Bank: MEEZAN BANK LIMITED - Analysis of Financial Statements Financial Year 2003 - Q1 Financial Year 2008
Meezan Bank Limited was incorporated on January 27, 1997 as a public limited company. It started its operations as an investment bank in August of the same year. In January 2002, the bank was granted nation's first full-fledged commercial banking licence dedicated to Islamic banking, by the State Bank of Pakistan.
The banking sector is showing a significant paradigm shift away from the traditional means of business and is catering to an increasingly astute and demanding financial consumer who is also becoming keenly aware of Islamic banking.
The bank achieved a strong balance sheet with excellent operating profitability, including a capital adequacy ratio that places the bank at the top of the industry, a long-term entity rating of A+, and a short-term entity rating of A1.
The bank's main shareholders are the leading local and the international financial institutions, including 'Pak-Kuwait Investment Company', the only AAA rated financial entity in the country, the 'Islamic Development Bank of Jeddah', and 'Shamil Bank of Bahrain'.
The total number of branches increased from 28 in January 2006 to over 100 in 31 cities. This branch network offers a comprehensive range of retail and wholesale banking products to a large customer base. Its branch network supported by real time on-line banking, a network of over 50 ATMs, a 24/7 Call Centre and Internet Banking.
ISLAMIC BANKING PERFORMANCE:
In Pakistan, the Islamic banking system has witnessed a healthy growth during the last couple of years and is steadily proving its potential to work as a compatible and parallel alternative system for providing the financial services.
IT IS GROWING IN TERMS OF SIZE AND STRUCTURE AS SHOWN BELOW: Total assets of the Islamic banks have been increasing significantly and have showed 64% growth in FY06 and FY05 and reached at the level of Rs 178 billion at the end of 9 months '07 from Rs 118 billion in FY06 ie a growth of 51% recorded during the period.
Deposit base also posted impressive growth of 66% and 67% in FY06 and FY05 respectively and grew further by 49% during 9 months '07 and amounted to Rs 124 billion from Rs 83 billion in FY06. Financing and investment portfolio grew 50% in FY06 and 60% in FY05. The momentum continued in 9 months '07 as total financing and investment reached at Rs 114 billion with a growth of 58% during the period compared to Rs 72 billion in FY06.
At the end of December 2007, there were six full-fledged Islamic banks operating in the country with a network of 185 branches. Also there are 12 commercial banks offering Islamic banking services through 103 branches. Presently, the share of Islamic banking industry is just 3.8% of the total assets of the banking Sector, but this sector has been performing well and growing rapidly.
RECENT PERFORMANCE (Q1'08): Meezan Bank Limited declared profit after tax of Rs 251 million with earnings per share of Re 0.55 in 1Q'08 compared to profit after tax of Rs 191 million with earnings per share of Re 0.42 in the corresponding period of 1Q'07. A significant growth of 31.5% has registered during the period under review.
Net spread earned by the bank grew significantly by 62.0% during the period and amounted to Rs 755 million in 1Q'08 compared to Rs 466 million in 1Q'07. The major reason for this growth is the profit earned by the banks on their financing and investments, which crossed one billion mark just in three months period and reached at Rs 1.4 billion over Rs 974 million in 1Q'07.
Other income of the bank also grew decently which amounted to Rs 218 million in 1Q'08 ie 13.6% more over the corresponding figures of 192 million in 1Q'07. Major contribution came from unrealized gain on investments held for trading. The total unrealized gain during the period was Rs 40.2 million over Rs 16.1 million in 1Q'07.
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Highlights-MEBL PKR (Rs) m
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Year and: Dec 1Q'08 1Q'07 Chg.(Rs) Chg.(%)
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Profit on financing investment 1,424 974 451 46.3%
Return on deposits 670 507 162 32.0%
Net spread earned 755 466 289 62.0%
Provisions 13 8 5 68.7%
Net spread after provisions 742 458 284 61.8%
Other income 218 192 26 13.6%
Other expenses 577 372 205 55.0%
PBT 383 278 105 37.7%
Tax 132 87 45 51.3%
PAT 251 191 60 31.5%
EPS 0.55 0.42 0.13 31.5%
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FINANCIAL PERFORMANCE (FY03-FY07):
The bank's profits witnessed a growth of 60% in the year 2007. The growth was driven by a high net spread income of Rs 1.2 billon, an increase of 71.7% from the previous year.
The ROA of the bank, which had seen a slight dip to 1.30% in FY06 (2005: 1.37%) surged to 1.43% in FY07. The bank's assets have been on the average being fuelled by growths in investments and fixed asset. The bank's assets at the end of 2006 were Rs 67 billion. The bank has been following a policy of expansion to cater to a large number of people, who are attracted to Islamic banking. An increased investment by 266% and the overall growth in earning assets promises higher profitability in the years to come. Also the ROA is above that of the other Islamic Banking Institutions (IBIs) which is 0.9%.
The deposits of the bank have grown remarkably this year around increasing by 58.4%. The deposits of the bank were Rs 54 billion at the end of 2007. The bank's deposits are mainly comprised of long term fixed and savings deposits comprising around 72% of the deposits. During FY07 period, the deposit structure depicts some changes, wherein the share of fixed deposits and saving deposits increased from 38 percent and 29 percent last year to 39 percent and 32 percent in FY07 respectively, thus increasing the term deposits from 67% to 71% respectively.
Corollary to this, the share of financial institutions and current non remunerative deposits have decreased from 10 percent and 23 percent in FY06 to six percent and 22 percent respectively in FY07. The shifting deposits mix is indicative of customers' continued growing trust in the Islamic banking products as they are becoming more eager to engage in long-term relationship with Islamic banks.
Financings (advances) have witnessed a growth of almost 500% since 2003. The break-up of financing as per various Islamic modes shows the continuous predominance of Murabaha and Ijara financing, having their share of 45 percent and 22 percent respectively.
When compared with the last year, the share of Murabaha has increased and that of Ijara has remained at the same level. Diminishing Musharaka has also started to increase its share, which shows the eagerness on the part of to diversify their financing portfolio.
Net finances in Q3'07, however increased only by 30% compared to 58% robust increase in deposits. Because of the slower growth of financing, the finance to deposit ratio dropped to around 82 percent and 69% in FY06 and FY07 from 92 percent in FY05. Earnings assets have shown an increase over the years showing strong liquidity position of the bank. The assets seem to experience some shift away from financing to the investments and other assets since the share of these two has increased over the year. This is line with overall banking industry where the assets mix has shifted more towards investments than advances.
On evaluating the performance of Meezan's earning assets we see that yield (yield as calculated by net spread income/earning assets) has shown an overall rising trend till FY07. Moreover, the 'Cost of Funding Earning Assets' has also followed the same trend. A slight increase in 'cost of assets' coupled with returning higher profits is a good sign for any business and signifies its potential to produce/earn in future.
On the performance side, markup income experienced a strong growth of 71 percent during FY07 net markup income after provisioning also witnessed healthy growth of 51 percent. Moreover, as the yield is still higher than costs of funding, it is hoped that the Meezan continues future expansion through low cost funding sources.
With the growing operations and fast expanding financing portfolio, the occurrence of non-performing financing is inevitable. The NPLs of the bank had been on the rise till FY07. The NPL has increased by 122.7% in 2006 to become Rs 408 million. The rise in NPL is due to the increase in defaults and substandard loans. As a proportion of finances (2006: Rs 27 billion) this amount is significant. NPL form 1.51% of the finances in 2006 but declined to 1.1% in FY07. The industry trend has been reversed in 2007 where NPLs have risen. Meezan's ratios have on the other hand shown improvement in FY07.
These ratios are still very low and do not carry significant threat to the financial soundness of Meezan. However, it will have to exercise extra safety measures for the financing portfolio, keeping in view the fact that Shariah-based modes of financing require that any late payment fee recovered from clients could only be used for charitable purposes. The bank needs to monitor defaults and must lend cautiously after having studied the creditworthiness of the borrower, as SBP is going to implement full provisioning against non-performing loans from 31st December 2007.
The peculiar trends in the funding and financing structures also had their impact on the key debt management indicators. We can see that the bank has increased its dependence on debt, as a source of finance. Debt management figures reveal that the bank has 84% of its assets financed by debt in 2003. However it has reached a very high level now at 91% and there is always a potential to fall back from heights. Further, the debt to equity ratio also suggests the same trend where the ratio increased at around 10% in FY07. Rising deposit times capital is indicative of customers' continued growing trust in the Islamic banking products as they are becoming more eager to engage in long-term relationship with Islamic banks.
The solvency situation for the industry as a whole witnessed a marked improvement in the recent years, caused by increasing profitability and fresh inflows of capital. In Meezan's case, there was a decline in the solvency position over the years as a result of high growth in deposits. Therefore, the earning assets as a percentage of deposits declined in FY07.
Since the capital of the Islamic banking system grew at a lower rate compared to the assets growth, the capital to total assets ratio decreased to 9.2 percent from 16 percent. Yet, the ratio is comfortably more than double the generally accepted benchmark of 5 percent. Moreover, the capital adequacy ratio of the bank at 11.63% percent is also well above the regulatory benchmark of 8 percent. Equity/deposits also witnessed a falling trend due to aforementioned reasons.
The bank has been following a conservative dividends policy as the last cash dividend came in the year 2003. The bank is more inclined on bonuses and rights, to increase its equity whereby conserving its profits for investment in expansion. From this, we hope that it will improve its debt management and solvency position in the coming years.
The price of Meezan Bank's share has been fluctuating between Rs 13 and Rs 38.50 from the year 2004 to December 2007. Since 2005, the share price has risen by 69% and has gone up to Rs 38.50. As has been the case the bank's profitability has not been too high.
But investors feel an upside in the share of the bank and with the expectation of Islamic banking occupying around 25% of the market share by 2010 there is bright possibility of growth for Meezan Bank. Also given the bank's policy of increased investments and expansion, the bank is likely to get more profitable in the coming years.
The share operated at a P/E multiple of 15.2 in 2007 mainly because of high share price. MV was 2.0x the BV indicating a strong investor demand for the share. The overall performance of the Meezan Bank remained encouraging and the key indicators depicted healthy trends in FY06 and FY07, auguring well for the future growth prospects.
FUTURE PROSPECTS: The Islamic banking industry is growing in Pakistan and six full-fledged Islamic banks are now in operation. It is interesting to note that the conventional banks are increasingly realizing the huge potential market backed by the untapped and steadily growing appetite for Islamic banking products; hence the drive for entering this market is based on business considerations in addition to religious considerations.
As the level of awareness and understanding of Islamic banking remains very low, this might pose as a threat to the credibility to the full-fledged Islamic banks like Meezan. For this reason, there is a need for all banks to act in concert and help build awareness of Islamic banking throughout the country.
Islamic banks should come forward to serve the nation by providing the less privileged with the opportunity to meet their needs in the Shariah compliant manner. The bank, which has firmly established its leadership position in the Islamic banking industry, should focus more on the development and offering of the financing products of social welfare such as education and micro finance.
Recently, the Meezan has put into place a comprehensive strategic plan for the next five years, using a 'bottom-up approach', which is being implemented using the 'Balanced Scorecard'.
The bank's strategy is to continue to build market share through an aggressive branch expansion plan supported by a strong technology backbone. For this purpose, it has decided to upgrade its core banking software and recently signed a contract with Temenos acquiring the right to use its latest product - T24.
Another important project is the setting up of a dedicated online real time Disaster Recovery (DR) ie a 'hot' DR site. However, the bank will have to manage its growing expenses is addition to following the stringent appraisal and monitoring standards.
This along with the strengthening systems and building capacities of the human capital will add to the efficiencies of its system and thus proving it a comparable alternate financial system. In the light of above scenario we can say that Meezan Bank is well poised to meet the challenges of the future and will continue to play its leadership role in the Islamic banking industry.
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Meezan Bank's financials
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ASSETS FY '03 FY '04 FY '05 FY '06 FY '07
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Cash and Balances
with treasury banks 1,042,285 2,623,588 3,956,938 5,897,394 5,644,028
Balances with other banks 683,596 1,751,083 2,855,823 4,134,875 3,729,549
Lending to Financial
Institutions 0 0 0 3,700,000 8,850,000
Investments 1,211,667 1,429,053 1,606,490 2,877,554 10,535,186
Financings 7,397,078 12,339,745 19,740,886 27,031,016 34,576,339
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FIXED ASSETTS 689,226 1,349,184 305,585 531,262 1,032,963
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Other Assets 78,537 204,737 2,210,100 2,266,522 2,810,494
TOTAL ASSETS 11,102,389 19,697,390 30,675,822 46,438,623 64,368,065
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LIABILITIES FY '03 FY '04 FY '05 FY '06 FY '07
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Bills Payable 169,062 196,145 260,732 563,228 1,192,160
Borrowings from Financial
Institutions 988,964 2,862,139 2,981,714 4,285,212 2,415,606
Deposits and Other Accounts 7,756,862 13,769,807 22,769,262 34,449,441 54,582,353
Liabilities against assets
Deffered liabilities 9,236 286 170,274 398,304 430,377
Other Liabilities 429,790 770,631 1,469,258 1,979,079 2,851,407
TOTAL LIABILITIES 9,353,914 17,599,008 27,651,240 41,675,264 61,471,903
NET ASSETS 1,748,475 2,098,382 3,024,582 4,763,359 5,706,656
REPRESENTED BY: FY '03 FY '04 FY '05 FY '06 FY '07
Share Capital 1,064,045 1,346,017 2,036,582 3,779,897 3,779,897
Reserves 351,444 256,578 407,235 528,085 720,785
Unappropriated Profit 221,073 258,325 527,123 448,427 1,219,228
1,636,562 1,860,920 2,970,940 4,756,409 5,719,910
Advance against rights issue 192,312
Surpus on Revaluation of Assets 111,913 45,150 53,642 6,950 (13,254)
1,748,475 2,098,382 3,024,582 4,763,359 5,706,656
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INCOME STATEMENT FY '03 FY '04 FY '05 FY '06 FY '07
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Profit/ return earned on
financings, investments
and placements 375,567 534,400 1,459,229 2,704,280 4,573,752
Return on deposits and
other dues expensed 182,354 250,393 690,418 1,464,173 2,451,968
Net spread income 193,213 284,007 768,811 1,240,107 2,121,784
Provision against consumer loans
Provision against non-performing
loans and advances - net (17,769) 16,991 68,811 121,581 435,018
Provision/(reversal) for diminution
in value of investments - net 1,995 1,750 (29,831) 1,297 878
Bad debts written of directly 0 0 0 0 -
(15,774) 18,741 38,980 122,878 435,896
Net spread after provisioning 208,987 265,266 729,831 1,117,229 1,685,888
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NON MARK-UP / INTEREST INCOME
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Fee, commission and
brokerage incorporate 53,869 100,739 174,750 216,216 321,685
Dividend Income/Gain on
Sale of Investments 114,625 108,592 92,569 165,228 104,345
Gain on Sale of securites 105,339.00 81,223.00 209,402.00 116,993.00 533,093.00
Unrealized Gain/(loss) on
revaluation of investments 0.00 42,081.00 57,792.00 (32,455.00) (31,453.00)
Income from dealing in
foreign currencies 26,830 26,830 77,961 201,519 392,319
Other Income 8,262 5,628 9,677 23,060 27,904
Total non mark-up/
return/interest income 308,925 365,093 622,151 690,561 1,347,893
517,912 630,359 1,351,982 1,807,790 3,033,781
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NON - MARKUP INTEREST EXPENSES
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Administrative expenses 255,449 409,296.00 718,384.00 1,022,991.001,755,761.00
Other Provisions/
write offs/(reversals) 0 0 0 0 5,948
Other Charges 20.00 482.00 4,776.00 2,884.00
Total Non markup
Interest expenses 255,469 409,481 718,866 1,027,767 1,764,593
Extraordinary Items 0 0.00 0.00 0.00
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PROFIT BEFORE TAXATION 262,443 220,878 633,116 780,023 1,269,188
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Taxation-Current-for the year 5,731 5,470 4,671.00 8,314.00 271,452.00
- for prior years 39,002.00 (60,572.00) -
- Deferred 21,284 (8,950) 169,988.00 228,030.00 34,235.00
27,015 (3,480) 213,661 175,772 305,687
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PROFIT AFTER TAXATION 235,428 224,358 419,455 604,251 963,501
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Basic AND diluted Earnings
per Shares 1.67 1.37 1.46 1.88 2.55
Average price per share 17.9 16.40 24.8 38.55
Weighted Average Number of Shares 106,405 134,602 203,658 377,990 377,990
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LIQUIDITY
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Earnings Assets to Assets 83.70% 100.78% 96.10% 97.89% 101.55%
Yield on earning assets 4.04% 3.67% 5.02% 6.72% 7.63%
Finance to deposits 95.36% 91.69% 87.80% 81.74% 69.20%
Cost of Funding earning assets 1.96% 1.74% 2.37% 3.48% 4.10%
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SOLVENCY
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Equity to Assets 15.75% 12.49% 10.17% 10.10% 9.22%
Equity to Deposits 22.54% 17.87% 14.02% 13.61% 11.76%
Earning Assets to Deposits 1.20 1.15 1.09 1.08 1.07
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EARNING
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Return on Assets 2.12% 1.14% 1.37% 1.30% 1.43%
Return on Deposits 3.04% 1.63% 1.84% 1.75% 1.77%
Return on Equity 13.46% 10.69% 13.87% 12.69% 16.88%
Asset Quality
Provisions to Non-Performing Loans -0.29 0.28 0.38 0.30 1.15
Non-Performing loans to Finances 0.8 0.5 0.9 1.5 1.1
NPL 62,192.0 59,971.0 183,373.0 408,442.0 379,727.0
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MARKET VALUE RATIO
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Average price per share 17.9 16.40 24.8 38.55
Price-Earnings ratio 13.07 11.23 13.19 15.12
Market-Book value ratio 1.15 1.10 1.97 2.55
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DEBT MANAGEMENT
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Debt to Equity 5.35 7.01 8.83 9.69 9.85
Debt to Asset 84.3% 87.5% 89.8% 90.6% 90.8%
Deposits time Capital 4.44 5.60 7.13 8.23 8.50
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DIVIDEND PAYOUT
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Dividend per Share 0.05 0.00 0.00 0.00 0.00
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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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