Bank: ASKARI BANK LIMITED - Analysis of Financial Statements Financial Year 2003-2003Q'08
Formerly known as "Askari Commercial Bank Limited", Askari Bank Limited was incorporated on October 09, 1991 and commenced its operations in April 1992 as a public limited company. The bank is principally engaged in the banking business.
It has a diverse customer base comprising corporates, SMEs, individual savers, households, farmers. Askari Investment Management Limited (AIM) is the wholly owned subsidiary of Askari Bank. The bank also has an offshore banking unit in Bahrain. The bank, in 2006, launched Islamic Banking under the name "Askari Islamic Banking".
RECENT RESULTS3Q'09 During the nine months ended September 30, 2008, Askari Bank's operating profit (before loan loss provisions) stood at Rs 3,327 million, showing an increase of 8% from the corresponding period last year. This is mainly due to increased business volumes owing to increase in number of branches from 122 to 166. Profit after tax was Rs 427 million, showing a significant decline from the same period last year mainly due to increase in provision against loans and advances to cater further down grade of certain accounts and fresh classifications.
Mark-up income grew to Rs 12,875 million from Rs 11,180 million, an increase of 15%, whereas mark-up expenses were Rs 7,482 million, registering an increase of 14%. The net mark-up income increased by 16% to Rs 5,393 million from Rs 4,630 million. Non-markup income registered an increase of 18% mainly due to significant increase in income from dealing in foreign currencies and moderate boost in fee and commission income on the back of surge in foreign trade business and taking advantage of movements in rupee-dollar parity.
Deposits increased to Rs 161,108 million as at September 30, 2008 as against Rs 143,037 million as at December 31, 2007 registering an increase of 13%, mainly due to increase in term and current deposits. Net advances also increased by 24% to Rs 124,630 million from Rs 100,780 million as of December 31, 2007.
INDUSTRY
The year 2007 was proved to be a volatile year for the banking sector in terms of profitability. Every quarter showed a different picture as shown in the graph. The overall profitability declined by 5.6% in 2007. The fourth quarter of the banking sector did not perform well. Banking sector till the end of HY07 depicted the growth of 53.2% in the profitability. But in the start of 2HY07, SBP proposed full provisioning against Non performing loans (NPLs) and withdrew the facility of Forced sales value (FSV). Consequently, banks had to make additional provisioning against their NPLs.
If the quarterly performance of the banking sector in FY07 is analyzed, the graph shows a mixed trend. The total profitability improved from the first quarter to the second quarter but after the amendment in SBP's regulation regarding NPL and FSV, total profitability declined in the following two quarters. The net interest income earned by the banking sector in FY07, posted a growth of 17.4% and reached at Rs 203 billion as compared to Rs 173 billion in FY06. The major reason behind this growth in net interest income was the high level of spreads throughout the year, which remained at 7.29% on average. Non interest income on the other hand grew significantly by 43% during the period under review.
RECENT PERFORMANCE, 1Q08
The profit of the bank before loan loss provisions declined by 7% as compared to the same period last year due to higher administrative expenses as the bank expanded the number of its branches and an unusual inflationary upsurge. The profit after tax witnessed considerably decreased from the same period of last year due to extremely high provision expenses in the face of high NPLs. The net mark-up income increased by about 22% due to a greater increase in total mark-up interest earned than an increase in total mark-up interest expenses. However, this appreciable increase was offset by the abnormally high costs of provisioning for loan losses.
The deposits declined mainly due to decrease in term and saving deposits. Net advances, on the other hand, increased only slightly. The bank continues to pursue an expansion phase. For this reasons we may expect the administrative expenses of the bank to increase in the future and hence lower the profits. The high NPLs may be predicted to continue their adverse effects at least in the short term as may be predicted for the industry. Therefore, the provisions for loan losses may continue to depress the profits.
ANALYSIS OF FINANCIAL PERFORMANCE FY03-FY07
The profitability of the bank for FY07 is a little below its previous years. The interest income of the bank was much higher in this year than the previous years. However, this aspect was offset by a simultaneous increase in the interest expenses of the bank. The banking spread of the industry declined by 14 basis points in 2007, affecting the bank's earnings. The non-interest income's share in total income is also increasingly gradually. Askari can be said to be progressing on this front in income generation from the two sources. This would enable it to buffer any effects of another fall in the banking spreads. Askari is also expanding its branch network and so has higher administrative expenses too.
As regards the deposits, the industry has been witnessing a shift in their composition from savings to fixed deposits. These would generate a higher return. As predicted in the 9 months analysis, the profitability of the bank was higher at the end of 2007. However, as there are signs of a recession approaching the economy, it may affect the banking sector profitability further as the profitability has already declined. The bank would require prudent policies in this case.
The scenario of the NPLs does not seem very favorable for the bank. The NPLs have consistently seen an increase, indicating that the bank is either not very efficient at collecting the outstanding loans or has a very liberal loan distribution policy. Their pace of growth has outdone the rate of increase in advances. The bank may face considerable credit risk from its loan defaulters. The bank's advances witnessed marginal increases in consumer finances, especially Ijara financing, corporate financing while they observed a slight decline in the shares of SME and Agriculture.
The assets of the bank witnessed some shift in their composition away from loans towards investments. This has also been the trend industry wide to meet the MCR requirements as directed by the State Bank of Pakistan. Though these investments offer lower returns than the loans, they are more preferable in this situation for the bank as it is struggling to collect its loans. The trend for NPLs replicates that for the entire industry. Due to an increase in NPLs, the provisioning also increased.
The debt profile of the bank appears to be improving. The share of equity as of total assets is increasing. This is indicative of the effort the bank is undertaking to meet the MCR requirements. This may also reduce the risk exposure of the bank against any further tightening in the monetary policy that is being already demanded by many sectors. The year-end results for the debt management scenario were not different from the results of the 9 months. The debt management ratios witnessed a slight decline in the year under review.
This indicates that the bank is making efforts to make slight changes in its capital structure that shift towards little more of equity financing. This may be termed as a favorable move as at higher levels of debt financing, the cost of debt increases, that may become prohibitive for the bank. In addition, as the SBP has increased the interest rates, the cost of debt has increased.
The liquidity of the bank has maintained a consistent trend, with its yield on earning assets always above the cost of funding them and these two have been increasing since the past two to three years. Hence, the bank at least in the short run may be said to be in a comfortable position. This liquidity consistency may be attributed to the excess liquidity that prevailed in the industry due to high reserve growth of the banking sector. The State Bank of Pakistan intervened in this situation by contracting the monetary policy once again in 2008.
Also, post emergency declaration when the rupee fell, SBP intervened twice to ease the liquidity conditions in the market. SBP has prudently managed the liquidity while the bank also has certain arrangements to maintain its liquidity. It has most of its investments in treasury bills. The liquidity position may be predicted to remain similar to the above in the coming years. However, at the same time Askari needs to safeguard its liquidity against the increasing NPLs. Moreover, as the recession is expected to be approaching, the bank may need to make some arrangements to ward off liquidity risk in the long term especially with regards to its NPLs that may decrease the amount of performing advances and require an increase in the provisioning.
The bank may be required to make more prudent investments preferably soon to maintain a comfortable position. The solvency has been successfully maintained over the years. As evident, the share of the bank is increasing. This may be regarded as a move against the rise in deposit rates and a decrease in the banking spread of the banking sector. This healthy trend in solvency may be predicted to continue in the future. The-greater-than-earning-assets deposits are the result of excess reserve money growth while the increase in the non-performing advances has undermined the advances performance. With the gradual shift to investments, we may expect the adverse impact of the NPLs to reduce, but this may take a long time.
The market value of the bank has shown an upward trend throughout. The company has been a consistent distributor of dividends. The increased profitability of the banking sector (an increase of around 100%) has made this sector one of the most lucrative ones to invest. This increasing marketability profile is reflective of Askari's high yields on earning assets and favorable liquidity and solvency positions.
However, the price of the share declined from its levels in the past two years. This may be attributed to the political situation that prevailed in Pakistan, the tightening of the monetary policy and the overall profitability picture of the banking sector. Still, the price per share of the bank may be said to be relatively high. However, due to the expected recession, the price may fluctuate in the near future. The bank has maintained its reputation as one of the consistent payers of dividends. The relatively high share price of the bank if accountable for this trend.
FUTURE OUTLOOK
Considering the political and economic situation of the country, the outlook of the banking sector for 2008 is still bleak. The profitability of the banking sector may become better in FY08 as compared to FY07 as the interest rates spread still high over 7.0%, but the growth may not be same as we have witnessed in the last few years. There has been witnessed a decline in the credit off take growth during FY07 due to increasing number of NPLs. Banks would have to manage their credit disbursement policy prudently in order to minimize the non-performing loans.
SBP has tightened the monetary policy once again. This would result in higher interest rates and may increase the banking spread of the sector, translating into higher profitability. The profitability of the bank may fluctuate slightly in the near future but in the long run it may increase. The bank is required to contain its NPLs that would increase its performing advances and income from earning assets. This requires Askari to formulate a more sound and prudent policy of loan collection. This may otherwise hamper its liquidity trend, which has been maintained consistently thus far. As Askari is increasing its investments, we may expect it to maintain its capital adequacy in the short as well as in the long run.
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ASKARI BANK LIMITED
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Year 2003 2004 2005 2006 2007
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Assets $ $ $ $ $
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Cash and cash balances 6,678,026 8,762,866 11,766,925 14,879,230 13,356,055
with treasury banks
Balances with other banks 2,650,166 4,847,899 5,550,148 7,333,002 3,497,054
Lendings to financial
institutions 5,770,842 2,324,839 10,172,242 8,392,950 14,444,143
Investments 22,104,425 17,239,157 25,708,194 28,625,915 39,431,005
Advances 44,777,538 69,938,041 85,976,895 99,179,372 100,780,162
Other assets 1,425,986 1,459,716 2,732,641 3,812,788 5,535,038
Operating fixed assets 1,979,919 2,595,023 3,192,862 3,810,331 5,128,428
Deferred tax assets 0 0 0 0 0
85,386,902 107,167,541 145,099,907 166,033,588 182,171,885
Liabilities
Bills payable 973,703 1,227,093 1,315,680 1,839,077 2,627,051
Borrowings from financial
Institutions 15,903,055 13,781,555 10,562,338 14,964,087 17,553,525
Deposits and other accounts 61,656,607 83,318,795 118,794,690 131,839,283 143,036,707
Sub-ordinated loans 0 1,000,000 2,999,700 2,998,500 2,997,300
Liabilities against assets 37,350 14,159 1,459 0 0
subject to finance lease
Other liabilities 962,592 1,282,981 2,271,393 2,603,113 3,219,796
Deferred tax liabilities 806,753 526,865 567,217 736,298 471,519
80,340,060 101,151,448 136,512,477 154,980,358 169,905,898
Net Assets 5,046,842 6,016,093 8,587,430 11,053,230 12,265,987
Represented by:
Share capital 1,141,680 1,255,848 1,507,018 2,004,333 3,006,499
Reserves 2,759,599 4,317,301 5,862,074 5,814,754 6,948,336
Unappropriated profit 0 0 0 1,799,979 2,144,810
3,901,279 5,573,149 7,369,092 9,619,066 12,099,645
Surplus on revaluation
of assets 1,145,563 442,944 1,218,338 1,434,164 166,342
5,046,842 6,016,093 8,587,430 11,053,230 12,265,987
Total Assets and Liabilities 85,386,902 107,167,541 145,099,907 166,033,588 182,171,885
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ASKARI BANK LIMITED
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Year 2003 2004 2005 2006 2007
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$ $ $ $
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Mark-up/return/
interest earned 4,073,715 4,487,206 8,780,698 12,596,921 15,143,241
Mark-up/return/
interest expensed 1,379,609 1,117,206 4,278,374 6,977,313 8,685,624
Net mark-up/interest income 2,694,106 3,370,000 4,502,324 5,619,608 6,457,617
Provision against non performing
loans and advances 308,528 277,398 638,547 1,128,137 3,920,240
Provision for diminution 0 38,066 -36,555 376 1,501
Bad debts written off directly 0 7 0 0 0
308,528 315,471 601,992 1,128,513 3,921,741
Net mark-up/ interest
income after provisions 2,385,578 3,054,529 3,900,332 4,491,095 2,535,876
Non mark-up/ interest income
Fee, commission and
brokerage income 524,775 649,988 838,561 1,013,660 1,072,868
Dividend income 37,658 26,318 51,143 109,326 137,079
Income from trading in
Income from dealing in
foreign currencies 112,808 180,992 356,218 584,344 655,761
Gain on sale of investments 0 0 99,825 112,474 2,361,251
Unrealized loss on revalutaion
of investments-HFT net 0 0 -582 -2,308 1,728
Other income 278,512 776,230 206,819 321,758 336,809
Total non-markup/
interest income 953,753 1,633,528 1,551,984 2,139,254 4,565,496
3,339,331 4,688,057 5,452,316 6,630,349 7,101,372
Non mark-up/ interest expenses
Administrative expenses 1,436,304 1,845,179 2,591,985 3,277,353 4,789,536
Other charges 1,227 138 1,832 6,141 12,051
Total non-markup/
interest expenses 1,437,531 1,845,317 2,593,817 3,283,494 4,801,587
1,901,800 2,842,740 2,858,499 3,346,855 2,299,785
Extraordinary/unusual items 0 0 0 0 0
Profit before taxation 1,901,800 2,842,740 2,858,499 3,346,855 2,299,785
Taxation - current 873,639 876,089 828,774 983,875 98,535
prior years' 0 0 -188,247 0 -233,950
deferred -74,904 43,611 196,558 113,006 -245,812
798,735 919,700 837,085 1,096,881 -381,227
Profit after taxation 1,103,065 1,923,040 2,021,414 2,249,974 2,681,012
Unappropriated profit
brought forward 0 0 0 1,617,597 1,799,979
Profit available for
appropriation 1,103,065 1,923,040 2,021,414 3,867,571 4,480,991
Basic earnings per share - (Rupee 9.66 15.31 13.41 11.23 8.92
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ASKARI BANK LIMITED
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Earnings Ratios
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2003 2004 2005 2006 2007
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Return on Assets (%) 1.42 2.00 1.60 1.07 1.17
Return on Deposits (%) 1.95 2.65 2.00 1.80 1.95
Return on Equity (%) 23.93 34.77 27.68 22.91 22.99
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Assets Quality Ratios
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2003 2004 2005 2006 2007
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NPL to Advances 0.03 0.02 0.03 0.04 0.07
Provisions to NPLs 0.24 0.25 0.27 0.31 0.57
Non Performing Loans 1,277,936 1,101,382 2,373,166 3,656,297 6,907,591
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Market Value Ratios
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2003 2004 2005 2006 2007
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Price to Earnings 5.33 6.14 9.46 9.35 11.18
Market Value to Book Value 1.51 2.12 2.59 2.19 2.44
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Debt Management Ratios
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2003 2004 2005 2006 2007
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Debt to equity 15.89 16.41 16.27 34.91 30.84
Deposit times capital 12.30 13.10 13.84 12.76 11.79
Debt to asset 0.94 0.94 0.94 1.63 1.57
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Liquidity Ratios
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2003 2004 2005 2006 2007
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Earning assets to assets 0.85 0.84 0.84 0.61 0.64
Advance to deposit 0.66 0.79 0.77 0.74 0.73
Yield on earning assets 0.061 0.055 0.083 0.098 0.104
Cost of funding earning assets 0.021 0.014 0.040 0.054 0.060
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Solvency Ratios
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2003 2004 2005 2006 2007
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Equity to assets (%) 5.92 5.75 5.79 4.68 5.11
Equity to deposits (%) 8.13 7.63 7.23 7.84 8.48
Earning assets to deposits (%) 117.17 111.85 104.57 102.96 105.81
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Dividend Payout Ratios
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2003 2004 2005 2006 2007
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Dividend yield 0.037 0.019 0.013 0.011 0.007
Dividend cover 5.07 8.54 8.07 10.08 13.30
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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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