Commercial banks have performed very well in Pakistan during the year 2004. This performance is considered a measurement of strength of banking and financial sector. This sector has two listed banks that are established in the market for a long time. These two banks until recently concentrated mostly on corporate clientele and paid scant attention to consumer banking or small and medium enterprises (SMEs).
With the growth of new banks in this sector, that have actively moved to fill the gap and tried to concentrate on consumer banking and SMEs, the larger two banks may be losing business to these smaller banks that are new entrants in this field. How best these small banks perform in future and how this challenge is met by the larger and old banks remains to be seen.
We have analysed ten banks in this sector to identify the strong areas of each bank. This is being reflected in the following analysis.
Net mark-up income: The ten banks show a total of 23965 million rupees net mark-up income during this period with an average income per bank of rupees 2396.5 million. Out of this National Bank of Pakistan has been able to earn 8116, Muslim Commercial Bank 5259.
These two banks make 56% of the total and the rest of the eight banks earn the balance of 42%. National Bank alone made 34% of the total income under this category.
TOTAL NON-MARK-UP INCOME: A total of Rs 17380 million were earned by these banks during this period. National Bank of Pakistan was able to generate an income of 5947 million rupees and Muslim Commercial Bank earned Rs 2784 million. These two banks earned a total of Rs 8731 that is again 50% of the total income under this category.
National Bank of Pakistan was able to generate 34% of the total income of ten banks. It should be observed that MCB showed 325 million rupees income as interest recoverable from the government on delayed refund of taxes. It remains to be seen if this income materialises as envisaged by the bank.
TOTAL GROSS INCOME: These ten banks earned a total gross income of Rs 41345 millions during this period. Out of this total income, National Bank of Pakistan accounted for Rs 14063 and Muslim Commercial Bank accounted for Rs 8043 million. These two banks contributed a total of over 53% and the remaining eight banks earned the balance of 47% of the total income. National Bank of Pakistan alone accounted for 34% of the total income of all the banks.
TOTAL EXPENSES: The ten banks together spent an amount of Rs 20676 million, out of which National Bank of Pakistan spent Rs 6992 million and Muslim Commercial Bank spent Rs 5416 million and both accounted for an amount of Rs 12406 million that amounts to almost 60% of the total expenditure.
National Bank of Pakistan alone spent almost 34% of the total spending. However, it should be observed that National Bank spent 49.73% of its income, whereas Muslim Commercial Bank spent 67.34 % Faysal Bank spent 30.62% and PICIC spent 19.92% of the total income.
This shows that in commercial banks, Faysal Bank was more prudent in its spending if compared on % of their incomes. However, PICIC, being basically an investment bank and having a few branches, was most competitive in its spending that showed only 19.92% expenses as a % of its total income.
PROVISION FOR TAXES: A total of Rs 7116 million was provided for taxation by all these banks and this amounted to almost 37.80% of the total pre-tax income of all these banks.
PROFIT AFTER TAXATION: A combined after tax profit of these banks was Rs 14068 millions that is shared by all these banks as follows:
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ALFALAH 809 6.37%
PICIC 1324 10.44%
NBP 4202 33.13%
MCB 1950 15.38%
ACBL 1513 11.93%
BOP 1056 8.33%
METRO 591 4.66%
PICB 641 5.05%
UNION 597 4.70%
FAYSAL 1385 10.92%
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From the above after tax earnings, it is observed that 33.13% of total after tax profits were earned by National Bank of Pakistan followed by MCB 15.38%, ACBL 11.93% Faysal 10.92% PICIC 10.44% and BOP 8.33%.
EARNINGS PER SHARE: The following earnings per share were recorded during this period and the annualised projected earnings are also shown below on the basis of their present earnings.
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Name Nine months Annualised
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ALFALAH 4.05 5.40
PICIC 7.58 10.11
NBP 8.53 11.37
MCB 5.78 7.71*
ACBL 12.05 14.00
BOP 7.01 9.35
METRO 4.92 6.56
PICB 4.16 5.55
UNION 3.34 4.50
FAYSAL 4.75 6.33
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MCB's earning includes with one time income from interest on delayed refunds due to insufficient information available of this income.
EARNINGS PER SHARE RATIOS: At present Faysal Bank shows the lowest earnings per share as 5.13, ACBL 5.73, PICB 5.95 NBPL 6.42 and MCB 6.62 at the current market price of the shares on an annualised basis. If the current EPR was used to determine the future prices of these stocks, we would arrive at the following price movements.
PRICE MOVEMENTS OF THE BANKING SHARES: Faysal Bank may move between 30.88 to 35.75, Askari Commercial may move between 87.40-101.20, PICB may show a movement between 31.35-36.30, NBP may move between 69.35-80.30 and MCB may show a movement between 48.55-56.10 per share between now and the time results are announced. These prices are suggested on the assumption that no operational changes take place that are abnormal and the market EPS of banking sector remains the same.
SIZE OF INVESTMENTS MADE BY BANKS: These ten banks have made a total of Rs 458191 millions investments during this period. Out of this investment Rs 189585 have been invested by National Bank of Pakistan and Rs 94636 by the Muslim Commercial Bank. These two banks together share a total investment of approximately 62% of the total investments made. The other eight banks share the balance of 38%. National Bank of Pakistan alone shares 41% of the total investments.
It is interesting to observe that these ten banks have made investments that equal 33.67% of the total assets of these banks. National Bank of Pakistan has made 37% of its total assets into these investments compared with 64% by PICIC and 65% by Faysal Bank.
This indicates that PICIC and Faysal have larger stakes in investments made by these banks. In the absence of any details regarding the type of investments, it may be difficult to comment but if these investments are in stock market then it may be argued that these two banks are exposed to the volatility of the stock market.
At the same time, there may be higher returns compared with other banks. These points must be borne in mind while making investment in the shares of these two banks.
DEPOSITS: These ten banks have been able to mobilise a total of Rs 1092524 million as deposits out of which the two banks, NBP and MCB, account for Rs 659648 million that amounts to almost 60% of the total deposits. NBP alone shares almost 40% of the total deposits mobilised by these banks. This is a substantial share of the market.
MCB shares almost 19.81% of the total deposits and Alfalah Bank occupies a third position in this respect by having a deposit base of Rs 100460 million that amounts to 9.19% of the total deposits of these banks. This indicates that Alfalah Bank has positioned itself into consumer banking and is giving a tough competition to the other two leading banks, possibly more to MCB.
ADVANCES: These banks have provided a total advances of Rs 620621 millions during this period. Out of these advances an amount of Rs 187432 million is advanced by National Bank of Pakistan. This amounts to 30% of the total advances followed by MCB 103907 million amounting to 16.74%, Alfalah 75770 millions amounting to 12.20% and Askari Commercial 59835 million that amounts to 9.64%. These statistics indicates that Alfalah is again at third position as far as advances are concerned.
PERCENTAGE OF ADVANCES TO DEPOSITS: The other interesting observation is that these banks have on average advanced 56.80% of their deposits. There are variations between the ten banks. Faysal Bank has advanced 90% of their deposits, whereas Metro has advanced 82% of its deposits.
Union Bank has advanced 79%, Askari Commercial 77% followed by Alfalah and PICIC each by approximately 75%. National Bank of Pakistan has utilised 42% of its deposits in providing advances to its customers. This reflects prudent lending to selected corporate clients and may be regarded as lack of interest in consumer banking.
EQUITY: These ten banks have a total equity of Rs 66534 million as at the end of September 2004. It includes an amount of Rs 23129 million as paid up capital and the balance of Rs 43405 million includes reserves and undistributed profits available for distribution.
This indicates that these banks have almost 187% reserves of their paid up capital. That shows a healthy balance sheet of these banks as a whole. National Bank of Pakistan has a paid up capital of Rs 4942 million whereas the reserves are 17290 million and this amounts to almost 350% of the paid up capital. This shows a strong balance sheet.
This is followed by MCB that has a paid up capital of Rs 3372 million and a reserve balance of Rs 5480 million. This amounts to almost 162% of the paid up capital. PICIC's reserve base is almost 202%. The other new banks should also improve their reserve base with the passage of time as these banks are providing tough competition to the other banks that have a long history of operations in the country.
NET ASSETS: The total net assets of these banks amount to Rs 83484 million against total equity of these banks of Rs 66534 million. This indicates that the net assets are covered by 1.25 times on average with by these banks. The individual coverage varies with each bank. Faysal Bank with 1.45 times leads the other banks in this comparison followed by NBP with 1.36 and MCB with 1.22 and Askari Commercial with 1.06 times.
ADVANCES AS A PERCENTAGE OF TOTAL EQUITY: The banking sector's average advances amount to 9.25 times of total equity. Again this varies from bank to bank. Alfalah has advanced 18.57 times of its total equity.
This is the highest in these ten banks followed by Union Bank with 15.69, Metro with 11.34, MCB with 11.74, NBP with 8.43 and BOP with 7.40 times of its total equity. These figures reveal that Alfalah Bank is lending with greater exposure of risk followed by Union Bank, Metro, MCB and NBP. Bank of Punjab's lending is only 7.40 times of its equity and that is the lowest in this ten banks comparative study.
NET INCOME AS A PERCENTAGE OF EQUITY: All the ten banks analysed in this study indicate that their yield as a percentage of equity varies between 17.7 percent to 23.5% and the average for the ten banks yield accounts for 21.58%.If the yield is annualised it varies from 37.26 for Askari Commercial Bank, 34.27 for Bank of Punjab, 31.40 for Faysal Bank, just over 28% for PICIC and between 25-26% for other banks. The annualised yield for banking sector of 28.77% seems quiet satisfactory.
FUTURE PROSPECTS: The requirements laid down by State Bank of Pakistan that the banks should have a minimum paid up capital requirement of Rs 1500 million by the end of 2004 and Rs 20000 million by 2005 desires that those banks having paid up capital lesser than the required limit for the year 2004 would either capitalise their reserves through the issue of bonus shares or through Right issue or a combination of both by the end of the current year.
These measures should bring down the future earnings per share and therefore it would be reasonable to predict a fall in the share value of these scrip due to increase in the paid up capital. The banks that may be affected by these additional requirements are Askari Commercial Bank Limited having a paid up capital of Rs 1256 million, Bank of Punjab Rs 1255, Metropolitan Bank having a paid up capital of Rs 1200 million. Other banks like Alfalah, PICIC, NBP, MCB and Faysal Bank are not affected by this additional requirement.
CHANGE IN INTEREST RATES: With the rising interest rates, there may be a possibility that it may narrow the lending and borrowing rates that may have some adverse impact upon the profitability of the banking sector.
CAPITAL GAINS: It is also being argued that currently the stock market is above 5900-index level.
In case it does not sustain or its growth is slower in future, it may result in reduced earning from capital gains and that may have an impact on earnings per share and that may result in lower prices of these banks.
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Comparative results of banks for nine months ending September 2004
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PICIC Union Faysal Total
ALFALAH PICIC NBP MCB ACBL BOP Metro COMM Bank Bank
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NET MARK UP INCOME 2203 417 9185 5250 2396 1234 1098 897 1998 1152 25830
Provisions 221 14 1069 -9 197 35 72 -6 242 30 1865
NET MARK UP INCOME 1982 403 8116 5259 2199 1199 1026 903 1756 1122 22843
% OF TOTAL INCOME 62.64 21.82 57.71 65.39 62.29 56.26 64.85 63.59 60.28 42.31 514.8461
INCOME
FEE INCOME 473 171 3602 1384 612 124 271 97 771 258 7763
DIVIDEND INCOME 34 439 1125 251 15 534 4 70 9 579 3060
GOVERNMENT SECURITIES 0 0 -19 -13 10 0 14 45 -2 35
INVESTMENT GAINS 240 325 523 205 0 568 1861
INCOME FROM F> EXCHANGE 156 0 591 305 136 24 177 63 68 123 1643
OTHER INCOME 279 834 648 532 35 250 104 68 264 4 3018
TOTAL NON-MARK
UP INCOME 1182 1444 5947 2784 1331 932 556 517 1157 1530 15850
% OF TOTAL INCOME 37.36 78.18 42.29 34.61 37.71 43.74 35.15 36.41 39.72 57.69 385.1539
TOTAL INCOME 3164 1847 14063 8043 3530 2131 1582 1420 2913 2652 38693
GROSS INCOME %
OF EQUITY 77.5 29.4 63.3 90.9 65.2 51.9 47.3 44.1 93.8 45.1 563.2189
TOTAL EXPENSES 1935 368 6992 5416 1352 731 592 573 1905 812 20676
EXPENSES % OF GROSS 61.16 19.92 49.72 67.34 38.30 34.30 37.42 40.35 65.40 30.62 413.9112
REVENUE
NET PRE-TAX INCOME 1229 1479 7071 2627 2178 1401 990 847 1008 1840 18830
EXCEPTIONAL ITEMS 0 0 0 514 0 0 0 0 0 0 514
PROVISION FOR TAXES 420 155 2869 1191 665 345 399 206 411 455 7116
PROFIT AFTER TAXATION 809 1324 4202 1950 1513 1056 591 641 597 1385 12683
EARNING PER SHARE 4.05 7.58 8.53 5.78 12.05 7.01 4.92 4.16 3.34 4.75 62.17
ADJUSTED EARNING 4.26 4.26
ANNUALISED EARNING 5.02 10 11.3 5.68 14 9 7.5 5.5 4.5 6 78.5
CURRENT QUOTED PRICE 37.75 72 73 51 92 62.5 60.5 33 31 32.5 545.25
CURRENT EP RATIO 9.32 9.50 8.56 8.82 7.63 8.92 12.30 7.93 9.28 6.84 82.26279
PRICE WITH CURRENT EP 46.79 94.99 96.71 50.12 106.89 80.24 92.23 43.63 41.77 41.05 653.3539
RANGE OF QUOTED PRICE 42.11 85.49 87.04 45.11 96.20 72.22 83.00 39.27 37.59 36.95 588.0185
QUOTED PRICE (HIGH) 51.47 104.49 106.38 55.13 117.58 88.27 101.45 47.99 45.94 45.16 718.6893
SIZE OF INVESTMENTS 40855 14004 189585 94636 18584 15872 15570 14329 9783 44973 458191
% OF ASSETS 29.68% 64% 37% 37% 17% 29% 29% 30% 12% 65% 3.496
% OF OTHER ASSETS 70.31% 36% 83% 63% 83% 71% 71% 70% 88% 35% 6.7031
DEPOSITS 100460 13679 443185 216463 77889 43587 46269 39248 61826 49918 1092524
ADVANCES 75770 10359 187432 103907 59835 30382 37936 21275 48752 44973 620621
ADVANCES % OF DEPOSITS 75.42 75.73 42.29 48.00 76.82 69.70 81.99 54.21 78.85 90.09 603.0219
TOTAL EQUITY 4080 6292 22232 8852 5414 4108 3344 3223 3107 5882 66534
NET INCOME 809 1324 4202 1950 1513 1056 591 641 597 1385 12683
PERCENTAGE OF EQUITY 19.8 21.0 18.9 22.0 27.9 25.7 17.7 19.9 19.2 23.5 192.2291
ANNUALISED 26.43791 28.056792 25.200912 29.37189 37.2614 34.2746 23.565 26.518 25.6196 31.3952 256.3054
PAID UP CAPITAL 2500 2080 4942 3372 1256 1255 1200 1823 1788 2913 23129
TOTAL ASSETS 142589 28484 516173 256246 101888 54962 66240 47656 78970 69029 1362237
Assets/Equity 34.94828 4.5270184 23.217569 28.94781 18.8194 13.3793 19.809 14.786 25.4168 11.7356 183.8509
ASSETS/CAPITAL 57.0356 13.694231 104.44618 75.99229 81.121 43.7944 55.2 26.142 44.1667 23.6969 501.5919
NET ASSETS 4963 6582 30327 10854 5788 6303 3967 3067 3122 8511 83484
ASSETS/CAPITAL 1.9852 3.1644231 6.1365844 3.218861 4.60828 5.02231 3.3058 1.6824 1.74609 2.92173 30.86997
Net Assets/equity 1.216422 1.0460903 1.3641148 1.226164 1.06908 1.53432 1.1863 0.9516 1.00483 1.44696 10.59892
EXPOSURE 30.308 4.9802885 37.926346 30.81465 47.6393 24.2088 31.613 11.67 27.2662 15.4387 246.4273
ADVANCES/CAPITAL
EXP ADVANCES/EQUITY 18.57 1.65 8.43 11.74 11.05 7.40 11.34 6.60 15.69 7.65 92.47066
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