Bank: SAUDIPAK BANK Analysis of Financial Statements Financial Year 2002- Financial Year 2007
Saudi Pak Bank is a subsidiary of SaudiPak Industrial & Agriculture Investment Company (SAPICO) and a joint venture between the governments of Saudi Arabia and Pakistan. The Saudi Pak Group comprises of Saudi Pak Insurance, Saudi Pak Leasing and Saudi Pak Bank. The Saudi Pak Group has holdings in diverse sectors of Pakistan's economy.
At present, the bank is providing services to its customers with a network of 50 online branches spanning in 21 cities of the country. In 2008, the majority shareholding of the bank was acquired by a consortium comprising of Bank Muscat S.A.O.G., International Finance Corporation (IFC), Nomura European Investment Limited and Sinthos Capital. A change in management has taken place with Shaukat Tarin as President and CEO of the organization.
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Recent Results: 1Q'08
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Pak Rupees
In million
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Loss before Taxation (296.4)
Taxation 50.8
Loss after Taxation (245.6)
Accumulated loss brought forward (4,119.5)
Accumulated loss carried forward (4,365.1)
Basic Earning per share Rs (0.49)
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Saudi Pak Bank continued to show losses in 1Q'08 as well. Although operating profits of Rs 80 million were witnessed before accounting for provisions, overall the bank showed loss after tax of Rs 245.6 million.
Mark-up earned for the first quarter ending March 2008 was Rs 1,118 million, a decline of 3% compared to the same period last year. The interest expend on the other hand declined by 11.7%, resulting in a net interest income of Rs 145 million without taking into account the provisions. The non-interest income has nearly halved in the first quarter of FY08, on account of decline in all categories of income.
Deposits have shown a slight decline, while the advances and the investments, all experienced a decline as well. However, with the new management coming in, better results may be expected.
The loss amount has eroded the equity of the bank much below the MCR requirement. Saudi Pak Bank had issued 80% rights shares, the whole amount of which has been underwritten. The rights issue has enabled the bank to maintain MCR at the prescribed SBP level.
ANALYSIS OF FINANCIAL PERFORMANCE (FY03-FY07 )
The earning profile of the bank has shown a negative trend for most of the years, with a decline in profitability stampeding in 2007. Saudi Pak Bank posted a loss, which is considerably higher, around 850% increase, than its loss incurred for the corresponding period of FY06.
The main reason behind this decline is that the increasing NPLs of the bank have resulted in a massive provisioning that considerably lowered the profits and turned the net markup and interest income negative. As a consequent of this, all the profitability ratios have declined quite steeply. Though the non-interest income increased over the last year, this increase was not sufficient to counteract the decrease in net interest income. Moreover, the non-interest expenses increased more than the non-interest income.
The yield on earning assets has shown an increasing trend however with an increase in the cost of funding them. This pattern parallels the trend in the industry. The bank has maintained an increasing trend in the proportion of total assets it maintains as earning assets, despite the fact that the composition of these earning assets varied significantly over this period. On the other hand, the cost of earning assets has also increased. However, factors like consistent inflows, relatively less interest rate sensitivity of the depositor, not to mention the liquidity preference of the depositors for maintaining checking and transactional accounts, both saving and current, caused a relatively small increase in the cost of funds of the bank.
The liquidity profile of the bank shows a comforting trend. The liquidity situation of the bank has improved in general over the period under review, with increasing earning assets to total assets and a declining trend in advance to deposit ratio (ADR). This was possible because of the steady inflows, particularly foreign inflows that continued to provide liquidity support despite SBP's tight monetary policy during the last two years. The ADR of the bank has shown a decline over this period because of heavy growth in bank's deposits, outpacing the otherwise moderate advances growth rate.
The generally increasing deposits relative to the increasing non-performing loans of the bank may be of concern as it may pose liquidity problems in the future. However, the deposits have posted a decline in 2007 from 2006, along with a decline in advances net of provisioning which has been seen as an increase in the advances to deposits ratio. The deposits, both term and savings have declined, while the remunerative deposits from financial institutions have increased.
As for the industry, the deposit base rose significantly in 2006 due to a booming economy, apart from higher foreign inflows through workers remittances and FDIs as well as expanding branch networks, product innovation and better marketing. In 2007, the deposits slightly declined. The banks are now introducing new products for the public to attract fresh deposits.
The asset quality has shown a deteriorating trend. The NPLs have increased in 2007 after remaining steady for the last two to three years. The NPLs, as a proportion of advances, have increased to 0.022% mark, although, general level is about 0.02%. The increase in NPLs may be indicative of a slightly risky credit risk position for the bank. The NPL situation of the bank may be expected to improve in the coming years with an amendment in its lending policy with greater long-term loans. Its effect is yet to be seen. A decline in the provisioning for the NPLs that is being substituted by longer-term loans was anticipated, however, for the year 2007 the effect has been increased provisioning.
With regard to the entire industry, credit just grew by a mere 3% in 9 months of 2007. The deceleration in the credit expansion is mainly attributed to the increase in NPLs for the whole banking sector. The major portion of these NPLs has been constituted by consumer loans.
The solvency contour of the bank shows a deteriorating sign with all the three ratios decreasing in 2007. Equity financed 3.2 percent of assets in CY03, 3.65 percent in CY04, 6 percent in CY05, 7.3 percent during CY06 and 5.44 percent in 2007. The earning assets to deposits ratio for the bank declined in 2007, as the rate of decrease in equity was greater than the rate of decrease of deposits. The debt as apportion of assets witnessed an increase over here, perhaps due to the longer-term loans. However, at such high levels, debt may become risky for the company as its cost may out do the cost of equity. The bank is recommended to increase its equity base. Perhaps, the old management was waiting for the new sponsors to consolidate the bank by injecting fresh equity.
The market value of the bank portrays mixed results with the market to book value ratios increasing markedly in 2007. However, the price to earnings ratio declined. This may be attributed to negative EPS of the bank due to lower profitability figures.
The price per share has increased reflecting better future prospects of the bank. The price per share may be expected to continue the same momentum in the future. The bank is currently under the expansion phase and has made a significant investment in that regard. Therefore, it has not adopted a dividend distribution policy right now. However, the bank in terms of its profitability has not been performing that well, this investment in expansion may predict a better performance in the future. This may be complemented by a rise in the earning assets of the bank and a decrease in its NPLs with the enactment of an amended lending policy.
FUTURE OUTLOOK The current growth momentum of the banking industry is likely to hinder if certain factors are not taken care of. The banks should reduce their NPLs structure and should recover their bad loans to offset the likely impacts that will go to hurt their profitability. Attempts are required to improve the performing loans portfolio to earn a greater return on deposits. The SBP has reduced the Special Cash Reserve requirement from 15% to 5% on total deposits on daily basis. This step will help the banks to overcome the liquidity problems. In addition, the implementation of Basle II will help in strengthening the credit standards for better risk management.
As regards the bank, it has not been performing well especially with regards to its performance in 2007. However, it will show some signs of improvement in the future if appropriate actions are taken to reduce its NPLs and increase its equity through which it will receive dividend income that may help to alleviate the impact of higher NPL provisioning. The investment picture of the bank also needs to be further improved. This will help the company to safeguard itself against various risks.
The consortium of International Finance Corporation, Bank Muscat, Nomura International and Sinthosis Capital has acquired a controlling stake in the Saudi Pak Bank around 86%. The investment of Rs 213 million translating into Rs 29.30 per share but after the company declared a right issue, the price fell to Rs 20.72 a share. The bank will need to be very aggressive to thrive in deteriorating economic conditions, coupled with falling banking sector spreads.
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ASSETS 2003 2004 2005 2006 2007
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Cash and Balances with
treasury banks 2,578,496 3,771,740 2,525,340 3,994,136 3,223,780
Balances with other banks 1,201,940 595,409 923,044 613,678 128,991
Lending to Financial Institutions 754,485 248,618 8,831,063 4,747,567 839,959
Investments 9,369,478 9,706,575 12,464,577 15,744,854 17,859,169
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ADVANCES 18,535,864 25,487,172 19,513,727 29,021,974 25,874,972
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Operating fixed assets 1,046,815 1,141,066 1,541,536 2,322,371 2,367,883
Other Assets 739,688 1,056,452 1,037,955 1,698,478 1,598,131
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DEFERRED TAX ASSET 915,461 829,879 911,307 1,012,680 1,767,715
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TOTAL ASSETS 35,142,227 42,836,911 47,748,549 59,155,738 53,660,600
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LIABILITIES
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Bills Payable 343,705 377,751 199,143 408,342 570,756
Borrowings from Financial
Institutions 8,216,983 6,462,494 5,481,288 4,236,775 6,880,449
Deposits and Other Accounts 24,578,053 33,271,211 37,136,042 49,015,090 42,373,710
sub-Ordinated loans 650,000 650,000 650,000 650,000 650,000
Liabilities against assets
subject to financial lease 1,541 1,054 63,030 80,155
Deffered liabilities 0 0 0 0 0
Other Liabilities 241,905 341,881 474,905 829,573 925,091
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TOTAL LIABILITIES 34,032,187 41,104,391 43,941,378 55,202,810 51,480,161
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NET ASSETS 1,110,040 1,732,520 3,807,171 3,952,928 2,180,439
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REPRESENTED BY:
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Share Capital 2,250,000 2,250,000 3,847,500 3,847,500 5,001,750
Reserves 140,381 205,633 218,556 218,556 218,556
Unappropriated Profit (1,245,658) (983,026) (860,072) (1,130,624) (4,119,537)
1,144,723 1,472,607 3,205,984 2,935,432 1,100,769
Surpus on Revaluation of Assets (34,683) 259,913 600,618 1,017,496 1,079,670
Total equity 1,110,040 1,732,520 3,806,602 3,952,928 2,180,439
3.2% 4.0% 8.0% 6.7% 4.1%
Checking - - (569) -
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INCOME STATEMENT 2003 2004 2005 2006 2007
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Mark-up/Return/Interest earned 1,304,732 1,857,400 2,632,485 3,701,901 4,799,853
Mark-up/Return/Interest expensed 872,292 1,146,840 1,849,189 3,260,952 4,440,116
Net Mark-up/Interest Income 432,440 710,560 783,296 440,949 359,737
Provision against consumer loans 33,357 (6,579) 915 (5,281)
Provision against non-performing
loans and advances - net (272,574) 13,892 490,471 463,988 3,134,651
Provision/(reversal) for diminution
in value of investments - net 830 671 (56,806) 3,074
Bad debts written of directly 498 0 729 0 0
(272,076) 48,079 485,292 408,097 3,132,444
Net markup/return/interest
income after provisions 704,516 662,481 298,004 32,852 (2,772,707)
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NON MARK-UP/INTEREST INCOME
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Fee, commission and brokerage income 207,925 317,196 240,648 305,464 369,468
Dividend Income/Gain on
Sale of Investments 19,752 9,322 41,347 59,851 44,465
Income from dealing
in foreign currencies 33,192 53,108 68,518 56,907 64312
Gain on Sale of securites (31,362) 43,975 145,177 210,855
Unrealized Gain/(loss) on rev. of
invt classified as held for trading (5,750) (5,962) 0
Other Income 451,921 45,349 265,776 138,604 87,725
Total non mark-up/return/
interest income 712,790 387,863 660,264 700,041 776,825
1,417,306 1,050,344 958,268 732,893 -1,995,882
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NON - MARKUP INTEREST EXPENSES
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Administrative expenses 413,823 520,454 732,803 1,262,448 1,270,317
Other Provisions/write
offs/(reversals) (27,063) (17,168) 18,595 (202,435) 38,019
Other Charges 1,529 75 11,300 75,700 16,047
Total Non markup Interest expenses 388,289 503,361 762,698 1,135,713 1,324,383
Amortization of deferred cost 50,000 50,000 50,000 16,667 0
Extraordinary Items - - - - -
share loss from associate 5,100 5,270
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PROFIT BEFORE TAXATION 979,017 496,983 140,470 (424,757) (3,320,265)
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Taxation - Current - for the year 120,623 127,997 156,100 35,382
for prior years 50,902 0 0 439,351
Deferred 429,112 42,724 (80,243) (105,282) (754,091)
600,637 170,721 75,857 (105,282) (279,358)
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PROFIT AFTER TAXATION 378,380 326,262 64,613 (319,475) (3,040,907)
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Basic Earnings per Share 2.33 1.24 0.23 (0.83) (6.25)
Diluted Earnings per Share 2.33 1.24 0.23 (0.83) (6.25)
no. of shares 225,000 225,000 384,750 384,750 501,750
Average price per share 13.15 15.55 21.425 21.45
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RATIOS
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LIQUIDITY
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2003 2004 2005 2006 2007
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Earnings Assets to Assets 84.97% 92.43% 92.14% 93.78% 79.25%
Advance to deposits 75.42% 76.10% 63.92% 56.34% 60.07%
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SOLVENCY
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2003 2004 2005 2006 2007
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Equity to Assets 3.16% 3.65% 6.12% 7.26% 5.44%
Equity to Deposits 4.52% 4.91% 7.87% 9.01% 6.71%
Earning Assets to Deposits 1.21 1.14 1.10 1.07 1.04
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EARNING
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2003 2004 2005 2006 2007
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Return on Deposits 1.540% 0.981% 0.174% -0.652% -7.176%
Return on Assets 1.08% 0.76% 0.14% -0.54% -5.67%
Return on Equity 34.09% 18.83% 1.70% -8.08% -139.46%
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ASSET QUALITY
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2003 2004 2005 2006 2007
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Non-Performing loans to Advances 0.018% 0.013% 0.020% 0.019% 0.022%
Provisions to Non-Performing Loans -83.0 4.8 109.1 100.1 510.9
NPL 3,283 2,896 4,496 4,635 6,136
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MARKET VALUE RATIO
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2003 2004 2005 2006 2007
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AVG. share price 13.15 15.55 21.425 26.65
Price-Earnings ratio 0.00 10.60 67.61 25.81 3.43
Market-Book value ratio 2.67 2.02 2.17 2.09 4.94
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DEBT MANAGEMENT
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2003 2004 2005 2006 2007
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Debt to Equity 30.66 26.43 15.35 12.78 17.39
Debt to Asset 96.841% 96.355% 93.885% 92.741% 94.563%
Deposits time Capital 22.14 20.35 12.71 11.10 14.90
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EARNING ASSETS
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2003 2004 2005 2006 2007
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Yield on Earning Assets 4.55% 5.24% 6.45% 7.48% 10.77%
Cost of Funding Earning Assets 3.04% 3.24% 4.53% 6.59% 9.96%
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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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