Bank: MEEZAN BANK LIMITED - Analysis of Financial Statements Financial Year 2003 - Half 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 Nations first full-fledged commercial banking license 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 the 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 renown 'Shamil Bank of Bahrain'. The Bank has an internationally renowned, very high caliber and pro-active Shariah Supervisory Board presided over by Justice (Retd.) 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 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 merchants worldwide and withdraw funds from their accounts from more than 1.4 million ATM's 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 re-introduce 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 to be based 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 restricts 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 per cent 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 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 & 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 HY10
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Profit & Loss Account 30-Jun 31-December Growth %
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2010 2009
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Net Spread Earned Before Provisions 2,976,610 2,546,437 16.9%
Fee. Commission, Forex and other Income 861,493 733,078 17.5%
Core Banking Income before provisions 3,838,103 3,279,515 17.0%
Provision Against Non performing Financing 442,397 713,421 -38.0%
Administrative & Other Expenses 2,264,908 1,642,619 37.9%
Profit after tax 718,895 509,225 41.2%
Earning Per Share 1.03 0.9 14.4%
Number of Branches 201 166 21.1%
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The core emphasis of the bank to maintain sustained and healthy profitability has manifested itself in the first half results of 2010. Profit after tax recorded a substantial increase of Rs 210 million (41%) from Rs 509 million in the corresponding period last year to Rs 719 million as at June 30, 2010. Overall revenues reflected growth of 23% and income from core banking activities increased by 17%. Net spread earned increased by 17% from Rs 2.54 billion to Rs 2.97 billion. Total other income for the bank grew by 36% in 1HFY2010 and stood at Rs 940 million as compared to Rs 691 million same period over the corresponding year. Disaggregately, fee and commission income and income from dealing in foreign currencies grew by 12.4% and 29% respectively, but the dividend income tumbled by 13.5% mainly due to weak bourses of the country.
Specific provisions of Rs 442 million have been made during this period for non-performing advances. This additional provision has increased coverage ratio to 77% of the non-performing portfolio thereby strengthening asset quality.
Total other expenses increased by 41% mainly on the back of administrative costs, which increased sharply primarily on account of additional costs associated with new branches added to the network. This investment has, however, resulted in strong growth in deposits. Increased profitability resulted in growth for EPS which rose to Rs 1.03 as compared to Rs 0.90 in same period corresponding period.
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Statements of Financial Positions Rupees 000
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30-Jun 31-Dec Growth
2010 2009
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Deposits 114,526,131 100,333,051 14.1%
Financing - Net 45,570,234 44,188,066 3.1%
Investments 25,417,444 23,290,309 9.1%
Due from financial Institutions 37,599,000 34,499,500 9.0%
Total Assets 136,531,477 124,181,734 9.9%
Share Capital 6,982,550 6,650,048 5.0%
Shareholder's Equity 9,809,430 9,090,535 7.9%
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Assets of the bank have increased by Rs 12 billion resulting in growth of 10% from total assets as at December 31, 2009. Booking good quality assets remains a key challenge for Meezan Bank while the shortage of SLR eligible investment securities, namely Shariah-compliant sovereign securities, has also impacted the overall profitability of the bank.
Management of the bank has been working proactively with the State Bank of Pakistan and the Ministry of Finance to address this issue and it is expected that this matter may be resolved very soon. This is a critical need of the Islamic banking industry. Under the assets, earning assets of the bank increased marginally. Dues from financial institutions increased to Rs 37.5 billion from Rs 34.4 billion in 1HFY09, thereby registering a minor growth of 9%. Investments of the bank also grew by 9.1% in this period and stood at Rs 25.4 billion. Financing on the other hand registered a small growth of 3% and increased to Rs 45.5 billion in 1HFY10.
Total liabilities increased by 10.2% in this half as compared to same period of the last year. These liabilities increased mainly on back of bill payable and deposit, which grew by 37.4 % and 14.15 respectively. Deposits have increased by Rs 14 billion from Rs 100 billion as at December 31, 2009 to Rs 114 billion as at June 30, 2010 resulting in growth of 14% for the half year as compared to banking sector growth in deposit of 10.4% during this period.
The focus has been on maintaining cost of funds within the parameters agreed by the Board. Further, improved macroeconomic conditions of the country and concerted efforts to book quality assets so as to improve the Asset Deposit Ratio are also few reasons that lead to the rise in the overall deposit of the banks. Dues from financial institutions dropped from Rs 8.4 billion last year to Rs 4.8 billion in HY2010.
Share capital of the bank remained stable and registered a growth of 5% from Rs 6.65 billion to Rs 6.98 billion. Reserves of the bank also surge by 13.7 % in this half of 2010. Aggregately, equity increased by 7.3% in 1HFY10.
FINANCIAL PERFORMANCE (FY03-FY09)
Notwithstanding the very high level of provisioning, the bank registered an impressive 65% increase in profit after tax, from Rs 621 million in FY2008 to Rs 1,025 million FY2009, 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 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 (PAT) 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 1.2billion, 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 FY09.
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 2005-2009 - 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 54 billion 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 musharka (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 Musharakah (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 Musharaka 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 where as 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, markup 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 NPLs have increased by 122.7% in 2006 to became 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 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 FY2009 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 FY07of 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
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Return on financing, 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 190 244 104 166
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 financing (1,430) (428) (435) (122)
Provision for diminution
in investments and impairment (89) (289) (1) (1)
Capital gain / (loss) on investments 76 (339) 502 86
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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Breakup Value (Rs) 13.67 12.87 15.13 12.60
Market Value per Share (P.s.) 15.74 21.48 38.55 19.50
Cash Dividend (%) - - - -
Stock Dividend (%) 6.00 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].
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