Bank: STANDARD CHARTERED BANK LIMITED - Analysis of Financial Statements Financial Year 2005-Financial Year 2007
Standard Chartered Bank (Pakistan) Limited (SCBPL) was incorporated on July 19, 2006. The ultimate holding of the bank is Standard Chartered plc, incorporated in England, which holds almost 99.0% shares of SCBPL. Hence the free float of share would only be 1.0%.
SCBPL acquired a controlling stake in Union Bank Limited worth US $487m (Rs 29.4b), which is the largest transaction in Pakistan's banking history. The bank granted approval for commencement of operation by the SBP, w.e.f. 30 December 2006.
In consideration for the amalgamation, shareholders of the Union Bank have been issued and allotted fully paid shares in SCBPL in the swap ratio of 2.5:1. Under this amalgamation 39.24m shares were issued and allotted at par to persons who were registered shareholders of Union Bank.
Trading of Union Bank Limited (UNBL) was suspended on December 29 2006 and the trading of SCBPL commenced from April 13, 2007. After the merger, the SCBPL emerged as an even stronger bank, with operations extended to 22 cities and branches network increased to 115. Union Bank was considered to be a strong player in consumer and SME banking.
BANKING SECTOR PERFORMANCE 2007: The FY07 was a volatile year for the banking sector in terms of profitability. Every quarter showed a different picture. The overall profitability of the banking sector declined by 5.6% (from Rs 80.32b in 2006 to Rs 75.86b in 2007).
The fourth quarter of the banking sector was not commendable. Banking sector till the end of HY07 depicted a growth of 53.2% in the profitability. But in the beginning of 2HY07, SBP proposed full provisioning against Non-Performing loans (NPLs) and withdrew the facility of Forced sales Value (FSV). As a result, banks had to make additional provisioning against their NPLs. The total NPLs of the banking sector reached at Rs 164b at the end of September 2007.
At the end of 1Q'07 the total profitability was Rs 18.49b, which improved to Rs 34.77b in 2Q'07 and after the amendment in SBP's regulation regarding NPL and FSV, total profitability declined to Rs 14.74 and Rs 7.66b in 3Q'07 and 4Q'07 respectively.
The net interest income earned by the banking sector in FY07, posted a growth of 17.4% and reached at Rs 203b as compared to Rs 173b in FY06. The major reason behind the growth in net interest income was the high level of spreads throughout the year, which remained at 7.29% on average.
Upsurge in the non-performing loans led to an increase in the provisioning. The total provisions against NPLs of the banking sector increased phenomenally by 205.4% in FY07 and surged to Rs 47b as compared to Rs 15b in FY06. High provisioning was the major reason behind a decline in the overall profits. Non-interest income on the other hand grew significantly and amounted to Rs 75b in FY07 from Rs 53b in FY06 ie grew by 43% during the period under review (Source: fnetrade.com)
RECENT RESULTS 2007: Standard Chartered has recorded a profit before tax of Rs 4.1 billion for FY07 compared to Rs 7.3 billion last year and a PAT of Rs 2.8 billion as compared to PAT of Rs 5.7 billion in FY06. The decrease in the profits is due to an increase in the provisions against NPLs last year and impairment losses on loans and advances by Rs 4.5 billion to Rs 6.1 billion.
Administrative expenses also increased in FY07 as a result of inclusion of non mark-up expenses of ex-UNB branches not included previously and also because of the amortization costs and incremental integrations costs associated with refurbishment of head office and installation of new and advanced equipments.
At the time of merger in January 2007, the combined bank had 115 branches in 22 cities. By the last quarter of 2008, the bank is expected to have 174 branches in 39 cities.
The ROA and ROD are showing a declining trend. The major reason for this is the acquisition of Union Bank that led to an increase in the assets without a corresponding increase in the returns for the year 2006. The trend has continued in FY07.
The assets have more than doubled, and the net assets have increased by 5 times, while the corresponding increase in the income has not been to that level. FY06 includes only the income from September 5th, 2006 to December 30, 2006.
Also, the provisions against NPLs have increased quite a bit leading to a decline in the PAT. It is expected that the provisions are also going to increase after 2007 because of the SBP's ruling to keep 100% provisioning against NPLs.
ROE has also shown a decline because of an increase in the equity due to shares issued by SCBPL. In the forthcoming year, the SCBPL particularly and the whole banking sector in general, expected to reap benefits of high spreads owing to constant monetary policy by the central bank. However, provisioning for NPLs will continue to dampen the bottom line of the company.
The share of equity has been increasing, indicating that SCBPL has been able to comply with the MCR requirements under Basle II. It is one of the strongest banks with respect to fulfilling the capital requirements.
The earning asset to deposit ratio is higher than the industry, because of the sudden increase in the equity. This situation gives the bank adequate leverage to aggressively diversify and expand its business operations. The equity has increased further in 2007, as a result of high retained earnings which can be utilized in future expansion of business operations.
It can be observed that SCBPL, in slight deviation from the industry maintains 21% deposits as fixed deposits (lower than the industry average), 43% and 34% as savings accounts and current accounts respectively (greater than the industry average).
On the other hand 43% of the loans are channeled towards the corporate sector, while of the consumer sector 40% of the loans consist of auto and mortgages. This situation could hint towards an asset liability mismatch if the fixed deposits are not increased keeping with the industry trend.
The increase in deposits in FY07 as compared to FY06 has been not significant. The increase has been contributed most by savings accounts followed by current account, while the fixed deposits registered a slight increase in FY07 as compared to FY06.
The individuals contribute 66.74% of the deposits (FY06), while the rest of the amount comes from various sectors like textiles, electronic appliances, production and transmission of energy and consumer goods.
SCBPL shows fluctuations in the composition of its earning assets. Post-acquisition in 2006, the advances portion in the earning assets increased on the expense of the lending to financial institutions. However, keeping in line with the industry trend, the lending to financial institutions has increased, which is mostly done in foreign currency.
The reason behind this is a slowdown in the lending activity due to tight monetary policy atmosphere, and exhaustion in the borrowing capacity of the private sector. The investments consist mostly of T-Bills and PIBs, which are giving returns more than the cost of funds.
The loan portfolio largely ignores the agriculture and SME sector, focusing more on the consumer sector. This slant towards the consumer sector was augmented with the acquisition of Union Bank. With the acquisition, SCBPL had inclusion of many different sectors as its customers, and an increase in lending exposure to the previous ones that it was already engaged in lending to.
For example, consumer goods and telecommunications and IT segment became part of SCBPL's portfolio while its exposure in the textile, cement, sugar, financial, and individuals sector expanded due to the acquisition of Union Bank.
Textiles account for 14.17% of the advances, second only to the individuals category which leads the pack by nearly 42% of the advances. Next in line come chemicals and pharmaceuticals with 6.30% share in the advances while financial and cement sectors bag 3.45% and 3.06% respectively.
SEGMENT WISE ANALYSIS: The business of SCBPL consists of global markets (GM), corporate and institutional banking and consumer banking. As of September 2007, the gross income nearly doubled as compared to SPLY (Same period last Year). Consumer banking contributed nearly 74% of the total income, while GM and institutional and corporate banking claimed nearly 12% share in the total income. If we consider the net income, consumer banking is the leader bagging 56%, GM coming second with nearly 30%. The reason is the lower cost associated with the GM business.
Consumer banking sector commands the highest share in terms of the segment assets, followed by GM segment. In the consumer banking business, SCBPL holds the forte in cards business, with the card business forming 27% of the portfolio as compared to 12% of the industry.
However, with the major marketing techniques that the other banks are employing, SCBPL is going to have a tough time maintaining its market position. The GM segment growth far surpassed the growth in the other two segments in the period under review.
The ADR showed a rise in 2006 because of an unprecedented increase in the advances due to acquisition. However, it shows a decline for FY07 because of a decline in the advances for that time period, in favour of lending to financial institutions.
The earning assets to assets have shown an erratic trend, rising to 124.88% in 2006 and declining in FY07. The trend can be attributed to a sizeable injection of equity in SCBPL in exchange for cash in lieu of the acquisition.
Due to the acquisition of Union Bank and subsequent injection of additional equity through share issue, the influence of debt in the balance sheet has declined drastically after 2005.
In 2006, the D/E ratio as well as the D/A and the Deposit times capital ratio has declined greatly. This situation gives the bank additional room to attract deposits, expand and aggressively pursue newer and maybe riskier ventures. Although with the acquisition deposit base also increased, so did the equity by an even greater percentage.
The NPL to Advances ratio has increased from 6.95% to 9.66% in FY07 as a result of an increase in the NPL's and provisions against them. Most of the NPL's arose from the acquisition assets and also because of the rising interest rate environment as has been discussed repeatedly in our analysis.
Under SBP, the bank is supposed to keep 1% and 3% general provision against its secured and unsecured consumer loans respectively. The increase in NPLs is majority due to Textiles sector which is facing difficulty in the face of international competition combined with rising cost of production-energy, financing and raw materials.
Second driver of provisions increase, are the individuals, who are facing the heat of floating rate loans in a tight monetary environment. It is quite clear that the interest rate spreads have shown a slight decline in FY06 as compared to FY05. However, in FY07, the interest spread has shown an increase, which is on line with the tight monetary policy stance by the SBP.
If we carry out a segment wise analysis of the net yield after taking into account the provisions and other administrative expenses, it can be observed that the highest yield is from the Consumer Banking segment in 2006, followed by corporate and institutional banking groups.
According to the annual reports, the yield of the consumer segment has been 7.63% with a segment cost of 4.05%, institutional and corporate banking yielding 2.97% ROA with 3.87% cost of funds, and global markets segment giving a ROA of 1.64% in contrast to the segment cost of 3.23%. Yield on earning assets has increased in FY07 and so did cost of funding earning assets because of the reasons mentioned above.
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FINANCIAL HIGHLIGHTS-STANDARD CHARTERED BANK PAKISTAN
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ASSETS (In thousand) 2005 2006 2007
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Cash and Balances with treasury banks 9927597 22797606 26295860
Balances with other banks 1,340,279 3,544,796 1,628,280
Lending to Financial Institutions 14,943,291 3,873,224 15,225,935
Investments 25,358,524 34,629,051 40,696,466
ADVANCES 50,214,718 129,004,118 119,537,015
Other Assets 9,165,565 16,929,462 16,992,650
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OPERATING FIXED ASSETTS 517,367 3,369,016 3,734,139
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Taxation recoverable
DEFERRED TAX ASSET 189,875 3,103,776 3,201,017
INTANGIBLE ASSETS 10,975 29,066,687 28,233,852
TOTAL ASSETS 111,668,191 246,317,736 255,545,214
Bills Payable 2,063,950 4,259,834 6,637,388
Borrowings from Financial Institutions 7,211,031 22,045,237 6,616,065
Deposits and Other Accounts 83,646,043 156,878,328 177,161,630
subordinated loans 2,414,851 1,912,455
Liabilities against assets 19,079 9,724
subject to financial lease
Other Liabilities 20,479,649 20,151,366
Deferred liabilities 10,322,394
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TOTAL LIABILITIES 103,262,497 206,087,623 212,478,904
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Share Capital 4,103,942 38,715,850 38,715,850
Reserves 1,113,606 1,653,044
Unappropriated Profit(Ret. Earnings) 4,657,389 729,214 2,971,681
8,761,331 40,558,670 43,340,575
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INCOME STATEMENT (In thousand) 2005 2006 2007
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Mark-up / Return/ Interest earned 7,013,439 14,565,027 22,530,080
Mark-up / Return/ Interest expensed 1,737,811 4,228,716 6,338,119
Net Mark-up / Interest Income 5,275,628 10,336,311 16,191,961
Recovery of amounts written 92,683 119,621 184,448
OFF in previous years
Provision against consumer loans
Provision against non-performing 29,677 1,477,286 6,236,931
loans and advances - net
Provision / (reversal) for 45
diminution in value of investments - net
Bad debts written of directly 206,099 474
29,677 1,683,430 6,237,405
Net markup/ return / interest 5,338,634 8,772,502 10,139,004
income after provisions
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NON MARK-UP / INTEREST INCOME
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Fee, commission and brokerage income 1,778,925 2,502,511 3,950,282
Dividend Income/ Gain 9,866 77,851 27,768
on Sale of Investments
Income from dealing in foreign currencies 655,045 699,354 1,116,633
Gain on Sale of securities -189,193 138,715 87,044
Unrealized Gain / (loss) on 19,447 5 -3,326
revaluation of investments
Other Income 176,044 268,803 934,310
Total non mark-up / return / interest income 2,450,134 3,687,239 6,112,711
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7,788,768 12,459,741 16,251,715
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NPL 613,283 8,969,830 11,548,534
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NON - MARKUP INTEREST EXPENSES
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Administrative expenses 2,348,699 5,072,060 -12,081,963
Other Provisions / write offs/ (reversals) 26,992
Other Charges 13,096 510 -78,518
Total Non markup Interest expenses 2,361,795 5,099,562 -12,160,481
Extraordinary Items
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PROFIT BEFORE TAXATION 5,426,973 7,360,179 4,091,234
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TAXATION 1,370,366 1,650,722 1,327,195
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PROFIT AFTER TAXATION 4,056,607 9,010,901 5,418,429
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LIQUIDITY 2005 2006 2007
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Earnings Assets to Assets 82.26% 124.88% 70.57%
Yield on earning assets 7.64% 6.84% 9.26%
Advance to deposits 60.03% 96.33% 90.11%
Cost of Funding earning assets 1.89% 2.68% 3.16%
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SOLVENCY 2005 2006 2007
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Equity to Assets 7.85% 16.47% 16.96%
Equity to Deposits 10.47% 25.85% 24.46%
Earning Assets to Deposits 109.82% 131.12% 119.93%
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EARNING 2005 2006 2007
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Return on Assets 3.63% 3.66% 2.12%
Return on Equity 46.30% 22.22% 12.50%
Return on Deposits 4.850% 5.744% 3.058%
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Asset Quality 2005 2006 2007
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Non-Performing loans to Advances 1.22% 6.95% 9.66%
Provisions to Non-Performing Loans 4.84% 16.47% 54.01%
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DEBT MANAGEMENT 2005 2006 2007
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Debt to Equity 12 5 5
Debt to Asset 92.473% 86.414% 83.403%
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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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