Bank: BANK OF PUNJAB Analysis of Financial Statements - Financial Year 2003-H1 2008
The Bank of Punjab was established in 1989 under the "The Bank of Punjab Act 1989". The bank provides commercial banking and related services in Pakistan and Azad Jammu and Kashmir, with special emphasis on agriculture sector. The bank has a network of 272 branches up to December 31, 2007.
The bank, through its wholly owned subsidiary, Punjab Modaraba Services (Private) Limited, conducts Modaraba operations. Its major customer is the government. Other customers are various public sector enterprises from different segments, including textile, real estate, transport, agriculture, financial institutions and individual customers.
RECENT RESULTS H1'08
The net interest income (NII) for the 2nd quarter registered a rise of Rs 353 million over the figure of 1st quarter while overall NII for the 1st half of the current year remained higher by Rs 68 million over the 1st half of 2007, showing an increase of 3.5%. Provisioning has shown a stupendous increase of 2617%, which has pushed the PAT in red for H1'08 despite a slight profit in 2Q'08.
Owing to provisions against advances made during the period, after tax loss for the half year stood at Rs 2,628 million against profit of Rs 1,825 million during the corresponding period of last year. However, after registering an after-tax profit of Rs 466 million for the 2nd quarter of the year 2008 with an EPS of Rs 0.88, the LPS of Rs 5.85 for 1st half of the year has now been reduced to Rs 4.97.
The assets have seen a decline of 7.3% at the end of H1'08 as compared to the end of FY07. At the end of half year, deposits of the bank remained at a level of Rs 180,824 million, A decline of 5.7% as compared to FY07. A decline in the fixed deposits was observed while the savings accounts witnessed a decline. Deposits from financial institutions also saw a decline. And shareholders' equity stood at Rs 12,485 million. Total advances at the end of half year remained at Rs 142,849 million, an increase of 6.7%. These include Rs 8,403 million due from three companies which, during the period under review, upon adjustment of Rs 450 million, were restructured under revised arrangements for a period of twelve years, including three years grace period. A provision of Rs 2,500,000 thousands has been made against these advances.
Advances include Rs 10,262,808 thousand (2007: Rs 3,349,891 thousand) which have been classified as non-performing in various categories. Investments declined by 48%, on account of offloading the market T-Bills held by the bank. It can be expected that in the coming times, when the impact of provisioning is lesser and the new management brings about better control, BoP will fare better. Already in 2Q'08 it has shown an inclination to make profits, which may continue hopefully in the future as well.
INDUSTRY
The year 2007 was proved a volatile year for the banking sector in terms of profitability. Every quarter showed a different picture as shown in the graph below: The overall profitability declined by 5.6% in 2007. The fourth quarter of the banking sector did not perform well. Banking sector till the end of HY07 depicted the growth of 53.2% in the profitability. But in the start of 2HY07, the SBP proposed full provisioning against non-performing loans (NPLs) and withdrew the facility of forced sales value (FSV). Consequently, the banks had to make additional provisioning against their NPLs.
If quarterly performance of the banking sector in FY07 is analysed, the graph shows a mixed trend. The total profitability improved from the first quarter to the second quarter but after the amendment in the SBP's regulation regarding NPL and FSV, total profitability declined in the following two quarters.
The net interest income earned by the banking sector in FY07, posted a growth of 17.4% and reached at Rs 203 billion as compared to Rs 173 billion in FY06. The major reason behind this growth in net interest income was the high level of spreads throughout the year, which remained at 7.29% on average. Non interest income on the other hand grew significantly by 43% during the period under review.
ANALYSIS OF FINANCIAL PERFORMANCE (DEC'04-DEC'07)
The bank has shown a rising trend of profitability except a slight decline in 2007. The interest earned has been greater for this year as compared to 2006. This increase has been offset by a similar increase in the interest expensed. This has been due to rising deposit rates and a higher deposit base that has caused a 14 basis point decline in the banking spread. The deposits of the bank for this reason have grown considerably.
The increase in the non-interest income was the main factor behind profitability. In addition to increase in fee, commission, brokerage income, there was also a significant increase in income derived from foreign currency dealing. Non-markup income grew by a massive 84% over the last year. In spite of increased provisioning for the NPLs, the bank was able to increase its profit for this year by about 17%.
Moreover, the administrative expenses also increased due to expansion in branch network, better products and technological implementations. Higher profits coupled with greater asset, equity and deposit bases led to a slight levelling-off of the profitability ratios. The non-performing loans of the bank show a slowdown from their previous, alarming levels. This is a favorable development, indicating that the bank has improved upon its credit policy. Moreover, the advances of the bank have increased over their previous years' levels. These two facts may reinforce the point that the bank may be controlling its advances prudently.
This credit expansion may be said to have been done in a very cautious, tactful and relatively conservatively in order to ensure that the financing is carried out to the borrowers that fall within the boundaries set by the bank and SBP. The bank has also tremendously increased the provisions to as a measure to protect its assets. The debt management profile shows some major shifts in the firms financing policy. As the proportion of total debt in total assets has decreased, the proportion of total equity has increased.
This coincides with the bank's efforts to meet the Minimum Capital Requirements as stated by the central bank. Total deposits of the bank increased by around 39% Advances portfolio also grew32%. During the year, enhanced liquidity was used for the enhancement of Advances' Portfolio and investments in order to achieve maximum benefit from rising lending rate scenario and growing capital and money markets. Investment portfolio of the bank constituted the second major portion of the total assets and during the period under review, total investments of the bank grew significantly by 160%.
We may say that the bank has continued to build its invest in high yielding mutual funds government securities in reaction to the decline in the net interest income. The deposits of the bank have also seen a shift in their composition from fixed to savings deposits. In fact, this trend has been observed in the entire banking sector. The bank's fixed deposits have been more than the savings deposits in this year. However, in the banking sector, the portion of savings deposits has surpassed the portion occupied by the fixed deposits. The increase in the deposit base signifies the effective attempts for deposit mobilization by the bank's management.
The market value of the bank has maintained a healthy trend. The price to earnings ratio of the bank has over the last year. The profitability of the bank with its current expansion process does provide many opportunities. Moreover, the prudently managed trend in its advances and NPLs and increasing portion of investments has meant a better quality of the bank's assets. The bank may be regarded in its growth phase. As evident from the graph, the market price of the bank has declined from July 2007's level, witnessing again a slight decline towards the end of the year due to political uncertainty. As the political uncertainty continues and the stock market plunges, the share price is likely to be affected.
The liquidity ratios have been in tandem with the pattern of the industry. In fact, during 2007, there prevailed excess liquidity in the banking sector due to the higher M2 growth. This was somewhat controlled by the tight monetary policy. However, excess liquidity still prevails in the market and if this trend continues, we may expect SBP to further tighten its monetary policy. The increasing liquidity of the bank indicates a comfortable position in case of any contingencies that may arise.
The yield on earning assets has increased but so has the cost of funding them. The deposits of the bank grew at a faster pace than its advances. This has further pushed up the liquidity level of the bank. This trend is likely to remain. With further tightening of the monetary policy by SBP, excess liquidity conditions may have negative may be prevented.
The solvency profile of the bank shot from over the last year. The equity of the bank has increased and so have its earning assets, particularly due to investments. The income from these investments has contributed significantly to the earnings of the bank and show signs of supporting solvency of the bank in the coming years. The bank has not distributed any cash dividends over the past few years as it is under the expansion phase.
FUTURE OUTLOOK
Considering the political and economic situation of the country, the outlook of the banking sector for 2008 is still bleak. The profitability of the banking sector may become better in FY08 as compared to FY07 as the interest rates spread still high over 7.0%, but the growth may not be same as we have witnessed in the last few years. There has been witnessed a decline in the credit off take growth during FY07 due to increasing number of NPLs. Banks would have to manage their credit disbursement policy prudently in order to minimize the non performing loans.
SBP has tightened the monetary policy once again, increasing the discount rate by 1.5 % to 12%. This has caused negative effects on the stock market with the stock prices declining. The bank may be predicted to be affected by this. Seeing this, the profitability of the bank may fluctuate slightly in the near future but in the long run it may increase. The bank is required to continue its efforts to prudently manage its assets and advances and NPLs so that it may increase its profitability. The share may be said to be a fair buy at this time.
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BANK OF PUNJAB Balance Sheet
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Year 2004 2005 2006 2007
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Assets $ $ $ $
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Cash and cash balances
with treasury banks 5,579,566 8,787,387 14,054,859 14,210,302
Balances with other banks 2,118,242 9,367,595 3,722,089 1,927,662
Lendings to financial institution 1,019,488 7,593,681 11,846,823 2,450,000
Investments 16,197,505 18,026,181 28,233,211 73,461,695
Advances 39,438,923 63,623,705 101,319,954 133,893,585
Other assets 1,277,201 2,040,568 3,609,457 5,778,192
Operating fixed assets 689,486 1,715,061 2,068,744 3,252,759
66,320,411 111,154,178 164,855,137 234,974,195
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Liabilities
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Bills payable 267,113 478,001 856,448 937,647
Borrowings from
financial institutions 2,831,605 6,791,007 6,989,424 17,842,915
Deposits and other accounts 54,724,311 88,465,051 137,727,606 191,968,909
Liabilities against assets
subject to finance lease 81,795 55,403 40,988 40,321
Other liabilities 567,540 1,474,425 2,816,341 2,983,079
Deferred tax liabilities 8,964 220,177 298,616 2,205,530
58,481,328 97,484,064 148,729,423 215,978,401
Net Assets 7,839,083 13,670,114 16,125,714 18,995,794
Represented by:
Share capital 1,506,230 2,349,719 2,902,490 4,230,379
Reserves 2,770,645 4,257,337 4,537,232 7,427,232
Unappropriated profit 143,590 169,817 3,219,246 3,452,842
4,420,465 6,776,873 10,658,968 15,110,453
Surplus on revaluation of assets 3,418,618 6,893,241 5,466,746 3,885,341
7,839,083 13,670,114 16,125,714 18,995,794
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Total Assets and Liabilities 66,320,411 111,154,178 164,855,137 234,974,195
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BANK OF PUNJAB Income Statement
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Year 2004 2005 2006 2007
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$ $ $ $
Mark-up/return/ interest earned 2,555,039 6,125,093 11,643,963 17,539,094
Mark-up/return/ interest expensed 719,074 2,668,739 7,573,722 13,939,377
Net mark-up/ interest income 1,835,965 3,456,354 4,070,241 3,599,717
Provision against non
performing loans and advances 46,940 327,373 340,626 1,616,421
Provision for diminution 0 0 33,000 24,479
Bad debts written off directly 121 3,623 100 246,869
47,061 330,996 373,726 1,887,769
Net mark-up/interest income
after provisions 1,788,904 3,125,358 3,696,515 1,711,948
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Non mark-up/ interest income
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Fee, commission and
brokerage income 172,873 255,149 473,212 653,512
Dividend income 554,218 753,669 1,385,875 1,804,878
Income from dealing in
foreign currencies 41,311 93,208 239,804 377,233
Gain on sale of securities 0 0 389,063 2,039,535
Other income 328,361 228,749 466,435 547,635
Total non-markup/interest income 1,096,763 1,330,775 2,954,389 5,422,793
2,885,667 4,456,133 6,650,904 7,134,741
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Non mark-up/ interest expenses
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Administrative expenses 1,116,097 1,274,971 1,751,970 2,250,777
Provision against lending
to Financial institutions 0 0 130,000 0
Provision against off
balance sheet items 364 0 175 292
Provision against
receivable from NIT 32,046 4,744 0 0
Other charges 1,217 11,461 38 37,950
Total non-markup/interest expense 1,149,724 1,291,176 1,882,183 2,289,019
Profit before taxation 1,735,943 3,164,957 4,768,721 4,845,722
Taxation - current 225,916 668,700 880,997 169,252
deferred 141,853 143,015 83,469 250,772
Profit after taxation 1,368,174 2,353,242 3,804,255 4,445,619
Weighted number of ordinary share 234,971,860 234,971,860 289,602,365 290,249,000
Basic earnings per share - (Rupee 5.82 10.01 13.14 10.51
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BANK OF PUNJAB
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Key Financial Ratios
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Earnings Ratios
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2004 2005 2006 2007
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Return on Assets (%) 1.21 1.33 1.39 1.89
Return on Deposits (%) 2.50 2.66 2.76 2.32
Return on Equity (%) 17.45 17.21 23.59 23.40
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Assets Quality Ratios
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2004 2005 2006 2007
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NPL to Advances 0.03 0.02 0.04 0.03
Provisions to NPLs 0.04 0.24 0.09 0.48
Non Performing Loans 1,166,012 1,359,567 3,608,154 3,349,891
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Market Value Ratios
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2004 2005 2006 2007
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Price to Earnings 11.32 9.99 7.76 9.31
Market Value to Book Value 1975.31 1718.87 1831.82 1494.35
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Debt Management Ratios
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2004 2005 2006 2007
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Debt to equity 28.88 25.88 34.02 11.37
Deposit times capital 6.98 6.47 8.54 10.11
Debt to asset 2.00 2.00 2.00 0.92
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Liquidity Ratios
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2004 2005 2006 2007
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Earning assets to assets 0.50 0.50 0.52 0.89
Advance to deposit 0.72 0.72 0.74 0.70
Yield on earning assets 0.045 0.069 0.082 0.084
Cost of funding earning assets 0.013 0.030 0.054 0.066
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Solvency Ratios
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2004 2005 2006 2007
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Equity to assets 0.07 0.08 0.06 0.08
Equity to deposits 0.14 0.15 0.12 0.10
Earning assets to deposits 1.04 1.01 1.03 1.09
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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