National Bank of Pakistan is the largest commercial bank in Pakistan. The bank handles treasury transactions for the Government of Pakistan as agent to the State Bank of Pakistan.
The bank has the largest branch network, and operates 1,232 branches in Pakistan and 18 overseas, including the Export Processing Zone Branch.
The Group also provides services as a trustee to National Investment Trust including safe custody of securities on behalf of NIT. National Bank of Pakistan (the Bank) was established on November 9, 1949 under the National Bank of Pakistan Ordinance, 1949. Initially, the Bank was set up with the objective to extend credit to agriculture sector. The nature of responsibilities of the Bank is unique and different from other banks/financial institutions.
The Bank acts as the agent to the State Bank of Pakistan for handling Provincial/Federal Government Receipts and Payments on their behalf. The Bank has also played an important role in financing the country's growing trade, which has expanded through the years as diversification took place.
NBP is the largest bank operating in Pakistan in terms of its asset base (Rs 709.5b, as of Jun30'07) and its shareholders equity (Rs 92.7b as of Jun30'07). The bank has the second highest amount of advances among all the operating commercial banks in Pakistan amounting Rs 331.7b, as of Jun30'07 after HBL's Rs 338.3b, while having the largest deposit base among the commercial banks in Pakistan at Rs 504.4b as of Jun30'07.
BANKING SECTOR PERFORMANCE - 7MTH'07 As the economy witnessed a slowdown in the credit demand, credit off-take of the banking sector showed a nominal increase of 0.83% in the 7mths'07 and stood at Rs 2.43t as compared to Rs 2.41t in Dec'06. On YoY basis, credit off takes showed a growth of 11.5% to Rs 2.43t in Jul'07 from Rs 2.18t in the same month last year whereas on MoM basis, credit off-takes declined by 2.2% from 2.48t at the end of HY'07.
The major reason behind this slowdown is the increasing volume of NPLs of the banking sector and high interest rates spread. Also, many sectors have exhausted their borrowing capacity for expansion purposes, leading to a deceleration in demand from the industrial sector as well. The weighted average lending rates of the banking sector were 11.31% at the end of 7mnth'07, up by 21 basis points from Dec'06. The increase in the banking sector profits for H1FY'07 is mainly because of the increase in spread on the back of rising interest rates.
RECENT PERFORMANCE (CY07-H1) NBP posted an increase in profits, raking up Rs 9 billion in the first half of this year, compared to Rs 8 billion in the corresponding half of the previous year. Non Performing Loans (NPLs) increased to Rs 37.4 billion, compared to Rs 34.7 billion in the middle of last year and Rs 36.3 billion at the end of last year.
There was a reduction in the advance to deposit ratio from the end of last year, showing better liquidity, as advances increased by Rs 15 billion, while deposits rose by more than Rs 50 billion.
Price to earnings and market to book were higher than the corresponding half of last year, showing a strong stock performance. This was also reflected in an increase in average share price to Rs 257 as compared to Rs 252 last year. There was also an improvement in the solvency and leverage positions of the bank.
ANALYSIS National Bank is the epitome of Pakistan's booming banking sector. It has shown a tremendous increase in deposits, loans and profitability in recent years. Share prices have also demonstrated a steady and healthy upward trend.
The bank is rated A-1+ for short-term credit and AAA in the long term. As of 2006, the bank constituted 15% of Pakistan's banking sector. With the thriving economy fuelling banking sector's remarkable growth, the competition among banks has also intensified, forcing them to make the services that they offer more competitive.
Banks also made up about 1/3rd of the market capitalization of KSE in 2006, indicating healthy stock turnover. In the recent period, National Bank has hovered around 11th place in the KSE-100 Index in terms of volume traded.
NBP has posted ever-increasing profitability over the last few years. This was caused by healthy increases in both interest and non-interest incomes. There was a major jump in profitability in CY05, when profits after tax nearly doubled. This was in fact caused by a more than 100% increase in interest income, when the interest earned on loans and advances to customers and institutions increased from Rs 10 billion to over Rs 21 billion.
This phenomenal growth in CY05 in fact eclipses the otherwise spectacular growth that occurred in other years. Profits rose by almost 50% in CY04, and by almost a third in CY06. This growth in profits is also not reflected that well in earnings ratios because assets and equity also showed a steep upward trend during these years.
In general, figures show that the liquidity situation has declined marginally. However, steady inflows, in particular foreign inflows, continue to provide liquidity support. One major reason for the decrease in liquidity has been SBP's tight monetary policy in the last two years which has drained off the excess liquidity from the system.
The advance to deposit ratio (ADR) for NBP has increased over the past few years, in line with the banking sector. Industry ADR stood at 70.3% in CY06 as compared to 66.5% in CY05 and 61.5% in CY04. Although the ADR has shown a declining trend in the H1FY'07 for the industry, it has increased marginally for NBP.
The major upward trend in deposits as well as the advances throughout the industry has been the result of the heavy economic activity during recent years fuelling the demand of consumers and the private sector for credit. These increases have occurred across all categories, over both short and long terms and in both local and foreign currencies.
The industry has also shown a trend towards increasing deposits in banks, a major cause of which, of course, is the booming economic activity, apart from higher foreign inflows in the form of worker remittances and FDI, as well as expanding branch networks, product innovation and better efforts towards marketing. In fact, the growth in deposits in the top five banks, including NBP, has actually been less than that in the next five banks.
The deposit growth in Public Sector Commercial Banks is the second highest in the industry, behind Local Private Banks. Growth in NBP deposits has been fluctuating over the years. They increased by 9% in FY03 and 18% in FY04, but decreased by half-a-percent in CY05. However deposits showed a resurgence in CY06, showing an increase of 8.3%, thus standing at over Rs 500 billion. This irregular trend is mostly caused by institutional deposits, which decreased in CY05 but then showed a healthy growth in CY06.
Customer deposits have shown a steady increase over the years. They increased by Rs 8 billion in CY05, and a significant Rs 31 billion in CY06. Within customer deposits, fixed deposits have posted higher growth than savings deposits.
NBP has maintained a steady proportion of earning assets to total assets. Earning assets growing at a slightly higher rate than total assets. Within earning assets, investments actually decreased by about 10% in CY04 and in CY06, while on the other hand advances have maintained a healthy growth rate of 37%, 22% and 18% in CY04, CY05 and CY06 respectively.
The result has been that advances have increased from 58% of earning assets in CY04 to 61% in CY05 and 66% in CY06, leading to a corresponding decrease in the proportion of earning assets constituted by investments. Industry figures substantiate this trend. In CY06 advances increased to 55.8% of total assets from 54.4% in CY05 while investment portfolio decreased from 21.9% of assets to 19.2% in the same period. In addition, 60% of the growth in banking assets in CY06 was accounted for by growth in advances. Apart from consumer and private sector credit, NBP also lends extensively to agriculture sector and is the largest lender to this sector.
The earning assets have shown both increasing returns and increasing costs. As discussed earlier, NBP has increased the ratio of advances to investments within its earning assets, which has also increased the bank's risk-weighted assets.
This trend can be interpreted as a trend towards improving the yield on earning assets on the back of leverage provided by the higher capital adequacy ratio. The yield on earning assets improved from 8.2% in CY05 to 9.5% in CY06. Industry figures improved from 7.6% to 9.3% in the same period.
Thus NBP manages to achieve higher than average yield on its earning assets. There had been a declining trend in both yield and cost of earning assets till CY04 due to a corresponding downward trend in interest rates. However, since CY04, interest rates have been on the rise.
This led to an increase in yield because the high liquidity carried over from the previous period allowed banks to penetrate into new business ventures carrying higher yields, while at the same time shifting assets from investments to advances.
On the other hand, although the cost of earning assets also increased, factors, like steady inflows, relatively less interest rate sensitivity of the depositor, not to mention the liquidity preference of the depositors for maintaining checking/transactional accounts (saving and current) caused a relatively smaller increase in the cost of funds of the bank. Cost of earning assets increased from 1.62% in CY04 to 2.28% in CY05 to 2.75% in CY06.
Non performing loans (NPLs) of the bank showed a downward trend till FY05, decreasing from Rs 39.77 billion in CY03 to Rs 36.10 billion in CY04, to Rs 33.74 billion in CY05. This followed an industry-wide trend, where NPLs decreased to Rs 177 billion in CY05 from Rs 211 billion in CY03. Thus, NBP in particular and the industry in general have been able to contain credit risk despite aggressive growth in advances to consumer and private sector.
This is also shown by the downward trend in NPLs as a percentage of advances. There was an increase in NPLs, however, in CY06. However, this cannot be attributed to relatively less monitored and regulated loans issued, since interest rates showed a significant increase in the period, while the high levels of indebtedness affected the ability of the market to absorb loans. Industry figures show that the downward trend of NPLs slowed down during this period.
Industry NPLs stood at Rs 175 billion at the end of CY06. Disaggregated industry analysis revealed that there were plenty of fresh NPLs incurred during this period. However, extensive write-offs and recoveries managed to reduce the overall level of NPLs. NBP has Special Assets Management Group dedicated towards the monitoring and recovery of NPLs.
The debt management figures show that the assets of the bank have been less leveraged over time. There has been a steady decrease in the debt to equity, which declined from 16.5 in CY03 to 6.7 in CY06. Similarly, debt to assets declined from 0.94 to 0.87 over the same period. This declining trend has been there despite a steady increase in debts. Furthermore, there has also been an increase in borrowing.
However, the equity portion of the balance statement has flourished during the last few years as a result of capital inflows, bonus shares and major profit retention. Assets increased by 18% in CY04, 4.5% in CY05 and 10% in CY06, while equity showed spectacular growth rates of 68% and 64% in CY04 and CY05 respectively, and a further 8% increase in CY06.
The solvency situation of the bank has also shown a marked improvement over this period. From financing 5.7% of assets in CY03, equity financed 10.8% of assets in CY05 and 13% in CY06. Similarly, there has also been an increase in the equity to deposits ratio.
NBP has exhibited a strong market performance in the period under consideration. Share prices have shown a marked upward trend, from Rs 35 in CY03 to Rs 68 in CY04, thus showing almost a 100% increase. This strong increase continued to CY05, with the average price increasing by 86% to Rs 126.
From there, the average price again doubled to Rs 252 in CY06. The increasing trend in the price to earnings ratio shows that prices have been increasing at a higher rate than profits, thus showing a growing investor confidence. Similarly, the market to book ratio has also been consistently on the rise, crossing 1 in CY04, showing that NBP shares are getting more and more overvalued.
NBP has in general displayed a conservative cash dividend policy, exhibiting banks' common tendency of reinvesting a greater share of profits, while issuing more bonus shares. The exhibition of this trend by the banking sector is in lieu of the MCR (Minimum Capital Requirement) under Basle-II. This is also shown by the high dividend cover on NBP shares, which has consistently ranged over 9 in CY03-05. At the same time, the price of shares has exhibited a phenomenal growth, so that dividend yields have fallen.
FUTURE TRENDS: The banking sector seems set to continue its strong growth trend. The boom in the economy has particularly favoured the services sector, and of course banking is a vital part of the economic growth of any country. Thus the current growth momentum is likely to hold in the near future, at least. The trend in remittances and foreign direct investment is also likely to continue, which would contribute towards banking sector growth.
The loan portfolio of banks would, however, depend on the growth and the capital demand in the corporate and consumer sectors, and future interest rates will of course exert an influence on overall demand as well as on NPLs. Also the 100% provisioning against NPLs, which is to be applied from next year, will affect banks' profitability.
If the current slowdown in loan growth continues, banks are likely to further increase their investment portfolios. The Government has also shown heavy borrowing needs from banks, and this is also likely to draw funds away from loans.
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2003 2004 2005 2006
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Cost of funds 37.99% 32.50% 71.69% 83.12%
Intermediation cost 46.70% 43.99% 77.94% 81.95%
Net profit margin 23.68% 30.70% 88.27% 103.77%
Interest margin 0.65 0.69 0.69 0.69
Net interest margin 1.41 1.20 1.23 1.15
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The challenge facing the banking industry, according to SBP's industry overview, is to increase the monitoring and regulation of loans to reduce NPLs while at the same time keeping loans high to sustain the high ROEs prevalent at the moment, especially when growth in capital is expected. This could be accomplished by tapping new, less risky areas, broadening the base of credible borrowers, adoption of strict monitoring and improving corporate governance standards.
Furthermore, the Government through the Privatization Commission is all set to offer shares of NBP in the international market through Global Depository Receipts (GDRs). A formal kick-off meeting was held at NBP headquarters in August this year, when it was decided that the timing of listing would be finalized keeping in view the completion of various formalities and considerations, including market considerations.
NBP opened its first Islamic Banking branch in 2006. It can use its vast resources and branch network penetration to quickly tap a large percentage of this market.
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Earning Ratios 2003 2004 2005 2006
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ROA 0.93% 1.21% 2.25% 2.81%
ROE 16.30% 16.78% 20.82% 21.58%
ROD 1.11% 1.44% 2.74% 3.53%
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Asset Quality Ratios
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Non Performing Loans 39.77 36.10 33.74 36.26
NPL to Advances 27.66% 19.86% 14.26% 11.97%
Provisions to NPL 0.64 0.75 0.85 0.90
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Market Value Ratios
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Price to Earnings 4.14 6.48 7.04 10.48
Market Value to Book Value 0.67 1.09 1.47 2.26
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Debt Management
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Debt to Equity 16.50 12.85 8.27 6.69
Debt to Assets 0.94 0.93 0.89 0.87
Deposit times Capital 14.72 11.66 7.61 6.12
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Liquidity
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Earning Assets to Assets 0.74 0.72 0.73 0.76
Advance to Deposit 0.40 0.44 0.53 0.61
Yield on Earning Assets 5.87% 5.68% 8.19% 9.51%
Cost of Funding Earning Assets 1.86% 1.62% 2.28% 2.75%
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Solvency
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Equity to Assets 5.71% 7.22% 10.79% 13.01%
Equity to Deposits 6.79% 8.57% 13.14% 16.34%
Earning Assets to Deposits 0.87 0.86 0.89 0.95
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