The banking sector has experienced strong growth in the past years. The rising trend of interest rates owing to tight monetary policy enabled banks to enjoy a high profitability.
Soneri Bank Limited was incorporated on September 28, 1991 and its first branch formally opened in Lahore on April 16, 1992 followed by Karachi branch on May 09, 1992. The bank now has a network of 89 branches spread all over Pakistan including the Northern Areas. Four of these branches are exclusively offering Shariah Compliant products to the customers.
The Fareesta Family, owners of Rupali Bank holds a controlling stake in the bank. The bank offers a range of corporate, treasury and retail banking with an emphasis on trade related services. The bank's key focus is to encourage exports and a major portion of advances portfolio nearly 40% is related to exports financing.
At present, the bank's equity sands at PKR 6.610 billion and the total assets at PKR 76.854 billion at the end of year 2007. 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.
SNBL has a paid-up capital of Rs 4.11 billion and has fulfilled the requirement of Rs 4.0 billion till the end of December 2007. The bank's credit rating assigned by the PACRA is "AA-" for the long term and "A1+" for the short term with positive outlook.
FINANCIAL PERFORMANCE IN FY07Soneri Bank declared PAT of Rs 1 billion (EPS: Rs 2.43) in FY07 compared to Rs 0.985 billion (EPS: Rs 2.39) in FY06 reflecting a positive growth mainly due to upsurge in non-interest income.
Net interest income grew by 9.6% to Rs 1.93 billion in FY07 over Rs 1.76 billion in FY06 due to an increase of PKR 4.7 billion in net advances of the bank along with a higher interest rate scenario. The growth in advances was 13% in 2007, which helped the bank to maintain its growth momentum. In the year, the provisions increased by almost six folds from 36 million (2006) to 234 million (2007). This is mainly due to removal of FSV benefit by the central bank in calculation of provisions. Although this is a onetime affect and subsequently provisions will not increase to multiple times.

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Financial Highlights
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Year end: Dec         2007 (mn)     2006 (mn)    Change   Change (%)
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Net Interest Income      1,937         1,767        170          9.6
Total Provisions           234            36        198          650
Net-interest Income
 after provisions        1,702         1,731        (29)        1.68
Non-interest Income      1,067           754        313        41.51
Profit before tax        1,476         1,448         28         1.93
PAT                      1,000           985         15          1.5
EPS                       2.43          2.39       0.04         1.67
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Non interest income augmented by 41.5% to an amount of 1,064 million which is the major contributor to overall increase in profit before tax (1,476 million) despite of NPLs provisioning. This helped the bank to maintain its profitability. The non-interest income increased by PKR313 million during the period ended Dec-2007.
As depicted from the non-interest revenue break-up of SNBL, it does not rely on the stock portfolio instead that its non-interest revenue comes mainly from fee income and income from foreign currencies. Fee income depicts relative stability as compared to that of trading income. There is a significant increase in income noted from gain on sale of securities. The 'securities profit' is taking the contribution of income from "dealing in foreign currency". On the other hand, the income from fee and commission was on a slide.
The profit after tax has grown by 1.5% in the year 2007 as compared to 7.1% and 41.4% in 2005 and 2006 respectively. The profit trend has been falling in last few years. The falling profitability is in line with the industry, but the Soneri is severely affected than others. Considering 2007, the return on assets stood at 1.36% while the industry enjoyed a 2% ROA. As compared to the industry (23% ROE), the Soneri had a ROE of 16.37% which is way less than the competing banks. The bank did not pay cash dividends; shareholders were given the option to accept bonus stock of approximately 30% (99million shares).
The bank deposits have been growing. In 2007 alone, these recorded a growth of 13.5% that inflated the deposits to Rs 60 billion (2006: Rs 53 billion). This was the period when the banks didn't make high profits like the previous years. However, since the tightening of the monetary policy in 2006, the interest rates on deposits have increased, thus shrinking the spread that the sector had been enjoying. Moreover, budgetary measures along with monetary policy are all set to further decline the banking sector's spread in FY08.
The bank's assets have also grown to PKR76.8 billion in 2007 - a growth of 8.7% (2006: Rs 70.7 billion). The profits again have not been able to meet the assets growth. Resultantly, the ROA has declined from 1.47% in 2006 to 1.36% in 2007. Compared to the industry average of 2.1%, Soneri Bank lacks behind by a fair margin. In line with the sector's trend, the investments have shown a great increase as compared to advances.
The bank issued new shares worth PKR 997 million. 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 2007 to PKR 6.61 billion.
The advances by the bank have seen an increase of 13% to come to a level of Rs 40.15 billion. The NPLs increased drastically in 2007, in continuation of the trends seen in previous years the banking sector witnessed an upsurge in NPLs in FY07 too, which negatively affected the profitability of banks. Main factors contributing to the increasing NPLs include:
-- Slowdown in economic growth and the political stability
-- Increasing interest rates
-- 100% provisioning requirement by the SBP. Economic growth, overall, has been badly affected by increased power and political crises. Due to further tightening of monetary policy, interest rates have increased. This, in addition to increasing inflation, has adversely hit the borrower's repayment capacity which has increased the NPLs. The major contributor to NPLs is the textile sector with sugar and electronic sector contributing marginally to the NPLs.
The NPLs to advances ratio was 2.16%, which is in line with industry. The advances have shown a slight shift in composition, with advances to cement and export import business as a part of total portfolio rising.
Deposits have increased by 13.2% to Rs 60.2 billion. The major increase has come in savings deposits, a trend observed in the industry as a whole. Fixed deposits and current account deposits have experienced a marginal increase, while the deposits from the financial institutions have experienced a decline.
The yield on earning assets showed a slight increase because of an increase in interest rates. However, this had a marginal effect as the cost of funding the earning assets increased side by side.
Although the investments grew by Rs 2.45 billion (15%) in 2007 but apparently the investments didn't show any increase as the percentage of total earning assets composition. Similarly, the advances contribution to total earning assets slightly rose due to an increase of Rs 4.7 billion (13.5%) in advances. Lending to financial institutions showed a slight decreasing trend and continued with it.
Soneri Bank has shown good market performance in the period under review. Listed on the KSE-100, its share price has increased by 2.5% from Rs 48.76 in 2006 to Rs 49.97 in 2007. The increase accompanied by growth in the bank's profitability resulted in P/E to stay at 20.40 to 20.56 (2006 to 2007). This year Soneri was moderately a traded share with the average daily volume over the period 2006 to 2007 being 765,435. Also MV to BV has declined from 2.92x in 2006 to 2.45x in 2007. This largely is the result of increase in the bank's equity. The bank paid the 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.
SONERI BANK FY04-06 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. 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% in 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 profit 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 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 new 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 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 advances by the bank have seen an increase of 10.5% to come 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. Forthcoming years might show an increase in the NPLs as the SBP has again tightened its monetary policy in an effort to curb inflation.
FUTURE OUTLOOK During the year 2008 the bank has plans to expand is network of branches with focus on small and medium size business to enhance its market share. Taking an industry look the profit margins are likely to further squeeze as the funding costs will rise. Furthermore, the lending rates are likely to stay high in line with tight monetary by central bank. Consequently, the profitability of Soneri is also likely to show a declining trend.
The budgetary and monetary measures like FED on banking services increasing from 5% to 10%, increase in NSS rates by 2%, increase in discount rate, frequent OMOs will all result in a decline in profitability for the sector.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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