The 31% (Rs.2.7bn) growth mostly came in the form of current accounts and margin/security deposits that grew by 51% (Rs.2.1bn) with the rest coming from savings deposits.  The growth in current accounts is likely to make the banks deposit base somewhat more volatile but it will also provide the benefit of lowering the cost of the banks deposit base allowing it to earn higher spreads and thus higher returns.  Also the banks current account deposits are comprise approximately 25% of the banks deposit base not a significant proportion.  The bank is most likely to have welcomed the strong growth in current accounts as a means to lower its cost of funds.  The banks ratio of local currency deposits to foreign currency deposits raises some concerns.  With 60% (Rs.7bn) of the deposits in the form of FC the banks deposits are likely to see slower growth and more volatility with recent changes in SBP FC accounts policy.

 

Operations

Profitability

 

 

UBL maintains a ROE that lies on the lower end of spectrum of ROEs of its competitors.  The low ROE does not arise as a consequence of a low degree of leverage on the banks balance sheet.  The existing level of leverage is higher than the average for the industry.  The bank also manages to generate an appropriate level of revenues on its existing asset base.  A breakdown of the ROE reveals the low ROE is directly correlated to the banks low profitability.

 

Many banks in the industry can attribute declining profitability to high levels of conservative provisioning in recent years but this does not hold true in UBLs case since the bank has only undertaken modest amounts of provisioning recently.  Therefore the declining profitability can be attributed to the growth in revenues not keeping pace with growth in expenses causing profitability to decline.  During 1997 the banks fund based income continued to show steady growth.  Non fund based income declined mainly because of a sharp decline in income from foreign currencies transactions which dropped by 52% (Rs.88m).  Administrative expenses continued to grow strongly with an 18% (Rs.71m) rise.  The combination of rising administrative costs and a drop in non fund based incomes facilitated UBLs poor income statement performance in 1997.

 

Risk Analysis

 

The banks CAR is on a declining trend that is not likely to see a turn around given the banks current position.  Therefore it is highly unlikely that the UBL will be unable to maintain its current growth rates in the near future. Another area of concern is the possible defaults the bank faces with its exposure in the ailing carpet industry.  The bank has not taken any steps to hedge it self from possible losses and the banks overall provisioning practices do not show much conservatism by the banks management.  Currently provisioning as a percentage of the banks total advances balance is a mere 1.7% (Rs.126m) which falls short of the industry margin by a significant percentage.  Finally the bank is stifled by profitability problems stemming from its high administrative cost, something the bank can ill afford given its current position.

 

Conclusion

 

The bank is likely to face some difficult years in the future if it wishes to tackle its current problems efficiently.  UBL will be required to streamline operations to bring high administrative cost under control.  It will have to forgo profitability for the sake of security and undertake significant provisioning to hedge itself against possible defaults.  The bank will have to undertake these steps in an extremely competitive environment in a time when the banking industry will be going through hard times.  The only thing the bank can look forward to is support from its strong backers to allow it to meet the current challenges it faces.

Bank Al Falah Ltd. (BAF)

 

Business Background

 

Formerly known as Habib Credit & Exchange Bank (HCEB), Bank Al Falah, a commercial bank incorporated in Pakistan, has been recently acquired by the Abu Dhabi Consortium (U.A.E) from the Government of Pakistan.  The Consortium is led by H.H. Sheikh Nahayan Mabarak Al-Nahayan- a prominent member of the ruling family of Abu Dhabi and Chairman of Union National Bank, one of the leading banks of Abu Dhabi-UAE.  The financial and managerial strength of Abu Dhabi Consortium has greatly enhanced the credibility of the Bank in Pakistan.

 

Board of Directors

 

H.H. Nahayan Mabarak Al-Nahayan                                     Chairman

Mr. Mohammad Saleem Akhtar                                             Chief Executive

H.H. Sheikh Suroor Bin Mohammed Al-Nahayan                 Director

Mr. Abdulla Khalil Al-Mutawa                                              Director

Mr. Abdulla Naser Hawaileel Al-Mansoori                            Director

 

Competitive Strengths

 

BAF is aggressively marketing itself as a trade finance bank in the market.  Its strategy is to lower rates of advances to attract big names.  To compensate for lower spreads, the Bank has to depend on fee based income for improved profitability.

 

The Bank has comprehensive advisory, product and execution capabilities

• Financing – debt (capital market instruments & straight loans) and equity (public & private)
• Full range of advisory services i.e. consultancy, M & A advisory, financial restructuring etc.
• Liability products
• Working Capital Finance
• Trade finance and other related services

 

Besides these BAF provides efficient Consumer/Corporate Marketing and Structured Finance services which are supported by the strong credit backing of a commercial bank with execution capabilities of an investment bank.  The Bank has a full-fledged liaison office in Abu Dhabi to support its international operations.

 

Shareholding Structure

 

Paid up Capital                                               Rs.600,000,000

Break-up of share holding:

Abu Dhabi Consortium                                   70%

Habib Bank Ltd. (GoP)                                  30%

Financial Analysis

Assets

Liquidity

 

Cash

BAF cash balance declined by 56% in 1997 to Rs.472mn with the closure of its Rs.469mn SDA.  With its new balance the banks ratio of cash to demand and time liabilities stands at 5.22% which satisfies the SBPs SLR requirement but is still comes precariously close to violating it.

 

Investments

The banks total investments declined by 8% during 1997 defying the industry trend of a rise in investments.  BAF rearranged the mix of its investment portfolio by reducing Central Government Loans and diverting the freed up fund towards STFBs.  The lack of investment growth can be attributed to the lack of funds available to the bank to undertake investments.  Also with Investments comprising 30% of the banks asset base a large increase in investments may have been unnecessary to enhance the already liquid asset base of the bank.

 

Asset Quality

 

Advances

BAFs advances growth picked up in 1997 after a period non existent growth in 1996.  The lack of growth in 1996 can be attributed to the banks effort of cleaning up its troubled advances portfolio.  The banks advances grew by 35%(Rs.1.2bn) during the year

With growth falling slightly short of the industry average.  At the end of the fiscal year the banks advances portfolio was valued at Rs.4.8bn.

 

Exposure by Sector

 

Industry	Deposits %	Advances %
Textile	1	37
Wholesalers/investors/properties	3
Cement	3	16
Fuel and Energy	18	20
Constructions	3
Others	72	27

 

The banks advances portfolio lacks diversity with most of the credit extended to three sectors of the economy.  This is consistent with the banks policy of targeting high net worth clients.

 

Advances on Non Performing status and Provisioning

BAF maintains the highest level of provisioning among the NEPBs, both in absolute terms and in terms of a percentage of total advances.  The banks provisions only experienced a 5% growth in 1997 with total provisions at the end of the year equaling Rs.1.3bn, 40% of the total provisions undertaken by NEPBs.  The slow growth in provisioning can be explained by the low levels of revenues the bank generated.  Provisions now cover 27% of the banks advances down from 35% in the previous year.  The industry average for provisioning is around 4%.

 

The bank has been forced to undertake such high levels of provisioning due to the poor quality of its asset portfolio that it acquired upon privatization.  Prior to privatization the banks loans were highly politically motivated and thus not very realizable.  The banks management is pursuing a strategy of using BAFs turnaround period to cleanse the balance sheet and start afresh.

 

The banks advances placed on non performing status grew to Rs.1.8bn although their 33% growth rate fell below the industry average of 96%.  Also as a percentage of advances they declined slightly from 38.36% to 37.88%.  Provisioning covered 92% of the advances placed on a non performing status in 1996, this number has dropped to 73% in 1997 due to the slow growth in provisioning.  The high level of advances on non performing status illustrates the necessity for the bank to undertake high levels of provisioning.

 

Capital and Liabilities

Capital Adequacy

 

Equity

The banks CAR declined slightly in 1997 to 6.76% with the banks total equity remaining constant at Rs.711mn.  The decline in capital adequacy was facilitated by a lack of growth in equity which did not see any additions during 1997 since the bank did not earn a net profit during the year.

 

Deposits

BAF deposit base experienced one of the lowest growth rates among the NEPBs growing a mere 13% bringing the banks total deposits to Rs.9bn.  Growth in fixed and savings deposits declined from 19% to 10%, while growth in current deposits showed strong improvement with the growth rate rising from –36% to 44%.  But overall the growth rates were poor compared to the industry.  The strong growth in current accounts did not alter the proportion of current deposit to fixed deposit much that changed from 8:92 to 10:90.

 

Growth in foreign currency deposits was an impressive 77% higher than the industry average of 51%.  This growth was facilitated by the large influx of deposits from the banks sponsors.  The slow growth in BAF deposits can be explained by the 66% (Rs.2.3bn) decline in LC deposits.  This has altered the proportion of LC deposits to total deposits from 45% to 13% and raised the same ratios for FCs from 55% to 87%.  This has greatly increased the banks reliance on FC deposits which have recently become highly unstable.  Given the banks average liquidity position the bank could face a severe liquidity crunch if FC deposits are with drawn.

 

 

 

Operations

Profitability

 

 

Return on Equity

The banks ROE has seen a sharp declining trend since 1995 with ROE dropping from 23% to 0% in 1997.  BAFs ROE has been largely influenced by the banks declining profitability indicative of poor operations.

 

Income

Although the banks advances experienced a 35% (Rs.1.3bn) growth, its interest income declined from Rs.1.1bn to Rs.1.0bn in 1997.  This decline in fund based income can be attributed to the banks policy of undertaking securitized lending which has resulted in low yields forcing interest income down to levels where the bank can not sustain any profitability.  The only way the bank was able to keep interest income above interest expense was with the help of the low cost deposits it has received from its sponsors which have allowed it to maintain a low cost of funds.  The banks income from foreign currency dealings also experienced a decline of approximately 30% because of the bank lack of competitiveness in highly competitive environment.  These two factors combined with the banks policy of high levels of provisioning wiped out the banks profits for the year.

 

Administrative Expenses

The bank was able to keep administrative expenses under control during the year forcing insignificant growth in the account.  This provided the bank with some relief in a year marred by poor income statement performance.

 

Risk Analysis

In its current position BAF has a number of problems it needs to overcome before it can start earning its investors reasonable returns.  The banks management is faced with the problem of tackling both declining profitability and a low quality advances portfolio at the same time.  The bank needs to strike a balance between sustaining profitability and competitiveness while at the same time cleaning up the troubled portion of its advances portfolio.  It seems that presently the banks management is solely focused on cleansing the advances portfolio and has thus let the banks core operations deteriorate.

 

Conclusion

The banks strong group backing is probably the only thing that can see it through a turnaround.  As long as the bank continues to receive sufficient financial support from its sponsors it can achieve a turnaround.  Currently the banks financial position is extremely poor and not indicative of bright future.

 

Quality Reports on Pakistan’s Economy and Business Sectors for Students

• Textile Industry of Pakistan – A Research Report

• Cement Industry of Pakistan – An Academic Report

• Pakistani Automobile Industry – In-depth Analysis

• Sugar Industry of Pakistan – An Academic Report

• Pharmaceutical Industry of Pakistan: Financial Analysis

• Oil Industry in Pakistan: Academic Report

• Pakistani Leather Industry – A Marketing Report

• Pakistan Steel Mill: Analysis

• Oil Marketing Companies in Pakistan: A Report