Bank: MEEZAN BANK LIMITED - Analysis of Financial Statements Financial Year 2003 - Q 2003 2008
Meezan Bank Limited (MEBL) was incorporated on January 27, 1997 and started its operations as an investment bank in August, the same year. In January 2002, in an historic initiative, Meezan Bank was granted 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 by Islamic banking.
The bank has 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 leading local and international financial institutions, including Pak-Kuwait Investment Company, the only AAA rated financial entity in the country, Islamic Development Bank of Jeddah, and the renown Shamil Bank of Bahrain. The bank has an internationally renowned, high calibre and proactive Shariah Supervisory Board presided over by former Justice Maulana Muhammad Taqi Usmani.
The total number of branches increased from 28 in January 2006 to 75 in September 2007. This comprehensive branch network offers a comprehensive range of retail and wholesale banking products to a large customer base in more than 22 cities. The branch network supported by a real-time online banking, a network of over 50 ATMs, a 24/7 Call Centre and Internet banking.
ISLAMIC BANKING 5-YEAR PERFORMANCEIn Pakistan, Islamic banking system has witnessed a very 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 financial services. 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. The industry is growing in terms of size and structure as shown below.
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ISLAMIC BANKING HIGHLIGHTS
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Indicators Dec '07 Dec '06 Dec '05 Dec '04 Dec '03
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Total Assets of Islamic Banks 206 118 12 44 13
% of Banking industry 4.3% 2.9% 2.1% 1.4% 0.5%
deposits 147 83 50 30 8
% of Banking Industry 4.1% 2.8% 1.9% 1.2% 0.4%
Financing & investments 138 72 48 30 10
% of Banking Industry 3.6% 2.4% 1 .8% 1.3% 0.5%
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Total assets of the Islamic banks have been increasing significantly and the market share of Islamic banking assets in the overall banking system rose to 4.3% at the end of December 31, 2007 which was 2.9% in December 2006. Deposit base also posted impressive growth with CAGR of 107% in the last four years, standing at Rs 147bn at the end of Dec'07 from just Rs 8bn in Dec'03, with the share of Islamic banks growing to 4.1% (Rs 147bn) in Dec'07 from 2.9% (Rs 83bn) in Dec'06. Financing and investment portfolio grew 50% in FY06 and 60% in FY05. The growth momentum continued in FY07 as the total financing and investment reached at Rs 107bn at the end of December 2007 which is 62.8% higher than the corresponding figures of Rs 66bn recorded in December 2006.
RECENT PERFORMANCE (9MCY08)Meezan Bank Limited declared profit after tax of Rs 526m with earnings per share of Rs 1.16 in 9MCY08 as compared to profit after tax of Rs 653m with earnings per share of Rs 1.44 in the corresponding period of 9MCY07, registering a 19% fall. This can be attributed to higher NPLs provisioning, which more than doubled from Rs 553 million in Dec'07 to Rs 1,755 million in Sep'08.
The profit earned on the financing and investments, crossed the four billion mark, during 9 months period of FY08 and reached at Rs 4.59bn over Rs 3.24bn in 9MFY07, registering a robust 42% surge. The ROD and other expenses also showed a 22% rise. As a result, pre-provision net spread earned by the bank grew significantly by 64%.
But its impact was reduced to 57.0% after accounting for a 1.5 times higher provisions for NPLs during the period. The net spread margins (both prior to and after NPLs provisions), also, rose to 4.63 from 2.27 and to 4.15 from 2.11, respectively on a YoY basis. This pronounced effect could be attributed to lower base resulting from declining profitability in 9m of FY08 than the SPLY.
Income from core banking business increased by 45%, on back of the increasing banking operations due to aggressive branch expansion policy. Fee, commission, forex and other income of the bank also grew decently by 8% over the corresponding figures of FY07. Major contribution also came from the dividend income which more than doubled during this period to Rs 156.155 million in Sep'08 from Rs 75,636 million over the same period last year.
The overall balance sheet footing has also shown a 14% growth over September 30, 2007 from Rs 67 billion to Rs 76 billion with financing increased by 16% over the corresponding period of last year. The bank's deposit base has shown an increase of 12% from Rs 54 billion to Rs 61 billion.
As a result, the overall finance-to-deposit ratio has improved slightly from 63% to 65% during the period under review. Amidst the difficult economic and political environment, the bank plans to continue with its branch expansion policy aiming to open 31 new branches and 12 sub branches by December 2008.
Despite the turbulent condition of the international financial markets, Noor Financial Investment Company, Kuwait (Noor), the major shareholder of the bank increased its shareholding in the bank from 34.6% to 45.5% reflecting the confidence it has on the future prospects of Meezan Bank. The shareholders of the bank have reaffirmed their respective in-principle commitment to meet the increased capital requirements of the bank over the next five years. This bodes well for MEBL in a scenario where small banks are merging to meet SBP's enhanced MCR requirements.
FINANCIAL PERFORMANCE (FY03-FY07)
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MEEZAN BANK FINANCIALS (9 M CY'08)
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PKR mn 30-Sep-08 30-Sep-07 % chg
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Profit & Loss Account
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Profit / return earned on financing/invest 4,588 3,241 42%
Return on deposits and other dues expensed 2,148 1,758 22%
Net spread earned 2,439 1,484 64%
Provision against NPLs (net) 254 102 148%
Net Spread Earned (after provisions) 2,185 1,381 58%
Fee, Commission, Forex & Other Income 559 515 8%
Core Banking Income 2,744 1,897 45%
Profit after Tax 527 654 -19%
Earning per Share - Rupees 1.16 1.44 -19%
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Balance Sheet 30-Sep-08 31-Dec-07 % chg
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Deposits 61,392 54,582 12%
Financings 40,006 34,576 16%
Total Assets 76,422 67,179 14%
Share Capital 4,536 3,780 20%
Shareholders' Equity 6,247 5,720 9%
NPLs 1,755 553 217%
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Ratios
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Finance/Deposits ratio 0.65 0.63
NPLs Provisions/Finances 4.4% 1.6%
Net spread Margin (before provisions) 4.63 2.27
Net spread Margin (after provisions) 4.15 2.11
Number of Branches (including sub-branches) 122 75
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Meezan bank's profitability saw a promising growth of 60% in 2007. The growth was driven by a high net spread income of Rs 1.2bn, an increase of 71.7% from the previous year. The ROA, 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 67bn.
The bank has been following a policy of expansion to cater to a large number of people who are getting 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 well this year around increasing by 58.4%. The deposits were Rs 54bn at the end of 2007. The banks deposits are mainly comprised of long term fixed and savings deposits comprising around 72% of the deposits. During the 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 6 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.
The ROD of the bank has seen a slight decline in 2006, being 1.84% in 2006 as against 1.75% in 2005, but rose in FY07. The bank's equity has been rising. It issued more capital in 2006 worth Rs 1.7bn. The bank's reserves also grew substantially by 29.7% to Rs 721m in order to meet the SBP's liquidity requirements. As with ROD and ROA, ROE which had declined in 2006 (because the profits did not match the growth in the bank's equity), it improved in FY07. The bank's ROE is too low compared to the sector's average of 23.8%. The administration need to get their act together to rectify the situation as the time is ripe for the growth of Islamic financial institutions.
Financings (advances) have seen 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 Mushareka 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 percent 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, '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, mark-up 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 then costs of funding, we hope that 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 because of 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 credit worthiness 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 Furthermore, debt to equity ratio also suggests the same trend where the ratio increased to 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 has shown 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 as 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 showed 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 38.5 from 2004 to December 2007. Since 2005, the share price has risen by 69% and has gone up to Rs 38.5. 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 PROSPECTSThe Islamic financial assets are expected to cross $1 trillion by 2010, as per the recent research report published by Morgan Stanley. The Islamic Banking industry continues to grow in Pakistan and six full-fledged Islamic banks are now in operation.
It is interesting to note that the conventional banks are increasingly realising 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.
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.
Meezan Bank plans to continue its strategy of maintaining a conservative policy and ensure that sufficient liquidity is maintained at all times to meet all eventualities. Moreover, the exposure of the Bank to the equity stock market is only 6% of its total investment portfolio and has a limited impact on the profitability of the Bank. 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
FIXED ASSETTS 689,226 1,349,184 305,585 531,262 1,032,963
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 Acounts 7,756,862 13,769,807 22,769,262 34,449,441 54,582,353
subject to financial lease
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
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REPRESENTED BY: FY '03 FY '04 FY '05 FY '06 FY '07
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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 financing, 375,567 534,400 1,459,229 2,704,280 4,573,752
investments and placements
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 (17,769) 16,991 68,811 121,581 435,018
loans and advances - net
Provision / (reversal) for diminution 1,995 1,750 (29,831) 1,297 878
in value of investments - net
(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
NON MARK-UP / INTEREST INCOME
Fee, commission and brokerage income 53,869 100,739 174,750 216,216 321,685
Dividend Income/ Gain on Sale of Investment 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 0.00 42,081.00 57,792.00 (32,455.00) 31,453.00
revaluation of invstments
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 255,449 409,296 718,384 1,022,991 755,761
Other Provisions / write offs/ (reversals) 0 0 0 0 5,948
Other Charges 20.00 185 482.00 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 Share 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%
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Asset Quality
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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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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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