Bank: BANK OF PUNJAB - Analysis of Financial Statement Financial Year 2004-3Q Financial Year 2007
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 the agricultural sector.
The bank, through its wholly owned subsidiary Punjab Modaraba Services (Private) Limited, also conducts modaraba operations. Its major customer is the government. Other customers are various public sector enterprises including textile, real estate, transport, agriculture, financial institutions and individual customers.
ANALYSIS OF FINANCIAL PERFORMANCE (DECEMBER'04-SEPTEMBER'07):
The bank has shown a rising trend of profitability except a decline in September 2007. However, deviations may be expected as the analysis is not of the entire year 2007. The interest earned has been greater for these 9 months 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 that have 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, a significant portion being backed by dividend income coming from the 195 NIT units the bank holds.
The banking industry in the 9 months observed a healthy profit growth. However, on a QoQ basis, the profitability picture was a little dim due to a slowdown in the credit expansion to the private sector, increasing number of non-performing loans and instability in the country. For such reasons, the growth in the net interest income was also subdued. Moreover, due to the contractionary monetary policy stance of the State Bank, the net interest income was lower. However, the non-interest income of the banking sector increased by about 36%. Much of this may be attributed to the buoyant activity, taking place in the stock market.
The profitability may be expected to improve at the end of 2007. It is likely to attain at least the same level as the previous year. The non-performing loans of the bank show a slowdown from their previous alarming levels. This is a favourable development, indicating that the bank has improved upon its credit policy. Moreover, the advances of the bank have also been less than their previous years' levels.
This may again reinforce the fact that the bank may be controlling its advances prudently. The bank has also increased the provisions to as a measure to protect its assets. At the end of the year, we may expect the levels to be a little higher but below the past years.
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 grew to Rs 120.5 billion. Investment portfolio of the bank constituted the second major portion of the total assets and during the period under review, total investments grew significantly by 148%. We may say that the bank has continued to build its investment 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 savings and fixed deposits stood at equal levels at the end of the 9 months. However, in the banking sector, the portion of savings deposits has surpassed the portion occupied by the fixed deposits. It may be predicted that the bank's savings deposits will increase more than the fixed deposits in the coming years and that the trend of the debt profile would remain in the subsequent years.
The market value of the bank has maintained a healthy trend. The price to earnings ratio has attained almost the same level as in the previous years only in 9 months. 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.
The liquidity ratios of the bank have been in tandem with the pattern of the industry. In fact, during the 9 months in 2007, there prevailed excess liquidity in the banking sector due to 19.3% 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. However, if SBP lacks in maintaining a tight control over the monetary policy, excess liquidity conditions may have negative effects in the economy.
The solvency profile almost maintained its 2006 level in the 9 months. Hence, we may expect the picture to become better at the end of the fiscal 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 is expanding its branch network. It opened six new branches during the period under review and is planning to open three Islamic banking branches in the coming months. Hence, it has not distributed any dividends.
FUTURE OUTLOOK:
There are demands to further tightening the monetary policy. The SBP may consider this option to curb the inflationary pressures. This would result in higher interest rates and may decrease the net interest income of the sector. The FY 2007 for BOP may experience a slight increase in its profit figures with the same liquidity and solvency picture. The stock market has now recovered a little bit but may experience downfalls in the wake of coming elections.
However, in the long run, the market price of BOP is expected to increase. As the Islamic banking sector is experiencing growth, (its balance sheet increased by 17.25% as compared to the other conventional banks that increased by 11.2% as of June 2007) we can expect BOP to perform well on this front in the coming years as it commences its operations.
As the investments of the BOP are increasing, we may expect it to maintain its capital adequacy in the short as well as the long run. Despite decline in the banking sector profitability in these 9 months, the outlook of the banking sector is still positive. SBP has completely abandoned the facility of Forced Sales Value (FSV) and proposed 100% cash provisioning for NPLs, which is to be implemented from December 3, 2007. The profits of the banking sector might be affected slightly in the coming years but fundamentals are strong and banks will continue their earnings momentum in future.
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BANK OF PUNJAB
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Balance Sheet
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Year 2004 2005 2006 9 months-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 14,254,840
Balances with other banks 2,118,242 9,367,595 3,722,089 3,656,264
Lendings to financial
instituitions 1,019,488 7,593,681 11,846,823 5,995,628
Investments 16,197,505 18,026,181 28,233,211 69,967,282
Advances 39,438,923 63,623,705 101,319,954 120,585,541
Other assets 1,277,201 2,040,568 3,609,457 5,096,807
Operating fixed assets 689,486 1,715,061 2,068,744 3,485,905
Deferred tax assets 0 0 0 0
66,320,411 111,154,178 164,855,137 223,042,267
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Liabilities
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Bills payable 267,113 478,001 856,448 1,122,134
Borrowings from
financial institutions 2,831,605 6,791,007 6,989,424 6,312,142
Deposits and other accounts 54,724,311 88,465,051 137,727,606 191,418,838
Sub-ordinated loans 0 0 0 0
Liabilities against assets
subject to finance lease 81,795 55,403 40,988 26,653
Other liabilities 567,540 1,474,425 2,816,341 2,754,473
Deferred tax liabilities 8,964 220,177 298,616 550,157
58,481,328 97,484,064 148,729,423 202,184,397
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Net Assets 7,839,083 13,670,114 16,125,714 20,857,870
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Represented by:
Share capital 1,506,230 2,349,719 2,902,490 3,845,799
Reserves 2,770,645 4,257,337 4,537,232 4,921,812
Unappropriated profit 143,590 169,817 3,219,246 5,955,741
4,420,465 6,776,873 10,658,968 14,723,352
Surplus on revaluation of assets 3,418,618 6,893,241 5,466,746 6,134,518
7,839,083 13,670,114 16,125,714 20,857,870
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Total Assets and Liabilities 66,320,411 111,154,178 164,855,137 223,042,267
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BANK OF PUNJAB
Income Statement
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Year 2004 2005 2006 9 months
$ $ $ 2007
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Mark-up/return/ interest earned 2,555,039 6,125,093 11,643,963 13,077,058
Mark-up/return/ interest expensed 719,074 2,668,739 7,573,722 10,182,440
Net mark-up/interest income 1,835,965 3,456,354 4,070,241 2,894,618
Provision against non performing
loans and advances 46,940 327,373 340,626 391,518
Provision for diminution 0 0 33,000 24,394
Bad debts written off directly 121 3,623 100 149
47,061 330,996 373,726 416,061
Net mark-up/ interest income
after provisions 1,788,904 3,125,358 3,696,515 2,478,557
Non mark-up/ interest income
Fee, commission and
brokerage income 172,873 255,149 473,212 444,833
Dividend income 554,218 753,669 1,385,875 1,793,427
Income from dealing in
foreign currencies 41,311 93,208 239,804 246,249
Gain on sale of securities 0 0 389,063 778,167
Other income 328,361 228,749 466,435 430,485
Total non-markup/ interest income 1,096,763 1,330,775 2,954,389 3,693,161
2,885,667 4,456,133 6,650,904 6,171,718
Non mark-up/ interest expenses
Administrative expenses 1,116,097 1,274,971 1,751,970 1,522,048
Provision against lending
to Financial institutions 0 0 130,000 -130,000
Provision against off
balance sheet items 364 0 175 0
Provision against
receivable from NIT 32,046 4,744 0 0
Other charges 1,217 11,461 38 996
Total non-markup/interest expenses 1,149,724 1,291,176 1,882,183 1,393,044
Profit before taxation 1,735,943 3,164,957 4,768,721 4,778,674
Taxation - current 225,916 668,700 880,997 467,148
deferred 141,853 143,015 83,469 251,541
Profit after taxation 1,368,174 2,353,242 3,804,255 4,059,985
Weighted number of
ordinary shares 234,971,860 234,971,860 289,602,365 384,579,900
Basic earnings
per share - (Rupees) 5.82 10.01 13.14 9.60
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BANK OF PUNJAB
Financial Ratios
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Earnings Ratios 9 months
2004 2005 2006 2007
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Return on Assets (%) 1.21 1.33 1.39 1.82
Return on Deposits (%) 2.50 2.66 2.76 2.12
Return on Equity (%) 17.45 17.21 23.59 19.47
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Assets Quality Ratios 9 months
2004 2005 2006 2007
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NPL to Advances 0.03 0.02 0.04 0.02
Provisions to NPLs 0.04 0.24 0.09 0.16
Non Performing Loans 1,166,012 1,359,567 3,608,154 2,492,772
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Market Value Ratios 9 months
2004 2005 2006 2007
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Price to Earnings 11.32 9.99 7.76 10.63
Market Value to Book Value 1975.31 1718.87 1831.82 1880.69
Debt Management Ratios
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Market Value Ratios 9 months
2004 2005 2006 2007
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Debt to equity 28.88 25.88 34.02 9.69
Deposit times capital 6.98 6.47 8.54 9.18
Debt to asset 2.00 2.00 2.00 0.91
Liquidity Ratios
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Market Value Ratios 9 months
2004 2005 2006 2007
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Earning assets to assets 0.50 0.50 0.52 0.88
Advance to deposit 0.72 0.72 0.74 0.63
Yield on earning assets 0.045 0.069 0.082 0.067
Cost of funding earning assets 0.013 0.030 0.054 0.052
Solvency Ratios
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Market Value Ratios 9 months
2004 2005 2006 2007
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Equity to assets 0.07 0.08 0.06 0.09
Equity to deposits 0.14 0.15 0.12 0.11
Earning assets to deposits 1.04 1.01 1.03 1.03
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Dividend Payout Ratios
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Market Value Ratios 9 months
2004 2005 2006 2007
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2004 2005 2006 9 months2007
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Dividend yield 0.000 0.000 0.000
Dividend cover DIV/0! DIV/0! DIV/0!
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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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