Bank: MEEZAN BANK LIMITED - Analysis of Financial Statements Financial Year 2003-1Q Financial Year 2010

Meezan Bank Limited (MEBL) is a publicly listed company, first incorporated on January 27, 1997. It is pioneers of Islamic banking in Pakistan and started its operations from March 2002. It started operations as an investment bank in August of the same year.
In January 2002 in an historic initiative, Meezan Bank was granted the 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 traditional means of business, and is catering to an increasingly astute and demanding financial consumer who is also becoming keenly aware of Islamic banking.
This Islamic banking industry has surpassed growth rates of conventional banks. Rapid growth of the industry has been accompanied by good financial performance and specific industry niche. The capital to risk-weighted ratio has invariably remained significantly above 8 percent required level, and NPLs ratios have been considerably low, 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, the Islamic Development Bank of Jeddah, and the Shamil Bank of Bahrain. The bank has an internationally renowned, very high caliber and proactive Shariah Supervisory Board presided over by former Justice Maulana Muhammad Taqi Usmani. MEBL has achieved a strong balance sheet with excellent operating profitability, including a capital adequacy ratio.
Meezan Bank is the first and largest Islamic Bank operating in Pakistan with a network of 201 branches in 54 cities. The bank offers a complete range of Islamic products and services including car leasing and home mortgages. The bank's retail banking network is supported by 24/7 banking services - these include 150 ATMs, Internet Banking and a 24-hour Call Center.
The bank has recently launched its VISA Debit card that allows its customers to shop at more than 30 million merchandises worldwide and withdraw cash from their accounts from more than 1.4 million ATMs worldwide. The bank was also awarded Best Islamic Bank of Pakistan for the fourth consecutive year in 2009 by Islamic Finance News and the Best Islamic Financial Institution in Pakistan in 2009 by Global Finance.
In Pakistan, Islamic banking emerged as a response to both religious and economic needs. Efforts for economy wide elimination of Riba started during 1970s and most of the significant and practical steps were taken in 1980s. The mid-80s attempt was a significant step in the evolution of Islamic banking system in the country. In a technical sense it was the most advanced model compared to any other model being practiced anywhere in the world at that time. However, that system fell apart as it did not adequately address issues such as putting in place an effective Shariah compliance mechanism, giving emphasis to capacity building, and opting for a flexible and evolutionary approach.
The initiative to reintroduce Islamic banking in Pakistan was launched back in 2001 when the government decided to promote Islamic banking in a gradual manner and as a parallel and compatible system that is in line with best international practices. Following the decision of the government to shift to interest-free economy in a phased manner without causing any disruptions, the effort was envisaged on a market driven and flexible approach.
The Islamic Financial Services segment is an increasingly important constituent of the financial sector in Pakistan and has grown in size and diversity in just a few years. The participants of the Islamic banking industry are all strong players with a sound capital base, compliant with SBP's MCR requirements uniformly applied to both conventional and Islamic banks, which restrict entry into the sector without the requisite sound financials.
The asset-base of the Islamic banks increased by 13.3 percent in October-December 2009 compared to 7 percent growth in total assets, posted by conventional banking system during the same period under review.
According to the SBP latest report, Islamic banking operations remain profitable and steady in December-09 quarter. Growth in assets of Islamic banking continued to surpass the growth of assets in conventional banking by expanding the share of Islamic Banking Institutions (IBIs) in the industry as a whole.
Report stated that despite decline in the rate of infected portfolio during December-09, increasing non-performing finance (NPFs) remains the key challenge facing IBIs since the first quarter of CY09.
The NPFs to financing ratio decreased by 20 bps to 6.3 percent amid healthy growth in financing. Category-wise analysis shows continuous increase in NPFs in loss category, which now constitutes almost half of the NPFs.
However, increase in NPFs has resulted in marginal change in provision largely due to enhancement of FSV benefit on classified loans. Resultantly, net NPFs to financing ratio increased and provision coverage ratio declined. Increasing net NPFs also deteriorated the capital impairment ratio by 1.5 percentage points during October-December 2009. Sector wise analysis depicts that textile, others and individuals have the major share in financing. However, infection ratio is quite high for the sectors of automobile and transportation equipment and textile. As per the report revelations, the balance sheet composition of Islamic banks remains stable during the quarter.
Nevertheless, in line with the historical quarterly trend, most components saw improvement during December-09. On the asset side, significant increase took place in financing and investments.

Financial performance 1Q10

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Financial Highlights                         31-Mar-10   31-December-10

                                               Rs '000      Rs '000    Growth (%)

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Net Spread Earned before provisions          1,449,878    1,370,283            6%

Fee, Commission, Forex & Other Income          342,136      206,933           65%

Core Banking Income before provisions        1,885,607    1,609,056           17%

Profit after Tax                               363,867      282,923           29%

Earnings per Share - Rupee                        0.52         0.52             -

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Deposit growth was historically slow in the first quarter of the FY10. Notwithstanding this fact, deposits increased by Rs 2 billion over December 31, 2009 reflecting the strong demand for Islamic banking products in country. Income from core banking business also increased by 17%, mainly on account of improved macroeconomic conditions of the country and concerted efforts to book quality assets so as to improve the Asset Deposit Ratio of the bank.
More importantly, profit after tax recorded substantial increase of 29% from Rs 283 million in 1QFY09 to Rs 364 million 1QFY10. The core emphasis of the bank to maintain sustained and healthy profitability has manifested itself in the first quarter results.
Specific provision of Rs 220 million has been made for non-performing portfolio thus strengthening asset quality and increasing coverage ratio to 77% of total non-performing financings. Administrative and operating expenses also increased from Rs 801 million to Rs 1,090 million over the first quarter FY10 primarily due to higher staff expenses, rent and costs associated with the increased number of branches.
The 5% bonus shares of Rs 333 million approved in last Board of Directors' meeting, has been issued to shareholders and accordingly enhanced paid-up capital now stands at Rs 6.98 billion.
Economic overview FY09
Pakistan has continued to suffer from the fallout of the international financial crisis that began in 2008. The real Gross Domestic Product (GDP) growth rate fell to 2% for fiscal year 2008-09; however, the process of gradual recovery has started and real GDP is likely to be close to the target of 3.3% for fiscal year 2009-10. Foreign Direct Investment (FDI) continued to fall and manufacturing sector output has also been negatively impacted due to a drop in demand for exports.
Although parts of the textile sector have benefited from the significant depreciation in the Pak rupee in 2008, the industry as a whole is still in a downturn. The silver lining has been the agricultural sector that performed well and registered positive growth and the outlook on agriculture for the current year is also good. In addition, workers' remittances increased during the year to a level of more than US $ 8 billion during January-December 2009. Another significant improvement has been the reduction in the Current Account deficit that fell from US $7.8 billion for the first half of fiscal 2008 to US $1.3 billion in the corresponding period in 2009. This reduction is mainly on account of lower crude oil prices. This together with aid flows under the IMF programme has helped stabilize the rupee exchange rate and increased foreign exchange reserves to more than US $15 billion.
The tight monetary stance adopted by the SBP brought the rate of inflation down from very high levels at the start of the year and the 12 month moving average rate of inflation for the year was 13.6%. As a result, we have recently witnessed the easing of monetary policy with the discount rate falling from 15% at the start of 2009 to 12.5% at the end of the year. The reduction in rates bodes well for the economy and should help industrial output recover to its former levels.
The stock markets in Pakistan performed very well in 2009. KSE 100 index registered an increase of 60% during the year while Shariah based KSE-Meezan Index (KMI) recorded an appreciation of 105%. The average daily trading volume stood at 171 million shares as compared to 133 million shares in 2008. A few capital market offerings were also seen, after a long period of inactivity, and received very good response from investors with two issues being well over-subscribed.
Financial performance (FY03-09)
Notwithstanding the very high level of provisioning, the Bank registered an impressive 65% increase in profit after tax, from Rs 621 million in FY08 to Rs 1,025 million FY09, an increase of 65%. In addition, the consolidated profit after tax of the bank increased from Rs 213 million in FY08 to Rs 1.577 billion in FY09, an impressive increase of 640%, primarily on account of substantial increase in the Net Asset Value of the bank's investments in the funds, managed by its subsidiary, Al-Meezan Investment Management Limited. Profitability ratios demonstrate a turnaround from the declining profits of 2008. ROE recorded at 16% in FY09, up from 12% in FY08.
MEBL realized a profit after tax of Rs 621 million, which is 36% lower as compared to previous year's profit of Rs 963 million. Net income from financings, investments and placements registered a 75% growth, as a 49% increase in income was not matched by 26% increase in returns on deposits. Compared to conventional banks MEBL did not show any massive increases in NPLs and is within the margin of safety. The decrease in profits is attributable to lower "Other Income" this year. On a general observation we see that unlike conventional banks, MEBL has been relying on other income unlike to make up its total profits but this year the picture didn't appear to be favorable as it had many losses from sale of securities and investments. All in all other income fell by 47% while other expenses rose by 54% thus reducing profit before tax by 22% and PAT by 36%. The profits decoded into an EPS of Rs 1.26 while last year EPS was Rs 1.96 per share.
Meezan Bank's profitability saw a promising growth of 60% in the year 2007. The growth was driven by a high net spread income of Rs 1.2 billion, an increase of 71.7% from the previous year. Over the years ROA had shown a mixed trend despite of persistent increase in profits. This might be true due to changing industry dynamics and rapid increases in assets. For instance, last year the total assets grew by 26% and before that they grew by 45% thus resulting in lower ROAs as the profits do not rise proportionately. In FY08 the ROA fell to 0.73% as compared to 1.43% last year for the reasons quoted before like lower profitability and increases in Total Assets. Another probable reason for lower ROA is that in year FY08 the whole economy was going through a down turn therefore nothing better could be earned as newer assets in FY08 comprised of Earning Assets like Financings (Advances), Investments and due from financial institutions (Lendings to Financial Institutions).
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 average being fuelled by growths in investments and fixed assets. 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 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%.
Total deposits at December 31, 2009 crossed Rs 100 billion compared to Rs 70 billion for 2008, an increase of 43%, compared to the national average of 12.63 %. Deposits increased in all categories, notably in Current Accounts and Saving Deposits. Margin deposit is the only category that witnessed a decline of 15% in FY2009.
Despite a difficult 2009 on both the economic and business fronts, corporate banking was able to achieve growth in its asset portfolio through careful addition of high quality customers and application of conservative risk criteria. Corporate assets, including corporate Sukuks stood at more than Rs 40 billion, an increase of 28% in 2009.
The substantial increase in the bank's branch network has allowed commercial banking to penetrate key markets and build a very well-diversified portfolio. The total asset portfolio of commercial banking has registered an annualized growth rate of over 50% per annum during the period 2005-09 - increasing from Rs 1.2 billion to Rs 6.5 billion. In light of the difficult economic conditions during 2009, the bank adopted a more cautious approach in booking assets and customer accounts were booked after extensive due diligence and market checking. As a result the total portfolio decreased from Rs 6.9 billion in 2008 to Rs 6.5 billion at the end of 2009.
In FY08, overall the deposits posted 29% increase as compared to previous year to an amount of Rs 70.233 billion. Major growth of 35% is seen in customer deposits while financial institutions deposits reduced to almost a quarter of FY07 deposits. A probable reason could be the liquidity strain prevailing in FY08, which led to deposit drains coupled with competitive return rates from NSS (National Savings Scheme). For the same reason in FY08 remunerative accounts grew by 17% while Non-remunerative surged up by 68% establishing that other banks were providing better returns on deposits. An important finding is that the deposits of Islamic banks increased as a share of Banking Industry to 4.8% showing increasing confidence of depositors in Islamic banks disregard the rate of returns.
The deposits of the bank have grown remarkably well in FY07 around increasing by 58.4%. The deposits of the bank were Rs 54billion 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 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.
Financing witnessed a continued upward trend in FY09, recording an increase of 11% over the year. Tijarah financing was the most popular advances of the year, increasing manifold times in FY09. Other good performing categories were Istisna (132%), running finance (125%), export refinance and diminishing musharika (27%). It's noteworthy that the bank allowed for higher provisioning in FY09, almost 127% higher than last year. However this did not mar the bottom line of the bank.
An impressive 15% growth is witnessed in financings (advances) from FY07 to an amount of Rs 39.768 billion with major contributions from Ijarah (23%), istisna (5 folds) and diminishing musharika (182%). Along with this it is important notice that non-performing loans increased by 63% highest recorded for this bank but still it's significantly lower than industry averages which actually gives an edge to Islamic banks over others.
In FY07 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 musharika has also started to increase its share, which shows the eagerness on the part of to diversify their financing portfolio.
Earnings assets as a proportion of total assets as followed a fluctuating trend over the years. From 86.2% in FY08 to 86.3% in FY09 it remained at a constant level, showing stability in the trend. Finance to deposits declined from 56.6% in FY08 to 44% in FY09. Deposits increased by a 44% in FY09 whereas financings increased by only 11%.
On evaluating the performance of Meezan's earning assets we see that yield (Yield as calculated by net spread income/earning assets) has shown on overall rising trend till FY09 coupled with increasing gap between the Cost and the yield on the earnings assets. Moreover, 'cost of funding earning assets' has also followed an escalating 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 robust growth of 38 percent during FY09 net mark-up income after provisioning also witnessed healthy growth of 21 percent in the same period. 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 have been continuously augmented till FY09.
The NPL has increased by 122.7% in 2006 to become Rs 408 million followed by a nominal growth of 35% in FY07 and excessive growth of 272% in FY08, highest recorded for this bank. The rise in NPLs is because of the increase in defaults and substandard loans. In FY09 the NPLs also witnessed a growth of 77% not as massive as last year's.
NPLs, as a percentage of finances recorded at 8.3% in FY09. This has increased since last year. In FY08 it stood at 5.2% of the total finances. NPL form 1.6% of the finances in FY07 but drastically increased to 5.2% of finances as the NPLs grew by 272%. Unlike industry in FY07 the bank shows a reduction in NPLs. 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 the SBP has allowed for only 40% FSV benefit to the banks.
The solvency situation for the industry as a whole has shown marked improvement in recent years, caused by increasing profitability and fresh inflows of capital. In Meezan's case, here was a decline in the solvency position over the years till FY2008 as a result of high growth in deposits.
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 solvency position in the coming years. Likewise was the policy in FY09 as the company announced a stock dividend of 5%.
Average price per share has seen a decline in FY09 followed by reopening of the KSE and a shaky recovery amidst lost investors' confidence. The average price recorded at Rs 21 in FY08 came down to Rs 15 in FY09.
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 upwards pressure 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 but later in improved further more on the pretext of lower average share price. MV was 2.0x in FY07 of 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 and continued to be satisfactory in FY08.
Future outlook
The Islamic financial assets are expected to cross $1 trillion by 2010 in other words 12% of domestic banking industry share by 2012. 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 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.
Going forward, Meezan Bank is cognizant of State Bank of Pakistan's (SBP) initiative to introduce e-bond automated trading for GOP securities, which includes Ijarah Sukuks through Bloomberg. Being a primary dealer for GOP Ijarah Sukuks, Meezan Bank will try to not only introduce this platform within itself, but also create a viable secondary market for these Sukuks.
Meezan Bank continues to facilitate other Islamic banks and Islamic banking branches in their quest to deploy or solicit excess liquidity through various Islamic modes. Treasury is in constant liaison with the bank's product development and Shariah Compliance (PDSC) department to devise new treasury products with the vision to create an Islamic interbank money market. The bank will strive to build a high quality-financing portfolio and increase ADR to a level between 55% and 60% so as to increase shareholder return.
As technology assumes ever increasing importance in the banking services industry, the Bank has developed a comprehensive IT strategy to see it through the coming years. The Bank is in process of implementing a new core banking application -T-24 (a product of Temenos, a leading Swiss software company). Core retail modules (Branch-wise functionality) have already been successfully rolled out in 51 branches. The deployment is in progress and the entire network will be switched to T-24 during 2010.
Meezan Bank is well positioned to meet the challenges of the future. The Board is confident that the bank will continue to play its leadership role in the Islamic Banking industry.

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Key Figures at a Glance

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                                              2009        2008        2007        2006

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Profit and Loss Account

Return on financings. Investments

and placements                              10,102       6,803       4,574       2,704

Return on deposits and

other dues expensed                          4.970       3,088       2,452       1,464

Net Spread earned before provisions          5,132       3,715       2,122       1,240

Fee, commission, forex and

other income                                 1,332         802         742         441

Dividend income                                190        2.44         104         165

Gross Core Banking Income                    6,654       4,761       2,968       1,846

Administrative and Operating Expenses        3,471       2.713       1.765       1,028

Core Banking Income

before provisions                            3,183       2,048       1,203         818

Provision against non

performing financings                      (1.430)       (428)       (435)       (122)

Provision for diminuntion in

investments and impairment                    (89)       (289)         (1)         (1)

Capital gain/(loss) on investments              76       (339)         502          85

Profit before Taxation                       1,740         992       1,269         780

Taxation                                       715         371         306         176

Profit after Taxation                        1,025         621         963         604

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Balance Sheet

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Total Financing - net                       44,188      39,528      34,576      27,031

Total Assets                               124,182      85,276      67,179      46,439

Total Deposits                             100,333      70,234      54,582      34,449

Share Capital                                6,650       4,926       3,780       3,780

Total Shareholders Equity                    9,091       6,341       5,720       4,763

Market Capitalization                       10,467      10,581      14,572       7,465

Number of Staff                              3,669       3,170       2,205       1,389

Number of Branches                             201         166         100          62

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Ratios

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Break up Value (Rs)                          13.67       12.87       15.13       12.60

Market Value per Share (Rs)                  15.74       21.48       38.55       19.50

Cash Dividend (%)                                _           -           -           -

Stock Dividend (%)                            5.00        8.60       20.00       10.00

Right Shares at par (%)                          -          35           -       50.00

Price Earning Ratio                           9.20       17.60       15.12       10.51

Earning per Share (Rs)                        1.71        1.22        1.96        1.88

Net Spread to Gross Return (%)               50.80       54.61       46.39       45.86

Net Profit Before Tax

to Total Income (%)                          14.87       13.21       21.43       22.98

Net Profit After Tax

to Total Income (%)                           8.76        8.27       16.27       17.80

Expense to Income (%)                        72.15       77.24       71.21       73.40

Financing/Advances to

Deposit Ratio-ADR (%)                        44.04       56.62       56.90       65.68

Capital Adequacy Ratio                       12.77        9.58       10.71       12.80

Return on Average Assets (%)                  0.98        0.82        1.70        1.57

Return on Average Equity (%)                 13.29       10.30       18.39       15.64

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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].
Copyright Business Recorder, 2010