The banking sector has witnessed strong growth in the past years. The rising trend of interest rate owing to tight monetary policy enabling the banks to enjoy high profitability.
Soneri Bank Limited incorporated on September 28, 1991 and its first branch formally opened the doors for operations in Lahore on April 16, 1992 followed by Karachi branch on May 09, 1992. The bank has now a network of 77 branches spread all over Pakistan including the Northern Areas, where no other private commercial bank has ventured so far. The Fareesta Family, owners of the Rupali Bank holds a controlling stake in the bank. The bank offers a range of corporate, treasury and retail banking related products with emphasis on trade related services. The bank's key focus is on encouraging exports and a major portion of advances portfolio nearly 40% is related to exports financing.
Its credit portfolio is characterized by low advance-to-deposit ratio over the years. The lending practice of SNBL is prudent and conservative in terms of asset quality.
In 2006, SNBL had a 2% market share in the total assets of the banking sector. Its share of total assets comparable to that of similar size banks, in terms of deposits, SNBL's share stood at 1.6% of the total industry deposit base.
Recently, the bank has opened four new branches, thus making the total to 77. SNBL has a paid-up capital of Rs 4.11 billion and has fulfilled the requirement of Rs 4.0b till the end of December 2007. The credit rating of the bank assigned by PACRA is "AA-" for the long term and "A1+" for the short term with positive outlook.
Financial performance 9mths'07
Soneri Bank Limited declared PAT of Rs 0.79b (EPS: Rs 1.93) in 9mths'07 compared to Rs 0.72b (EPS: Rs 1.75) in 9mths'06, reflecting a growth of 10.1% mainly due to upsurge in non-interest income.
Net interest income of the bank grew by 14.5% to Rs 1.45b in 9mths'07 over Rs 1.26b in 9mths'06 owing to an increase of Rs 396m in the net advances of the banks. Although the growth in the advances portfolio was nominal (1.1%) in 9mths'07, but it helped the bank to maintain its growth momentum. During the period under review, bank got the reversal of provisions of Rs 868m against non-performing loans, which lead to decline in the total provisions of the banks significantly by 99.2%. Due to this reversal, net interest income after provisions amounted to Rs 1.4b in 9mths'07 over Rs 1.2b in 9mths'06. The decline in the provisions is the positive sign for the bank because from December 31, 2007, banks have to do incremental provisioning against NPLs.
Non-interest income of the bank was the major contributor behind 10.1% increase in its earnings. With the increase of Rs 205m ie 36.3%, non-interest income of the bank stood at the level of Rs 767.5m at the end of 9mths'07 (Rs 562.9m in 9mths'06). The growth in non-interest income was mainly on the back of other income, which grew by Rs 122.2m during the said period.
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Financial highlights PKR (Rs)m
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Year end:Dec 9mths'07 9mths'06 Chg.(Rs) Chg.(%)
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Net-interest income 1,450 1,267 184 14.5%
Total provisions 0.15 19 (19) -99.2%
Net-interst income after
Provisions 1,450 1,248 202 16.2%
Non-interest income 768 583 205 36.3%
PBT 1,287 1,051 236 22.5%
PAT 793 720 73 10.1%
EPS 1.93 1.75 0.18 10.1%
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Courtesy:fnetrade.com
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As depicted from the non-interest revenue break-up, the bank does not rely on the stock portfolio instead its non-interest revenue comes majorly from fee income and income from foreign currencies. Fee income depicts relative stability as compared to that of trading income.
The profits 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 stood at Rs 985 million at the end of 2006. The year 2005 witnessed a growth of 41.9% in the bank's profits.
The deposits of the bank have witnessed a healthy growth. In 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 high spreads. However since the tightening of the monetary policy in 2006 the interest rates have risen and the growth in bank's earnings have declined. As a consequence there has been a decline in ROD to 1.96%.
The bank's assets have also grown to Rs 70.7 billion in 2006 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 issued fresh shares 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 earning 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 profitability.
The advances by the bank witnessed an increase of 10.5% to come the level of Rs 35.4 billion. The asset quality 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. Forthcoming years might show an increase in the NPLs as the SBP has again tightened its monetary policy in an effort to curb inflation.
The capital adequacy of Soneri Bank is well above the regulatory minimum requirement of 8%. SNBL has resorted to subordinated debt as a form of Tier II capital. SNBL is also expected to issue 10% rights share in order to fulfil the minimum capital requirement.
Soneri Bank has shown strong market performance in the period under consideration. Listed on the KSE-100 and KSE-30 indexes, its share price 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 from 14.17 in 2005. 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 2005 to 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 SNBL's share. The bank paid last dividend in 2005 worth Rs 165 million (dividend cover=5.57). The bank has been on the conservative side with its dividends retaining profits for reinvestment in bank's expansion.
FUTURE OUTLOOK: The monetary policy for Jan-Jun'08 has been tightened further by raising the discount rate by 50bps to 10.5%. Increase in CRR by 100 bps strives to reduce liquidity in the market. The recent drive by the regulator to reduce the banking sector spreads shall result in a decline in the profitability of the sector. The banking sector spreads have declined, but only marginally. The stricter provisioning requirements and withdrawal of FSV implemented by the SBP will 1) reduce the profits and 2) make the banks cautious in their lending, as is evidenced by the deceleration of credit.