National Bank of Pakistan (NBP) has earned pre-tax profit of Rs 12.025 billion during the calendar year 2004 which reflects an increase of 33.5 per cent over the pre-tax profit of Rs 9.009 billion earned during the previous year 2003. The post-tax profit of Rs 6.243 billion during 2004 depicts an increase of 48.71 per cent over the post-tax profit of Rs 4.198 billion during the previous year. The pre-tax profit of Rs 12.025 billion has been earned on the net assets amounting to Rs 27.584 billion as of the 31st December,2003. Thus the return on net assets works out to 43.6 per cent.
The analysis of the domestic and overseas operations reveal that on the net assets- Rs 21.137 billion (as of 31st December,2003) deployed in Pakistan, the pre-tax profit of Rs 10.713 billion gives earning/net assets ratio of 50.68 per cent while in the overseas operations, the bank earned the pre-tax profit of Rs 1.312 billion on deployment of the net assets amounting to Rs 6.447 billion (as of the 31st December,2003) which gives the earnings/ net assets ratio of merely 20.35 per cent. The accompanying notes No 41 and 40 to the bank's annual reports for 2003 and 2004 respectively contain the geographical distribution of the net assets/ profits.
The bank claims to have launched new products eg (a) advance salary accounts (beneficiaries are 500,000 ), (b) Small and Medium Enterprises [SMEs] beneficiaries are stated to be 18,000, (c) Agricultural loans "Kissan Taqat" etc.
The management of the bank claims to have increased the non-interest/ non-mark-up income [excluding capital gains ] by Rs 2.456 billion ( page 16 ) and brought down the net NPLs (non-performing loans) by Rs 5 billion ie from Rs 12 billion a year earlier to Rs 7 billion. The gross NPLs are stated to have been brought down by Rs 3.6 billion by restructuring and cash recoveries.
As mentioned earlier, there is a vast difference between pre-tax profit/ net assets ratio in the context of the domestic/ overseas operations. The bank management should have analysed the causes of the poor overseas operations and detailed them in the report under review.
Now that the bank has become a listed company, more responsibility devolves on it towards its shareholders. Though the Bank is represented in 17 countries, it is widely believed that quite a few branches were opened on political grounds rather than on the commercial considerations. The branches opened in Afghanistan and Central Asian Republic can be cited as examples. Notwithstanding whether it is a fact or otherwise, it is also widely believed that the postings in the overseas branches are usually made on the basis of influence rather than merit.
The success of the management of the banking companies is currently by and large being judged by the quantum of the profit generated; by whatever means- notwithstanding.
The question also is: what should be the sequence of the beneficiaries of the ever-increasing profits of the banking companies among (a) owners eg the controlling shareholders - in the case of NBP government of Pakistan (b) minority shareholders ie general public (c) the depositors and (d ) the Bank's own kitty ie reserves and the accumulated profit accounts? The reply would obviously be: firstly the depositors on whose money the banks function, secondly the owners including both the controlling shareholders as well as the minority shareholders represented by common man and lastly the bank's own kitty.
But NBP has worked just in the reverse direction. Out of after-tax profit of Rs 6.243 billion for 2004, the sums of Rs 984.821 million and Rs 738.616 million (total Rs 1.723 billion ) which works out to 27.6 per cent of the after-tax profit have been paid to the shareholders as bonus shares and cash dividend while the balance amounting to Rs 4.52 billion comprising 72.4 per cent has been retained in the bank's own kitty.
The policy of retaining upto 3/4th of the after tax profit in the bank's own kitty has raised the amount of reserves and accumulated profits to Rs 20.334 billion as on the 31st December,2004 which is more than 4 times higher than the amount of the paid-up capital viz Rs 4.924 billion. Another aspect of the matter is that as at the close of 2004, the profit available for appropriation aggregated Rs 12.186 billion, only 14.14 per cent whereof viz Rs 1.723 billion was paid as cash dividend and bonus shares.
Is there any real need of retaining such huge percentage of the funds available for appropriation in the bank's own kitty when 80 per cent of the NPLs stand provided for and any possible modernisation/expansion of the bank's network is unlikely to require any substantial outlay.
It would be recalled that in the fiscal bill 1999, it was provided that where the reserves of a company (which included unappropriated profits also) exceeded 50 per cent of the paid-up capital, it was required to pay tax @ 10 per cent on the amount which so exceeded. Later on, the Central Board of Revenue adjudicated that 40 per cent of the after tax profit shall be distributed to the shareholders failing which tax at the above rate was to be paid on the shortfall amount. However, the powerful corporate mafia got the decision reversed. To compel the listed companies, including the banking companies, to reasonably share their profits with the minority share holders, the enactment of similar law appears to have become inevitable.
The bank has meted out very harsh treatment to the depositors. The amount of bank's deposits as per the annual report for 2004 were Rs 465.571 billion on which interest paid was Rs 6.38 billion which works out to 1.37 per cent. In 2003 interest paid on the deposits of Rs 395.492 billion was Rs 6.612 billion which works out to 1.67 per cent. In the ascending interest rates and quickly marching up inflation scenario after July,2004, reducing the interest rate on deposit is a callous policy.
The bank could conveniently raise the deposit rate by about one percentage point from 1.67 per cent in 2003 to at least 2.5 per cent in 2004 without materially affecting the after tax profit as in that event interest payment would have increased from present 6.38 billion to Rs 11.639 billion reducing the pretax profit by Rs 5.259 billion to Rs 6.766 billion but the tax burden must also have reduced to 41 per cent of Rs 6.766 = Rs 2..77 billion and the after tax profit would have worked out to Rs 3.996 billion as against 2003 after tax profit of Rs 4.198 billion.
While meting out harsh treatment to the depositors, the bank had been generous to the borrowers . In 2003, the interest earned on the advances of Rs 161.266 billion amounted to Rs 9.288 billion which gives the weighted average lending rate of 5.76 per cent while in 2004 interest earned on the advances of Rs 221.444 billion is Rs 10.884 billion which gives the weighted average lending rate of 4.92 per cent only. Why this reduction when July-December,2004 half year witnessed ascendance in the interest rates.
As per the data down-loaded from the State Bank of Pakistan (SBP) website, the weighted average lending rates of the public sector bank(s) [on advances including zero-mark up] during this half year hovered around 6.62 per cent to 6.88 per cent while that in respect of advances [excluding zero mark up], it has been around 7.5 per cent.
As the NBP has been the only bank in the public sector ( and if at all there are other banks too in this category, their share in the advances will be nominal ), the SBP data about public sector bank(s) would by and large be relating to the NBP lending. Why this wide gap between the SBP data and that derived from NBP's annual report.
The bank's president has mentioned on page 16 of the report that the non-interest based income [excluding capital gains] has increased by an impressive amount of Rs 2.456 billion due to higher fee-related income. A perusal of the Profit and Loss account (P and L account) reveals that the total non-interest income has risen by only Rs 1.057 billion [from Rs 7.248 billion in 2003 to Rs 8.305 billion in 2004] which also includes Rs 701 million earned from capital gain on equities and amalgamated in the income under the Head "other income"[please see accompanying note No 25].
Thus the increase in the non-interest income after excluding capital gain shall stand reduced from Rs 1057 million to Rs 356 million only. The claim made on page 16 of the report needs to be reviewed in the light of the data depicted in the P&L account.
The quantum of NPLs has come down from Rs 39.772 billion in 2003 to Rs 36.099 billion in 2004 [ Note No 10.2 ] ie a reduction of Rs 3.673 billion. It has been mentioned by the President of the bank at page 16 that this has been possible due to cash recoveries and restructuring. One important aspect has been left out in the above assertion ie the write-offs.
NPLs amounting to Rs 801 million [ principal only]were written off during 2004 which leaves the amount of reduction through cash recoveries and restructuring to Rs 2.872 million. How much amount out of Rs 2.872 billion represents cash recoveries and how much amount comprises restructuring has not been disclosed. The non-disclosure of such an important information leads one to assume that the very substantial portion of reduction has been on account of restructuring.
The write-offs of principal aggregate Rs 801 million. But if the write-offs of the interest element [together with other relieves provided ] is taken into account, the total write-offs reach Rs 4.639 billion [ Annexure II to the annual report ]. 88 percent of this amount is due to settlement under the State Bank of Pakistan's scheme and relates to old loans.
It will be seen from Note 11.3 that a sum of Rs 437.211 million has been shown as receivable from the government on account of exodus staff under Voluntary Hand-shake Scheme but simultaneously the amount is also shown to have been off-set through the "provision".
However, the details of this provision are nowhere available in the annual report and the accompanying Notes. It may be stated here that this matter is as old as 2001.
This scribe had raised this issue in his comments on the Bank's annual report for 2001 and the Bank has stated in reply as follows: " out of Rs 7106 million, the bank had lodged a claim for Rs 6,032 million (balance amount will be paid from pension fund maintained by the bank in this regard) that has been reflected as asset and liability, in view of management, 30 % of such claim may not be recovered and therefore classified as deferred cost and provision in the form of separate account was made and charged to deferred cost which is being amortised in accordance with the Technical Release (TR)28 issued by the Institute of Chartered Accountants of Pakistan (ICAP) and the charge is reflected in the P and L account under the name 'amortisation of deferred cost'" [Please see Business Recorder dated the 28th October,2002]."
HERE A FEW QUESTIONS ARISE: (1) The amounts receivable from the government and the so-called provision [ it is actually the deferred cost account balance as explained by the Bank ] at the end of a particular year are the same viz 2003- Rs 806.686 million/ 2004 Rs 437.211 million. Does that follow that government is not now making any payment at all or is making payment in instalments exactly as per the amortisation schedule of the Bank. If nothing is being received from the government, how the receivables from the Government are being reduced every year and what is the need of continuing to carry over the receivables from the government year or over in the reduced amounts. (2) The contra accounts neutralise each other.
How can the receivables from the government and the so-called provisions (in fact deferred cost ) accounts, both being "assets" side items, cancel each other? (3) Whether would it be prudent to call a charge to "deferred cost" as provision as the concept of the "provision" to a common man is "charge to the P and L account".
Note No 12.5 contains the details of movement in surplus on revaluation of properties. The balance in the account as at 31st December,2003 was Rs 5.458 billion. Naturally, the same amount must have been carried forward as on the 1st January,2004. However, the amount brought forward is Rs 5.989 billion. What has caused the amount to inflate by Rs 531 million and how has it been accounted for is not clear.
The nature of advances mentioned in Note 10.7 under the nomenclature " debts due by directors, executives, officers and staff or the bank or any of them either severally or jointly with any other persons" is not clear while the amount has substantially grown to Rs 9.766 billion. This matter was also, inter-alia, raised by this scribe while offering comments on the bank's annual report for 2001[ the outstanding balance at end 2001 was Rs 2 billion].
THE BANK MANAGEMENT AT THAT TIME HAD TAKEN THE PLEA AS FOLLOWS: " Quote:The advances given to the executives/ officers, for various purposes viz house building/cars/motor cycles etc are disbursed in accordance with the bank's policy and the terms of employment. Bank's interest is always safeguarded by ensuring adequate security against any possible loss of recovery. Mark-up is also charged against those financing which is deducted at source along with principal amount while payment of salary. The analyst must have witnessed decrease in the amount from Rs 2320.945 million to Rs 2034.996 million which is Rs 285.949 million ie 12.3% as compare to the preceding year.
Since there exists no such requirement of disclosing the nature of finance, the same is not being disclosed however the nature of such type of financing is always known to the people with ordinary prudence. unquote".[ Please see Business Recorder dated the 28th October,2002]. It will be seen that the bank management had at that time categorised the advances under the aforesaid category purely as advances to the employees and had also challenged the "prudence" of the scribe.
Will the Bank management still categorise these advances as employee loans when the quantum of the advances has increased more than four times. Obviously, the position taken in 2002 by the bank management has become untenable in the current situation. The bank also cannot take refuge under the pretext that there is no requirement for disclosure of the nature of advances because it is now a listed public company and is also answerable to its stock-holders.