Bank: PICIC COMMERCIAL BANK LIMITED - Analysis of Financial Statements December 2001 - June 2007
PICIC Commercial Bank Limited was incorporated in 1993 as Schön Bank Limited and commenced its business on 4th April 1994, with a paid-up capital of Rs 500 million. In 1997, Al-Ahlia Portfolio Securities Bank, Sultanate of Oman, acquired the major shareholding and changed its name to Gulf Commercial Bank.
Thereafter, in February 2001, the bank's management again changed when Pakistan Industrial Credit and Investment Corporation acquired 60% controlling shares from Al-Ahlia and changed its name to PICIC Commercial Bank in May 2001.
Since the acquisition, the bank's performance has turned around and now it is the fastest growing private commercial bank in Pakistan. At the time of takeover by PICIC in February 2001, the bank had only 15 branches. Now it is the 6th largest bank in Pakistan after 5 nationalized and privatized banks. Currently it has a network of 115 branches (including 7 collection booths in 44 cities).
The bank plans to further expand its network by opening 20 branches in 2007, for which approval of State Bank of Pakistan has been sought under the Annual Branch Expansion Plan 2007. Strategic branch expansion remains its priority, which will enable it to cover all important towns and cities, and to explore new markets in the smaller un-banked towns with the help of technology based services such as on-line banking and ATMs.
As on 30th June 2007, JCR-VIS Credit Rating Company Limited reaffirmed the medium to long-term credit rating of PICB at A+ (Single A Plus) and the short-term rating at A-1 (A-One). It continues to be on 'Rating Watch - Positive' status due to the expected positive implications of the acquisition of majority shares of the parent company PICIC, by NIB.
RECENT PERFORMANCE (H1-FINANCIAL YEAR 2007):
The bank's growth momentum tapered off during H2 2006 and H1 2007, primarily because of an increase in non-performing advances and an increasing cost of funds and loss of business momentum. The latter was caused by uncertainty surrounding the bank's merger and future direction.
Whilst the bank's deposits in H1 2007 increased by 15.6% to Rs 68,730 million from Rs 59,467 million (as of December 31, 2006) they came at a high cost in an increasing interest rate environment. On the asset side, advances reduced by 4.3% to Rs 33,335 million from Rs 34,883 million (as of December 31, 2006), investments increased by 79% between December 31, 2006 and June 30, 2007, bulk of these comprising Treasury Bills at lower yields than the cost of deposits.
As a result of above, net mark-up in the second quarter of 2007 was severely eroded and was down 22% from the second quarter of 2006. Net mark-up for the six months ended June 30, 2007 was down 12.5% over the same period in 2006. Non-mark-up earnings were also reduced by 19% over the same period last year, primarily due to a reduction in the gain on sale of securities and dividend income.
Administrative expenses rose 27% in the first six months of 2007 as compared to same period last year (SPLY), primarily due to branch related expenses as 14 new branches were opened in the second half of 2006 and staff related expenses which increased by Rs 115 million. Provisions against non-performing loans also increased to Rs 202 million for the period ended June 30, 2007.
In light of above expenses, profit before tax fell by 47% from Rs 881 million to Rs 460 million during the period ended June 30, 2007 as compared to June 30, 2006 and profit after tax fell by 50% from Rs 649 million to Rs 321 million in the same period.
=========================================================================
Financial Highlights - PICB Rs '000
=========================================================================
H1 '07 H1 '06 Chg (Rs) Chg (%)
=========================================================================
Interest earned 3,262,154 2,903,573 358,581 12.35%
Interest expensed 2,228,421 1,721,842 506,579 29.42%
Net interest income 1,033,733 1,181,731 (147,998) -12.52%
Provision against NPLs 201,076 190,685 10,391 5.45%
Total Provisions 202,844 191,121 11,723 6.13%
Net interest income 830,889 990,610 (159,721) -16.12%
Total non-interest income 404,186 501,147 (96,961) -19.35%
Total non-interest expense 774,570 610,078 164,492 26.96%
Profit Before Tax 460,505 881,679 (421,174) -47.77%
Taxation 139,417 231,752 (92,335) -39.84%
Profit After Tax 321,088 649,927 (328,839) -50.60%
Basic/Diluted EPS 1.17 2.38
Effective tax rate 48% 28.50% 40.63%
H1 '07 Dec '06 Chg (Rs) Chg (%)
Deposits 68,730,058 59,467,497 9,262,561 15.58%
Advances 33,334,675 34,883,751 (1,549,076) -4.44%
Investments 28,019,863 15,661,143 12,358,720 78.91%
ADR 48.50% 58.66%
NPL provisions to advances 0.60% 0.55%
=========================================================================
FINANCIAL PERFORMANCE (FINANCAL YEAR 2001-FINANCIAL YEAR 2006):
Although the year 2006 was difficult for the management because of numerous factors such as change of some of the directors and the CEO, PICB continued to focus on achieving its targets by making best use of the conducive business environment and overall performance remained quite satisfactory.
Total mark-up income of PICIC Bank for the year ended December 31, 2006 increased by 39% to Rs 5,796 million compared to Rs 4,172 million for the previous year.
Net mark-up income (after mark-up expense and provisions) for the period under review declined by 15% to Rs 1,789 million (2005: Rs 2,100 million). This drop in profitability was largely due to provisions against NPLs this year of Rs 476 million (2005: Rs 9 million) and also due to larger mark-up expenses.
Total mark-up/interest expense increased by 71% and represented 61% of total mark-up income for the year ended December 31, 2006 as compared to 49% for 2005.
Non-mark up income of the bank for the year ended December 31, 2006 was 11% lower at Rs 857 million as against Rs 958 million in 2005. This was due largely to lower gain on sale of securities as compared to the previous year. The year under review was closed with after-tax profit at Rs 969 million (2005: Rs 1,504 million), registering a 36% decrease from the previous year.
For PICB, the return on assets trend is increasing up-till 2005, but fell in 2006. The reason for this can be attributed to the declining profit after tax mainly due a high provision for NPLs. The trend for ROE is a rapid increase from 2001 to 2002, as the bank was relatively newer in 2001 but by 2002 it started solidifying its customer base, thus leading to a rise in revenues and profits, becoming a boon for investors. This is proven by the calculation of the percentage increase in profits by 72.07% in this one year time frame. Whilst the bank was not issuing a great number of shares, hence the ratio kept rising till 2003 after which it fell in 2004. This is explained by a rise in profits by 36.97% being less than the rise in equity by 69.5%. The ratio recovered again in 2005. The ratio for 2006 is very low on account of lower profit after tax in 2006.
ROD of PICB, indicating the return that the bank is receiving from its deposits, is higher than the ROA but follows a trend similar to it, solely due to the smaller amount of deposits that the bank has compared to its assets base as the numerator is same for both the ratios. It is one of the few ratios that has been increasing till 2005. This rise is due to bank's better profitability, as it becomes a major player in the financial market. For instance, the rise in the ratio is significant in 2004 to 2005 period, which is to be explained by a 68.6% increase in profit after tax being much higher than the 27.38% increase in average deposits for the same period. However, like ROA it nose-dived in 2006 owing to declining profit after tax.
The asset quality of the bank has declined as the NPL provisions rose to 1.4% of the total advances in FY06 from 0.03% of total advances in Dec'05.
As on December 31, 2006, gross NPLs were Rs 1.759 billion (December 31, 2005: Rs 0.586 billion). In percentage terms gross NPLs on December 31, 2006 were 4.9% of gross advances (2005: 1.8% of GA). Provision was made as required.
Very low level of NPLs could be the result of PICIC Bank's prudent strategy to lend to the right type of customers. However, as some doubtful loans have the tendency to stay under cover for sometime due to different reasons, a prudent policy for PICIC Bank would be that the management remains extra vigilant in the appraisal and monitoring of all loans.
Recently, SBP proposed 100% cash provisioning for non-performing loans (NPLs). This is likely to decrease the profitability of the banks. Like all other banks, PICB's asset quality is also likely to further deteriorate, if it doesn't increase its advances considerably.
PICIC Bank's advances as on December 31, 2006 were at Rs 34.884 billion (50% of total assets), showing a 5% increase over Rs 33.162 billion advances on December 31, 2005 (51% of TA).
Trend for advances to deposits ratio (ADR), a key indicator of how liquid the bank's assets are, show that it has been fluctuating. While the ratio fell for a couple of years, it recovered in 2003, thus steadily rising till FY 2005 after which it remained constant in FY06. The reason for its initial decline was rise in the deposits not being offset by an equal or greater rise in advances. The rapid growth in advances in 2004 by 80.4% was much higher than the growth in deposits 35.67% in the same period, leading to a rise in the ADR then onwards. In 2005 as well, advances rose by 28.4% which was not matched by deposits that rose by a lower 21.26%, thus setting the stage for another increase in the ratio. However, it remained stagnant in FY06 due an 11% and a 5% rise in deposits and advances respectively, thereby maintaining the same ratio as in the same period last year.
Earning assets to assets simply calculates that what proportion of the assets held by the bank is actually helping to generate revenue for it. The earning assets of PICB are lending to financial institutions, investments and advances. These three assets help generate income for the bank. The trend as highlighted by the graph shows that there is an overall increase till 2003, and there was a slight decline then onwards which continued till 2006. This decline can be explained by an increase in the total assets which are not offset by an equal or greater increase in the earning assets. Therefore that particular increase in assets can be explained by an increase in bank's cash balances, balances with other banks, again liquid and the increase in operating fixed and other assets. This is not a good sign for PICB as it means that it has money tied up in assets which are more or less "idle" as they are not helping it in generating income which is the ultimate motive of any profit driven enterprise.
The trend lines for both the yield on earning assets and cost of funding them depict a negative trend till 2004 after which they rise and continued to rise till 2006. The reason for this trend can certainly be the fact that the interest rates were comparatively low till 2004, but show a sharp rise from 2005 onwards after a tight monetary stance by SBP. Also, PICB was investing in low interest bearing options initially but later changed its stance.
The solvency ratios are even stricter measure of the liquidity of a bank's assets. Equity to assets indicates the use of equity in financing the bank's assets. This ratio has seen an overall increase, though the ratio was falling in 2002 and 2003.
The overall increase over the years depicts that the use of equity for financing is taking a preference over the use of borrowings and deposits. This is a good sign for the bank as it may mean lower interest payments and lower risk of liquidation.
A slight decline in the ratio in FY06 can be attributed to a higher increase in PICB's assets base than its equity base.
PICIC Bank saw only an 8% increase in its total assets to Rs 70 billion as on December 31, 2006 as compared to Rs 65 billion on December 31, 2005. The increase in total assets has been managed largely through additional Deposits. Growth in Total Assets has not been achieved through corresponding increase in equity, which as a percentage of total assets has reduced to 5.8% (December 31, 2005: 6.2%). Of the total, PICIC Bank has 78% investments in Available-for-Sale Securities while 23% are in Held-to-Maturity Securities.
Equity to deposits ratio further contrasts two modes of financing. While equity is an entire category, deposits are a very important section of liabilities for a bank since the finance for a bank's operations as well as investing activities come primarily from deposits. The trend is similar to that of equity to assets. The ratio fell in 2002 and 2003 and the explanation for this comes from the fact that while average equity rose by 46.06%, average deposits rose by 105%, thus causing a decline due to greater change in denominator.
But the trend completely changed for the remainder of the periods as there was a rise in the ratio throughout, signifying that perhaps deposits are declining in importance as a source of finance. For instance for 2003 to 2004, whilst average equity rose by 69.5%, average deposits rose by only 42.7% thus explaining the rise. Later it declined slightly on account of higher proportionate increase in deposits than in equity base, showing that like all the other banks PICB is also attracting larger deposits from its customers.
Deposits with PICIC Bank as on December 31, 2006 constitute 85% of total assets (2005: 82%). Earning assets to deposits ratio shows a contrast between the bank's reliance on earning assets with deposits with respect to revenue generation. As we can observe in the graph, this ratio has been on a steady decline ever since 2001. This decline may be explained through the calculation that while average earning assets and deposits both are increasing as the bank grows in size and operations, the rise in deposits is much greater, being 11% in 2006 as compared to the 8% increase in earning assets in the same period.
Debt management ratios are important to calculate for any bank, as they are an indicator of the extent to which the bank is using debt financing or financial leverage. And it helps the bank gauge if it is in trouble and whether or not it should reduce its reliance on debt in the near future.
Debt to equity ratio measures the reliance of the bank upon the funds invested by the owners as compared to the reliance of the bank on liabilities for raising capital. The trend shows that the ratio steadily increased from 2001 through 2003, owing to the rise in liabilities being much more than the rise in equity, for instance liabilities rose by 78.3 % in 2002 as compared to the 42.15% rise in equity.
However, the ratio has been decreasing since 2004 by a slight amount owing to the rise in equity being higher this time around. For instance, average liabilities in 2004 rose by 35.84%, surpassed by a rise in equity by 69.5%. In 2006, total liabilities are about 16.2 times of the equity (2005: 15 times). The ratio again increased slightly due a higher increase in debts (16%) compared to that in equity (13%). This is further confirmed by the deposit times capital ratio showing that increase in debts is mainly due to a rise in deposits of PICB.
According to the notes to the financial statements, Capital Adequacy Ratio of the bank works out to 9.88% as on December 31, 2006 (2005: 9.42%) as against prescribed minimum equivalent to 8% of the risk weighted assets of the banking company.
Among the market value ratios of PICB, the market to book ratio continued to show a positive trend till 2005 on account of escalating market prices compared with very modest increases in BV. However, this ratio declined in 2006 owing to the rise in BV/share (mainly due to a rise in unappropriated profits) coupled with the decline in market price from 36 to 33.
The P/E multiple of PICB, that shows an increasing trend till 2004, on the other hand increased in 2006 despite the fall in market price. The rise is due to a much lower EPS, which is in turn due to lower after tax profit in 2006.
Paid-up capital of PICB was required to be increased to Rs 3.000 billion by the end of 2006 to meet the shortfall in Minimum Capital Requirement by the SBP. In view of the expected acquisition of PICIC by NIB Bank (backed by Temasek Group of Singapore), the SBP has, at bank's request, allowed extension in the time limit for increasing the company's paid-up capital. Accordingly, the board did not recommend any pay-out (cash dividend or bonus shares) for the year 2006 and out of the profit of Rs 1,424 million available for appropriation an amount of Rs 750 million was transferred to Revenue Reserve.
The trend further shows that the dividend payments made by PICB have not been very regular. With no cash dividends in initial 2 years (under consideration), the bank gave a DPS of Rs 1.5 in both 2003 and 2004 and rose it to Rs 6 in 2005.
FUTURE OUTLOOK: As the economy witnessed a slowdown in the credit demand, credit off-take of the banking sector showed a nominal increase of 0.83% in the 7mths'07 and stood at Rs 2.43t as compared to Rs 2.41t in Dec'06. The major reason behind this slow-down is the increasing non-performing loans of the banking sector and high interest rates spread. The weighted average lending rates of the banking sector were 11.31% at the end of 7mnth'07, up by 21 basis points from Dec'06.
The operating environment for banks in 2007 will continue to be very challenging in the wake of intense competition in the pricing of assets and liabilities. SBP has strictly advised all commercial banks to decrease the spread, which will help in curbing inflation and will help in increasing the deposit base of the banks.
Erosion of banking spreads will force the banks to offer improved and innovative products and services in an effort to produce better results. Increased competition will further encourage the banks to use new financial instruments to facilitate transactions and adjust their risk profile. It will also require banks to re-align business objectives and further diversify their products.
Moreover, SBP has decided to completely withdraw the benefit of forced sale value (FSV) against all NPLs for calculating provisioning requirement from December 31, 2007. It proposed 100% cash provisioning for NPLs. This proposal is to be implemented from the next year but it would likely to hit the banking sector, including PICB profitability.
The forthcoming acquisition of PICIC by NIB Bank (backed by Temasek Group of Singapore) will give rise to a number of opportunities to the new entity. The merged entity with a strong capital base/equity will lead to a further widening of business and market share by tapping additional niches in the current market. The newly emerged organisation will be better placed amongst the financial institutions given its size and strength and a large network of branches which will give it a distinct competitive advantage in customer service delivery. Hence, we can maintain an overall positive outlook for the bank.
============================================================================================
Balance Sheet 2002 2003 2004 2005 2006
============================================================================================
Cash and balances
with treasury bank 1,817,427 2,335,290 3,495,792 5,173,687 5,583,591
Balances with other banks 275,381 487,482 790,783 1,561,364 2,170,897
Lending to financial Institutions 3,824,143 106,250 6,748,310 8,706,436 9,285,608
Investments 10,306,316 21,736,954 13,199,518 13,657,530 15,661,143
Advances 10,876,336 14,316,832 25,828,363 33,162,262 34,883,751
Earning Assets 25,006,795 36,160,036 45,776,191 55,526,228 59,830,502
Deposits 21,154,925 32,499,771 44,091,795 53,468,021 59,467,497
Total Assets 27,982,188 40,133,853 52,007,610 65,128,634 70,289,867
Total Equity 1,323,240 1,783,777 3,482,869 4,185,944 4,471,066
Total liabilities 25,680,235 37,914,583 48,478,219 61,070,584 66,214,277
--------------------------------------------------------------------------------------------
Income Statement 2002 2003 2004 2005 2006
--------------------------------------------------------------------------------------------
Mark-up/return/interest earned 1,776,501 2,617,602 2,336,412 4,171,890 5,795,979
Mark-up/return/interest expensed 1,297,191 1,547,246 1,067,647 2,061,889 3,530,329
Net mark-up/interest income 479,310 1,070,356 1,268,765 2,110,001 2,265,650
Provision against NPLs -31,510 107,932 -6,911 8,871 476,376
Net interest income after provision 509,097 950,739 1,274,355 2,100,215 1,788,766
Total non mark-up/interest income 326,393 438,723 679,417 958,597 857,465
Total Income 835,490 1,389,462 1,953,772 3,058,812 2,646,231
Administrative expenses 326,151 563,621 822,602 1,147,703 1,350,451
Total non mark-up/interest expenses 326,423 564,391 823,629 1,153,192 1,367,016
Profit before taxes 509,067 825,071 1,130,143 1,905,620 1,279,215
Total taxation 189,819 203,659 230,063 401,581 310,374
Profit after tax 319,248 621,412 900,080 1,504,039 968,841
--------------------------------------------------------------------------------------------
EARNING RATIOS 2002 2003 2004 2005 2006
--------------------------------------------------------------------------------------------
Return on Deposits 2.07% 2.32% 2.35% 3.08% 1.72%
Return on Assets 1.54% 1.82% 1.95% 2.57% 1.43%
Return on Equity 30.02% 40.00% 34.18% 39.22% 22.38%
--------------------------------------------------------------------------------------------
LIQUIDITY RATIOS 2002 2003 2004 2005 2006
--------------------------------------------------------------------------------------------
Advances to Deposit Ratio 0.56 0.47 0.52 0.60 0.60
Earning Assets to Assets 0.85 0.90 0.89 0.86 0.85
Yield on earning assets 0.10 0.09 0.06 0.08 0.10
Cost of funding earning assets 0.07 0.05 0.03 0.04 0.06
ASSET QUALITY RATIO 2002 2003 2004 2005 2006
NPL provisions to advances 0.00 0.01 0.00 0.00 0.01
--------------------------------------------------------------------------------------------
SOLVENCY RATIOS 2002 2003 2004 2005 2006
--------------------------------------------------------------------------------------------
Equity to Assets 5.13% 4.56% 5.72% 6.55% 6.39%
Equity to Deposits 6.91% 5.79% 6.88% 7.86% 7.67%
Earning assets to Deposits 1.15 1.14 1.07 1.04 1.02
DEBT MANAGEMENT RATIOS 2002 2003 2004 2005 2006
Debt to Asset 0.92 0.93 0.94 0.94 0.94
Debt to Equity 17.96 20.47 16.40 14.28 14.70
Deposit times capital 14.47 17.27 14.54 12.72 13.05
--------------------------------------------------------------------------------------------
MARKET VALUE RATIOS 2002 2003 2004 2005 2006
--------------------------------------------------------------------------------------------
Price/Earnings Ratio 4.35 5.76 9.72 6.56 9.45
Market to book value 1.17 2.01 2.27 2.36 2.05
--------------------------------------------------------------------------------------------
DIVIDEND RATIOS 2002 2003 2004 2005 2006
--------------------------------------------------------------------------------------------
Dividend Cover 0.00 3.86 2.97 0.92 0.00
Dividend yield 0.00 0.04 0.03 0.17 0.00
============================================================================================
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
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].
Comments
Comments are closed.