As per the annual report of the National Bank of Pakistan for the calendar year 2003, its pre-tax profit has increased from Rs 6.045 billion in 2002 to Rs 9.009 billion in 2003 which depicts an increase of about 50 percent.
The post-tax profit, however, depicts an increase from Rs 2.253 billion in 2002, to Rs 4.198 billion in 2003.
The increase in the profit does not owe its origin to the "core banking activities" but from the side-business and reduction in the expenditure as is being examined hereinafter.
What are the "core banking activities"? State Bank of Pakistan (SBP) recognises only the mobilisation of deposits and advancing of the loans as may be seen from para 6.3 (pages 67-71) of SBP report for the October-December, 2003 quarter.
NBP's net mark-up/interest income (ie interest earnings on advances less interest paid on deposits) hardly envisages any notable rise.
The figures for 2002 and 2003 are Rs 12.428 billion and Rs 12.717 billion respectively, even though the depositors have been more squeezed during 2003 as the (weighted average) deposit rates have been cut by 57.29 percent in the year as against the reduction of 47.21 percent in the (weighted average) lending rate as would be evident from the table appended:
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Rs in billion
Advance/deposits 2002 2003 Year over change
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Advances 140.547 160.990 -
Interest earnings 15.368 9.288 -
I: Weighted average 10.93% 5.77 % (-) 47.21%
lending rate Deposits 362.866 395.568 -
Interest expenditure 14.180 6.612 -
II: Weighted average 3.91% 1.67% (-) 57.29%
deposit rate
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After adjustments on account of provisions against the non-performing loans (NPLs)/diminution in the value of investment/off-balance sheet items etc, net interest/mark up income stands reduced from Rs 10.319 billion in 2002 to Rs 10.098 billion in 2003: a slight reduction over the previous year.
As for non-interest income, it has risen from Rs 5.209 billion (2002) to Rs 7.248 billion (2003).
This is solely on account of capital gain on shares trading as there have been minor increases under other items.
Out of the increase of about Rs 3 billion in the gross (pre-tax) profit, two-thirds has been generated from non-banking activity ie the capital gains on the shares trading (please see note No 25 to the bank's annual report).
This appears to have become possible because the KSE 100 index rose by 65 percent during 2003 from 2701.42 points (31-12-2002) to 4471.60 points (31-12-2003).
The President of the Bank has talked proudly about this achievement. It is a well-known fact that the stock exchanges are the speculation shops all over the globe and capital gains on equity trading can never be taken for granted as a sustainable source of revenue.
At times, the stocks come down very sharply, resulting in heavy losses to the equities owners as there is no system in Pakistan to hedge such risks. The near complete collapse of the National Investment Trust a few years back is not an instance of the too distant past
As per note 9.1 to the AR, the bank's investment in the listed and unlisted equities amounted to Rs 5.359 billion as of 31st December, 2003 which constitutes 37.5 percent of the bank's capital/reserves and the un-appropriated profits (as of 31-12-2002).
The banks' heavy investments in the stocks have at last compelled the SBP to review its policies in this context.
The Prudential Regulations, effective 1st January, 2004, require the banks to ensure that the investment in stocks does not exceed 20 percent of their respective paid-up capital/free reserves including the un-appropriated profits.
However, the banks have been permitted to bring their investments in the stocks within the permissible limit by the end of October, 2004.
This long spell allowed by the SBP seems to be the result of the bourses lobby as they apprehended that large scale unloading of the stock by the banks, instantly, would result in pulling down the "indice" sharply.
What would happen in 2004 depends on the movement of the KSE 100 index which has already risen beyond proportion and the banks' unloading of their stocks during the last quarter of the year.
One genuinely feels that the present price level of the stocks has brought the net return at par with the National Savings Scheme instrument "Special Savings Certificates."
For example, Fauji Fertiliser Company Ltd pays almost 100 percent dividend. After tax, Rs 9 per share would mean a net return of 7.03 percent at the current price of Rs 128 per share.
On the SSCs, the net return is 6.3 percent (interest rate 7 percent less tax 0.7 percent). The general public is, therefore, likely to move to SSCs from stocks unless there is substantial down-trend in the prices.
The banks are still likely to have interest in the investment in the stocks as they cannot buy SSCs but their capacity will stand curtailed, effective 1st November, 2004, unless the bourses' lobby is again successful in getting the deadline extended.
Another 1/3rd of the bank's enhanced profit comes from the reduction of non-mark up/non-interest expenditure from Rs 9.137 billion in 2002 to Rs 7.806 billion in 2003 and this has mainly been on account of the reduction in the "charge for defined benefit plans". No details about this cut are available in the AR.
Now some other items. The non-performing loans are stated to have come down from Rs 43.706 billion (31-12-2002) to Rs 39.772 billion (31-12-2002) - a reduction of Rs 3.934 billion. It is not clear, however, whether this reduction owes its origin to cash recoveries or it is merely a technical reduction, through rescheduling under fresh agreements.
The nature of the advances recorded under the caption "Particulars of loans and advances to directors, associated companies etc" [Note 10.7] is not clear as the quantum goes on increasing and disbursements under the sub-heading "the directors, executives, officers, and staff of the bank or any of them either severally or jointly with any other persons" during 2003 stand at Rs 8.248 billion.
In my comments on the NBP's annual report for the calendar year 2001, I had raised this issue and the bank's reply is reproduced here: "The advances given to the executives/officers for various purposes viz house building car/motor cycle etc are disbursed in accordance with the bank's policy and terms of employment. The bank's interest is always safeguarded by ensuring adequate security against any possible loss of recovery. Mark up is also charged against those financing which is deducted at source along with principal amount while making payment of salary.
The analyst must have witnessed a decrease in the amount from Rs 2,320.945 million to Rs 2,034.996 million which is Rs 285.949 million or 12.3% as compared to the previous year.
As there exists no such requirement of disclosing the nature of finance, the same is not being disclosed however, the nature of such type of financing is always known to people with ordinary prudence" (Please see Business Recorder dated the 28 October, 2002).
What the NBP tried to justify in the above clarification was that the relevant advances were basically the staff loans.
The amount of advances of the above nature crossed Rs 3 billion in the year 2002. I, therefore, again raised this matter in my comments on the annual report of the bank for that calendar year published in the Business Recorder dated 11th August, 2003.
An extract from my comments is reproduced here: "It will be seen that the bank had stated its policy in the matter of grant and recovery of loans to the employees for various purposes and in fact refrained from disclosing the nature of the advances, on the excuse that there is no requirement for disclosing the nature of the advances.
This was to create an impression that these were the staff loans. If one takes that all these advances as related to the staff, then the questions arise: (a) How a huge sum of Rs 3 billion was disbursed during 2002 when there had been a large scale exodus of staff without new recruitment's and the staff on the strength of the bank may already have availed of the loans permissible under the bank rules; if at all there were borrowers, they may be very few (b) the outgoing staff must have left the bank after clearing their liabilities towards the bank which must reduce the outstanding amount of Rs 2 billion as at the end of 2001; it has rather increased to Rs 2.7 billion (c) What does the inclusion of "directors" in the narration signify?
The directors are not obviously entitled to the advances admissible to the staff'.
The clarification on the nature of the aforesaid advances is all the more necessary because the NBP management is now responsible to the private shareholders also with the sale of a part of its shares to the general public.
Note No 11 to the annual report indicates that a provision of Rs 806.686 million has been made with a view to absorbing the possible shortfall in the receipt of funds from the government of Pakistan in connection with the Voluntary Handshake Scheme (VHS).
The amount charged to the Profit and Loss account for this provision is Rs 293.612 million only.
In Note 11.5, it has been indicated that a sum of Rs 381.599 million, being the amount of provision against "other assets", is a charge for the year 2003.
This amount, however, does not appear in the Profit and Loss account. It is not clear where the cumulative amount of Rs 894.673 million (ie lesser charge under VHS viz Rs 806.686 million - Rs 293.612 million = Rs 513.074 million) plus the amount of provision against other assets Rs 381.599 has been accounted for/camouflaged.
During 2002, 2968 employees were retrenched under VHS while 1077 new employees were recruited in 2003. If such a large-scale recruitment was contemplated, what was the real justification for the huge dislodgement of the employees in the earlier year. It is generally said that fresh recruitment's in the banks are now made from amongst the residents of posh localities.
The real intention behind the large-scale exodus of the present employees appears to be to make room for the new generation from posh areas/families. The doors of the banking sector thus go on closing on the youngsters from families of the average/poor strata of society.
The practice of write-offs of loans and interest continues. During 2003, write-offs aggregate Rs 2.581 billion on account of principal and interest.
The largest beneficiaries of the write-offs are Metropolitan Steel, Karachi (principal Rs 214.255 million + waivers/other benefits Rs 533.376 million total Rs 747.631 million) and Ulbritch's Pakistan (Principal Rs 29.474 million + interest Rs 59.662 million total Rs 89.136 million).
Unfortunately the national identity cards Nos. of the directors/partners of these companies are not available with the lending bank.
Even the address of the Ulbritch's Pakistan has not been mentioned in the statement of write-offs.
This is indicative of the prudent manner in which loans were made available to these companies. If one correctly recollects, the above mentioned first beneficiary of the write-offs is the same group to which public sector factory at Hyderabad was sold (privatised) and the fate of that factory is known to all.
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