Incorporated on September 28, 1991 the first branch of Soneri Bank Limited, SNBL, formally opened doors for operations in Lahore on April 16, 1992 followed by Karachi branch on May 09, 1992.
The bank now operates with 73 branches (2 Islamic) spread all over Pakistan including the Northern Areas of the country. The bank caters to the banking requirements of small and medium sized entrepreneurs, providing them services with emphasis on encouraging exports. Nearly 40 percent of its credit portfolio is related to export financing and credit decisions are taken within 48 hours.
SNBL has been assigned a credit rating AA- for long term and A1+ for short term and A+ for its TFCs by PACRA.
RECENT PERFORMANCE (JANUARY-SEPTEMBER 2007):
During the first three quarters of this year, Soneri Bank posted an after-tax profit of Rs 494 million, in comparison with a profit of Rs 331 million in the same period of last year. Deposits rose from Rs 53 billion at the end of CY06 to Rs 58 billion, while advances rose by around Rs 400 million. NPLs, however, showed a major rise from Rs 351 million at the end of last year to Rs 533 million. Debt to assets declined marginally from 92% to 91%, with a corresponding improvement in solvency. Overall bank assets reached Rs 74 billion.
PAST PERFORMANCE ANALYSIS (CY04-CY06):
The profits of the bank have grown by 7.1% in the year 2006. This growth has been led mainly by an increase in the markup/interest income of the bank. The profits of the bank stood at Rs 985 million at the end of 2006. The year 2005 had seen a growth of 41.9% in the profits.
The bank deposits have been growing for the bank. In the year 2006 alone they recorded a growth of 11.3% that inflated the deposits to Rs 53 billion (2005: Rs 47.6 billion). However the deposits had grown by 27% the previous year so the trend has subdued a bit. The bank's ROD rose in 2005 to 2.17% on the back of high profits growth. This was the period when the banks made huge profits from the high spreads. However since the tightening of the monetary policy in 2006 the interest rates have risen and the growth in bank's earnings has declined. As a consequence there has been a decline in ROD to 1.96%.
In line with an increase in the deposits, SNBL's assets have also grown to Rs 70.7 billion in 2006, depicting a growth of 11.7% (2005: Rs 63.3 billion). A growth in balances with other banks was the main force behind this assets swell up. The profits again have not been able to meet the assets growth. Resultantly, the ROA has declined from 1.63% in 2005 to 1.47% in 2006. Compared to industry average of 2.1% Soneri Bank lacks behind by a fair margin and needs to catch up by making better use of its assets.
The bank also issued new shares in FY'06 worth Rs 1.46 billion. This equity injection was done to meet the reserve requirements of the SBP and to finance its expansion plans. Overall, the bank's equity grew by 27.8% in 2006 to become Rs 5.6 billion. However, the ROE has seen a decline like other earnings ratios to 19.7% (2005: 24.76%). An industry average of 23.8% is an indicative that Soneri Bank needs to revamp itself and try to increase its profitability.
The bank's advance to deposit ratio has remained quite consistent over the period under study, showing that it has not been affected by the general shortage in liquidity that the banking sector has displayed.
Industry ADR stood at 70.3% in CY06 as compared to 66.5% in CY05, 61.5% in CY04, and 52.5% in CY03.This perhaps indicates the aggressive approach taken by nearly all banks to take advantage of the high demand for loans and financing that has been prevalent in the economy. Soneri bank should undertake a more aggressive loans expansion strategy.
Deposits increased by 27% in CY05 and a further 11% in CY06. Although advances increased by nearly a third in CY05, they increased by only about 10% in CY06. This reinforces the idea that a greater loan portfolio expansion is required. A significant trend within the deposit structure has been that fixed deposits have shown a much steeper rise than savings deposits. Despite the tightening of the monetary policy by SBP, alternate sources of funds and increasing equity levels have allowed the bank to carry on the expansion of its loan portfolio at a rapid pace.
But the yearly growth rates in advances also reveal that this growth has slowed down over time, especially in CY06. The reason behind this slowdown is the increasing credit concentration of all markets which makes it difficult for them to continue to absorb credit at the same pace. At the same time, SBP's stricter monetary policy has increased the cost of borrowing. The high infection rate of advances is also responsible, as the industry in general has deliberately decelerated the expansion of its credit portfolio to improve screening, monitoring and regulation of loans.
A sector-wise breakdown of credit shows that this deceleration has affected all the major sectors-corporate, consumer and SME. In the corporate sector a major trend identified as responsible for it is the sluggishness in demand for fixed investment credit, which was mainly a result of a lack of economic growth in some subsectors that reduced their capacity to absorb loans at the same pace, while in some sectors it was also because of increasing reliance on retained earnings or foreign borrowings. The high-growth consumer finance sector also experienced deceleration, industry figures showing a growth of 66% in CY05 but only 29% in CY06.
SME finance growth also slowed down from 27% in CY05 to 13% in CY06. Industry figures also reveal a greater level of diversity in loan portfolio and reduced differences between sectors, improving risk diversification and generating more productive alternate avenues of earning.
Within earning assets, advances have shown growth at the expense of investments. Advances grew from about 58% of earning assets to about 68%. Industry figures also show that in CY06, the share of advances in total assets increased to 55.8 percent from 54.4 percent in CY05, while the investment portfolio of the banking system further lost its share to19.2 percent from 21.9 percent in CY05.
Soneri Bank has shown a trend of increasing yield and cost of earning assets. Yield increased from 4.6% in CY04 to 10.2% in CY06. This trend has been followed by the whole banking sector because, since CY05, 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, a trend also explained elsewhere.
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.
The advances by the bank have seen an increase of 10.5% to come to a level of Rs 35.4 billion. The asset quality of Soneri has improved as NPLs of the bank have increased slightly in 2006. But as a proportion of advances the increase is minimal causing the NPL to advances ratio to improve to 1.04% (2005: 1.09%). This generally has been the trend in the banking sector. In the industry NPLs have decreased to Rs 177 billion in CY05 from Rs 211 billion in CY03.
Soneri like other banks has been able to contain credit risk despite aggressive growth in advances to consumer and private sectors. 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.
Debt figures show that the bank has shown a decline in its leverage position. Debt to equity fell from 15.4 in CY04 to 12.4 in CY06, while debt to assets declined from 0.94 to 0.93, showing clearly that debt has financed a smaller proportion of assets. Assets grew by 11% in CY06, while debt rose by 10%. Deposits have been the major contributor to the rise in debt. The healthy rise in deposits was discussed earlier.
Soneri Bank has shown an improving solvency position over the period under study. Equity to assets increased from 6.1% in CY04 to 7.5% in CY06, while over the same period equity to deposits increased from 8.1% to 10%. The trend in rising equity has been displayed by the banking sector in general. SBP also recently increased the MCR for banks to Rs 3 billion by the end of CY06, with yearly increments of Rs 1 billion to reach Rs 6 billion by the end of CY09. However, Soneri Bank finished CY06 with capital of over Rs 5 billion, so it is well ahead of the SBP requirements.
SNBL has shown strong market performance in the period under consideration. Listed on the KSE100 and KSE30 indexes, the price of the share has increased by 56.9% from Rs 31.08 in 2004 to Rs 48.76 in 2006. The price increase accompanied by not so phenomenal growth in the bank's profitability has resulted in P/E to increase. Soneri is not a very highly traded share with the average daily volume over the period 2004 to 2006 being 89,876.
The share seems to be overvalued at a price 14.82x the EPS. Also MV to BV has however declined from 3.51x in 2005to 2.92x in 2006. This largely is the result of increase in the bank's equity. However this value is still quite high and the overvaluation of the share might be because of some upside that the investors see in Soneri's share.
The bank paid the last dividend worth Rs 165 million (dividend cover=5.57) in 2005. The bank has been on the conservative side with its dividends retaining profits for reinvestment in bank's expansion.
FUTURE PROSPECTS: 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 sustain into the near future at the 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 NPLs. Banks are likely to use current high capital adequacy to expand their loan portfolios, and tap different markets.
The ongoing implementation of the Basel II capital accord provides a comprehensive and more risk sensitive capital allocation methodology. This will enable banks to optimize their resources in terms of their risk exposures. Its implementation, however, has become a very challenging task for the regulators around the world, keeping in view the fact that it prescribes significant up-gradation of risk management standards and technological advancement within banks.
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.
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.
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Ratios
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Earning Ratios
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ROA 1.30% 1.63% 1.47%
ROE 21.31% 24.76% 19.70%
ROD 1.73% 2.17% 1.96%
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Asset Quality Ratios
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Non Performing Loans (millions) 262 350 351
NPL to Advances 1.08% 1.09% 1.04%
Provisions to NPL 1.24 1.17 1.15
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Market Value Ratios
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Price to Earnings 7.93 14.17 14.82
Market Value to Book Value 1688.60 3507.58 2923.79
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Debt Management
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Debt to Equity 15.38 14.23 12.41
Debt to Assets 0.94 0.93 0.93
Deposit times Capital 12.28 11.43 10.06
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Liquidity
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Earning Assets to Assets 0.84 0.84 0.81
Advance to Deposit 0.65 0.66 0.67
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Yield on Earning Assets 4.64% 7.73% 10.19%
Cost of Funding Earning Assets 1.68% 4.01% 6.40%
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Solvency
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Equity to Assets 6.10% 6.57% 7.46%
Equity to Deposits 8.14% 8.75% 9.94%
Earning Assets to Deposits 1.12 1.12 1.08
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Other Ratios
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Cost of funds 8.50% 22.43% 39.71%
Intermediation cost 7.26% 8.82% 10.84%
Net profit margin 7.33% 10.25% 10.38%
Interest margin 0.61 0.48 0.32
Net interest margin 1.14 1.27 1.22
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