Bank: ASKARI BANK LIMITED - Analysis of Financial statements Financial Year 2003- Financial Year 2009

Formerly known as Askari Commercial Bank Limited, Askari Bank Limited was incorporated in Pakistan on October 09, 1991 and commenced its operations in April 1992 as a public limited company. The bank is registered on all the three stock exchanges of Pakistan.
The bank has 200 branches (2007: 150 branches); 199 in Pakistan and Azad Jammu Kashmir, including 18 Islamic banking branches. The bank is principally engaged in the banking business. It has a diverse customer base comprising of corporate, SMEs, individual savers, households and farmers. Askari Investment Management Limited (AIM) is the wholly owned subsidiary of Askari Bank. The bank also has an Offshore Banking Unit in Bahrain.

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KSE Symbol                            AKBL

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Current Stock price                  20.25

Profit after tax (Rs)       Rs 1.18billion

Outstanding Shares               608815962

Market Capitalization       12182407399.62

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In FY09, for the first nine months banks were reluctant to lend to corporate and individuals owing to skyrocketing bad loans amid lack of demand from industries who were avoiding high financial charges. But, with some sign of economic recovery, lately, with inflation tapering off amid marginal growth in large-scale manufacturing sector, the demand for corporate credit gradually rose. However, attractive rates offered by government bonds still remain lucrative enough - wooing banks to put depositors' money in low risk papers instead of meeting the demand of private sector (Industry review, Business Recorder, 2010).
Banking sector performance in CY09
As analyzed in the Financial Sector Review of the SBP, CY08 was a challenging year for the banking sector when adverse developments in various risk factors severely tested its resilience. Although the overall banking system was able to withstand these shocks by escaping any serious threat to its stability, a few small banks are still reeling from the impact, while a number of financial indicators deteriorated visibly during the year. Consequently, the banking sector stepped into CY09 with a few financially weak small banks, a potential threat to the erosion of the capital base with the lagged impact of deterioration in asset quality, heightened market and credit concentration risks, and a difficult macroeconomic environment.
Notably, government's decision to implement an aggressive macroeconomic stabilization program with the help of IMF's Stand-By Arrangement from November CY08 played its role in stemming the rapid deterioration of economic fundamentals in the initial months of CY09. Gradual improvement in the economic environment observed in recent months is a source of comfort for the banking sector, as various risk factors seem to be dissipating. Some of the favorable developments include the reversal of the monetary stance due to the easing off of inflationary pressures, restoration of the regular functioning of the Karachi Stock Exchange and relative stability in the exchange rate. These developments not only helped in stemming the rapid deterioration in some of the financial indicators of the banking sector, but also signaled gradual improvement in the stability of the banking sector in 1H09, as against the position at end-CY08.
Financial performance
On the balance sheet front, the Net Assets grew by 6%. Earning assets (advances, lendings to financial institutions and investments) form the majority of assets in any bank. Over the years, we see a shift in composition of these earnings assets. In FY08, the lendings to financial institutions fell drastically which is quite apparent in the graph. Only probable reason for this change is the rising interest rates in FY08 and also that banks maintained their spread (around 7%) coupled with troubled economy where businesses were shutting down. Advances gained this year with a total growth of 28%, which is impressive considering the banking industry. On a closer look majority of the lendings were on a shorter-term basis, reason being the poor economic conditions and shorter-term advances helps in risk aversion. When talking of advances, NPLs (non-performing loans) come complimentary. The NPLs growth, 69%, this year has been highest compared to industry. This is a threat to tanks' profitability and may restrain further lending.
Askari Bank was able to post an after-tax net income of Rs 1.18bn in FY09, which is 187% increase from the previous year of FY08. The bank has been able to accomplish this through various ways. Its year-on-year mark-up interest income increased by 23% mounting to Rs 22bn in FY09. Following this, we observed that there was a huge increase in particulars of provision for impairment in value of investments by 1500%, as the amounted augmented to Rs 76,784 million in FY09 compared to Rs 5 million in FY08. This was due to the charges for the year that were charged on the investments made by the bank. Second was the increase in the gain on sale of investments, which increased by 291% amounting to Rs 143 million in which two main particulars have to be pointed out.

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GAIN ON SALE OF INVESTMENTS - NET  (000s)       2009      2008

Market Treasury Bills                         62,177       266

Shares - Listed                               47,015     6,682

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Such high increase in sale of investments, have yielded in high profits for the bank for FY09.
The scenario of the NPLs does not seem very favourable for the bank. The NPLs have consistently seen an increase, indicating that the bank is either not very efficient at collecting the outstanding loans or has a very liberal loan distribution policy. Their pace of growth has outdone the rate of increase in advances. The bank may face considerable credit risk from its loan defaulters. In FY06, bank's advances witnessed marginal increases in consumer finances, especially Ijara financing, corporate financing while they observed a slight decline in the shares of SME and agriculture.
The assets of the bank witnessed some shift in their composition away from loans towards investments. This has also been the trend industry wide to meet the MCR requirements as directed by the State Bank of Pakistan. Though these investments offer lower returns than the loans, they are more preferable in this situation for the bank as it is struggling to collect its loans.
In FY09, the bank maintained its marginal increase of lending to financial institutions as it only increased by 3%, similarly the advances too are seen as controlled lending as these also increased by a mere 5%. The reasons tend to be the same as it were in the previous year. Low advances because of high NPLs rising from consumer banking and also from certain sectors of the economy especially the textile sector. However, on the flip side, we see a dramatic increase of 88% of investments, which amounted to Rs 135bn. The investments category is further broken down to see where are investments done.

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                                            2009              2008

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Market Treasury Bills (Government)    37,742,897        16,043,454

Unlisted Term Finance Certificates    12,615,735         6,485,385

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Much can be observed that the investments are done marketable securities issued by the government. This is mainly done to cover the revenue-expenditure gap of the fiscal deficit. This condition has led to the government borrowing from the private sector and less from SBP. Therefore, the much of the investments done is basically of government securities.
The liquidity of the bank has maintained a consistent upward trend, with its yield on earning assets always above the cost of funding them. It's imperative to note that cost and yield on funding earning assets run parallel which means that banks are not compromising on their spreads in the years of performance regardless of dynamic economic conditions. This liquidity consistency in the years until FY06 may be attributed to the excess liquidity that prevailed in the industry due to high reserve growth of the banking sector.
The State Bank of Pakistan intervened in this situation by contracting the monetary policy. Also, post-emergency declaration when the rupee fell, the SBP intervened twice to ease the liquidity conditions in the market. The SBP has prudently managed the liquidity while the bank also has certain arrangements to maintain its liquidity. It has most of its investments in treasury bills. The liquidity position may be predicted to remain similar to the above in the coming years. However, at the same time Askari needs to safeguard its liquidity against the increasing NPLs.
Askari Bank was able to maintain its liquidity condition with keeping its ratios in line with previous year of FY08. The earning assets to assets remained at 81% as much of the percentage was due to the fact of a high increase of investments in the government securities. Subsequently, advances to deposits remain constant at 71%, as the bank did not increase its advances to consumers due to high NPLs to advances in the previous year.
The bank's spread was sustained at 4% as it only decreased marginally by 1%. This was because the industry average remains to be at 5-6% for FY09. This again helps us to understand the positivity of the bank in such recessionary condition that they are not compromising on their spread and maintaining at 4%.
The solvency of the company has been successfully maintained over the years. As evident, the share of equity is increasing. This may be regarded as a move against the rise in deposit rates and a decrease in the banking spread of the banking sector. This healthy trend in solvency may be predicted to continue in the future. The greater than earning assets deposits are the result of excess reserve money growth while the increase in the non-performing advances has undermined the advances performance. With the gradual shift to investments, we may expect the adverse impact of the NPLs to reduce, but this may take a long time.
The trend of maintaining healthy solvency was carried out even in FY09, as the equity to assets was maintained at 6.1%, along with this the earning assets to deposits remained 100%. This shows the asset based is well utilized by the bank and with the new trend to shift towards low risk investment of government securities. As observed more of the deposits are concerned with long-term deposits.
Asset quality has been improving since 2008. We saw a decrease in provisioning to NPLs in FY09, as it decreased by 7% from FY08. With the new regulation by the SBP of keeping Forced Sale Value to 40%. The upcoming provisioning would be lower than the previous ones. The asset quality was also maintained as low advances were given to consumer as well as other corporate sectors, therefore the NPLs to advances also stood still at 9% in FY09. Whereas the NPLs were still the same for the period but not increasing as can be seen through previous years.
The market value of the bank has shown an upward trend throughout. The bank has been a consistent distributor of the dividends. The increased profitability of the banking sector (an increase of around 100%) has made this sector one of the most lucrative ones to invest. This increasing marketability profile is reflective of Askari's high yields on earning assets and favourable liquidity and solvency positions. We may expect such trend to continue in the future. In FY06, the high share-price of the bank is accountable for this trend. Market value to book vale are not reliable measures of performance anymore as the market prices of shares are distorted therefore it does not depict a true picture.
In FY09, the market value rose after the nine months ending showing a late year push towards the recovery of the economy. As the investors gained confidence in the company, the results were shown as the EPS surged from Rs 0.95 to Rs 2.18 in FY09. However the dividend payout remains very low, as low as 0.07%.
The bank has maintained its reputation as one of the consistent payers of dividends. This year the bank did not give any cash dividends rather it gave stock dividend, this would help bank in two ways, first, by maintaining liquidity and second by making up for the MCR requirements.
The bank was able to maintain a healthy 11.5% contrast to minimum requirement of 10%.
The required minimum capital requirement can be achieved by the bank, either by fresh capital injection or retention of profits. The stock dividend declared will be counted towards the required paid up capital of the bank pending completion of the formalities for issuance of bonus shares. The bank intends to meet this requirement by way of bonus issue subsequent to balance sheet date, in this year.
Future outlook
The banking industry can be seen positively as some private credit increase is observed in the year-end of 2009 and started picking up. With key policy rate at 12.5% the SBP maintains to keep a balance and wants to increase the circulation of the money in the economy and not keeping it tied up.
On the other hand, much of the investments still lie on the government securities as the government borrowing.
With uncertainty still hovering in the economy and the inflation till feb2010 still remains high at 13.8%, the key policy rate is designed neither to be tight nor to be sluggish. Therefore much can be expected in the upcoming year, as the pace for economy recovery along with increase private credit can uplift the economic cycle.
Concerns of SLR and CRR are not in consideration for most banks as healthy safety is kept to ensure no bankruptcy is involved.
The only matter of concern would remain the outcome of the new monetary policy which is said to be designed in a way to boost the economy.
Askari Bank in particular remains strong in terms of their balance sheet as their asset base is strong and their liabilities are more of long term. Along with this the current year performance is considered extraordinary. Therefore positive expectation can be anticipated for the bank.

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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Copyright Business Recorder, 2010