Bank: STANDARD CHARTERED BANK - Analysis of Financial Statement Financial Year 2005 - 1 H 2010
Standard Chartered Bank (Pakistan) Limited is a subsidiary of Standard Chartered Plc. which is incorporated in England. Standard Chartered has had a long presence in Pakistan. It opened its first branch in Karachi in 1863.
Standard Chartered has now employees over 4,000 people and has a branch network of 162 branches across Pakistan. Standard Chartered's core businesses in Pakistan are in consumer banking and wholesale banking.
Standard Chartered Bank (Pakistan) Limited (SCBPL) was incorporated in Pakistan on July 19, 2006 and it became the first international bank to be incorporated in Pakistan. Standard Chartered acquired controlling stake (95.37%) in one of the best private banks in Pakistan called the Union Bank, through a transaction of US $487 million. Union Bank Ltd was the 8th largest bank in Pakistan in terms of market share of assets and had an extensive customer base with 400,000 retail and SME banking customers. However it had a small but growing wholesale banking business.
Now SCBPL's business activities constitute Consumer Banking, Corporate & Institutional Banking (Wholesale Banking) and Global Markets. The bank has the honor of being the first international bank to get an Islamic banking license and open the first Islamic banking branch. Another major achievement of the bank includes its short-term credit rating of AAA for long-term and A1+ for short-term. These are the highest long-term rating assigned by PACRA to any private sector commercial bank. The Standard Chartered Bank has also subsidiaries which include: Standard Chartered Leasing Limited, Standard Chartered Modarba, Standard Chartered Services of Pakistan (Private) Limited.
On July 15th 2010, Standard Chartered was also named as the "Best Regional Bank" in Asia and "Best Bank in Pakistan" in the awards for Excellence 2010 by Euromoney.
RECENT RESULTS 1H10
ECONOMIC SITUATION UP TO 2Q10
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Balance Sheet 30-Jun-10 30-Jun-09 Q-0-Q
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Paid Up Capital 38,716 38,716 0%
Total Equity 49,074 44,215 11%
Deposits 205,688 189,947 8%
Advances - Gross 143,852 137,967 4%
Advances - Net 125,835 123,192 2%
Investments - Net 72,659 66,128 10%
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Profit & Loss 30-Jun-10 30-Jun-09 Q-0-Q
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Revenue 11,485 11,924 -4%
Other non-markup expenses 505 6,613 -92%
Operating Profit (before provi. & tax) 4,596 5,311 -13%
Provisions (net of recoveries) 2,544 5,016 -49%
Profit before tax 2,052 295 596%
Profit after tax 1,326 205 547%
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Up to June 30th 2010, the economy has shown signs of recovery growing at 4.1%, the fastest progress compared to the previous three years. However, due to the recent heavy floods across the country, massive damages have surfaced which continued to damage the positive growth momentum moving forward. As the 20 million struggle with displacement, destruction of infrastructure, agriculture commodities like rice, cotton and sugar crops and loss of human capital will directly fuel inflation making matters worse than anticipated. As the government will be engaged in major reconstruction and rehabilitation programs, significant fiscal reforms are expected ahead including tax reforms, power sector reforms and PSDP re-allocation. However, large donations and funds that will be coming in the country through IMF, ex-pats, ADB and other countries will provide some cushion to the economy albeit short-term.
OVERVIEW 1H10
This year has shown considerable growth for SCB. A staggering increase of Rs 1.7 billion was witnessed in profit before tax from Rs 295 million in H1 2009 to Rs 2.05 billion in H1 2010. The striking difference between the two periods was achievable only on account of significant reductions in provisions against loans and advances from Rs 5 billion to Rs 2.5 billion, 50% decrease.
Although Net income interest only saw an increase of 3%, non-interest income remained relatively on the lower side than expected due to significant reduction in FX and derivatives income. For 2Q10 income from dealing in foreign currencies was Rs 694 million as opposed to Rs 1,106 million in 2Q09. The fees and commissions brokerage also dropped from being Rs 2,128 million in 2009 to Rs 1,894 million in June 2010.
Total assets of the bank stood at Rs 299 billion with the composition remaining fairly stable (Advances: 42% and investments: 24%) of total assets. Wholesale Bank Loans grew from Rs 101 billion to Rs 108 billion while Consumer Banking including SME loans took a plunge from Rs 40 billion to Rs 35 billion. The share of Private Sector Credit also grew from 76% to 88%. Non-performing loans have remained stagnant at Rs 21 billion for the time while the advances to deposit ratio of the bank has improved from 60% to 61% currently.
Mark-up earned has increased by 4% to be Rs 13.66 billion, while the mark-up expensed increased by 5%, offsetting the increase in interest income. However, Net interest income increased by a mere 3% ended at Rs 8.49 billion as opposed to Rs 8.23 billion which was earned in June 2009. Provisions against non-performing loans declined sharply by 45% for June 2010 and were Rs 2.07 billion against Rs 3.80 billion in June 2009. This resulted in an 85% increase in net mark-up/interest income after provisions, Rs 5.974 billion against Rs 3.22 billion in June 2009.
Total non-mark-up income decline by 19% due to reduction in the fees, commission and brokerage segment plus significant decrease in dealing foreign currencies was also witnessed in the quarter.
PAT skyrocketed to Rs 1.32 billion as compared to Rs 205 million. As mentioned before, primary reason for the increase is credited to a staggering decrease in provision (net of recoveries) resulting in an earnings per share (EPS) of 0.34, compared to 0.05 of last year.
Deposits have increased by 9% to Rs 205 billion compared to Rs 189 billion in the previous year, but have declined by 1% since December 2009 from being Rs 206 billion to Rs 205 billion in June 2010. Due to the uncertain and lackluster situation of the economy, investments took a drop of 13%. Advances on the other hand, have seen a slight increase of 1% from being Rs 83.2 billion in the beginning of the year to Rs 72.2 billion for the six months ended period.
FINANCIAL PERFORMANCE FY05-09
During FY09, the revenues after tax for SCB have shown an improvement. The revenues grew from a level of Rs 630 million in FY08 to Rs 669 million in FY09. However, they are still much less than the revenues of Rs 5,709 million in FY06 and Rs 2,767 million in FY07. The net mark up income of the bank has remained almost consistent during the last three years. It was at Rs 16,192 million in FY07, then it increased to Rs 16,419 million in FY08 and declined a bit to reach a level of Rs 16,284 million in FY09. However the non-mark-up income of the bank has shown a growth over the last 5 years. It stood at Rs 3,687 million in FY06, then it increased to Rs 6,147 in FY07, Rs 6,566 million in FY08 and Rs 6,883 million in FY09, showing a growth of 4.8% in FY09.
During FY09 the net interest income of the bank has remained almost consistent. With the interest earned, there has been an increase in the interest earned on loans and advances to customers. It increased from Rs 17,737 million in FY08 to Rs 18,688 million in FY09. Another major increase was seen in the interest earned on investments that were classified as available for sale securities. The interest earned on these increased from Rs 3,503 million in FY08 to Rs 7,124 million in FY09. Within interest earnings, a decline was seen in the interest earned on loans and advances to the financial institutions. The interest earned on it declined from Rs 358 million in FY08 to Rs 141 million in FY09. Within markup interest expensed, expense has increased on deposits. The expense has increased from Rs 5,752 million in FY08 to Rs 9,148 million in FY09. Also, the expense on securities sold under repurchase agreements has increased from Rs 239 million to Rs 471 million in FY09. Also, interest expense on borrowings from SBP under ERF schemes has increased from Rs 252 million in FY08 to Rs 501 million in FY09. Despite the Bank's conservative stance towards high yield consumer lending, the bank's gross interest income grew by 14% from Rs 23,307 million in FY08 to Rs 26,653 million in FY09. This can be attributed to the healthy growth of 37% in Wholesale Bank interest based revenues in line with the growth of 17% in corporate advances from Rs 86 billion to 101 billion, and the growth in investments which more than doubled from Rs 30 billion to Rs 84 billion. However, overall net interest income is marginally down by 1% owing to the rise in cost of deposits, which can be mainly attributed to a minimum rate requirement of 5% on savings deposits stipulated by the State Bank of Pakistan in June 2008. Non-interest income continues to make a healthy contribution to the overall revenue of the bank with a 4% growth over last year.
During the year FY09, the non-interest income of SCB increased from Rs 113,714 million in FY08 to Rs 13,749 million in FY09. The increase was seen in the fee, commission and brokerage income; which increased only slightly from Rs 3767 million in FY08 to Rs 3,913 million in FY09. Sharp decline was seen in the dividend income, which decreased from Rs 14 million in FY08 to Rs 7.8 million in FY09. Also there was a gain on sale of federal government securities of Rs 467 million in FY09 as compared to a loss of Rs 335 million on sale of federal government securities in FY08.
On the earnings side, the different earnings ratios have shown a declining trend over the last 5 years. The major reason for this has been the declining profits after tax of the bank. The RoE declined from levels of 53% in FY05 to 17.8% in FY07 and then further declined to 3.5% in FY09. Also the return on deposits has declined from 5.39% in FY05 to 0.32% in FY09. Similar trend has been seen in the RoA for the bank. It has declined from 3.9% in FY05 to 0.25% in FY09.
The asset base of Standard Chartered Bank has increased over the last 5 years. The total assets of the bank stood at Rs 111,668 million in FY05 at have increased to Rs 312,874 million by FY09. However the proportion of different components in the overall asset mix has been fluctuating. During FY09 the proportion of investments increased as compared to that of the previous 4 years. The total investments of the bank stood at Rs 83,785 million in FY09 as compared to Rs 29,587 in FY08 and Rs 40,696 million in FY07. In investments category, an increase has been seen in the held for trading market treasury bills. They increased from Rs 989 million in FY08 to Rs 7,265 million in FY09. Also the investment in market treasury bills in available for sale category has increased from Rs 17,078 million in FY08 to Rs 63,388 million in FY09. Another major increase has been observed in the sukuk bonds classified as available for sale. They have increased from Rs 300 million in FY08 to Rs 1,800 million in FY09. The increase of Rs 1,500 million in sukuk investments reflects the PIA sukuk bonds.
A major concern for SCB is the worsening asset quality. There has been an increase in the Non Performing Loans of the bank over the last 5 years. The NPLs stood at Rs 8,421 million in FY06 as compared to Rs 12,389 million in FY09. Also the provisions have shown an increase from a level of Rs 1,477 million in FY06 to Rs 7,454 million in FY09. Non-performing consumer loans continue to be the key issue in the current economic scenario with interest rate hikes constantly deteriorating the repayment capacity of individual borrowers, and consequently catalyzing consumer loan losses. Hence provisioning and write offs against consumer loans has increased especially in FY08. Application of SCB Group policies for general provision against consumer loans has also resulted in significantly higher provisions during FY08 than that specified under the prudential regulations. Focused measures for arresting the trend of delinquencies are being taken by the bank. Reinforcing recovery and collection teams and processes and also realigning credit policies with changing market dynamics has already been taken by SCB.
The debt to equity ratio for SCB has declined considerably over the last 5 years. The ratio stood at 12.28 in FY05 - the period when it had not acquired the Union Bank. However it declined from FY06 and onwards and has remained around 5. The major liability on the bank's balance sheet is the deposits of the customers. The deposits of the bank have shown an increasing trend over the last years. They stood at Rs 83,646 million in FY05, then increased to Rs 156,878 million in FY06 and have reached a level of Rs 206,958 million in FY09. The Bank has successfully enhanced its deposit base from Rs 174 billion to Rs 206 billion representing an 18% growth, being amongst the highest in the industry. This has been a direct result of our customer centric approach, enhanced brand positioning and expanded footprint. This has not only improved our market share, but has also strengthened our customer base, which creates future business prospects to cross sell our product suite. The surplus liquidity generated through deposit mobilisation is primarily invested in risk-free government securities, thereby maintaining a high level of liquidity along with positioning the book for any interest rate shift. Another major observation within the deposits of the bank is the increase in the fixed deposits. The fixed deposits of the bank have increased from Rs 46,870 million in FY07 to Rs 51,228 million in FY08 and have further increased to Rs 58,402 million in FY09 Also the savings deposits of the bank have declined. They declined from a level of Rs 68,996 million in FY07 to Rs 61,960 million in FY08, however they gain increased to Rs 79,300 million in FY09.
As can be observed from the graph below the earning assets of the bank have shown an increasing trend over the last 4 years. The lending to the financial institutions has increased from Rs 3,873 million in FY06 to Rs 20,568 million in FY09. However this is a decline as compared to the levels of Rs 31,467 million of FY08. The decline has been seen in the repurchase agreements, which have declined from Rs 1,2476 million in FY08 to Rs 3,446 million in FY09. These carry mark-up at rates ranging from 11 percent to 12.4 percent per annum, payable at maturity, and are due to mature by January 2010. These arrangements are governed under Master Repurchase Agreements.
The advances of the bank have shown a consistent trend over the last 4 years. They have increased from Rs 129,004 million in FY06 to Rs 124,447 million in FY09- showing only a slight fluctuation. The amount of advances in FY09 is segmented into Rs 134,642 million in the form of loans, cash credits, and running finance, Rs 6,588 million in form of bills discounted and purchased and Rs 1,6784 million of provisions for NPLs.
As is evident from the graph of solvency ratios, the ratios have increased during the last 5 years. The equity to assets grew from 7.53 in FY05 to 16.33 in FY 06 and has since then remained around 16. It was 15.26% in FY09. The equity to deposits grew in FY06 to 25.644% from 10% in FY05. And since then has remained around 23%, it stood at 23.07% in FY09. The earning assets to deposits increased from 90.35% in FY05 to 99.04% in FY07 and then further increased to 110.6% in FY09.
The overall profitability of the bank has shown a declining trend over the last 4 years. There was a major decline in the profits of the bank in FY07. They declined from Rs 5,709 million in FY06 to Rs 2,767 million in FY07. They further declined in FY08 to Rs 630 million, and have shown a slight improvement in FY09 to Rs 669 million. All this has contributed to declining EPS of the company to Rs 0.17 in FY09 from Rs 3.06 in FY05. EPS in 1Q10 has been recorded at Rs 0.21, or at an annualized basis of Rs 0.84
The graph above shows the trend of KSE 100 index against the stock performance of Standard Chartered Bank, Pakistan. As can be seen, the stock has continued to show downward trends even when the market had started to pick up.
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FINANCIAL ANALYSIS - STANDARD CHARTERED BANK PAKISTAN
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2005 2006 2007 2008 2009
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Financial Snapshot
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Profit After tax 4,507 5,709 2,767 630 669
Net Interest Income 5,276 10,336 16,192 16,419 16,284
Non Interest Income 2,450 3,687 6,147 6,566 6,883
Total Assets 111,668 246,318 255,545 264,617 312,874
Total Equity 8,406 40,230 43,066 42,757 47,746
Total Debt 103,262 206,088 212,479 221,860 265,128
Advances 50,215 129,004 119,537 125,601 124,447
Investments 25,359 34,629 40,696 29,587 83,785
Lendings to Financial Institutions - 3,873 15,226 31,467 20,568
NPLS - 8,421 10,493 16,534 21,389
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Earning Ratios
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Return on Assets (%) 3.9 3.2 1.23 0.27 0.25
Return on deposits (%) 5.39 3.64 1.56 0.36 0.32
Return on Equity (%) 53 30 17.79 3.75 3.49
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Assets Quality Ratios
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Provisions for NPLs - 1477 6237 10495 7454
NPL to Advances - 6.53% 8.78% 13.16% 17.19%
Provisions to NPLs - 17.54% 59.44% 63.48% 34.85%
NPLs Growth - - 24.61% 57.57% 29.36%
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Debt Management Ratios
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Debt to equity 12.28 5.12 4.93 5.19 5.55
Deposit times capital 9.95 3.90 4.11 4.08 4.33
Debt to asset 0.92 0.84 0.83 0.84 0.85
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Liquidity Ratios
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Earning assets to assets - 68.00% 68.66% 70.54% 73.13%
Advance to deposit - 82.23% 67.47% 71.%% 60.13%
Yield on earning assets - 8.70% 12.84% 12.49% 11.65%
Cost of funding earning assets - 2.52% 3.61% 3.69% 4.53%
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Solvency Ratios
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Equity to assets (%) 7.53 16.33 16.85 16.16 15.26
Equity to deposits (%) 10.049 25.644 24.309 24.495 23.070
Earning assets to deposits (%) 90.35 106.77 99.04 106.93 110.55
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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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