Bank: SAMBA BANK LIMITED - Analysis of Financial Statements Financial Year 2006 - 2003 Q 2008
Crescent Commercial Bank Limited was a scheduled commercial bank, licenced by the State Bank of Pakistan (SBP) under Section 27 of the Banking Companies Ordinance, 1962. Looking back, CresBank was formed as a result of an agreement between Crescent Investment Bank Limited (CIBL) and Mashreqbank psc (Mashreqbank) for the amalgamation of CIBL and Mashreqbank's Pakistan operations into a new banking company.
The amalgamation was took place on July 9, 2003 under a scheme of amalgamation approved by the shareholders and sanctioned by the SBP under Section 48 of the Banking Companies Ordinance, 1962.
On March 30, 2007, Samba Financial Group acquired 68.4% shares of CresBank by subscribing six hundred million new ordinary shares for a consideration of Rs 6.0 billion. The Crescent Bank acquisition had come after its liabilities had exceeded its assets. CresBank's Board has been reconstituted to appropriately reflect the change in the bank's ownership. CCBL's new Board of Directors brought immense banking and business judgment, strong knowledge of the global banking industry, and a deep understanding of opportunities and challenges faced by the bank.
The expertise and vision provided by the new board will help guide the bank towards long term sustainable growth that will deliver superior returns to the stakeholders and also benefit the institution and the country as well. Following this investment by Samba, CresBank has emerged as one of the highest capitalised banks in the country with a paid-up capital of Rs 8.769 billion. Subsequent to State Bank's approval, the name of the bank has been changed from Crescent Commercial Bank Limited to Samba Bank Limited effective from October 20, 2008. It is a subsidiary of Samba Financial Group, Saudi Arabia and incorporated in Pakistan. Samba is Saudi Arabia's premier financial institution with total assets approximately US $48 billion and shareholders equity of US $4.8 billion in early 2008.
Samba enjoys one of the highest credit ratings by Standard & Poors, Fitch, and by Capital Intelligence. The Saudi banking group offers varied banking and investment services with a commitment to providing innovative financial solutions of the highest quality and delivering superior returns to its investors. CresBank will benefit immensely from the balance sheet strength and strong profile that Samba provides. CresBank is listed on all the three bourses of the country. The bank currently has a network of 28 branches, 11 in Karachi, 8 in Lahore, 4 in Islamabad, and one each located in Peshawar, Sialkot, Faisalabad, Multan and Gujranwala.
BANKING INDUSTRY IN Q3FY08
Advances growth of the banking system has jumped by 20 percent YoY in FY08 to-date fuelled by the borrowing from agriculture and power sectors while overall deposits to the banks fell to Rs 3.67 trillion compared to Rs 3.77 trillion, declining approximately by 2.7 percent during the period under consideration. Of the 23 commercial banks, the earnings for the three quarters of FY08 have been 4% less as compared to the same period last year and the profits declined by Rs 2.3 billion to Rs 55.3 billion as against Rs 57.6 billion in FY07. The domestic banks disbursed Rs 128 billion from July 1 to November 08, 2008 against Rs 72.8 billion during the same period last year.
The banking sector's spread continues its rising trend after witnessing a dip to the level of 6.78% in June 2008 that was being taken as an after effect of minimum profit payment of 5% on saving accounts. In September 2008, spread of the banking sector recorded at 7.49%, cumulating an average of three months (3Q08) spread of 7.3%. Interestingly, September 2008 banking sector spread is at two-year high. Furthermore, it is the 3rd highest banking sector spread observed during the last 5 years. Currently the banks are facing multiple challenges, including restricted liquidity, higher NPLs, strong competition, and above all slow economic growth of the country.
The liquidity crunch aggravated due to the economic imbalances like increasing trade deficit, declining foreign reserves, low foreign inflows and capital flight. The lack of investor confidence has led to flight of $10 billion in the past months. Due to slow foreign inflows and rising expenses, the borrowing by the government for the budgetary support from SBP, has reached Rs 226 billion, a rise of about 2000 percent (from Rs 10.951 billion on July 1 to October 18) during the current fiscal.
The government borrowing for the budgetary support from the banking sector has gone up by 352 percent to Rs 461.280 billion during the fiscal year 2008. Moreover, rumour of freezing foreign currency accounts and bank lockers fuelled the capital flight further and increased the dollar demand. An advance to deposit ratio of 76.5 percent showed an increase of 20 percent from June 08 and has also resulted in an even tighter liquidity position for the banks. To ease the liquidity crisis prevailing in the banking sector, the SBP has decreased Cash Reserve Requirement ratio, which bank keep with the State Bank as reserve money on all deposits of up to 1 year maturity twice; reduced by 2% with immediate effect and further by another 1%.
Other reasons also played their part in restricting the liquidity in the system, such as the revision of rates on National Savings Schemes. On many schemes of national savings rate of profit was increased by 1% to 2%, which led to withdrawal of funds from commercial banks who were giving lowest possible returns. Accordingly the National Savings experienced an inflow of Rs 60 billion in the last two months. This had pushed banks to raise deposit rates as high as 12-14% for a year's term deposit and up to 18% on a longer term deposits thus adding a part to the cost of funds.
Due to tightening of monetary policy the interest rates soared affecting the debt servicing ability of the borrowers including the major customers such as textile and individual consumers leading to major write offs and high provisioning against loans. Commercial banks in their half-yearly reports have shown an addition of Rs 26 billion as NPLs pushing the banking sector total NPLs to Rs 194 billion. As a matter of fact, more than 80% of the bank's lending are based on KIBOR. This benchmark rate has been rising for the past few months and is likely to stay on a steep rise, thus further confirms NPLs growth in future.
RECENT PERFORMANCE IN Q3FY08In the quarter ending the September 2008, the bank realised a net mark-up income of Rs 520 million, which is 174% higher than the income earned in the same period last year of Rs 190 million. This colossal growth in net income is attributable to more number of branches and improved performance of the bank. The income from customers had the largest share of the income pie followed by smaller shares from government securities and TFCs and bonds.
It is pertinent to note that the bank had improved on its alarming rate of increase in provisions against non-performing loans. These were increasing at rates as high as 900% during period FY06-07, but in the current period, the trend had actually reversed. There was a deceleration of 45% in the provisions against NPLs. Consequently, net income after provisions, stood at Rs 387 million as compared to Rs -59 million in Q3FY07. Conversely, the non-mark-up income fell in the same period by 23% owing to losses in dividend income and gains on sale of securities. In the period under consideration the stock markets performed poorly due to many reasons beyond the control of the local investors.
Taking expenses into consideration we see major increases in administrative expenses by almost 50%. This burden of cost is reasonable, as there are changes going on back and forth of the organisation it might have called in for external expensive consultancy. The administration costs have been so massive that the earnings turned into losses this year too. On the balance sheet front the bank was able to show impressive growth of 26% in advances since FY07. A praiseworthy control of NPLs growth is apparent in the period under consideration, which is almost less than 1%. The deposits fell by 27% as the management strived to retire high cost deposits. This in turn helped to raise the ADR of the bank implying a better utilisation of available funds. Investments fell by 35% compared to FY07 as major chunk of funds has been liquidated from market T-bills.
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Financial Highlights - SAMBA bank Ltd Rs '000
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9M FY '08 9M FY '07 Chg (Rs) Chg (%)
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Interest earned 1,316,277 774,016 542,261 70%
Interest expensed 795,805 583,985 211,820 36%
Net interest income 520,472 190,031 330,441 174%
Provision against NPLs 133,642 245,028 -111,386 -45%
Total Provisions -132,696 -249,459 116,763 -47%
Net interest income
after provisions 387,776 -59,428 447,204 553%
Total non-interest income 97,788 126,950 -29,162 -23%
Total non-interest expenses 955,575 677,321 278,254 41%
PBT -470,011 -609,799 139,788 -23%
Taxation -137,436 -51,837 -85,599 165%
PAT -332,575 -557,962 225,387 -40%
Basic/Diluted EPS (0.38) (0.82) 0.4 -54%
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9M FY '08 Dec '07 Chg (Rs) Chg (%)
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Deposits 9,286,872 12,644,938 -3,358,066 -27%
Advances 6,032,060 4,693,113 1,338,947 29%
Investments 2,565,767 3,947,925 -1,382,158 -35%
ADR 0.65 0.37 - -
NPLs 1,879,289 1,872,496 6,793 0.4%
NPLs/Advances 31.16% 39.90% - -
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FINANCIAL PERFORMANCE FY06-07
In FY07, the banks experienced a lot of changes from both the regulator and the market. The profits in the first two quarters of the banking industry as a whole was on a smooth upward path but this did not last long. The SBP took a turn in its policy of calculating provisions against non-performing loans. The benefit of FSV was now removed resulting in a hard-hit on banks' profitability. Although this was implemented in order to carry on the Basel-II procedure which helps make the banking structure to become more resilient to credit crunches and losses.
So after this the spreads were reduced due to an increase of 50 basis points in discount rates coming up to 10.5%. In response to this the interest rates rose while banks maintained the same deposit rates. Furthermore, the banks had another regulation to fulfil that was to maintain an MCR of Rs 4bn by the end of FY07. Banks, with strong capital base were least affected by this regulation, but the smaller ones either taken over or merged with the others in order to survive. To further intensify the competition, Barclays Bank also decided to step into local lucrative financial market.
In the year ending December 2007 the bank successfully issued 600 million shares of Rs 10 to Samba Financial Group of Saudi Arabia. The bank also struggled to mobilise deposits at reasonable costs to improve its liquidity consequently the bank experienced major increase deposit base from Rs 5.577 billion to Rs 12.644 billion. Most of the deposits were a result of new consumer product, personal loans, launch which enabled the bank to increase its scope of operations. In an effort of fund mobilisation the bank branches have been increased from 18 to 28 this year in order to give better market penetration. The branch expansion will continue in near future.
Most importantly the credit rating of the bank also improved in the same period under consideration; long-term improving from BBB (triple B) to A (Single A) and Short term improving from A-2 (A-two) to A-1 (A-one). The bank had some deep-rooted weaknesses, such as extremely high NPLs and its provisioning which had its tolls on profitability. The bank survived by minimizing its losses. In FY07, the bank realised a loss after tax of Rs 1.322 billion as compared to a loss of Rs 587 million in FY06. If we see the quarterly performance of profits, we observe that it has severely suffered in 2007.
The increasing losses are due to rising provisions against non-performing loans, which were in accordance with the State Bank's directives aiming to strengthen the banking system of Pakistan. Other reasons, which come into play for higher losses are investments into infrastructure, human capital, and placement of excess liquidity into interbank markets, which are earning low but are considered safe. These costs are mandatory as the bank has recently been overtaken by new management, which needs some time and money to fix inherent problems. Similarly, the ratios like return on assets and return on equity are also negative due to losses so they are not very helpful in gauging the performance.
The deposits show a remarkable growth of 127% from FY06 which is attributable to the dedicated efforts of the management. On a closer look we see that most of the growth in deposits was in Savings accounts and current non-remunerative accounts which means that it does not cost anything to the bank; bank does not pay any interest on N-remunerative deposits. These help to provide liquidity to the bank, which aid in extending more loans to consumers. As far as savings accounts is concerned, there was not any consumer protective policy from the State Bank of Pakistan and therefore no minimum return rates were paid. And banks did save a lot from this policy loophole. Moving on this growth of deposits took a U-turn and actually shrunk in the nine months ended FY08.
Major reasons which affected the whole banking industry, were minimum deposits rates of 5% and competitive returns on the similar to bank deposits schemes like national savings scheme. These two reasons drained huge amounts from all the banks including Samba. On the other hand, the borrowing by Samba from the repo market has increased by a hefty amount, indicating a need for funds for the bank in wake of diminishing deposits.
The liquidity stance of the bank is apparent from the Advance to deposit ratio. It has been around 46% in FY06 and 37% in FY07. A larger proportion of the assets if taken up by lending to Financial Institutions and Investments collectively. It implies that the most of funds from deposits were not utilised for the core activity of the bank; loans extension. One possible reason could be the funds were directed to the investments in the expansion of the branches and software updates.
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Financial Statements
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Balance Sheet
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2006 2007
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Cash and Balances with treasury banks 782,781 1,003,611
Balances with other banks 132,037 63,348
Lendings to financial institutions 493,473 8,565,836
Investments 2,228,268 3,947,925
Advances 2,395,018 4,693,113
Operating fixed assets 846,259 854,292
Deferred tax assets 747,876 804,266
Other assets 552,964 722,911
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Total Assets 8,178,676 20,655,302
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Liabilities
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Bills payable 50,626 1,056,878
Borrowings 442,469 182,611
Deposits and other accounts 5,577,641 12,644,938
Sub-ordinated loans - -
Liabilities against assets 7,231 3,403
subject to finance lease
Deferred tax liabilities - -
Other liabilities 521,908 565,314
Total Liablilities 6,599,875 14,453,144
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Net Assets 1,578,801 6,202,158
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Represented By
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Share capital 2,769,517 8,769,517
Reserves 43,080 43,080
Unappropriated profit (1,220,064) (2,593,956)
1,592,533 6,218,641
Surplus/Deficit on revaluation of assets (13,732) (16,483)
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Total equity 1,578,801 6,202,158
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Income Statement
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Interest Income 2006 '000 2007 '000
Mark-up/return/interest earned 483,218 1,182,921
Mark-up/return/interest expensed 551,936 837,869
Net mark-up/interest income (68,718) 345,052
Provision against non-performing 81,570 834,695
loans and advances
Provision for diminution 53,652 85,884
in the value of investments
Bad debts written off directly - 4,198
Provisions 135,222 924,777
Net mark-up/interest income after provisions (203,940) (579,725)
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Non mark-up/interest income
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Fee, commission and brokerage income 15,687 23,807
Dividend income 25,376 31,270
Income from dealing in foreign currencies 5,556 (8,596)
Gain on sale of securities 17,417 53,893
Unrealized loss on revaluation - -
of held for trading investments
Other income 20,249 28,058
Total non mark-up/interest income 84,285 128,432
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Balance (119,655) (451,293)
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Non mark-up/interest expenses
Administrative expenses 647,114 891,889
Other (reversals)/provisions/write offs 47,279 28,845
Other charges 34,297 652
Total non-markup/interest expenses 728,690 921,386
Balance (848,345) (1,372,679)
Extraordinary/unusual items -
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Profit/loss before taxation (848,345) (1,372,679)
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Taxation
Current 5,000 10,050
Deferred (5,710) -
Prior years (260,000) (59,837)
Total Tax (260,710) (49,787)
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Profit/loss after taxation (587,635) (1,322,892)
Unappropriated profit brought forward (725,775) (1,220,064)
Transfer from general reserve 93,346 -
Share issue cost - (51,000)
Accumulated loss carried forward (1,220,064) (2,593,956)
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Basic/Diluted Earnings per Share -2.21 (1.82)
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Dividend Paid
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Non Performing Loans 1,986,573 1,872,496
Provisions
No of branches 18 28
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Ratios
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Earning Ratios 2006 2007
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ROA -7% -6%
ROE -21% -15%
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Asset Quality Ratios
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Non Performing Loans 1,986,573 1,872,496
NPL to Advances 83% 39.9%
Provisions to NPL 7% 49%
NPLs Growth -6%
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Debt Management
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Debt to Equity 4.18 2.33
Debt to Assets 0.81 0.70
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Liquidity
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Earning Assets to Assets 63% 83%
Advance to Deposit 43% 37%
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FUTURE OUTLOOK
The current economic situation does not guarantee any better picture in future. Although the domestic market is not too much integrated with the international financial market but it still did suffer from the spillover effects of the liquidity crunch. In the current fiscal year, State Bank of Pakistan (the regulator for banks in Pakistan) has revised a few and implemented many policies which restricted the banking business in the short run but will eventually lead to greater benefits.
One of the new policies was the maintenance of very high paid up capital by the banks. In this respect Samba financial group has injected enough capital to meet the requirement of Rs 8 billion. The bank inherent many deep-rooted problems like highest ever NPLs, low market penetration and persistent losses. On a closer look we see that the management has been effective in getting things straight and going. We see a positive sign that the numbers are improving and will soon catch up with the industry averages.
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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